By Jeffrey Saut, Art Huprich, Scott Brown
July 3, 2012
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).
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
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
A decisive close beneath trend line support at $77.56 opens up lower prices
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.
Important Investor Disclosures
Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. Non-U.S. affiliates, which are not FINRA member firms, include the following entities which are responsible for the creation and distribution of research in their respective areas; In Canada, Raymond James Ltd., Suite 2200, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) 659-8200; In Latin America, Raymond James Latin America, Ruta 8, km 17, 500, 91600 Montevideo, Uruguay, 00598 2 518 2033; In Europe, Raymond James Euro Equities, SAS, 40, rue La Boetie, 75008, Paris, France, +33 1 45 61 64 90. This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Investors should consider this report as only a single factor in making their investment decision. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask your Financial Advisor for additional details. The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. Persons within the Raymond James family of companies may have information that is not available to the contributors of the information contained in this publication. Raymond James, including affiliates and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication. Additional information is available on request. Analyst Information Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of Raymond James & Associates, Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of Raymond James & Associates, Inc., and are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public companies, and trading securities held by a research analyst account. Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks. The covering analyst and/or research associate owns shares of the common stock of The Home Depot Inc.
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.
Ratings and Definitions Raymond James & Associates (U.S.) definitions Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.
Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name Disclosure The Home Depot Inc. Raymond James & Associates received non-securities-related compensation from HD within the past 12 months. Risk Factors Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research or Raymond James’ summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716. International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small-cap stocks generally involve greater risks. Dividends are not guaranteed and will fluctuate. Past performance may not be indicative of future results. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. The prospectus contains this and other information about mutual funds. The prospectus is available from your financial advisor and should be read carefully before investing.
For clients in the United Kingdom: For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FSA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Services Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Services Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monétaire et Financier” and Règlement Général de l’Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. For Canadian clients: Review of Material Operations: The Analyst and/or Associate is required to conduct due diligence on, and where deemed appropriate visit, the material operations of a subject company before initiating research coverage. The scope of the review may vary depending on the complexity of the subject company’s business operations. This report is not prepared subject to Canadian disclosure requirements.
For Latin American clients: Registration of Brazil-based Analysts: In accordance with Regulation #483 issued by the Brazil Securities and Exchange Commission (CVM) in October 2010, all lead Brazil-based Research Analysts writing and distributing research are CNPI certified as required by Art. 1 of APIMEC’s Code of Conduct (www.apimec.com.br/supervisao/codigodeconduta). They abide by the practices and procedures of this regulation as well as internal procedures in place at Raymond James Brasil S.A. A list of research analysts accredited with the APIMEC can be found on the webpage (www.apimec.com.br/ certificacao/Profissionais Certificados). Non-Brazil-based analysts writing Brazil research and or making sales efforts with the same are released from these APIMEC requirements as stated in Art. 20 of CVM Instruction #483, but abide by recognized Codes of Conduct, Ethics and Practices that comply with Articles 17, 18, and 19 of CVM Instruction #483. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client releasable resear ch This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement
(c) Raymond James