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Five Things You Need to Know: Foreclosure Woes Contained to Overall Economy; Speaking of Supply...; Retail Redux; Arithmetic vs. Geometric; What's Your Upside?

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

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


1. Foreclosure Woes Contained to Overall Economy

A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes, according to the Wall Street Journal.

  • As a result of the rising backlog, some home lenders are turning to auctions to speed up the disposal of the properties rather than relying on Realtors to sell them.
  • A recent auction in San Diego shows the extent of the discounts lenders are having to accept to unload the properties.
  • Houses and condos included in the auction typically sold for about 30% below the previous sale or appraisal prices, the Wall Street Journal said.
  • In a few cases, the discounts were as much as 50%, the newspaper reported.
  • About 90% of the homes offered were sold, though some deals fell through because buyers couldn't qualify for financing.
  • Two things to take away from this:
    1) Foreclosures aren't simply "contained" to the families (or in many cases speculators) who are losing the properties. Those homes will need to be re-sold to someone. That increases supply.
    2) The desire on the part of lenders to dispose of the properties pressures pricing throughout the area. Increased supply + lower demand = housing price deflation.


2. Speaking of Supply...

According to data from ZipRealty, the supply of homes listed for sale continued to grow rapidly in April.

  • The number of homes listed for sale in 18 major metropolitan areas tracked by the firm was up 7% in April.
  • Now it's normal in April to see a seasonal jump in home inventories as it kicks off the busy spring real estate season.
  • Still, the 7% increase is far and above the seasonal norm, according to Credit Suisse.
  • Home inventories nationwide have increased an average of 4.5% in April from March over the past 22 years, the firm said according to the Wall Street Journal.
  • San Francisco saw an increase in inventories of about 19%; Washington, 17%; Orange County, CA, 15%; and Seattle, 14%, the Journal noted.


3. Retail Redux

Last Friday we took a look inside the weak April Retail Sales figures. Our take was the news was grim, no matter how you slice, but over the weekend Sandi Lynne, publisher of WallStreetinAdvance.com, had a slightly different take that we thought was worth sharing:

Kevin,

I won't defend retailers, since many of them do such a lousy job but the National Retail Federation seriously played with the calendar, this year, moving "March" through April 7th. That means that All of Easter fell in March, instead of April, and April started a weekend day short, since most retailers were closed Easter day.

The difference for Drug stores/Pharmacies was sticking to the Gregorian Calendar, so March ended, and April began, given them the benefit of allergy season and a full week of Easter selling INCLUDING Easter Sunday--since almost all the drug stores are not only open longer hours than most other retailers, often 24/7, but also stayed open on Easter Sunday.

Spring apparel is lackluster, at best, baby doll styles (Empire waists outside fashion lingo) the only addition to the mix, a lack of defining fashion always a problem for apparel retailers but I wouldn't inject more serious implications into April's results, and especially not to Pharmacies/HBA stores which didn't let the NRF write their calendar, even if Federated (FD) is determined to destroy retail in its efforts to make Macy's work around the country.

Regards
Sandi Lynne
WallStreetInAdvance.com


4. Arithmetic vs. Geometric

Minyan Fran hit us up over the weekend with an interesting, and quite common, question. Why are the charts of the Value Line Geometric and Value Line Arithmetic indexes different?

Kevin,
I follow Value Line. I also use point and figure charting.
This past Friday, May 11, 2007, I noticed that the Value Line Arithmetic Index ($VLE) was in a column of 0's, while the Value Line Geometric ($XVG) was in a column of X's. Shouldn't they be the same?
Would You comment?
Thank You very much,
Minyan Fran

The answer is "not necessarily." Although these indices contain identical stocks, they are weighted far differently, which may account for "differences" in their charts.

Indexes calculated as an arithmetic mean, meaning using a simple average, have a tendency over time to report higher returns than indexes calculated using a geometric mean. A geometric mean is compounded rather than averaged.

Why is this important? Well it matters significantly if you are reporting results to, say, investors. A geometric average is considered superior by some because it takes compounding into account, and therefore the results tend to reflect more accurately the actual rate of return over the period under consideration.

Whichever type of weighting one chooses, Fran's question raises an important issue. Investors should carefully consider what returns their favorite index reports. Is it truly fair to compare your portfolio's returns to the S&P 500 capitalization-weighted index? Is your portfolio capitalization-weighted? Probably not. What about the S&P 500 equal-weighted index? Is your portfolio really equal-weighted? Typically not, almost immediately after you first constructed it. Nevertheless, if the S&P 500 is your benchmark, the equal-weighted index may provide a closer comparison than the capitalization-weighted index.


5. What's Your Upside?

We're not even halfway through 2007, but already we have what is in all probability our Socionomic datapoint of the year: The "Upside" of Risk.

  • Marsh Inc. this month launched an aggressive marketing campaign - the posters are plastered all over subway cars here in New York City - related exclusively to Risk.
  • The branding campaign includes a special website, aptly titled: .
  • According to the company's public relations release accompanying the branding campaign's debut, Marsh is "encouraging businesses to focus on another side of risk – the 'upside.'"
  • Only at this point and time... with stock market volatility at historical lows... could an insurance firm devoted to "risk management" decide to "question the "risk is negative" belief and literally turn the concept of risk on its head."
  • The advertising campaign uses phrases such as "When You Risk upon a Star" and "To Risk Perchance to Dream."
  • "The campaign, created by the New York office of Ogilvy, seeks to disrupt the traditional view of risk as a liability to be avoided by asking the reader to also consider finding opportunities in risk," according to the press release.

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No positions in stocks mentioned.

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