Money and Investing Thoughts

Home Front: Worse than 1993 and 1982 for Californias housing starts.

I found some of the data in the linked article on new housing starts for California very interesting. I am going to just throw out some data, give a bit of analysis and let you decide on your guess for the future of California housing. Unless noted otherwise, the numbers are for total housing starts, single plus multifamily units.

• In 2008 California home builders started construction on 65,380 units, including just 33,048 single family homes.

• The record year for California home construction was 322,018 in 1963. Only 7 years of the last 50 have had housing starts below 100k, including a 5 year stretch in the mid 1990′s when build rates ranged from 85k to 97k per year.

• During the 1982 recession when mortgage rates were 16% there were 85,656 home starts, 20k more than in 2008.

• In the early 1990′s the U.S. government shut down the majority of the military bases in California, a major employer in the state. During the resulting recession, California home builders managed to build at least 84,656 (1993) units.

• The 20 year average for new home starts in California is 138,500. During the recent bubble year of 2002 to 2006 new home starts averaged 190,000 per year.

• California’s current population is approximately 38 million. In 1990 it was 29 million. The projected annual population growth rate is 1.5% compared to the U.S. average of 1.1%.

Analysis: I expect new home starts for 2009 to be even lower that 2008. 2010 will not be much better and with a 2 year lead time for the permitting process in California by the end of 2010 there will be a housing shortage in the state. The states population will increase by 1.5 million (think of all of Philadelphia looking for a place to live) and the economy will be recovering.

I have been stating for months that the first month when the median sale price does not decrease will set of a tremendous buying surge in California. Sales are already double the rates of late 2007 as many realize they will not see home prices again at these levels in California. With home builders building at less than half the historic rate the dynamics of the California housing market will be interesting to watch.

Yesterday (Wednesday) the Baltic Dry Index (BDI) tacked on 14.6% to close at 1,318. The Capesize (BCI) and Panamax (BPI) indexes gained 13% each.

Here is a listing of the three Baltic indices, their recent low and date of low and gain since then:

• BDI: 663 on 12/05/08, now 1316, +98.5%
• BCI: 830 on 12/03/08, now 2380, +187%
• BPI: 442 on 12/11008, now 1000, +126%

The indices are now moving upward at a pace comparable to the downward run last fall. It will be interesting to see how long and far this rally carries. My tracking of the dry bulk stocks shows their results continuing to the positive and they average an 8.34% share price gain so far in 2009.

On the other side of the shipping world, it appears that rates are definitely softening for the oil tankers. The oil price cantango storage trade is winding down and the OPEC production cuts are real and affecting the amounts of oil that need to be shipped. The VLCC spot market oil tanker companies will see their margins squeezed for the foreseeable future. In the tankers I still like Nordic American Tankers (NAT: 14.24 +0.26 +1.86%) with their low daily costs and only Suezmax size tankers.

Much has been written about the BDI being a leading indicator of global economic recovery. If this is true, the economic turnaround may come sooner than many expect.

Note: I currently have a long position in NAT.

Inergy, L.P. | Investor Relations | Press Release

Last week Inergy, L.P. (NRGY: 17.71 -4.97 -21.91%) declared their 29th consecutive distribution increase and now they are backing that up with a nice earnings report. NRGY is one energy related company where low energy prices can provide a benefit to the bottom line.

NRGY is primarily a retail propane provider with a growing midstream natural gas business. The retail propane side benefited from lower prices as their customers were less concerned about conservation during the cold last quarter of 2008. As a result, gross propane profits increased by $35.5 million to $152.7 million. Currently propane operations account for about 80% of revenues.

As a result of the strong quarter (Q1 for fiscal 2009) the company’s management increased their outlook for the year’s EBITDA by about 10%. Continued growth of the distribution seems to be pretty secure.

For the income investor, NRGY looks like a secure place for a growing income stream. The shares are still sporting a yield of almost 11%. I think this company should yield closer to 8%, giving a share price potential of $32.

Note: NRGY is a component of this site’s hypothetical Income Portfolio.

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For the first quarter of their 2009 fiscal year Headwaters, Inc. (HW: 2.38 -0.01 -0.42%) reported a net loss of 2¢ per share against the consensus estimate of a 4¢ profit. For the same quarter in the prior year HW had a 1¢ per share loss excluding discontinued and sold business lines.

I started following Headwaters a little over a year ago as they started working their business plan to generate new revenues as the proceeds from their Section 45K clean energy business wound down when the section of the tax code expired. They have been working on transferring their clean energy technology to the building of facilities that process waste coal into usable/salable high quality coal. The fall in energy prices, the housing crash and the general economic slowdown have had significant impact on Headwaters’ three major business lines, slowing the companies return to strong profitability. Here is a quick outline of their major business lines:

Building Materials: Headwaters manufactures and sells block, stone and other building materials used primarily in new home construction and remodeling. Revenues for this business declined 17% from the same quarter a year earlier and accounted for 53% of total sales. HW has been aggressive in bringing out new products and cutting costs in building materials, but this segment will struggle until new home building starts to rebound.

Coal Combustion Products: Headwaters processes fly ash from the burning of coal in electricity generating plants and sells the end product as and additive to Portland cement use. The fly ash HW sells results in stronger concrete and significantly reduces the amount of CO2 produced related to new concrete construction. About 25% of the segments revenues are from service contracts with power generators. These sales could grow significantly if government infrastructure spending increases along with the current administration’s emphasis on reducing greenhouse gases. In the last quarter 40% of HW’s revenues were from this segment.

Energy: For a little over one year Headwaters has been ramping up their coal cleaning operation. They now have 11 facilities in operation at various stages of ramp up. When fully operational these facilities will be able to clean 5 million tons of coal per year. In the quarter HW sold 336,000 tons of coal compared with 85,000 tons sold a year earlier. Merchant coal sales (excluding tolling sales) increased 9-fold, year over year. With cutbacks in steel production the higher value metallic coal market has disappeared for Headwaters and they are currently primarily selling steam coal. Energy sales accounted for 6.4% of revenues in the quarter.

In tolling, a power marketer (or fuel supplier) contracts with the operator of a generating plant to convert the power marketer’s fuel into electricity, which is delivered over a transmission line to an agreed-upon location. The generator does not take title to either the fuel or the electricity, but is paid a tolling fee for its services.

Headwaters’ revenues are slowest in the last and 1st calendar quarters of the year and analysts are projecting a loss for the next quarter. Management is projecting earnings for all of 2009 at between 35¢ and 70¢ per share. The wide range is due to the uncertainty of the timing of recoveries in the housing and energy sectors. At this time Headwaters is a company with several lines of business that should thrive when infrastructure spending and home building start to increase. The question is how long will the company and investors have to wait until that day arrives. At this point I think the stock would be interesting to investors with at least a 2 year time frame.

Note: HW is a component of this site’s Opportunities Portfolio and a personal holding.

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Each week I recap the results of the WilderHill New Energy Global Innovation Index, symbol NEX, and published by New Energy Finance Ltd. The index consists of approximately 90 stocks from 22 countries. The NEX is the tracking index for the PowerShares Global Clean Energy Portfolio ETF (PBD: 9.26 +0.14 +1.54%). For reference, the NEX has a 52 week high of 436.21 and closed 2008 at 177.99.

For the week ending at market close on Monday the NEX lost 1.9%, finishing at 162.41. The NASDAQ was unchanged for the same period.

Solar energy, one of the two largest sectors in the index was the big loser for the week, off 3.6%. A couple of German solar companies (#’s 2 and 3 in the loser list below) were the main culprits in the sector’s pullback. The other co-largest sector, wind energy, was down 2.6%. Belgian gearbox manufacturer, Hanson Transmissions and Danish firms Greentech and Vestas were down 11.4%, 11.1% and 10.7%, respectively.

The one sector in positive territory was energy efficiency, up 1.3%. The sector’s gain was largely due to EnerNOC’s nice week.

Here are the best and worst performing stocks from the NEX for the week:

NEX top gainers since 27/01/09
EnerNOC ENOC + 22.3%
Zoltek ZOLT + 19.7%
Sao Martinho S/A Ord SMTO3 + 14.3%
Kingspan Group KSP + 13.8%
Takuma 6013 + 12.7%

NEX top losers since 27/01/09
Gushan Environmental GU - 17.1%
Solar Millennium S2M – 14.3%
GT Solar International SOLR - 14.0%
Fuel Systems Solutions FSYS - 13.1%
Centrotherm Photovoltaics CTN – 12.1%