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Betting On Builder's Stocks?

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AP

Day to day the news is still bad. Lousy earnings today from Toll Brothers after lousy earnings from Hovnanian yesterday after lousy housing starts data for July (starts at a 17-year low). Yet the S&P Homebuilding index shows the group up 20% over the last two months.

What’s up with that? Derivatives Traders?

“They like to get into things before they actually bottom out,” says Randy Frederick of Charles Schwab. “So even though we really haven’t seen a recovery in the housing market and by most of the data that you look at, it says the bottom’s not here yet…the whole housing sector overall is up 40% in the last couple of months. So it’s a pretty huge turnaround despite the fact that these builders are still posting losses, and potentially losses for the next couple of quarters.”

Those builders, like Toll Brothersand Rylandand KB Home, who are relatively cash-rich and building their cash coffers, will survive the downturn. Despite what the fundamentals might be saying, “the technicals are saying that these stocks are in pretty solid shape right now.”

Ken Leon of S&P is not so bullish. “Well the homebuilders, this is an early cyclical group, when there’s recovery,” says Leon. “So, you will see trading action, but looking at the economy, looking at the housing market, and the homebuilders specific performance, we don’t think that there’s a really, true recovery until the second half of 2009. That suggests that there may be good trading opportunities, but we would probably want to be on the sidelines as homebuilders would as well with their businesses.”

    • Toll Brothers Reports Another Quarterly Loss

On the whole, the builders’ stocks are pretty darned cheap right now, so if you’re making the long-term play, it might be hard to lose. Short-term is going to be dicier. All the builders agree that sky-high inventories and rising foreclosures which just bloat those inventories, are making for some serious headwinds.

But I do tend to believe Bob Toll, CEO of Toll Brothers, who keeps harping on the pent-up demand. It’s out there, on the fence, being pushed around by tighter lending standards, falling prices and larger macro economic concerns.

Questions? Comments? RealtyCheck@cnbc.com