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TWST: Let's start, Barbara, with what you include in your coverage of the building materials sector at Arnhold & Bleichroeder.

Ms. Allen: I follow a wide variety of companies, all 25 of which are tied to the housing and construction cycles... I also cover the traditional “deep cyclicals” like gypsum wallboard, cement, concrete, and aggregates producers.

TWST: Are there common threads that drive these sectors, other than their relationship to the building market?

Ms. Allen: Yes, there are some. New housing demand is a crucially important determinant of business for all of these companies. I keep an eye on that through my coverage of the traditional homebuilders and manufactured housing companies. Public works is a major component of demand for the cement and aggregates companies. Funding for those kinds of projects is provided by both the federal and state governments, and, while obviously tied to economic activity, it runs on a different cycle from housing. Repair/remodeling activity, both by the consumer and by commercial entities, has become an increasingly important part of demand. Even the traditional commodities products like wallboard are generating perhaps half of total business from remodeling. These activities are driven by housing turnover (resales of existing homes, comprising about 80% of all title transfers per year) and consumer confidence, especially as related to job stability. You can see that they're all related to the economic cycle, but each subsector has slightly different nuances when analyzing supply and demand.

TWST: Tell us what you expect to see as far as consolidation as well as what would make sense to you.

Ms. Allen: Mohawk (NYSE:MHK) has expanded through about a 50/50 blend of acquisitions and internal growth, but as I said, this year I expect them to concentrate on paying down debt, given their 45% debt -capital ratio. Examining their 10 to 15-year history, one sees that ratio as the peak, followed by assiduous debt reduction in the next year or so.