Steve Kroft Visits Stockton

Magazine covers are often thought of as inflections points and contrary signals in building an investment case, and perhaps Steve Kroft’s 60 Minutes piece will turn out to be a better signal than Business Week’s Bonfire of the Builders August cover story was. Kroft’s piece has been bookended by one of the strongest rallies in homebuilder since last August; and the rally has been accompanied by a burst in volume as well.

Everyone is assuming it is just short covering, and we would certainly not chase them after the ramp of the past few days, but these will be good stocks again at some point, a statement few investors have been willing to accept since the summer. Coincidentally, several homebuilding stocks are trading back nearly to levels last seen at Halloween. A scary move for stubborn shorts.

The media coverage of subprime and housing is probably peaking, and perhaps many of the stocks have bottomed. Yes it is a mess, but if you want to invest at the point of maximum pessimism we have likely already been there.

The game changed around January 10th. Bernanke was showing signs of coming out of his coma, Buffett was nosing around in the bond insurers and Countrywide apparently was not going to zero after all.

Of course you do not have to game the bottom to make a lot of money, and we would bet the people that got these stocks right on the way down are likely to overstay their welcome on the downside, missing the turn:

November 28, 2007
Last week’s implosion in the GSE’s were the latest calamity to hit housing proxies, and the Fed will deliver lower interest rates in an attempt to ease the pain. We are keeping our eye on the XHB, but cannot envision a long position until a technical bottom takes shape and housing inventories begin to tick down. You won’t have to pick the bottom to make money when the stocks finally come around; this is a situation in which we would rather buy them higher when the stocks have sniffed out a turn in fundamentals ahead. 1440 Wall Street

We are still in wait and see mode, whats the rush unless you need to cover? But the S&P Homebuilding ETF (XHB) did bottom on the ninth of January, and is well above where it has traded for the past few months, trapping shorts who thought these stocks were a one-way proposition:

The price action in the stocks has gotten our attention, however, and we might be in the 7th inning of waiting out the move down. I have seen a lot in my days, and the decline in this sector, including the price action on August 1st, has been memorable, and historic. A house of cards, indeed.

Check out Steve’s 60 Minutes piece if you did not catch it. And although the longs and shorts have taken turns getting nuked in these stocks, Steve’s lovely wife Jennet wrote book that is worth a read; 109 East Palace: Robert Oppenheimer and the Secret City of Los Alamos is a remarkable account of the Americans involved in the building of the first atomic bombs. Nice work, Jennet.

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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