Update On Ryland, Wage Reports, Home Builders And Other General Ramblings

Well, so much for my post stating home builders were weakening a few weeks ago. Mr. Smarty Pants saw the Home building Index advance-decline line was going to make a new low when I posted about Ryland. The very next day someone starting hammering home building stocks upwards. I seriously doubt that was a coincidence. When I called for a home building rally months ago, I surely expected more upside than we were getting but it seems the velocity has finally picked up. The short interest in these stocks was absurd and someone is killing the shorts. If I had the amount of money needed to root these shorts out, I'd be on a buying binge as well. I seriously doubt this has anything to do with most investors thinking the worst is over. It's likely more about making money at someone else's expense. Of course, maybe there are a few believers. There is a Fed chart out there somewhere which shows a historical average of eighteen months from home price corrections to home price stabilization. That would be right about now.

On to reported wage weakness a few days ago. Could the wage weakness have anything to do with the reported increase in layoffs? Can't have wage inflation if you don't have a job. Not really but I couldn't resist. Of course, we knew wage inflation was not an issue. The long bond has told us wage inflation is not an issue consistently for years. As I've stated repeatedly, inflation cannot be a permanent phenomenon unless it is accomplished by debasing the currency or accompanied by wage inflation. Monetary growth is not necessarily debasing the currency as perma-bears would have you believe. At least not to the point of causing crisis. It is usually a sign of an expanding economy. So, is it really a surprise we are seeing all of the inflation gauges crater? Again, what are we experiencing? That's right. An asset bubble. And, what happens when asset bubbles pop? That's right. Prices go down. In 2000-2003 it was equity prices. In 2006-? it is commodities, global real estate, etc. ie, Hard assets. How this unfolds is not written in stone as there are many evolving inputs but so far, as I've said time and again inflation is dead. As funny as it seems, the perma-bears seem upset that is the case. It punctures much of their arguments and no one likes to be wrong.

Finally on to my favorite whipping boy, Robert Toll. The home builder Toll Brothers reported poor earnings a few days ago. They are still making a profit but write downs and cancellations were seriously ugly. I still marvel at Robert Toll on CNBC in the summer of 2005. Quite a few of the housing CEOs were rock stars. Regulars on CNBC who were praised for their brilliance. I remember how Robert Toll told us his business was very strong while he was offloading over $200 million in stock as I noted in a post earlier this year. Just so happens he timed the exact bubble peak in his company's stock price to sell. What a coincidence. Similar to what is happening to energy companies over the last six months? Today, that same brilliant Robert Toll is telling us housing is showing signs of stabilizing in Washington DC. Do we believe a man who didn't have the truth available in the summer of 2005? A man that either doesn't have the pulse on his business or outright lied. Pick the explanation you feel comfortable with. Is he right this time? Mr. Toll needs to take a lesson in economics 101. The housing market has weakened considerably but is still well above trend in production. If production returns to trend, and there is no reason to believe it won't unless the U.S. allows 30 million new immigrants into the country over the next year, we still have a long drop to return to a sustainable production level. That doesn't even take into account the growing supply of unsold homes, elevated prices and other problems with real estate.

The people who see value in housing stocks right now are anticipating a return to peak production trend or something similar. Similar to the hypothesis the "buy the dip" crew believed when Oracle, Intel, EMC, Sun and others were cratering in 2000-2003. But, that return to unsustainable trend never happened and buyers were severely punished. Don't make this too difficult. We are in the same situation with real estate. Home builders will likely stabilize with production about 50% less than their peak. (Very rough guess based on mid 90's production levels for discussion purposes. Although it could be less than that since corrections tend to overshoot just as bubbles overshoot.)

Given stock price expansion accounted for much of the move in home builders and a new valuation will be given based on a much lower trend in sales, it is reasonable to guesstimate that it will be at least ten years before these stocks return to their 2005 highs. Seven years after the bubble peak is Oracle, Intel, EMC, Sun or others any where near their 2000 peak? Most bubble stocks are still down 70+% even after seven years.

We can all talk about what will happen to housing, sub prime mortgages and all of the associated businesses until we are out of breath. There is only one statistic that matters as it pertains to the future of real estate both in the U.S. and abroad: initial jobless claims. That's it. If employment remains robust, we will probably muddle through this with a big but managable mess. (That doesn't mean housing stocks will stabilize because they likely won't. I'm talking about the economic impact.) If employment doesn't remain robust, we will likely see a very nasty economic and/or financial situation unfold for all global markets. Don't think global central bankers are unaware of this. They surely are and it is at the top of their list of worries but their hands are tied somewhat given many other imbalances. Regardless of what happens, the home building stocks are a bull trap in my estimation.