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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Frank Pembleton who wrote (93352)	8/9/2001 10:37:54 AM
From: Frank Pembleton	Read Replies (1) \| Respond to of 95453

Stock Brief by Briefing.com Updated: 09-Aug-01 Time to Bail Out on Homebuilders [BRIEFING.COM - Robert J. Reid] If you have been fortunate enough to be in the homebuilding sector over the last year, it's time to take profits. It could get ugly. We all know what happened to the oil drillers when there was even the first sign of slowing demand. The homebuilders are not as volatile, but a bad economic report or two could severely hurt the group. Rates A-Falling According to Freddie Mac, the average rate on a 30-year mortgage was 7.07% over the first six months of the year, down sharply from the 8.05% seen last year. Declining interest rates, strong home sales data and deeply discounted valuations have been driving investors to these stocks over the past year. The housing data have been on a modest upward trend since mid-2000 as low mortgage rates keep a flame under home sales. The downturn in confidence, the halving of the Nasdaq and an overall economic slowdown have not slowed the sector nearly as strongly as expected. There's No Denying It The data is right in front of us and it looks great. In June, housing starts rose a much stronger than expected 3% to a 1.658 mln unit rate. In fact, the June surge was the second fastest pace of this year behind January, while consensus estimates were actually looking for a 1.4% decline. Strength in the Northeast and South helped to offset the more sluggish tone in the West and Midwest. Existing Home Prices Plateau However, there are reasons to be concerned. The primary risk is that as the consumer is increasingly injured by layoffs, debt and a soft economy the resilience in the housing sector -- first sales then construction -- will weaken. Proponents of the sector argue that the strong new home sales data point to continued strength. After all, that is what these companies do -- new homes. However, you cannot overlook the slowing pace of existing home sales as shown below. Remember that home buyers no longer have their fat Nasdaq portfolios to use as a down payment, so they need to sell their existing home for the down payment, so existing home prices are becoming more important. Anecdotal Evidence Certainly my sample is small as it's limited to the Chicago area, but after attending open houses just for fun over the past couple of months, it is clearly a buyer's market. Three to five years ago, open houses were filled with buyers with prices often going above the asking price. But now, 90% of the time, I was the only person looking and was only the third name or so to sign the guest book. Sellers would make small talk just to have someone to talk to. This is not a scientific sample, but it was a stark contrast to just a few years ago and probably true for most metro areas that have had a strong new home build-out. Analysts Remain Too Positive Too many analysts are positive on the group. This is a bad sign. For example, Merrill Lynch is just now downgrading the oil drillers this morning after the group has already moved sharply lower. Again, the golden rule is to sell when the news is the best. Don't wait around for the analysts to downgrade. Look at the number 1 and 2 stocks by market cap: for Lennar (LEN 40.86) 9 of 11 analysts have Buy ratings and for Centex (CTX 42.75) 10 of 13 have Buy ratings. We have made the point many times on our site. Analysts have a role to play and it's best you understand their role. Try to avoid stocks that analysts have already upgraded because the news is in the stock. Conversely, sell before the downgrades inevitably come (always happens for cyclical stocks). Get in front of the curve so you're selling before the institutions sell. Others in the group include: BZH 63.50, DHI 23.90, KBH 27.85, MDC 33.91, NVR 156.00, PHM 35.70, RYL 51.68, SPF 21.23, TOL 35.31, WBB 37.08. As a side note, SPF has a lot of exposure to the weak California market. Also, be careful with BZH has it trades over $60, but has a tiny float of 3.9 mln shares. It's not heavily shorted (10% of float, which is moderate), so don't wait around for short squeeze rallies there. Conclusion If the economy is indeed heading into a recession, then it's reasonable to conclude that home sales and housing starts will eventually slow, regardless of the favorable rate environment. When you combine the risk of a slowdown with the fact that valuations are no longer as compelling, it's time to take profits. You want to sell stocks when the news is the best. It's just a matter of time before one of these economic housing reports shows a sharply lower than expected number. Every release becomes a possible land mine. Also, if you wait for the analysts to downgrade, it will be too late.