A Note to Homebuilder Longs

Updates on JOE & OSTK, Plus RIG, MRO & TIE

Dear Bottarelli Research Member,

With the markets still flirting with their all time highs, we’re not seeing any significant upside or downside interest. Therefore, I think it’s best to call it a week and start fresh on Monday – when the markets offer us a better gauge as what to expect next. With September officially in the books when the closing bell rings today, I think October will spark a new level of selling pressure. That’s why we’re currently holding two put options and no calls.

As you know, one of our two puts is on St. Joe (JOE – NYSE). And recently, the stock has been experiencing a modest level of buying interest. In fact, the entire homebuilder sector has been ticking higher – right alongside the rest of the markets. So while I have a quick moment, I’d like to comment on this by making a quick note to all the bottom-feeders who think they’re picking up homebuilder stocks for attractive prices: You’ll lose money.

What’s happening is that the recent housing numbers have been SO BRUTAL that speculators are already calling this the bottom in homebuilder stocks, which is sparking a rash of bottom-feeding buying interest. The nation-wide drop 1.35% drop in housing prices was the recent catalyst that caused investors to call the bottom, but I just don’t buy it. At least not yet.

For example, housing prices have increased over the last two years by 40%, 60%, even over 100% in some parts of the country. With increases like that, how much impact will a 1.35% fall have? Not much, if you ask me. For example, I seriously doubt that a house in Peoria, Illinois that’s been sitting on the market for 9 months at $300,000 will now have buyers lining up with a new listing price of $295,950.

Here’s the thing: We could very well witness a recovery in the housing sector by mid 2007, as home sales and home prices pick up in the peak selling months that fall in spring and summer. Assuming that’s the case, we still have October, November, and December to contend with, which are months notorious for molasses-like home sales.

To put it another way, real estate stocks are not like internet, tech, or semiconductor stocks, where bubbles come and go in a matter of months. On the contrary, real estate trends move slower than virtually every other sector group. That tells me that before we see any true housing stock turnaround, we first need to see the numbers actually get better. Not worse. And quite frankly, I don’t see that happening before the calendar turns over to 2007. For that, I think that anyone buying housing stocks will lose money in the near-term, as we will witness lower prices in the final three months of 2007. Continue to hold your JOE October 55 Puts (JOE VK).

In other news, I’d like to carefully balance out our current ledger with some longer-dated calls, just to act as a buffer in case we continue rallying. Some Charter Members have asked me to share with them what I’m looking at in advance of an actual trading alert – so here’s what I got:

First off, we have Transocean (RIG – NYSE). If they trade down to their 50-day moving average around $70.50 and hold that level, it could prove to be a launching pad for more upside gains. That’s call candidate #1.

Next up we have Marathon Oil (MRO – NYSE), which happens to be the one oil stock that’s gotten punished the most. If MRO can call the 200-day moving average a support point, we’ll once again have a launch point for an upside rally, which could at least take shares to the mid-point of the 50-day and 200-day moving average. That could be an easy $5.00 gain from current levels, perhaps even more. That’s call candidate #2.

And finally, we have Titanium Metals (TIE – NYSE), a stock that I’m calling a “coiled spring.” As you can see by the chart below, two things are happening at the same time: One, the stock has traded basically flat for the last four months, which typically means that any coming break-out (or break-down) will be very explosive. Two, the 50-day and 200-day moving averages have just hit, which is a situation you don’t see happening too often. Technically speaking, this level could act as a HUGE area of either support or resistance, all depending on TIE’s next move. So let’s watch TIE closely because if we can peg the right directional move, we could have a great winner on our hands. That’s call candidate #3.

And finally, I’m not too worried about Overstock.com (OSTK – NASDAQ). If (and when) the markets turn over and trade lower, I think it’ll continue falling and we’ll take immediate profits.

Until next week, have a good weekend — and as always…

Lock and load!

Sincerely,