As you can see from this chart, existing home sales in December shot to the upside. In fact, compared to November, home sales were up 4% in the Midwest, 7.4% in the South and a stunning 13.6% in the West. And while the Northeast took a bit of a hit, all told home sales in the U.S. rose a respectable 6.5%!

Good news? No doubt about it. Rising home sales mean that buyers are coming back into the market. And that means that one of the biggest investments out there for most people — buying and paying for a house — is showing signs of health. Now, factor in the ripple effect sparked by home sales transactions — including banking business, contractor activity and a boost in tons of home-related products and services — and the news gets even better.

But that’s not all. The latest report from the National Association of Realtors also shows that the supply of existing homes is falling. With about 3.7 million units on hand, current existing home inventory amounts to 9.3 months of supply. That’s the lowest supply level in a year and is significantly off last year’s high of 11.2 months booked in April.

The culprit? No big surprise here: Tumbling home prices. In fact, during December the average home in the United States fetched $175,400, down 15% from the year-ago period’s $207,000. And while that’s painful for home sellers, it’s also the sign of a sector beginning to right itself.

Here’s my point…

Imagine you’re an average retail store owner. You’re managing the store day-in and day-out, and you know that times are tough. Sales are weak and customer flow is just not what it used to be. And while your daily bank deposit isn’t terrible, it’s certainly not what is used to be.

So, what do you do? In a nutshell, you hunker down. You buy the products that carry high-margins — read: high profits — and that are in big demand. You keep inventories lean by buying just enough to keep the store stocked. And for those inventories that haven’t been moving, you make the oldest move in the book to get them off the shelf: You drop prices.

That’s exactly what the real estate market is doing: It’s lowering prices and, as a result, sales are beginning to spark. And while that may seem plain and simple, I don’t have to remind you of markets where, no matter how low the prices fell, no one wanted to buy.

Bottom-line: While the real estate market is hardly out of the woods, the latest data is certainly a step in the right direction. And no matter how you slice it, that’s a positive for the broader economy and the stock market.

Best wishes,
Wayne Burritt

January 28, 2009

Existing Home Sales Show Glimmer of Hope was originally featured in the Penny Sleuth.

Poor India, the old stomping grounds of the great Hindu kings, the playground of the Mughal Empire, had a rough year in 2008. India has had such a good run – five years of nearly 9% economic growth and a booming stock market – that it had reason to feel it was Fate’s spoiled darling. But in a long and checkered life, a good many things come unstuck. And so India has.

In 2008, it stock market lost 60% of its value. The rupee lost 20% against the dollar. Foreign investors pulled out in record numbers. India’s best companies struggle. The global economic freeze walloped India hard.

So the question is should you buy India or forget it?

India is a place of staggering contradictions. On the one hand, there is “the Indian miracle.” There are the booming companies and spotless IT campuses. The many millionaires minted daily. Yet there is also awful poverty. The World Bank estimates some 420 million people live below the poverty line. That statistic doesn’t capture the awfulness of it at all.

I’ll never forget the train station in Agra. The mass of poor people lying on the ground in blankets, the beggars and human misery in that place. Yet it has been this way for eons. Mark Twain wrote about the squatters in Following the Equator (1897), about the crowds with their “humble bundles and baskets and small household gear.” Twain would probably still recognize the place.

In India, you’ll see a man in a suit chatting away on a cell phone and on the ground next to him a snake charmer. You’ll see elephants pottering down roads in Rajasthan alongside buses and scooters and hand-pulled carts. You’ll see beautiful buildings right next to absolute squalor.

In Paul Theroux’s new book Ghost Train to the Eastern Star, he retraces a route he took 33 years ago, when he was 33 years old. Part of that trip goes through India. And so Theroux, now 67, is in a good position to judge the changes in India. He is mostly unimpressed. “We drove through the streets of Mumbai, past the slums, the sidewalk sleepers, the lame and the halt. Was the miracle, I wonder, just an illusion?”

Theroux writes about the constant presence of the poor. “Unlike the poor in Europe or America or even China, the poor in India are a constant presence. Where else do people put up with plastic huts on the sidewalk of a main road – not one or two, but an entire subdivision of humpies and pup tents? They inhabit train stations, sleep in doorways, crouch under bridges and railway trestles.”

The biggest slum in all of Asia, Dharavi, lies right in the heart of India’s Manhattan, Bombay. Over some 520 acres live 600,000 people, with one public toilet per 800 people. It is a place of unbelievable filth.

Yet many people in India seem to ignore such slums. I remember sitting in a presentation in which some official from Bangalore showed us slides of new buildings and smooth, functioning roads – a modern city – as he talked up the investment potential of his rapidly changing city. Yet right outside was a completely contrary view: dusty, uneven roads; derelict buildings; and extreme poverty.

Yet there is a lot of good in India. These episodes recount how much more there is to do.

It doesn’t neglect all the progress. And the promise of India, even now, is still enormous.

Consider that even as growth forecasts come down from 9% to 5%, India is still one of the world’s fastest-growing economies. Its people are young and hungry for a better life, unlikely to unbutton the old waistcoat and put their feet up. Half of India’s population is under 25 years old. There are many English speakers. The savings rate is near China’s lofty levels. “The crowning reason for optimism,” opines The Economist “is the savings rate.” Unlike the U.S., India is a nation of savers.

What to Buy in India

And there are many needs and opportunities. India’s road network is the world’s second largest, but in need of further upgrades. Power outages are common in Indian cities, too. India plans to spend nearly $500 billion on infrastructure over the next five years. Power generation alone should increase 14% annually over that span.

There are good companies here available on the cheap. The economic deepfreeze won’t last forever. If you can sit on Indian investments for a few years, my guess is you will be amply rewarded.

If you believe in the long-term growth of India, as I do, then now is not the time to overlook it. The sun dipped behind some clouds in 2008. It won’t always look so dark. Stick with the survivors, build low-cost positions and be patient.

Sincerely,
Chris Mayer

January 21, 2009

Investing in India in 2009 was originally featured in the Penny Sleuth.

We teeter closer to the sequel no one wants to see: Great Depression II. We got horrible news on the job front last week. Unemployment climbed to 6.7% as the nation lost another half a million jobs in the month of November alone. It was the worst rack of numbers in 34 years. One in 10 American mortgages is now either behind on its payments or in foreclosure.

Businesses are cutting back. Consumers are cutting back. Commodity prices have collapsed. The stock market is down more than 40% this year. When we close out the books for 2008, you’ll have to go back to the 1930s to find a comparable disaster for stocks in a single year.

So I find myself looking back at the 1930s often these days. What survived and what did not? The story of American Home Products is worth a quick look, as it offers one idea of what did make it — and winded up doing pretty well.

American Home Products was an anomaly in American business. Started in 1926 by a group of businessman long since forgotten, AHP was a maker of household products. It started out as a true small cap and grew quickly through acquisitions. Nothing so unusual about the tale so far. After all, the second great merger boom in American business took place in the 1920s. The period gave us many names we still know — including General Motors.

But AHP was unusual in two respects. First, it continued its acquisition spree through the Great Depression when everyone else was battening down the hatches. It could do this because its finances were top-notch and its earnings power robust. Ben Graham, that great old investment writer from long ago, gave AHP a mention in his 1940 edition of Security Analysis. He gives us an appendix with the stock prices, earnings and dividends of AHP from 1929-1939.

AHP was not immune to the Great Depression, whose effects linger on its financial record. But the stock never came close to reporting a loss. Peak earnings of $5.49 per share in 1929 fell to $3.93 in the depths of 1932. It recovered by ‘39, turning in $5.23 per share.

Investors who held it through the Great Depression did all right. The stock price bounced all over the place, as you would expect. It hit a high of $86 in 1929 and a low of $25 in 1932. But by the late 1930s, it was still humming along in the $50s and would hit $60 per share in 1939.

All the while, it paid its investors nice dividends — a total of $34.35 over the decade. Considering what happened to the rest of market, and keeping in mind the dollar held its value better then, you would’ve been happy to park some money in AHP that decade.

There is a second trait that marks AHP as an anomaly: It bought businesses in unrelated industries. It owned firms in floor wax, coffee, oil, cheese products, insecticides and much more. It was the early model of a conglomerate. In this, AHP defied the wisdom of the times, which consolidated related business. It was the age of General Motors and General Foods and International Harvester. Big empires built in one industry. But perhaps AHP’s diverse platform helped it weather the Depression better than if it had only a floor wax business.

So here we have a model of survival in the worst of times. AHP was a well-financed business that did more than one thing. It was an opportunistic business in the best sense of the term. It bought firms when and where they were cheap, without regard to the lines that divide industries.

Well, maybe the conglomerates of today will also fare better in today’s harsh climate. We own quite a few of these kinds of businesses in our Capital & Crisis portfolio. You can join my readers and check out these stocks while they can still be had on the cheap.

Until next time,
Chris Mayer
December 9, 2008

Conglomerate Stocks: The Great Depression Success of American Home Products was originally featured in the Penny Sleuth.