Following up on Jeff’s entry from yesterday, we found the following words from a report issued by Merrill Lynch today to be in line with our current thinking on the homebuilders. We’ve often compared the performance of the group to the NASDAQ crash and since Rosie’s comments do such a good job, we’re not going to reinvent the wheel. Suffice it to say, we agree. There will be a time to buy these beaten down areas, but there will also be many, many false starts along the way, just as had occurred following the NASDAQ crash. These areas are best bought on dips of weakness rather than bought on technical strength. Most importantly, however, is the observation that yesterday’s winners are rarely the long term leaders in ensuing bull markets, an important realization for those who cling to their losses in the homebuilders and select financials in the hope of a full recovery.
“The homebuilding stocks are defying gravity. Here we get arguably the worst housing report for the cycle with new inventories approaching 10 months’ supply, the most since 1981, and home prices deflating 15% YoY, and the homebuilders are the best performing group year‐to‐date (didn’t Toll Brothers just report a $245 million write down and a $96 mln net loss?). The S&P homebuilder index has surged 25% this year, led by Pulte (+51%). Just remember ‐‐ the homebuilders posses the Nasdaq curse because they have traced out the identical boom/bust/reflex rally pattern ‐‐ the builders soared 1,400% from 2000 to 2005 before collapsing 80%; and we saw many failed rallies (35 in total) before tech bottomed in late 2002 and keep in mind that the sector did not lead this latest bull market that ended in the fall of 2007 (participants in bubbles never end up re‐emerging as leaders in the ensuing bull market). ‐Rosie”
