RealMoney Silver - Evidence of a Bottom

Evidence of a Bottom
By Jim Cramer
RealMoney.com Columnist
5/16/2008 7:59 AM EDT

Have we really bottomed? The stubborn lack of decline in the homebuilders, coupled with the better-than-expected retail sales, the strong transports, and the conclusion of a deal like Clear Channel (CCU) , has created an environment where you are hard-pressed, if you rely on stocks as forecasters, to ignore the possibility of a bottom.

I watch the HGX like a hawk, the homebuilding aggregation, and it simply won't come down. That's despite the awful numbers, the covenant violations (Standard Pacific (SPF) ) the bad loans, the lack of mortgage money, the insistence of a down payment and an abysmal spring traffic season.

So, why are people buying the group that signaled the downturn? I think it comes down to price. If you force the homebuilders to sell, as Toll (TOL) did this quarter, taking no gains on homes, you clean up inventory. If you clean up inventory, which is what happened in western Florida, you stabilize pricing. When you stabilize pricing, you bring out buyers. It is a virtuous circle.

Which brings us back to the government. The feds, being pushed by Sen. Dodd, could provide real help, or provide some damage to the process depending upon the actions in the upcoming weeks.

If we spend $200 billion to $300 billion to allow the FHA to guarantee loans and stretch out the payments, we will allow people to stay in homes. That takes off more inventory, the foreclosure inventory. But if we give the builders a credit, they stop cleaning up their inventory because they can pay the banks with that credit. One will offset the other. (If they just listened to Bob Toll and offered a $15,000 tax credit on a home, then we could deal with unsold inventory, but the Dems are focused on keeping people in their homes who deserve to be in them, not selling new homes.)

So the Senate matters, as does the president who is completely laissez-faire about this issue and could become the enemy quickly with a veto. Given that we just got a veto-proof farm bill for the least needy group out there -- the farmers -- anything can happen. (And aren't we craven about that!)

Now, we got news this morning that Fannie (FNM) is about to scrap a rule about requiring down payments in hard-hit areas. This is astonishing because it will wipe out a lot of equity for FNM as these are natural defaulters, but it sure helps clear out more inventory.

All of this litany can justify the HGX turn. Against it is unemployment, which is a big if, and the psychology of the consumer, who is once again proving surprisingly resilient.

Yesterday, Bob Marcin issued a note about whether we are in a recession or getting to one. Obviously the bullish litany says we will avoid it. The market is sure saying that.

Either way, the chances that this rally is for real, that the early-cycle plays have some staying power, seems much more destined after this week's action.

Oh, and don't forget, the level of bearishness is rather amazing given the potential turn. That matters too, as hedge funds that are bearish don't go to the sidelines, they place bearish bets, and when those don't turn out right -- as they didn't in retail this week -- the action is pretty explosive to the upside.

Next week we get Lowe's (LOW) and Home Depot (HD) earnings. In some ways these could be the biggest tells of all because they sell products that you use when you nest or when you fix up to sell.

If they have good numbers, the debate could be sealed and the upside made much more clear.

Probably pays to wait after a big up week like this. But the onus, this week, shifted to the bears to make their case, and that's a real tough stand to make after this week's action.

At the time of publication, Cramer had no positions in the stocks mentioned.

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