It’s not that everyone wasn’t bracing for a bad New Home Sales report. The government stimulus required contracts be signed by the end of April. That should have left a huge hole for May, and it certainly did. What was unexpected was that April was revised down rather dramatically to 446,000 from 504,000. That’s a big miss. Then came May. Sales, or should I say “contracts” were down 32.7% to 300,000 units. Expectations were for 410,000. This was the lowest reading on record, dating back to 1963. The inventory, based in months’ supply, jumped to 8.5 from 5.8 months. The median price fell 9.6% to $200,900, the lowest since December 2003. Sales were down 53% in the West. Why was the number “not so bad”? The 300,000 was bad, no doubt. Expectations were for a decline of about 18%, not 33%. However, averaging out April and May, 373,000 New Homes were sold, about equal to the average from last year. Therefore, things aren’t really getting worse, although admittedly they are not getting much better either. Don’t forget that we typically see about 700,000 homes destroyed or condemned each year, so the pace of replacement has not kept up with the number of dislocated home dwellers. Although the inventory rate jumped to 8.5 months, it was all because of the sales side. The actual number of units in inventory fell to 213,000, the fewest number of new homes for sales since 1970. The drop in home prices is also due to the fact that you no longer get an $8,000 credit on your taxes. Of course you’re going to pay less for that same home. The Homebuyer Tax Credit was created to get viable buyers to help absorb some of the massive inventory. We saw inventories decline in both existing and new homes. The whole “shadow market inventory” hasn’t been absorbed, nor did we expect it to be accomplished this year. Housing is a 2011 story.
The market reaction to the housing data was initially negative. However, look at how well the very stocks of the companies most sensitive to these data performed. KB Homes KBH (+4.4%), Toll Brothers Inc. TOL (+2.5%), Pulte Group PHM (+2.1%), and Lennar Corp. LEN (+3.8%) bounced on this extremely negative number. All of these stocks had declined awaiting the news since their April peak, as investors discounted a massive slowdown in sales after April. However, the companies were well prepared, slowing down the construction of new homes to match that expectation. Investors looked at this as a long-term opportunity to buy this group bouncing off of a 6-month low. Even the closely tied home repair stocks, Home Depot HD (-0.4%) and Lowe’s Cos. LOW (+0.4%) held their ground in the face of adversity. If companies were to be devastated by the news, it should have been these companies. The overall market managed to bounce off of its low because these stocks handled the bad news quite well.
The Financials are still struggling their way through the murky waters of financial reform. The Senate negotiators dropped a proposal to require the banks to finance a prepaid fund of $50 billion in case of a collapse. Meanwhile, consumer protections were tightened. Up next is the so-called “Volcker Rule”. Some of the most controversial measures have been saved for last, as the Senate Democrats try to press for a July 4th deadline on presenting a financial reform package to Congress before summer recess. The S & P Financial SPDR, XLF, is still holding between the recent lows around 13.50 and the 200-day moving average at 15. Investors seem comfortable with this range until the details are finally hammered out.
Energy stocks didn’t get a reprieve after getting hammered on Tuesday. There was a question as to whether the New Orleans District Judge owned and had too much interest in several of the oil company stocks. This could weigh against this decision. However, it was the huge surprise build in crude by 2 million barrels that put pressure on the commodity, down 2.56%, and prevented the energy stocks from bouncing. Expectations were for a drawdown of 800,000 barrels. The weak economic news also pressured crude. The NYSE Arca Oil Index, XOI, was down 0.7%, which was a drag on the S & P. Energy and Utilities were the worst performing groups on the day. Banks were also near the bottom of the list. The other sector under pressure was Technology, which was modestly lower on the expectations that the economy isn’t really rebounding as well as one would hope.
Late in the afternoon, the FOMC released its official statement following a two-day meeting. The Fed maintained its commitment to keep rates extremely low for an extended period of time. That was certainly no surprise. “Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” Long-term inflation expectations remained stable. The change in tone was that housing remains depressed and that financial conditions were “less supportive of economic growth”. Perma-hawk Hoenig continues to favor a rate increase, but he stands alone. There was a bit of volatility after the FOMC statement, but the averages settled down and closed mixed on the day. That may not seem like much of a success, but I would say that the news has been exceptionally negative of late, and the technicals have been more negative than positive, yet the pressure to sell stocks at this level has been mild. The bulls still want a catalyst. The conservative outlook by companies reporting earnings on earlier fiscal quarters have offered little inspiration. However, huge cash positions, low inventory levels, and a stable economy (relative to Europe, anyway) represent an attractive option at this level.
It’s not that everyone wasn’t bracing for a bad New Home Sales report. The government stimulus required contracts be signed by the end of April. That should have left a huge hole for May, and it certainly did. What was unexpected was that April was revised down rather dramatically to 446,000 from 504,000. That’s a big miss. Then came May. Sales, or should I say “contracts” were down 32.7% to 300,000 units. Expectations were for 410,000. This was the lowest reading on record, dating back to 1963. The inventory, based in months’ supply, jumped to 8.5 from 5.8 months. The median price fell 9.6% to $200,900, the lowest since December 2003. Sales were down 53% in the West. Why was the number “not so bad”? The 300,000 was bad, no doubt. Expectations were for a decline of about 18%, not 33%. However, averaging out April and May, 373,000 New Homes were sold, about equal to the average from last year. Therefore, things aren’t really getting worse, although admittedly they are not getting much better either. Don’t forget that we typically see about 700,000 homes destroyed or condemned each year, so the pace of replacement has not kept up with the number of dislocated home dwellers. Although the inventory rate jumped to 8.5 months, it was all because of the sales side. The actual number of units in inventory fell to 213,000, the fewest number of new homes for sales since 1970. The drop in home prices is also due to the fact that you no longer get an $8,000 credit on your taxes. Of course you’re going to pay less for that same home. The Homebuyer Tax Credit was created to get viable buyers to help absorb some of the massive inventory. We saw inventories decline in both existing and new homes. The whole “shadow market inventory” hasn’t been absorbed, nor did we expect it to be accomplished this year. Housing is a 2011 story.
The market reaction to the housing data was initially negative. However, look at how well the very stocks of the companies most sensitive to these data performed. KB Homes KBH (+4.4%), Toll Brothers Inc. TOL (+2.5%), Pulte Group PHM (+2.1%), and Lennar Corp. LEN (+3.8%) bounced on this extremely negative number. All of these stocks had declined awaiting the news since their April peak, as investors discounted a massive slowdown in sales after April. However, the companies were well prepared, slowing down the construction of new homes to match that expectation. Investors looked at this as a long-term opportunity to buy this group bouncing off of a 6-month low. Even the closely tied home repair stocks, Home Depot HD (-0.4%) and Lowe’s Cos. LOW (+0.4%) held their ground in the face of adversity. If companies were to be devastated by the news, it should have been these companies. The overall market managed to bounce off of its low because these stocks handled the bad news quite well.
The Financials are still struggling their way through the murky waters of financial reform. The Senate negotiators dropped a proposal to require the banks to finance a prepaid fund of $50 billion in case of a collapse. Meanwhile, consumer protections were tightened. Up next is the so-called “Volcker Rule”. Some of the most controversial measures have been saved for last, as the Senate Democrats try to press for a July 4th deadline on presenting a financial reform package to Congress before summer recess. The S & P Financial SPDR, XLF, is still holding between the recent lows around 13.50 and the 200-day moving average at 15. Investors seem comfortable with this range until the details are finally hammered out.
Energy stocks didn’t get a reprieve after getting hammered on Tuesday. There was a question as to whether the New Orleans District Judge owned and had too much interest in several of the oil company stocks. This could weigh against this decision. However, it was the huge surprise build in crude by 2 million barrels that put pressure on the commodity, down 2.56%, and prevented the energy stocks from bouncing. Expectations were for a drawdown of 800,000 barrels. The weak economic news also pressured crude. The NYSE Arca Oil Index, XOI, was down 0.7%, which was a drag on the S & P. Energy and Utilities were the worst performing groups on the day. Banks were also near the bottom of the list. The other sector under pressure was Technology, which was modestly lower on the expectations that the economy isn’t really rebounding as well as one would hope.
Late in the afternoon, the FOMC released its official statement following a two-day meeting. The Fed maintained its commitment to keep rates extremely low for an extended period of time. That was certainly no surprise. “Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” Long-term inflation expectations remained stable. The change in tone was that housing remains depressed and that financial conditions were “less supportive of economic growth”. Perma-hawk Hoenig continues to favor a rate increase, but he stands alone. There was a bit of volatility after the FOMC statement, but the averages settled down and closed mixed on the day. That may not seem like much of a success, but I would say that the news has been exceptionally negative of late, and the technicals have been more negative than positive, yet the pressure to sell stocks at this level has been mild. The bulls still want a catalyst. The conservative outlook by companies reporting earnings on earlier fiscal quarters have offered little inspiration. However, huge cash positions, low inventory levels, and a stable economy (relative to Europe, anyway) represent an attractive option at this level.