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Author: winomaster Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 660  
Subject: Some Reservations Date: 12/9/2008 1:09 PM
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I'm considering buying some USG because the upside potential seems so great if the housing market (and USG) return to their previous highs. But I have some reservations that I wonder if folks here have considered:

1) I know USG went bankrupt in 2001 due to the abestos settlement. But I have seen some reference to earlier bankruptcies. Has USG gone bankrupt during earlier housing downturns? If this is true, are we to believe they have the financial strength to survive today this mother of all housing meltdowns?

2) An Overbuilt Country: Our political leaders have been using housing to prop up the economy for years by relently stimulating overbuilding in the housing market. We are the most overhoused country on earth. Our cities are in an advanced stage of decay, with vast tracts of abandoned housing because government has contrived a whole array of incentives to assure that more housing is built every year than we really need. Every housing start that exceeds our real needs setts in motion a process that ends in another house falling vacant in our inner cities. The finacial meltdown we are suffering today might just lead to a return to sanity and we will be building many fewer houses in the years ahead. If so, USG will be many years returning to it's former heights.

3) Profit Margins: Margins in Drywall (and housing in general) are better when politicians accomodate the industry by pumping it until it reaches boom proportions. I'm guessing we won't see the industry at such peak intensity anytime soon. So even if sales achieve 80% of the past pace, profits are likely to remain below that level.

Are these factors why USG has declined so precipitiously? Does USG not have a realistic chance of returning to recent highs any time soon?
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Author: mindshar Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 639 of 660
Subject: Re: Some Reservations Date: 12/10/2008 11:19 AM
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If this is true, are we to believe they have the financial strength to survive today this mother of all housing meltdowns?

IMO, odds are that Buffett will back USG to ensure their survival. How much common shareholder equity will remain is more of a question.

We are the most overhoused country on earth.

What does it mean to be the "most overhoused"?

with vast tracts of abandoned housing because government has contrived a whole array of incentives to assure that more housing is built every year than we really need

In my opinion urban blight has a lot more to do with the availability of interstate highways and generally inexpensive gasoline to enable commuting, the decline of many of our manufacturing industries, and "white flight" following many of the race riots in the 60's. Urban blight isn't anything new after all; it's been with us for decades -- since long before the current housing bubble.

So even if sales achieve 80% of the past pace, profits are likely to remain below that level.

I think production cuts and the potential elimination of weaker competitors should compensate, with margins approaching past levels once home building rebounds.

If so, USG will be many years returning to it's former heights.

I agree that USG's not a short-term investment and it could take quite a while for the stock to rebound significantly.

Are these factors why USG has declined so precipitiously?

I would say they are some of the factors... IMO other factors include a general concern about USG's debt levels (despite the length of time USG has before its bond debt comes due), and also a generally short-term outlook for investors and fund managers looking primarily at their returns in the next few quarters.

Does USG not have a realistic chance of returning to recent highs any time soon?

I'm not sure that we can expect much any time "soon". But as long as we don't suffer significantly more equity dilution, I think USG has significant long-term price appreciation potential. $100/share may not be realistic, but multiples of the current price definitely sound feasible, once the housing market rebounds.

One other wildcard is the potential demand increase due to climate change. If you accept the notion that global warming is causing an increase in the prevalence and severity of storms and/or wildfires, then there will be an increased need to replace and repair homes. Katrina destroyed 350,000 homes, and damaged or left inaccessible another 500,000 homes. 850,000 homes is a huge number -- larger than our current annualized rate of housing starts.

Certainly not an outcome I want to see happen, but one which may become material.

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Author: winomaster Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 640 of 660
Subject: Re: Some Reservations Date: 12/10/2008 12:14 PM
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"We are the most overhoused country on earth." (Winomaster)

"What does it mean to be the most overhoused?" (Mindshar)

Over-invested. Past investments in housing are being abandoned and left to wither on the vine. For example, we subsidize the cost of extending roads, sewers, water supplies, etc into new development areas. If this necessary investment was incorporated into the price of any new home, the price to buy new would not appear so artifically attractive. In Europe they do not subsidize new housing in this manner and so there are substantial economic incentives for neigborhoods to be maintained and rehabbed. In Europe they don't have urban blight as we do. It's all a result of foolish government subsidy.

"In my opinion, urban blight has a lot more to do with the availability of interstate highways and generally inexpensive gasoline to enable commuting, the decline of many of our manufacturing industries, and "white flight" following many of the race riots in the 60's. Urban blight isn't anything new after all; it's been with us for decades.--since long before the current housing bubble." (Mindshar)

I dont mean to say that subsidies of new housing are the sole cause of urban blight. But subsidies have made a difficult situation in the cities into a disaster zone. Any economist will tell you that subsidies promote economic inefficiency.

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Author: mindshar Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 641 of 660
Subject: Re: Some Reservations Date: 12/10/2008 1:54 PM
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We are the most overhoused country on earth.

What I meant is by what measure are we the most "overhoused"? Is this something that is backed up by some sort of statistic or just a naked assertion?

I just don't see at all how urban blight and suburban migration can be attributed to subsidies in any meaningful way. Generally developers of new subdivisions *do* have to pay for infrastructure like sewer, water, roads etc, so the cost *is* included in the price of housing. Either that or it is paid for by local property taxes, or other taxes levied locally by specific ballot measures, which can't be considered subsidies, since they are paid for by those receiving the benefits. The only possible exception to this is federal highway funds, but most countries including major European countries allocate road funds in their national budgets.

On the other side of the coin, we have economic redevelopment agencies and "enterprise zones" which use *direct* subsides to *encourage* development in urban areas.

If subsidies have any impact at all, in my opinion, it would be to incent *urban* development.

In Europe they do not subsidize new housing in this manner and so there are substantial economic incentives for neigborhoods to be maintained and rehabbed.

In Europe they tax gasoline and diesel fuel extremely heavily, which is the primary reason for higher urban concentration. If we levied the same taxes on motor fuel that Europe did we would see a significant migration back into cities over time, and most likely the end of urban blight as we know it. We might end up with *suburban* blight, but that's a different story.

In Europe they don't have urban blight as we do. It's all a result of foolish government subsidy.

But we don't subsidize suburban and rural development over urban development in the U.S. in any meaningful way. That's just not true. Europe's government influences urban versus suburban development *far more* than the U.S. through high fuel taxes. It's also one of the reasons public transportation is more economically viable there -- that and population density.

Any economist will tell you that subsidies promote economic inefficiency.

That is *not* the same thing as saying all economic inefficiency is a result of subsidies though.

And while I agree that subsidies tend to come with undesirable (and often unintended) side effects, it doesn't mean that they *always* end up with an overall net negative impact does it?

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