Wednesday, October 3, 2007

Debunking Another Absurd Stephen Kim Homebuilder Rally

Wondering why the homebuilders are up huge this week? Surprisingly simple explanation:

NEW YORK (AP) -- Housing stocks rallied for a third consecutive day Wednesday, as sentiment increased that the long-battered shares may have reached a bottom, even if the beleaguered housing market has not. With no industry data to guide them, investors appear to be taking their cue from an analyst who earlier in the week upgraded the entire sector.

Citigroup Global Markets analyst Stephen Kim wrote in a client report Monday he does not foresee the stocks falling much more. However, he does not expect conditions in the industry to improve anytime soon.

"We are not trying to suggest that trends in the homebuilding sector are about to get much better," he said. "It is precisely when things have gotten this bad that the stocks start looking good."

For a moment, I thought I had been transported back in time to December 6, 2006, date of a previous Stephen Kim research report.
Citigroup recommended that investors buy shares of homebuilders now as order trends are expected to turn positive in the first quarter of 2007. "While many wait for an improvement in fundamental data such as prices or inventory to signal an 'entry point' in the stocks, we urge investors to look back to prior cycles, when the group rallied far ahead of fundamentals," Citigroup analyst Stephen Kim said in a research note. The brokerage firm raised its price targets on the following companies:

Pulte Homes Inc. - $45 [now $16.25, off by 64%]
D.R.Horton Inc. - $48 [now $14.84, off by 69%]
Lennar Corp. - $88 [now $25.90, off by 71%]
Centex Corp. - $83 [now $29.28, off by 65%]
Toll Brothers Inc. - $42 [now $22.79, off by 45%]
KB Home - $92 [now $28.60, off by 69%]
MDC Holdings Inc. - $85 [now $43.52, off by 49%]
Ryland Group - $95 [now $25.5, off by 73%]
Beazer Homes USA Inc. - $80 [now $10.08, off by 87%]
Hovnanian Enterprises Inc. - $63 [now $13, off by 79%]
Standard Pacific Corp. - $43 [now $6.24, off by 85%]
Meritage Homes Corp. - $87 [now $16.62, off by 81%]
Technical Olympic USA Inc. - $18 [now $1.94, off by 89%]
Stephen Kim sounds like a guy you should listen to if you want to lose two-thirds of your money.

Here's how the builders have done since he called the bottom on December 6, 2006:

See that tiny blip upwards on the very far left? That was the effect of his report. The bullishness carried through until it became clear that the "spring selling (buying?) season" was never going to materialize.

I worked in the industry and I remember what people were thinking. They honestly thought that spring of 2007 would come and the real estate market would kick right back into high gear.

That didn't happen, and now there are key problems that make it even less likely that we have reached the bottom of the housing market.
  • Lending is tight. Homebuilders do great when there is no-questions-asked lending.
  • Prices are still too high. High relative to rents, high relative to median incomes, high relative to other goods' historical increases, high relative to building costs. They need to come down much further - and the Case-Shiller HPI futures markets are predicting it.
  • Inventory is huge in absolute numbers and in number of months' sales, and keeps getting bigger by both measures.
Given these challenges, and the tarnished balance sheets of the builders (with high debt, loads of difficult to sell homes, staggering amounts of lots and land, and problematic off-balance sheet vehicles loaded with land and debt), it's unlikely that the builders' stocks have reached bottom.

Mr. Kim: We have not reached the end of the housing bust. We are only now reaching "the end of the beginning."


Anonymous said...

Good job. I don't see any reason to buy HB's at the bottom either. They rotted there for almost a decade after the last bust. That also means no real rush to close out your shorts.

Silly people, they forget to look past the 5 year charts.

Anonymous said...

Oh, I'm not implying we are at a bottom in the RE market or the builders stocks.

I wasn't clear about that. Sorry.

CP said...

For someone whose thesis is based on historical patterns in the homebuilding industry, Mr. Kim certainly doesn't give much thought to how long it takes for a real estate bear market to play out.

It's only been about six months since the housing bubble was universally acknowledged to be over.

And he thinks this is the bottom?

jmf said...

Moin from Germany,

excellent take!

Here is more on Kim from Mike Morgan

"Forget about the rear view mirror stuff you hear from analysts like Dan Oppenheim, Stephen Kim and the likes. And forget about the nonsense the WSJ puts out through third tier reporters like Michael Corkery.

We all know where we’ve been, and don’t need to hear it again and again and again.

In all due respect to Stephen Kim, he did give us some forward looking advice this week in a goofy article written by Corkery, when he said the builders were a buy if you want to hold for a year or two.

Talk about doubling teaming the virtues of useless. The problem with this ka ka, is he’s been saying it for the last two years, and the builders are in for a lot of pain during the next 12 months. I’m still not sure why this guy has a job. He’s been wrong for three years, and now he’s telling you to buy and hold for two years. Why not buy in 3-12 months when the builders really take it on the chin?"


T. James Scully said...

We suffered this week through the spectacle of the largest US bank, Citicorp, resorting to timing the Monday morning, Oct. 1st release of it's discredited home builder sector analyst Stephen Kim's opinion, designed to manipulate the stocks in the sector immediately coincide EXACTLY...with the release of Citi's own pre-earnings warning of a 60 percent reduction in upcoming quarterly earnings...due primarily to it's home mortgage related "investment" activity....

Adding to this disgraceful market manipulation attempt by Citicorp, was the failure of the financial journalists community to detail Stephen Kim's "record", detailed here, of the last two years, sans the Dec., 2006 Kim "call", described in this blog....

....journalists failed to ask why Stephen Kim, (read his pathetic two years long record at the preceding link...), is still allowed (and employed ???) by Citicorp, if they are not themselves a criminal organization...TO MAKE CALLS ON HB STOCKS, UNDER THE CITI "BANNER", GIVEN HIS DISASTOROUS PRIOR RECORD, or to note, as a means of countering Citicorp/Stephen Kim... that the last HB downturn took 17 years to recover to it's prior peak level of activity:
Brisk Pace In Building Of Homes

Published: January 21, 1995

....In single-family homes, December construction was at an annual pace of 1,226,000, a 2.8 percent rise that lifted the overall 1994 gain to 6 percent. At 1,195,600 homes, the yearly total was the highest since 1978.....

Thus...if we didn't already know it, we have the smoking gun....the clear evidence that Citi and Mr. Kim are co-criminal conspirators, flagrantly manipulating the US stock market, their silence, in response to Citicorp's manipulations..... the financial journalism media, along with the SEC, are abetting Citi's criminality by indifference, by design, or Citi management, SEC, and CNBS/WSJ, et al....are all coincidentally....effing clueless....ALL ALARMINGLY AND UNSETTLING POSSIBILITIES !

Anonymous said...

Thanks for the wonderful article and great graph. The important difference between now and previous cycles in the HB industry is that in most cases, recovery followed a severe and protacted downturn in the economy which in my opinion is yet to happen. These HB stocks may be a buy in say, 2010 or 2011. It was irresponsible for Mr. Kim to even hint at a bottom and one wonders what his or Citigroup's "motivation" was to suggest this.

Unknown said...

There is no mystery as to what Kim's motivation was. He was told by his company, Citigroup that their portfolio is suffering, and their own stock is down. To get a boost for both, make some news, proclaim that the worst is over and then reap the benefits. If it were a private investor say boosting the value of junk or penny stocks the'd be in Milken's jail cell.

Anonymous said...

Your take on Kim is correct however the recent rally has been spurred by other factors as well, namely Ivy Zellman's initiation piece (Tue or Wed) & HOV's recent claims to have sold 2,100 units during their Deal of the Century sale. The CEO noted that the market is at or near bottom. We have heard this before.

Anonymous said...

Thanks for doing this analysis. This is why I like the Internet.

Anonymous said...

Here is hard evidence that puts Kim et. a. in perspective