President's Plan Key For Economy - And Hopefully For Housing, Too

 |  Includes: BAC, BZH, C, DHI, GS, HOV, JPM, KBH, LEN, MS, TOL, WFC
by: Markos Kaminis

The shares of homebuilders started higher on Wednesday as investors began to bet that President Obama’s highly anticipated speech scheduled for Thursday evening might benefit them. However, most of what has been leaked to the press about the speech seems to leave out housing.

Still, considering the depths that the real estate market has fallen to, and the relatively dead current marketplace, it would seem likely the President’s plan might contain a little something for real estate. As a result, homebuilder shares are sure to move with conviction in one direction or another Friday, depending on the details of President Obama’s plan, and whether there’s enough punch in it for sector betters.

My expectation is that these shares will trade higher moving into the speech, and so offer further short-term profit opportunity. However, if you hold on to a directional play past the close Thursday, it seems that would be a pure gamble at this point, and you’re on your own with that.

The SPDR S&P Homebuilders ETF (AMEX: XHB) took back 3.5% Thursday, as news was leaked of the President’s $300 billion or larger plan to stimulate jobs and the economy. However, most of what I’ve seen seems to overlook housing. Rather, I hear of payroll tax cut and unemployment benefit extensions. There’s talk of infrastructure spending at the core of the plan, but it seems capital is destined for public works projects that involve the repair of roads, bridges and schools. I agree that the intense rate of unemployment in construction should be addressed directly, but if we leave out housing, we leave out a large group of specifically skilled Americans in need of employment.

We hear the President will unveil subsidies for states to keep teachers, fireman and police officers on the job. The more people you keep employed or get off the unemployment line, the better. Cutting taxes for those who are already employed would not create jobs as fast as we need them now in my opinion, and I’m not sure spending would pick-up quickly enough either as a result. Companies have tended to hoard capital, and employed consumers who are given a little more free cash are less elastic in their purchase decision making then the unemployed given a lot more capital and financial security with a new job opportunity.

Given the sorry state of affairs in real estate, and the government’s history of ideas and intentions to restore the market’s health, including through the financial encouragement of those on the fence to buy their first home, there’s a decent chance the President will have some sort of new aid for the ailing marketplace.

Lending tightness has been often cited as an obstruction to recovery. There is chatter of a creative idea the government may roll out, through which it establishes a sort of bank to fund small business and other projects. It’s expected this organization could be self-sustaining once it starts raining loans. Perhaps the President might unveil something of the sort for the housing market as well.

Whatever the case, housing stocks heated up Wednesday, with moves of 4% to 12% seen across names like Toll Brothers (NYSE: TOL), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), D.R. Horton (NYSE: DHI), K.B. Homes (NYSE: KBH) and Hovnanian (NYSE: HOV). Banks were up to, with the shares of Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) posting increases of between 3.6% and 7%. The XHB is down more than 15% year-to-date, with all of the decline marked since late July, thus driven by the D.C. debt debacle and the following downgrade by S&P.

As a result, I suppose it’s appropriate for Washington to provide a catalyst now for the recapturing of that lost capital. That said, given the state of politics today, the President will have to design his plan to Republican ideals in order to get it through the legislature.

It would seem this is what President Obama is attempting to do, and if he can add a little pressure on the GOP via his presentation to a joint session of Congress and via live television feed across the nation, he will. All politics aside, this is an economic matter that should be weighed seriously, as a state of extremely weak confidence among consumers, investors, purchasing managers, and hiring managers currently threatens to return our economy to recession. This special stimulus plan has the ability to undo some of the damage created by DC, and potentially counter it effectively.

Heading into July, I had been forecasting home price stabilization and housing growth for the second half of 2011. However, my forecasts have been qualified against the risk of what ended up actually playing out in Washington. As a result, I believe housing growth for this last six months of the year is now threatened and the home price strengthening trend undermined.

This plan, however, if properly calibrated and prioritized over politics, has the potential to set things straight again. Investors in homebuilders and otherwise beware though, as we have little evidence of the political cohesion necessary for its passage.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.