Ahead of Wall Street - December 18, 2012 - Ahead of Wall Street

Tuesday, December 18, 2012

Optimism on the 'Fiscal Cliff' front should provide a positive backdrop for today's trading action. But a snap rally after a deal does get announced appears unlikely as the market was all along pricing a last-minute resolution.

Both sides in the negotiations appear to be coming down from their initial maximalist positions, making a deal very much within reach over the next few days. The market's position reaction Monday reflected this reality and the trend will likely continue today as well. We could see it at play in the bond market as well, with treasury bond yields steadily inching up. This makes sense as demand for the safe-haven treasuries should drop in a less uncertain environment. But we shouldn't expect a significant carry through from this trend as the market was all along behaving as if the deal was a certainty. After a short period of weakness after the election, stocks have been making steady gains, ignoring the rhetoric from both sides.

Deal optimism aside, we have the December NAHB Housing Market Index, also known as the homebuilder sentiment index, coming out a little later. The expectation is for the measure to tick up a bit after the strong increase in November that took it to its highest level since May 2006. The improving housing outlook has been a solitary bright spot on the economic horizon. As would be expected, this has made homebuilders like PulteGroup ( PHM ), Lennar ( LEN ), and Toll Brothers ( TOL ) star stock market performers this year.

We will hear more about this favorable trend this week in the November Housing Starts data Wednesday morning and the Thursday fourth quarter earnings release from KB Homes (KBH). Given the strong gains in homebuilder stocks thus far, investors are justified to worry if the recovery story has already been fully priced in. We should keep in mind, however, that while earnings growth for the rest of the corporate world has run its course, it is just getting underway for homebuilders and other housing related companies. Total earnings for the Construction sector are expected to be up 28.7% in the fourth quarter, the highest of any of the 16 sectors. This follows earnings growth of 55.8% and 42.3% in the third and second quarters, respectively. What this means is that homebuilder stocks should be able to sustain their momentum as long as they are able to sustain the earnings growth momentum.

Sheraz Mian

Director of Research

KB HOME (KBH): Free Stock Analysis Report

LENNAR CORP -A (LEN): Free Stock Analysis Report

PULTE GROUP ONC (PHM): Free Stock Analysis Report

TOLL BROTHERS (TOL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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