This week is going to be an eventful week of earnings, Fed talk, jobs reports and can likely set the stage for lots of volatility for the next few weeks which leaves me just enough time to discuss a topic that I have wanted to for a couple months now, but something more timely seemed to bump it out of the way, besides the guy is dead. That’s right, today I want to talk about an old timer, a throwback, a dusty legend of the Arkansas dust that ended up shining bright in Big D. James Hagerty in the Wall Street Journal helps us tell the tale.
Donald Ray was born in 1950 in rural Arkansas. He grew up with five siblings who all slept in the same bedroom. This might come as a shock to many, but not every child has always had their own room. These days kids practically have their own wing of the house, but in the case of Donald Ray he and his family slept in the basement of a jail because his dad was the Sheriff, and the prisoners were one the top level and the family lived down below. There is one fantastic characteristic about being poor. When you are you don’t realize it because usually everyone around you is poor also and you just think it is normal. Well Donald Ray would turn out to be anything but normal, but it didn’t start out that way.
He found that college wasn’t really for him, but he did find a wife there so it wasn’t a completely wasted trip to high education. For him, life would revolve around real estate. He tried selling homes but quickly was drawn to building. This is best told by Hagerty, “One afternoon in late 1978, Donald Ray Horton arrived at a bank in Fort Worth, Texas, an hour early for his appointment with a loan officer, just to show how eager he was. He ended up waiting two hours to see the banker.
The 28-year-old Horton, who had quit college at 21 to sell real estate in Arkansas, wanted to reinvent himself as a home builder and needed $30,000 to build his first house. He finally got a chance to make his pitch around closing time. After more than an hour of dickering, the weary banker took off his glasses and dropped them on the table, Horton recalled in an oral history recorded in 2019.
“I’m going to loan you the money” to build the home, the banker said. “Not that I think you know what you’re doing, but I think you will sell it.”
The banker “was right on both counts,” Horton said later.”
The career of one DR Horton was underway. I always wondered if it was Dr Horton or DR Horton because the letters Dr before another name usually lead to someone being called doctor. Appropriately so if they are wearing a stethoscope or ridiculously so if they have a PhD in a social science. This was no doctor but a DR. Both capitalized and he earned it more than some historian on ancient Egypt. DR Horton started with one home and like the man he was compared to, Sam Walton, he built up a business using street smarts, hard work, and the ability to stretch a nickel a country mile.
“For the first three years, Horton said, he didn’t take a day off: “I did everything. I was the accounts payable, I was the construction, and I was also the salesperson.”
Even after the company was well-established, Horton made do for years with used furniture in executive offices and the boardroom. A clerk rerolled adding machine tape so she could use both sides. On business trips, Horton and other senior executives shared rooms in budget motels.”
He had his clerk reroll adding machine tape so that she could reuse it. That might be one of the greatest things I have ever heard. We live in a world that is so foreign to that concept. We try to impress on Instagram or the Facebook before we have achieved at all. We would rather look like a businessman than be a businessman. This was not in the DR playbook. He built houses and he built them for first time homebuyers which meant he had to pinch every penny and he did, but it worked, and he became the nation’s largest homebuilder by 1982 and his companies would hold that spot until his death in May of this year.
When you run a business like DR did or Sam Walton, the attention to detail requires that every detail is important. You have low margins but if you can get big volume, you can win big. That DR did. He almost lost it all in the great financial crisis but was able to survive, but it taught him a great lesson. “The housing crash confirmed one of Horton’s favorite sayings: “In the real-estate business, it’s easy to make money, harder to keep it.” The company still indoctrinates employees with some of Horton’s other maxims, known within the firm as Hortonisms. One of them evokes his childhood while warning against complacency: “It’s a quick trip from the penthouse to the outhouse.” Now I don’t know if I have ever heard DR say this but it certainly is one of my favorite lines as well. I find it fascinating that a man as successful as he was still felt that sense of vulnerability. That is precisely what I am trying to talk about and warn against. Nothing is as safe at it seems, yet few things are as risky as they seem either. It is an interesting dichotomy. We will focus on protecting and playing defense in this bubble, but there will come a time to lean into fear and perhaps assume more risk, but not right now.
I wanted to talk about this man and his fiscally conservative mentality for a while now, but it is more timely now than ever. Warren Buffet has been selling Bank of America stock for 9 straight days now. The banks have rallied this spring and early summer, but Buffet is now again adding to his cash pile as he is seemingly preparing for fiscal winter. We have talked about Nvidia, a stock that today reached over 30% off its high set just weeks ago. After the close yesterday Microsoft saw weakness in its seemingly indefatigable cloud business. It truly seems like something is turning the boat all at once here.
Dr. Copper, as the copper market is sometimes is called, has drppped over 20% from its high just months ago as it too seems to be pointing to a slowdown. This is what happens when an old man slowly eases into a hot bath. It is slow at first as first one leg then the other slowly cause a rise in water levels, then a deep breath and down goes the ass and undercarriage and the water level shoots first up and then down and all hell breaks loose after that. Cussing and splashing and half the water ends up out of the tub before things settle down. A scalded undercarriage is nothing to laugh at and neither is a scalding cup of coffee, one that is perhaps severed at Starbucks, the place where same store sales have seen the second straight quarter of revenue misses. Is there a better indicator of declining consumer strength that the sugarwater sellers from Pike’s Place market? Despite the news, the stock for Starbucks was up 5% after the bell. The economy is bad, and every day another bit of awful appears, but the stock market is not a believer in mass yet. Bonds are being bid as some nervous nellies like yours truly are starting to look around and say, this equity thing might not be too good. I am not touching bonds as I follow in Warren’s footsteps and believe cash is king.
One of the last statistics to appear at the end of a business cycle is a rising unemployment rate. That is happening, but it has been a slow burn so far. From 3.4 to 4.1 % seems like a lot, but 4.1% is still very low historically and with the state of the jobs market post Covid 3.4 was a little bit of a lower anomaly as well. What is not an anomaly is how quickly this rate can move. Just last week Nike announced larger than expected layoffs and Stellantis is now saying that it will be laying people off as well. As these companies begin to slow down, the marketing spend, cap ex spend, and labor spend all dry up at the same time. We are seeing this all start happening simultaneously. This is coincided with the tech stocks selling off and little small caps rallying to 52 week highs. No sector is more fragile to declining financial conditions that these small companies that don’t make money, don’t have bulletproof balance sheets, and have no more pricing power than the big companies that make money and have the balance sheet goods to show for it.
The Olympics are taking place in Paris right now and they have been plagued by wokeness, heat, and terrorism. They are extravagance personified. The amount of money spent is truly some of the worst ROI in history of finance. The ruins will gather moss but will not host any Rolling Stones. DR Horton would not approve of these expenditures. He would recommend saving for a rainy day, because its getting cloudy and you can hear thunder. Perhaps that’s why I wanted to talk about DR Horton today, he too was a bygone relic. Rest in peace sir.
Sincerely Yours,
C Thomas Printer
On this date in history… 53 years ago today to be exact, the lunar rover vehicle cruised around the surface of the moon if you believe in that.
Also born on this date … the 1976 winner of the Nobel prize in Economics, Milton Friedman.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.