Toll Brothers, Aug. 23, 2006

“Housing Slump Proves Painful for Some Owners and Builders”:

“‘It would be difficult to characterize the position of home builders as other than in a hard landing,’ says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported that net income fell 19% in the third quarter ended July 31.

“In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. ‘I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy,’ he says. ‘This time, you've got low unemployment, you've got job creation, you've got a stable stock market, and relatively low interest rates.’ ”

It seems a dose of reality is needed for Robert Toll as well. The macroeconomic connection missed by Robert Toll is that housing was and is in a bubble and bubbles pop. As for “low unemployment and job creation,” it should now be obvious to everyone that the reason they were low was because an overheated housing bubble was creating jobs until the bubble popped. The reason you have not seen a downturn like this before is because you have not seen a national housing bubble like this before. Let's now turn our focus to the Question of the Day.

Does Greed Have Bounds?

“Propitiously Timed Grants Helped Karatz Collect More Than $100 Million”:

“Several past stock option grants to Bruce Karatz, the highly paid chief executive of KB Home, were dated at unusually low points in the home builder's stock price, and the company said it has commenced a review of the awards.

“Four grants to Mr. Karatz between 1998-2001 were propitiously timed. One was dated at the stock's lowest closing of the year, another at a quarterly low, and the remaining two at monthly lows. That pattern raises questions about whether the grants were made on the fortunate dates specified in company filings.

“Mr. Karatz has reaped more than $100 million from cashing out many of the unusually timed options, according to regulatory filings.

“Caroline Shaw, a spokeswoman for KB Home, said in a statement following inquiries from The Wall Street Journal that KB Home ‘has been reviewing these grants with the assistance of outside counsel. Because they are the subject of pending litigation, we will not comment on them’…

“Last month, a shareholder filed a lawsuit in Los Angeles County Superior Court against Mr. Karatz and other KB Home officers and directors, alleging that executive grants had been manipulated to carry the dates on which the stock was particularly low…

“Backdating can lead to civil and criminal fraud charges, as well as a litany of accounting and tax troubles. Earlier this month, federal prosecutors charged three former executives of Comverse Technology Inc. in a backdating scheme; one remains a fugitive. Two former officials of Brocade Communications Systems Inc. have also been criminally charged with backdating-related offenses.

“The stock option grants at KB Home could complicate efforts to untangle stock options timing problems at another company, UnitedHealth Group Inc. The chairman of KB Home's compensation and stock option committee from 1995-2000 was James A. Johnson, who also serves as a UnitedHealth director. UnitedHealth Group is facing a criminal and civil investigation into a series of stock option grants to its chief executive, William McGuire, as well as to other senior officers…

“Mr. Karatz's grants at KB Home regularly dwarfed those given to any other executive. In 2000, for instance, he received 500,000 options -- 30.9% of all the options granted to the company's employees. The grant was dated Oct. 13, 2000, the lowest closing price of October, and just ahead of a leap in KB Home shares that took them up more than 20% in a month.

“In 2004 and 2005, he exercised all of those options, pocketing profits of about $54 million.

“Another grant, for 450,000 shares, was dated Oct. 25, 1999, the day the stock reached its lowest closing price of the year. Those options accounted for 20.1% of all grants to employees. Grants to Mr. Karatz prior to 1998 generally exhibited unremarkable timing.

“Mr. Karatz was one of the highest-paid executives in the U.S. in 2005, according to The Wall Street Journal's annual survey of executive compensation. His total direct compensation in 2005 was $155.9 million, the bulk of it coming from exercising options, according to the Journal report. Mr. Karatz continued to own stock valued at $132.6 million as of Nov. 30, the fiscal year-end for the company.”

Eventually the market has to balance out the tops and that leads to bottoms. The market is a zero sum game with alot of twists and turns. So come this Labor Day be careful for your portfolio.