Toll Brothers by Malcolm Berko on Creators.com

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Toll Brothers

Dear Mr. Berko: I think the housing industry is coming back because the recession is over and want to buy 300 Toll Brothers shares. I was told by my broker not to buy Toll Brothers stock because Robert Toll, the founder and CEO, sold all his stock in September of this year at $22 a share. He says when a CEO sells all the stock in a company he owns that this is a bad sign for the company's future. He suggested that I buy 200 D.R. Horton and 200 Pulte Homes instead of the 300 Toll Brothers. What do you think? Is my broker right? Should I buy Horton and Pulte instead? E.W., Elkhart, Ill.

Dear E.W.: Robert "Little Daddy" Toll didn't sell all his stock; he only sold 4.4 million shares for about $86 million dollars. He and his brood still own 14 percent of the company founded by Big Daddy in 1968. Little Daddy is 68 years old and I think he suspects that the price of Toll Brothers (TOL — $20.03) may have moved too high too quickly and doesn't deserve this multiple. However, TOL probably has the strongest balance sheet in the homebuilding sector, a book value of $19 a share, over $2 billion in cash and debt that is only 38 percent of capital. TOL is a strong company, darn well managed and the Tolls may be among the wisest people in the business. And when wise people sell 4.4 million shares of their company stock, you can safely wager fists full of hundred-dollar bills to a barrel of pennies that Little Daddy Toll, whose eyesight is 20/20, sees what's on the horizon more clearly than the investors who moved his stock from a low of $13 to $23.

Now, while I deeply respect Ben "Gentle Ben" Bernanke, I'm not as sanguine as he that the recession is kaput, but I'm taking comfort in my worry beads and pray that he's right. Still, there's an elephant in the room, which everyone is tiptoeing around as if the beast doesn't exist.

And everything will continue to be fine as long as it doesn't have a bowel movement. But when it does, the molecular harmony will be challenged by a strong and negative dissonance. That recession may be over, but as unemployment continues to increase, fewer and fewer consumers can afford to own a TOL home. And frankly, fewer and fewer consumers can afford to own a Horton, a Pulte, a Ryland, a Hovanian, a Beazer, a Standard Pacific or a Lennar home. The reasons are not the record number of foreclosures, the huge number of existing homes for sale or the unwillingness of banks to issue new mortgages. I think Little Daddy thinks that consumer income has been flat for the last eight years and that the consumer lacks the income to purchase a new home.

And I think Little Daddy is as right as nine pence and trivet. With a solid 10 percent of the workforce unemployed and many who are employed making less than they did four years ago, new home sales don't appear appealing. And fewer working consumers translate to lower corporate revenues, making this sector more dismal. Corporations will continue to cut costs and reduce employment to balance their financial keel. That translates to lower personal earnings and/or more job losses. So banks are reluctant to lend and the few consumers who can afford a $300,000 home are reluctant to buy, fearing they may be downsized.

I think those green shoots everyone has been talking about need a lot more water, fertilizer and sun. The recession may be over, but that doesn't mean everybody will be employed again by year's end, that corporate revenues will return to their 2004, 2005 and 2006 levels or that your IRA or home value will return to the 2006 or 2007 levels. The rampant prosperity of the past is the punishment of the future, and recovery is years away. Little Daddy was right to sell his shares and I don't think the homebuilding industry is coming back this year or next.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.