The stocks rallying on good news is normal. Rallying on bad
news means it's climbing the proverbial wall of worry and looking
ahead to better days. So what portends when it dives on good
news? Run while you can still get out alive. Company news and
earnings are always positive at height of the market and everyone
thinks this time it's different.
Such is the case with homebuilder shares. The former
high-flying iSharesDow Jones US Home Construction (
) andSPDR S&P Homebuilders (
) led the losers list Thursday, collapsing 3.37% and 1.39% while
the benchmark SPDR S&P 500ETF (
) ticked higher 0.25%.
Shares caved in even thoughD.R. Horton (
),MI Homes (
), Meritage Homes (MTH) and Ryland (RYL) all eclipsed Wall Street
earnings expectations when they reported Wednesday and Thursday.
OnlyPulteGroup (PHM) missed views although earnings doubled and
sales climbed a notable 20% year over year.
Homebuilders failed to follow the market higher after the June
swoon. In the past three months, ITB tumbled nearly 10% and XHB
2% while SPY added 6.6%. This foretells the housing rebound faces
demolition because the stock market looks forward.
The housing recovery was artificially fueled entirely by the
Federal Reserve's easy money policies and economic stimulus
programs, says economist Harry Dent, founder of HS Dent, a
research firm in Tampa, Fla.
"That has averaged about $2 trillion a year (that's $1
trillion in monetary stimulus and $1 trillion in fiscal
deficits)," Dent wrote. "Money is not lent and invested in real
future growth. Instead, banks, investment banks, and brokerage
firms use it for speculation, often at very high leverage. And
recently money has been flowing into housing speculation --
Young families looking to buy their first homes can't compete
with deep-pocketed institutional investors.
"Today's young people can't do that because they're hanging by
their toes, strung up with unprecedented student-loan debt and
facing tougher lending standards," Dent wrote in a note Thursday.
"Unemployment is still high and consumer confidence has dropped
The bull run that started in March 2009 will likely end
between late 2013 to early 2015, Dent projects, noting that the
average bull market lasts 3.6 years while the current one has
gone on for 4.3 years. Very few have lasted longer than five.
PulteGroup and D.R. Horton tore down home builder
in a productive session on the
stock market today
Homebuilders Stock Collapse
PulteGroup crashed 10.3% after missing analysts'
second-quarter EPS missed forecasts despite doubling to 26 cents.
Sales climbed 20% year over year to $1.28 billion vs. analysts'
target of $1.39 billion. New orders fell 12% year over year. It
lifted its share buyback by $250 million to $352 million. Sterne
Agee cuts its price target to $26 from $32 although rating shares
D.R. Horton gapped down 8.6%. Earnings surged 110% to 42 cents
a share, well above estimates. But cancellations rose and home
buying tailed off as mortgage rates rose.
MI Homes fell 7.2% after reporting Q2 revenue vaulted 37% to
$234.6 million, blowing away forecasts of $171 million. Earnings
soared 47% to $0.25 a share.
Meritage Homes and Ryland both topped market expectations when
they reported results after the close Wednesday. But shares sold
Thursday, 3% and 5% respectively.
Taylor Morrison (TMHC) andKB Home (KBH) tumbled 6.8% and 6.7%
respectively. Taylor reports Q2 results August 13. KB reports Q3
results in mid September. In late June it said it expects 2013
revenue will fall in line with analysts' forecasts at $2.1
billion to $2.2 billion.
Compass Point cut its price target onBeazer Homes (BZH), KB
Home, Ryland andStandard Pacific (SPF).
Rising Interest Rates
Mortgage rates have followed Treasury yields higher since
early May, when speculation grew that the Federal Reserve will
begin to taper bond buying in the next few months.
Higher interest rates and rising home prices across the
country will likely curb the housing market in the second half of
the year, Fitch Ratings wrote in a statement Tuesday. "The large
public builders are gaining share largely due to their land
resources, liquidity and access to capital markets," the ratings
agency wrote. "New home construction is gaining share of the
total market as some existing homeowners remain reluctant to list
and sell their homes."
D.R. Horton, as noted above, was among the first builders to
acknowledge a significant negative impact from rising rates.
Housing Starts Tumbling
Housing starts dropped 9.9% month-over-month in June to their
lowest level in 10 months mainly because multi-family housing
construction fell 26.2%. Single-family homes, which makes up 70%
of building activity, fell 0.8%. "Building permits dropped 7.5%
during the month too, though single-family permits climbed to a
new cyclical high," Yardeni Research reported last week.
New home sales for June showed a statistically insignificant
gain after factoring in that the May numbers were revised lower
by 3.6%, according to John Williams, an economist and founder of,
who greets the month-to-month data with skepticism.
"There has been no recovery. Although the existing home sales
series shows some uptrend, the new homes activity statistically
remains in stagnation, despite a minor uptrend in the monthly
levels of activity," Williams wrote Thursday. "As of June 2013,
existing-home sales activity still was down 30.1% from the June
2005 pre-recession peak. Given the volatility, instabilities and
uncertainties in the compilation of the existing sales data,
however, not too much can be read into the reported trends."
"Single-unit housing starts in June 2013 were 67.6% below the
January 2006 pre-recession high," he added.
Bearish Stock Charts
ITB broke below key support at the 200-day line, confirming a
trend change heading south. It has a weak IBD Relative Strength
Rating of 35, indicating it's lagged 65% of the market in the
past 12 months. Its E Accumulation/Distribution Rating is the
lowest possible on an A-to-E scale. That signals institutional
investors are heavily unloading shares and not buying.
XHB broke its 50-day line but still trades above the 200-day,
indicating it remains in a weak uptrend. It has a stronger RS
Rating of 52 and weak D- Accum/Dist Rating.
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