Wednesday, May 18, 2005

Home Builders Risk Mass Cancellations

The Kansas City Star has an editorial on China policy that quickly turns to housing. "The benefits to U.S. exporters from a modest rise in the Chinese currency would most likely be small, while the effect of higher interest rates could be larger."

"If that were to happen, the effect could be acute in the housing market. Investors in housing stocks have been nervous for some time, happy to see ever-higher profits but worried that the good times must end someday and fearful that they could be left holding the bag when that happens."

Then a bond analyst reveals just how sensitive speculators are. "When things were at their worst in Las Vegas, Pulte was seeing cancellations of home purchases that amounted to 75 percent of new sales. 'The risk of similar, and perhaps more prolonged, regional downturns should not be ignored,' Kathleen Shanley wrote in a note to clients."

"Shanley points out that Pulte's inventory of land is concentrated in areas where home prices have been rising rapidly and that the company's cash flow is negative, even as profits soar, because of all the land it is buying. Pulte has been borrowing money even as it buys back stock at high prices."


At 12:30 PM, Blogger John Law said...

I just can't believe these inflation numbers. reading this blog you can tell that many people are stretching to make mortgages, that means there spending has to slow down at some time. the housing bubble is just a way inflation is not counted. we just seem to ignore it. houses going up is inflation! with people having to heat larger homes, that's another added cost. when they have to drive longer because they couldn't find an affordable home near their work, that's an added cost. those costs won't go away, especially if these people are stuck with their houses.

At 12:33 PM, Anonymous Anonymous said...

Long rates falling fast, short rates steady, yield curve flattening. Looks like the next refi boom may be converting ARMs to Fixed. Home builder stocks back near highs. The bubble is looking ever frothier.

At 1:08 PM, Anonymous Anonymous said...

I'm in the midst of convincing my friend to change her HELOC to a fixed rate mortgage.

She's got an offer now for 5.75% fixed, with $2500 in closing costs rolled into the new loan. (She said they also have a bimonthly payment plan that will drop her rates to 4.99%. I'm hoping there isn't some funky ARM aspect to this.)

Can I get a hallelujah? It's hard being a Cassandra/renter, seeing the chaos and misery about to happen. Esp. when it involves loved ones.

At 1:11 PM, Anonymous Anonymous said...

Assuming no prepayment penalties, the mortgage rates curve will never be inverted. There is always a premium for fixed mortgages because of their option-like (callable) properties. it is getting very flat though.

At 1:36 PM, Anonymous frank said...

When is the time for some put options on some of these bad boys?

Is Jan 07 enough time for a good decline out and what strike price?

I was thinking of KBH because of its bad reputation. But here's a good case for Pulte.

At 1:44 PM, Anonymous Hellboy said...

You might want to think about shorting NovaStar and maybe Countrywide first. Subprime loans will be the first "explosions" heard.

At 1:47 PM, Blogger John Law said...

how can pulte be losing money because they're buying so much land? don't they know what they're doing? doesn't sound like this company has a good future. they're also buying their stock at the highs! this is tech territory.

At 1:48 PM, Anonymous Don said...

I'm short KBH and TOL (painfully so today). I agree that sub primes may blow up first, I'm considering some short sales on those as well.

At 2:25 PM, Anonymous stock jock said...


Shorting stocks is always very risky. Most of the big down moves happen very quickly---in one day, or in a series of days. Otherwise they can crawl higher for weeks or months on end.

This is particularly true when you short stocks that have a very high short interest (like the homebuilders or REITs right now.) When there is a rally, the market-makers and momo players attack the big short positions hard---like today.

Sometimes these attacks force shorts to cover heavily and often create "technical" chart breakouts which attract even more buyers. So it's risky.

The summer is also frequently a dangerous time to short, particularly during years that look like the market should go down. The three worst years in stock market history---1929, 1987, 2000---all had wicked summer rallies from late May/early June all the way to the end of August. These rallies gained 16-30%, pretty major.

So even though the markets ultimately crashed, a whole lot of shorts were shaken out during the "fake" summer rallies...and a whole lot of "longs" were lulled into complacency by the same rallies.

At 2:52 PM, Anonymous Anonymous said...

about buying puts...

The new LEAPS series should appear in mid summer, and that would take you to Jan might want to wait for that.

Most home builders were up 3 to 6% today. Almost all of them have very low price/earnings ratios, under 10 in most cases. So they can still go up a lot. Eventually though, they are toast. The timing is the tricky part, obviously.

I trade a lot and this market has me totally confused...just like the house market! Just when you think its over, it comes roaring back to life.

Same problem..too much liquidity. Pick a market, the normal rules aren't applying, and in every case we can thank Mr. Greenspan and his incredible money creating machine.


At 2:53 PM, Anonymous Anonymous said...

disagree w/you on the 3 worst stock years in history. maybe you are basing it on 1 day losses. However, other years had larger overall declines (e.g. 1973, 1974, 2001, 2002)

At 3:17 PM, Anonymous Frank said...

The 2008 LEAPS sounds like a good idea. Maybe I should swing for a big home run and shoot for about a 50% decline by 2008. Those put option prices are around $1 on KBH.

Obviously, I have to educate myself fully on option strategies.... I am not worried about P/Es since home builders command very low P/Es and that can change quickly when the market turns.

I don't have the stomach for shorting. With an option it expires and you are out the money. You know that it was all at risk when you bought it. But if you win then you get all that fantastic leverage.....

I wonder if any of these RE cowboys like the Armenian kid hedge with put options on the builders. But they don't appear to know their ass from a hole in the ground except that "houses always go up."

But I guess options are very much akin to gambling as the house sets the rules and they win on average.

At 5:16 PM, Anonymous Don said...

> But I guess options are very much akin to gambling as the house sets the rules and they win on average.

If you think the seller wins simply sell the options instead of buying them. The market is not a casino. The phrase I've heard used about option sellers is: 'They eat like chickens and shit like elephants'. Lots of small gains, occasional huge losses.

At 5:55 PM, Anonymous Anonymous said...

(disagree w/you on the 3 worst stock years in history. maybe you are basing it on 1 day losses. However, other years had larger overall declines (e.g. 1973, 1974, 2001, 2002)

The point I was making was that vicious rallies often occur during years that prove to be anything but bullish. The 30% summer rally in 1929 is a case in point.

Yes, some years saw bigger declines, but 1929, 1987 and 2000 were memorable in that the markets reversed in a shocking manner and each had robust summer rallies that were clearly head-fakes.

That's what makes shorting so tough sometimes. You know in your gut that things aren't that great, yet the market rallies 20-30% just as things start looking bleak. Then it turns out the rally was a head-fake and the market tanks, but many who were short were long blown out of the water.

At 9:09 PM, Anonymous desirenter said...

I am short HBs and yes, I agree that it was a painful today. Its hard to time this, thats why buying puts alone does not cut it. The question to ask is - whats the worst case for these HBs rising that you can stomach. Is it a double ? A lot of people lost their shirts when they shorted the techs in 1998. But the techs went up 5x or more in under 2 years. Can HBs do that ? I dont think so. When you short, there are other strategies to hedge:

1) Buy out of the money calls to limit your losses.
2) Buy calls/stocks of sectors other than HB. Its quite unlikely that the HBs keep going up while the rest of the market keeps tanking. Market is likely to move in tandem, I think. Ofcourse, your worst case is bad here. U could also buy calls on different sectors e.g. tech. So, if there is broad based market rally, you are hedged. This is what happened to me today - altho I took severe losses in HBs today, the gains in my tech. portfolio more than made up for it.

At 8:16 AM, Anonymous Anonymous said...

Well, that hurt....LOL....

I've been shorting TOL ever since everyone in that office starting dumping shares. But in all honesty, i've lost about 2K. I'm always starting to count my paper gains instead of locking them in. Then a day like yesterday and I get totally blown out. Fundamentally, i can't see the HB's continue to rise, once all the bad news starts to settle in. But then again, I thought the housing boom was over a year ago.

Bottom line is I'm done screwing with the shorting TOL...I'm really not cut out for it.

At least my house has gone up in value......on paper...LOL



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