Bearish Reset on Housing

By Dr. Duru written for One-Twenty

June 30, 2007

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The bullish engulfing pattern that promised to provide the next technical bounce for the homebuidler stocks failed on Friday. Just like that, the bears are poised to regain control and take the housing-related stocks even lower. There is good reason to brace ourselves for another month of downside troubles:

  1. The selling continued in Beazer Homes (BZH) after the firing of its chief accounting office for trying to shred documents of interest in a fraud probe. More high-volume selling on Friday produced a 4.4% drop and a fresh 4-year low. BZH has become one incredibly hot potato. It will now be hard to play any bounce on this stock until some news (almost any news) regarding some criminal findings arrive. Some more analyst downgrades would help too!
  2. Alt-A mortgage lender Impact Mortgage Holdings (IMH) suspended its divided and suffered a one-day drop of 22% on Wednesday.
  3. Alt-A mortgage lender American Home Mortgage Investment Corp. (AHM) dropped an earnings pre-announcement bomb and suffered a 12% drop on Friday to fresh four-year lows (starting to sound familiar?). It suspended 2007 earnings guidance as it now expects to record a loss in the second quarter. Their overall message implies that all the financial damage will be contained to the second quarter but that sounds like the wishful thinking that has preceded the last two Spring home-selling seasons.
All of this week's bad news in individual housing-related stocks was accompanied with the growing re-kindling of the sub-prime drama. There has been plenty of ink spilled on the growing dangers posed not only to the housing industry but also to the financial system in general. So, I will not try to summarize and instead point you to a Bloomberg article that gives an excellent summary of the current perils: "S&P, Moody's Mask $200 Billion of Subprime Bond Risk (Update2)." I tell ya, when I read stuff like this, I become amazed all over again that our financial system works as well as it seems to work. We somehow seem capable of allowing greed and avarice to spread through the latest bubble and/or financial schemes right up to the point collapse, only to be saved by more creative financial dealings. Currently, we have Fitch and Standard & Poor's insisting that prognostications of a collapse in debt markets are unwarranted speculation. We have big financial institutions with heaps more leverage, influence, and capital standing ready to save the distressed assets with the most lucrative potential recovery value. And if things really get bad - like the Savings & Loan crisis from the early 1990s or the 1987 stock market crash - the government has proven ready and willing to crank up the currency printing presses and/or extend our tax dollars to save the day.

When the sub-prime mess first surfaced for the majority of us back in February, the market quickly dismissed the perils because it seemed like it was just the "dumb" money that was getting hurt: mortgage companies and brokers too greedy for their own good, get-rich-quick housing speculators, and poor people with no other hope of securing a home. But now, we have the "smart" money stumbling over themselves. When big boys like Bear Stearns (BSC) fumble, the rest of the financial world hesistates and listens carefully. The market has not yet cared to take us for a ride like we had in February and March, but June has definitely stalled out the market's rapid recovery from the year's lows. The market's bounce was maintaining a pulse in the housing-related stocks. But I now think if the housing-related stocks continue to sink, we will have a clear indicator of the downward direction the rest of the stock market wants to take.

Be careful out there!

DR. DURU®, 2007