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August 25, 2005

Housing Juncture

I've stated in previous blog entries that how the market responds to news in more telling than the news itself. For example a company could release similarly solid earnings reports in different quarters and see the market react differently depending on the environment. The reactions betray the hands of the market gods and can provide valuable guidance to traders.

I bring this point up because Toll Brothers solidly beat the number in their earnings release today, yet failed to spark a sustained rally in homebuilder stocks. The psychology for these stocks is quite negative right now, and the mood is supported by fundamentals. The realization that the housing boom is on shaky legs is creeping into the minds of speculators and investors alike. The homeys have now suffered two consecutive days in which a positive report sparked a morning rally that fizzled by afternoon. Many of the homeys are nearly 20% off their highs, and the Dow Jones Home Industry index is down about 15%.

The volatility of the last two days is telling. What it tells is that we are likely at a junction where the bulls and bears will fight fiercely, and the winner is likely to walk away with large spoils. Is there a final blow-off phase forthcoming or will the bears finally spoil the party? Based on the similarly lousy performance of the retail sector (Best Buy, Wal-Mart, Target, and CDW are all languishing), it seems that most traders believe that the party is over. The consumer stocks matter because they are one of the primary beneficiaries of the housing boom, being recipients of home equity-fueled consumption.

In other news, Research in Motion caught a bid today on news that Blackberry service will now be available in Austria. The stock gained over 3%. Will Austria add 3% to RIMM's earnings. Maybe, but what are those earnings worth? At RIMM's current market cap, the 3% gain values them at half a billion dollars. Is Blackberry service in Austria worth half a billion dollars? I don't think so.

Disclosure: Short BBY, RIMM; Long TOL Puts


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