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To: orkrious who wrote (301686)	2/9/2005 8:32:22 AM
From: orkrious	Read Replies (2) \| Respond to of 436258

Homebuilders Rewrite the Growth Playbook By James J. Cramer RealMoney.com Columnist 2/9/2005 8:10 AM EST Click here for more stories by James J. Cramer Homebuilders # The homebuilders have gone from cyclical growth to secular growth, which means they deserve higher multiples. # As long as the Fed keeps long-term rates low, this process will continue. # Until companies like Toll, Lennar and Centex get the multiples they merit, be wary of betting against them. Playbook screw-up! Nowhere in the playbook does it say to buy the homebuilders after the sixth tightening. Nowhere in the playbook does it say that the homebuilders should be the No. 1 performer at this stage in the economic advance. Yet there are so many hedge funds in this game now, and so many that use the playbook, that it is time to re-examine what's happening. It is time to see if the playbook -- the mythical collection of all the things that work when the economy's in a late-stage advance -- is still valid, or whether it is an Andy Reid-style brain freeze that clutches the market. To start we have to recognize that the Federal Reserve took rates so low that even after all these bumps, we are still nowhere. We are still so low that you could question whether the tightenings should even hit the radar screen. I judge this not because of the shape of the yield curve, but because short rates are still horribly uncompelling as a cash alternative. That could change soon, but it hasn't yet. Second, we have to recognize that long-term rates worldwide are incredibly low. Turkey's borrowing at 5.5%. India's borrowing at 6%. It's hard to see why the U.S., with some newfound fiscal discipline on domestic spending -- guns but no more butter -- should be paying 6% or 7%. When you put it in the context of Bulgarian borrowing at 5.75%, you see the point. Third, the homebuilders have now entered their third year of re-multiplization, coming from their now-complicated land-banking. Only these big homebuilders can take down the land, take the zoning changes and get you the rates you need to make things work. They have decyclicized the industry, as much as the purists refuse to believe this. When a group goes from cyclical growth to secular growth, the complex process means higher multiples, even when they would normally be shrinking. That's what's going on now. As long as long-term rates stay low, I expect the process can continue. How high? Toll (TOL:NYSE - commentary - research) has a 16 multiple. I could argue it should get a market multiple. Same with Lennar (LEN:NYSE - commentary - research) and Centex (CTX:NYSE - commentary - research). That's the battle now, getting the homebuilders market multiples. Until they get them, I would be wary of betting against this group. The playbook isn't wrong; the industry's changed. Simple as that.