September 21st, 2006

Cramer and Home Building Stocks

According to, the definition of mea culpa is “an acknowledgment of a personal error or fault.” The two reason I haven’t written more recently is 1) I’ve been having too much fun finally making some money again and 2) I’m so disappointed in the performance of the industries and stocks highlighted in my past four postings.

  1. Each of the stocks listed (BTM, EMT, KTC and NTT), along with the rest of the international telecom industry group, in my September 4 post have shown declines while the rest of the market has, on balance, increased.
  2. In my August 27 post, I took Jim Cramer to task for his not taking a look at “where stocks have come from” in his pumping Mining Equipment stocks (like CAT, TEX, JOYG) right at their peak. The jury is still out on that posting since half the stocks have outperformed and half underperformed the S&P.
  3. Neither have the shipping stocks (OMM, OSG, FRO, GMR, TNP and EXM) list my August 23 post faired much better.
  4. The defense stocks (LMT, RATION, NCO, GAD and BAH) mentioned on August 20 post have faired much better. All have increased and their performance, on average, has exceeded the S&P 500 over the same period.

Had I not had a bad case of writer’s block as a result of these calls, I would have focused on the industries where I, in fact, was putting my money since my August 19 correct call of a market bottom like Insurance, Banks, Retail and Semiconductors. But, unlike some talking heads, I assume responsibility for my “bad” calls along with taking credit for the good ones.

One of my complaints with Jim Cramer is that he rarely attaches a measurable time dimension to his recommendations. Take, for example, the significant amount of time he gave last week to his “line in the sand” rant about home builders having hit bottom. While he ridicules “reading chart” as being no better than reading astrology signs, this homebuilding call can be no more than reading the charts of stocks in this Industry Group.

I first recommended shorting the group in my October 11, 2005 post, I reiterated the call in my March 7 posting called “Selling Home Building Stocks Short?”. In that post (many charts of stocks in the group are included), I wrote:

“….The group index did bounce off the resistance level at the end of October and developed the left shoulder of a perfectly formed head and shoulder formation….If charts like the one above were flipped upside down I would have no hesitation saying (and have often said just so) that “a breakthrough of the resistance level triggers a buying opportunity”. In this situation, would a breakdown of the support level not indicate a shorting opportunity?…As a group, the stocks in the industry have already retreated 25-30% from their peak last summer. Caution dictates asking whether there’s further room on the downside and, if so, is there a trading opportunity here (selling short or buying puts) and how could it be played?”

The group continued it’s drubbing since since then making a total decline so far of 50%! It seems to have stabilized just as the rest of the market was undergoing its last correction in May-August. But does that make these stocks buys now, Jim? Stabilizing by forming a bottom and moving up aren’t the same thing. What time horizon should be put on Cramer’s homebuilder call? Are there better places for putting your money now?

When I look at the charts of the group’s individual stocks, I see that the consolidation patterns they’re forming could just as easily be mid-points before further declines additional 50% from this level as turn-around bottoms. It certainly smells, like a bottom but that’s why I like to wait for a breakout before making a call and committing my money.

KB Home (KBH):

Hovnanian (HOV):

Centex (CTX):

Toll Bros. (TOL):

But, I guess making bets like this (or not making them) are the reason why Jim Cramer is on CNBC and I’m here writing this blog. By the way, speaking of CNBC, check out Fast Money with Dylan Ratigan (a daily review is available on It’s fast moving and the guys on the show seem to be much more objective and accurate than Jim … but they also throw out a lot more you have to sift through than Jim’s often misdirected picks.

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