What to make of the recent sell off
7-24-07: The sell off in recent days has many investors asking if this is a temporary correction or something more. Sparked by fear of further housing slump, dismal earnings and bearish outlook from mortgage companies, the DOW is down 226 points. As we have mentioned before, the housing market has always been a concern. However, most analysts believed the worse is behind us. This might not be true. Considering the mortgage industry is tightening its lending practices, more pain could still be ahead.
Lenders are no longer giving away money as they used to. This will reduce the number of qualified buyers. Adding to the concern, the government may be getting more involved through increased regulations, which is always a bad thing for a market economy. In the mean time, homebuilders keep building, adding to the already large inventory. Homebuilder's profits are way down. For example, DHI, one of the largest builders profit is down 30% in Q2 and see no relief in sight. We believed price decline will continue through the end of this year as there will be more pressure to cut prices, thus reducing profit margin.
Although real estate is local, most areas that have enjoyed consistent appreciation could see further decline as the number of unsold homes continues to rise across the nation. According to a recent government housing report, June home sale was the slowest in 13 years. In our view, it will take more than price decrease to jumpstart this housing market. Interest rate reduction will help, but it is doubtful mortgage rates will decline to a level that will make any difference in buyer's attitude. If one decides to venture into this sector, make sure to take a long term view.
Although the housing sector looks gloomy, we believed the homebuilders such as DHI, TOL, HOV and KBH is looking very attractive at current price. Recent concerns over the housing sector have these companies trading at their 52 week low, making them “value stocks” in our eyes. While it is premarture to call the bottom for these stocks, we believed the recent sell off have reduced the risk of further decline.
While it is not possible to predict which direction the stock market will go from here, we do believe the market has developed an attitude of exuberance. To put it into perspective, the DOW has appreciated approximately 30% since the beginning of the year. That is unprecedented and should be viewed with caution. Anytime the market runs up this fast, there will always some pull back. Scary as it may seem,
our view is the current sell off is temporary, a knee jerk reaction to the subprime lending fiasco and the realization that recovery in housing remains elusive. Depending on one’s objective, this could also be viewed as an opportunity to buy beaten down stocks.
Comments
do you mean, you believe, the selloff in the mkt is over or you expect futher more decline before we bottom out? thanks
Posted by: shawn | July 25, 2007 11:35 AM
Good question, Shawn. It is really tough to call if the sell off is just a minor bump or a more serious pull back. Given the market has been up so much this year, we are incline to believe there will be more of these sell off before the year is over. People will get scared and start yanking their money out of the market. We believed the DOW will NOT be above trading 14,000 by the end of the year. We are less optimistic, our view is the DOW will be somewhere in the 13,500 area.
Posted by: ibooyah | July 26, 2007 07:41 AM
I suspect this sell off will continue for the next few days. Do you see any bargains in the mean time? Seems some of your recommendations are close to entry price.
Posted by: dazraf | July 26, 2007 07:53 AM
Lot of bargain this morning. We added position in KBR which is now trading below 30.
Although the housing market is looking gloomy, we bought a small position in CIT at $43, we think this is a good entry point.
This morning we are also closely monitoring AKAM,down 21%..
Posted by: ibooyah | July 26, 2007 09:14 AM