Bolling: Watch for a Builder Rebound


When I heard that Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and the two CEOs of Fannie Mae (FNM) and Freddie Mac (FRE) were meeting this weekend to discuss a rescue package for the mortgage-financing giants, I wasn't sure how the market would react.

That is until I heard Pimco's Bill Gross talk about the way the feds might backstop the two. He would be the guy to listen to with regard to where money and influence might be applied. His assessment was right on, and the market is certainly applauding the outcome

As you are no doubt aware by now, the U.S. government will take over Fannie and Freddie under a conservatorship plan and receive senior preferred stock. This investment implies the full support of the U.S. government and should strengthen our housing market's shaky legs.

More important, foreign investors, who have been shying away from our mortgage-backed securities and our housing-related equities and bonds, may find a confidence in this maneuver. It may attract foreign investment into our housing markets, our real estate and our financial institutions. This could be the catalyst for a rebound in the sectors that have been hit hard lately.

Take this with a grain of salt: I am a trend trader and love buying stocks, commodities, real estate, concert tickets, anything, as they are making new highs. I have a clear "trader's lean" toward buying strength. It has served me well for many years.

This came up last Thursday, as I was watching Hovnanian (HOV) and Toll Brothers (TOL) get waxed after reporting lousy quarterly numbers.

What would a trend trader want with these two dogs? I can't put my finger on it, but the thought process went as follows:

These guys are really reporting more bad numbers. ... Hovnanian is trading at $6.50! That was a $70 stock not too long ago. ... I know Ara Hovnanian personally, and he is a straightforward guy, an honest guy who is a great CEO of a founding-family company. At $6.50, I have to give this a look.

So, then I checked the others in the space, and focused on Toll Brothers. This stock is up for the year. Up 19%, in fact. The reason being thrown around the Street is that Toll builds luxury ($650,000 on average) homes for the wealthy. Toll has a strong presence in the upper echelon of homebuilding. It appears the wealthy aren't as affected by the economic slowdown as the rest of the country.

Toll's conference call also included a noteworthy tidbit: The comapny has more than $1.5 billion in cash. Most builders are burning through cash like a biotech firm without a cure.

To make it simple, HOV appears oversold, and TOL is shaking off a tsunami of bad news. Both will be watched carefully, and I refuse to stay with these very long unless they run green on my screen.

As always, trade with your head, not over it.

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