The major indices continued to rally into the close Monday, after spending most of the day down substantially. The Dow ended the day up fractionally and the S&P 500 was down less than one point. Institutional money continues to enter the markets, says Jim Cramer, and that has limited the size and duration of pullbacks.
Even as the uncertainty comes out of the markets, the clarity that replaces it is tepid at best. But with the S&P 500 resting at seven-month highs, one troublesome sector has badly lagged: housing and home-building stocks.
After hitting a low three months ago, the SPDR S&P Home builders ETF (NYSE: XHB) rallied 70% off the bottom during the next two months, far outpacing the broader markets. That gap has since narrowed, with the XHB down 10% in the last month even as the S&P 500 is positive.
The phenomenon has been felt across the industry; buildings products companies, like wallboard manufacturer USG (NYSE: USG) and flooring company Mohawk (NYSE: MHK), staged impressive rallies from the March lows to the May highs of 300% and 200%, respectively. They now join a handful of major home-building stocks, including KB Home (NYSE: KBH) and Pulte (NYSE: PHM) that are off 10% to 30% since the group peaked in early May.
While home-building stocks have struggled, the Financial Select Sector SPDR (NYSE: XLF) is just below recent highs near $13. This symbolizes the current conundrum facing the Federal Reserve: lower mortgage rates are needed to spur the housing market and help work-off excess inventories, but banks need large interest rate spreads to increase earnings and recapitalize their balance sheets. With mortgage rates ticking up into the mid-5% range after temporarily dipping into the high 4%s, traders may be making the appropriate sector rotation bets, but it begs the question: should they be betting long at all right now, with the potential for a nascent recovery in housing to be squeezed out?
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Reader Comments (Page 1 of 1)
6-09-2009 @ 4:36PM
william lindblad said...
Anyone that expects a recovery in real estate, both residential and commercial, will be in for a wait - a long one.
As you state, from the Fed and most economists views the answer is lower rates/cheap money and if the bank balance sheets were not in their current shape this would be the logical approach. The main problem is that logic and reason won't work in a gold rush and greed driven atmosphere. That is how we got here. This whole mess is unique and new and cannot be compared to past economic fiasco. While all of the noteworthy economic wizards keep trying to relate present events to those of the past, the one factor that shoots all theory to hell is that this one is world wide. Real estate problems are all over the world. True, we are the starting point and certainly have the most, but the rest is massive also and that does not include all of the fancy named mortgage backed securities that were peddled worldwide and are now worthless paper.
With this mind I think it safe to conclude that the major homebuilders along with the product line suppliers and eventually the big retailers, will be hard pressed to show a profit. Lowes and the Depot are doing OK with the garden centers and people doing repair and replacement. As the paychecks both dry up and become in question this activity will be on vacation also. The unemployment rate is fast approaching 10% and new job creation is nowhere to be found. Simple answer - we got problems.