07/17/13   Housing Blip

Editor’s Corner

Ron Rowland

The housing market recovery was dealt a huge setback in June.  Housing starts dropped 9.9% for the month to an annual rate of just 836,000 units, the lowest level in 10 months and more than 62% below last decade’s peak.  Much of the improvement in housing the past few years has been in the multi-family segment, or housing for renters.  However, in June, multi-family starts plunged a whopping 26.7%.  Additionally, multi-family permits dropped 21.6%, extinguishing hope that the June number was a one-month glitch.

Rising mortgage rates are catching much of the blame for the falloff in housing.  Indeed, the average interest rate on a 30-year fixed mortgage has jumped from about 3.5% to more than 4.6% the past two months.  In past recoveries, rising mortgage rates have tended to spur purchasing activity as homebuyers rush to lock in low interest rates.  As we’ve said in the past, this recovery is different in many respects.

It’s not all gloom for the housing market.  In fact, there are still many bullish data points.  On a year-over-year basis, both housing starts and permits are showing double-digit growth, even when June’s dismal numbers are included.  Furthermore, the housing backlog is 20.5% higher than a year ago and builder confidence posted an increase.  All this leads many analysts to proclaim that June was nothing more than a temporary blip in housing activity.  Homebuilder stocks seem to agree and are higher today than a week ago.

The Fed’s beige book, released earlier today, also suggests housing activity is stronger than the June reports indicate.  The Fed was mostly positive on the housing market, noting that residential real estate and construction increased at a moderate to strong pace in all districts.  This continues to stimulate manufacturing in several districts.

Housing was also a topic today in Fed Chairman Bernanke’s testimony on monetary policy to the House Financial Services Committee.  “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully,” he said.  Analysts will be looking closely for any changes in his words tomorrow when he is before the Senate.

Investor Heat Map: 7/17/13

Sectors

All sectors benefited from the market rally of the past week, with the bottom three moving back into positive trends.  Consumer Discretionary holds on to its top billing, as autos and leisure provided good gains.  Telecom jumped from fifth to second as merger and acquisition activity spurred the sector to new 5-year highs.  Financials slipped to third even though big banks are reporting record profits.  Health Care is in fourth, buoyed by outstanding performance from the biotech segment.  Industrials hit a new all-time high this week, allowing the group to remain in the upper half of our rankings.  Technology, Consumer Staples, and Energy are performing well, although they have been unable to climb very far in the rankings.  Utilities, Materials, and Real Estate resumed their upward trends but still haven’t recovered their May and June declines.

Styles

The top seven Style categories are ranked in the same relative order for the third week in a row.  Micro Cap has been providing the leadership for a number of weeks and has expanded its lead over second place Small Cap Growth.  Both Micro Cap and Small Cap Growth are posting higher momentum scores than any of the Sector or Global categories, a feat not often accomplished among the Styles.  Mid and Large Caps still lag, and Mid Caps seem to have a slight advantage over their larger brethren.  Mega Caps have moved to the bottom, pushing the entire lineup closer to inverse capitalization perfection.  There is no consistent advantage between the Growth and Value segments.

Global

Our Global rankings had only two regions in positive trends a week ago, but the count has improved to seven today.  Japan maintains its top ranking, and the U.S. is firmly nestled in second place.  Most developed markets moved out of negative trend territory with World Equity, EAFE, U.K., Europe, and Canada all joining Japan and the U.S. on the upside.  Pacific ex-Japan is the one developed market region that has been unable to extract itself from the negative vibe of the emerging countries and regions.  China and Emerging Markets posted spectacular weeks, but they have been in such steep negative trends that it’s going to take much more than a week or two to get things turned around.  Latin America managed to produce a small improvement this week, although it significantly lagged the gains of China and Emerging Markets.  As a result, Latin America finds itself even more isolated from the rest of the world in this week’s rankings.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“I think we’re just at the beginning of the [housing] recovery. I think it will continue for four to seven years. It’s not too late to get involved.”

John Paulson on 7/17/13, famed hedge fund manager who made a fortune shorting the housing and mortgage markets a few years ago


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