For Whom the Toll Sells

Why are the Toll brothers selling their stock? Are they
selling to conduct "personal financial planning?" Or
because the housing market is topping out? Or because Toll
Bros., itself, is facing more challenging times? Or all of
the above?

We have no idea, but we are nevertheless intrigued by the
size and frequency of the recent sales.

Last month, the Toll brothers – the actual brothers, Robert
and Bruce, not the home-building company they oversee –
sold more than 2,000,000 shares of their company’s stock.
The sales netted them about $120 million – also known as
"real money."

We do not begrudge the Tolls their good (and very large)
fortune, but we would point out that insiders NEVER sell
because they expect conditions to improve.  That’s what
buying is for. If insiders are selling, should we outsiders
be buying? If the Toll brothers are selling, what fate lies
in store for the U.S. housing market?

To be sure, the housing market needn’t fall, merely because
Robert and Bruce Toll are lightening up on their stock
holdings.  But their hefty sales hardly inspire confidence.

Curiously, very few insiders at other home-building
companies are running for the exits.  Perhaps the Tolls
alone have good reason to sell, and not the insiders at
other home-building companies. Or perhaps the Tolls are
merely the FIRST to sell. In either case, we would not
consider these sales a favorable omen for home-building
stocks or for the housing market in general.

Even so, we would not dare to bet against home-building
stocks just yet. Selling short the homebuilders has created
a financial Gettysburg.  Wave after wave of courageous
short-sellers have assaulted the group only to tumble into
a gnarled heap upon their fallen comrades.  But if – we
repeat, IF – one wishes to wage war against home-building
stocks, Toll might be weakest flank.

"There’s a time to sow and a time to reap," the writer of
Ecclesiastes reminds us. And the time for reaping farm-
machinery stocks may be at hand.

In October 2002, the U.S. Producer Price Index (PPI)
increased for the first time in 12 months. This seemingly
inauspicious event marked an important turning point for
the nation’s industrial sector. Finally, they would begin
to enjoy the pricing power that had eluded them for so many
years.

The PPI has registered a year-over-year increase every
month since October 2002, in the process boosting the price
of producer goods by a hefty 10%. The PPI for foodstuffs
has increased at an even faster clip – up 20% since October
2002.

We should not be surprised, therefore, that the shares of
Caterpillar have been trending higher in harmony with the
rising price of foodstuffs. Because farmers and other
industrial producers have received rising prices for their
products, they have increased their investment in the types
of heavy machinery and equipment that "Cat" sells.

So it’s party time in Peoria! Caterpillar produced a
stellar 34% jump in second quarter earnings and predicts a
40% jump for 2005 as a whole. Investors have not failed to
notice the company’s improving fortunes. Caterpillar shares
have tripled over the last three years.

But maybe enough is enough, at least for the for the time-
being. You will note on the chart above that the PPI for
foodstuffs has begun to "rollover." Meanwhile, even though
corn, wheat and soybean prices have rallied occasionally
this year, they have not managed to sustain an advance.
Farmers, therefore, may be hesitant to continue buying new
machinery…for now.

Even though we expect the U.S. agricultural sector to
continue delivering investor-friendly results over the next
few years, we are less optimistic over the next few months.
Net-net, why not harvest a few shares of Caterpillar and
toss some extra dollars into the silo?