Tuesday, August 04, 2009

Has Housing Bottomed? Pending Home Sales Rise For 5th Straight Month

The market is slightly lower in early trading, but that is not surprising given the outsized gains we made yesterday, and the prolonged rally we have enjoyed since mid-July.

The economic data released this morning was better than expected, especially in the housing sector. Pending home sales for June rose +3.6%, which handily exceeded expectations for a 0.7% increase. Moreover, this was the 5th straight monthly increase for this datapoint.

This will likely prompt the question, "has housing bottomed"? I think the answer is yes, due to the fact that low interest rates and first-time buyer tax credits have helped spur demand. But a bottom for housing will not look anything like a bottom for stocks. By that I mean that the housing bottom is likely to be prolonged and shallow. I expect home prices to stop dropping, and bounce mildly in some areas, but I do not expect solid home price appreciation for a few years.

In other economic data, personal income for June fell -1.3%, but personal spending increased +0.4%. That is a good sign. For the economy to continue to strengthen we need to see consumers start to spend a little again.

Consumer staples are the strongest sector so far, helped by the acquisition of Pepsi Bottling Group by Pepsico. Utilities are the biggest laggard.

Asian markets were mixed overnight; the dollar is roughly flat; the 10-year yield is higher near 3.70%; and the VIX is flat near 25.50.

Trading comment: WMS reported strong profits and raised guidance, and the stock is spiking higher. I am taking profits here, and will look to reenter down the road a bit. Yesterday, I added RIG and AKS. RIG should benefit from higher oil prices and an economic recovery, while AKS should benefit from stronger auto production and steel prices.

The market is still oversold, and I don't want to chase it here, but I am willing to buy individual situations that look promising.

long AKS, RIG


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