While the homebuilding sector
remains the darling of many analysts, one short-seller continues to pound nails into its coffin.
profiled the homebuilders as a short opportunity back in August, and the play was quite successful. While many of the sector's names have rebounded lately, one hedge fund manager continues to like the short side.
"These stocks are trading on hope," says the fund manager, who wished not to be identified. "We like the shorts more than ever. Employment trends are still negative; the stocks are trading at a premium to book value where they were three or four months ago when people didn't think we were in a recession."
Plus, the fundamentals of the homebuilding business are weakening: Backlog is stagnant if not falling; inventory is edging higher; and cancellation rates are high, about 20% in September, and creeping higher. In good times, cancellation rates run about 5% to 6%.
Homebuilding bulls point to the record level of mortgage business, something the fund manager calls a false signal. "Mortgage originations have been strong, but 85%-plus are from refinancing," he says. "With rates so low recently, everyone who wants a home has purchased in the last year or two. The biggest risk is that everyone who wants a home has one."
He notes that real estate agents are already reporting a significant slowdown in high-end home sales -- generally, houses costing more than $600,000 -- which will eventually hurt high-end builders like
, which he is short.
"What's happening with the economy is currently affecting high-end home prices, but that will eventually filter down to midlevel builders as well," he says.
Chairman Alan "Greenspan has done everything he can to support the homebuilders, but fundamentals continue to weaken and there isn't much more he can do."
The manager is also short
and is eyeing as possible shorts both
, trading at more than two times book value, and
, which trades at nearly five times book value.
However, he'd leave
alone, as its diversified income stream provides some protection. If you want to be long the sector, he says he'd focus on
, a manufactured-home developer.
A Golden Deal?
agreement Wednesday to acquire Australian gold-mining company
is pretty complicated. Yet, one analyst sees a way to make money from it.
If the deal goes through, it would create the world's largest gold producer with 97 million ounces of gold reserves and 8 million ounces per year in production. While Newmont's all-stock bid for both companies offers a nice premium, its lack of cash makes a competing offer possible. Plus, Newmont's largest competitor,
, could jump into the fray.
"The real story here is probably not about value anymore. It is about ego and control," says Barry Allan, gold analyst at Toronto-based Research Capital. "Barrick has been boxed into a corner by Newmont and Franco-Nevada. If this deal goes through, every time Barrick looks across its property line, Newmont will be there: in Nevada, in Australia and in Canada. And, to add insult to injury, since Franco holds royalty rights to some Barrick production mines in Nevada, Barrick would end up paying royalties to Newmont. That won't happen if Barrick has any way to avoid it. These two companies despise each other."
Hence, Allan thinks Barrick will do something: either make a higher, part-cash offer for Franco-Nevada or try to support a competing offer for Normandy from
. AngloGold, whose $1.47 per-share bid for Normandy was trumped by Newmont, has said it would respond to Newmont's move within 10 days. At current stock levels, Newmont's bid for Normandy is valued at about $1.51 to $1.56 a share.
Allan thinks investors could be rewarded by purchasing Franco-Nevada and being short Barrick in anticipation of a bid. "At some level, there will be a bidding war for Normandy and potentially for Franco-Nevada," he says. "If Barrick does bid on a strategic and egocentric level, you don't want to own Barrick stock."
Franco-Nevada is currently trading about $2 below the current Newmont offer. With Barrick feeling pressure either way, this paired trade has some appeal while you wait to see which goose ultimately lays the golden egg.
If one pundit is right, there's little OPEC can do to persuade Russia to dance.
Marvin Zonis, professor of international business at the University of Chicago Graduate School of Business and a longtime student of Russian economics, attributes Russia's
hard-line stance on oil production to President Putin's attempt to supplant Saudi Arabia and OPEC as the primary source of crude oil for the West.
While lower oil prices may affect Russia, Zonis says that country is more capable of living with lower prices than OPEC. "The Russian economy has been doing well, and it's not just because of the higher oil prices," Zonis says. "The Russian economy doesn't turn around on the back of oil. For Russia to demonstrate its commitment to the West, they can take $15
per barrel oil."
While he thinks Russia will maintain current production, it'll need to boost production to become a significant player. As for OPEC, Zonis thinks Russia got the best of the cartel this time. "OPEC realizes they have been stiffed," he says. "There is not much chance of a change while Putin is trying to demonstrate to the West he has made a serious turn."
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds' firm had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to