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| Sentiment Seems to Be Declining Even More |
| Written by Jonathan Smoke | |
| 07.11.2008 | |
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Discuss this article on the forums. (0 posts) At least looking at Wall Street, the housing industry looks dismal and that should include its prospects. But is this based on momentum or fundamentals? If it’s based on momentum, like I think it is, the dark mood may be a good thing. While the Dow and the S&P 500 are down over 15% over the last 12 months, take a look at the market’s view of homebuilders. The SPDR Homebuilders ETF is down over 50% in the last year (see chart below). It’s down almost 70% from its inception in January 2006, which was near the peak for the homebuilder’s stocks. I wager that this sentiment is not based on fundamentals. Instead, I think it is a reflection of how poorly the last two years have been and not about what may happen in 2009 and beyond. I know first hand how poor the data most professionals, including Wall Street analysts, use to judge housing markets and homebuilders. While they can do as many surveys as they want, the truth is they can’t tell you where builders have assets, how much they are really worth, how individual communities are faring, etc. There’s no way they understand the fundamentals. Tea leaves maybe. I also benefit from having industry exposure. I have personally talked to top executives from four top public builders in the last month. Each of them is in a more positive “planning for the future” mode compared to the dour “slash overheads, write down communities, drop options, and just survive” mentality that I saw over the last 12 months. Sure, my sample may not reflect all publics, and it certainly doesn’t reflect the small builders with limited capital that are struggling to survive. But if I weren’t using all of my capital to improve housing intelligence, I’d be going long on several big builders who are positioned well to capitalize on discounted land, make operational improvements and emerge from this downturn as much more professionally run companies than the industry has ever seen. The 17th century proverb says, “It is always darkest before the Day dawneth.” Me thinketh that it’s pretty damn dark right noweth. Wake me upeth in the morn’. 
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