Thursday, September 07, 2006

Homes for Sale, Any Buyers?

After doing some reading this evening, we discovered that the market started out a bit under the weather due to some news on the housing front (this was not immediately available from the major news sources we follow during the day, the media choosing to focus instead on the lower prices for gas and oil). Two leading home builders, KB Homes and Beazer Homes, announced poor results and made comments about the future outlook, that not being too good. Both of these builders mainly markets to lower end home buyers.

From Beazer’s statement, “…net sales through the two months ended August 31 were 49% below prior year levels and cancellations of existing contracts rose to 50% from 26% in the same period in the previous year. As compared to prior years, a higher percentage of home closings are being deferred or cancelled, immediately prior to closing in many cases, due to worsening buyer sentiment and the inability of buyers to sell their existing homes. This revised outlook also contemplates potential charges to exit non-strategic land positions currently under review… The company is reviewing its operating plan for fiscal 2007 in light of the ongoing deterioration in business conditions and is currently aligning its overhead structure and capital spending with this level of closings to maximize profitability and optimize capital efficiency during this period…”

We quote this homebuilder because they said it better than we could. As we have said for the past year, the housing market is in a difficult period and this will take a toll on the stock market. These two companies, KBH and BZH are both down 50% from the highs of this past year. The facts speak for themselves in the previous paragraph.

To the action in the stock market, the traders tried to buy the market after the early morning hit and they managed to push the NASDAQ indexes, as well as the SP 500, into positive territory. The Dow didn’t quite make it. When the early afternoon highs were in, the market sold off until the end of the day and managed to close not far off the worst levels of the day.

Two down days has not generated much in the way of fear although the volatility indexes are up a little indicating there is some recognition of a downturn. We continue to suggest caution in dealing with this market. There is too much complacency and bullish optimism. The bulls will not be rewarded going through this month and maybe beyond.

This is the last post of the week and we will see you next week. The market is about to go our way in a Big way so we recommend you ask us any questions you want in the comments section. We will answer them as quickly as we can but at least by the next day’s post. There are many possibilities to consider and we would like to comment on the topics you are interested in.

As for our positions, we have eliminated all long exposure to the stock market. We are still long Treasury bonds (TLT) and we are short the Dow and NDX indexes (by owing RYCWX and RYVNX). We think that the next big move will be down and we are well positioned if it occurs.

Aggressive traders have the ability to trade put options and this would be an ideal time to ask us about these types of trades. In order to hedge your raw stock positions, if you absolutely can not sell them, is to buy protective puts. This is especially true in some of the riskier tech stocks like INTC. We still hold out our long term low price for INTC of 12 (on the way lower, maybe into the single digits).

NVDA (Nvidia) has just experienced a big retracement of the drop from its May highs. May’s high was almost 32 with July lows down in the 17 range. Last week’s high was 29.50 and today it closed at 27.61. We could easily envision, or is that Nvision, the price going back down to at least 17 if not lower. These are opportunities worth taking a look at.

Dow Industrials: 11,331.44 -74.76
QQQQ: 38.48
RYVNX: 21.94
RYAIX: 24.28
RYCWX: 41.94
TLT: 87.26
BEGBX: 13.66

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