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November 8, 2005

Toll Brothers Grimm

Toll Brothers played wolf today and toppled another piece of the consumer house, built of fiat bills. The warning revealed what we already knew: the housing market is weakening. Toll reduced its 2006 earning projections and its stock shed about 13%. It was joined by Centex (down 6%), Beazer (down 5 %) and Building Materials Holding (down 9%). BMHC is a materials supplier to the major home builders. It's stock has flown higher than most of the homeys, and I believe it will fall harder as weakness in the housing market continues to unfold.

Despite the grim announcement, executives at TOL, along with analysts, took their best shots at spinning things positively. Robert Toll did not conjecture that home prices could fall, but rather that "we may be entering a period of more moderate home price increases." Analysts, an ever-optimistic bunch, insist that the downturn in housing will be moderate and that housing stocks are a deal at their currently low P/Es. However, they lose sight of something I've stated here before: we have experienced a housing market bubble, not a housing stock bubble. The stocks will simply be the victims of a poor psychological environment as our housing boom chills.

Another headline screamed across the financial presses today: Dell has begun offering AMD processors on its web site! Although Dell is only selling stand-alone chips at this point, the door is now wide open for Dell to start incorporating AMD processors in its systems. I had hopes that this inevitable turn of events would spur a sell-off in Intel shares, but the stock was up a half percent today. The news must have already been priced into the stock. It seems this inevitability was more widely anticipated than I thought. Nevertheless, the move by Dell does hang another weight on INTC shares.

Disclosure: Short BZH, BMHC, INTC; Long INTC Puts


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