Homex Development Corp. (ADR) (NASDAQOTH:DHOXQ)

CAPS Rating: 2 out of 5

A vertically-integrated home development company engaged in the development, construction and sale of affordable entry-level, middle-income and upper-income housing in Mexico.


Player Avatar TheGarcipian (35.19) Submitted: 12/4/2008 10:41:39 PM : Underperform Start Price: $17.70 DHOXQ Score: +22.27

Based upon some housing info I've read lately, I don't think the housing industry has fully escaped the paralyzing clutches of the current financial meltdown. Reading an article from David Rosenberg, Chief North American Economist for Merrill Lynch, I found these salient points (dated late-November, early-December 2008), which I agree with:

"We learned that the housing market is nowhere close to bottoming out. New home sales dropped 5.3% in November to a 433k annualized rate – the worst since the 1982 recession. Even though sales are now down 69% from the July 2005 bubble peak of 1.39 million units, we believe builders have not been aggressive enough in curbing production because the most critical variable of all, the unsold inventory backlog, rose to 11.1 months' supply from 10.9 in September.

"We need to see the inventory backlog drop to 8 months' supply. The reality is that even though single-family starts have dropped to 26-year lows of 531,000, they are still running 23% above the prevailing level of new home sales. The worst the inventory-sales ratio ever got in the early 1990s real estate meltdown was 9.4 months' supply. We are currently 18% above that level and almost 40% higher than the 8 months' supply we would need to see before calling an end to the housing deflation phase.

"Another 15-20% decline in home prices is likely from here. As we saw last week, the Case-Shiller index fell 1.85% Month-over-Month or at a 20% annual rate. All 20 cities were down both sequentially and Year-over-Year. Home prices are now down a remarkable 22% from the 2007 peaks. With the unsold inventory sitting at the third highest level of the past three decades and mortgage approvals for new home purchases falling to their lowest level in nine years, we believe the laws of supply and demand point to a further 15-20% decline from here. So, of all the things that happened last week in the market, retailing stocks up 17%, the bank stocks up 26%, tech up 9%, the one development that probably has the greatest chance of being reversed is the 60% surge we saw in the homebuilding group."

Those last 3 paragraphs are Rosenberg's thoughts. From looking at the Slow Stochastics on the HXM chart, it appears to me that now is a good time to short this stock, as it is currently peaking and has just crossed the 20-day EMA line, a Rubicon that seems destined to foretell HXM's fall time and time again. Thumbs-DOWN.

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