Monday, July 27, 2009

Here’s a Shocker: People Buying Homes…and Companies Buying Companies

New-Home Sales in U.S. Climbed 11% in June, Most in Eight Years
By Courtney Schlisserman

July 27 (Bloomberg) -- Purchases of new homes in the U.S. climbed 11 percent in June, the biggest gain in eight years, adding to evidence the slump that began in 2005 is stabilizing.

Sales increased to a 384,000 pace, higher than any forecast of economists surveyed by Bloomberg News and the most since November, figures from the Commerce Department showed today in Washington. The number of houses on the market dropped to the lowest level in more than a decade….

Builders had 281,000 houses on the market last month, down 4.1 percent from May and the fewest since February 1998. The number of unsold inventory fell a record 36 percent from June 2008. It would take 8.8 months to sell all homes at the current sales pace, the lowest level since October 2007.


Back in April we published “Stress Test On, Crisis Over.”

The crux of “Stress Test Etc.” was that since the government was finally getting around to stress-testing the banks, the financial crisis must be over.

This prompted a swift reaction and much disbelief— “Sold to YOU” being the most memorable, and the most printable of the negative responses—along with a why-are-you-so-hard-on-Democracy lament.

But the point of “Stress Test Etc.” was not some knee-jerk reaction against Government policies in general and the then-unpopular Treasury Secretary in particular.

It was 30 years worth of experience watching politicians react years too late to whatever it was they should have been reacting to a long time ago if they had really wanted to do anything about it.

By way of example, recall the Sarbanes-Oxley legislation, which only came out after WorldCom and Enron had gone down in flames—and which did absolutely nothing to prevent a far worse level of financial chicanery to infiltrate Wall Street and very nearly bring down Main Street by the time the dust had settled.

But the dust has indeed settled—after record-breaking government intervention in financial markets—and Main Street is getting back on its feet.

Witness today’s new home sales. But even more interesting than today’s home sales is the Agilent-for-Varian Inc. acquisition.

Agilent is paying $1.5 billion in cash for Varian, which makes all kinds of lab equipment. That amounts to almost 12-times Varian’s trailing EBITDA, which equates to an 8.3% pre-tax, gross yield on its purchase price.

And that’s an extremely hefty price to pay except when you consider with what Agilent is earning on its cash these days—which is probably less than 1%.

If corporate America seems to think—as home-buyers now seem to be thinking—that the time is right to convert low-earning cash into a higher-earnings hard asset, we’re in for a surprisingly strong recovery.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.


Mark B. Spiegel said...

>>If corporate America seems to think... that the time is right to convert low-earning cash into a higher-earnings hard asset, we’re in for a surprisingly strong recovery.<<

Huh? Except in the most convoluted of scenarios, how does "a" necessarily lead to "b"? On the other hand, I could easily explain how it DOESN'T:

I'm a company with $1 billion burning a hole in my pocket, and rather than investing in a new factory (or new software, or more advertising, or whatever), I instead buy another company with a plan to wipe out lots of SG&A via "eliminations", thus putting a few thousand more people on the unemployment rolls.

Anonymous said...
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Anonymous said...

I'm surprised that property is recovering so quickly as it tends to be a late cycle asset.

Are consumers really that confident in getting into one of the most leveraged assets a private individual can own or is it the property recovery focused on those who are lucky enough to be able to use cash? Rates are low but the best rates are still not easily accessible for most people I thought.

But What do I Know? said...

Maybe, if home sales were really going up--look at the non-seasonally adjusted chart on calculated risk. Home sales are down Y-O-Y--even after the $8000 benefit and historically low mortgage rates.

As for companies buying companies, I agree with Mark--all it means is more layoffs. Now, if you're simply looking for equity price increases and some deals to arbitrage, then it is good news, but it doesn't help the economy as a whole.

I guess good news depends on where you're standing. . .