Table of Contents
We have a light economic calendar with a sharp focus on housing data. Earnings season has ended, and Congress is out of town. There is plenty of space for journalists to fill in a quiet, mid-summer week. Perhaps the housing data will fill some of that space. We may be overdue for a closer look, asking:
Do changes in the housing market represent an investment opportunity?
Last Week Recap
In my last installment of WTWA, I asked whether the U.S. might be enjoying an economic sunrise. I took each of the key issues and outlined the key questions for investors.
Others picked up the general topic, but no one is doing this type of specific analysis. That only underscores the importance for thoughtful investors. Sometimes (perhaps often) we are rewarded for looking beyond the obvious.
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Investing.com’s version, which provides helpful callouts for various news events. My static image shows where they are, but if you go to the site you can enjoy the interactive features.
The market gained another 0.8% on the week with a trading range of only 1.9%. My weekly indicator snapshot monitors the actual volatility as well as the VIX (see below).
The weekly sector chart shows the sources of the action.
The “recovery” trade is now weakening. Industrials, financials, energy and materials are all part of that group. Defensive sectors like utilities, consumer, and health, continue to improve. Materials, consumer discretionary, communication services, and information technology are declining. You can watch the progress of the rotation via this chart. (The sector names are here. The Bloomberg symbols add “S5” at the start of the name).
No WTWA next week – probably.
No inflation? I happened upon this downtown NY restaurant luncheon menu from 1917. A nice range of appetizing choices, and the price is right!
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators have always been a valuable part of my economic review. They are especially important as we all try to monitor the economic recovery. His weekly report shows some improvement in all time frames, with something of a question mark for federal emergency unemployment benefits. NDD has recently added a valuable feature, a report of the worst reading in each indicator. This is a good way for us to assess the rebound.
- Job Openings increased in June to a level of 5.889M up from the (downwardly revised) 5.371M for May. This is not the most important part of the report, although the implications for labor market structure are ignored by most analysts. The Washington Center for Equitable Growth regularly provides a first-rate analysis. A key finding is how the coronavirus recession differs from the Great Recession. The quits rate is one of several key indicators worthy of our attention.
But some of those quits may represent coronavirus fears or childcare concerns. (Reuters).
- Initial jobless claims declined to 963K, better than expectations of 1.150M and the prior week’s 1.191M
- Continuing claims declined to 15.486M down from (a downwardly revised) 16.090M.
- LA Port inbound traffic increased by 5% year-over-year in July (Calculated Risk). The rolling 12-month average is down 0.5% in June. This series is a good demonstration of the challenges in spotting the trend changes in data with a strong seasonal component.
- Mortgage applications increased 6.8% versus a decline of 5.1% in the last week in July. The overall pace is still excellent.
- University of Michigan consumer sentiment (Aug Preliminary) registered 72.8 beating expectations of 70.5 and slightly ahead of July’s 72.5.
- NFIB Small Business Optimism for July declined to 98.8 from June’s 100.6.
- Inflation showed increases much higher than expected. For a lesson on the important subcomponents, just read Jill Mislinski’s post – updated with the current data. The chart showing the breakdown is quite informative!
- The PPI for July was up 0.5% on the core rate, worse than expectations of 0.1%. June registered a decline of 0.3%.
- The CPI for July increased 0.6% on the core, versus and expected of 0.2%, which was also June’s increase.
- Unit Labor costs for Q2 increased 12.2% versus expectations of 5.5%. The prior increase was 9.8%, revised up from 5.1%.
- Retail sales for July increased a disappointing 1.2%. Expectations were for a 1.8% gain. The June increase was 8.3%, revised higher from 7.3%. David Templeton (HORAN) points out that the increase brings total sales back above the pre-shutdown level. He writes:
Clearly, the below chart shows the “V-shaped” recovery in this economic data point. Consumers account for 70% of the economy or GDP. The additional unemployment support that expired at the end of July contributes to positive consumer sentiment which has contributed to a positive retail sales environment. This type of data will need to be watched as that particular unemployment insurance support program has expired.
The “excess deaths” from the coronavirus (NYT). With continuing controversy about how to measure the number of deaths, those skeptical of hospital reports suggest comparison with normal death rates. Using that approach, the count has already surpassed 200,000. Here is the summary but check out the full article for a state-by-state analysis.
Readers who have read something to the contrary should be sure of their facts. Here is an example of a popular analysis debunked by Menzie Chinn as the Worst Statistical Analysis I Have Seen This Year. What happens is that the original error is retweeted and linked to by the millions who like the conclusion. Very few of these people ever see Prof. Chinn’s analysis.
Stock splits. With the news from Tesla (TSLA) and Apple (AAPL) the interest in stock splits has grown. MarketWatch interviewed Howard Silverblatt, senior index analyst at S&P Dow Jones indices.
“I’m getting requests from companies looking for raw data… asking, ‘Is there a reason I should split [my shares]?’” he said.
Silverblatt said he thought boards of companies might indeed follow Tesla and Apple’s lead at some point and split their shares in an effort to appeal to a wider retail audience, even if doing so is almost an entirely cosmetic exercise by a company and one that could be expensive.
“Will, there be others that split? I have to say yes. Those [companies] can’t be the only ones,” he said, referring to Apple and Tesla.
The Wall Street Journal in a 2017 article titled the “Split Decision: The Pros and Cons of Splitting Shares,” wrote that beyond appealing to retail investors, making a stock appear more liquid and less overvalued have been among some of the reasons that companies had opted to enact splits.
Or for criticism of stock-splitting pundit advocacy, Carny Barkers. Fans of the Pundit-in-Chief should just skip this one.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
We have a light economic calendar with a sharp focus on housing data. I have strong continuing interest in the unemployment claims, but not much in “leading” indicators or the regional Fed indexes.
Earnings season has pretty much ended and Congress is on “recess.” May Wall Street players will be taking summer vacations.
This implies a low-volume market, not one that is low in volatility. With less volume we can expect algorithmic trades driven by news about vaccines, school closings, COVID death rates, and political news.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
With a housing report nearly every day and little competitive news, it provides an opportunity for more complete assessment of the changing housing market. It is important from many perspectives, but as usual, I am focused on this question:
Do changes in the housing market present an opportunity for investors?
The Coronavirus pandemic has changed behavior and the role of the home. More are working from home, a trend that will continue. Demographic forces emphasize the needs for new families. Empty nesters want to downsize.
What does it all imply?
The Growing Attraction of Ownership
The WSJ explains Why Your House Could Be Your Best Performing Asset Class. The key is to think of your home purchase in terms of the total return. You need to add the service delivered to the potential for appreciation.
These services now go far beyond shelter.
First, for most workers, it has doubled as an office. Typically 24% of the workforce works from home, and because of the pandemic, 31% more do, according to the Labor Department.
Most will go back to the office when the pandemic is over. But many have discovered they are happier, more productive, or both, working remotely at least some of the time. Because of the pandemic, 62% of hiring managers surveyed by Upwork, an online freelancing platform, expect more of their workforce to be remote from now on.
For some families, the home is now a classroom – hard to value, but significant. Part of the value is a private space where a mask is not needed.
Asked how the pandemic affected their homebuying plans, 21% of buyers recently surveyed by Redfin said they want space to work from home, 21% said more outdoor or recreational space, and 7% said a place for children to learn from home. Savvy sellers are catching on: Along with granite countertops and master bathrooms, listings now mention attractive backdrops for Zoom calls.
[As I was describing these key values of the asset class, Mrs. OldProf informed me that it was not the best performing – not even close. She called my attention to the Dr. Fauci baseball card, which quickly moved from an “IPO” price of ten bucks to the current $387.]
Larger Homes and Offices?
JP Morgan Asset Management has started a joint venture with American Homes 4 Tent. JPM’s Mike Kelly comments:
Kelly predicts that fears over the spread of Covid-19 will drive more people to seek more spacious living situations outside cities, accelerating an existing trend among young people to settle in the suburbs. Many people who have found they can work well from home during the pandemic will continue doing so part-time even after the economy opens back up in cities, he said.
“Because of Covid, we do think there’ll be more opportunity for people to work from home more steadily,” he said. People who may not have wanted to commute every day may now be able “to live in the suburbs and commute to work two or three times a week, potentially even less.”
Investment in homebuilders
Chuck Carnevale spotlights three NYSE homebuilders describing the convergence of value and momentum investing.
As always, he analyzes the fundamental data, but also mentions the risk. In particular he points out the results during the great recession. Here is an example of one stock that meets the value criteria and also displays momentum.
As always with Chuck’s articles, it is important to watch the videos. There is always a great lesson along with the stock idea.
One feature of the homebuilding investment opportunity is the ability of company management to adapt to conditions. They have not overbuilt the market. Several of the companies have responded to the need for cheaper entry-level homes.
One reason that home construction has done so well during this recession is the dramatic fall in mortgage rates. It provides a buffer. Rates will rise at some point, of course, but this will probably be accompanied by improved economic conditions. It is unusual to find investments that work under a wide range of economic circumstances.
I have a few other conclusions in today’s Final Thought.
Ideas for Investors
I have switched the investor section to a separate post. I hope to run it nearly every week, calling it Investing for the Long Term. Last week I highlighted some current ideas using the background of my Great Reset project. I feature many of the same authors I have highlighted for years. The difference is that I make a more extensive comment on each idea and place it somewhere within this matrix.
In the article comments there is a spirited discussion both about the categories and individual stocks. Excellent! My objective is to get individual investors thinking about their selections in the right way. We must accept realities and being willing to look ahead.
I hope that WTWA readers will give my new series a try.
A Personal Favor
Please also consider joining the Great Reset group. This drives my own investment analysis, and (I hope) inspires others. You will get updates about what is being studied and can be part of the process. There is no charge and no obligation, but I hope you will join in my Wisdom of Crowds surveys. I need more wise participants! (The latest survey is still open). The results of our team effort will be published on a regular basis, so you will be joining me in contributing to a greater good.
We have already identified key sectors to avoid as well as those worth further examination. Members have avoided some of the most dubious ideas, but there is still time for new members. I have created a resource page where you can join my Great Reset group.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here.
Despite the improving technical indicators, I continue my rating of “Bearish” in the overall outlook for long-term investors. My key risk avoidance method is lightening up positions when I expect a recession. Hello? That is where we are. It is not a time for aggressive action by long-term investors. We should also keep watch on the increase in anticipated inflation. So far it has had little effect on bond prices but eventually it will.
The C-Score remains at levels never before seen. It is combining the sharp economic rebound with pandemic effects. When we are able to separate the two, a current mission of Dr. Dieli, it will provide more guidance on the timing and extent of the recovery.
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score”.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies. This week Brian also takes note of the improvement in corporate credit spreads.
David Moenning: Developer and “keeper” of the Indicator Wall.
Georg Vrba: Business cycle indicator and market timing tools.
Doug Short and Jill Mislinski: Regular updating of an array of indicators, including the very helpful Big Four. Here is the update reflecting today’s Retail Sales report.
There is plenty of green highlighting the recent months. I cannot remember a time with such a sharp demarcation as we see between Mar/Apr and the next three months. Directionally it looks very good. What about the magnitude of the rebound?
Here is Jill Mislinski’s explanation:
…we’ve plotted the same data using a “percent off high” technique. In other words, we show successive new highs as zero and the cumulative percent declines of months that aren’t new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is our four-pack showing the indicators with this technique.
FiveThirtyEight explains What Economists Fear Will Happen Without More Unemployment Aid.
Econofact underscores the need for childcare as part of the economic reopening.
Chuck Carnevale’s excellent analysis would be a perfect fit for the Great Reset matrix. I included it in WTWA because it is also a perfect fit for this week’s data!
Economic Rebound Hopes
Investors will not have a clear path for an economic rebound from any single pandemic solution. It will require a combination of very extensive testing with nearly instant results. This will identify hot spots and slow down the spread of the disease. Here are some items to consider:
Saliva-based coronavirus test funded by NBA, NBPA gets emergency authorization from FDA
Still too expensive, but it is a step.
Here’s How The US Can Start Testing More People for Covid-19
Makes progress with better use of current methods.
The Plan That Could Give Us Our Lives Back
Testing is a non-optional problem. Tests permit us to do the most basic task in disease control: Identify the sick, and separate them from the well. When tests are abundant, they can dispel the fear of contagion that has quieted public life. “The only thing that makes a difference in the economy is public health, and the only thing that makes a difference in public health is testing,” Simon Johnson, the former chief economist of the International Monetary Fund, told us. Optimistic timelines suggest that vaccines won’t be widely available, in the hundreds of millions of doses, until May or June. There will be a transition period in which doctors and health-care workers are vaccinated, but teachers, letter carriers, and police officers are not. We will need better testing then. But we need it now, too.
The wand that will accomplish this feat is a thin paper strip, no longer than a finger. It is a coronavirus test. Mina says that the U.S. should mass-produce these inexpensive and relatively insensitive tests—unlike other methods, they require only a saliva sample—in quantities of tens of millions a day. These tests, which can deliver a result in 15 minutes or less, should then become a ubiquitous part of daily life. Before anyone enters a school or an office, a movie theater or a Walmart, they must take one of these tests. Test negative, and you may enter the public space. Test positive, and you are sent home. In other words: Mina wants to test nearly everyone, nearly every day.
The tests Mina describes already exist: They are sitting in the office of e25 Bio, a small start-up in Cambridge, Massachusetts; half a dozen other companies are working on similar products. But implementing his vision will require changing how we think about tests.
These approaches will eventually be a part of the health and economic solution. For that to happen we must end finger-pointing, accept testing as a non-political matter, and provide the funding for rapid progress. It is much cheaper than continued economic losses.
Solutions are rarely bold strokes. Many people, organizations, and ideas are behind every success.
I’m more worried about
- China/US trade issues. Remember when this used to be a big story? China will not meet the terms of the “Stage one” deal, although U.S. exports to China are higher. This could have an important economic effect. (Brookings).
- The mail. And don’t count on FedEx (Reuters).
- The vaccine solution. (Statista).
I’m less worried about
- The potential for extensive coronavirus testing, a needed companion to vaccine development, for the reasons cited above.
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Disclosure: I am/we are long LEN, PHM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.