You might want to skip reading today's paper. Rarely do you get such an unrelenting stream of horrid news headlines. ClearChannel's
(CCU)
$19 billion buyout looks near collapse, consumer confidence has plunged to levels "usually seen only during recessions" (WSJ).
The Case-Shiller home price index declined, the stock market may be in a "lost decade" says a lead story, and Thornburg Mortgage is looking to save itself with a bond offering that will pay 18% interest initially (to me 18% is a sign of extreme desperation to be quickly followed by insolvency -- my opinion only).
Durable goods were just announced and were down 1.7%. The stock market is trading slightly below where it was nine years ago as measured by price only on the S&P average (slightly up with dividends added). I guess we should go back to bed and pull the covers over our heads.
But why then has the stock market rallied 6% off the intraday lows seen late January, and why does the market continue to trade well in the face of continual bad news? My guess is that we have discounted the bad news and see value in the debris.
Ryan Knott, CEO of National Home Auctions, was a guest on Larry Kudlow's show last night. (I was on as well, but Mr. Knott had something of value to offer. I played the "Kudlow Straight Man" role.) His company conducts auctions of foreclosed homes around the country, and, as you might guess, his business is booming.
The remarkable thing is he said that the average price the foreclosed homes are going for is 75-95% of the prior mortgage. That's amazing! He figures that he and several of his like-sized competitors will auction some 60,000 homes this year. My guess is that the number will be far greater, as more entrepreneurs enter the business.
This revelation is important on two levels. First, it's great to see there is a market for what are probably the worst of the foreclosures (I'm guessing the better inventory would be kept by the banks so they could realize the maximum recovery), and, second, the price level is surprisingly high. I would have guessed that foreclosed homes in the hands of liquidators would go for less than 50 cents on the dollar, and instead they are trading between .75 and .95 cents.
As I said on Tuesday, and as this evidence supports, I feel we are bottoming in the housing market. This is not a turnaround, but the beginning of a bottom, and that is forward-looking news. The headlines mentioned above would have you drive your car with your eyes firmly fixed on the rear-view mirror. Do not despair. Great opportunities present themselves in times of crisis.
Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.
