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I Was Wrong

By Dennis Gartman
Saturday, September 9, 2006

Steve Sjuggerud’s note: I start every day by reading The Gartman Letter. I get two things from it... stories AND insights that I simply don’t find anywhere else. The Gartman Letter is not cheap... but if you’re a trader controlling a large stake, you can’t afford not to read it. For a trial, contactchip@thegartmanletter.com

I made a mistake...

Last week I suggested that Robert Toll's comments regarding the housing industry made him a bad trader.

You see, last year Mr. Toll was wildly bullish in interviews at the highs of the housing market. And now that housing is in the process of turning decidedly bad, he is wildly bearish.

Robert Toll is no idle spectator here… he’s the President of Toll Brothers, one of America’s largest homebuilders, with $6 billion in yearly sales. As my readers pointed out… Mr. Toll was a huge seller at the top of the market. Let me explain:

Last year, amidst the bubble in the US housing industry, Mr. Toll said in various interviews on both television and in the print that he fully expected the housing boom to continue a long while into the future. He said, specifically, “we've got the supply and the market has got the demand; so it's a match made in heaven... Why can't real estate just have a boom like every other industry? Why do we have to have a bubble and then a pop?”

You have to have a pop, Mr. Toll, because that is the nature of things... Markets rise; markets fall; bubble's blow up and then “bubble's BLOW UP!” They always have; they always will, and there is nothing that can be done about it.

Nowadays, Mr. Toll is depressed about the prospects for the US housing market, saying that he's never seen conditions as severe as they are presently. He's even said that the housing industry is faltering even without any “macroeconomics nasty condition[s]” that could normally be counted upon the take the market lower.

On these comments, I called Mr. Toll a bad trader last week in The Gartman Letter. But on closer inspection, I was very wrong...

It turns out that not only was Mr. Toll not a bad trader, he is apparently a very excellent one. At the precise times that he was most wildly bullish when speaking to the public regarding the future of housing, he was himself selling hundreds of thousands of shares of Toll Brothers at a frantic pace.

TOLL SOLD $100+ MILLION WORTH OF STOCK AT THE TOP

The pace of his selling last year was impressive. It stopped only days ahead of the stock's all time high made mid-year last year. With some quick, back-of-the-napkin math, it appears that Mr. Toll's selling began in earnest in February of '05. He liquidated a bit more than 470,000 shares at or near $44/share (split-adjusted) – roughly $21 million dollars worth.

He stopped selling for a while. And then began selling very much in earnest in late June, selling approximately 347,000 shares between June 21st - June 30th, at or above $50/share – roughly $17 million dollars worth.

In July, his selling became acute, increasing at a dizzying pace. To the best of our knowledge, he sold approximately 1.882 million shares at an average of better than $51/share (nearly $100 million worth!). At that point, his selling stopped.

It appears that during his rather aggressive period of selling, which coincides rather tidily with the stock's high forged in June-July of '05, he sold approximately 2.7 million shares at an average post-split price of $49.65. Given that the stock is now trading at $25 and change, this was good trading indeed!

We stand in awe of his prescience.

WHERE TO FROM HERE

We are old enough to recall from the days in the late 70's when Seattle real estate (in the days before Microsoft) was in abject free fall. We can recall the signs outside of Seattle "Will the last person leaving Seattle, please turn the lights off." Housing prices fell for six or seven years in relentless fashion.

We recall the bust after the boom of housing in Houston in the 80's. Home prices there fell for six or seven years... relentlessly. We recall the bust in housing prices in southern California in the late 80's that required six years at least to stop falling and move to the old highs.

Those days, we fear, were minor compared to the national boom in housing we've lived through recently.

Not only was this a boom on the east coast; not only was this a boom on the west coast... this was a boom in the South, and in the Midwest and the Northwest. Worse still, this was a boom that was cashed in upon, as the nation's homebuyers took their net worth out of the houses along the way.

If it took six to eight years for the previous boomtowns to go bust and then return to their form of old, this time I fear it may take a good deal longer with the outcomes a great deal worse.

I'll simply say that when 500,000 people are real estate agents in California, and that when rational people here in my hometown of Tidewater, Virginia leave jobs with the defense industry to become real estate agents here, that a top has been formed.

Invest accordingly.

Good trading,

Dennis Gartman 
For DailyWealth





Market Notes


CHART OF THE WEEK

“I was just trying to make some money.”

That's what Bunker Hunt said to his sister having just bankrupted one of America's richest families. It took him just three months to lose a multi-billion dollar fortune.

This chart tells the story. The Hunt brothers bought as much silver as they could... silver futures, silver coins, silver ingots, silver mines, anything silver. By January 1, 1980, they had accumulated over 192 million ounces of the metal, valued at $35 an ounce.

On the other side of the trade, a whole group of Wall St. types had gone short silver futures, and were getting 'squeezed.' These firms had a legal obligation to deliver silver at predetermined prices to the counter-parties in the trade. Only problem was, the counter-parties - the Hunts and the other silver bulls - already controlled the world's supply of silver.

The “shorts” were trapped, so what did they do?

They changed the rules at the silver exchanges, limiting the amount of silver any one individual could own and increasing margin requirements. It's one of Wall Street's favorite tricks...if the rules don't work in your favor, you get 'em changed.

Silver crashed...from over $50 at its intra-day peak, to below $10 less than two months later. The Hunts went bankrupt and Paul Volcker organized a $1.1 billion dollar loan to “prevent the very fabric of American finance from tearing apart.”

Could it happen again? Send us your take at editorialfeedback@dailywealth.com.

- Tom Dyson



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