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Five Things You Need to Know: The Word "Plummeting" Was Used At Least Once; The Word "Cloud" Was Used At Least Once; What If...?; It's Only Another Homebuilder Reporting a 73% Drop in Profit; Minyanville's Tax Guide for Gamblers


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. The Word "Plummeting" Was Used At Least Once

Home prices in the 20 metropolitan areas tracked by the S&P/Case-Shiller Home Price Index fell in January. And we are pretty sure that in the release the word "plummeting" was used at least once.

  • Home values dropped 0.2% from a year earlier, according to the index.
  • That marks the first decline in home prices tracked by the index in six years.
  • Compared with a month earlier, home prices fell 0.6 percent, the sixth straight decline, according to Bloomberg.
  • The S&P/Case-Shiller Home Price Index is a composite of transactions in 20 metropolitan areas.
  • Looking inside the report, of the 20 metro areas covered by the report, 17 showed declining home prices and only one (Charlotte, NC) showed an increase in prices.
  • Eleven cities showed a year-over-year decline in prices while eight showed an increase from a year earlier.

    Click chart to enlarge.

2. The Word "Cloud" Was Used At Least Once

Consumer confidence in the U.S. fell from a five-year high, according to Bloomberg. And we are pretty sure the word "cloud" was used at least once.

  • The New York-based Conference Board's index of consumer confidence fell to 107.2 from 111.2 in February.
  • For all of 2006 the index averaged 105.9, so unlike the Case-Shiller Home Price Index this isn't so much of a "plummet" as a "slip."
  • Nevertheless, the word "cloud" found its way into news stories about the confidence number.
  • Lynn Franco, the director of the survey, told Bloomberg, "Apprehension about the short-term future has suddenly cast a cloud over consumers' confidence."
  • Good lord, just wait 'til next month after consumers have had time to digest the plummeting Case Shiller Home Price Index!
  • (I mean, when I saw that the thing had "plummeted" this morning I immediately called a Realtor and put my Manhattan apartment up for sale... and I don't even own it... I rent!)
  • One last thing, and this is also consumer related: The proportion of people in the survey who say they expect their incomes to rise over the next six months fell to 17.5 percent from 19.2 percent.
  • Hmmm. Plummeting? Cloud? That settles it. We're opening a discount consumer staples retail store called The Plummeting Cloud!

3. What If...?

Ok, we all know the Fed insists that the "ongoing adjustment" in the housing sector isn't going to spread and impact the broader economy. But we're defensive pessimists, always searching out the worst possible scenario so that anything better than the worst is - to us anyway - actually an upside surprise! So bear with us while we imagine what a real estate "adjustment" spillover to the broad economy might look like.

  • First, one might see home improvement-related companies such as Home Depot and Black and Decker reporting a downturn in sales momentum as fewer home sales translates into fewer home remodels.
  • Next, appliance makers such as Whirlpool and Maytag would probably report deteriorating profits and we'd see headlines like this:
  • Of course, subprime lenders such as New Century would definitely feel the pinch.
  • Then, borrowers situated in that gray area between subprime standards and premium credit ratings would probably begin to show signs of stress, especially if their mortgages were adjustable-rate mortgages and they were convinced to take on more home than they could afford.
  • That would then spillover to lenders with so-called Alt-A exposure, such as Countrywide, GE's WMC Mortgage, and IndyMac Bancorp.
  • While the layoffs in the home building and construction sector would be widely expected, job losses in the mortgage industry and even among Realtors would probably surprise many by virtue of the stunning job growth in those employment sectors over the past five years.
  • Consequently, lenders would be forced to protect themselves by tightening standards and scrutinizing borrowers more carefully.
  • Unfortunately, that would remove what was formerly a layer of demand from the market at exactly the same time the inventory of homes on the market is bulging, causing pricing power to evaporate.
  • Meanwhile, state and local governments would begin to get phone calls and letters from homeowners upset at property taxes that now seem too high relative to declining home values.
  • Faced with little choice but to cut property taxes, or be booted from office, capital projects would likely begin to disappear from budgets and government employees in some of the hardest hit areas would themselves be joining the ranks of the unemployed as services and staff are cut.
  • But wait, if the real estate "adjustment" were truly spreading we could expect still other areas of the economy to take a bruising... such as newspapers.
  • Newspapers would very likely see sharp drops in advertising as real estate and real estate-related advertisers - one of the newspapers' most lucrative segments over the past five years - cut back.
  • Ho, ho, no worries!
  • This is just our own twisted & perverted "nightmare" scenario!
  • Can you even begin to imagine the horror if this scenario were to really be taking place... right before our very own eyes?!
  • Why, there'd be widespread calls for government intervention!
  • A "blame game" would surface in the ivory towers of academia, where the intelligentsia would take turns debating just who is to blame for this growing real estate disaster.
  • Ultimately, lenders and borrowers would likely square off against one another to see who gets to jail whom!
  • Yes, it's a good thing none of this is happening.

4. It's Only Another Homebuilder Reporting a 73% Drop in Profit

Lennar Corp. (LEN) this morning reported a 73% drop in profit for its fiscal first quarter. Eh, big deal. We're now officially desensitized to housing-related slowdown news.

  • The one piece worth highlighting here is Lennar's reported 7% decline in selling prices.
  • That's above and beyond the special "Kiss Me I'm Irish" incentives being offered up in the Chicago, IL area. Seriously!
  • According to the Wall Street Journal, "Chief Executive Stuart Miller - warning that the trends are being exacerbated by the recent meltdown in the subprime-mortgage sector - said he couldn't forecast when the housing market may stabilize, and he revoked Miami-based Lennar's prior financial guidance."
  • Anyway, remember last week when KB Home (KBH) reported an 84% drop in profits?
  • Exactly. So, sorry LEN, "we were, like, facing up to massive profit declines reported by homebuilders while you were still listening to REM."

5. Minyanville's Tax Guide for Gamblers

A story in the USA Today warns everyone not to forget that if you cash that big ticket at the track or if your savvy bracket picks earns you some extra cash in your office NCAA pool, be sure and report your winnings to the IRS. Thanks a lot, USA No Fun Today!

  • Did you know that gambling winnings are taxable at your ordinary income tax rate?
  • Were you aware that nearly 60% of taxpayers reported being "not very likely" to report gambling winnings to the IRS?
  • Can you believe only 35% of taxpayers said they were aware that they were required by the IRS to report gambling winnings?
  • It's true! And depressing!
  • Taxpayers are supposed to report all gambling winnings on Line 21 of Form 1040, the USA Today says.
  • Meanwhile, to help you, Minyanville has prepared a brief primer on handling gambling winnings with the IRS.

    Minyanville's Tax Guide for Gamblers

    1. If you win more than $600 while gambling, and the payout is more than 300 times your initial wager, then for IRS purposes you should consider yourself "A Pretty Good Gambler" and quit your job immediately so that you can gamble full time.

    2. A form W-2G for Certain Gambling Winnings is required by the IRS to be issued if you win more than $1,200. Make sure your bookie issues you a W-2G for all winnings. Refuse to pay any losses if your bookie fails to provide you a receipt with his taxpayer identification number.

    3. For payouts that exceed $5,000, casinos often withhold as much as 25% of your winnings to pay federal taxes. Make up the difference by letting the remainder ride on one more roll of the dice.

    4. In certain states, gambling winnings may be subject to state tax. If you gamble in another state, however, that state may also take a cut of your winnings. To avoid confusion, drift aimlessly from one casino and racetrack to another, never staying put for more than two or three weeks at a time. After all, you're a gambler, not a square.

    5. The amount you deduct for gambling losses can't exceed your winnings. Therefore, the easiest way to save on taxes is to always make sure your winnings never exceed your losses.

    6. Non-cash gambling winnings and prizes are taxable too. For example, if you gamble that your boss won't notice the office supplies you stole, and you win, then you must report the stolen property as gambling winnings. But not to your boss, because then they would become gambling losings.

    7. Although your lucky shirt is necessary to win at poker or blackjack, it is not deductible as a gambling expense. The IRS is very clear about this.

    8. Keep meticulous records of your gambling activity. Follow your bookmaker, photograph his hangout, record his calls and try to photograph the organized crime boss he reports to.
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