It's been quite some time since I posted Lance Lewis. It's a good read tonight.
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TOL Coughs Up A Hairball
Asia was mixed overnight. Japan lost a touch, while Hong Kong bounced a touch. Europe was off just a touch this morning, and the US futures were also lower after homebuilder TOL was forced to guide down, which appeared to turn on light bulbs in a few people’s heads that maybe there was in fact a problem developing in the housing market (more on that below).
We opened down in the S&Ps and slid back to Friday’s lows, where some buyers appeared for whatever reason and proceeded to rally us all the way back up to virtually unchanged (filling the opening gap). We then quickly had a flameout and spent the rest of the session sliding back to just shy of the lows for the day, which was also basically we closed. Volume was about flat with yesterday’s pace (1.4 bil on the NYSE and 1.6 bil on the NASDAQ). Breadth was slightly negative on both exchanges.
The chips were chased for most of the day because I suppose some people were still busy trying to load the boat with beta for the big year-end rally that Heehaw keeps telling us is every American’s birthright. By the close, however, the chips were mostly flat to lower by a percent or so. The equips were also strong early on but have up most of their gains to end flat to up a percent or so. The SOX fell just a touch.
DELL slipped 2 percent and back to last week’s lows, while CSCO was flat ahead of its earnings tomorrow after the close.
The rest of tech was mostly lower, and a few of the Internuts were hit particularly hard. NTES, for example, (which is one of the Chinese Internet gaming stocks) was beat for 22 percent after it failed to meet lofty expectations and warned that competition was increasing. Competition in an industry where there are little or no barriers to entry? Shocking isn’t it?
The financials were mostly lower. The BKX and XBD both fell half a percent. The derivative king fell a percent. BAC fell a hair, and C rose a touch. GE fell a percent.
GM fell over 3 percent and back to just shy of its recent October low. AIG fell a percent. ABK fell half a percent, and MBI fell over a percent. The mortgage lenders were down 2 to 3 percent across the board, as TOL’s news finally appeared to get a few people’s attention in the mortgage finance area. FRE and FNM were both off a percent.
The retailers were mostly lower, with the RTH falling nearly 2 percent. TGT fell 2 percent, and BBY fell over 3 percent. The housing stocks and retail stocks continue to track together on the charts (see the daily HGX housing index plotted over the RTH retail index for the past 6 months here). Why is that? Because the housing bubble drives consumer spending, and consumer spending is 70 percent of GDP. In other words, the housing bubble is the economy, and the market appears to recognize that fact, which is why I continue to believe: “The housing bubble is all that really matters.”
The homies were all down between 5 and 10 percent, although TOL bested them all with a 14 percent collapse after the company warned this morning that 2006 earnings and revenue would likely fall below its prior guidance. TOL noted a “softening of demand [my emphasis] in a number of markets”. TOL tried to put a positive spin on the news by saying, "It appears we may be entering a period of more moderate home price increases, more typical of the past decade than the past two years." A period of “more moderate increases”? A period of declines in home prices is probably the more appropriate wording, because that’s what we’re already seeing in most major markets.
The fact is that there must have been some serious acceleration in the deterioration of TOL’s markets just in the past 30 days because TOL’s CEO was quoted in early October as reassuring people that TOL’s business would remain on track with its projections well into 2007. Obviously, something has recently changed. TOL blamed weak consumer confidence due to Hurricane Katrina and rising energy prices. As we’ve noted though, the funny thing is that energy prices are below their pre-Katrina levels and the hurricanes have long since past. What TOL doesn’t seem to realize is that the peaking of the housing market this summer and the lack of its economic stimulus is what has in fact turned consumer sentiment down, and it’s now a self-reinforcing phenomenon. The housing market weakens, and then consumer sentiment weakens, which only weakens the housing market even more and so on.
While TOL’s problems shouldn’t be news to anyone given all the evidence of a peak in housing that we saw this summer, it is the first large national homebuilder to fall on its face and not tell us that the future is so bright that we all need shades. So, that’s important from a psychological standpoint. Before, people could sort of “hope” that everything would be OK and that the housing market would maybe pick up again. After what TOL said today, that sort of delusional behavior gets to be a little harder for most grown adults to participate in (although I would note that multiple analysts were out this morning saying TOL’s news was “company specific”).
Yea, it must be company specific after ZIPR said last week that housing inventory was rising rapidly in all of its markets and that median selling prices had been falling for the past two months nationwide. Then we have these stories appearing in newspapers around the country every single day: LA Home Prices Take Dip In October, Foreclosure rate soars in Massachusetts, San Diego prices down 6% from Sept to Oct, etc that cite rising inventories and declines in home prices nationwide. Yes, clearly the weakness in the housing market is TOL specific. Obviously, I am being sarcastic, but you can see how silly statements like “this is company specific” are.
The fact that people are just now clueing into the fact that maybe there is a problem in housing is a testament to the ability of today’s equity managers to believe absolutely anything, as long as it’s bullish. It also highlights the fact that nothing has really changed since 2000 as far as psychology goes. Even though the handwriting was on the wall as after the NASDAQ crashed in Q1 of 2000, it took horrific news out of corporate America in November and December of 2000 in order to finally clue people in to the collapse that was occurring in technology and business spending. So far, we appear to be seeing the same phenomena with housing and the consumer.
Crude oil rose 24 cents to $59.71. The XOI rose nearly a percent. The XNG was flat, and the OSX rose nearly a percent. The JOC rose half a percent, and the CRB rose just a touch. The XLB fell half a percent. Recall back in 2002 when the dollar topped in Q1 and began to fall, and commodities as well as gold and its shares all began to rally. The word on everybody’s lips back then was “deflation”. Now, here we are 3 years later, with the dollar having rallied for nearly a year, short-term interest rates having quadrupled, commodities appearing to have topped in September/October after experiencing one of their longest bull markets in history, the gold shares being in basically a bear market for 2 years, and all anyone is talking about is inflation. Ironic isn’t it?
Gold opened flat this morning in the US and proceeded to rally to as high as $463.80 before giving up a touch into the close to end up $1.90 to $462.30. Interestingly, gold was actually lower overnight but appeared to rally when TOL’s news hit at 5 AM EST this morning. My guess is that people were placing bets that the Fed would now stop and maybe even begin to ease because TOL’s news was concrete evidence that there was a problem in housing. Unfortunately, I think these people going to be disappointed once again, as has occurred several times this year when this sort of bet has been made.
The HUI slid a third of a percent despite the rally in the metal, which is bearish. If the rally in the broad equity market has now failed as of today, it’s likely going to produce a drag on the gold shares as well, while gold will likely continue to trade with commodity sector, which at the moment appears to be poised for a significant demand-based correction in my view. In other words, I suspect both gold and its shares have more correcting to do.
The US dollar index began the day up half a percent but slipped back to just up a touch. The yen rose a touch, and the euro fell a touch. Heehaw will tell you that the euro is weak because of the riots in France (do you find that one as humorous as I do?), but the real reason for the dollar’s strength of late continues to be the same as the reasons that we cited back in January for the dollar to likely experience a bear market rally:
1) Favorable interest rate differentials as a result of the Fed raising interest rates.
2) Large dollar short positions that are still being squeezed.
3) US corporations repatriating earnings held in foreign currencies due to the Homeland Investment Act.
4) Unwinding of dollar-based carry trades.
I’m not suggesting that we should be fundamentally bullish on the dollar, but as we have said for some time, these continue to be reasons why the dollar could experience a bear market rally of some size and potentially a lengthy duration. And it could still have further to go. A look at the following weekly chart of the US dollar index reveals that technically (and technicals are extremely important to forex traders) the dollar index is breaking out of a large 2-year base on the charts and could easily rally back to its 200-week moving average at minimum, and yet still be within a secular bear market (much like stocks have done over the past two years). At some point after Mr. Confetti (Bernanke) takes over for Uncle Al next year, I suspect the dollar is going to run into trouble once again and begin another leg down, but for now, I’m going to continue to give it the benefit of the doubt.
Treasuries rallied in the long end on the back of the news out of TOL, as the yield on the 10yr fell to 4.54%. The 2/10 spread narrowed 3 bps to just 14 bps, as the curve has begun to flatten once again. A housing bubble implosion is extremely deflationary, and up until the point that the Fed reverses course and begins to “drop money from helicopters”, the bond market could see a big rally as a result.
The 10yr junk spread to treasuries narrowed 1 bp to 303 bps.
TOL’s news appeared to give us a reversal in the equity market today, which proves once again that even a blind squirrel like myself finds an acorn every now and then. The question now becomes “how smart are they?” In other words, will TOL’s news be the wakeup call for the market to connect the dots and begin to discount the inevitable recession that is going to result from the housing market peaking, as has occurred after every major US housing market peak in the post-WWII era (see the following chart of US private residential investment as a percentage of GDP and US recessions)?
Or, will we have to have more and more bad news come out before equity investors finally start aggressively selling stocks? After all, as we’ve pointed out with a chart of consumer confidence run over the S&P, a precipitous decline in consumer confidence is rarely a good thing for the stock market or the economy, but this stock market has managed to stick its head in the sand regarding that fact as well.
My own guess is that because of the positive seasonal tendencies and the fact that today’s risk/reward ratio for most money managers favors always being overweighted in stocks rather than be underweighted and potentially miss out on a rally and lose one’s job, the market may “hold together” to some extent and not go down “well” between now and year-end, but that the rally in the S&Ps still likely failed today.
As more bad news from the housing market and the consumer surfaces over the next couple months, those sectors (along with mortgage finance) could still get crushed, but the market as a whole may continue to play “pretend”, as people simply rotate around among different sectors and the market as a whole moves sideways to down, as has been the case in the Dow and OEX for nearly 6 months now. Or at least, that’s going to be my assumption until I see something different (like aggressive across-the-board selling). |
