The banking sector isn’t the only equity space that confounds us – the housing stocks are as equallyabsurd. Despite what you may have heard from your local real estate agent, the fundamentals for US housing are looking dismal. Ever since the tax credits have rolled off, new home sales are nowrunning at 300,000 on a seasonally-adjusted annual rate (“SAAR”), representing a new all time lowthis past May. For comparison, this is down from an all time high of 1,389,000 new home sales madein July of 2004.
Reading this, you may expect the home builder stocks to have performed poorly.But no, not in this market! As you can see in Chart A, from the day that Bernanke rst saw his ‘greenshoots’, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April23rd – all while new home sales were down 14% over the same time period on a SAAR basis.
‘TheMarket is Always Right’, as they say, but it simply can’t be with regard to these stocks. The housing‘green shoots’ were the product of government initiative, rather than true fundamental improvement,and were thus short term in nature. Now that the government program has ended, the whole sector looks poised to fall apart.At the end of the day, nobody should be surprised by the recent economic data. The stock market rallythat began in March ’09 was driven by monetary phenomena rather than anything fundamental, andbased on data from CMI for 2010 it appears that we have already entered an economic contractionphase. The market is now beginning to reect the fact that the green shoots were actually just theearly signs of weeds, and it would sufce to say that virtually all the major world governments havesome serious gardening to do. The recent contractions don’t necessarily mean that we’ll experience arepeat of 2008’s stock market performance in 2010, but it does suggest that investors should questionthe real fundamentals underlying their investments, lest the market begins to trade on them again.