Home builders slide in soft market

Shares of U.S. home builders slid on Friday after market leader D.R. Horton Inc., The USA’s largest home builder, slashed its forecast and a report showed consumer confidence was eroding.

The Dow Jones U.S. Home Construction Index, a barometer for home-building stocks, was 4.9 percent down at 570.02. It hit a two-year low and has lost half its value since peaking a year ago.

Yet, the drop came as no surprise to investors, who had for the past few years resisted awarding home-builder stocks higher valuations, despite pleas from the companies themselves.

"This means that investors have anticipated that earnings for the companies would come down," said Victory Capital Management analyst Michael Koskuba.

For about the past three years, as they repeatedly turned in double-digit profit growth, U.S. home builders complained the stock market did not value them fairly, with their average price-to-earnings ratio hitting only as high as about 9.6.

And over the past two years, the average P/E of large U.S. home builders was 7.34, about half the S&P 500's P/E of 15.95.

"Essentially investors thought that earnings would come down for these companies," Koskuba said.

The large, publicly traded home builders argued they were no longer cyclical stocks. They said they had grown so big that when the market soured, they could increase their earnings by taking market share away from the smaller private builders.

But investors didn't buy the theory.

"Although they were posting extremely high growth for that five-year period, they were not afforded market multiples because in the back of investors' minds was always the fact that home building was cyclical," Koskuba said.

Because investors never pumped up the P/Es, the fall hasn't been as dramatic, and the average for the top home builders is now about 4.85.

Horton shares fell as much as 11 percent to a two-year low, and were down 7.2 percent at $21.21 in late Friday trading. It was among the top losers on a down day for New York stocks.

Following Horton's announcement late on Thursday, on Friday morning the University of Michigan's preliminary July reading on consumer sentiment was 83.0, down from June's 84.9. It was lower than the median forecast of Wall Street economists polled by Reuters for a reading of 85.5.

Among U.S. builders, Meritage Homes Corp. (MTH.N: Quote, Profile, Research) shed 7.7 percent to $38.85, and Centex Corp. (CTX.N: Quote, Profile, Research) fell 4.6 percent to $45.20. Pulte Homes Inc. (PHM.N: Quote, Profile, Research) dropped 3.9 percent to $26.95 and Beazer Homes USA Inc. (BZH.N: Quote, Profile, Research) lost 5.5 percent to $38.57.

In the options market, defensive trading is being seen throughout the housing sector, with increasing put volume in Toll Brothers Inc.(TOL.N: Quote, Profile, Research), Beazer, The Ryland Group Inc.(RYL.N: Quote, Profile, Research) and Pulte, said Frederic Ruffy, analyst at Optionetics, a California-based options education firm.

Investors often turn to equity puts, which give the right to sell the stock at a preset price and time, to protect existing stock holdings or bet on further weakness in a stock.

"At some point they will be attractive again," Koskuba said. "But as long as the numbers keep going down, investors are still scared of going back in."

Source: Reuters New York

Bank of Japan look to raise interest ates for first time in six years

The Bank of Japan will probably raise interest rates for the first time in almost six years this week as the world's second-biggest economy emerges from a decade-long battle with deflation.

Governor Toshihiko Fukui and his policy-board colleagues will increase the key overnight rate between banks by 0.25 percentage point on July 14, according to all 16 economists surveyed by Bloomberg News.

Japanese companies including Matsushita Electric Industrial Co. have completed the job cuts, factory closures and debt reorganization that followed the bursting of the bubble economy in the early 1990s and now plan to increase investment at the fastest pace in 16 years. Fukui said last month he's concerned that prolonging the zero-rate policy could promote unnecessary investment and kindle inflation.

"The ending of zero rates will be testament that Japan's long struggle with excess is now over and that the economic cycle is back to normal,'' said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong. ``We look for the economy to enter a sweet spot as it fully transits from deflation to inflation.''

Sixteen central banks raised interest rates in June, including the U.S. Federal Reserve, the European Central Bank and those of South Korea and India.

Japan's largest companies plan to increase investment this year at the fastest pace since 1990, the Bank of Japan's Tankan business confidence survey showed last week.

Consumer Prices

Matsushita, the world's-biggest consumer electronics maker, is building the world's biggest plasma display factory to increase production. Honda Motor Co. said in May it would build its first car plant in Japan in 30 years.

Other evidence supports the bank's contention that economic growth will be sustained as companies divert rising profit to expansion rather than debt repayment.

Japan's consumer prices rose for a seventh month in May when the unemployment rate fell to an eight-year low of 4 percent, and in June bank lending climbed the most in a decade, recent reports showed.

"Companies are cranking up spending plans and it's hard to anticipate that momentum will slow any time soon,'' said Akio Makabe, professor of economics at Shinshu University. ``A recovery of the job market will help boost household spending.''

The yen rose to a four-week high this week on speculation an interest-rate increase will lure investors to yen-denominated assets. The Nikkei 225 Stock Average has rebounded more than 8 percent since June 13, when it set a seven-month low amid concern a spate of global interest-rate increases would stunt world economic growth.

Business Support

The government's opposition to an interest-rate increase has eased. The Cabinet Office on July 7 said the gross domestic production deflator, a broad measure of price changes in the economy, will turn positive in 2006 for the first year in eight.

Prime Minister Junichiro Koizumi on July 4 said the bank should make its own decision on interest rates, dropping previous calls for the bank to act cautiously.

The government opposed the bank's last rate increase in August 2000. Seven months later, the bank had to cut rates back to near zero as an Internet-led global economic boom faltered, allowing the government to accuse it of making a policy mistake.

Businesses are getting used to the idea of higher borrowing costs. Only 3.6 percent of companies polled by the Mainichi Newspaper said they consider a rate increase this week would be too soon, according to a July 9 poll, and 89.9 percent said a rate increase would be acceptable as long as the bank exercised appropriate judgment.

Second Rate Increase

"The necessary economic conditions mentioned by the Bank of Japan for a rate hike are taking shape,'' Fujio Mitarai, head of the Japan Business Federation and chairman of Canon Inc., said on July 10.

The central bank will keep rates low even after a first rate increase because the pace of economic expansion will slow next year and inflation will be subdued, economists said.

Nine of the 15 surveyed economists said the bank won't make an additional increase this year. Eight said the key rate will be capped at 0.75 percent or below by the end of next year.

"The Bank of Japan will likely attempt a second rate hike this year, but there is no guarantee that upcoming economic data will justify such a move,'' said Teizo Taya, advisor to the Daiwa Institute of Research and a former central bank policy board member.

The bank will this week also raise its discount rate, with which it makes overnight loans directly to financial institutions, and cap a gain in the interbank overnight loan rate to between 0.4 percent and 0.5 percent from 0.1 percent, the surveyed economists said.
Source: Bloomberg