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Housing: Correction to Resume… Plus, a 194% portfolio return…
Exorbitant rate cuts may have provided that needed psychological boost, but the party’s over. Yep, over the next week we’ll get that stark reminder that a housing glut, falling prices, coming foreclosures, delinquencies, and mortgage resets are still wreaking havoc.
Worse, remember that $50 billion in mortgages will reset at higher rates starting next month. After that, about $30 billion worth of mortgages will reset every month until September 2008. When all is said and done, we could watch as $1 trillion worth of mortgages reset, and as an estimated 3.2 million homeowners face the risk of delinquency and foreclosure.
But why worry about that right now? We have enough to worry about with existing and new home sales due out today (Tuesday) and Thursday, July’s S&P / Case-Shiller Home Price Index due out today (Tuesday), and August construction spending out on Friday.
And that’s on top of expectedly dismal earnings from Lennar (LEN) and KB Home (KBH) today (Tuesday) and Thursday, respectively. We’re now looking for stellar numbers from these, as homebuilders continue to take impairment charges and write down the value of unsold homes, which is killing off book values.
It’s just the same story, different month. Homebuilders are cutting back on construction (you’ll see that in the construction spending report) and are cutting prices (sometimes by as much as six digits) to alleviate glut pressuring profit margins.
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Hot Options Activity: Invoking the name of Lampert
Just as we noted with Nabors Industries (NBR), be cautious when trading rumor. A month after the NBR buyout rumor circulated ahead of the Lehman Brothers Energy Conference, a deal has yet to be announced. And, more than likely, it won’t be announced.
Now, take a look at Safeway (SWY). On a rumor that Eddie Lampert is interested in buying the company, 4,852 October 35 call contracts were picked up. If you were in the stock prior to the rumor, sell. If you bought after the rumor, sell. This rumor has been making the rounds since Lampert bought 9.2 million shares in 2003.
And still there’s been no buyout. FYI -- The same rumor floated in July 2007 and November 2006. Judging from the 12,500-call option activity in July, a buyout was imminent. Unfortunately, the buyers that sent the stock to $36 got to watch it sell off to $30 a month later.
Even shares of Macy’s (M) are still racing on renewed Lampert rumors. Shares of Macy’s were up as much as four percent last Friday on ripe takeover rumors. But it’s nothing new. The retailer has been the subject of false Lampert takeover rumors since summer after posting disappointing same-store sales. Macy’s call option activity skyrocketed to 36,900, an eight-fold increase from the 20-day average.
June 22, 2007 and July 18, 2007 were the last times the rumors were floated.
Following the June 22, 2007 rumor, the stock popped to about $46 before plunging under $30. Following the July 18, 2007 rumor, the stock plunged from $42 to $30.
If you’re going to buy options based on rumor, at least do the research first. Buyers of Macy’s and Safeway rumors have lost a lot of money.
Take care,
Ian L. Cooper
Stockonomist.com
P.S. If you have any questions, comments, or concerns, feel free to e-mail us at Members@stockonomist.com.
With 36 days remaining, we still have a tight horse race on our hands in the Stockonomist challenge. There’s still plenty of time to catch the leaders who currently hold 194%, 161% and 131% portfolio returns to date. As always, we invite each of you to submit comments on your strategies, held positions, or thoughts on the game.
With your permission, of course, we’d add it to the weekly Stockonomist.com letter. Thanks, and good luck.
Earnings Announcements for the Week of September 24 ,2007
September 25 – Aehr Test Systems, HB Fuller Company, Lennar Corporation, and Red Hat Inc
September 26 – Actuant Corporation, Asure Software, Bed Bath & Beyond Inc, and Paychex Inc
September 27 – Chattem Inc, Christopher & Banks, Finish Line Inc, Global Payments Inc, Jabil Circuit Inc, KB Home, McCormick & Company Inc, Rite Aid Corporation, and Vail Resorts
September 28 – AZZ Inc, International Minerals Corporation, and LightPath Technologies Inc
Economic Releases for the week of September 24, 2007
September 25 – Consumer Confidence
September 25 – Existing Home Sales
September 26 – Durable Orders
September 26 – Crude Inventories
September 26 – GDP
September 27 – Initial Claims
September 27 – New Home Sales
September 28 – Personal Income
September 28 – Personal Spending
September 28 – Chicago PMI
September 28 – Construction Spending
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