May 25, 2022

Archives for July 2010

Newmont Mining – Getting Ready For A Price Explosion

Newmont Mining (NEM) has been a frustrating stock for many investors over the past 14 years.

As the price of gold moved from the $390 range in May 1996 to $1200 today, Newmont’s stock price is only $3 above the all time high of $59 reached in May 1996.  Long term Newmont shareholders are certainly justified in wondering when the price explosion in gold will be reflected in Newmont’s stock price.

Based on recent relative price performance and fundamentals, Newmont shareholders should finally be looking forward to an explosive move upward in the price of the shares.

During the recent price correction in gold, Newmont’s shares have shown a strong relative price performance compared to other large major gold producers.  Short term price pullbacks in Newmont were quickly recovered, indicating eager buyers at lower prices.

NEWMONT GOLD OUTPERFORMS

NEWMONT GOLD OUTPERFORMS -COURTESY YAHOO.COM FINANCE

The fundamentals on Newmont are exceptional and do not seem to be fully factored into the stock price.  Newmont sells at a forward price earnings ratio of only 15 times earnings, has had quarterly revenue growth of 46%, enjoys a 17% return on equity, has had quarterly earnings growth of 188%,  is sitting on $3.4 billion in cash ($7 per share) and the stock price has recently hit an all time high.

newmont-ready-to-fly

Based on the trend in fundamentals and strong relative price performance, look for a blowout earnings announcement by Newmont on July 28th.

Disclosures: Long NEM

Strategic Defaults – The Difference Between The Rich And “Other People”

Million Dollar Home Owners Falling Off The Cliff

“I think you’ll find the only difference between the rich and other people is that the rich have more money” – Mary Colum

If the difference between the rich and “other people” is money, why are the rich walking away from their mortgages just as fast as anyone else?   This question is examined in a recent New York Times article which cites a serious delinquency rate of 1 in 7 for homeowners with a mortgage over $1 million compared to a delinquency rate of 1 in 12 for smaller mortgages.  The Times’ conclusion is that the biggest defaulters on mortgages are ruthless rich folks with no scruples.

Without citing specific statistical analysis, the Times article seems to draw the conclusion that anyone with a million dollar mortgage would have substantial financial resources that could be tapped to keep the mortgage current.   This may well be the case for some, but drawing from my own experience in the mortgage industry, many homeowners with the million dollar mortgages are financially thin and over leveraged.   For a variety of reasons ranging from ego, poor financial planing or irrational exuberance, many purchasers walk into million dollar homes with empty pockets.

Many of the million dollar homes now in default were purchased when eager buyers believed that home values could only go up and that buying as much home as possible simply meant larger profits down the road.  A ten percent gain on a million dollar home results in a handsome $100,000 gain – ten times the profit from purchasing a $100,000 home.

A few short years ago, at the height of the housing bubble, income was deemed irrelevant when banks granted mortgage approvals.   The proverbial strawberry picker or fast food cashier with average credit could use exotic mortgage programs to buy at any price level chosen, without the bother of a down payment or income verification.    Ever increasing home values then allowed cash extraction from a refinance or second mortgage, once again without the hassles of verifying income.  It should come as no surprise that wannabe millionaires taking the biggest risks now have the highest default rates.

According to the Federal Reserve, “half of the defaults are driven purely by negative equity” when the mortgage debt exceeds 150% of a property’s value.  Since high priced homes have seen large declines in value, it should come as no surprise that many strategic defaults will occur at the high end of the market by homeowners with million dollar mortgages.  The open question is – does having a million dollar mortgage imply a wealthy homeowner?

If a statistical study was done on the net worth of defaulting homeowners who have million dollar mortgages, it would probably reveal that many of these alleged “rich” homeowners have an embarrassingly low or negative net worth.  Consider the findings from one of the most influential studies on the mind set and lifestyles of the wealthy from The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William D. Danko.

Characteristics of the millionaire next door:

  • Avoids buying status objects or leading a status lifestyle
  • 97% are homeowners with an average home value of $320,000, occupying the same home for over 20 years
  • The average millionaire lives well below his means and spends below his income level

The rich did not get rich by being poor stewards of capital or chasing housing bubbles.  The bulk of those defaulting on million dollar mortgages (strategically or otherwise) are simply poor people, living in big houses they could never afford in the first place.

Living Large

Living Large

Will Governor Schwarzenegger Trigger 55,000 California Foreclosures?

California’s long running budget crisis has now degraded to the point where Governor Arnold Schwarzenegger has ordered a pay reduction to the minimum wage rate of $7.25 an hour for 200,000 state employees.

The California banking industry, perhaps sensing an opportunity to rebuild their poor public image, has jumped into the budget mess with a plan to rescue beleaguered state employees.   Spearheaded by $7.6 billion asset Golden 1 Credit Union, banks are tripping over themselves to offer “Budget Impasse Loans”, an easy way for over leveraged State workers to tide themselves over until the budget crisis passes.

Bloomberg: The Golden 1 Credit Union, a lender that caters to state workers, will offer zero-interest loans to customers whose pay falls because of the stalled spending plan, according to a July 2 statement.

Golden 1 said as many as 55,000 of its customers may participate this year, if state-employee pay is cut to the federal minimum wage, currently $7.25 an hour. Flyers that tout the program are being distributed in its 84 offices, carrying a message that says “balancing the state’s budget doesn’t have to affect your own.”

“We could survive off our savings for a little while, but it would be a real burden on us,” said Chava Yniquez, a 49- year-old technician in the Senate printing office who has used Golden 1 budget-impasse loans in the past. “It’s a lifeline.”

The California budget crisis and bankers pushing loans are not the issues to ponder here.  Golden 1 Credit Union’s estimate that 55,000 employees will need a loan after seeing their first pay check reduced indicates the very fragile financial condition of 25% of the State’s workforce.  How many more will need a “Budget Impasse Loan” after two weeks, or a month?  Will the first week of the Governor’s budget balancing plan wind up pushing 55,000 home owners onto the path of foreclosure?  Terminator indeed!

The very banks offering “Budget Impasse Loans” may shortly find themselves offering “Loan Modification Plans” if the California budget crisis eventually requires permanent pay concessions from State employees.

Golden 1 Credit Union, which lost $22.6 million in 2008 and $23.1 million in 2009 may be offering a valuable service to strapped State employees, but is a customer one paycheck away from default a solid credit risk?  Golden 1’s website notes that budget impasse loans will be offered with “rates as low as 0% APR”, implying that some borrowers will be paying a “risk adjusted” rate of interest.  Since Golden 1 is offering depositors a whopping .25% on regular savings accounts, even a “low rate” of, say 4%, would still leave them with a very nice spread.

At a time when the universal “solution” for every financial problem is to borrow more money, perhaps the banks should develop a unique “new program” involving financial responsibility, saving and wealth accumulation.

Finally, in the “too ironic not to mention” department, the Press Release issued by Golden 1 immediately prior to the Budget Impasse Press Release reads as follows:

SACRAMENTO, Calif., June 30, 2010—Employees and business partners of The Golden 1 Credit Union participated in the second annual United Way Toilet Paper Drive on June 18 contributing 15,989 rolls of toilet paper to benefit local nonprofits.

Golden 1’s contributions represented 33.5% of the total rolls of toilet paper collected by United Way in this drive. Of these, 10,205 came from the credit union’s employees and 5,784 came from its supportive business partners.

Perhaps soon, California State employees can contribute to this worthy effort by sending Golden 1 their state paychecks.