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Will Toll Brothers, Hovnanian Surprise?


Homebuilders to report telling earnings.


It's time for things to heat up in the market as either the rally will fizzle or there will be a summer rally.

Certainly everything is in place for a summer rally, beginning with enormous uncertainty and unrelenting pessimism. Expectations are low in all aspects from the economy to the stock market. Earnings are behind us for now, so economic data will probably move the needle but so too will investor sentiment.

Even though most investors remain intimidated by the market most aren't in selling mode nor are they walking away. Instead, everyone is looking for a sign or signal. With that in mind I'm not sure it would be enough for the market to simply move higher. The fence-sitters need a lot more.

I would say the best way to get the summer rally going is to have a positive surprise in the jobs data out this Friday. Taking it a step further, actual job creation at some point this summer could be the impetus for a sustained and more believable rally.

One group to watch this week is the homebuilders. Toll Brothers (TOL) and Hovnanian (HOV) report earnings this week.

Toll Brothers is the proxy for the upper end of the housing market, which hasn't been immune to the broader correction. The good news is the company should have positive cash flow and that might be its saving grace, as we already know from preliminary results the results will not be pretty. According to preliminary results revenue was $817.9 million in the second quarter down 30%, backlog $2.08 billion -50%, and contracts in value $730.5 million -49% and homes 1,237 -39% and averaging selling price per unit $590,000 down from $711,000 in the year ago period.

Hovnanian has already issued a preliminary report on the quarter, too. The good news was cancellations, which were 29% during the period down from 38% in 1Q08 and 32% year over year. The backlog of homes stood at 3,577 down 54%. Investors may find some comfort in the $600.0 million private placement of notes and $300.0 million in debt refinancing the company achieved in recent weeks.

The homebuilders defied the odds by enjoying a great first quarter with respect to share prices but there has been a little pressure of late. It is highly unlikely there will be good new or any silver linings, which means if there are these stocks could make big moves to the upside. Last week we saw surprises in retailers, both high end and discounters, so it's possible these companies could pull out the proverbial rabbit. The Philadelphia Housing Sector Index came off a reverse head and shoulders and rallied nicely but is now trapped in a tight trading range and hovering near the bottom of that range.

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Of Bulls and Bears

The following is an excerpt from my June Newsletter:

It's a contest! I'm not talking about the process in which the Democratic Party is trying to pick a candidate for the White House. While that has been fun to watch at times and excruciating at other times the tug-o-war in the stock market has been even more riveting. The bears either felt they had delivered the knockout punch or just didn't follow up when the market was clearly on the ropes in February and March. Still, the bearish argument rings louder than the bullish argument. The fact that so many investors and market watchers are down in the dumps about the economy and stock market means stocks face an amazing uphill battle. Yet the market has just finished its second month of achieving higher gains. Of course those gains have been dismissed as an oversold bounce an observation that is readily shared by pessimism and optimist alike. The real test begins this month, however, the market is at a pivotal point technically and key measures on the economy should give greater insights to the second half of the year.

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The economy is in the doldrums and the recession will be longer than recent economic corrections.

Financials still have a lot more pain to go and until they come clean the broad economy will flounder and the stock market will remain under pressure.

Consumers are in debt to their eyeballs and with unemployment on the rise many will be forced to stop spending, sell their (oversized) homes and/or stop meeting their obligations.

The housing situation is only going to get worse as supplies mount and would-be sellers still refuse to face facts and lower their asking price.

Inflation is a runaway train and will slam consumers as well as corporate bottom lines. Along the lines of this point is the weak US dollar which is either the main culprit in higher commodities prices or a leading contributor.


Businesses have weathered the storm nicely as earnings mostly beat consensus and when excluding the aforementioned financials earnings were exceedingly better than expected.

The long awaited and predicted recession still isn't here no matter how one measure it. Sure, there are niches where recessionary pressures are raging but most pundits are hard pressed to say for sure there is prove the entire economy is in recession.
Stocks are undervalued in relationship to underlying value.

At the end of the day the market is forward-looking even though it tends to react to past events as much as positive future events. Case in point is the huge number of companies that offered solid to great guidance only to see it positively impact the stock for a session or two. I love when the street sells stock in a company that has already told us it's going to do great, these become fantastic buying opportunities. Yet, it does speak to the conflicted nature of investors and the challenges ahead.

For instance volume has been extraordinary thin on up days and down days. Short positions are climbing but that is a pro and con trend as it suggests many are betting on a correction but at the same time it has historically been a great contrarian indicator. I'm bullish on the market in part because so many people from professional investors to novice are not but mostly because so many experts keep telling us it's worse than we think or know.

All the major key equity indices, the NASDAQ Composite, Dow Jones Industrial Average and Standard and Poor's 500 are at key points on the charts. The S&P begins the month right at the 200-day moving average but the big test on the upside is 1,440, through there and I think the index is off to the races as some shorts panic and fence sitters make their move.

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