Randomly Noted

Ambac's shares are up 70% today

Ok, it is good news for Ambac that the monoline insurer of bonds posted a profit late yesterday of $558 million versus a $2.3 billion loss in the year ago quarter. But the fact remains that when you peel away some of the items behind the earnings, the company still didn’t perform all that well.

For starters, it had a $133.2 million gain related to the change in value of its credit derivatives portfolio. Add to that a $472 million tax benefit. Those numbers alone add up to $605 million of gains.

It continues to see stress in its portfolio of residential mortgage backed securities. The company recorded a net loss of $385.4 million.

The worst may be over for companies like Ambac. But that doesn’t mean they are finished feeling the pain of the credit crisis.

Make no mistake about it. Breaking a 13 quarter streak of net losses is a good thing and K. Hovnanian, the homebuilder, has something to crow about. Investors pushed the stock up 4% in after hours trading Tuesday and will likely push it higher when trading opens Wednesday.

But the savvy investor will look beyond the headlines to see that the corner has not been turned for homebuilders in general and Hovnanian in particular. Start with this – the company reported after-tax net income of $236 million. But when you back out a tax benefit of $291 million, the company lost around $54 million. Sure, that’s better than the triple-digit millions of dollars of losses we’ve been seeing, but it doesn’t show strength – instead it shows a slowing of the bleeding that took place in the housing market. The company noted that its contract cancellation rate was the lowest in nearly five years. But it was 21%. And sales were off 14%.

Yes, good to break that bad losing streak. But there is still some way to go before one can feel good about homebuilders.

Here’s a staggering statistic mentioned in Fannie Mae’s just released financial results – nearly 1 out of every four residential properties in the U.S. (24%) today has negative equity because the value of the homes are less than the mortgages against them. What that likely means is any rebound in housing prices will be slow at best. If homeowners with negative equity wal away from their obligations, forced home sales will tilt the supply-demand balance of homes in favor of supply, as in too much of it. Thus the continued pressure on housing prices.

And of course this isn’t good news for a company that holds a lot of these mortgages. Fannie Mae reported a 4Q loss of $16.3 billion, an improvement over the loss of $19.8 billion a year ago. Things are so bad at Fannie that it asked for an additional $15 billion from the Treasury just a few weeks ago. All of this comes on the same day that another government-owned company, AIG, posted staggering losses as well.

How bad is the outlook for Fannie? It says in its filing that it can’t be certain about its long-term sustainability (in other words, it may not be around.) And it says that the dividend payments it will have to start paying the Treasury for giving it money (via preferred stock investments) will be so large that the company will have to borrow from the Treasury to pay the Treasury those dividends. The question isn’t what the long-term sustainability of Fannie Mae is but how long can the Treasury sustain a situation like this.

If this trend continues, the housing market (which seemed to be stabilizing) could get worse before it gets better.

Moody’s Investors Service today downgraded Commodore CDO III and noted that about 29% of the mortgages and other securities that the CDO has invested in are in default. That’s up from about 17% at the end of February.

Fitch took similar action in late September and noted at that time that many of the subprime residential mortgages that are part of this CDO were vintage 2004 and 2005

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The housing crisis hasn’t been good to companies that build them or make products that go into them. Like Armstrong World, which produces flooring, ceiling materials and cabinets. In the most recent 2Q, Armstrong said sales were off 20% versus last year and net income was down 50%. And the outlook for the rest of the year remains equally grim.

So why did private equity firm TPG Capital just spend $180 million to buy a big chunk of Armstrong and structure it in such a way that Armstrong doesn’t receive a nickel?

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If there was a question about how important employment is to turning around the U.S. economy, look no further than at some housing data released a short while ago. Newswires reporter Dawn Wotapka reports an increase in national foreclosure filings in the U.S. There were about 336,000 filings in June, the fourth straight month the figure rose to more than 300,000.

RealtyTrac said that increased unemployment was responsible for the increase in foreclosures, and with the unemployment trends being higher each month this year, no relief is in sight. The U.S. Labor Department reported unemployment rose to 9.5% in June, the highest level since 1983.

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Lennar's 16% Gain Today Has The Stock Near Break-Even For The Year

The numbers by themselves look pretty dreadful – Sales at homebuilder Lennar were off 21% in the second quarter. The loss was $125 million. Deliveries of new homes down 18%. New orders off 19%.

So why, then, was the stock up 16.37% late in the day? Because as bad as business was for one of the largest homebuilders in the U.S., things are starting to look a little better.

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At least that’s the cautious message from executives at BB&T Corp., a Southern regional financial firm.  While there are still farily large inventories of unsold homes in Atlanta, BB&T CEO Kelly King said during the firm’s 1Q conference call today that he recently spoke with two Atlanta builders, one which has about 7% of the Atlanta market and the other about 5%. Each reported “significant” activity in the past 60 days. “They’re definately selling houses,” he said. And that’s good news for banks like BB&T, which saw good mortgage business in the first quarter.

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Housing has understandably garnered a lot of attention in this recession. Many think a true economic recovery won’t occur until housing prices bottom out and at least stay put or slightly rise.

But in a chicken-egg dichotomy, it’s hard to imagine that happening despite all sorts of government support programs and mortgage interest rates that for high-quality borrowers have astoundingly descended by the 5% level.

The chicken to housing’s egg is unemployment. A Labor Department report for March on state and regional breakdowns shows that in March the U.S. was a somewhat divided nation. There are the hurting and the hurting more.

The nationwide unemployment rate was 8.5% in March, a figure expected generally to head to and past 10%. This traditionally lagging indicator likely will still look gloomy even after a consensus forms that (at some point) the U.S. economy has stopped falling.

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