House prices way down... "Tons of dollars" in real estate... MBIA in the clear (for now)... Janus is a bargain... Porter is a scream... Home sales: Not as bad as you think...

"Wherever you look, things look bleak," says Robert Shiller, co-creator of the S&P/Case-Shiller home-price indexes. Home prices fell 8.9% in the fourth quarter of 2007, compared with the fourth quarter of 2006. As covered in The Digest, Miami was the hardest-hit major city, with an 18% annual decline in 2007. Las Vegas, Phoenix, and San Diego house prices all fell 15%. Charlotte, Portland, and Seattle are the only three metro areas measured by the Case-Shiller index that still haven't experienced year-over-year price drops.

Maybe this is the time to buy a second home, if you have a spare few hundred grand lying around... In a recent Barron's interview, fund manager David Winters said, "If you buy real estate cheaply, it is unencumbered by debt and you are patient, you can make tons of dollars." 

By Winters' criteria, Extreme Value picks Alexander & Baldwin, St. Joe, Tejon Ranch, and Consolidated-Tomoka ought to make you tons of dollars. They've already done well as a group the last few years, but it's really hard to say when they'll make anyone "tons"...

The world's largest bond insurer, MBIA, is out of the hot seat. Standard and Poor's said it won't downgrade the company anytime soon. MBIA is still on negative outlook, meaning it could be cut in the future. For the moment, $1.2 trillion worth of insured securities is safe.

To avoid the downgrade, MBIA will stop writing guarantees on asset-backed securities for six months. It'll also separate that business from its municipal business within five years. The company cut its dividend, which is currently 11.2%. The stock gained 20% yesterday.

It would be tragic if the bond insurers failed – literally, an honest-to-goodness human tragedy, created by $70 billion in losses. Cambridge University researchers studied 40 years of data from the World Bank and World Health Organization and concluded "systemwide" financial crises increase deaths from heart disease by 6.4% in wealthy countries. In Britain alone, 1,300 to 5,100 people could die if "a significant proportion of banks" suffer a crisis similar to Northern Rock.

Shares of Extreme Value pick Janus Capital (JNS) have been falling recently. CEO Gary Black is taking the opportunity to buy more. He bought 50,000 shares – worth $1.2 million – on Wednesday. He's required to own four times his base salary in Janus shares by 2009, but he passed that milestone already. He now owns twice the required amount... but he's the only Janus insider to buy shares in the last five years.

I recommended Janus Capital on a few occasions between 2004 and 2006. If you're a long-term buyer of stocks, it makes far more sense to buy a big brand name growth-fund shop like Janus than to buy growth-oriented mutual funds. In both cases, you get the benefits of the long-term appreciation of stocks. With Janus, you don't pay mutual fund fees. You earn them. And as its assets appreciate over time (provided it continues to attract them), fees go higher. At around 15 times free cash flow, Janus is a bargain. It should sell for closer to 20 times free cash flow.

While Janus' CEO has been buying, First Solar's CEO, Michael Ahearn is dumping. The First Solar executive sold $59 million in stock last week. Porter shorted this solar-power stock not too long ago in PSIA. To learn more about PSIA and where to find Porter's analysis of First Solar, click here...

New highs: Westshore Terminals (WTE-UN.TO), PowerShares Agriculture (DBA), Stone Energy (SGY), XTO Energy (XTO), Chunghwa Telecom (CHT).

A little housekeeping before we delve into today's mailbag. Our e-mail servers for our customer service department were down today. The problem should be fixed tonight, and the department will resume answering your questions tomorrow morning. We apologize for the inconvenience.

In today's mailbag, more of you weigh in on the value of stops and how you use them. Send your comments here: feedback@stansberryresearch.com.

"I have only recently moved back into 'active' investing in individual stocks rather than just owning mutual funds. Radical changes in my life brought on by sudden illness have resulted in long term disability, severe chronic pain, prescription costs in excess of $2,000 per month and unanticipated retirement several years [early]. The point of all that information is that I need to replace a substantial portion of the annual income I have lost due to no longer being able to work. At the same time I cannot sustain a substantial loss. I now subscribe to three investment newsletters, read the Wall Street Journal, and use the Internet to keep track as best I can to investment opportunities. I appreciate the advice and information that you provide. I do not always agree, and I always double check any potential investment through other sources, but really enjoy your newsletter. Your most recent comments on using stop losses and/or trailing losses combined with limiting the amount of money put into any one position is an example. That is how I invest, but it is helpful to be reminded of the importance of this practice. Thanks... you are doing a great job." – Paid-up subscriber Peter Ryner

"I find Porter to be a scream. I laugh at all of his jokes, including all of the letters from the CEO of GM – although the latest one verged on boring. Porter, when I read your original reply about when not to honor a trailing stop I almost fell off my seat! Of course, it was also the correct answer. It's perfectly obvious to everyone that you don't sell a stock right before it's going to make a comeback! If I could pick bottoms then I would have bought more JRCC at $3.90. I originally bought at $13.50 and totally ignored the trailing stop – because I'm a dick. It was very painful to watch it drop to 9, 6, 4, and then close one day at $3.90. But I was convinced I'd make money on the trade – just not convinced enough to buy more! Do I now kick myself for not piling in at $4? Nah, because if I'd bought at $4 it would have dropped to $2. I'm happy I'm back in the black and I'll sure as hell honor the trailing stop next time. Damn it, somebody get me another Shirley Temple. I'm losing my buzz." – Paid-up subscriber Ken Mosher

Ferris comment: So let me get this straight. You ignored the stops, which resulted in you making money (i.e., "back in the black"), and now you're vowing not to do this anymore. My father's right. Some people just want to be poor...

Reminds me of a story I heard once. A Wall Street suit from some smooth, shiny place like Goldman Sachs had a system for trading Japanese warrants. He expected to make $1 million over the course of a year with it. He made $3 million in a few months... and stopped trading because the results were too different from the projections. Dumbest thing I ever heard. It worked, so he stopped doing it.

But that's one of the great things wrong with Wall Street. Smart people – who need something complicated for their great brains – sit around trying to apply complex math to investing. They're virtually always wrong. Long-Term Capital Management (LTCM) was the quintessential example. It was made up of about 16 guys who probably had an average IQ of 160 or some high number like that. They believed in their math. They used 100-to-1 leverage, and they blew up. The best thing they did: Create a fantastic opportunity in off-the-run vs. on-the-run Treasuries... for everybody else.

"Excellent answer to the subscriber who got stopped out at a 25% loss, only to see the shares rebound on Dr. Sugg's QCC recommendation. You could have also mentioned that QCC is a very 'thinly' traded stock, volume wise. Averaging 160,000 shares daily. Unfortunately, I'm speaking from experience myself. So a little education is called for when it comes to volume. They will bring the price down 'to steal' your shares! Stops entered on big volume shares are much more 'trustworthy' and I can sleep well at night." – Paid-up subscriber Steve Russo

Ferris comment: Don't ever enter stops into the market, period. Not on big volume stocks, little volume stocks, or anything else. The only person who should know your stops is you.

"Had to smile. I have been learning and investing in the commodity markets for a few years now, not all together successfully thus far. But here we are in a bull market in near ALL commodities, and now is the time for a commodity newsletter is it not? That surely would be the sign of a top. Thanks for all the valuable and appreciated work from everyone in there." – Paid-up subscriber Kerrill

Regards,

The Housing Market Is Not as Bad as You Think
By Ian Davis

The sale of single-family homes reached an all-time low last month, according to the nation's largest real estate trade association.

This headline statistic from the National Association of Realtors made all of the popular news carriers on Monday (including Bloomberg and Reuters). However, if you read their articles carefully, you'll notice that the "all-time low" index was created just nine years ago.

So, in reality, existing home sales are simply at nine-year lows. Furthermore, the last bear market in real estate didn't fall within the last nine years.

The last time the U.S. housing market experienced a downturn was in 1990... 18 years ago.

It was time to investigate further...

Since nine years is a very narrow view when you're talking about housing, I went searching for a better index.

Surprisingly, I found it in the same place as the index the media were sensationalizing. You see, the National Association of Realtors produces many different housing indexes.

The index that the news media were covering tallied the total sales of existing homes (including single-family, townhomes, condominiums, and co-ops). This index was created in 1999.

But the organization also publishes an index of total sales of existing single-family homes (excluding townhomes, condominiums, and co-ops). This slightly narrower index goes back to 1968.

The following chart shows these two indexes. As you can see, they are virtually identical – except that one of the indexes (the one that includes townhomes, condos, and co-ops) is shifted higher by about 1 million sales.

Housing Sales Are Far from All-Time Lows

As you can see, although existing home sales are at nine-year lows, they are far from all-time lows. In fact, if you go back farther than 1998, sales remain above prior peaks in the late '70s and mid-'80s.

This is all well and good, you might say, but the U.S. population has increased by about 30 million people since just 1998. So although the total amount of sales remains high, a smaller proportion of the population is currently selling their homes.

So to account for the soaring U.S. population, I adjusted the existing home sales index (the one with the long history) by the total U.S. population. (I was able to get monthly population data from the Federal Reserve's Economic Data website.)

The following chart shows this adjusted index versus DataStream's home-construction index – which includes all the big homebuilder stocks like Toll Brothers, Pulte Homes, and D.R. Horton.

Even Adjusted For Population Growth, Homes Are Still Selling

This chart shows two things. First, existing home sales are fairly high, even after adjusting for population growth. And second, when U.S. home sales fall to extreme lows, it often signals a good buying opportunity for home-construction stocks.

So, although the U.S. housing market is weak right now, it is not as weak as the popular media would like you to believe.

Also, although the real-estate market is still weak, home-construction stocks may have already achieved their lows. I'm still keeping a close eye on the housing market, and I'll share my favorite housing play in an upcoming issue of Quant Trader.

Until next time...

Good investing,

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