Home Builder Confidence Weaker; Supply Side Still an Issue

The National Association of Home Builders/Wells Fargo Housing Market Index missed consensus expectations by two points, slipping to 59 against the Bloomberg projection of 61.  The index had held steady at 58 for several months before leaping to 60 in June.  While an index above 50 shows that builders are optimistic about single-family housing, there are still some underlying issues in the industry that are keeping that optimism in check.

The ratio of new homes to resold homes has dropped to 1.2:1 from a high of 2:1 in the 1970s.  There are numerous factors involved, however as more and more homeowners exit an inverted status that resulted from the real estate crash, that ratio will likely drop even further.  Home sales and housing prices have increased dramatically in recent months due to the continued low interest rates.  This will increase pressure on the industry when rates finally start to normalize, although at this point we're likely looking at mid-2017 before there's any change of significance to the 30-year.

According to Ed Brady, chairman of the housing market trade group, “We are still hearing reports from our members of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor.”

Supply side problems have been a consistent theme throughout 2016.  Fannie Mae Chief Economist Doug Duncan lamented in February, "The supply from the builder perspective is just not back to normal. It's up from last year, but it's still below what long-term demographics would suggest, particularly in the lower price points of housing."

Not all regions have fully recovered from the housing crisis, and underwater mortgages coupled with long foreclosure timelines continue to add pressure to the overall supply side of the equation.  With demand continuing to rise, housing prices will also continue to experience a steady increase.  That will aid homeowners still struggling from upside down mortgages, but it certainly will not assist new home builders.  Add the prospect of interest rate hikes in 2017 to the mix, and my expectation is a weakening of the overall Home Builders Index as 2016 progresses.

All of this is good news for the home improvement industry, of course.  Companies like Home Depot (NYSE:HD) and Lowes (NYSE:LOW) will continue to benefit as homeowners choose to maintain and refurbish their properties rather than trade up to new properties.

Housing Starts are released tomorrow at 8:30 AM EDT.  That report should paint a more complete picture since it deals with the actual start of construction as well as the actual number of new permits in flight.  Consensus estimates for Housing Starts is 1.170 million, up from 1.164 million, and for Housing Permits it's 1.150 million, up from 1.138 million.  It's important to note, though, that the rate of new permits has been weakening year over year, adding to the overall struggles in this industry.

Keep an eye on the performance of these three numbers (Housing Market Index, Housing Starts, Permits) over time.  They each have a direct impact on the overall performance of the stocks in the Home Improvement Retailers Industry.  While we, as short term traders, do not focus on the fundamentals, knowing the overall pressures on the stocks in a particular industry does give us that slight edge we need over the competition.

Happy Trading

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:

• Sales at retailers and restaurants rose 0.6%.
• Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
• Sales of building materials and gardening supplies were up 3.9%.

With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally.