I knew the top was in two weeks ago when Cramer went on Mad Money and recommended going long three homebuilder stocks. We know that Cramer’s function on CNBC is primarily to get retail investors hyped up on highly overvalued stocks that his hedge fund buddies are looking to unload but need liquidity in order to sell big positions. Cramer’s picks are notorious horrendously. Anyone remember Bear Stearns?
New home sales went off a cliff in March vs. February – down 11.4% month to month. This is in the context of falling mortgage rates, zero-percent down payment mortgages, significantly reduced FHA, Fannie Mae, and Freddie Mac mortgage insurance premiums and a substantial loosening of mortgage underwriting standards. This is ALSO in the context of new home builders providing an increasing amount of incentives, price discounts (vs. officially reported prices) and mortgage financing.
I will have lot more to say on this later this week when I get a chance to dissect the new home sales report. Suffice it to say that – on a seasonal pattern basis – March new home sales are almost always higher than February. If we could “unwind” the Census Bureau’s “seasonal adjustments” and annualization calculus, I’m sure the actual March number for new home sales was complete disaster.
I know that homebuilder margins are getting crushed because both DR Horton and NVR reported flashy top-line growth but significantly lower gross margins. Homebuilders calculate revenues using the listed price but have to add price discounts and incentives into their cost of sales. This is why DR Horton was down over 5% yesterday despite top-line and bottom-line earnings “beats.”
The Dow Jones Home Construction Index is
down 4% down 4.5% right now and is down over 7% since Tuesday’s close. It’s down over 9% since reaching a frenzied, housing stock bubble high of 600 on April 6. This is in the context of the S&P 500 pushing toward new all-time highs – click to enlarge:
The homebuilder stocks are offering us one of the best short-sell opportunities since the tech and housing bubbles popped. Readers who played my Beazer short-sell recommendation made over 20% in a very short period of time. Same with KB Homes. Both of those stocks are now back to where they were when I first published. All of my homebuilder stock recommendations are going to be home runs.
You can read and understand why here: Homebuilder Research Reports. I show in detail how these homebuilders are manipulating their accounting to make their earnings per share look substantially higher than it would be if honest were used. I also show how they all have accumulated a record level of inventory and debt, in the context of unit sales volume that is one-third the level of the peak of the housing bubble.
You can also see a sample of my homebuilder research by supporting this website – I’ve also included a mining stock research report: