From Dan Ferris in the S&A Digest:

I'd hate like hell to be a homebuilder stuck with lots of inventory right now. Unfortunately, that seems to be the position most of them are in... Toll Brothers, Ryland, Meritage, D.R. Horton, Lennar, M/I Schottenstein, and Pulte all have inventory valued higher than their equity. In other words, a writedown to inventory will destroy a large portion of shareholders equity.

Some are in really miserable straits: Beazer has inventory valued at nearly nine times its equity. Standard Pacific and KB Home have more than three times their equity in inventory. NVR and MDC Holdings are much better positioned, with 0.3 and 0.5 times equity worth of inventory, respectively.

I've never stopped telling my readers to avoid banks and homebuilders. Through the rally since March, that looked like a mistake. I say screw the rally. A 50% rise in share price just makes them better short-sale opportunities. Nearly all the major homebuilders are now trading at premiums to book value, even though their equity value is about to take it on the chin. The rally has raised the prices of stocks, bonds, and other paper assets, but it hasn't made the homebuilders' inventory any more valuable.

Crux note: Dan Ferris is the editor of Extreme Value, and he's currently recommending a true rarity in the gold industry - a deep-value gold stock with the very real potential to return 28 times your money. To learn more, click here...

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