NFP: Final Piece in Fed Puzzle?

Everyone’s favorite datapoint is out today: Non-Farm payrolls gets released at 8:30. Of course, I am sticking with the "Under," with consensus around 150,000 new jobs created — barely enough to keep up with population growth.

I have said in the past that any single monthly data point is far less relevant than the overall trend, and that investors should never get too hung up on any outlier — to the upside or the downside.

Today may prove to be the exception to the rule.

Bloomberg reported that St. Louis Fed President William Poole, felt "50-50” about another hike on August 8th. San Francisco Fed President Janet Yellen said in a speech that "federal funds rate currently lies in a vicinity that is roughly appropriate" for the balance between growth and containing inflation.

That makes today’s NFP the last major data point the Fed will get prior to their meeting next week. Between now and 2:15 on Tuesday, we’ll get Same Store Sales, and Productivity and Costs — neither of which are major Fed movers.

That raises the importance of today’s NFP report.

Fed Fund Futures are leaning slightly to a pause, with the odds of another hike at 42%. In the Ahead of the Tape column this morning, Justin Lahart describes it thusly:

"The confusion [over Fed futures] reflects an uncertain
economic outlook. The economy appears to be slowing, but it isn’t clear
how severe the slowdown will be. Inflation appears to be heating up,
but it isn’t clear how much."

Whether the Fed pauses or not, I expect to see a major revision to
their statement, one that implies they will not be hiking in September.

All the teeth gnashing over a 1/4 point hike —  is there THAT much difference between 5.5% or 5.25%? I find it quite telling, as it it reveals how fragile this recovery actually is. A robust economy with strong job growth and healthy organic expansion wouldn’t care a whit about a 5.5% Fed funds rate. Yet the markets have been wailing about the Fed as if they had Bernanke’s boot on their collective throats.

Me thinks they doth protest too much.

The issue Bernanke must wrestle with is of Greenspan’s making: The prior Fed chair cut rates to historic levels, setting off a re-inflation of the economy that morphed to the present inflation. At the same time, this Fed stimulus of increased money supply and ultra low rates has been the prime driver of the expansion. 

What has complicated matters for the new Fed Chair is the old Fed Chair’s "measured removal of accommodation." Imagine telling a child that you were going to take a piece of candy away from them every hour on the hour? They sure as hell would start whining each time the big hand approached the 12. 

Similarly, equity market participants have been crying with each and every approaching rate hike, and have been celebrating any evidence that they may get to keep their candy.

Today’s data is likely to cause more of the same — a light number — anything below the consensus — gives the Fed their final excuse to pause. Lahart also noted the importance of NFP wage component:  "A big increase in average hourly earnings, in other words, might tip the Fed further into inflation-fighting mode, prompting it to raise rates again."

I’m betting the number is soft. I put on partial long positions yesterday, and will scale into more in the event of an ugly number that causes a nasty gap down. 

Forget Fisher’s 8th inning analogy, now in its 14th month. At this point, my only question about the Fed is whether  its the top or the bottom of the 9th.

Wage Cost Worries
Justin Lahart
WSJ, August 4, 2006; Page C1

Fed’s Poole, Yellen Signal Interest-Rate Pause May Be Justified
Scott Lanman, Craig Torres
Bloomberg, July 31 2006

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What's been said:

Discussions found on the web:
  1. Ben commented on Aug 4

    So you’re now joining the “one and done crowd” or the already done crowd, which would have been the one-and-done crowd for the last 2 months. I agree.

  2. Fax commented on Aug 4

    Many times I read about how weak this recovery is …… and the #’s prove that out . What I never see is why that’s the case , and what the fixes are …..

    any thoughts out there ????

  3. tg commented on Aug 4

    You’re right Barry
    those #’s stunk today …..
    Fed should raise 1 more time for insurance and that’s IT

  4. Craig H commented on Aug 4

    Something for everyone.

    Unemployment rising: check

    Wage inflation rising: check

  5. Craig commented on Aug 4

    Fax….read the rest of this blog.

    Cheap $= encouraging bubbles in various segments, noteably RE and Re related jobs. When the cheap $ has to go, so do the jobs. All built on sand.

    BTW Barry, Ed has hishead up his Ars.

    Residential construction workers ARE NOT the same as commercial construction workers.

    They are NOT interchangeable as Ed suggests.
    this reveals his ignorance of construction.

    When a framer is out of work he doesn’t become a high-rise steel worker, he becomes unemployed.
    When a RE agent can’t sell houses, he/she doesn’t get into commercial RE. They become unemployed.

    Ed wrote off the loss of construction jobs as a simple shift in workplace. WRONG.

  6. Larry Nusbaum, Scottsdale commented on Aug 4

    Finally: It’s safe to go back in. The Fed is done. I wasn’t fooled in the past. I waited patiently for this day to load up the boat now that the coast is clear. Perfect. And, to think that I predicted it…….(again)

  7. tjofpa commented on Aug 4

    Looks like Beeks got the data to Duke and Duke on Wednesday this time around.

  8. ari5000 commented on Aug 4

    Big gap ups are meant to be faded…

    BR — are you seriously just NOW adding to long positions?

    Are you really a short term bull now or am I confused?

    I shorted the DIA above 113.

    Sell the news, methinks. But tight cover in case.

  9. Bynocerus commented on Aug 4

    The 3/10 curve reinverted big time in the last hour. Maybe another 1-2% up and then over a cliff from there.

  10. Tim commented on Aug 4

    Let me make this clear, which is wrote I wrote in Barry’s last poll prior to the last Fed proclamation: The FEd is done. Make it a captial D, as in Done. Ah, what the hell, make it all caps, as in THE FED IS DONE.

    For Bonus points, I also see an attempt to make a double top in the DOW before a solid move down before end of October. See you then.

  11. ss commented on Aug 4

    The volume today will be an important tell.

    I heard that cash levels (and CDs) at the discount brokers are at mountainous levels. It will be interesting to see in a few months if they come off the sidelines. Individual investors have been so apathetic that trading has been dominated by programs, and hedgies. All the pundits have been predicting that large caps will now have their turn…it will be interesting to see what the returning individuals see as buys. I actually agree that (finaly) large caps will play catch up. Watch the volumes in ETFs for clues.

    Here’s a look at the ECRI leading index…I wish it was a shorter term chart so we could see the current hook down, but here it is:

  12. S commented on Aug 4

    A month ago I thought the probability of a recession was greater than 50%. I based that view on the idea that the inflation data were too strong to prevent treasurys from rallying. To my surprise, the adults in the treasury market collectively decided inflation is not a threat and pushed yields to sub 5% across the curve. I now think the simulative effect of sub 5% rates make the elusive “soft landing” scenario the likely outcome. With interest rates below 5%, I expect a renewed surge in residential mortgage refi activity and got long CFC and one of the builders, BZH, earlier this week. I love it when stocks go up on bad news. It will be interesting to see if the homebuilders continue to rally in light of the horrible news out of HOV today. If so, that will be a huge tell and signal the recent rally in the builders is for real.

    I also believe there is an underlying bid to support the market that will prevent any kind of nasty and enduring selloff. Short interest is historically high; corporate buybacks occurred at a staggering $600 billion annual rate in the first quarter; and there’s a ton of fresh private equity capital looking for a home.

    All this against a backdrop of reasonable valuations. The S&P500 is selling at ~15x the consensus for next year’s operating earnings.

    Sub 5% rates changed everything for me.

  13. Mark commented on Aug 4


    Ditto that. I am in the business and Ed’s assertion is LUDICROUS! It is so blindingly stupid that it has to be an intentional lie.

  14. ss commented on Aug 4


    Agree. Good comments



    Monetary policy….check (finally!)


    Added agressively to AAPL today

  15. Mark M commented on Aug 4

    How many GAP UPS in the indexes have there been just because of fed rate question…
    does anything else matter for the stock market??? or do we just GAP UP at whim.

  16. M.Z. Forrest commented on Aug 4

    The dollar is falling against the Euro. With quarter pt hike by the European Central Bank expect more dollars to flow to Europe. This may turn out to be a Pyrrhic victory for the markets (if the fed doesn’t up the rate.)

  17. Mark commented on Aug 4


    Instead of running the “Millionaire Now!” blog and investing in real estate, perhaps you should run a hedge fund. Good competition for yourbrother, Random Roger. It may give him some direction.

  18. ss commented on Aug 4

    I expect some weakening in the $$, but don’t agree with the concensus that it will collapse. I’m expecting a trading range. This will help the trade deficit, and exporters.

  19. DBLWYO commented on Aug 4

    O.K. can we move beyond interest rates then ? As BR suggests it doesn’t make a lot of difference per se, or so it seems to me. On the other hand 1) GDP->Profits->Earnings->Stock Price [give or take PEs and discount rates :), ceteris paribus ] but 2) Employment + Wage Earnings -> Consumption -> GDP [fyi Consumption is now 70% of GDP, up from it’s long run average of 66-67%].

    Greg Mankiw has an interesting cite of Ray Fair’s recent macro-econometric analysis at
    which is worth looking at.

    Business investment is the swing factor where higher investement is based on rising expectations of demand growth and necessary to move from a stimulas-based economy to a self-sustaining, “organic” one. We haven’t crossed over into self-sustaining growth and stimulas has faded thereby suggesting, strongly, that a downturn is in the offing. Odds are ?

    The last three payroll numbers are really….really scary as a) they’re below the 150K figure of merit necessary for replacement growth and b) we’ve NEVER had growth at the 250-300K level long enough to replace the last jobs of the bust and downturn (I estimate the shortfall is nearly 2 milion jobs).

    If any of this is at all credible then where do bullish investors think the demand increase is coming from to sustain price rises let alone maintain them ?

    I’d be very interested in hearing any perspectives on economic realities vs. investment ?

  20. Larry Nusbaum, Scottsdale commented on Aug 4


    Instead of running the “Millionaire Now!” blog and investing in real estate, perhaps you should run a hedge fund. Good competition for your brother, Random Roger. It may give him some direction.

    Posted by: Mark | Aug 4, 2006 9:54:48 AM


  21. Zephyr commented on Aug 4


    You are wrong about the employment picture. Non-Farm Employment is at an all time high. Your figure of 2 million jobs lost is about right for manufacturing related employment. However, the total of all employment is actually UP by about 2 million OVER the previous employment peak.

    Here is a link:

  22. Craig commented on Aug 4

    I use charts, follow trends, etc. BUT, IMO the real thing to watch is sentiment going forward into a weakening economy. Watch the lead bull. When he (finally) sees shrinking profit margins, he will turn and run for the exit.

    Right now bad news is good (for 25 basis pts? and a pause?).
    When that flips over itwill be bad news is bad news.

    Better be standing safely outside when they rush the exits.

    MARK: Absolutely! Either Ed is a liar, or he is as stupid as others here have said. There will be a huge number of residential contractors, subs, laborers, etc. out of work. I imagine they will be added to the “not looking for work anymore” list, so they can be conveniently hidden for election purposes.

    I wonder if Paulson will announce, ala Snow, the same BS Ed is spewing, or if he will have some integrity.
    It remains to be seen.

    One thing is certain. Barry is right about jobs vs housing. My Dad called me to say the same thing after watching “Krudlow” (his name for the show). He was an electrician for many years. He was raving about how rediculous Yardeni’s answer was too.

  23. jab commented on Aug 4

    At what point does the market go from “Oh Great! it’s a weak economy” to “Oh Shit! it’s a weak economy”?

  24. semper fubar commented on Aug 4

    At what point does the market go from “Oh Great! it’s a weak economy” to “Oh Shit! it’s a weak economy”?

    Apparently from past experience (didn’t Barry post some charts recently?), right after the Fed pauses.

  25. jjr commented on Aug 4

    First there is a soft landing
    Then comes stagflation
    Lastly, hyper inflation

    At this point in the economic cycle, how on earth can anyone make a valid prediction of a soft landing. There aren’t enough cards on the table yet. Let’s see what happens when the economic realities continue to worsen.

    I agree with something Barry discussed awhile back about inflation. If the Fed doesn’t keep a tight rope on it, well then they may lose all control. Sorry for my inarticulate paraphrase. They’ve got the tiger by the tail right now, but should they loosen their grip too much it could turn around and maul them.

    I happen to believe that we’re still in the late stages of a counter-trend bull impulse in a bear market that started early in the milllenium. If you believe this, then the most logical course of action in these braindead rallies is to fade them. I agree with Craig, that once bad news gets back to being bad news … look out below. We could see another 10% drop in the indexes.

    I don’t know what you housing bulls are smoking, but pass the bowl over this way. We’ve only just seen the beginning of the end of the housing cycle. The decline is likely to be slow motion and ugly. It’s going to take years and years. My preferred vehicles for capitalizing are the structured product HGX and shorting the marginal lenders, starting with NDE.

    And someone please tell me exactly what outcome the oil services sector is pricing in? Look at the forward P/Es on stocks like RDC. The only way that they are in trouble is if there is a sharp and prolonged drop in demand for oil and NG, i.e. a global recession. So, are the oil services stocks seriously mispriced, or are they currently the most accurate predictor of the future?

  26. jjr commented on Aug 4

    Sorry, structured product HPB not HGX. D’uh. Single inverse of the HGX with a guaranteed payout of $10/share. There’s also MPL, which is double inverse, but there is a cap on it.

  27. noname commented on Aug 4

    SS, “Added agressively to AAPL today”

    Help me out here (not sarcasm), what’s the rationale for loading up here amid the restatement disclosures.

  28. Alaskan Pete commented on Aug 4

    Zeyphr: You need to account for population growth for the “total” employment figure to have any relevance.

    Nusbalm: You get em tiger, jump in with both feet. FED is done. Whoo hoo! All clear. The water is safe now. Buybuybuybuybuybuy! Boo yah!

    I think we get a sharp rally on a pause that quickly peters out, and I will fade the dogpoop out of that rally.

    Personally, I think the little homebuilder headfake is about done. Lennar rallied 10% since Thurs a.m. and hit a wall at the first resistance on the daily. It’s given back about 1/3 of the move already today. Hovnanian cut Q3 guidance by 20% today (ouch, that’s gotta hurt) and we haven’t seen the real pain hit the HBs bottom lines yet IMO. Don’t know what HOVs major market regions are, but LEN is heavy into some of the worst markets…Phoenix, Florida, etc.

    My brother owns an electrical company (electricians, not power co) in the Atlanta metro area. They do about 70/30 residential to commercial. By his accounts, the housing market there has fallen off a cliff in the last 6mo. He’s already had to cut one of his crews, where last year he couldn’t hire enough master or journeymen electricians to handle all the work and everyone was putting in 60-70hr weeks. The builders who hire him as a sub are canceling spec projects left and right. I’m afraid this is going to be a slow, ugly, grinding recession as the housing crackup percolates through.

  29. Bob A commented on Aug 4

    yeah… we’re going to rally into October as all out war breaks out in the middle east. take a picture for me.

  30. retired commented on Aug 4

    Well said about how fickle the perception is. So would you be selling today or next week? Is barry’s “trade” only good to hold until today after positioning in the past week? What is the evidence that a postive perception will hold for more than a few days? TA of large cap stocks look like there is some room to grow until resistance. Perhaphs, a quick 2-3% spike to capture.

  31. Leisa commented on Aug 4

    To Alaskan Pete—Hopefully, it is only a slowdown that your brother faces and not bankrupt/cash strapped contractors who fail to pay or pay on time.

    I’m married to an electrician. I remember the 80’s. Not pleasant.

  32. Mark commented on Aug 4

    I CAN’TWAIT to read the Fed Statement. I get such a kick out of the tortured use of the English language! Stuff about the economy “moderating” and inflation pressures being “contained”, the need for “policy firming” or “neutrality” and the like. Makes me appreciate my law degree and the practiced art of obfuscation. Such a joy! This one should be a real doozie!

  33. William commented on Aug 4

    Hey AlaskanPete,
    More housing information. About Atlanta and the housing slowdown….which was only supposed to affect the ‘hot’ areas on both coasts, the daily rag in Colorado Springs had headlines Wednesday that said, “Home Construction Plunges 45% from July of 2005″….and the largest percentage decrease since 1990.

    I understand it is really bad in Ohio too….which isn’t located on either coast.

  34. Larry Nusbaum, Scottsdale commented on Aug 4

    “First there is a soft landing
    Then comes stagflation
    Lastly, hyper inflation”

    Then, do we invade Poland?

  35. Kevin commented on Aug 4

    As a housing market, Front Range Colorado moves with California and resembles a “coast” market. At least Denver-Boulder does. Not as sure about Colorado Springs.
    Salt Lake City on the other hand for example performs like a heartlands market.
    Ohio though should be a true non-coast market.

  36. BDG123 commented on Aug 4

    Buying Apple? Are you kidding? Send me your email address and I’ll send you something that will make you SELL Apple.

  37. Leisa commented on Aug 4

    Anecdotal trustee sales news from Richmond VA: I tend to watch trustee sale notices. Until just recently, most of the foreclosures were $80K and below. Some lower which suggests that it might be an 2nd position lender. OUt of the 27 today, 11 were over $90K. 40% as opposed to maybe 5-10%.

  38. Mark commented on Aug 4


    From email today from colleague( I haven’t confirmed):

    ECRI index updates:

    WLI-weekly growth rate = 0.1% (lowest since June 05)

    WLI-monthly growth rate = 0.0% (lowest since May 05)

    FIG-monthly growth rate = 1.7% (up from a June 06 rate of 0.5%)

    Now what were you saying about FIG?

  39. jjr commented on Aug 4

    “First there is a soft landing
    Then comes stagflation
    Lastly, hyper inflation”

    Then, do we invade Poland?
    << Close Larry, then we invade Iran.

  40. M.Z. Forrest commented on Aug 4

    For the ones hoping for a fed rate hike stoppage:

    Why does this financial perpetual motion machine continue to run? Because, it’s asserted, foreign central banks and private investors need dollars and U.S. assets for their safety and liquidity. Perhaps, but they’re clearly looking for alternatives. A Russian official earlier this year openly questioned the dollar’s continued status as a reserve currency. Now, the Italians are saying as much by their actions.

    Rising interest rates abroad and a diminishing foreign demand for dollars translate into reduced liquidity for the U.S. financial markets. And that’s regardless of what the Fed does, or doesn’t do, on Aug. 8.

    Barron’s Online Up and Down Wall Street Daily

  41. ss commented on Aug 4

    You are correct Mark.

    U.S. Future Inflation Gauge Rises
    NEW YORK, Aug 4 (Reuters) – U.S. inflation pressures rose in July due in part to lower interest rates, higher commodity prices and slower vendor performance, a report on Friday said.

    These factors were partly offset by a disinflationary move in a measure of jobs.

    The Economic Cycle Research Institute’s U.S. Future Inflation Gauge, which is designed to anticipate cyclical swings in the rate of inflation, rose to 124.0 in July from an upwardly revised 123.3 in June. It was originally pegged at 122.6.

    “While remaining below its October high, the (gauge) has crept up in recent months. Thus, underlying inflation pressures may have peaked, but still remain elevated,” said Lakshman Achuthan, managing director for ECRI. The October 2005 level was 125.6 with an annualized growth rate of 9.8 percent.

    The index’s annualized growth rate, which smoothes out monthly fluctuations, rose to 1.7 percent from an upwardly revised 1.6 percent in June. The growth rate was originally pegged at 0.5 percent.

    “Forecasting inflation cycles is more complex than simply following the jobs report. The future inflation gauge takes into account international influences on inflation and warns that pressures remain elevated,” Achuthan said.

  42. Craig H commented on Aug 4

    Do we bomb the Iranian nuke sites before or after the mid-term elections? I guess it all depends on the opinion polls.

    October surprise?

  43. ss commented on Aug 4

    Bloomberg News

    Comments on Economy, Inflation
    Aug. 4 (Bloomberg) — Lakshman Achuthan, managing director at Economic Cycle Research Institute, comments on the U.S. job market trend, inflationary pressures, and the Federal Reserve policy on interest rates. He spoke from New York in an interview before the Labor Department released its July employment data today.

    On job market trend: “It seems as though the trend has been shifting to the downside. Certainly the goal posts have been moved” as economists are forecasting fewer job creations. “Looking at the leading indicators of employment, there’s a cycle there. It certainly looks like the best news on jobs growth is behind us at this point.”

    “It’s not that we’re not creating jobs, it’s not that the sky is falling or that the economy is stalled out here. But some of the stronger part of the cycle is behind us. We’re in a bit of an easing pattern here in terms of overall growth, and jobs are going to be affected.”

    On his analysis of the future inflation gauge: “We see that it peaked out back in October. It’s still elevated, which is notable. But it had a little bit of a drift downward. And then in the last few months, we saw that it may be popping to an upside.”

    “If it continues easing downwards, it’s very good news for the Fed. Basically that would mean that underlying inflationary pressures are easing. And the Fed has been talking about how you have to look at forward-looking inflation measures as opposed to coincident measures such as the jobs report. But if it pops up to the upside, the forward-looking numbers would be a little tougher to digest.”

  44. DBLWYO commented on Aug 4

    The general figure of merit for steady-state employment growth is 150K jobs/month. During Q300 employment was approx. 132 million which meant 84.3K new jobs were created over the prior quarter, but also meant a deficit against the steady-state of -64.7K/mon in that quarter.

    In Q304, the apparant nadir, employment was approx. 130 million with new jobs of 127.3K/mo but with a cumulative deficit since the employment downturn of approx. -2.6million. The numbers behind this are readily downloadable from the Labor Dept. btw.

    Employment was slowly climbing back out of this trough to the point where it is now about 134 million. Unfortuantely we’ve never gotten the growth that would have sustained new jobs above the 150K steady-state number and over the last two quarters it’s fallen back to a cumulative deficit of -2.8million.

    In that latter number you see the canary in the mine for future demand, which leads to businessess correctly reducing investment – hence the lack of organic growth. You also have the explanation for the lack of confidence in the economy and the likely harbinger for a the oncoming downturn.

    Now it’s quite possible my d’loading was in error, my speadsheet skills are rusty or my algebra and thinking is bad. Please feel free to test my data and arguments. However if it has some ring of validity then in fact we’ve never gotten the substantive employment growth required and the work on this blog, Ray Fair at Yale, Irwin Kellner or others showing this has been the worst job creating ‘recovery’ in the post-war period on record would also need to be checked.

    On the other hand we can double-check and then use this as a way to position ourselves beforehand.

  45. Bynocerus commented on Aug 4

    “On the other hand we can double-check and then use this as a way to position ourselves beforehand.”

    Posted by: DBLWYO | Aug 4, 2006 1:15:39 PM

    “Friday looks like an ideal short candidate right now.”

    Posted by: Bynocerus | Aug 2, 2006 3:18:45 PM

    How did I know to fade the open this morning? Well, that’s for me to know and you to figure out, but I can assure you it had nothing to do with worrying about whether or not the NFP farm numbers reflect reality.

    Guess I must be one of those “nervous shorts,” huh SS?


  46. ss commented on Aug 4

    Fading a gap up opening on a “jobs numbers day” has had an extremely high odds success rate.

    You’re not’re cocky. Stay the course!

  47. Mark commented on Aug 4


    You can tell your ol’ friend Mark. ;)

    Now if The Boys don’t rally this thing by 3pm that will be an awful small door for the stampede to go through now won’t it?

  48. MM commented on Aug 4

    so Craig
    son of an electrician
    what’s your cure for all this ??????
    you’re so smart

  49. Bynocerus commented on Aug 4

    I tell you what SS: Stop trolling, put your money where your considerable mouth is and you’ll have my respect. Nearly every trade I’ve made this year I’ve telegraphed on this board, which I would consider a much more valuable resource that debating the number of angels that can fit on the head of a pin.

    I read Barry’s Blog for his trading insight and to see where my blind spots are. Some of the posters also provide that type of info. More trading, less pontificating.

  50. ss commented on Aug 4

    “Nearly every trade I’ve made this year I’ve telegraphed on this board, which I would consider a much more valuable resource that debating the number of angels that can fit on the head of a pin. ”

    Of course YOU do….’nuff said!

  51. jab commented on Aug 4

    I agree with Byno and not ss – FYI I increased short positions today plan to continue to do so next week on any more weak rallies. May even buy more GLD and SLV.

  52. ss commented on Aug 4

    Today was like kissing your sister.

  53. Mark commented on Aug 4

    LOVED the 3pm Buy Program coming in. Was that you “ss”?

  54. Craig commented on Aug 4

    Well MM, I’m not so smart that I would or could proclaim a cure.
    I am 51 and Dear old Dad is 74, so I’ve seen this cycle a few times over the years. I got to graduate from HS in time to wait in line for gas every other day and see 17% savings accounts. I still have no answer.
    All I can do is the same as everyone else and try to move along slightly ahead of the herd.

    Finance crossed with Politics produces extremely ugly children doesn’t it? My cure would be to neuter one or the other so they never combine again. Or ask the unicorns to help. The probabilities for each are probably equal.

    Other than impossible pipe dream cures, my take away is to try to participate in the early stages of these balloons when possible and get out when the buzz starts to block out logic, then play defense.

    I was a seller early today on a BA trade and also a few shares of VLO when @ their high for the day. I bought a little CVS on a small dip. I’m mostly in cash except for some small energy plays (dividend paying trusts) some JNJ and the CVS I bought today. Defense.

    I think we saw the first bulls squish out the door this afternoon. It’s a sign when even a CNBC talking head asks when bad news is going to finally be bad news!
    The answer was: Today.

  55. S commented on Aug 4


    I’m not a homebuilder bull, per se. In fact, I’m projecting a very signficant decline in ’07 earnings relative to this year — followed by a flattish to slightly down ’08. However, I can see why the deep value guys can get attracted to the builders at current levels.

    In my work, I’ve discounted this years estimates to 75% of consensus and cut ’07 estimates in half. Since HOV is the disaster de jour, let’s look at it as an example.

    HOV reduced it’s ’06 guidance from $7.30 to $5.375 (using the midpoints of it ranages). That is pretty close to 75% of previous guidance, which gives me some comfort in the assumptions I’ve used for this year.

    ’07 is the huge wild card. But cutting the current consensus estimates for ’07 in half seems to be a fairly conservative approach, at least on the surface.

    So, using those assumptions, HOV is trading at about 0.8x ’07 projected book value. In the housing crash of the early ’90s, the builders bottomed at around 0.5x book.

    When they stopped going down in late July, a couple of the ones that I’ve done work on got down to about 0.6x my projection for ’07 book value. That appears to be the point where either the deep value guys got interested or the shorts get nervous.

  56. jab commented on Aug 4

    S – I think the homebuilders are going to have a period where they are not profitable. I have been short TOL and KBH for over a year and not even thinking about covering until outright losses start to be discounted. FYI – I was a CFO for a large homebuilder for 5 years so I have a little background here. I will say this once they have bottomed and the entire issues in this segment are worked out which will take years not months (I posted on these a while back as have others) then there will be a huge opportunity in this area. Think of this – If you added up all the publically traded homebuilders they represent LESS than 40% of the market. The downturn will send the weak players in the other 60% of the business under or make them buyout targets – as well there will be mergers amoung the public companies. But the downturn must run its course and it has just started.

  57. Gromos commented on Aug 4


    Wasn’t it Austria first? Anyway, just couldn’t stop from commenting. Very interesting discussion all in all.

  58. S commented on Aug 4


    As someone with industry experience I value your input. A prolonged period of unprofitability certainly changes things.

    Consolidation is part of my thesis as well. It was happening when the industry was healthy and it will continue. I also wouldn’t rule out “going private” transactions. General William Lyons took that company private at a very healthy premium to the prevailing market value not long ago. HOV and TOL both have large family ownership so it is not unthinkable for them to do something similar.

  59. Craig H commented on Aug 4


    I too have had puts on various homebuilders for months and only see reasons to add to them on bounces. I expect them to base around their 2002 levels, which represents a price/book ratio of 50%-70% of their currently inflated book values. A deep recession could take them down even further. Anyone who thinks this is unthinkable should take a good look at DHOM.


    As far as consolidation is concerned, it’s way too early for that. The homebuilders who have capital will wait for lower prices just as their potential customers are doing. As far as going private is concerned, it’s a pipe dream for most. I suspect that Lyons had ulterior motives for hastily paying a huge premium to take his company private and close the books to prying eyes.

    Ara Hovnanian sold 1 million shares in June at around $30; he’s a seller not a buyer at current prices. Bob Toll is still giving himself options for under $5. Why should he end that party?

  60. tjofpa commented on Aug 5

    Dear Beeks,

    The firm did quite well again thanks to your important and timely info. You’ll find the envelope in the usual place at the Watergate. See you at the company picnic.



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