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BREAKING NEWS
November 14, 2006
Ex-KB Home Chief Reaped Big Riches in Boom
The resignation of KB Home's long-time chief over backdated stock options grants is focusing renewed attention on the big riches that home-building executives reaped in recent years.

Few people have ridden the housing wave as successfully as former KB Home CEO Bruce Karatz and other heads of publicly traded home builders, whose business exploded from late 2003 until the end of 2005 as consumers armed with low mortgages rushed to buy homes in hot markets.

Since then, however, the sizzling housing market has slowed and home-building stocks have fallen.

Karatz took in nearly $45.6 million in the fiscal year ended November 30, 2005, including base pay, bonus, restricted stock and stock option grants, up about 29 percent from $35.3 million in 2004, according to data compiled by Salary.com, a compensation specialist.

KB Home's stock rose 39 percent in 2005, but shares are now down by about that same percentage so far this year as the housing market has cooled.

Karatz agreed on Sunday to repay the Los Angeles-based company, the fifth-largest U.S. home builder, about $13 million in gains he received from mispriced stock options.
Reuters


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Scandal Meter Flashing Hot in the Real Estate Sector
Category: REAL ESTATE
By: Pete Kendall, November 14, 2006

When bubbles burst, they invariably unleash a negative social response against the most aggressive and successful exploiters of the preceding advance. In the next phase of decline, it will pay to be mindful of the speed and scope of the retribution.
The Elliott Wave Financial Forecast, September 2006

This article seemed to me to perfectly fit the socionomic thesis. It describes how former KB Home CEO Bruce Karatz reaped riches during the housing boom. The article states that "the sizzling housing market has slowed and home-building stocks have fallen." It doesn't connect the slowdown to the greater scrutiny on Karatz and other homebuilder executive's compensation, but it certainly implies it.
--Joe B.

The Elliott Wave Financial Forecast’s anticipation of this story was discussed in the August issue (see Additional References below). The wealth grab just goes to show that “greed” is the right word to describe the emotion that takes hold at a top. The level of greed exposed as the financial crowd reverses toward the fear of a bottom is one way of measuring the scale of the decline. Karatz’s take of more than $45 million after a $35 million score in 2004 suggests that we have not heard the last of the housing bust.

martha and buddyIn an interesting side note, here’s a picture of Karatz with another bull market celebrity who got a little too greedy with the gains in her stock portfolio and ended up getting swallowed by the first leg of the bear market, Martha Stewart. Back in April, Karatz posed with Stewart when KB Home unveiled three model homes of their co-branded development, called Twin Lakes in North Carolina. Birds of a bull market feather, flock together. 

Additional References

September 2006, EWFF
Re-Recrimination Bears Down
After a brief reprieve in early 2004, a July 2004 EWFF piece considered the potential for “Phase II of the Recrimination Wave,” citing “subtle signs that the post-bubble backlash that accompanied the decline from 2000 has resumed.” Clear evidence of an even nastier renewal of the offensive against the most aggressive practitioners of bull market accounting practices, for instance, came in the middle of last year when WorldCom and Tyco’s executives were finally sentenced to up to 25 years in prison. Another stride came early this year as the NASDAQ 100 reached its peak, and Tyco, a conglomerate that was assembled through the bull market of the 1990s, announced a plan to split into three separate companies. The stock dropped like a brick on the news.

In the wake of the May highs, the rumbling turned into a torrent. Evidence of a new onslaught of recrimination includes the return of Martha Stewart bashing (“Everyone Hates Martha,” NY Post, July19); the criminalization of the “once celebrated practice” of creating millionaires out of Silicon Valley secretaries through backdating stock options (“Stigma Emerges, Glitter Fades for Stock Options,” San Jose Mercury News, July 23); and the Enron saga’s re-arrival on the front page (“Guilty Verdicts For Enron Brass,” May 25 Business Week). When Ken Lay died of a heart attack in July, The Houston Chronicle quoted the former Enron leader’s preacher saying that his “heart simply gave out.” But the extremely negative force of the unfolding decline will not let Lay lie in peace (pun intended). His memory continues to be sullied by an endless series of Internet speculation about his Elvis-like survival and a ruthless roasting by late-night comedians. We count numerous jokes about Lay’s eternal damnation, such as, “Don’t know if this is a coincidence or not, but Ken Lay died last week and today, Hell filed for bankruptcy,” from Jay Leno. Another sign of reputation trashing is the resumption of government attacks on Microsoft. The European Union just socked the software company with a $356 million penalty because it refuses to surrender the code to its Windows operating system to rivals. Microsoft faces additional fines of $3.82 million a day, beginning on July 31, unless it provides “complete and accurate technical specifications.” The socionomic motivation behind these “anti-trust” attacks was discussed fully in the May 2000 issue of The Elliott Wave Theorist and was applied to a recent wave of attacks on Google in these pages in February.

Of course, The Elliott Wave Financial Forecast called for the opening of whole new fronts of scandalous revelations in the next phase of the bear market, and it appears to be happening as advertised. We cited real estate and hedge funds in particular as likely focal points, and lengthening rap sheets in both fields suggests that they will in fact be hotbeds of scandal in the months ahead. Here’s the latest from Forbes, for instance:
Attack of the real estate Rip-Offs
Urge to cash in on the housing bubble has spawned an industry of schemers
—July 21, 2006

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ARTICLE COMMENTS
I continue to appreciate the informative and pragmatic comments from Elliot Wave International. The use of the gold price as a reference for measuring true value of a commodity or index which is usually valued in current dollars certainly shows how much paper is printed to value tangible assets. The US figures for total home equity debt since 1997 is a very clear warning of a reality check arriving very soon. Unfortunately it will be the mums and dads who will suffer the most pain.
Posted by: Robin Moseby
November 14, 2006 09:50 AM



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