Homebuilders, Commodities and Diesel

When my brothers and I were called upon to do the occasional chore growing up, one of the simple tasks we were asked to do was putting away the dishes. Three of us, three components of "dishes," glasses/dishes/silverware. Like calling shotgun, calling dishes was the thing to do. Then came silverware, and if you were slow, you got stuck with glasses. However, to prevent the dishes guy from gaining too much of an advantage, we made the "no stacking" rule. This precluded the dish putter away from stacking all the bowls and plates at the dishwasher and thus blocking the other two from their jobs while speeding up his own.

The point? Well, they're at it again. Except in this case, the homebuilders are stacking up negatively compounding errors. In a recent article, SA's Judy Weil detailed homebuilder desperation.

A new financing program currently available through K. Hovnanian Mortgage (HOV) enables qualified buyers to purchase a home with just a 3% down payment that can be lowered to 0% down if combined with a second program — resulting in 100% financing.

Let's not leave out the genius of Lennar (LEN).

This weekend, Lennar Corp. will start interest rates at 2.88% for the first year - 3.88% for the second - before a slightly higher rate locks 'for life.' In some markets, Ryland Group Inc. will cover the down payment and closing costs, while KB Home has zero-down deals.

Any of this sound creepy and familiar? I'd say so. But hey, I just live in South Florida surrounded by lock-boxed homes and multiple family renters who jam themselves into soon-to-be foreclosed upon houses from flippers who can't pay their adjustable rate mortgages. "Resulting in 100% financing." Again, this means that these people will really have two mortgages at the outset, setting them up for financial disaster. I guess these guys haven't learned from the already defunct mortgage arms of other builders; they want to make sure they go belly up as well.

Returning to some good ideas, the following supports my recent foray into diesel (long Cummins, (CMI)). Bill Fleckensteinwrites:

Hourly costs to operate a 250-horsepower farm tractor in the nation's heartland have gone from $10.26 per hour in 2003 to $36.43 per hour this spring. This is directly attributable to diesel cost increases.

Yes, indeed. And farmers will have to keep paying for those diesel engines and the repairs for them as well.

As mentioned a few days ago on my blog, part of the diesel play lies in Brazil.

According to MSN Money's Jon Markman, Brazil is the world's biggest exporter of raw materials. The global demand for Brazil's exports is fueling strong economic growth.

Whether it's ag or ore, diesel engines do the heavy lifting to transport that raw stuff around.

What about China? The NBERreports:

Trade between the whole of Africa and China (imports and exports summed) grew from $10.6 billion to $73.3 billion between 2000 and 2007, and between Sub-Saharan Africa and China from $7 billion to $59 billion over the same period. China is now Africa's third largest trading partner behind the EU and the US. The Chinese FDI stock in Africa has grown from $49 million in 1990 to $2.6 billion in 2006.

China's not trading for lollipops in Africa, they're building rails and mines to export commodities for themselves. Diesel will play a huge role in this development.

Disclosure: Long CMI

References:

• Seeking Alpha: Desperate Homebuilders Bringing Back Bubble-Era Financing - Housing Tracker
• San Francisco Chronicle: Stocks soaring in raw material-rich Brazil
• MSN Money: $4 a gallon means more for a beer
• National Bureau of Economic Research: China’s Growing Economic Activity in Africa

Comments

[Tom Lindmark]

Need to note that the homebuilders are not making the 100% mortgages. These are FHA loan products. No risk to the homebuilder, big risk to the taxpayer. Here's a link that explains the process-blog.metro-real-estate...

[jjason]

So what. Is there a dividend? What's the price to tangible book ratio? Does CMI have good earnings? And is the stock at a all time high?

Just some of the info that is important.

[DrMike54]

Well written and well researched.

The problem has now become: who, if anyone, will be given these 0 down mortgages? Even if they CAN get one, who wants a home that may depreciate ANOTHER 25% in the next 12 months? With the economy in such dire straits, gas at $4....soon to be $4.50.... a gallon for regular (not to mention deisel), and consumer confidence at all time lows, why would anyone buy a house?

And if the new Democratic regime will raise capital gains taxes, and taxes on dividends, why should anyone want to buy a share of stock? (unless you are buying some of the ProShares Inverse ETF's).

Don't get me wrong, there are probably 50-100 agriculture, natural resource, steel stocks, a few heavy machinery stocks and a few special situations that make sense here but the great majority of stocks won't make sense (or money for those that own them) for the next 4-5 years.

[Brian A. Davis]

Excellent post Adam and Dr. Mike,
The point that homebuilders are still "finding buyers" for homes is out-right scary. It sounds as though the homebuilding sector has become the equivalent of JD By Rider cards... And in the car business the old saying is "There's an ass for every seat!" I can only imagine some of the creative financing options that are now available...this will dry up soon. Dr. Mike is correct...After all, how many bottom feeders are really out there to pick up homes when gas is sky-high?
I'll make a prediction here about the gas prices. They will stay high, and spike a little more...creating another bubble in Green Energies... When the new Green Cars get put into production, oil companies will drop prices and crush the competition. We'll forget about Green Energies again...until it really hurts.
Maybe another side story in Africa would be infrastructure companies. Although GE is has not performed well lately, the infrastructure division was one of the most profitable.