Posted
Jan 22 2008, 11:54 AM
by
Robert Walberg
This may seem crazy, especially with the global financial markets in the midst of the worst turmoil we've seen in nearly a decade, but the Fed's decision to slash the funds rate by another 75 basis points sent the first strong buy signal in the depressed housing sector in over a year.
One stock that stands out among the battered and beaten up homebuilders is Toll Brothers. The stock rallied nearly 5% on Tuesday on volume of 6.4 million shares -- nearly four times the daily average volume.
Truth be told, the Fed's decision to cut short-term interest rates isn't going to have a big or immediate impact on mortgage rates. Mortgage rates are tied to the long-end of the yield curve, and long-term rates are apt to remain stubbornly high due to the current anxiety in the financial markets. Nevertheless, the Fed's action is important for two reasons. First, it told the market that the Fed will do whatever it takes -- read more rate cuts -- to reduce the economic impact of the housing downturn. Second, and this is tied to the first, the rate cut changes market psychology. Instead of fearing a prolonged downturn, investors will start to look to the time when conditions improve and housing starts to firm.
Investors shouldn't underestimate the impact of the change in psychology, especially when a) builder sentiment is very near all-time lows and b) short-sellers have been betting aggressively against the sector -- and the stock. Nearly 16% of Toll's float is currently being sold short. If bears sense a change in the market's mood regarding the industry they will be forced to cover those short positions, creating a nice wave of buying. With virtually no sellers left -- face it who's still long the sector -- the path of least resistance is to the upside. As for builder sentiment, it too has only one way to go from here -- and that's up.
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