September 29, 2008

This week Prof. Hirschey spoke to the class about the housing bubble. He encouraged us not to monitor the Case-Shiller Index, but the broader Housing Price Index from the Federal Housing Finance Agency (FHFA). He showed how the house price/income ratio in the hot spot regions of the housing market has grown. In California alone, the house price/income ratio is comparable to Hawaii’s. Hawaii’s house price/income ratio is the highest because it is based on a large supply of vacation homes. He also emphasized that the fourth quarter of 2006, largest boom in housing, doesn’t describe the overall housing market. Five states have severe housing problems: Massachusetts, Illinois, Colorado, Nevada, and Florida. In states like Missouri, housing prices have actually increased.
To take advantage of this disparity in perceptions and the political situation, he encouraged APM to buy Fannie Mae preferred stock: T. Because Fannie Mae has $41 billion in equity and is currently trading at a very low price, Prof. Hirschey thinks buying now would be a great opportunity.

After Prof. Hirschey’s presentation, we discussed the moral hazard that comes with banks getting to big too fail as it relates to the current bail-out proposal. We discussed the Dow falling over 700 points that day and the portfolio implications. The overall consensus was that selling was not an option at this point. All of our holdings have good long-term prospects. If anything we should perhaps buy more. There was a suggestion to write some calls on some of the holdings.

Each group gave a presentation on a current portfolio holdings. We had presentations on ConAgra, Launch Tech, Interceramic, A-Power, and Capital Federal. A common motif in the presentations was how the current economy is affecting each underlying industry.
The recommendations from each group were:
Group 1 – Reduce Interceramic (CERAMIC B/D) position
Group 2 - Sell Capitol Federal (CFFN)
Group 3 – Buy more A-Power (APWR)
Group 4 – Buy more LaunchTech (8196:HK)
Group 5 – Hold Diagio (DEO)
Group 6 – Hold ConAgra (CAG)

The presentations and models are available on the Research page for the class.