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January 12, 2006

Down Days Happen

Red was the dominant color on my stock screen for the first time in two weeks. Though the bears finally walked away with a daily win, they can hardly feel smug after the bulls' performance in the previous seven. Today was more like a "gimme" for the bears since the bulls were due for a breather.

The biggest losers on my screen were the home builders, which have received some negative press recently. The idea that the housing market of the passed several years was a bubble is gaining credence. In addition, both The Wall Street Journal and posted articles describing massive land grabs by many home builders, even to the point that the homeys have been running negative cash flow during these highly profitable years!

The biggest offenders, according to, are Pulte Homes and Toll Brothers. Their article correctly concludes that any sort of significant recession, especially one exacerbated in the housing arena, could force these companies to liquidate properties below their purchase prices and take huge write-offs. In the midst of these reports, news of a massive land deal in Arizona was announced in which Toll, Meritage, and Simon Property have jointly purchased a 5,485 plot of land for $312 million… roughly $57,000 per acre. The companies plan to build homes on about 4,800 acres and sell the remaining land to commercial developers. The project, as planned, would be one of the largest mixed-use developments ever attempted and, no matter how it turns out, will be a very interesting case study to follow.

Despite the weakness in housing stocks today, I have not initiated any of the shorts I eventually plan to execute. My trading model shows them overbought, but not extremely so. My suspicion is that today's drop is simply another blip in the present march higher. If they continue to weaken over the next several trading days, I may change my mind about that.

Oil had an interesting day, initially marching more than 1% higher before closing flat. My short-term view on oil was stated yesterday: that it will do anything but go sideways. Oil's chart and oil traders' psychology have set it up for a spike, but the direction is unclear. For the intermediate term , I expect oil to be lower, and that's a difficult statement to write given that I'm very bullish on this commodity long-term. The problem I see is a strong potential for sharp recessions in both China and the U.S., which could seriously mitigate demand. In any case, large funds have placed heavy bets on oil this year, and many small investors have been drawn in by last year's gains. The biggest surprise for oil this year would be to see it under $50. Therefore, I think there's a good chance it will happen. I would take such on opportunity to get seriously invested in energy-related assets.

Disclosure: None


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