Vulturing The Housing Sector

Macroplay of the Week: Vulturing the Housing Sector

The ill-fated “Cisco Rally” of last Wednesday
put an exclamation point on the underlying weakness of the market: A top ten
Nasdaq gain, followed by a close total giveback.
The blow-by-blow is worth understanding.

Stage One: Cisco announces blow-out earnings, and some market participants
incorrectly see this as a much broader signal that not only is the economy
recovering but so, too, is tech spending. This
ignites a fever of tech-stock bargain-shopping, with semiconductors helping to
lead the way. A wave of short-covering
throws gasoline on the flame. Anchors at CNBC are all smiles.

Stage Two: More sober analysts quickly come to understand that the increase
in Cisco’s earnings are the result not of ANYstrong demand, but rather some very aggressive cost-cutting from a company renown
for its bloated operations.
Back to square one. Smiles turn to
the more perennial frowns at CNBC — what do these people care whether the
market is going up or down, but rather simply tell it like it is and let people
make money off that reality?

For the coming week, little has changed to change expectations that the economic
recovery will be either very weak or succumb to the double dip.
Until we see signs of a renascent consumer confidence, a rise in business
investment, or a stronger recovery in Europe and Asia to boost American export
demand and growth, what you see is what you get.
And lurking behind this is the dangers of a weakening dollar — which I
shall examine in next week’s column.

Lots of reports for the week: The press will make a big deal out of the Consumer
Price Index on Wednesday — but who cares about non-existent inflation at this
stage of the business cycle? Certainly not the market.
Here are our picks for key indicators for the week:

On Tuesday, the retail sales numbers fly and will provide another glimpse of the
fragile consumer psyche. Any sign
of significant weakness below the consensus estimate will likely hammer the
market.

On Wednesday, the supply side will reveal itself in the industrial production
and capacity utilization. Look for
a weakening here below consensus, with the possibility of another market
downdraft.

On Thursday, any falloff in housing starts and building permits will send the
sector deep into the red. An upside
surprise would be very much of a surprise and drive the sector sharply up.
An interesting opportunity here, but my speculation is on the down side.

On Friday, the most esoteric of the numbers come out: International Trade.
It will be interesting to watch the export numbers.
The dollar is weakening which should bolster exports; that would give
the market a nice bounce. BUT
Europe and Asia are still soft, which hurts exports — and we’d get
more of the same.Macroplay of
the Week: Vulturing the Housing Sector

WARNING: This is a pure macroplay that runs counter
to both the fundamental and technical SHORT-term
signals. To wit: If there was any doubt
about the fragility of the housing sector, it should have been completely erased
by Fed Chairman Greenspan’s firm denial of a “housing bubble.”
This kind of rhetoric is right along the lines of the Third World finance
ministers who announce that they will defend their nation’s fixed exchange
rates against any and all speculators — and then a week later devalue the baht
or the peso or whatever by 40%.

Before you get too excited in your shorts, consider the possibility that
Greenspan might be right. With the stock
market in the tank and a bulging demographic full of nesting middle-agers and
aging “got to buy two houses now,” there may be plenty of fuel for the housing boom fire. That said,
here’s the case for the burst bubble.

On a purely momentum basis, housing stock prices are bid up to wild heights —
not quite on the order of Handspring at $90, but certainly rich for the
valuations.

On a macro basis, we saw the sector take a fairly significant dip two months ago
when the consensus was that the Fed would begin raising interest rates.
BUT along came an oil-price shock and the
threat of the Fed rate hikes receded to give the housing sector a temporary
reprieve — with the emphasis on “temporary.”

BECAUSE, two things can happen now
— both of them bad for the sector.

Either we get the recovery, we are looking forward to, which will force the Fed’s
interest rate hand and hit the housing sector centerfold.
OR we get the slow recovery or double dip which, after a multi-year
housing binge, must sap the strength from the market.