KB Home (NYSE: KBH) shares are trading higher after a report that hedge fund manager Edward Lampert has bought "small stakes" in homebuildersCentex (NYSE: CTX) and KBH, thinking that the housing market may be poised for a recovery. Investors are taking this news as a good sign for KBH. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on KBH.
After hitting a one-year high of $44.51 last June, the stock hit a one-year low of $15.76 in January. KBH opened this morning at $18.21. So far today the stock has hit a low of $18.15 and a high of $19.07. As of 12:00, KBH is trading at $18.87, up 1.00 (5.6%). The chart for KBH looks bearish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in just five weeks as long as KBH is above $15 at July expiration. KBH would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
KBH hasn't been below $15 at all in the past year and has shown support around $17.50 recently. This trade could be risky if the financial sector continues to tumble or if the Fed makes its first interest rate hike in a while, but even if that happens, this position could be protected by the support the stock might find around $16 where it put in a bottom in January.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in KBH.
Centex Corp. (NYSE: CTX) shares opened lower today, but have risen throughout the day, even after the company posted a fourth-quarter loss of $911 million, or $7.34 per share, well below analyst estimates of a $2.43 per-share loss. Revenue tumbled 37% for the quarter to $2.31 billion, as CTX cut its average selling price 15% to help build up sales. Investors must believe that the worst is over for CTX. If you think this stock won't be falling too far in the coming months, then it could be a good time to look at a bullish hedged play on CTX.
After hitting a one-year high of $49.85 last May, the stock hit a one-year low of $17.77 in November. This morning, CTX opened at $20.02. So far today the stock has hit a low of $19.79 and a high of $22.25. As of 12:15, CTX is trading at $21.92, down 1.10 (-5.3%). The chart for CTX looks bearish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider a June bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in two months as long as CTX is above $17.50 at June expiration. Centex would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
After hitting a one-year high of $49.85 in May, the stock hit a one-year low of $17.77 in November. This morning, CTX opened at $25.90. So far today the stock has hit a low of $25.00 and a high of $26.09. As of 1:00, CTX is trading at $25.01, down $1.31 (-5.0%). The chart for CTX looks bullish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 12.4% return in six weeks as long as CTX is below $30 at May expiration. Centex would have to rise by more than 20% before we would start to lose money. Learn more about this type of trade here.
Judging by my latest emails, everybody wants to know "how should I play the financial sector right now?" Let me make it real simple for you: avoid this entire sector at all costs. Don't buy them and don't short them, at least not yet. I've been repeating the same thing over and over since December, so while I know this will leave many unsatisfied, nothing much has changed in two months. In fact, the recent downgrade concerns over bond insurers MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK), student lender Sallie Mae (NYSE: SLM) and more importantly, prime mortgage lender Fannie Mae (NYSE: FNM), means the situation has gone from bad to worse. Yes, we still risk economic disaster and that's when defaulting consumers could really hurt credit card companies American Express (NYSE: AXP) and Mastercard (NYSE: MA).
But thanks to the lack of transparency in this industry, there's simply no way to accurately judge how bad things really are and as I learned the hard way, accurately gaming disaster is next to impossible.
The good news is that if I had to guess, I'd say the chances of a true disaster are slim. Given that this seems to be an increasingly popular view, many of these financial stocks have been punished to the point of exhaustion. And just as I wouldn't buy them, I wouldn't short them here either. Despite the seemingly steady stream of negative news, the risk of further damage to shareholders and the overall market crashing all around them, broker stocks like Goldman Sachs (NYSE: GS), Bear Sterns (NYSE: BSC), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS) have basically stopped going down. They haven't bounced much either, but the nation's three largest banks Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan (NYSE: JPM) have managed that feat, with all three bouncing considerably off their lows.
TheStreet.com's Jim Cramer says before stimulus plans or anything else, we have to get some homes moving.
Hurry. Hurry with the rate cuts. Hurry with the stimulus package. Hurry with the bond insurer bailout. Hurry with the write-offs. Hurry with the Fannie Mae (NYSE: FNM) (Cramer's Take) limits. Hurry with something, anything, because things are still going down and they are going down with increasing speed.
That's what the market said yesterday and the market is saying today already with this ridiculously low 10-year treasury that has not produced the break down to the 4.5 level of 30-year fixed that we need so badly to clear out the inventory of unsold homes.
It is all so obvious that everything has to be hurried. It doesn't take Toll (NYSE: TOL) (Cramer's Take) saying there is little light at the end of the tunnel this morning or Whirlpool (NYSE: WHR) (Cramer's Take) saying this is the worst market in two decades, but that's the feedback we are getting.
TheStreet.com's Jim Cramer says until the public feels they won't lose money on a home, no problems will get solved.
Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.
I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.
The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.
Or it can try to change the psychology of the home buyer and homeowner.
TheStreet.com has a great piece comparing Apple Inc.'s (NASDAQ: AAPL) iPhone with other alternatives in the market. While mostly the iPhone is found to be the most intuitive, the one minus is the email it seems. Also, Fortune has a piece on the power of Apple's founder and CEO, Steve Jobs. In premarket trading, Apple shares reached $175 -- have you read Georges Yared's post and bought before?
Dell Inc. (NASDAQ: DELL) chose retailer Carrefour Group to be the first European mass merchandiser to sell Dell notebook and desktop computers in its 365 stores in France, Belgium and Spain beginning in January.
Sirius Satellite Radio Inc. (NASDAQ: SIRI) said that Ford Motor Co. (NYSE: F) may have its satellite radio services in approximately 70% of Ford and Mercury 2009 vehicles next year.
TheStreet.com's Jim Cramer explains what could force the Fed to cut rates again.
The housing index just can't rally for a minute. The thing's amazing. The stress of the system is so clearly manifested by this that I have to wonder if the Fed wants this index lower.
Many of these firms lent money recklessly. Are the Fed heads thinking these companies need to pay like the New Centurys and the NovaStars (NYSE: NFI) (Cramer's Take) did? (Are the feds, by the way, thinking that this GMAC company has to go because that was a huge provider of crummy mortgages?)
Things keep getting worse and builders get more and more cautious. In fact, according to the Commerce Department's most recent survey, housing starts dropped 10% to an annual pace of 1.19 million in September from a 1.33 million rate in August. That's worse than economists expected. Briefing.com's survey showed economists estimated a more modest fall to 1.29 million.
We haven't seen a housing market this weak since 1993 and the future doesn't look any better. Housing permits were down 7% to an annual rate of 1.23 million in September from 1.32 in August. That's the lowest level for permits in 12 years.
Centex (NYSE: CTX) of Dallas joinsthe growing list of home builders that will be taking charges. The Wall Street Journal reported this morning that Centex plans to take $1 billion in charges [subscription required]because of the deteriorating housing market. Charges reported by the Journal include:
$850 million impairment on its neighborhood and land inventory plus $40 million more on land held by joint ventures.
$40 million write-off in pre-acquisition costs and option deposits
$60 million provision for future mortgages.
These loses are on top of the $193 million in write-offs for the first fiscal quarter.
Yesterday, Moody's downgraded Centex's credit rating to junk status and said it expects to see weak conditions in the housing industry until at least 2009. Moody's also told the Journal that Centex, "has had difficulty unloading excess inventory, is facing rapidly declining home deliveries and revenue generation, and has close to a seven-year lot supply."
Centex reports its results officially on October 23. Expect bad news and falling stock prices between now and then.
Main Street and Wall Street have never been further apart than right now. I can imagine that if you live on Main Street and you don't have to buy or sell a house and you didn't buy one in the last three years, you might be thinking, what the heck? Inflation's going up, oil's going up, food's going up, the stock market's going up. Shouldn't the Fed be tightening? What's wrong with this picture?
To which I say, who cares? The Federal Reserve cuts when there is a credit problem or problems that could cause a dramatic slowdown in the economy. We have one. It's the implosion of securities backed by bogus mortgages. And it infects pretty much everything.
But it is not palatable to have a major company not be able to meet payroll because of a problem with the commercial paper market. We can't have housing, autos and retail go down because we can't finance anything. Finance matters. That's Wall Street's job.
If Wall Street can't finance Main Street, then Main Street will eventually feel it, and how good would it be to have that forestalled if it is at all possible. Once Main Street feels it, it can be too late.
Of course if you are of the opinion that it is right and good that Main Street feels the sting that is supposed to be felt by speculators, I can't help you.
I had a discussion today with a staffer at CNBC about whether I could be Chicken Little. I said that all my homework says I won't be and that there is much trouble in the system, but if something "bad" doesn't happen soon in mortgage-land, I could look like I was just one of those doomsayers.
Right now, I look like the latter because of Main Street, but on Wall Street, I am just calling it as everyone sees it on the fixed-income side.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in any of the stocks mentioned.
McDonald's (NYSE: MCD) loves hedgehogs -- Ananova reports that McDonald's in Germany is redesigning the holders for its McFlurry ice cream treat after reports that hedgehogs were dying for their love of the confection. Apparently, the creatures would wriggle into the containers to reach the last juicy bits in the bottom, become stuck, and suffocate. The new packaging is currently being tried out on a group of test hedgehogs before going into production.
McDonald's also loves loyal customers like Lee and Mary Humphrey of East Sussex, England. The octogenarians have eaten the same meal in the same McDonald's every day for the past 17 years. After more than 6,000 meals and $50,000 worth of their standard meal, a double hamburger each and shared fries, the couple claims their health is fine. Take that, Super-Size Me!
Won't we ever learn? The Cox News Service reports that, as gas prices level out a bit, Americans have quit seeking out used hybrids and returned to SUVs. Cars.com's Consumer Search Index showed that searches for used Ford (NYSE: F) Escape, Honda (NYSE: HMC) Civic and Toyota (NYSE: TM) Prius hybrids dropped precipitously in favor of gas guzzlers like the Buick Enclave and Ford Expedition EL.
CNBC's Jim Cramer says he is dumbfounded that Centex Corporation (NYSE: CTX) still pays a dividend, and he is certain that the dividend will be cut or erased barring a miraculous turnaround in housing. Today's news that new home sales were up is at least partially negated by the fact that prices were down. If you are inclined to agree, then it could be a good time to get into a bearish hedged trade on Centex.
After hitting a one year high of $58.42 in December, the stock slid to a one-year low of $28.84 earlier this month. This morning, CTX opened at $31.66. So far today the stock has hit a low of $31.52 and a high of $32.70. As of 11:10, CTX is trading at 32.26, up 0.40 (1.3%). The chart for CTX bearish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
If you agree with Cramer, then for a bearish hedged trade, I would consider an October bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just 2 months as long as CTX is below $40 at October expiration. Centex would have to rise by more than 24% before we would start to lose money. Learn more about this type of trade here.
CTX has not been above $40 since mid-July and has shown some resistance around $33.50 recently. This trade could be risky if the housing market responds well to a potential Fed rate cut, but even if that happens, CTX could have trouble getting above $39, where it topped earlier this month.
Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red.
The NYSE had volume of 3.6 billion shares with 1,612 shares advancing while 1,706 declined for a loss of 6.18 points to close at 9,428.86. On the NASDAQ, 2.2 billion shares traded, 1,426 advanced and 1,685 declined for a loss of -2.65 to 2,542.24.
EMC Corporation (NYSE: EMC) rose $1.33 (8%) to $19.05; ahead of it's subsidiary VMware making its debut on the NYSE tomorrow in an IPO that analysts are predicting will be big. EMC will retain 90% of the shares. This is likely the reason for the active calls as EMC Corp. (NYSE: EMC) saw heavy volume on the August 19 calls (EMCHT) with over 56,000 options trading.
In options there were 5.4 million puts and 5.8 million calls traded for a put/call open interest ratio of 0.92. The CBOE Volatility Index has been high closing today at 26.57. This is the fear indicator of the market. Not only is the index up, but options on the index are high with the CBOE S&P 500 Volatility Index (NASDAQ: $VIX) moving volume on the August 25 calls (VIXHE) with over 35,000 contracts.
Other stocks with active options include State Street Boston (NYSE: STT) saw heavy volume on the November 75 calls (STTKO) with over 60,000 options trading. Most of the active puts were on the indexes and the iShares Russell 2000 ETF (NYSE: IWM) had volume on the August 78 puts (IOWTZ) with over 86,000 options trading.
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
KB Home (NYSE: KBH) shares are trading higher after a report that hedge fund manager Edward Lampert has bought "small stakes" in homebuilders Centex (NYSE: CTX) and KBH, thinking that the housing market may be poised for a recovery. Investors are taking this news as a good sign for KBH. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on KBH.
Here are some highlights from this past week's 
Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red. 
Earnings preview for Ford
Apple shares rise on report Steve Jobs is free of cancer
Toyota whups GM in the first half of 2008
