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Five Things You Need to Know: Analysts Surprised By Unsurprising Surprise Decline in New Home Sales; Cocktail of Doom; Sallie Mae Sue; Buffett Loaded for Bear?; The Real Buffett Way


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Analysts Surprised By Unsurprising Surprise Decline in New Home Sales

As expected, the Commerce Department this morning reported that New Home Sales for August declined more than expected.

  • Purchases declined 8.3% to an annual pace of 795,000, the lowest level in more than seven years.
  • Incredibly, however, the decline exceeded forecasts (yet again) making it seem almost as if the people making the forecasts weren't even trying to guess right.
  • Year-over-year, purchases are down 21%.
  • And the median price plunged 7.5% from a year ago, the worst decline since 1970.
  • You know who isn't surprised by this kind of housing report, though?
  • Fannie Mae (FNM) CEO Daniel "My Name Is" Mudd.
  • Mudd told Bloomberg he expects home prices to fall 2% to 4% this year, and more next year.
  • And, of course, the decline in home prices and record foreclosures will increase credit losses at Fannie Mae, he said.
  • According to Bloomberg, Fannie had 25,125 foreclosed properties on its books at the end of last year.

2. Cocktail of Doom

We're going to pause for a moment to describe a cocktail of permabearishness. Consider the following:

  • Tighter lending standards.
  • Low affordability.
  • Increased risk aversion.
  • Monetization of existing assets.
  • Shake with ice, strain and serve.
  • That's quite the deflationary cocktail, isn't it?
  • Who other than a permabear would list that drink on the bar menu? Take a look:
    "The oversupply of unsold new and resale homes and downward pressure on new home values has worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand, while higher foreclosure activity combined with heightened builder and investor efforts to monetize their real estate investments boost supply."
  • That;s a quote from KB Home (KBH) President and CEO Jeffrey Mezger from the company's earnings release this morning.
  • KBH this morning reported a third quarter loss due to the cost of abandoning recent land purchases.

3. Sallie Mae Sue

Sallie Mae (SLM) is up more than 7% this morning on news reported late yesterday that the student-loan company would press the investment firm J.C. Flower & Co. to complete its $25.3 billion takeover.

  • The J.C. Flower-led consortium of buyers said yesterday they are unwilling to complete the deal at the current price.
  • What's the hitch? Why the cold feet?
  • According to J.C. Flowers the deal should be reworked to a lower price due to a student loan measure awaiting President Bush's signature that will reduce government subsidies to loan providers by $20.9 billion over five years.
  • Sallie Mae estimates that the bill would reduce core earnings by
    1.8% to 2.1% annually over five years.
  • The Flowers statement about the bill makes it seem as if the legislation was a total surprise.
  • But look, we're talking about Washington here.
  • If J.C. Flowers was truly surprised by the impact of the legislation then they are essentially owning up to being the least well connected investment firm in the history of finance.
  • Before an investment firm makes a $25.3 billion leveraged buyout offer for a finance company it's customary for someone at the firm to be aware of potential legislative impairments.
  • Or maybe this is really about something else.
  • According to estimates by Citigroup (C) investment banks may have to write off $25 billion of
    LBO-related loans and bonds to fund takeovers.

4. Buffett Loaded for Bear?

Conveniently arriving just moments before the Sallie Mae (SLM) news yesterday afternoon was the latest Bear Stearns (BSC) rumor - that legendary investor and billionaire Warren Buffett was reportedly considering buying as much as a 20% stake in the firm.

  • Last week, Bear Stearns reported a 61% decline in third-quarter profit, largely due to losses suffered by its mortgage trading unit.
  • The rumor of a Buffet stake in the firm sent BSC stock higher by more than 7% yesterday.
  • The move by Buffett - should it actually happen - carries a whiff of familiarity about it.
  • Buffett's Berkshire Hathaway (BRK) once made a similar investment in Salomon Brothers, taking a 12% stake to help the firm fend off a move by Ronald Perelman.
  • When was that? Almost 20 years ago to the day.
  • September 28, 1987.

5. The Real Buffett Way

By now everyone knows the story of how legendary investor Warren Buffett started in 1956 with $10,000 and turned it into billions. How did he do it? By buying companies, not stocks, and holding on for the long-term. Or so some would have us believe. Minyanville takes a closer look at the "real" Warren Buffett way.

No positions in stocks mentioned.

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