Thursday, October 12, 2006

Making Payroll in the Real World

Finally, the Contractor Will Take Your Calls

Housing Slump Frees Up Builders and Lowers Cost Of Materials for Remodeling

—Wall Street Journal

Wall Street is a manic-depressive beast.

One moment the housing stocks are the poster-children of the trees-grow-to-the-sky brand of momentum investing, defying the skeptics, most especially Alan Abelson and his almost-weekly wolf-crying column in the front pages of Barron’s about the perils of…well, everything, it seems, but especially housing stocks, by hitting the new high list every day.

The next day housing stocks are all on the new-low list and Wall Street's Finest are busily slashing estimates and scratching their heads over what could possibly have gone wrong with trees-growing-to-the-skies euphoria, despite the fact that housing has, over the last 150 years, been a rather cyclical business.

Then, the day after the analysts have finally thrown in the towel and downgraded the stocks, the Fed decides to stop raising interest rates, and suddenly the housing stocks are all “breaking out,” as the chartists say, triggering the following type of commentary which I am not making up:

Home Builders confirm some positive tendencies that have been brewing over the past few months. The chart pattern of the HGX [home building stock index] completed a 4-month bottoming formation yesterday with a break through a key line of resistance around the 217 area. Over the past month, we have seen a consistently positive volume profile as volume spikes accompanied up moves on the price pattern, indicating accumulation of stock. Some positive follow-through beyond yesterday’s high at HGX-220 will confirm this bottoming formation. We believe that this is an intermediate, if not longer-term upside trend change for the group. We will be looking at resistance areas coming up around 226, 233 and then 250.

How that helps anybody decide how to invest their money is beyond me, but it’s the kind of minute-by-minute stuff that makes traders’ fingers get itchy for the kind of manic-depressive action that increasingly dominates the markets.

Thus, a bunch of guys spend their days watching green lines and red lines and blue lines on a computer screen, making buy or sell decisions on the basis of what those green lines and red lines and blue lines are doing at any second of any minute of any hour of any trading day.

And that's how Wall Street makes its payroll.

Somehow I doubt the individuals who, to paraphrase Jimmy Stewart’s impassioned speech to the cynical Mr. Potter in “It’s A Wonderful Life,” actually do most of the building and painting and landscaping in the housing industry, particularly care about what the green and red and blue lines are doing on some trader’s screen on Greenwich Avenue.

Their concern, in these fallow days for new housing construction, is to meet payroll. And that's not just because the Wall Street Journal headline quoted above says so.

It's what I'm hearing at the Greek diner, too.

The setting was a table in the corner with two guys, one a builder and the other a subcontractor who, as far as I could tell, was not getting his end of the work done to the satisfaction of the builder.

The key part of the conversation, as I heard it in bits and pieces above the general noise level, came after the subcontractor had been blustering and whining, in between phone calls on his Nextel push-to-talk that everybody in the place could hear, until the builder pressed him for details.

And this is what the subcontractor said:

“There’s nothing in the account. I mean, every week I’m struggling to make payroll. Seventeen thousand, eighteen thousand a week I’m trying to make.”

The builder, unnervingly, listened without saying a word. The sub went on:

“There’s nothing in the account. My guy’s pullin’ his hair out—the last hair he has he’s pullin’ out.”

Which may be why, as the Wall Street Journal reports, “the contractor will take your call”: whatever those red and green and blue lines are doing on that trader's screen on Greenwich Avenue, he needs the money.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


The Irrational Investor said...

What's a good source for the skinny on technical analysis in hedge funds, investment banks, and trading houses? Market Wizards is a bit dated. I spotted someone toting a Goldman Sachs carry bag at a Tom DeMark lecture recently -- even though I've read that Fisher Black used to wander the trading floor "appropriating" charting books.

whydibuy said...

The manic depressive nature of the street can be seen in Greenspins latest comments that after a 9 month plateau, housing is bottoming out. Nevermind that the house inflation was created by his ever easing monetary stance and ever lowering standards when it comes to lending. This from a guy who used to run the fed. Of course R. Shillers view that housings disconnect from income growth is unsustainable and due for a 20% retraction. Or that fools who loaned way more than they could possibly pay back are choking on those I/o, arms and no doc mortgages. Or all the anedotal pieces on blogs following the real estate debacles in various parts of the country. Nope, housing will now resume its trend of surging up far more than income. All is well again. All that was needed was a couple percent price reduction and we're off to the races. Nevermind that history has shown these real estate cycles take years to wash out and go deeper than anyone expects. But what do I know. Greenie is the wizard of wall street.

Lee_D said...

The upside to the new home market cooling off is a return to quality workmanship.

Here in oil country, both housing starts and resale all over Alberta has gone bananas in the past two years. One unintended consequence is that to meet the demand, builders have to give work to mediocre sub-trades who are doing inferior work, and just bashing jobs in and moving on without care for the final result. I've seen some really grim workmanship in the past year and both the builder and the homeowner pays the price. I've read of similar situations in Florida and other overheated markets also.

As one of my builder clients (who ironically had the dining room ceiling in his new home collapse because the plumber did a crap job piping the upstairs bathtub) put it, there's a lot of trades who won't be given work once things slow down, but by then the damage is done.

Right now, if you choose to build a new home in our market you are going to pay way too much, and get too little in return. As another aquaintance put it "I'm not building until the next recession, when I can make the trades dance when I snap my fingers."

Jake Wolf said...

Be wary if the contractor takes your call. I talked to an interior contractor today who said his dumpster guy said business was rapidly slowing down. The contractor has plenty of work lined up all the way through the spring. It's the guys flipping houses you should be careful with. They are used to working around empty homes and with more and more work becoming renovations and additions there will be alot of competition among the worst of the worst for your business.

Another thing the contractor said is the requirement to have good credit with suppliers. There should be a way to check a contractor's credit report.