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Homies Bits and Pieces


Why would analysts include a year already past in their "assumptions" for the future?


A look a local price cuts, CDS spreads and some "interesting" assumptions

First let me get the easy part out of the way: after last week's bull bashing, which was attributed to everything from options expiration, to a falling dollar, to rising rates, falling commodity prices, rising commodity prices, higher inflation, and lower interest rates, I do not have a clue what the Minx has in store for us. I will venture one guess on the precious ones: gold at $650 is down $80 in short order. That's a lot of dollars, and it has some support in this area. My guess is that it holds and bounces a bit, before the next leg down starts. Let me also suggest that I am in complete agreement with Laurie that physical gold at $700 will look like a bargain in the not too distant future. My current "timidity" about gold has to do with the recent wacko dynamics of trading in the paper instruments, where all the ducks spelled "Blow Off."

On to some homies anecdotes and some puzzling assumptions by Morgan Stanley's analysts:

  • Over the weekend Beazer Homes (BZH) advertised a "72 Homes in 72 Hours Sale" at many of its Washington, Maryland and Virginia communities. It advertised price cuts of $50,000 to $150,0000 on $500k to $750k homes. In essence, previous buyers in those communities saw 10-20% of their equity (assuming there was any to start) vaporized.

  • Brian Reynolds (aka the Iron Horse) continues to see only demand in the corporate bond market, but there has been a slight widening of spreads in the Credit Default Swaps (CDS) market. This was driven in part by somewhat higher demand for credit protection, but also by speculators who use CDS as a vehicle to put pressure on specific companies or the markets as a whole. Oddly enough, among the names I looked at, one of the sharpest increases in spreads was in the 5 yr. CDS of Lennar Homes (LEN).
  • Tomorrow we will hear from Robert "We Will Crush The Shorts" Toll (TOL). Alas, his hubris served him well for about three days after those last famous words, as the only thing that's gotten crushed since then is his stock. IMHO there is a lot of bad news built into the stock right now, and I am also fairly confident that Boo will not be disappointed. This seeming dichotomy puts extra premium on one's time horizons.
  • Finally a truly puzzling piece analysis by Morgan Stanley's homies tag team of Robert Stevenson and Kristin O'Connor. Last week they slashed 2007 estimates for KB Homes (KBH), Lennar (LEN), and Pulte Homes (PHM). They also reiterated their "Overweight" ratings, cut their price targets, and described the stocks as cheap both from a P/E and Book Value standpoint. There are enough forks on the roads to those conclusions to get lost several times, but we all know that that kind of analysis is not unusual.

    However, when it comes to the "assumptions" underlying their bullishness, I am on my umpteenth re-read, and remain 100% convinced that, if I keep at it long enough, at some point the words in their report will actually change. Here are their key "conservative" assumptions for years 2005-2010, with a few thoughts just in case the words in the report do not change:

    • 7% average annual growth in unit deliveries: a) Why would they include a year already passed in their "assumptions" for the future? b) In 2005 (a.k.a. "the year of the feeding frenzy") new homes sales grew 6.6% over 2004 (I am using "sales" and "deliveries" interchangeably for my argument); this year sales are expected to fall about 10% vs. 2005. Does that mean that for 2007-2010 sales will increase 11.35% per year?
    • 5% annual price increases: Just by sticking my head out the window to "forecast the current weather" (or by reading BZH full page ads for that matter) I'd say that's eminently plausible as long as inflation runs at least 10% per year.
    • Understated land values on the companies' books relative to current demand by apartment, retail and office developers: Hasn't virtually every homie told us already that they are not buying any more land, and they are walking away from some purchase options? Are they that much smarter than commercial/retail developers? (Hint: no.)

Have a great week Minyans!!

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Positions in gold, BZH, TOL
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