Why did Citigroup upgraded Homebuilders? Read this,
Before getting into why Citigroup may have upgraded the homebuilders, let’s review the similarities between October 1987 and October 2007 as hopes of a rate cut trap the bulls.
October 19 marks the 20th anniversary of the day nervous investors lost it all. It was the day floor traders headed to the exits, screaming with eyes shut, ears covered. It was also the day top floor investors were asked to hand over their window keys.
Managers were fearful of “jumpers” on the day the Dow plunged 22%.
But could it all happen again? You bet.
Even today, we have the same “crash” triggers in place: inflationary fears, skyrocketing oil prices, and Middle East tensions.
So, yes, it could happen again.
While we’re beginning October 2007 on a high note, be cautious. October has historically been a raucous month for the major indices. I’m sure you’re familiar with the crashes of 1929, 1987, October 27, 1997’s 554-point plunge, and the beatings of 1978, 1979 and 1989.
Scary similarities between 1987 and 2007…
In 1987, we had a rookie Fed boss in office.
In 2007, we have a rookie Fed boss in office.
In 1987, we had a powerful run on the stock market.
In 2007, we have a powerful run on the stock market.
In 1987, we had a weak dollar thanks to the Plaza Accord of 1985, which produced coordinated interest rate cuts and the eventual depreciation of the U.S. dollar in relation to the yen and the deutsche mark.
In 2007, we have a weak dollar because of overly aggressive interest rate cuts.
In 1987, oil prices were skyrocketing. Oil prices were dominating the wild fluctuations of consumer prices during the first three quarters of the year.
In 2007, oil prices are skyrocketing. Oil surged above $83 a barrel last week.
In 1987, we had Middle East issues with Iraq and Iran.
In 2007, we have Middle East issues with Iraq and Iran.
In 1987, we had a problem with housing.
In 2007, we have a problem with housing.
Similarities aside, the one big difference is inflation. But then again, is what the economists telling us about inflation true? My grocery bill is outrageous. My oil bill is ridiculous. Gold is at $750. Oil is above $83. The dollar is getting killed.
Could October 19, 2007 happen again? You bet… and it will.
As for the homebuilders…
There is still no bottom. Housing prices are dropping. Home sales are plummeting. Millions of ARMs will reset. Millions will lose their homes. Millions will become delinquent in payments. And housing prices will continue to come down.
Lennar and KB Home just posted monumental losses.
Yet, Citigroup is upgrading the homebuilders? Just why did they do that?
According to the analyst behind the upgrade, “We are not trying to suggest that trends in the home-building sector are about to get much better ... they have never been worse. And in this sector, with its long history of feverish booms and catastrophic busts, it is precisely when things have gotten this bad that the stocks start looking good."
So, because things have gotten bad, the homebuilders now look good. What?
There’s further downside risk for homebuilders because the homebuilders aren’t earning anything. They’re cutting home prices because of glut. Nothing is looking good. These builders will continue to write down impairment charges to write down the value of land held on books.
So, because more write-offs are expected and housing is expected to get worse, an upgrade is warranted?
Has thinking become a crime?
Here’s another reason not to listen to Citigroup. While you and I were shorting builders, lenders and banks for triple digit gains throughout 2007, the likes of UBS and Citigroup were heavily invested in subprime.
Citigroup just wrote off $5.9 billion because of subprime troubles and anticipated mortgage and banking losses. Q3 profits will now come down about 60% because of that. Q3 net income will now fall to $2.2 billion from $5.51 billion.
The truth – housing is a mess. ARM resets will wreak havoc starting this month. Home prices will continue to plummet because of heavy 8-month supply glut. Yet, homebuilders should be bought?
Please… ignore the banks. They got it wrong betting on the long side of subprime and lending. And they’re getting it wrong again.
Thinking has become a crime.
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