Homebuilders – The NEW Value Trap

Five years from now when the homebuilding stocks are 20-30 percent lower and marking time, small investors will all own shares in what the institutions have distributed to them since mid 2006.

The companies are not crap and they won’t be in 5 years, but the stocks will be value traps. Victims of a badly ended trend where the stocks were overowned and overhyped.

It is no one person’s fault, it is just the way Wall Street works. They are just not real growth stocks. Nothing was different this time and no particular CEO or management team will be totally immune.

The industry will continue to go out of favor with Mutual Funds. That does not mean you should sell your home or get bearish on the world. Hundreds of new trends have been emerging since the homebuilders peaked last spring.

Do not overthink it and get sucked into buying value. That’s for Warren Buffett and a select few, great value managers.

Housing stocks, not housing as a business in general are done. Housing is cyclical, always has been, always will be. You CAN overbuild, just like you can make too much capacity for semiconductors. With homebuilders, leverage sped things up. I disregarded my own analysis and in the Fall I bought the housing sector for a short-term bounce trade. That was my worst idea of the year. I quickly took my losses and have watching the mess once again from the sidelines.

I never tried to call a top in housing, but definitely warned that it would get worse after they had already fallen 50 percent back in February. I followed up repeatedly . I guess that’s why the permabears ‘disgust’ me so. As if calling a top makes you a special gifted market person.

I guess I was wrong about housing stocks being a value trap way back when . They never made it to value, just straight to bankruptcy.

Owning them now is not for anyone other than forensic accountants who have a crystal ball into The Fed and lenders tolerance or for penny stock speculators.

Jeff Matthews just just did a great look back at his housing call . Jeff is not scared of shorting on the way up. That’s why I would NEVER act on his posts. But, he has seen all the cycles. More than some 30 year old analyst writing 312 page missives on homebuilders or internet stocks. As I mentioned last week about the JP Morgan internet analyst – that’s a pathetic waste of time. We get to read Jeff’s missives for FREE. You just need to know ‘HOW’ to read them. Here is my fave and money part of the blog post:

I bought Time Magazine today for the first time since…probably since 9/11, when I bought every newspaper and magazine available with a cover story on the World Trade Center attacks. The relevance of a weekly “news magazine” these days is, after all, right up there with “Book-of-the-Month” clubs and the Sears Catalogue.

Nevertheless, I bought this new issue of Time Magazine because the front cover is titled “Home Sweet Home” (stamped in large letters, the “S” converted into a Dollar sign) with an illustration showing a man covetously hugging a house. The sub-title reads: “Why we’re going gaga over real estate.”

I bought it, quite simply, because this Time Magazine is as good a “cover story” kind of market-mania, surely-we-are-approaching-a-top indicator as I have ever seen.

If you had been excited Jeff’s great post in June of 2005 and sold all your housing stocks and even shorted, you would have been right, just a little early.

Both China and Solar are Case Studies in waiting. It’s the exact same. Wall Street is cooking up the supply. Timimg when it overtakes demand is a fool’s game, but it will happen. China is on the verge of another break, while Solar seems to be just getting legs. Both will end the same way, but you don’t need to predict when, just avoid being the YUTZ’s holding the shares once it is clear the trend has run it’s course.

Here is a taste of the real stories and the spreading mess .

Can you shoot homebuilder executives for not being able to read a balance sheet and analyze leverage? If so, thousands would be lined up, but Wall Street would force the creation of thousands more in a different industry (actually they are starting it again in solar :) ). Why waste the bullets on just these chumps.

Amateur hour. A real tragedy is unfolding.

The best thing about this market has been that it has survived. It’s really not important in hindisght, just how. It just has. Hooray. The next best thing is David Tice and Bill Fleckenstein are back in the press calling for the crash. Shit, even Cole from Blackstar (long only) and the Fly are talking about the FXP (double leverage short China ETF). Furthermore, every 401k holder now has an emerging market and china exposure allocation. Ask 10 people you will see.

If you don’t think the Chinese have been cooking the books worse than our banker friends at Bear Stearns, Merril and Goldman, you are delusional and will one day get wiped out. That day looks to be sooner than later after the meteoric rise of this year.

I am not changing my portfolio based on this rant because I am only 30 percent exposed to equities and it’s designed to be long stocks in strong uptrends. I don’t think I was ever good enough on my best days to time these things and fight the trend. Knowing that helps.

On the homefront, the homebuilders are about to implode once again. If they were going to rally off their 70-80 percent plunges, they would have. Guess what, it’s getting worse. I thought these would become a value trap for years all the way back in March , but they are not. It’s worse. There is nothing there but bad book value, getting worse. Unless my friends (who have been in the real estate business 30 years) are lying to me.

I am sitting on a pile of cash as are others in Phoenix ready to prey on the newbie builders that will be in ultimate pain by next summer. After the February ratchet in ARM mortgages, consumers will have enough fight to get them to the summer at best. They shpuld reach ultimate pain as well.

If I am right and the market discounts this 6-8 month, we could be tipping into a mess for a while.

Thoughts?

Today I was reading about the 7th year of a continued mess in telecom – The REAL bubble. The bubble that just won’t end it’s tortuous unwind.

If you own homebuilder stocks, are you prepared for the same thing happening over 5-7 years. It could happen.

Focus on strength.

Thank Goodness Elliot Spitzer is on top of this stuff so we don’t get another Etoys or WorldCom :) .

After being embarrased by my bottom fishing dip into the homebuilders last month on this blog, rest assured that as much as I see this pukefest as a contrarion indicator, I won’t touch it.

I can’t stress enough that Phoenix is a complete disaster. I have been a lender to commercial developers through my buddy Blair who I work side by side with in Phoenix. Daytraders have nothing on what amateur land bankers and spec home builders are going to go through.

A cyclical storm is a cyclical storm. Seven years after the semiconductor bubble burst, the best semiconductor businesses are a fraction of their all-time highs. Those developers that don’t understand the glut of homes and the drastic price cuts in the works, are in for a world of hurt. The reason I love stocks and not real estate is that bids just disappear for long periods of time in real estate.

Thank goodness for the internet and biotech/stocks :) .

I think a roll-up of bankruptcy lawyers is your best strategy to make money off this mess.

Here is what I wrote back in February and the meat is below:

Homebuilders – The NEW Value Trap

There is all kinds of juicy goodness going on. Real juicy. I have been writing about the trends for months.

Even I did not think the stocks would drop 70 percent from already crashed prices. In fact I traded a few for a nice loss. Value traps suck you in. Lesson learned.

In hindsight, it is freaking unbelievable to me how poorly managed these homebuilders really were. I mean, unlike internet companies in the bubble, these things had cash flow.

Wall Street has done what it does best once again. Distribute shares from the few to the many. Nasty, but predictable.

Toll Brothers, the nation’s largest builder of luxury homes, said Wednesday that its third-quarter profit plunged 84.8 percent as the housing downturn and credit worries resulted in cancellations and hefty write-downs. The chairman and chief executive, Robert I. Toll, said the quarterly cancellation rate, which rose to nearly 24 percent, was greater than at any other point in the 21 years the company has been traded publicly. Toll Brothers said earnings for the three months that ended in July sank to $26.5 million, or 16 cents a share, from $174.6 million, or $1.07 a share, during the period a year earlier.

Why not just say homebuilders cause cancer and restless leg syndrome (RLS for you drug home gamers) and most dangerous of all – Limp Dick syndrome in white over extended males.

The most important thing to watch is Toll brother’s reaction to the news. If it rises, the selling has likely run it’s course for now.

What a mess in homebuilding.

No sooner does my post speculating about a housing bottom dry than Bank of America plunge protects Countrywide with $2 billion .

I could care less about the financials and homebuilders because I don’t own them, but the tech leaders are going to explode and I own a lot of them.

I don’t know if Bank of America can fix things, but they are going to put a new world of hurt on the shortsellers once again.

You know how to MAKE the loans, you have no idea how to COLLECT the loans . (Hat Tip – Trader Mike )

For those that have timed and made money off this debacle, truly well done. Most have just written about it and were three years early on the call.

For those in loans that they do not understand, don’t hide your head. read the article and do something proactive if you can. Otherwise, you will be handing over the keys.

Morning – Fire people

10-4 – Talk to Analysts – answer same questions you did yesterday and day before.

4-5 – Fire a few more people, check closing stock price. Drink heavily. Imitation Vodka now.

5- midnight – Rework spreadsheets under new new new worst case scenarrio.

That is why when things go bad, they spiral out of control. No one is looking ahead. Damage control. The private equity guys are circling. This cycle ended fast. Quite efficient really.