With this Gleanings report, we begin a monthly chart presentation and discussion, which attempts to pull together the separate disciplines of Economics, Fundamentals, Technical analysis, and Quantitative analysis.

 

The report contains what we think are currently some of the most important charts. We will have an overview and then highlight some of the key near-term variables that we believe could have a measurable effect on where the various markets are going.

 

We’ll walk our readers through the key points, before drilling down into the specific recommendations offered in our recommended lists, with the goal of highlighting investments that tie back to the themes that have been running through both our macro and fundamental research in recent weeks.

 

The two metrics that may “kick start” the economy are Gasoline and Homebuilding:

 

1) A penny decline in fuel prices adds $1 billion to consumers’ purchasing power.

2) $150 billion pick-up in homebuilding would add not only jobs, but 1.0% to GDP.

3) Recession fears have occurred the past two summers without a recession.

4) We expect the fall of this year to show the same “no recession” outcome.

5) Investors heeding our housing analysts’ upgrade of the group months ago have done pretty well. Those who didn’t might consider the SPDR S&P Homebuilders ETF (XHB/21.53), or the iShares DJ Home Construction Index (ITB/16.95). Some second derivative names, with Strong Buy ratings from our fundamental analysts, are: Home Depot (HD/$53.01/Strong Buy), Plum Creek Timber (PCL/$39.92/Outperform), and Rayonier (RYN/$45.38/Strong Buy).

 

Jeffrey Saut

For my discussion I picked homebuilding because it is one of the keys for the type of economy we will have going forward. In “your father’s” recession, and subsequent recovery, the two sectors that pulled the economy out of recession were autos and homebuilding. Plainly, autos have done their job since we have gone from roughly a 9MM unit seasonally adjusted annual rate (SAAR) to nearly a 15MM annual run-rate. The laggard has been homebuilding, but that appears to be changing.

 

As can be seen in slide 5, the Homebuilder’s Index is breaking out of a 4-year base to the upside, suggesting the worst has been seen and discounted.

 

The next slide (6) shows For Sale Inventory. One of the things that got us cautious on housing was the rise in For Sale Inventory that began in mid-2005. Now, For Sale inventories have collapsed.

 

The second thing that got us cautious on housing was the rise in the cost of a house at the same time inventories were rising (slide 7). Affordability, however, is currently at a record.

 

Such metrics have caused a noticeable improvement in sales. Recent reports indicate new home sales continue to accelerate. The seasonally-adjusted annualized pace of new home sales (contract signings) rose 7.6% month-over-month (margin of error of ±12%) to 369,000 units.

 

Drilling down to the unadjusted data, May sales jumped 25% y/y and increased 6% sequentially, indicating that the positive momentum in housing has continued to build in recent weeks. Moreover, these results came as prices rose, with the median new home price climbing 5.6% y/y to $234,500 in May, which was an acceleration from +5.0% y/y in April.

These are not unimportant data points.

 

As can be seen in chart 8, with business spending back up to pre-recession levels, if housing and commercial construction “kick in,” the nation’s GDP number could improve noticeably.

 

Indeed, while we are not predicting it, in a $15 trillion economy a $150 billion pick-up from housing would add 1% to the GDP numbers. Obviously such a surge would take time; but make no mistake, the homebuilding complex is on the mend.

 

Further, any lift to real estate would also go a long way to creating jobs, as reflected in slide 9. The final slide from my presentation shows the price of gasoline, which has fallen from $3.43/gallon in April to $2.50 currently.

 

That is tantamount to a huge tax cut since every one penny decline in price adds ~$1 billion to consumers’ purchasing power.

 

The Homebuilders’ Index is Breaking Out of a 4 Year Chart Base Suggesting a Better Outlook for Real Estate

 

For Sale Inventory: 1988-2012 Existing & New Homes For Sale as % of Total Owned Units

 

• Many lower-end homes have been snapped up by cash investors. Likewise, non-distressed sellers and foreclosing lenders have held back a large number of houses.

• “Listed for sale” inventory is at its lowest level in nearly 10 years, creating a sense of urgency with buyers.

Raymond James Housing Affordability Index: 1987-2012

(Based on Median Existing Home Prices, Median Household Income, & Prevailing Mortgage Rates)

 

2012 Outlook: Business Spending is Carrying the Day

• Fortunately business spending is back to pre-recession levels.

• Residential spending, which accelerated modestly in the 2001 recession, has collapsed from the housing bubble peak of $500 billion annually.

• CRE spending followed a more normalized correction pattern in the 2001 recession and is now below the low of 2003 (in nominal dollars).

Adding $150 Billion to Homebuilding Construction Would Add 1% to GDP and Go a Long Way In Improving the Employment Numbers

The Drop In Gasoline Pieces Is Tantamount to a Huge Tax Cut

Because Every One Penny Decline In Price Adds ~$1 Billion To Consumers’ Purchasing Power

 

Art Huprich

When the Dow Jones Industrial Average moves into what I have deemed a “structurally fair environment,” during which the index trades laterally for between 16 and 20 plus years, as it did from 1966 to 1982, 1929 to approximately 1949 and 1906 to 1925, unless an investor implements a more tactical approach to the stock market, it can get very frustrating both financially and psychologically.

 

Within the context of a structurally fair environment and consistent with the stock market’s peak in early 2000, implementing a tactical strategy that entails relative strength analysis, to one degree or another, can aid in portfolio performance. Relative strength measures the price performance of a stock, sector or index versus a broader index or universe of stocks. Relative strength can improve if the vehicle being analyzed rises a greater percentage than the vehicle it is being measured against during an uptrend or if it declines at a lesser rate during a downtrend. The goal is to own or be over-weighted outperforming vehicles and/or underweighted underperforming vehicles.

Current Condition: Frustration Abounds! Please use a Violation of Support and Resistance Accordingly

Don’t Underweight the “Good Old U.S.A.!”

Small Caps favored over Mid Cap (marginally) and Large Caps, yet Large Caps are Improving

Growth versus Value: Small Cap = Blend / Mid-Cap = Growth (marginally) Big Cap = Growth

S&P Macro Sectors: Besides Consumer Discretionary, long-term relative strength trends favor...

U.S. Dollar Index: For the time being, this looks “higher.”

Commodities: What Inflation? Commodities suggest otherwise

Crude Oil:

A decisive close beneath trend line support at $77.56 opens up lower prices

 

Scott Brown

 

Mild winter weather boosted payroll growth in January and February, borrowing seasonal strength from April and May. However, concerns about Europe, the election, and the fiscal cliff could restrain new hiring in the short term. The government sector remains a drag on overall growth. The fiscal cliff (the expiration of the Bush-era tax cuts, the end of the 2% payroll tax reduction, and automatic spending cuts) is set to subtract about 4% from GDP in 2014. However, no matter who is elected president, most of the can is likely to be kicked down the road.

Inflation-adjusted wage and salary income growth has been relatively lackluster, but lower gasoline prices will add to consumer purchasing power and provide support to consumer spending growth over the next few months.

The Fed extended Operation Twist, largely as an insurance move, and could undertake further accommodation at the next policy meeting (July 31/August 1). The Fed expects unemployment to remain well above target and inflation to be at or below target for the next few years (hence, some scope for further action). A lot may depend on the pace of job growth over the next few months.

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