Okay guys,
I know it's been a while since I did one of these emails about investing. It was hard for me to get over the losses of Katrina but lately I've been timing stuff a lot better and I have some new strategies that seem to be working.
I've basically figured out that it's a LOT easier to figure out which sectors/companies are going to do badly than figuring out which ones will do well. So here we go.
As you all know the housing sector is basically in a boat-load of trouble. But how can you play that.
You can certainly play the finance end of it but that is very volatile and tied to metrics that are very hard to understand much less predict.
But the builders are easy to see negative potential for.
Here's a list of some of the builders in the market today listed in descending order of market cap.
| Name | Symbol | Last Trade | Change | Mkt Cap |
| D.R. Horton, Inc. | DHI | 14.42 | -0.39 (-2.63%) | 4.54B |
| Pulte Homes, Inc. | PHM | 15.33 | -0.63 (-3.95%) | 3.92B |
| Lennar Corporation | LEN | 24.3 | -1.52 (-5.89%) | 3.89B |
| Centex Corporation | CTX | 28.31 | -0.74 (-2.55%) | 3.42B |
| Toll Brothers, Inc. | TOL | 21.8 | -0.73 (-3.24%) | 3.42B |
| NVR, Inc. | NVR | 501.94 | -22.06 (-4.21%) | 2.73B |
| KB Home | KBH | 28.09 | -0.63 (-2.19%) | 2.51B |
There was an overall rise (of around 10-15%) this week in this sector sparked by some pure insanity but we're seeing some corrections today. Here's a great blurb from MIC pointing out how bearish we should really be about this ridiculous week:
"Homebuilders' shares have been rallying today despite a disappointing pending home sales report that came out from the National Association of Realtors, as traders showed optimism that builders' shares will trade higher to gain back the lost ground. Technical indicators for the stock are neutral and slightly improving while S&P gives PHM a neutral 3 STARS (out of 5) hold rating. We will just watch this one for now. There are no bullish hedged trades we like for PHM or most of the housing industry yet. "
With all that aside. There is still some volatility left in this sector which will play itself out over the next week. But there are some key dates and economic indicators which will create some real opportunity for you to make some serious percentage gains.
Bottom line is these builders are in some serious trouble. Pulte started the year with $1B in cash and they spent 1/2 of that in six months. The other half will be spent in less than that and they'll be cleared out in no time. This sector is not really that open to M&A activity because it doesn't make much sense for one builder to acquire another when they're all doing bad. Most of their work force is illegal hires so their payroll numbers don't really tell us much about how badly they're really doing.
As an example of the level of desperation some of them or facing. D.R. Horton (DHI) who has a $4.5B market cap secretly put some San Diego condos on auction this past weekend through a third party company (trying to completely mask their own name from the record) with starting bid prices less than 1/3 of the initial value. On the Friday running up to the auction they realized the press was going to kill them on the day of the action so they blocked the event from the press and only allowed buyers with $5K cash in hand to enter the door on the day. Well they got screwed by a group of people they weren't even expecting. People that had bought homes in the same community that was being auctioned off showed up with $5K in cash to bid the prices up so they wouldn't kill their own comps. And good for them cause they did it and since D.R. Horton had given them 3 days to back out, most of them did. Even with that said the auctions closed with properties being "sold" for around 60-70% of the original value on average, the exact figures are available here (also posted by me) :D
So why did the sector go up this week? Well know one knows for sure yet. But some speculate internal buy-backs and some suspect naked puts. It could also have to do with this RETARD Stephen King from Citigroup that upgraded all the builders in one shot even though he did say they're gonna eat dirt for a while short term and didn't provide ONE good reason for his optimism. The only good thing it did was create a great short opportunity for the rest of us. But when is a good time? I'm guessing two weeks will be great but the next UP day would be perfect. Here's when you should looks to buy back though. Oct 24/25. Some great reports come outthat day that will just kill those stocks and none of them can possibly be "figured in" already.
| Date | ET | Release | For | Actual | Consensus | Prior |
| 17-Oct | 8:30 | Housing Starts | Sep | NA | 1331K | |
| 17-Oct | 8:30 | Building Permits | Sep | NA | 1322K | |
| 18-Oct | 8:30 | Initial Claims | 13-Oct | NA | NA | |
| 25-Oct | 8:30 | Durable Orders | Sep | NA | -4.90% | |
| 25-Oct | 8:30 | Initial Claims | 20-Oct | NA | NA | |
| 25-Oct | 10:00 | Existing Home Sales | Sep | NA | 5.50M | |
| 25-Oct | 10:00 | New Home Sales | Sep | NA | 795K |
So I would short before the 17th if you're gonna do it at all. It really doesn't matter which one you short. The rising tide lifts all boats but the opposite is also true. I would look to short on an up day before the 17th and buy to cover on the 25th. I'm looking for a 10% gain here and I know I can get it.
It's as sure a bet as you're gonna find anywhere. If you gain your 10% I expect my usual cut. But if you lose I'll send you a picture of a violin.
Some great articles to read:
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