Is Housing Slowing Down?
Is housing slowing down? January housing starts, at 890,000, was below expectations of 925,000 (December was revised upward), which follows the poor showing of the National Association of Home Builders builder sentiment index, out yesterday.
Toll Brothers reported a surprisingly weak quarter, with earnings of $0.03 a share — well below consensus of $0.10 a share. Revenue and margins were also below estimates. What happened? Fewer closings and lower average selling prices, but that is likely because of a different mix of houses for sale. Gross margins were lower.
The one saving grace: New order growth of 49 percent, well above the average of roughly 30 percent to 40 percent for the other builders.
The weaker profits may be changing, as well. CEO Douglas Yearley, Jr. was borderline ebullient, noting "demand has increased" and then went on to say, "We are also enjoying increasing pricing power due to the release of pent-up demand colliding with limited supply." He noted orders for the first three weeks of February were up 40 percent year over year and that "momentum is building."
Building-materials maker Owens Corning (thinks fiberglass insulation and roof shingles) also posted earnings below expectations; guidance was also weaker than expected. Insulation sales increased 7 percent, but roofing sales dropped 9 percent. Roofing sales are more dependent on replacement.
1) Caterpilllar suffered double-digit falls in Asia, North American sales. The company's retail sales were down four percent in the three months ending in January, compared to the same period last year. Asia/Pacific was down 12 percent, while North America was down 11 percent.
2) Congressional bickering is back on the front pages, and stocks are likely to suffer for it.
Sequester talk starting to dominate trading desks. With Congress out of session until next Monday, this leaves only five days before the sequester deadline. It's unlikely some compromise will be reached before then.
The drop-dead date is March 27, when the government will shut down without congressional action to fund government operations for the remainder of fiscal year 2013.
Senate Democrats have introduced a bill to split the roughly $112 billion in sequester cuts for this year evenly between revenues increases and spending decreases and put off sequestration until 2014. There is no bill from House or Senate Republicans yet (there will be — it will likely be all spending cuts). Republicans have a problem: Sequestration is the only viable deficit reduction tool they possess.
Why do we care? Because keeping the partisan bickering off the front page has likely been a major factor in the stock market rally of 2013. Think about it: The word "fiscal cliff" has fallen into disuse, and you haven't heard the word "sequestration" much as a headline news item in the last six weeks, have you?
But that is changing. Lawmakers are now likely to spend the entire month of March in a fight to prevent the government from shutting down.
We don't know how long the sequester will last, or how much it will shave from gross domestic product, but remember: Much of the 2013 gains in earning are predicated on a modest second half recovery. That could be at risk.
Can we finally get a deal to get this piece of political risk off the table? Personally, I'm optimistic, but it's likely the markets will get worse before they get better.
2) The dark side of currency depreciation: Japan posted a record trade deficit in January. What about that weak yen? It helped exports, the value of which was up 6.4 percent. But Japan has to import massive quantities of crude oil and gas. The weakening yen, as well as rising crude prices, has now worked against them.
3) The Wal-Mart Stores issue: It was mostly delayed refund checks. A viewer whose family is in the retail business wrote in to say that the first 10 days of business in February was "as bad as walmart said," but then noted "but from feb 12 onwards back to some kind of normalcy, main point I want to tell u is, 85 pct of the problem was delayed refund checks, balance was 2 pct payroll [tax] and gas problem."