Investment Contrarians

housing starts

Why It May Be Time to Walk Away from the Housing Sector

By for Investment Contrarians | Aug 30, 2013

Housing SectorI’m sure you are not surprised to see the housing market continuing to move lower. After several strong years of recovery in the housing market, during which home prices rose and home starts and building permits moved higher, we are now facing some hesitancy in the housing market.

As many of you know, the housing market has been propped up and driven by the Federal Reserve’s quantitative easing policies. But with the easy money eventually drawing to a close, we are seeing some heightened fragility on the charts.

The reality is that mortgage rates are continuing to rise, which we know is counterproductive to any recovery in the housing market. The rate on a 30-year mortgage now sits at 4.8%, according to the Mortgage Bankers Association (MBA). Moreover, with the Fed looking at paring down its bond purchases, more upward pressure will be placed on bond yields and mortgage rates.

And you know what happens when mortgage rates rise: they kill the recovery in the housing market.

The MBA also said that the higher rates have resulted in a decline in mortgage applications for the third straight week.

The steady rise in housing starts and building permits appears to be flattening as rates rise, and developers see demand potentially declining on the horizon.

Take a look at the chart below of the S&P 500 Homebuilders Index. Notice the bearish descending triangle on the chart since the index’s peak in May. We have seen lower highs and lower lows capped by the recent breakdown at the support level, as shown by the horizontal blue line in the chart below.

SPDR S&P Homebuilder Chart

Chart courtesy … Read More

Fed’s Easy Money to Cause Next Financial Meltdown

By for Investment Contrarians | Mar 14, 2013

Easy Money to Cause Next Financial MeltdownThe Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.

Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.

Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.

Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.

Here’s the dilemma:

The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … Read More

Is a Bubble Developing in Housing?

By for Investment Contrarians | Feb 28, 2013

Bubble Developing in HousingRecently in these pages, I talked about how the government, the Treasury, and the Federal Reserve were creating an artificial economy that was supported by cheap money and low interest rates.

One of the major benefactors of this cheap money was the housing sector, which is now sizzling hot. The median price of an existing home in the U.S. was $173,600 in January, up 12.3% from an average of $154,600 a year earlier. (Source: United States Census Bureau web site, last accessed February 27, 2013.)

Driving the renewed buying in the housing sector has been the environment of near-zero interest rates. The Federal Reserve has been injecting additional liquidity into the economy and mortgage market via its $85.0 billion in monthly bond purchases. The problem is that the low interest rates and easy money have driven the excess buying of homes and investment properties, as speculators jump into the housing sector, looking for deals and driving up home prices.

My concern is that the buying may be creating another potential bubble in the housing sector. You may not believe it, but I view this as a possibility. Housing starts in January showed some stalling. And now, with the sequestration budgetary cut set to take effect tomorrow, the automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade) could have a widespread impact on the country and the economy, including program cuts, job losses, and economic chaos. The Congressional Budget Office (CBO) has warned that the U.S. economy could contract by 1.3% in the first half of this year if the sequester is … Read More

Why America’s Confidence Is Fragile

By for Investment Contrarians | Feb 13, 2013

America’s Confidence Is FragileThe recession is over, and the U.S. economy is showing some encouraging signs of economic renewal.

Shoppers are hitting the malls and stores, helping to drive up retail sales. I’d stick with the top department stores, like Macys, Inc. (NYSE/M), or discounters, such as Wal-Mart Stores, Inc. (NYSE/WMT), which will continue to rebound.

The housing sector has been sizzling since the recession, with a superlative rise in housing starts, building permits, and home prices. Homebuilder stocks, including the developers of residential real estate, are sizzling on the charts—Toll Brothers, Inc. (NYSE/TOL) and Hovnanian Enterprises, Inc. (NYSE/HOV), especially.

Since the recession, the jobs market is showing some growth, with the unemployment rate holding just below eight percent. As the jobs market recovers, look to some of the staffing companies, such as Robert Half International Inc. (NYSE/RHI), Manpower Inc. (NYSE/MAN), and Kelly Services, Inc. (NASDAQ/KELYA), to deliver.

So, America appears to be headed in the right direction since the recession hit; but underneath all of the economic jargon and positive media headlines about the “Great Recovery” in America’s economic engine, there’s still a sense that many people are still trapped in economic despair, feeling the impact of the recession.

After scanning through “Diminished Lives and Futures: A Portrait of America in the Great-Recession Era,” I can see that uneasiness and worry remains a real issue in the minds of Americans. (Source: Szeltner, S., et al., Worktrends February 2013, Rutgers, The State University of New Jersey web site, last accessed February 12, 2013.)

Some of the key findings of the research were as follows:

• About 90% of the respondents remained worried about … Read More

Is the Housing Market “Home Sweet Home?”

By for Investment Contrarians | Jan 21, 2013

Housing Market Is “Home Sweet Home"It was extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall how easy it was to get a mortgage without even having to provide an income or work history to the lenders. When an entry-level worker at McDonalds Corporation (NYSE/MCD) can get a mortgage with no questions asked, you have to wonder how long it might be before a housing bubble surfaces.

Luckily, after several years of the housing market being dragged through the mud, the current situation has vastly improved to the point where housing stocks are hot.

The declining mortgage rates have helped. The $40.0 billion in mortgage-buying by the Federal Reserve each month has driven down the cost of interest rates to record lows.

More people are working now, and with the jobs picture improving (albeit, at a slow pace), I expect the housing market will continue to strengthen.

Wherever you live, it’s clear the housing market is displaying much-improved industry metrics. We just saw another strong housing starts and building permits reading.

In December, there were an impressive 954,000 annualized starts, which is above the estimate of 880,000 and November’s 851,000.

Also lending support to the housing market recovery was a strong building permits reading of 903,000 in December, beating the estimate of 880,000 and September’s 900,000. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode well for homebuilder stocks.

Home prices, representing another key piece of the housing market, are edging higher, with the S&P/Case-Shiller U.S. Home … Read More