One major fallout from this recession is the discrepancy of what has happened between small private companies and large public companies in the same sector. With the Federal Reserve shoving money into the capital markets there has been a flood of capital to deploy. This is why, despite the worst recession in decades, there have been so few public company failures... any company in trouble is able to issue shares and recapitalize itself.
Casinos are too big to fail, home builders are too bit to fail, REITs are too big to fail - very, very few public companies have actually failed these past few years. The entire public commercial real estate market has recapitalized itself this way. About 8-9 months ago company after company came to market, issued boatloads of shares to dilute shareholders... and the stocks shot up. Magic. There was no such "out" for private companies. Even as recently as this past week, I have watched companies in various sectors shoot UP after they do a secondary offer - that's not how is used to work. Usually in economics 101, when more supply hits the market the price goes down. Somehow Uncle Ben has successfully repealed the laws of economics. When companies diluted their shareholders, the stock would go down... I can only attest there is so much money now flowing in the capital markets with no place to call home, that institutional investors are piling in.
Specific to the homebuilders, in the worst downturn in US history there have been no major PUBLIC homebuilder bankruptcies, despite a death watch about 2 years ago. [Jan 29, 2008: Credit Default Swaps Paint Ugly Picture for Homebuilders] [Jan 11, 2008: Standard Pacific (SPF) - the First Major Homebuilder to Go?] [Jan 24, 2009: Bloomberg - Hovnanian May Fail Absent Miracle] Apparently miracles do happen and Schumpeter's "Creative Destruction" is now old school. (what's that you say about destruction being a necessary piece of capitalism?) Good old American
corporate socialism free market capitalism.
Speaking of miracles, the US Congress is also a miracle maker.... especially when lobbyists are involved. Two years ago when the first "beautifully titled" Foreclosure Prevention Act of 2008 was passed, we said it was a complete hoax, a bailout for banks and homebuilders (shocker!); it had very little do with preventing any foreclosures. [Apr 4, 2008: Congress is Rushing to Help Homeowners Out!! (Not)] As written in 08:
The National Association of Home Builders, one of the top 10 corporate donors to politicians, has stopped contributing to congressional candidates after it failed to get what it wanted in recent anti-recession legislation.
The association had unsuccessfully pressed lawmakers to adopt a provision to reduce the tax liability of home builders by allowing them to offset their past profits with future losses.
Since 1990, the trade group has given nearly $20 million to federal candidates.
But who says nothing gets done in the halls of Congress? When they are motivated, and see their political contributions at risk, boy, they are like a steamroller! In under 60 days...
Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis.
The bill contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year timeframe.
While Democrats and Republicans called the bill a productive bipartisan compromise, Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington, questioned whether the trade off was worthwhile for Democrats. "This is first and foremost helping the big villains in the story," he said.
So please don't say Congress doesn't do anything. The minute their campaign donations are threatened they are among the most efficient bodies in the world.About 9 months ago, I highlighted another story [Jun 23, 2009: WSJ - Land Deals Help Home Builders Stay Alive (Not to Mention Tax Rule Changes, and Government Largesss]:
Other publicly traded home builders also dumped land during the crunch. By selling land at huge discounts to what it was once valued, big builders generated large losses for tax purposes.
By applying those losses against profits during prior years, they have collected about $2.55 billion in tax refunds this year, according to Zelman & Associates, a housing-research firm. Big builders are benefiting in other ways from the high mortality of small and midsize builders. The smaller players had loans cut off by lenders and are dying off in droves, surrendering market share to the big players. As many as half of the nation's privately held builders have shut down during the housing bust, and many others are struggling to survive, according to a Credit Suisse estimate.
So the big get bigger and consolidate power, and the small(er) die. If you are a major political contributor, heaven and earth will be moved for you. If you are smaller, you should go into that dark corner, fend for yourself and preferably rot so that the bigger players can take over more of the market (and the politicians get even more political contributions). Welcome to Cramerica.
This past quarter I did a lot of reading of housing earning reports... across the board they beat estimates by huge margins. Business rebound? Not so much. But a massive handout by Congress with tax loss rule changes contributed huge gains to EPS. It has become so egregious that, much like the smaller banking institutions in America are complaining about the "firewall" around the largest banks, we are now seeing the same thing in the housing industry.
Not that it matters, because it's business as usual. And, as speculators, we just have to giggle in glee and accept the taxpayers' handouts. (Remember, Wall Street = Main Street). By direct transfer, the taxpayer losing out on this money means more money for me as a speculator. Did I mention Cramerica is a wonderful place?
- It's tax season, and the IRS is being particularly generous to some of the nation's largest homebuilders. Several publicly traded companies, including Lennar Corp (NYSE:LEN)., Hovnanian Enterprises Inc. (NYSE:HOV)and Pulte Homes Inc (NYSE:PHM)., expect to rake in roughly $2.5 billion in federal tax refunds combined, according to company filings.
Stop for a moment there. $2.5 Billion. The majority in about 9-10 companies. Once more let me say, as I've repeated over and over the past three years, the best ROI (Return on Investment) in America is lobbying dollars. Crony corporate socialism defined. (And this is why we are seeing the huge beats in earning estimates.)
- Lawmakers amended the tax code last fall to help struggling companies stay in business by essentially giving them a greater opportunity to recoup previously paid taxes. The move has helped some of the biggest builders turn a profit for the first time in years.
So if you, dear peon, make financial mistakes in your life -- say you overextend yourself -- you tend to have to deal with minor things like bankruptcy. That's the life of a taxpayer. If, however, you are a public corporation with politicians wrapped around your torso, you don't suffer the same consequences. Indeed, money will be transferred to you so you do not suffer from your decision making. It's a good life, no? (Insert dogmatic line here: "We need to bail out the largest homebuilders or the economy would fail.") No wait, that was the line used for the banks.... err, well, get back to me and I'll think of a good reason for this handout. Especially for homebuilders that were not even in real financial trouble but who benefited during the bubble times and in down times were given massive reverse Robin Hood (steal from the many to give to the few) handouts.
- But some small builders say the souped-up tax break is primarily giving their large rivals yet another competitive edge. That's because the latest windfall looks less like a lifeline and more like a war chest. Several large builders are now sitting on more than $1 billion in cash and are snapping up tracts of land to be ready for the next building boom.
- "These public (builders) sold hundreds of millions of dollars worth of land and took huge losses and wound up with hundreds of millions of dollars of checks from the government sitting on their balance books," said Ken Endelson, CEO of Kenco Communities in Boca Raton, Fla. "It was a real bailout. No different than the banks."
- In November, Congress passed a law that lets companies of all sizes that are losing money reach back five years and get a refund for taxes paid when they were making money. Previously, large companies were limited to recouping taxes paid up to two years earlier. That extension was a boon to builders because the economy and the housing market were flying high five years ago and they couldn't put up new houses fast enough. "They were earning bubble profits back then," said Credit Suisse analyst Nishu Sood.
At FMMF, we call this the "heads we win, tails we still win" ethos that now dominates almost all of the major industries in America (not to mention corporate executive compensation). But only if you are amongst the largest players, of course. You win from the bubble profits (which you had to pay taxes on) but when the bubble bursts... guess what, we will retroactively make sure you are refunded those taxes paid!
- Sood, the Credit Suisse analyst, estimates that a dozen of the publicly traded builders paid about $8.5 billion in taxes between the booming years of 2004 and 2007. As of November, the builders had recouped $3.7 billion in refunds.
So basically HALF of the BUBBLE year profits in taxes, were handed right back to the homebuilders. Good thing the US doesn't have a budget deficit or anything ... or else we'd actually need this money we just handed back to a select few companies.
But we are not DONE yet...
- At the current pace, the large builders combined are on track to recover at least $6 billion in refunds.
Boo Yah! Almost 3/4ths of the tax receipts from the Ben Bernanke/Alan Greenspan bubble will be handed right back to the homebuilders. Heads they win, tails they still win. Now bonus those executives because it takes a certain type of talent that only a few people on Earth have to run a company that doesn't even have to pay taxes. And all your mistakes are washed away by Congress. (Remember, this is what executives tell us when anyone question's compensation; they have a skill set that is so rare.)
(My comments in parenthesis)
- In recent weeks, builders have reported quarterly results that include the gains they expect to receive from tax refunds. Among those to post a profit were KB Home (NYSE:KBH), Lennar, Hovnanian, D.R. Horton Inc. (NYSE:DHI), Beazer Homes USA Inc. (NYSE:BZH), Ryland Group Inc. (NYSE:RYL) and Meritage Homes Corp. (NYSE:MTH)
- Pulte, the nation's largest builder, lost money in its fourth quarter despite an $800 million tax benefit. (That's real money, folks; you just handed back almost $1 billion to one company. D\id you receive a thank you note in the mailbox from Pulte?)
- Hovnanian, which is based in Red Bank, N.J., earned $236 million for its fiscal first quarter -- its first profit since 2006. But without a $291 million tax benefit, the company lost about $55 million, or 69 cents a share. (You're welcome Ara, the CEO who has been paid $90 million in the 5-year period through 2008, thanks to Ben Bernanke's bubbles. This was one of the companies that should have been put out to pasture if the "free market" existed. Now it will probably be a $30 stock in a few years; the taxpayers of America are a generous people.) Analysts say the tax refunds have allayed bankruptcy concerns for Beazer and Hovnanian.
- Government efforts to prop up the housing market, such as two tax credits for homebuyers, helped drum up orders last year. But most builders have said sales remain weak, so they're bringing in less in revenue. To stay afloat, builders laid off thousands of employees, halted developments and generated cash by selling land at sharp discounts. That led to losses they are using to collect tax benefits now.
So the tax refunds helped a few public homebuilders that should have gone to bankruptcy to survive. But, for the others, it just helped pad their war chests so they can win again with the taxpayer's help during the next real estate rebound.
- For others, such as Pulte, Lennar and D.R. Horton, each with more than $1 billion in cash reserves, it's given them more financial elbow room.
- Many large builders have been buying up developed home sites, often from banks that have repossessed the land from other builders unable to make loan payments. It's a smart move because the land is cheaper now and homes built on it can be sold eventually at a higher profit. The bigger companies also can afford to wait out the market better than smaller builders.
- "We don't have the ability to buy a bunch of property right now at a discounted price like (large builders) do," said Mick Galatio, owner of Desert Wind Homes in Las Vegas. "They're really getting a jumpstart on the small, private builder and we're going to have to work very hard to try to compete with that."
Sorry, Mick... you are
too big to fail too small to care about.
Speaking of, it's almost time to start buying some homebuilders so we can all watch in amazement as May home sales are higher than April home sales, and June home sales are higher than May. Remember last year when that happened, every pundit was shocked at the "housing recovery" and home building stocks surged. Even though this seasonal pattern happens every year, we have to prepare for the cries (of joy) of "here comes the housing rebound" when once again it happens this year. I need to go find my Kool Aid costume...
Disclosure: Long taxpayer handouts so public companies can benefit, and small private companies can go into a corner and die. Yee haw.