June 7, 2004

Inside Veritas -
Article 1 - 1st Quarter Metropolitan Price Data Raises Serious Questions
Article 2 - Notes of Interest
Article 3 - What about North America’s Border War?
Article 4 - Taxation and Finance - Audits — New IRS Audit Initiatives
Article 5 - May Auto Sales Up?
Association News Update From Laura
Economic Update - “Pistons:” Economy’s Last Defense?
BS: Still about Nothing in particular
Housing Industry Update

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1st Quarter Metropolitan Price Data Raises Serious Questions

   Following release of first Quarter metropolitan sales data by the NAR, the Wall Street Journal ran a feature showing the median price of an existing home in Los Angeles rising 100.7% during the past five years. But, the subsequent release of the government’s House Price Index suggests a home in the L.A. area appreciated just 72.8% during the period. In “Detroit,” the median price was up just 21.4%. However, the HPI for the period is at 29.9% Price data as reported raise more questions than they give answers. For example, the Realtors note that the “median existing home price was up 6.5%” over a year earlier data. However, it doesn’t tell that the $170,800 represents the first time since early ‘95 that prices fell in two consecutive quarters. In fact, U.S. median prices were 3.5% below last year’s third quarter level. And, while home values, as measured by the HPI, soared 3.67% in last year’s 4th quarter, they rose less than 1% in ‘04’s first. A big part of the problem relates to some local (and even statewide) market conditions being so unusual, that their housing the nation’s housing market. Take California with the highest prices in the nation. But due to its unique property tax situation, (Housing Quarterly - Fall ‘04) “comparatively” few Californian homes go on the market, creating a scarcity, and driving prices way up. Or, look at the fastest growing area in the nation, Las Vegas. In the past six months, values are up 11%, and prices 22%. As you can see in the chart below, of the nation’s ten largest metro areas, only 3 (Chicago, Houston & Atlanta) have a close relationship between prices and values over the past five years. The remainder have all had mitigating circumstances impacting their markets. Note: Michigan’s homes have continued to lag in appreciation, as they have since ‘00. It was 41st for the year, with values up 3.75% (only 0.35% in the first quarter). “Flint’s” up 3.5% for

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Notes of Interest

  Coming September 30th - Mark LaLiberte One of the nation’s most inspiring lecturers, on building of energy efficient, healthy homes — brought to BAMF by Andersen Window and C&L Ward Bros. At the Holiday Inn, Thursday (9/30)

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   The NAR reported existing home sales hit their second highest rate in history in April, at 6.64 million units, bring the annual rate of sales for the year to 6.31 million, or 3.5% higher than the year end record set in ‘03. April was the 10th consecutive month sales topped the Six million rate, a level never hit prior to last July.

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We saw an interesting release of Agriculture Department data which, although preliminary, suggests their really isn’t much evaporation of farms or farm land in Michigan. In fact, if one believes the department, there may be a resurgence of small farms. From 1997 to 2002 the state only “lost” 246 of 53,519 “farms” (whatever is considered a “farm”). That’s a decline of less that 0.001% per year. But it shows farms 10 to 50 acres grew by 3,451 (22.6%), while farms over 2,000 acres grew by 32.4%.

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   What about North America’s Border War?

  The NAR’s press release was titled “Strong home price pattern continues in most metro areas,” noting “above average ‘appreciation’ in the first quarter.” However, the national median existing home price ($170,800), despite rising 6.5% from ‘03’s first quarter, was 0.8% lower than last year’s 4th quarter, and 3.5% below the 3rd quarter level. The 1st quarter median represents the first time since early 1995 that prices fell for two consecutive quarters.

While these numbers corroborate what we’ve been forecasting in recent months, we need to remind readers that “lower prices” are not synonymous with “lower home values.” In fact, we’d suspect that home “values” will be reported as substantially higher at the beginning of June with the release of the OFHEO’s “House Price Index.” As we pointed out with last year’s fourth quarter data, while prices experienced a sharp drop, values soared at an exceptional rate, which was evident when the recent “market distortions” were removed.

The headlines stressed that housing starts were “down slightly” in April, to a seasonally adjusted rate of 1.97 million units, from a revised rate of 2.011 million in March. However, the March numbers were near the highest since the 1970s, and reflect an earlier start to the prime building season. In actual figures, if we look at the single family sector, we can illustrate just how strong the early part of the year has been.

In raw numbers through April, construction’s begun on 493,600 single family homes, up 14.2% from the first four months of ‘03’s record breaking level. And, when we annualize the rate of activity, we’re looking at 1.578 million units (year to date), or 5.3% above last year’s record.

Locally, permit activity remained exceptional, as authorizations for “owner occupied” housing were up 24.8% across Southeast Michigan through April, according to Housing Consultants, led by Oakland County’s additional 526 units (in comparison to ’03). Genesee County is up 21.3% (101 units), led by Grand Blanc Township with 99 (single family and condo) permits, followed by Mundy (66), Burton (55) and Davison (53). As somewhat of a surprise, Fenton Township was the fifth leading authority (46 units). However, the “Fenton” area (including Linden [35] and Fenton [31]) combined for 112.

Barry

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Taxation and Finance ---- Company Sponsored Employee Gatherings

   Retreats and company meetings are an important component of a successful business. They are opportunities for employees and managers to come together, discuss business strategies, develop new product ideas, and plan future activities. Retreats and other off-site meetings are increasingly an annual ritual of corporate culture. They are also expensive and businesses seek to deduct as many of the costs as possible.
Traditionally, the IRS has taken a very strict approach to the deductibility of expenses from company meetings. If the meeting is deemed extravagant, the costs of holding the meeting will not de deductible as ordinary business expenses and may be treated as income to the employees. The IRS takes special interest in business meetings that are held at resorts, on cruise ships and outside the U.S. It is very good at denying these costs as excessive and taxpayers do not have a good track record of prevailing in the courts. That is, until recently.
In September, a federal appeals court found that a company-sponsored fishing trip to a five-star resort in Canada was a legitimate cost of doing business. The IRS had determined otherwise and a federal district court agreed. Undeterred, the company appealed and won.
The fishing trips were a longtime company tradition. For more than 20 years, the company brought managers, sales people and factory workers from across the country to its home office for a three-day meeting. At the end of the meeting, almost all of the participants traveled, thanks to the company, to a resort in Canada for three days of fishing. Fishing was not the only thing on the agenda. The company showed that over the three days, the participants discussed the business' performance, its sales, activities of competitors, and brainstormed ideas for new products. Testimony also revealed that while employees were not required to attend the fishing trips, they were strongly encouraged to attend by their managers and many felt it would be disloyal to the company not to go. Some employees testified they did not like fishing.
The appeals court was convinced that the fishing trips were not corporate junkets. Even though they were full-expense paid trips to a 5-star resort, employees viewed them more as mandatory company meetings than as vacations. The court allowed the company to deduct the full cost of the trips.
Of course, some of the facts were unique to the company. The appellate court even took time to note its admiration of the company's pro-employee philosophy. Not all employers might fit that bill. However, the decision does break with the traditional IRS approach and opens the door to challenging adverse determinations.
Seek the advice of a tax professional to help you anticipate what expenses will be deductible and which expenses may be challenged. Careful planning also avoids the risk of having the costs of the meeting treated as income to your employees.

R, P & T

May Auto Sales Up?

U.S. auto sales were up 3.4% last month, in comparison to May ‘03, depending on your definition of “U.S.,” as Bill Clinton might say. While the American “Big 3” had a combined rise of 2,000 vehicles, the Japanese “Big 3” (Honda, Nissan and Toyota) experienced an increase of 39,000 units. Furthermore, Korea’s “Big 3,” (Kia, Hyundai & Suzuki) saw sales up by more than 10,000 vehicles.
Of the U.S. companies, General Motors’ sales were up 2.6%, but its gain of 11,000 was offset by a Ford sales decline of the same amount. Chrysler was up the other 2,000 units (0.7%).
So, with those numbers, it’s hardly a surprise the “Big 3’s” market share continued its decline, responsible for just 58.7% of May’s sales, which was 1.6% below the May ‘03 figure. Japanese companies, on the other hand, 30.8%. And, from a year to date perspective, the “Big 3” don’t fare much better. Their collective January - April market share has fallen another 1.1% since the same period in ‘03, while the Japanese are up 1.7%, as Nissan and Toyota have experienced a combined increase of 2%. While Nissan continues the fastest growing pace (its share of the market’s up 24%), Toyota is now just 2.5% short of its bid to become the nation’s # 3 auto maker.
In looking at previous year’s data, it appears the gap between the two was 5.4% at this time in ‘02, and 3.6% a year ago. And, in comparison to the first five months of last year, Chrysler’s sales are up by 17,600 units, Toyota’s by 86,000.

Beyond Seinfeld: It’s still about "Nothing" in particular

   Granholm Takes Crank Call from “ColliePHORNya”

  “If you win, I’ll send you Brad Pitt to the Governor’s Mansion.” The offer sounded authentic, presented in the thick Austrian accent of California’s Governor. And, the offer’s recipient, Michigan Governor Jennifer Granholm, had every reason to think the Thursday morning call was actually from the nation’s best known governor, looking for a traditional bet on the upcoming NBA finals. However, the “voice” wasn’t Governor Schwarzenneger, but local impressionist Eric Harthen (Bill Clinton in parade commercials back in ‘96). The call was part of a scam by WKQI-FM’s “Mojo in the Morning,” weaseling it’s way to the governor by claiming to be the press secretary for the California Gov.
But despite getting suckered by a prank, we have to give the Governor credit for the way she responded to the “Brad Pitt” offer. She countered with, “We could send you Michael Moore.”
Editor’s Note: I heard part of a replay on the news Thursday night. What was most hilarious was the excitement of the Governor’s staff when they thought they were actually getting a call from “Ahhrnhold.”

“Seinfeld” Briefs:
  
   Here’s one to those who love the line, “you get what you pay for!” We note that no one is calling Governor Granholm regarding a bet with Florida Governor Bush over a “Red Wings - Lightening” NHL final, since the “wings” lost in the semis to Calgary. Well, there was an interesting point made regarding the NHL finalists: “Tampa Bay ($33.5 million) and the Calgary Flames ($35.2 million) have less combined payroll than the Red Wings’ $77.8 million.”
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Why’d we keep the “bunny” with no “Playboy” reference this month? Well, to remind us of the notable ways some individuals get to “bamfhome.com/”. A recent “search string” that brought someone to us was “Christie Heffner,” Hugh’s daughter who was once referenced in Veritas.
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Et. Tu! from Sen. John McCain: “I fondly remember a time when real Republicans stood for fiscal responsibility."

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Association News and Events by Laura

  

New Members' Applications Before and After Custom Painting, Randy Lamb Sponsor: David Hughes R.C. Plumbing, Scott Stanley Sponsor: Kathy White

2004 BAMF GOLF OUTING Our Annual Golf Extravaganza Monday, August 9, 2004 Flushing Valley Golf and Country Club         Four person scramble Shotgun start at 10:30 a.m. Sponsored contest on holes Burgers/Hot dogs for lunch Refreshments available throughout the outing (drink tickets provided) Dinner at approximately 4:30 p.m. Lots of Door Prizes The most talked about BAMF event!   Reservations & Hole Sponsorship Info Golf-Lunch-Dinner - $100.00 per person Hole Sponsorships - $125.00 & $175.00 Reservations will begin on Tuesday, June 1st. All payments are due by July 7, 2004. GET YOUR FOURSOME TOGETHER AND CALL LAURA OR TRACEY AT 810-603-2200 STARTING 6/1/04 OR EMAIL TRACEY@BAMFHOME.COM

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Economic Update: “Pistons:” Economy’s Last Defense?

  The Detroit “Pistons” believe they play best under pressure. If so, they should surprise everyone and destroy the L.A. Lakers in the rest of the NBA Championship series, as they did in game one.
Not only does the “Auburn Hills” franchise bare the burden of being the only hope of a Metropolis stuck with “Ford” and “Illitch” owned teams, we now discover it’s representing the hopes and dreams of the nation’s stockholders.
Yes, despite the solid growth in the U.S. economy (manufacturing recovery with jobs as well), stock prices may be more dependent on another game saving block by Tayshaun Prince than a $5 per barrel decline in oil prices.
Thursday, the New York Daily News pointed to Wall Street’s “Shaq Curse,” (only 3 years in the past 15 have seen a decline in the Dow Jones industrial average [2000, ‘01 and ‘02]. The Lakers won the NBA each of those years. And, the market’s best year was ‘95, when the Orlando Magic lost the NBA Finals). So, what ‘s the bond between the ‘95 Magic and 2000 - ‘04 Lakers? Super star of the court and screen, Shaquille O’Neal!
While the Laker star pockets his $100 million plus, he shows no concern for the lives he ruins. Now, only the Pistons stand between America and a new “Shaq Attack!” So move over “Cowboys!” America has a new “team.” And, it’s from the other “Big D!”

Growth Stronger; Job Creation Strong; Manufacturing Solid

The major indicators we’ve been focusing on for the past several months had an exceptional May. In particular, the factory job growth that seemed imminent in late winter and materialized in April, accelerated in May, as the economy added another 248,000 jobs. And, along with the manufacturing and job news, we also found a faster pace of first quarter growth the economy’s booming (including the housing data on pages 1 & 4).
What we still find most notable is the continued recovery of the long suffering manufacturing sector. On Monday, the Institute of Supply Management’s (ISM) manufacturing index said the 12 month upturn in manufacturing activity was continuing at a faster pace. But, perhaps more importantly, the ISM’s employment index showed growth for the seventh consecutive month (following the often bemoaned 37 month contraction), also at a faster pace.
But more heartening was the Labor Department’s employment report confirming the upturn in manufacturing job creation. After breaking even in March and gaining 21,000 in April, the sector added 32,000 jobs in May.
Obviously, the 53,000 new manufacturing jobs barely make a dent in the millions lost since 2000, but the upturn is significant from a recovery perspective.
However, manufacturing jobs weren’t the only good news in Friday’s employment report. Both, the March and April gains were revised upward, bringing a total increase of 947,000 jobs for the 3 month period, the strongest jobs’ data since the first half of 2000.

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Housing Activity Update:

  We’ve often said, to understand housing data, ignore the headlines and read the article. Well, perhaps ignoring the article isn’t always a bad idea.
Since most housing data are presented on an adjusted annual rate basis, to make up for seasonal impact, climate conditions can often have a more profound affect on a report than economic conditions. Weak markets can look strong in a mild winter, while strong markets may look weaker on the heels of a mild winter. Why? Because they’re always compared with the rate of the previous month.
April data for housing starts and “new” home sales provide great examples of the distortions of “rates” of activity.
In reality, housing data for the first four months of the year are nothing short of exceptional. However, if one were to read ness publications) reports, they would think we’re on the verge of a major decline. Did new home sales really "tumble" as the headlines and articles said? The report said new homes sold at a rate of 1.093 million units, which was 11.8% below March. And, the web headlines touted the fact the decline was the "biggest monthly drop in 10 years." However, there are some serious problems with the government data, which suggest the decline is really no big deal. The real problem with the April data is, they followed March, a month that had sales that were way out of line (from an historic perspective). While homes sold at (what appears to be) an all time high rate of 1.239 million in March, we get a better illustration by looking at the actual sales of 121,000 units during the month. Those (actual) sales were up some 24% from March '03, and 35% from March '02. And, while April's sales’ rate was up 6.4% above the year earlier rate, its actual sales were up nearly 10% (more than 16% above April '02). In fact, according to actual sales' estimates through the first 1/3 of 2004, new home sales are up 17.9% (or, 62,000 units) above ‘03's record setting pace. While housing starts were off “slightly” in April, they were “off” from March, when the rate was above 2 million, a figure basically unheard of since the ‘70s. And, as with sales, when we look at actual data, we find the construction’s begun on nearly half a million homes through April, up a solid 14.2% from last year’s record breaking level. Local Activity Locally, permit authorizations for “owner occupied” housing were up 25% across Southern Michigan, according to Housing Consultants, led by Oakland County’s additional 526 units. Genesee County is up 21.3%, led by Grand Blanc Township (99 permits), Mundy (66), Burton (55) and Davison (53). Fenton Township was the fifth (46 units). However, the “Fenton” area (including Linden [35] and Fenton [31]) combined for 112.

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