Six Facts Lost in the IRS Scandal
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On a quarterly basis, euro area real GDP growth was fl at in the first quarter of 2012. Available indicators for the second quarter of the year point to a weakening of growth and highlight prevailing uncertainty. Looking beyond the short term, the euro area economy is still expected to recover gradually. However, ongoing tensions in some euro area sovereign debt markets and their impact on credit conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to continue to dampen the underlying growth momentum. The June 2012 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP growth ranging between -0.5% and 0.3% in 2012 and between 0.0% and 2.0% in 2013. Compared with the March 2012 ECB staff macroeconomic projections, the range predicted for 2012 remains unchanged, while there is a slight narrowing of the range predicted for 2013. The economic outlook for the euro area is subject to increased downside risks.
The sluggish developments in consumption largely refl ect movements in real income, which is among the main determinants of consumer spending trends. Growth in aggregate real income started to decline in the course of 2011, on the back of weaker employment growth, and was further eroded by rising inflation. Household income in real terms declined year on year in the fourth quarter of 2011 for the second consecutive quarter. This, combined with continued elevated inflation, renewed uncertainty regarding the economic outlook and fiscal retrenchment, led to the household savings ratio rebounding somewhat from near pre-crisis lows.
The outlook for financial stability had deteriorated, particularly in light of heightened uncertainty about how, and when, euro-area risks would be resolved. Official policy measures, including the ECB’s longer-term refinancing operations (LTRO), had led to improved bank funding conditions and reduced market volatility in 2012 Q1. But underlying concerns about sovereign indebtedness, banking sector resilience and imbalances across the euro area had persisted and the improvement in sentiment had proved temporary. For example, spreads on Spanish sovereign debt relative to German bunds had increased to historically high levels and bond yields of several other euro-area governments remained elevated and volatile.Nothing we don't already know, but a good overview of the last 6 months. At the end of the last year, the ECB opened up a massive credit facility. This stabilized the financial markets for some time, as it gave market participants hope that a "floor" of sorts was being set under the market. However, the overall financial situation in the EU region continued to deteriorate, largely because more countries (Italy and Spain) saw their respective bond yields increase to unsustainable levels.
Market strains had re-emerged reflecting rising financial distress and political tension in the euro area, particularly regarding Greece and concerns that the country might require further debt restructuring and/or leave the euro area. A number of developments had reinforced perceptions of strong links between the creditworthiness of European sovereigns and euro-area banks, such as the efforts of the Spanish authorities to recapitalise the Spanish banking sector. Increasing concerns about sovereign balance sheets had manifested themselves in a sustained redistribution of international capital, with growing evidence of capital flight from some euro-area banks and capital markets and a reluctance byinvestors to hold some euro-area assets.
The Committee noted that major UK banks’ exposures to the most vulnerable euro-area economies’ sovereigns and banks were not high, totalling 6% and 14% of core Tier 1 capital respectively. But UK banks had significantly larger exposures to private sector borrowers in many of these countries. And, although some banks had made sizeable provisions, the risk of further significant losses persisted while the macroeconomic backdrop remained adverse. BanksI believe this is the real concern many central bankers have: another large and wide-spread credit event which would essentially freeze the financial intermediary system of the region. This would almost always lead to a recession, as credit would essentially dry up. However, considering the precarious nature of the overall economic situation right now, such a development would be disastrous.
in other EU countries were also exposed to vulnerable euro-area countries, leading to the potential for indirect losses for UK banks. If contagion were to spread, there would likely be significant disruption through secondary channels, such as increased counterparty risk and stresses in funding markets, with adverse feedbacks to the macroeconomy
These concerns prevailed against a backdrop of deteriorating global growth prospects. In particular, some larger emerging economies had experienced rapid credit growth and there were signs of overvaluation in some Asian property markets. A disorderly unwinding of asset prices could result in direct losses on UK-owned banks’ exposures to the region, which for some banks were significant
The worst drought in the US in 25 years has wrought havoc on the country’s most important crops, putting the global economy at risk of its third food inflation shock in five years.
The US Department of Agriculture on Wednesday slashed its forecast for the corn crop by the most since the drought of 1988, cutting its 2012-13 production estimate by 12 per cent and its season-end inventory estimate by a hefty 37 per cent.
The US is the world’s largest corn exporter and is a key supplier of other food commodities including soyabean and wheat. The USDA monthly estimates are among the most closely monitored barometers of food commodities markets.
\The much lower-than-expected size of the US crops sent the price of corn and soyabean higher, reviving memories of the price jump in 2007-08 during the food crisis and the surge in 2010-11 after Russia banned exports of grains.
However, policymakers do not believe the world is facing a new food crisis because the global supply of wheat and rice, the two commodities most important for the world’s food security, remain relatively plentiful and prices are still below previous highs.
Corn deterioration heralds 'huge yield downgrade'
further sharp decline in the condition of US crops, which showed particular deterioration in the top corn and soybean growing state, has opened the door to a "massive yield downgrade" in a key report.
The US Department of Agriculture, in a weekly crop condition report, cut by eight points to 40% the proportion of domestic corn in "good" or "excellent" condition as of Sunday, the lowest figure since the drought year of 1988.
The proportion of soybeans rated good or excellent tumbled by five points to 40%, also a 24-year low, thanks to the hot and dry Midwest weather which has dashed hopes of bumper crops, and sent grain prices soaring.
'Massive yield downgrade'
Indeed, the run-up in soybean futures to a record high on Monday, and corn futures to within 2% of their own all-time top, came on "expectations that the USDA would reduce their US crop condition ratings after the session closed", Luke Mathews, at Commonwealth Bank of Australia, said.
"And the USDA did not disappoint. The deterioration in crop conditions paves the way for a massive yield downgrade by the USDA" when it on Wednesday releases the latest edition of its monthly Wasde crop report, key features of the agricultural commodities calendar.
"We think the USDA will cut corn yields to 150-153 bushels per acre," from a current estimate of 166 bushels per acre, Mr Mathews said.
A downgrade of that level would equate to some 1.2bn-1.4bn bushels (29m-36m) tonnes of corn production, factoring in the official forecast for harvested corn acres of 88.9m acres.
Commerzbank said: "Radical cuts in the yield and crop forecasts by the USDA tomorrow are inevitable."
The Company consists of six operating business segments: four geographically-determined homebuilding regions; financial services; and corporate. All of the Company’s business is conducted and located in the United States. The Company’s operations span all significant aspects of the homebuying process—from design, construction and sale to mortgage origination, title insurance, escrow and insurance services. The homebuilding operations are, by far, the most substantial part of its business, comprising approximately 97 percent of consolidated revenues for the quarter ended March 31, 2012. The homebuilding segments generate nearly all of their revenues from sales of completed homes, with a lesser amount from sales of land and lots.
During the first quarter of 2012, attractive housing affordability levels; modest improvement in economic and unemployment indicators; and moderate changes in buyer perceptions appear to have enhanced the Company’s ability to attract qualified homebuyers. New home prices appear to have stabilized; required sales incentives have continued to decline in most markets; average sales traffic through the Company’s communities has increased; sales rates have risen noticeably; and cancellation rates have decreased. The Company has begun to raise prices in selective markets and has reported an increase in sales volume for the quarter. These trends may be early signs that new housing markets have begun to improve. An uncertain macroeconomic environment; tight mortgage credit standards and mortgage availability; and a large inventory of lender-controlled homes acquired through foreclosure continued to impact the homebuilding industry by keeping sales absorptions per community depressed, compared to traditional levels. The Company continues to believe that meaningful advances in revenue growth and financial performance will primarily come from higher demand in the form of a return to more traditional absorption rates.The Company’s net loss from continuing operations totaled $3.0 million, or $0.07 per diluted share, for the three months ended March 31, 2012, compared to a net loss from continuing operations of $17.4 million, or $0.39 per diluted share, for the same period in 2011. The decrease in net loss for the first quarter of 2012, compared to the same period in 2011, was primarily due to higher closing volume; lower inventory valuation adjustments; a decline in interest expense; and a reduced selling, general and administrative expense ratio. Pretax charges related to inventory and other valuation adjustments and write-offs totaled $2.1 million and $9.1 million for the quarters ended March 31, 2012 and 2011, respectively. In spite of reporting a net loss, the Company continued its progress toward profitability by raising gross margins through continued investments in new, more profitable communities; completing less desirable communities; and lowering expense ratios.The Company reported a rise in closing volume for the quarter ended March 31, 2012, compared to the same period in 2011, primarily due to increases in sales rates and active communities. The Company’s consolidated revenues increased 28.7 percent to $215.9 million for the three months ended March 31, 2012, from $167.7 million for the same period in 2011. This increase was primarily attributable to a 25.4 percent rise in closings and to a 3.2 percent increase in average closing price. The increase in average closing price was due to a slightly more stable price environment, as well as to a change in the product and geography mix of homes delivered during the first quarter of 2012, versus the same period in 2011. Revenues for the homebuilding and financial services segments were $209.5 million and $6.3 million, respectively, for the first quarter of 2012, compared to $161.4 million and $6.2 million, respectively, for the same period in 2011.New orders rose 46.4 percent to 1,328 units for the quarter ended March 31, 2012, from 907 units for the same period in 2011, primarily due to increases in sales rates and active communities. New order dollars increased 51.8 percent for the quarter ended March 31, 2012, compared to the same period in 2011. The Company’s average monthly sales absorption rate was 2.1 homes per community for the first quarter of 2012, versus 1.5 homes per community for the first quarter of 2011. In order to prepare for a slow recovery and to attain volume levels
“Evidence from the field suggests that the 'for sale' housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process. And while the housing downturn was broad-based and national, the recovery process continues to be very localized. Although highly conservative mortgage lending practices and challenging appraisals remain a constant headwind, we are experiencing net positive price and volume trends in most of our markets.”
Mr. Miller continued, “As the overall housing market has continued to improve over the last several quarters, our well located communities and product execution has allowed us to outperform the market. During the quarter, deliveries increased 20%, new orders increased 40%, backlog increased 61% and our operating margin increased over 100% to 9.2%, our highest margin percentage since Q2 2006. This operating leverage was driven by our ability to increase sales per community, raise prices and lower incentives, and control our overhead costs.”“During the quarter, we reversed a portion of the valuation allowance against our deferred tax assets amounting to $403 million. This conclusion was based on an extremely detailed evaluation by our management team and reviewed by our independent auditors, Deloitte & Touche. The evaluation consisted of all relevant evidence, both positive and negative, including such factors as nine consecutive quarters of earnings, the expectation of continued profitability, as well as the improved housing market.”Mr. Miller concluded, “Looking ahead, our strong balance sheet and significant liquidity, which was enhanced this quarter by our new $525 million unsecured revolving credit facility, continue to position us to capitalize on future strategic opportunities.”
Revenues from home sales increased 23% in the second quarter of 2012 to $796.4 million from $649.8 million in 2011. Revenues were higher primarily due to a 20% increase in the number of home deliveries, excluding unconsolidated entities, and a 2% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 3,192 homes in the second quarter of 2012 from 2,652 homes last year. There was an increase in home deliveries in all the Company's Homebuilding segments and Homebuilding Other. The average sales price of homes delivered increased to $250,000 in the second quarter of 2012 from $245,000 in the same period last year. Sales incentives offered to homebuyers were $29,800 per home delivered in the second quarter of 2012, or 10.7% as a percentage of home sales revenue, compared to $33,900 per home delivered in the same period last year, or 12.1% as a percentage of home sales revenue, and $34,200 per home delivered in the first quarter of 2012, or 12.2% as a percentage of home sales revenue.
In our second quarter of 2012, we continued to see an improving sales trend as the number and value of our net sales orders increased 19% and 28% compared to the same period of fiscal 2011. Consistent with fiscal 2011, we are seeing a demand pattern in our net sales during fiscal 2012 that is similar to the demand pattern we traditionally saw prior to the current housing downturn. The traditional demand pattern has the lowest net sales orders in our first fiscal quarter, a sequential increase from the first quarter to the second quarter, a consistent level in the third quarter and then slowing net sales orders in the fourth quarter. Our net sales orders for the current quarter increased 55% from the previous quarter, reflecting the expected seasonal increase as our spring selling season began. Our recent results and other national housing data suggest that the overall demand for new homes has slowly begun to improve, but we expect that demand is likely to remain at low levels for some time, with uneven improvement across our operating markets.
In the three and six months ended March 31, 2012, revenues from home sales increased 27% and 21% from the prior year periods and pre-tax income was $42.3 million and $71.5 million compared to pre-tax losses of $30.8 million and $50.7 million in the prior year periods. Based on our sales order backlog of 6,189 homes at March 31, 2012 and our current sales pace, we expect to close more homes in the second half of fiscal 2012 than in the first half, and we expect to continue generating pre-tax income. These results reflect our ability to operate profitably in a challenging environment through our strategy of investing capital to expand our operations, managing inventory levels efficiently, improving gross margins, and controlling SG&A and interest costs effectively
During the 2012 first quarter, we continued to focus on disciplined land acquisition to grow community count in the move-up segment, constructing well built, innovatively designed, and energy efficient homes, and providing an industry leading customer experience, all of which contributed to our first profitable first quarter in six years. Net income for the 2012 first quarter was $8.5 million, or $0.02 per diluted share, compared to a net loss of $14.8 million, or $0.04 per diluted share, in the first quarter of 2011. In addition, our number of average active selling communities, average selling prices, new home deliveries, net new orders and backlog levels increased during the 2012 first quarter compared to the year earlier period. While the housing market remains challenging, affordability in each of our geographic markets generally remains attractive relative to historical metrics. With over $366 million of unrestricted homebuilding cash and the additional amounts that remain available under our $210 million revolving credit facility, we believe we have ample liquidity to position the Company for future growth.
Homebuilding pretax income for the 2012 first quarter was $7.3 million compared to a pretax loss of $13.4 million in the year earlier period. The improvement in our financial performance was primarily the result of a 53% increase in home sale revenues and an $8.0 million decrease in interest expense. The 2012 first quarter also included $4.1 million of income related to the settlement of a property insurance claim.Home sale revenues increased 53%, from $143.7 million for the 2011 first quarter to $220.3 million for the 2012 first quarter, as a result of a 46% increase in new home deliveries and a 5% increase in our consolidated average home price to $343 thousand
Homebuilding revenues increased 17% for the first quarter of 2012 from the same period in 2011 primarily as a result of an 18% increase in the number of units settled. The increase in the number of units settled was primarily attributable to our beginning backlog units being approximately 26% higher entering the first quarter of 2012 as compared to the same period in 2011, offset partially by a lower backlog turnover rate quarter over quarter.
Gross profit margins in the quarter ended March 31, 2012 decreased 77 basis points compared to the first quarter of 2011 due primarily to pricing pressures experienced in prior quarters. In addition, gross profit margins were negatively impacted by higher construction costs quarter over quarter. We expect to continue to experience gross profit margin pressure over at least the next several quarters.The number of new orders and the average selling price of new orders for the first quarter of 2012 increased 31% and 6%, respectively, when compared to the first quarter of 2011. New orders were higher quarter over quarter in each of our market segments. The increase in new orders was driven by increased sales absorption in many of our markets. As discussed in the Overview section above, we believe this increase is attributable to a stabilization of housing prices in certain of our markets and other favorable economic factors. In addition, new orders in the current quarter were favorably impacted by a decrease in the cancellation rate to 10% from 12% in the prior year quarter.
In a CNNMoney survey that asked 15 economists to rank the impact of moves Congress could make to help the U.S. economy, nine endorsed some kind of extension of the Bush tax cuts.
But five of the economists wanted to extend the tax cuts for all taxpayers, while four endorsed the Obama administration's call to extend the cuts for all but those in the upper income tax bracket.
From Core Logic:
- As of April 2012, shadow inventory fell to 1.5 million units, or four-month’ supply and represented just over half of the 2.8 million properties currently seriously delinquent, in foreclosure or REO.
- The four-month’ supply of shadow inventory is at its lowest level in nearly three years. It parallels the unsold months’ supply of non-distressed active listings that hit a more than five-year low in April, falling to a 6.5-months’ from a 9.1-months’ supply just a year ago.
- Of the 1.5 million properties currently in the shadow inventory, 720,000 units are seriously delinquent (two months’ supply), 410,000 are in some stage of foreclosure (1.1-months’ supply) and 390,000 are already in REO (1.1-months’ supply).
- The dollar volume of shadow inventory was $246 billion as of April 2012, down from $270 billion a year ago and a three-year low.
- Serious delinquencies, which are the main driver of the shadow inventory, declined the most in Arizona (-37.0 percent), California (-28.0 percent), Nevada (-27.4 percent), Michigan (-23.7 percent) and Minnesota (-18.1 percent).
- It is important to note that the CoreLogic numbers exclude homes that are already listed in the market - it only shows the "shadow" (unlisted) inventory. That means that the overall inventory of distressed homes is far greater than the chart above shows (maybe 2 to 2.5 times that number).
Two key components are impacting the decline in shadow inventory:
1. A smaller portion of loan delinquencies now results in a sale due to the various loan restructuring programs and
2. the inventory has been hitting the market much faster than people anticipated.