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November 11, 2005

Foot Shuffling

Today was a snoozer. We saw a whole lot of nothing happening as the indices, being in bull mode, rolled off small gains for the day. The main item that caught my eye was a $1.50 pop in Fannie Mae. That's another buck fifty I can make when I eventually short it. Mining stocks have been stealthily gaining for the passed few sessions, most notably Pan American Silver, which jumped 3.5% today and is up 13% from its October low.

I continue to believe that the message in the metals is very important. They are forecasting a resumption of the dollar slide, probably within a couple months. Soon thereafter, the stock market will respond by going dramatically lower. Equities may start a slide sooner than later, but I don't think the slide gets dramatic until it is clear the dollar bear has resumed.

The homeys were flat today with the exception of BMHC, which rattled off a $2 gain. This is a very volatile stock, so nothing can be read into today's move. BMHC is a company I've mentioned here before. The company provides construction services to the home building industry. As stated directly from its Web site:

"BMHC, a Fortune 1000 Company, is a holding company with two subsidiaries that are among the largest suppliers of building materials and construction services to the U.S. homebuilding industry with sales in excess of $2 billion. These two subsidiaries, BMC West and BMC Construction, specialize in delivering high-quality building products and turnkey construction services to national, regional and local homebuilders and contractors."

BMHC is a successful company that has made a lot of money during the housing boom. As a supplier to this industry, though, it will suffer the woes of bubble deflation as the market turns. For the first three quarters of 2005, which represent the pinnacle of the housing bubble, BMHC posted net margins of 4.5%. Such thin margins can evaporate into overhead quite quickly when business conditions sour. For example, last year the company posted a 2.6% net margin. In 2003, net margin was 1.7% and in 2002 it was 0.6%. And these were the good times!

stock graph

The stock may also be weighed down by the fact that officers have been granted a total of about 1.4 million option shares (about 10% of the shares outstanding), exercisable over the next 6 years at an average price of $12.87 (about 1/6 of the current share price). Again, this is a very volatile stock. Caution must be exercised by anyone who thinks this play fits into his/her trading strategy.

Disclosure: Short BMHC; Long PAAS Calls


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