Use access key #2 to skip to page content.

binve (< 20)

Homebuilders, Making a Few Distinctions: A Technical Appendix to FB's Newest Post

Recs

28

October 25, 2009 – Comments (11) | RELATED TICKERS: NVR , SPF , XHB

For those of you who don't know who floridabuilder is, he has been a dominant Caps player for years, but most importantly his blog posts on the home building industry are the stuff of legend (well, I don't know if they can technically be called a "legend" since you can go back a re-read all of them, but let's just say they are legendary and held in very high esteem by many :) ) He was one of my earliest favorites in my binv271828 portfolio.

As the title of this post says, it is an appendix to FB's post: Break Time - NVR - If your going to be a bear, try not to look like a jacka$$. It is a fantastic read, and a prerequisite to understanding this post

First, let me say I am a bear (My friend Mark910 sums up my thoughts pretty well My name is Mark and I am a Bear......My 12 step recovery plan.). But let me add more nuance to this statement. Like I say at the top of my blog - "I analyze macroeconomic issues from a fundamental and technical perspective". So when I look at the long term fundamentals and technicals, from a macroeconomic perspective, I am bearish on US equities as a general asset class for the next 5-10 years (which means that I think equities will have nominal losses, but more importantly hugely underperform other asset classes). Here is my spiel as to why I think this: binve's long term view. But I am not a bear for the sake of being a bear, I would much rather be long US equities and I think over the long term, after we complete a needed correction, US equities will be another huge true bull market. Please read the comments in blue at the end of this post: Thoughts on the Dow/Gold Ratio

And notice my wording --- I am bearish on US equities as a general asset class. This is the main reason why I focus on the broad market indicies (SPX, INDU, RUT, COMPQ, and NDX) when I do most of my analysis. Because this is the best representation of how the market interprets the broader economy. But that's the thing about general asset classes, you can apply your analysis to them only generally. Some will outperform the average while some will underperform the average.

And so lets get into homebuilders. I too am bearish on homebuilders as a sector for the long term, but there will be outperformers and underperformers here too.

Which goes exactly to FB's point, the importance of being able to make distinctions. Here is an excerpt from his post:

"... What cheeses me off to know end are people that can't make distinctions

Everything sucks, there are no jobs, all real estate is worthless, blah blah blah..............

You know why?  Because they are masters of the obvious.  Look at my distinction tree, no pun intended.  The more distinctions you can make on any subject in the world the more wealth you will make within the boundaries of that subject.  Who makes more money?  A professional cook that is highly trained in French cuisine, with an unmatched pedigree who lives and breathes his subject matter?  Or the CPA MBA who gets bored with numbers, because it is all the same day after day crunching numbers............  Who is paid more money?  Who is more sought after?

It doesn't matter what your field of expertise is, except for this, the more of a subject matter expert you are the more money you make and the more you will be taken seriously.  Seriously.

You become rich by understanding distinctions that other people can't see.  You become rich by investing your time (your job and investments) in those areas.  Life really is that easy. ..."

And this is an exceptionally good and valid point. FB has proven his ability to consistently find outperformers and underperformers in the Homebuilding sector. His analysis of these companies and how the supporting industries (mainly financials) affect HB performance is unmatched.

So, normally if I looked at a sector, as a macro guy, I would look at the average sector behavior (through a good index / benchmark) both fundamentally and technically. But for this post, I am going to look at some individual issues and see if there is some wheat that is separable from the chaff. And of course, there is. Not because of anything that I will show you, but because FB had done all the fundamental analysis and has shown us this is the case.

Let's look at some charts.

... Continued in the comments section (so you can see all my damn charts) - right Paxtor? :) ...

Original post here

11 Comments – Post Your Own

#1) On October 25, 2009 at 4:55 PM, binve (< 20) wrote:

We will be looking at NVR, SPF, XHB (for an index comparison), and a random assortment of other tickers. No need to provide fundamental analysis, FB has already done all the work:

- Break Time - NVR - If your going to be a bear, try not to look like a jacka$$
- Chapter 3: Builders - did land prices double? why this is bad for banks... real bad.
- Chapter 2: Builders - The $8,000 Tax Credit Question + Did Land Prices Just Double?
- My best blog ever! Seriously.. Geitner plan, a smattering of poop, and who really controls the US
- Pitch thread for NVR
- Pitch thread for SPF

These are just a few resources provided by him.

Before jumping into the individual charts, lets see what the chart of XHB (homebuilders index) looks like:



Yep, as expected we have had a large move down from the top. Moreover, the move down is very impulsive (5 waves). And since a correction is *never* a Five by itself, a Five is only part of a correction. This is an important fact, and it will show up in more analysis and charts later on. So regardless of the current rally, the long term forecast for builders is down, per this wavecount analysis.

Another note, the XHB index was established in early 2006. The reason why we call the 2006 peak as a "top" (rather than it just being a local high point on the chart due to a not-very-long price history) is that most of the builders show a peak that occurs right at the identified peak, early 2006.

As per the original post referenced above, FB has maintained the NVR is the outperformer in the group, so lets take a look at NVR from a long term perspective:



This is a very healthy chart. A nice clear impulse up since 1995. Moving up steadily through the tech boom and the early 2000 sell-off.

As I was saying above, the general description/analysis of a sector applies to that sector generally, and there will be both out and under performers. NVR is the clear outperformer. FB has identified the the fundamentals behind the strength, and the technicals are confirming it.

And while the long term chart of XHB forecasts long term weakness, the long term chart of NVR forecasts long term strength.

So let's zoom in to a shorter timeframe.



NVR has been correcting with the rest of the homebuilders since the peak in 2006. This was a sea-change in builder stocks coinciding with the real estate market peak. Even the strongest builder cannot escape from this unscathed.

But if we examine the structure of the correction, it is clearly *NOT* impulsive down. By my count, it looks like we are getting a double-three (regular flat followed by an expanded flat -- my projection). I think NVR will have one more correction when the rest of the market goes through its next large correction (I think there will be another large down move in stocks next year, which I know that most do not agree with me on this). But beyond that, I think NVR will bottom faster, and be making new all time highs while the rest of the homebuilding pack (as measured by the XHB) is still languishing.

But lets stop talking generals with XHB, lets look at another builder specifically: SPF.

SPF is a horrible builder. I have looked at their balance sheet, and it makes me want to vomit. I normally do not short stocks outright, but I shorted SPF in real life in 2007-2008 a couple of times very profitably. Unsurprisingly, FB is bearish on SPF as well. Lets see what the charts have to say about SPF:



The count for SPF is nearly the same as XHB, since the peak in 2006 the count is a very clear 5-waves down. This large impulse means SPF's woes are not over yet. But I am also showing a projection that takes SPF higher (in a relative sense) before it starts it's next large downleg. (see the notes on the chart)

Let's think about why for a second:

From the peak, SPF was down > 98% !!. So in order to put in a decent rally off the bottom, very little interest is needed. It was just so utterly oversold, and the bullish sentiment for SPF was utterly spent, that short covering and a little speculation can drive a nice bounce.

Maybe you disagree and think that SPF has turned the corner and is now a healthy company and that is the reason why they are trading higher. If that is your theory, good luck with all that. To me, the chart says maybe some more upside for the next few months, but lots more downside (maybe even de-listing and/or bankruptcy) for the long term.

Now lets compare NVR to SPF side-by-side:



Read the notes on the chart. This goes to the observation that I made earlier: And since a correction is *never* a Five by itself, a Five is only part of a correction.. The is the main reason why the NVR chart looks long term healthy while SPF does not. The NVR correction counts as a healthy correction with a healthy retracement level, corresponding to a well-run company positioned well in its industry. SPF ... not so much.

Next lets look at some comparison among a few HBs:



These are a lot of the big names, and what is immediately obvious is that most have patterns that look like XHB. Large impulsive move down. NVR is a clear winner here. And based on my TA above, will continue to be for a long time.

Finally, lets compare against the market and the Lumber index





So FB knows what he is talking about when it comes to red thumbing and green thumbing builders. However, this is exceptionally obvious and a large post from binve filled with charts is unnecessary to make or confirm that point.

But what I liked about going through this exercise was that the the fundamentals of the industry and several prominent names in the industry, as identified by FB, is confirmed by TA. Most of you hate / don't believe in TA (and most despise Elliott Wave even more), so I am not expecting this post to make anybody a convert.

In short, it was useful for myself and I am sharing it with the community. Hopefully it was useful to some of the rest of you as well.

Report this comment
#2) On October 25, 2009 at 5:34 PM, anchak (99.84) wrote:

Excellent blog Binve as usual!

I was looking at the Construction Index also - very few people realize that it LED massively ....peak was mid-2005.

Your corrective hypothesis - essentially has this index rallying thru 2010 - post a mild bump - right about now. I am sure - you have thought about the implications of that also!

Just my 2 cents!

Report this comment
#3) On October 25, 2009 at 6:18 PM, binve (< 20) wrote:

anchak, Hey AC, thanks bro!

Yep, I was identifying the peak in early 2006, but you are absolutely correct, there was a higher high in mid 2005.

Here is a chart that looks at the long term performance of several sectors:

Your corrective hypothesis - essentially has this index rallying thru 2010 - post a mild bump - right about now. I am sure - you have thought about the implications of that also!

:) Indeed I have. I think the market may have topped here, but honestly, that is not how I am leaning. I still have several bullish count projections that take the rally in the market out to December and up to 1150-1200 on the SPX, see (EOD Count Oct 12 with a Bunch of Charts and Count Options - Oct 12).

FWIW, I think things will go like this: Financials will peak first, the the broad market, then homebuilders.

I think first up / first down will not apply to homebuilders specifically because of the $8000 (soon to be $16000) first time buyer credit. Also because the homebuilding industry was utterly decimated in the last drop, and so technically oversold, that a rally by them will last longer.

I could be very wrong on all of that, but that is what I think right now.

Thanks man!!.

Report this comment
#4) On October 25, 2009 at 6:59 PM, Tastylunch (29.95) wrote:

 Maybe you disagree and think that SPF has turned the corner and is now a healthy company

Everytime someone greenthumbs SPF, Alstry dies a little on the inside.:

I miss the days where he just hated on SPF instead of ranting in the third person.

hunh

that's an interesting Binve thesis. I can't argue with any of it, even Goldman Sachs's call for Builders to rally through year end matches with what you show. And I have to admitI'm surprised to see EWave come to the conclusion on individual equties..

Just curious buddy have you thought about applying this sort of analysis that you may know less about?

Might be interesting to see what you come up with where you may not any possible confirmation bias (not that you necessarily have any here, but it would be an interesting test of the method). If you could the NVR and SPF equivalents of other sectors this culd be a very profitable enterprise for you.

dunno what sector that would be for you? Restaurants maybe? Insurance?

FWIW, I think things will go like this: Financials will peak first, the the broad market, then homebuilders

dunno about you but builders was last crash's story I figure at best they will be a side player this time. REITS are what interest me now. I really do not think they are a safe inflation hedge at all.

I hate me some FCE-A, too bad they are an Ohio company. :(

Report this comment
#5) On October 25, 2009 at 7:14 PM, anchak (99.84) wrote:

Tasty...FCE-A is a nice little standing joke - isn't it. M-Star thought their equity has zero value - well obviously the Market never takes very well to that sort of argument from them - like they trashed everything they thought HAD VALUE in 2008.

Of course now the story will turn - everything is Tremendous VALUE! 

 

Report this comment
#6) On October 25, 2009 at 7:40 PM, Tastylunch (29.95) wrote:

anchak

haha too true!

Report this comment
#7) On October 25, 2009 at 7:59 PM, alexpaz (29.60) wrote:

Awesome Work Binve! Next Blog: Commercial Real Estate...Do it!!

Report this comment
#8) On October 25, 2009 at 7:59 PM, binve (< 20) wrote:

Tastylunch,

Everytime someone greenthumbs SPF, Alstry dies a little on the inside.

LOL!. I can just see Alstry like Janis Joplin, taking a piece of his heart, with green thumbs on SPF. Its just so amusing because it is true, in the right environment, garbage can soar. Think SPF or BAC or C. Complete garbage up several hundred percent because of oversold conditions. I know some blowhard analysts will try to pin some BS fundamental reason like "mortgage exposure isn't as risky" or "Merril acquistion is good for the bottom line" blah, blah. But it is just so much more simple: In order to put in a decent rally off the bottom, very little interest is needed. When stocks are so utterly oversold, and the bullish sentiment is utterly spent, that short covering and a little speculation can drive a nice bounce.

Which means bounce rallies like this can a) go on longer than most think and b) will terminate much more abruptly than most think. They are both bull traps and bear traps at the same time.

Just curious buddy have you thought about applying this sort of analysis that you may know less about?

Interesting thought man. I just focus on the macroeconomic issues so much, that is where my interest really lies. But looking at some outlying stock from an EW perspective might be a fun (or profitable, like you suggest) exercise. Not a bad idea :)

Thanks man!.

Report this comment
#9) On October 25, 2009 at 8:00 PM, binve (< 20) wrote:

alexpaz, Thanks man! I might look in to that :) Any tickers you would be interested in?

Report this comment
#10) On October 25, 2009 at 9:54 PM, anchak (99.84) wrote:

BInve...you are tracking IYR - aren't you?

SLG and SPG. Tasty has a better list in this space!

Report this comment
#11) On October 27, 2009 at 12:00 PM, alexpaz (29.60) wrote:

Binve, I think BXP & VNO will need to raise capital in the next 6 months. SPG is best of breed in the IYR basket. It's a tough sector to trade, you know the fundamentals are just downright horrible and its just a matter of when.

Report this comment

Featured Broker Partners


Advertisement