KBW Mortgage Finance Index: Bearish Support About to Collapse

From the late November lows of last year we have been quietly buying, led by our increasingly bullish view on the equity markets. Late February we found ourselves fully invested.

From mid-March we have been on a ride along bull market street. This is a rally of broad participation including corporate-bonds, emerging market bonds,commodities and high yield currencies.

The sectors that lead the way into the financial crisis; Real Estate and those involved with financing Real Estate (mortgage finance) and residential and retail have yet to join in the rally. We would lie peaceful in our beds at night if some of these stocks were able to break out of their bear trends.

• Ryland (RYL)
• KB Homes (KBH)
• PHH Group (PHH)
• Hudson City Bancorp (HCBK)
• Washington Federal (WFSL)
• Fidelity National (FNF)
• New York Community Bank (NYB)
• First Horizon (FHN)

Let us take a look at the KBW Mortgage Finance Index. This includes 24 mortgage finance sector and residential construction sector stocks.

The bearish KBW is starting to turn shade bullish from our viewpoint and is reaching towards a "key" resistance level. We suspect that is a little of the radar owing to its contribution of the current state of affairs. However we see this a a sign of the Real Estate sector in the US has turned is starting to look more positive. The below $MFX chart is also supportive of this view.

We would look for a break above 20 to confirm a fundamental change. This would be a 10 month high. Peaceful nights' sleep may only be a few weeks away.

Disclosure: Long Call Options on MFX.

Comments

[HardwoodFlo...:]

Why do you think Wall Street home builders will be the builders of the future?

I think that a lot of the new building will be deign-build done by smaller shops building for unique clients.

The big builders will be relegated to cheap crappy houses. They will be competing with on-going for closures and distressed sales.

I just don't see the attraction of big Wall Street builders. Look at their track record it's awful. These companies sold themselves to investors on the proposition that they could, because of their in house marketing and economists, do a better job than the mom and pop builders and avoid the pitfalls because they wouldn't over build. Well then they started managing for each quarter and stock price and that meant more and more houses with more and more square footage (particularly as the credit markets got easier) b/c for them it cost about the same to build a 3,500 square foot house as it did a 5,000 square foot house.

In the future they will be relegated to building houses below $400,000, reduced square footage means less margin. Then, their top line is going to suffer to. So they are going to be getting it at both ends. reduced average selling price and reduced margin.

Sorry, just don't see it.

Jul 31 01:13 PM

[Pottermus:]

Until unemployment is reduced to acceptable levels there can be no real recovery in housing. Obama has stabilized banking now he needs to get everyone back to work.

When and if that happens 90% of all real problems will be cured.

Aug 01 12:10 PM

[Homer II:]

yeah Obama... quit micromanaging the Cambridge Mass police and get busy creating those 5 MILLION jobs you promised us. It really should be about 9 MILLION jobs since there have been 3.4 MILLION MORE JOBS LOST since you took office about 6 months ago

Aug 02 03:16 AM

[Russ Wetherill:]

I just love to hear people talk about technical chart resistance levels as though they meant something. This chart only reflects market sentiment - in other words that some stock investors think that the homebuilders are worth x amount at y time. If you look at the left side of the chart, you will see that these same investors thought that the stock was worth 5 times the current value less than two years ago. Are you going to trust these geniuses to tell you that you should buy now?

Aug 05 02:40 PM