A lot of the talking heads on the financial news networks have been discussing how the current rally is a fake rally and shall soon end. This reminds us of the talk we have heard throughout the bull run which has lasted a bit over 3 years and has continued forward despite the major headwinds of Europe and China. Could there be pullbacks in the future? Sure. That is highly likely, but a bear market is certainly not set to take over at this point. The foundation is set for solid economic growth here in the U.S., if only we had elected officials willing to lead the country rather than feed off of it. In the U.S. we have a huge oil and gas boom, with the lowest natural gas prices in the world and which has resulted in a manufacturing renaissance in states such as Ohio, Michigan, Pennsylvania and New York. Look no further than what is happening in North Dakota for an idea of what would happen if we embraced the fossil fuel riches we possess rather than act embarrassed and try to regulate them out of relevancy.
That may sound quite opinionated and political, but it is not meant to be. It simply states the facts of what is happening and provides a glimpse of what is possible as the economy really is at a crossroads.
There will be no economic news out today pertaining to U.S. markets, and as usual we will have a back loaded data week.
Looking at Asian markets we see markets are mostly higher:
All Ordinaries - up 0.43%
Shanghai Composite - up 0.54%
Nikkei 225 - down 0.16%
NZSE 50 - up 0.73%
Seoul Composite - down 0.16%
In Europe markets are higher:
CAC 40 - up 0.60%
DAX - up 0.48%
FTSE 100 - up 0.34%
OSE - up 0.87%
What are we looking at? Recent housing data.
This group has been on a tear recently with many of the names trading at 52-week highs. The housing market is rebounding, and our sources are telling us that it is due in part to a return (and this is in our home market) of the first time homebuyer as well as middle class families re-entering the housing market as they need larger accommodations and now feel comfortable making the largest purchase many will make in their lives. It is our opinion that investors want to stay clear of the high-end builders and rather stick to the builders of middle class homes. So we would shy away from shares in Toll Brothers (TOL) and instead focus on Beazer Homes (BZH), KB Homes (KBH) and Lennar (LEN) which one would expect to outperform Toll Brothers based on the information we are getting from our people on the ground. All ships will continue to rise with the rising tide, but longer-term we expect the latter three to perform better as new grads get hired quicker due to an improving economy and more renters re-enter the homeowner ranks, which will see greater demand for entry level and mid-level housing.
Investors should look at the news on Wednesday (MBA Mortgage Index and Existing Home Sales) and Thursday (FHFA Housing Price Index and New Home Sales figures) as potentially more fuel for the fire to power this group higher, much as the housing data this past Thursday did.
What are we looking at? Looking at an extension of the housing play.
We feel that if you are playing the homebuilders that you should also allocate some funds to the larger regional plays and those with heavy mortgage exposure. As readers know, we are fans of Wells Fargo (WFC) as one of our only favorite national banks as it originates roughly one third of all mortgages in the country now. Further, we like Regions Financial (RF) and BB&T (BBT) as plays on the housing rebound in the southeastern United States and a rebound in their business. For investors looking for the safety of yield, stick with Wells Fargo (current yield of 2.60%) and BB&T (current yield of 2.50%) which have what we believe to be some of the safest dividends in the industry.
Remember, as the housing market recovers, housing prices increase more, more homeowners are able to refinance their homes at lower rates and thus create higher profits for the banks, It also creates more disposable income to power the next leg up in the economic recovery.
Earnings this morning…
One would expect a disappointment from Best Buy (BBY) based on recent performance and the fact that it appears that Amazon (AMZN) and other retailers are eating into Best Buy's business. We have been bearish on the stock since we visited some of the company's newer stores in our area looking for one product that Best Buy's computers said it had in stock and did not. BBY's computer systems were flawed and so too was the customer service experience - which has let us down numerous times even when buying high margin items that the company claims will deliver the future growth. If this is our experience, we wonder what service others are getting. Based on the numbers, we cannot imagine it is any better.
Investors should listen closely to the conference call to hear how BBY will implement its version of 'Geniuses' as this will be an important customer service implementation. In order to get consumers to pay a bit more for its commoditized products, Best Buy has to offer a better experience with service representatives who are knowledgeable and helpful, which currently is not the case. We suspect it will take between 6-12 months to roll this out and get it working sufficiently and probably another year to gain recognition in the marketplace. The question one will need to ask is whether the company has that much time to see this transition through, thus the need to listen to the question and answer session after management gives their rundown of the results. The company is expected to report $10.6 billion in revenues and $0.31/share in earnings according to Bloomberg.