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July 27, 2006

Bulldozing the Homeys

Two more home builders lowered guidance... big surprise... during their earnings calls this morning. Pulte Homes and Beazer slashed the midranges of their respective 2006 earnings forecasts by about 15% and 10%. More telling, both reported large drops in new home orders with Pulte seeing a 30% decline, Beazer 16%. Though most of the homeys have now slashed guidance twice, this is only the beginning. Its likely even these lowered figures will prove to be ambitious.

Building Materials Holding, whose business is obviously declining in direct proportion to the decline in new homes sales, has hardly had any relief since the selling of its shares began in earnest in early May. Since then, BMHC has shed 40% of its market value and now stands 57% below its October peak. While I believe these shares, along with most of the homeys, will see much lower lows as recession eventual takes its course, the risk/reward does not seem to be favorable for a short at this juncture. The homeys are long over due for a vicious counter rally.

Newmont Mining also reported this morning and as has been the mantra for their quarterly reports, their shares were hit hard due to revenue falling shy of expectations. The deficiency appears to be a product of a lower number of ounces sold versus a year ago. Whether Newmont is holding back or simply not able to pull the gold out of the ground quickly enough, I don't know. What I do know is that Newmont nearly doubled their quarterly profit over a year ago with an average selling price per ounce about 50% higher and 6% fewer ounces sold. These figures tell me that their earnings are set to explode once gold resumes its bull run.

Another point to be gleaned from this action is that gold and silver plays are nowhere near the mania stage they will surely reach down the road. There remains quite a bit of skepticism regarding the future of metals, and therefore another great buying opportunity lurks. As I discussed back in the spring, I anticipated a summer consolidation in gold and silver plays, and I still await that little click in my head that tells me it is time to buy aggressively.

As for equities in general, the buy-the-dippers appear to have run out of firing power. After a feeble attempt to force prices higher at the outset, equities teetered for a couple hours, then headed steadily lower. The SPX and NDX went out with losses around the half percent area. While the bulls failed to keep their game afloat, one can hardly say the bears were impressive. I sense that another dramatic game of chicken is underway, and whomever blinks first is likely to lose large.

Disclosure: Short NEM Puts


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