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  • The Housing Double-Dip Has Begun


    double dip

     By Steve Christ

    According to a new study released today by the Center for Housing Policy, buying a home still remains outreach for many workers despite historically low mortgage interest rates and steep drops in home prices.

    Entitled Paycheck to Paycheck: Wages and the Cost of Housing in America, the study compares and ranks the costs of buying or renting a home in more than 200 U.S. metropolitan areas with salaries for over 60 occupations.

    Even still, despite better prices the study found that while the income needed to purchase a median-priced home dropped in 93 percent of the homeownership markets many workers still do not earn enough to own a home.

    Deep discounts or not, according the group, housing is still too expensive.

    That's why no one should really be surprised by the existing home sales figures released this morning by the National Association Realtors(NAR).

    According to the NAR, sales of existing homes fell in for a third month in February, casting even bigger doubts on the spring selling season.

    From the AP by Martin Crutsinger entitled: February existing home sales drop 0.6 percent

    "Sales of existing homes fell for a third straight month in February, pushing sales down to the lowest level since last July. There is concern the fragile housing rebound is faltering, making it harder for the overall economy to recover.

    The National Association of Realtors said Tuesday that sales of previously occupied homes dropped 0.6 percent in February to a seasonally adjusted annual rate of 5.02 million.

    The weakness in sales depressed prices with the median home price dropping almost 2 percent from a year ago to $165,100.

    In fact, sales nationally have been declining since November, eroding gains made over the summer. The downward direction troubled economists because the government has taken unprecedented steps to support the housing sector.

    To keep mortgage rates low, the Federal Reserve has spent almost $1.25 trillion. In addition, Congress extended a deadline for homebuyers to qualify for tax credits. Both programs are set to end soon.

    High unemployment and tough lending standards appear to be holding buyers back. That could derail housing as it tries to emerge from the worst downturn in decades and harm the overall economy.

    "Until job growth resumes, housing demand will remain weak and susceptible to another lurch down when the homebuyer tax credit expires in April," said Sal Guatieri, an economist at BMO Capital Markets.

    Last month, the inventory of unsold homes jumped by 312,000 to 3.59 million, an unusually large increase that pushed the supply of unsold homes to 8.6 months.

    Lawrence Yun, chief economist for the Realtors, called that increase "discomforting" and said if it climbs above 10 months supply it could put significant downward pressure on prices."

    Let the double dip begin.....

    Related Articles:

    The 2010 Housing Market "Shadow Inventory" Underwater Homes Trap Borrowers into Higher Rates

    FHA Defaults: Many More on the Horizon

    Mortgage Delinquencies a Set New Record

    The Brewing Trouble at the FHA

    To learn more about Wealth Daily click here


    Disclosure: no positions
    Tags: housing
    Mar 25 10:22 AM | Link | Comment!
  • Healthcare: Big Brother is Watching You

    Funny how things work out.

    Despite American opposition, the "Washington Knows Best" bill had many feeling like it was rammed down their throats...

    But while millions were busy complaining about those large tax increases, $500 billion in Medicare cuts, and "dangerous interference in the doctor-patient relationship," we paid less attention to the new and massive powers that'll be granted to the IRS, (the U.S. version of the KGB?)

    Some of the highlights of the new IRS powers, include:

    • IRS agents will verify if you have "acceptable"health care coverage

    • IRS has the authority to fine you up to $2,250 or 2% of your income for failure to prove you have "minimum essential coverage"

    • IRS can confiscate your tax refund

    • IRS audits are likely to increase

    And there are more, which you can learn more about here.

    This isn't to say there aren't some "good" parts to the overhaul. We present the good below, too.

    Here's more from other Wall Street "experts" as highlighted by Business Week... as well as some investing opportunities.

    Ralph Giacobbe, Credit Suisse

    On Sunday, the House passed the Patient Protection & Affordable Care Act (H.R. 3590) and the Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872). The combined legislation would cover 19 million uninsured beginning in 2014, with a majority of uninsured covered by 2016 (30 million). The Congressional Budget Office has scored the bill to cost $940 billion.

    In our view, coverage of 32 million uninsured provides the greatest benefit to hospitals. The final bill has some incremental adjustments/reductions to the group. ... [N]onetheless, we believe health-care reform could provide hospitals with slight upside to numbers. More importantly, greater coverage of the uninsured should alleviate a large portion of bad debt expense.

    Jeff Kleintop, LPL Financial

    A catalyst for another 5%-10% stock market pullback that weighed on the stock market late last week is the health-care legislation that was passed in the House on Sunday. Within the Health Care sector, the impact is mixed, the HMO industry is negatively impacted while the hospital companies, along with other beneficiaries of increasing health-care volumes, benefit. However, much of this impact has already been priced into the sector. The potential negative outcome for the broader market stems from the tax and deficit impacts of the legislation.

    The new taxes are a negative for investors. The legislation imposes a new 3.8% tax on investment income. In addition it adds a 0.9% tax on wages for those earning more than $250,000, set to take effect in 2013.

    Another macroeconomic impact is the potential to increase the deficit. The bill establishes new insurance exchanges for the purchase of health insurance by those who do not have insurance offered through their employer. The bill caps the share of family income spent on health-care premiums. Two important facts are necessary to understand the concern evident in the markets over the deficit impact of the legislation:

    • The average cost of a family health insurance policy offered by employers was $13,375 in 2009, according to the Kaiser Family Foundation and the Health Research & Educational Trust. On average, employees pay about 20% of premiums with the employer making up the rest (an average of $10,700 per employee).
    • Under the exchange, the cost of a policy would be subsidized by the taxpayers for individuals and families with incomes up to 400% of the poverty level. This means a family of four with the national average income of about $70,000 (at 317% of the poverty level of about $22,000) would have their spending capped at 9.5% of income, which would be about $6,650. The other half of the cost of the insurance would be picked up by taxpayers.

    Tom Gallucci, Lazard Capital

    The long period of time between the passage and implementation of the bill inherently lends itself to some level of uncertainty. The debate around health care will persist even after this legislation is behind us. Polls suggest much of the public has been opposed to reform as passed, and Republicans have vowed to make the legislation a centerpiece of the November elections. We suspect it will be a material aspect of the debate for the 2012 presidential race as well.

    Depending on how the political winds blow in the next two years and whether government budget deficits grow or narrow, changes to the legislation are possible. Even without formal adjustments to the bill, the real-life effects of large federal bills tend to be difficult to predict, as there are typically unintended consequences. Given the sheer size of this legislation, the number of constituents it affects and the authority it leaves to regulators, analyzing the long-term impact of the bill is more difficult than it may at first appear.

    Scott Fidel, Deutsche Bank

    The House vote sets the stage for health reform to soon become law. Our long-standing view is that the reform bill will be a net long-term negative for industry profitability; the benefits of covering more than 30 million uninsured will likely be more than offset by the negative impact of Medicare Advantage payment cuts, industry taxes, and stringent new regulations on underwriting practices.

    At the same time, these risks are already well understood by investors after more than a year of rancorous debate; our buy side survey showed nearly 80% of investors expecting reform to be approved into law.

    However, while many investors believe the approval of the bill will allow for clarity after more than a year of anxiety-producing debate, we view the House vote as marking only the end of the beginning of this process. The next phase will include the release of thousands of pages of regulations at the agency level translating the law into a new regulatory framework.

    Phillip Seligman, Standard & Poor's Equity Research

    We view the passage by the House of Representatives of the health reform package as positive for managed care organizations (MCOs), on balance. The MCOs will face fees, which are delayed until 2014, and will have restrictions such as the ban on rescissions, no lifetime caps, and inability to bar coverage based on health status, which can pressure margins.

    But we think these negatives may be offset by enrollment gains, providing economies of scale, leverage over general and administrative costs, and greater negotiating clout with providers. We also see potential opportunities for consolidation.

    And here's another investor positive reported by the Wall Street Journal.

    The health care package passed on Sunday contains few provisions that are poisonous to the pharmaceutical industry, though drug makers may have to pony up several billion dollars more than previously expected.

    Absent from the legislation are provisions that would allow American consumers to buy re-imported drugs from abroad and let the federal government negotiate drug prices, two controversial issues that the industry has said would devastate their balance sheets.

    The approval of the bill is likely to be applauded by Wall Street and could benefit the stocks of drug makers in the short-term.

    "I was unable to find anything in there that would cause me to have anxiety if I were a shareholder in a pharmaceutical company," said Ira Loss, a senior health-care analyst at the research firm Washington Analysis.

    The legislation, which still has to be signed by President Barack Obama, also gives drug makers 12 years of protection, or exclusivity, to sell biologic medicines before facing the threat of cheaper, off-brand alternatives.

    Billy Tauzin, who led the industry's negotiations on health care with lawmakers, said overall drug makers fare well. "While we're not totally happy," Tauzin began, "we generally feel like it tracks with out principles."

    Sanofi-Aventis SA (NYSE:SNY) Chief Executive Christopher Viehbacher said in an interview that the impact of the legislation will be neutral to slightly negative "but better for the industry than if healthcare reform didn't pass."

    Tauzin, head of the Pharmaceutical Research and Manufacturers of America or PhRMA, and Viehbacher said getting protection for brand-name biologics is among the important provisions for the industry. Drug makers pushed hard to get 12 years of exclusive market protection while the White House and some lawmakers wanted to lower the protection to seven years.

    Tauzin acknowledged, however, that drug makers will take a "severe hit" in the form of fees on their profits and rebates they'll have to pay the government. Tauzin is the outgoing president of the Pharmaceutical Research and Manufacturers of America, or PhRMA, the main lobby for the drug industry.

    Such fees total about $80 billion under the bill passed Sunday and would be divided among drug makers.

    Still, many analysts say drug makers will end up recouping those costs through new customers: The bill would provide insurance coverage to an additional 32 million Americans.

    "Chalk up another good round for Pharma and Biotech in health care reform," began a note to clients Friday from Concept Capital, a research firm.

    Ken Tsuboi, co-manager of the Allianz RCM Wellness Fund, sees the impact of bill, and its $90 billion in concessions over 10 years, as relatively minor in an industry that has annual global sales of about $750 billion, with about $300 billion in the U.S., and margins close to 30%.

    "I think that it is actually a pretty good deal for Pharma," Tsuboi said.

    The stocks of large pharmaceutical companies generally have trailed the overall market over the past year. That likely reflects the projected impact of losing patent protection on several key drugs in coming years, more so than any concerns related to the health bill.

    Tauzin said the industry is concerned that a federal advisory board created by the legislation would end up limiting patient choices. He added, however, that it's too early to tell exactly how the board would operate.

    Another plus for drug makers is a proposal to close the so-called Medicare "donut hole"—the gap in coverage that forces seniors to pay out of pocket for drugs after a certain threshold is reached. Closing this gap is an industry priority; it will likely increase sales for drug companies because people frequently stop taking their medication or switch to generics once they have to pay for them out of pocket.

    Miller Tabak analyst Les Funtleyder took a sanguine view of the bill's impact on drug makers.

    "When you dig into it, the fact remains that more people are going to get covered and there doesn't seem to be regulation in costs," Funtleyder said. "If you have more people and limited cost control, that is good for the sector."

    We'd love to hear your thoughts on this very emotional issue, too. You can leave comments below.

    Disclosure: no postions
    Tags: SNY, healthcare
    Mar 23 8:52 AM | Link | Comment!
  • The Next Generation Fuel: From Pond Scum to Profits

    Cell biologist and Dr. R. Malcolm Brown, Jr. was the first professor at the University of Texas to work on a personal computer.

    "They told me I had to use the mainframe," Malcolm recalled to me over a meatloaf and catfish lunch last Wednesday at the Eastside Cafe in Austin.

    "But I said 'no,' I'm gonna go ahead with this." I could tell the excitement he felt 30 years ago from the way he told the story. "You'd be amazed what you could do with 48K in those days!"

    Even though he was a trailblazer in putting the PC to academic use, Prof. Brown has made a career out of playing with plants. His greenhouse and garden in the hills west of the Texas state capital are immaculately arranged, and at his namesake laboratory back on the UT campus, some beakers hold algae cultures that have been growing for 40 years.

    Just as over time the rest of the world woke up to the possibilities of computing and connectivity, today the tiny organisms that Malcolm Brown and dozens of his graduate students have nurtured and examined for over a generation are recognized as potential biofuel powerhouses.

    From Pond Scum to Blue-Green Gold

    The future of biofuels?

    Dr. Brown got in touch with me early this year after reading my dispatch from the American Council on Renewable Energy's RETECH expo. I noted that Brazil's largest sugar processor Cosan (NYSE: CZZ) had entered into a $12 billion joint venture with Royal Dutch Shell (NYSE: RDS), Europe's second largest oil producer.

    As I've stated a few times now, there are several pivot points between fossil fuels and renewables. Maybe it's an offshore oil rig being powered by wind turbines, or in the case of Dr. Brown's research, oil fields in west Texas where waste water is host to a cornucopia of productive organisms.

    New federal rules and incentives are making collaborations between oil titans like Shell and biofuel powerhouses like Cosan commonplace.

    The next step is bringing cellulosic ethanol to billion-dollar scale. That's something the U.S. government is already pushing for — big time.

    On February 3, the Obama Administration released its Final Renewable Fuel Standard, known as RFS2. Under RFS2, corn ethanol's status will diminish over the next decade because of its weakness relative to sugarcane ethanol. This is a point of heavy contention from corn state lobbyists and corn ethanol enthusiasts across the board.

    From farmers to Archer Daniels Midland (NYSE: ADM) crop scientists, many assert rightly that corn ethanol research and development should continue. I invite feedback from anyone involved in the sector.

    However, the chain from research to policy to profit right now runs straight through what are known as advanced biofuels. Advanced biofuels have a greenhouse gas (GHG) footprint that is over 50% better than gasoline. Land use factors in heavily to the Environmental Protection Agency's GHG calculation, and RFS2 follows EPA stats showing that sugarcane ethanol has an International Land Use Change (ILUC) impact less than 1/6 that of corn-based fuel.

    There's a step above sugarcane feedstock, however, and it's cellulosic ethanol. This is where Dr. Brown and his beakers come into play.

    If you think of cellulosic ethanol currently, corn husks and switchgrass may come to mind. Yet, I've now seen time-lapse footage taken through a light microscope in Malcolm Brown's lab that shows a bug called acetobacter spinning out cellulose like a spider spins a web.

    The strands produced by these micron-sized bacteria are nanometers wide, which means that when put together, a sheet of cellulose produced under optimal conditions can be as strong as steel. It can also be used to make paper, of course, since it's analogous to wood pulp.

    There are other mighty bugs in Brown's lab, too.

    One Man's Trash...

    EPA calculations put cellulosic ethanol GHG emissions at 60% less than gasoline, but that includes land use just like corn ethanol. Being a Texan, Malcolm Brown has grown cultures in water from all over the state; he's found that some of the best water for growing bugs that produce sugar and cellulose is found in oil wells where brackish water is a waste product of crude extraction.

    Even enhanced oil recovery (EOR) techniques now in use to get more oil out of dying fields can lead to bountiful bacterial produce, because the carbon dioxide from that process can be used to stimulate increased sugar production during photosynthesis.

    Prof. Brown also showed me in his lab how cyanobacteria, commonly known as blue-green algae, can be shocked into producing more sugar than normal by changing the salinity of the water they're in. It's basic osmosis — the kind of stuff you learn in high school biology class — but seeing it applied to create next-generation biofuels is pretty amazing.

    Now, as with every single renewable energy type under development, it's a matter of scale. These cyanobacteria have been tested in ponds and can be scaled up to testing in square-mile size tracts of foot-deep water. They can be placed next to power plants to take carbon dioxide into the fuel production process, or large tracts of scrubby west Texas land can be laid across with oil well water to grow the bugs.

    The Brazilian Connection

    Jose Goldemberg, the Brazilian scientist who set off that country's sugar-based biofuel revolution in the 1970s, has met with Malcolm Brown and marveled at the production he's been able to get out of such simple organisms.

    In test tanks and ponds, the UT-Austin team has logged 14 tons of sugar per acre-foot per year. In laboratory conditions, that harvest rises to 94 tons of the sweet stuff, which is equivalent to 13,000 gallons of ethanol per acre-foot per year. That sucrose can then be added directly to yeast to create ethanol, instead of breaking down cellulose starch to get glucose.

    The best part is that while these scummy powerhouses work, the sugar they put out can be taken without blasting the cells apart — this may be the ultimate renewable fuel.

    You can learn more about Dr. Brown's work and goals here at his laboratory's website. He'd be happy to hear from you, and I can tell you that his enthusiasm for creating a high-efficiency, world-leading biofuel in the United States is contagious.

    Just as Jose Goldemberg's vision in 1978 was turned into a national initiative to make Brazil a world energy power and investment target, researchers across the U.S. are working to make American biofuels maximally efficient and, ultimately, very profitable for investors who follow the idea flow from lab to market.

    As my colleague Nick Hodge reported last summer, Exxon Mobil has already made a $600 million bet on algae biofuel. Surely that's not the end of the money movement into this sector.

    We'll keep you up to date.


    Sam Hopkins

    Sam Hopkins

    Disclosure: no postions
    Tags: CZZ, ADM, energy, biofuel
    Mar 23 8:47 AM | Link | Comment!
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