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Five Things You Need to Know: New Home Sales; A Question of Psychology?; Not Horrible News for Once!; Quarterly Banking Report; Capital One Update


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


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

1. New Home Sales

The Commerce Department reported new homes sales were up 1.7% more than initially reported in September, but were still 23.5% lower year-over-year.

  • The 728,000 annual pace of new home sales was lower than median Bloomberg survey expectations for 750,000.
  • Even worse, the median price of new homes dropped by the most in nearly four decades.
  • The median price of a new home dropped 13%, the most since 1970, to $217,800.
  • This is the initial stage of price capitulation following on the heels of yesterday's existing-home sales median price decline.
  • The Office of Federal Housing Enterprise Oversight also reported that home prices declined for the first time since 1994.
  • Meanwhile, the RealtyTrac data showed 224,451 foreclosure filings nationwide, up 94% increase from a year ago, 2% month-over-month.
  • And in a sign the stress is deepening, and also likely to pressure existing-home prices even further in 2008, bank repossessions increased 35%, according to RealtyTrac.
  • This is important because not all foreclosure filings lead necessarily to foreclosure completions where a homeowner loses their home.
  • The surge increases the inventory of homes on the books of banks, which can lead to additional price pressures as those homes often are resold at distressed prices to move them off the books.

2. A Question of Psychology?

All real estate is local. The problems in real estate are all related to subprime. The rich are different. These are just a few of the phrases offered up to defend real estate from what is perceived by many to be overly-aggressive bearishness. The problem is fundamentals follow psychology, not the other way around. What happens when the psychology of risk aversion spreads? We get headlines like this from the Aspen Times: "October Real Estate Sales Tumble."

  • "The credit crunch that's caused a slump in the national real estate market might be having an indirect effect in Pitkin County," the Aspen Times notes.
  • The dollar volume of sales in Pitkin County fell nearly 37% in October, a report by Land Title Guarantee Co. showed, the Aspen Times reported.
  • Michael Russo, managing partner at Aspen Sotheby's International Realty, told the newspaper that Aspen-area buyers are "immune" to tightening credit conditions because they often have the resources to pay cash for a second, third or fourth home.
  • "But Russo said some would-be buyers in Aspen might have wanted to wait to see if prices of real estate would be affected by national conditions. "They wonder if they can buy more for less," he said.
  • What demand there is for Aspen housing is largely international in flavor thanks to a record-low dollar.

3. Not Horrible News for Once!

Finally, some not horrible news... for once. Two indicators we track for equities, the bullish percent index for the S&P 500 and the Nasdaq-100, both reversed up to positive with yesterday's action, according to data from Investors Intelligence. (For more on the bullish percent indicators and what they mean, click here.)

This tells us demand is back in control of those areas of the market for the first time since they reversed down in October. The news isn't particularly good for the average stock in general, however. The larger bullish percent indexes for stocks listed on the NYSE and the Nasdaq Composite remain negative and pretty far away from a reversal higher.

So what does this mean? Why the reversals up in the S&P 500 and Nasdaq-100? Quality and liquidity. Those indexes have a high concentration of large cap stocks, the most liquid and largest stocks in the market. As we head into the year's end we will likely see more rotation into large cap stocks.

Because the S&P 500 and Nasdaq-100 are capitalization-weighted, meaning the largest stocks in those indexes account for the most price movement, we will likely continue to see these indexes outperform the average stock.

Why then, does it feel worse for stock owners than the performance of these indexes might suggest? Look at it this way. In the S&P 500, 119 stocks are up more than 20% year-to-date. Not too bad, eh? But 110 are down more than 20%. In the Nasdaq-100, 29 stocks are up more than 20%, 18 are down more than 20%.

4. Quarterly Banking Report

If you're looking for some strange and terrible reading on a day after the market was up more than 2.5% - and who isn't? - take a few minutes to comb through the FDIC Quarterly Banking Profile.

  • Almost half of all institutions reported lower profits in 3Q, and this is the first time since 2003 that quarterly earnings have been below $30 billion.
  • Loan-loss provisions totaled $16.6 billion, more than double the $7.5 billion insured institutions set aside for credit losses in the third quarter of 2006 and the largest quarterly loss provision for the industry since the second quarter of 1987.
  • Net charge-offs totaled $10.7 billion, the largest quarterly amount since the fourth quarter of 2002.
  • The largest increase in net charge-offs occurred in loans to commercial and industrial (C&I) borrowers, where charge-offs were $796 million (91.4 percent) higher than a year earlier.
  • The industry's reserves for loan and lease losses increased by $5.7 billion (7.0 percent) during the quarter, the largest increase in 18 years.
  • However, the increase in reserves failed to keep pace with the sharp rise in non-current loans.
  • The industry's "coverage ratio" declined from $1.21 in reserves for every $1.00 of non-current loans to $1.05 during the quarter - the lowest level for the coverage ratio since the third quarter of 1993.
  • While everyone is worried about residential mortgages, loan loss increases were largest in C&I, not mortgages, which actually rank third after "other" consumer loans.

5. Capital One Update

The good news for Capital One (COF) coming out of yesterday's Friedman Billings & Ramsey conference is that the company hasn't moved on its 2008 view of charge-offs we reported on Nov. 7 and ranging from $4.9 bln to the mid-$5 blns. But there are still questions surrounding the companies assumptions.

  • Vice President of Investor Relations Jeff Norris provided an update with a better breakdown of its U.S. card charge-off rate.
  • After the spike in charge-offs related to bankruptcy reform in late 2005, the company (like most financials) benefited from unusually strong credit performance in 2006. COF is calling credit performance in 2007 a normalization of credit performance.
  • There was a surge in Q3 delinquencies, but COF believes less than 20% of the uptick is explained by "localized economic worsening, driven in select regions" related to the housing market.
  • The rest can be explained by normal seasonality and the company's own pricing choices in the portfolio to "build resiliency."
  • The assumption is that the present level of credit performance "normalization" and pace of degradation in localized housing markets remains in place throughout 2008.
  • Those assumptions about housing market degradation may still be too rosy.
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