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Houses vs. Headquarters

Max Egan
Thursday, 20 Oct 2011 | 10:52 AM ET

One of the fundamental measures of the strength of consumer demand is housing. Consumer decisions are necessarily dependent on what is happening with their largest expenditure/investment. Today, existing home sales in September were down 3% month over month. On Wednesday, housing starts for September were up an annualized 15%, driven by strength in multifamily homes (up 51.3%), but not single-family homes (up only 1.7%).

According to the Mortgage Bankers Association, delinquencies across all mortgage markets are slowly trending up in 2011, which is a reversal from the dramatic improvements in 2010. Another worrying sign is the price declines of Markit’s PrimeX indices recently, showing that speculators are betting on further deterioration of the housing market. The weakness in the residential housing market stands in stark contrast to the strength of multinational corporations. The unprecedented amount of cash on corporate balance sheets shows that companies have streamlined operations. Corporations will continue squeezing out efficiency gains to increase profits because consumer demand is not growing fast enough.

In the midst of earnings season, we are expecting strong results from stocks with revenue derived from the corporation, rather than the consumer. WW Grainger (GWW), a provider of maintenance equipment and services to businesses, is one of our holdings that reported strong results on Tuesday. This week the home retailer Lowe’s (LOW) announced that it was closing 20 of its stores. Now to find the leading manufacturer of cubicle walls…

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