Editor's note: In this edition of "360 Degrees,"
commentators take a look at the homebuilding sector, prompted by the latest report from
. The spotlight still burns on this sector, as Nick Yulico points out this morning with his
coverage of today's existing home sales report.
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Still Not Time to Move Home, by Dan Fitzpatrick
This column was originally published on
Aug. 22 at 11:21 a.m. EDT.
This week, the market seems fixated on the housing numbers. Today we heard from
. Tomorrow morning we get the July existing-home sales numbers. Yawn. Thursday brings the new-home sales numbers. Key point -- they're not going to be good. Everybody knows that. The question is whether they are going to be as bad as everyone expects.
When it comes to the homebuilding stocks, there are three camps -- and two of them are inhabited by bears. First is the
aggressive ursine bunch who believe that these stocks are only resting on a cliff before moving much lower. Second are the more
wary bears, who still don't like the sector but feel that it's a crowded short. Finally, there are the apologetic, tentative bulls anticipating a sustainable bottom. These are the folks who believe that all the bad news has already been factored into the sector.
I'm still comfortably ensconced in the first camp. I am hearing about a lot of cancellations. High cancellation rates can effectively nullify any new sales. Builders are now taking a cue from their prospective buyers and walking away from land deals. This is not breaking news -- but it's so rampant and widespread that I don't know how it's possible to accurately discount this into the stock price.
For example, when
, a California-based homebuilder, posted results last month, it disclosed that it had written off $16.3 million in deposits and due diligence (preacquisition) costs for abandoned or uncertain projects.
disclosed that it will be walking away from substantial land-option deposits. The company couldn't even quantify the cost in its forecasts.
We are seeing similar expenses incurred by
($36 million) and
Now, it would be a mistake to believe that expenses of this kind will continue. They won't, but they'll persist longer than you might imagine. How could that be? With only so many deals in the pipeline, how many more deposits are left to forfeit? Well, lots of these deals are land-development deals and may not be scheduled to close until 2007. Also, homebuilders make money when they sell finished product, so the continual slowing of construction starts equates to decreasing revenue and profit going forward.
In addition, I have a thesis, based on anecdotal evidence, that divisions are not being straight with the corporate offices. In a slowdown of this magnitude, executives become fearful of losing their jobs if they disclose the "real deal." Employment insecurity reigns supreme in this environment and fosters selective disclosure. Sales agents are being instructed to conceal cancellations until they have resold the unit. That's wrong.
Refundable deposits on units that have not yet received a "final report" are being reported as bona fide sales. That's dumb. Acquisition-related marketing reports are being fudged in order to make deals look better, with the hope that the economy will pick up in time. That's suicide.
So let's take a look at a few of the bigger names. Remember, strong stocks can become overbought and remain that way far longer than most folks realize. Conversely, and more to the point, weak stocks can become oversold and remain that way for quite a while, too.
The Philadelphia Housing Index has been treading water since last month, with no real sign of a turnaround. Notice how oversold the relative strength index (RSI) had become, falling well below 30. That doesn't happen often, and is a sign of extreme weakness. But unless the HGX moves back above 210 or so, I'd look at the current weakness as an opportunity to unload some shares. Let's take a look at a few stocks now.
took a 50% haircut from the January high, but it doesn't appear as if it was enough. A series of lower highs and higher lows after a sustained downtrend is typically a continuation pattern -- not consolidation. I'd look for more downside if the stock falls below the support line I've drawn above. I would not be surprised to see the stock test $30 before this is through. (Let the hate mail fly).
D.R. Horton is showing the same type of pattern we saw in Beazer. Notice how long the
price-by-volume bar is at the $22 level? A lot of stock has been changing hands here. I'd look for additional supply to push the stock lower. If the price drops below $20, it's probably not a good idea to stick around.
has been trying to find a bottom around $42. RSI is showing extreme weakness. It's not even faking a bounce. I'd be a seller on any move below $42, and if you're looking for a better reference point than this weekly chart, then zoom out to a monthly chart.
This is for those who keep saying, "The homebuilders just can't go down any more." Enough said.
Want to see a
homebuilding stock? Go south of the border to Mexico.
is the strongest of the bunch, but seems stalled at $40. I wouldn't be a buyer until this stock breaks through resistance.
That's my current take on the homebuilding group. If you want to know when these stocks are likely to turn around, I'll let you in on the best "tell" for this industry: It's you! When you start seriously thinking about buying a new house -- or hear your friends talking about it -- then you've got a pretty good idea that you're getting in on the ground floor of a meaningful advance. I just don't see that happening for many, many moons.
Be careful out there.
Little Pink Houses Out of Homebuilders' Reach, by Howard Simons
This column was originally published on
Aug. 22 at 10:59 a.m. EDT.
Ain't that America, home of the free
Little pink houses for you and me.
-- John Mellencamp
Being an astronaut must be fun, even if NASA manages to lose the home movies of one of humanity's greatest achievements, as it recently disclosed it did with the Apollo 11 moon-landing footage. As a rocketeer, you get to see things from above and in perspective. Of course, you can do the same thing on a much smaller scale from an airplane window.
I used to have to fly to Tulsa, Okla., on a fairly regular basis, giving me a broad perspective of that state's topography. Eastern Oklahoma now has more lakes than Minnesota; and Tulsa, which is on the Arkansas River, is a seaport. Both facts are attributable in large measure to the work of Sen. Robert Kerr, chairman of
, who served in the Senate between 1949 and 1963 and who was a key player in rounding up the votes for fellow Sen. Lyndon Johnson. As chairman of the Select Committee on National Water Resources, Kerr took payment in dams, as evidenced from a mile-high view of his state. The point: from space, you can see what a U.S. senator is really capable of doing.
Fly into any major city today, and if your memory is long enough, you will see urban sprawl extending much farther than before. The point is: From space, you can see what monetary policy and the
are capable of doing. You can see clearly the results of the grand social experiment of driving interest rates lower between 2001 and 2004, when the first rate hikes began, softly and slowly, to remove the stimulus for credit-dependent industries, such as homebuilding.
Changing Fortunes for Homebuilders
This is exactly how interest rates are supposed to affect the economy. In theory, interest rates equilibrate between future and present consumption. Higher rates discourage present consumption in favor of future consumption, while lower rates do the exact opposite. And markets do move to excess. It was not enough for some that a few marginal homebuyers could now qualify for some plain-vanilla 30-year fixed-rate mortgage; no, we had to jam anyone who could fog a mirror into undocumented option-adjustable-rate mortgages. We shifted a lot of housing-related investment into those years and created a boom for homebuilders.
Oddly enough, the beneficiaries of this boom kept a level head, if the National Association of Homebuilders sentiment survey is to be believed. This index, which recently hit a low of 32, spent most of the time in the period from March 2000 to August 2005 between 55 and 70. During this time, the relative performance of the S&P 500 Homebuilders Index to the
as a whole did nothing but rise in a straight line. Incidentally, the last time I addressed homebuilders specifically in this column was in
August 2005; the negative action then was attributable to rising mortgage rates.
The homebuilders could have gotten giddy, at least in their sentiment survey, but chose not to do so. Homebuilders have seen booms and busts before, and they were determined not to confuse a bull market for brains.
If only Wall Street kept such a clear head. A casual observer might think there are some out-of-control egos in this business.
The Interest Rate Connection
But if homebuilders kept their cool on the way up, they certainly panicked on the way down. The relative performance of their stocks has fallen, and with it, so have their spirits.
While you may think they are manic-depressives without the benefit of the occasional mania, they are actually reflecting the abyss created by the interest rate mechanism discussed above.
Prior to August 2005, their sentiment index reflected the national average rate for fixed-rate mortgages so well that it was simply a redundant indicator.
But what the small rise in mortgage rates -- from below 5.5% to above 6.5% -- did was close the door behind the deluge of marginal new homebuyers who had flooded into the market.
The builders satisfied 2006-07 demands in 2002-05. They will have to wait for the next wave of homebuyers, and given how homes define durable goods, that may take many years.
A Picture of Homebuilder Confidence
Mortgage Rates and Homebuilder Sentiment
Another way of looking at this interest rate relationship is by updating and expanding a complex chart from my August 2005 column on homebuilders. The rate-cut era began in January 2001. We can divide the next five-and-a-half years into three regimes, the one prior to July 2003, the one after August 2005 and the one in between these two.
If we map the relative performances of the homebuilders against the relative movements of 10-year note yields and superimpose trend lines on them, we see how both the pre-July 2003 (green trend line) and post-August 2005 (red trend line) periods show strong dependence on interest rate trends. The middle segment (blue trend line) had only a weak relationship to rate trends.
Yield Curve Effect
We can also, on the chart above, map the relative performance of the homebuilders against the shape of the yield curve as measured by the forward-rate ratio from two to 10 years. This is the rate at which we can lock borrowing in for eight years starting two years from now. During the pre-July 2003 period, the yield curve was fairly steep; the homebuilders as a group tend to do well in a steep yield-curve environment.
The present yield curve is quite flat, which works against the homebuilders. Overall, we have to conclude the group is left wishing for a combination of lower long-term rates, a steeper yield curve and a stronger economy. While nothing is impossible, this combination is unlikely to occur anytime in the foreseeable future.
Don't Move Into Toll Brothers Yet, by Jim Cramer
This column was originally published on
Aug. 22 at 9:17 a.m. EDT.
To me there was nothing good here: another number cut, another statement about how housing is slowing, another reduction on top of a reduction. No sign that inventory is being worked off yet.
Sure, every stock is entitled to a bounce. But, I urge you to
read Helene Meisler today. She tells you exactly what will happen, from a technical point of view, to the stock. I couldn't agree more. A classic sell-into-strength situation.
When do you buy Toll? As the playbook says, after the first
in rates. Don't bother to anticipate it; that won't work.
Just wait if you don't own it, and if you do, be grateful for any bounce you might get.
At the time of publication, Cramer had no positions in stocks mentioned.
At the time of publication, Fitzpatrick had no positions in stocks mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.
Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of
The Dynamic Option Selection System
. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.
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