Another word that I refuse to use around kids is bottom. It has six letters, but in my book it is right up there with the most inappropriate four letter ones, especially when describing the real estate market. Maybe this is just a quirk of mine, since it didn’t trouble Maria at all when Robert Toll, CEO of Toll Brothers (TOL), suggested that the real estate market had bottomed. “I would guess, and that’s all it is, it would be another four or five months before you finally burn off inventory in most of the markets.”
So, who really used inappropriate language? Has the real estate market bottomed? Excuse me. Has the real estate market reached its lowest point? Each CEO has three character witnesses. Let’s see who has the stronger case.
MD: Your honor, I would like to call Mr. Toll’s first witness - Former Fed Chairman Alan Greenspan. Good morning Mr. Greenspan. Do you consider bottom a curse word?
Greenspan: “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown.”
MD: No, I mean in reference to the real estate market.
Greenspan: “We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing.”
MD: Thank you, Mr. Greenspan. Your honor, I would like to call Fed Chairman Ben Bernanke. Mr. Bernanke what’s your position on the bottom word?
Bernanke: “There are some indications that inflation pressures are beginning to diminish. The monthly data are noisy, however, and it will consequently be some time before we can be confident that underlying inflation is moderating as anticipated.” Core inflation is “somewhat elevated.”
MD: Somewhat elevated! When was the last time you put gas in your car? College tuition, medical premiums, food prices are through the roof! Oh, I forgot those items are not included in the core rate. Back to the question at hand - How about Toll stating that the real estate market has bottomed? What’s your position on that?
Bernanke: I am seeing “some tentative signs of stabilization” in the housing market.” Problems in the real estate sector “do not seem to have spilled over to any significant extent to other sectors of the economy.” “Overall, the US economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes.”
MD: Thank you Mr. Bernanke.
Bernanke: It may be “some time before we can be confident that underlying inflation is moderating as anticipated.”
MD: Stop, please, stop with the inflation talk. Mr. Larry Kudlow, CNBC Economics Reporter - would you please take the stand?
MD: Mr. Kudlow could you corroborate Mr. Toll’s position?
Kudlow: “The great American consumer has been written off so many times in the last couple of years, just like the rest of the economy. But he/she is alive and kicking. Another great story never told.”
MD: Mr. Kudlow some believe that you take your optimism to extremes. Do you recall making the following quote? “I think people should stay in for the long run and be optimistic because free-market capitalism is the best way to create wealth and prosperity.”
Kudlow: Yes, that sounds like one of my quotes.
MD: Do you remember when you made that quote?
Kudlow: I have said similar statements many times. I’m not sure exactly when that one was made.
MD: Mr. Kudlow that was in September 1929. One month before the great depression started. No further questions.
Judge: Mr. Toll, I must admit that I am rather impressed with the stature of your witnesses. However, all of their evidence is rather “touchy-feely.” Mr. Tomnitz, I hope that your witnesses have more concrete evidence.
MD: Your honor the first witness is Mr. Ara Hovnanian, CEO Hovnanian Enterprises (HOV). Mr. Hovnanian is it true that your company’s first-quarter loss was $57.3 million, or 91 cents per share, for the three months ended Jan. 3?
MD: Is it true that your revenues decreased by 8.8% to $1.2 billion, as a result of declines in the number of homes delivered and net contracts?
MD: Is it true that your company cut its 2007 profit target to between $1.10 and $1.50 per share, from a previous target of $1.50 to $2 per share?
MD: Mr. Hovnanian, is it true that your company and other builders have been offering price incentives, such as premium kitchens or other amenities to move inventory? If this is true and you are still lowering guidance – would I be correct in saying that customers are not responding to incentives?
Hovnanian: Enough already. “It’s not getting worse, and it is slow but steady.” “Once the housing market bottoms out - we are not expecting a rapid recovery.”
MD: Thank You, Mr. Hovnanian. Dr. Nouriel Roubini, noted Economist, would you please take the stand. Dr. Roubini the subprime meltdown, that we are currently experiencing, would it occur at the top or bottom of market?
Roubini: “Words such as “catastrophic”, “imploding”, “scary” and such coming from market participants cited by the WSJ are worth pondering. One could of course provide more formal data and analytics to prove this serious credit crunch in the subprime segment of the mortgage market: many investment banks – GS, JPM, MS, Citi - are now doing that in their research this week.”
MD: S–t. Excuse me your honor.
Roubini: “But I would argue that the quotations above from the WSJ – as well as Mr. Tomnitz of DR Horton statement this week that housing will “suck” every month of calendar 2007 – should be sufficient to prove the existence of a serious credit crunch to any reasonable person who follows the simpler “smell test” or “duck test” or “obscenity test” (to paraphrase Justice Stewart definition) to prove an argument: “if it walks, quacks, ducks, looks and stinks like a rotten duck it is a rotten duck”. And subprime looks and stinks in every way and shape like a rotten duck.”
MD: D—n. No further questions your honor. Next is Peter Schiff, President of Euro Pacific Capital. Mr. Schiff, I am still shaking a little from Dr. Roubini’s testimony. Can you offer us a little comfort?
Schiff: “The current train wreck unfolding in the sub-prime lending sector provides a good preview as to what will happen to the entire credit-financed bubble economy when the funding dries up. Contrary to the self-serving rhetoric of Wall Street and housing industry shills, the entire mortgage sector is not insulated from sub- prime. In fact, sub-prime is just the tip of the credit iceberg. Beneath the surface lie similar problems in Alt-A and prime loans, where borrowers also relied on adjustable rate mortgages to purchase over-priced homes that they could not otherwise afford.”
Schiff: “With the sub-prime market drying up, most first-time home buyers will be unable to buy. Without those ‘starter-home” buyers, the trade-up buyers (most of whom have the ability to make down-payments and are therefore considered “prime borrowers”) will be unable to sell their existing homes, and hence unable to trade up. This brings down the entire house of cards. Home prices must collapse, affecting all homeowners, regardless of their credit ratings.”
MD: Thank you, Mr. Schiff. Your honor, I would like to call for a recess.
Judge: There is no need for a recess. I have made my judgment. Dr. Roubini and Mr. Schiff, you have scared the h— out of me. I hope that people are listening to you, but please never come into my courtroom again.
It is obvious to me that we are nowhere near the bottom and that Mr. Tomnitz was correct in stating that the housing market sucks.