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|Includes:KBH, Lennar Corporation (LEN)

By Carlos Guillen

Equity markets are making a rather surprising move to the upside despite rather pessimistic consumer confidence data; however, better than expected housing data appears to be giving investors the encouragement they needed to drive markets higher.

Perhaps a bit concerning today was data that came from the Conference Board, as it showed that consumer confidence fell this month. According to the Conference Board, its consumer confidence index fell to 79.7 in September from 81.8 in the prior month, landing below the Street's consensus estimate of 80.0. The result served to corroborate the data published by the University of Michigan 11 days ago, which also showed further deterioration in sentiment, as the University of Michigan Consumer Sentiment September preliminary result landed at 76.8, which was lower than the Street's expectation of 82.0 and lower than the 82.1 reached in the prior month.

It is apparent that the main reason for the drop in confidence was that despite equity gain, concerns about future labor growth weighed more heavily on consumer attitudes. In general, confidence is unlikely to improve in the coming month unless Congress can manage to avert a general government shutdown, prevent a default, and articulate to the public that the economic situation will not be harmed by future Congressional bickering. On a positive note, the drop in sentiment is unlikely to impact consumption trends. As long as aggregate income remains on an upward track, consumption growth should follow regardless of how consumers perceive the economy.

Despite the depressing consumer sentiment results, housing data has helped lift markets today. As it stands, stocks are continuing to make small gains during today's trading session with the Dow Jones Industrial Average up over 20 points

Builders' Foundation Stands Amid Mortgage Mayhem
By David Urani

Housing has been on the front lines of the market of late, and today came a couple of much anticipated earnings reports from Lennar (NYSE:LEN) and KB Home (NYSE:KBH). The companies were able to give out some more clues as to the health of the housing market amid the upward pressure in mortgage rates.

Lennar, one of the stronger homebuilders in recent years, on balance turned in a very solid second quarter (ended August 31). They beat by $0.08 on the bottom line with a 46% increase in sales to $1.6 billion, above the $1.5 billion consensus estimate. Unit deliveries were up 37% and new orders were up 15% (up 32% in dollars). Gross margin also increased by 170 basis points. It was a great result all around, although if there's one thing the bears would point a finger at it's that the 14% increase in new orders, although solid, was a deceleration from the +27% posted in the previous quarter. That could be evidence of the effect the rising mortgage rates had on demand. But it's clear sales momentum was not derailed, instead it let off the gas somewhat.

KB Home, which has been more shaky in terms of the company's execution than the likes of Lennar, showed notably more weakness but still had a decent quarter on balance. The bottom line beat by $0.07, and while revenue did miss consensus by $21 million, at $549 million is was still up 29% from a year ago. KB Home however went for somewhat of a different approach as they made a clear effort to maximize profits through pricing at the expense of sales momentum. Average prices were up a full 22% leading to a 500 basis point increase to gross margin. However, that came at the expense of a tepid 6% increase in new orders, and even more worrying a 8.6% decline in new orders. Of course, as with Lennar, mortgage rates will have had some effect on the sales and new orders as well. So when looking at the company's new order decrease we must now question just exactly how much is due to pricing and how much of it is mortgage rates.

Both LEN and KBH struggled to get traction at the open but their respective conference calls helped to send theirs and other homebuilder stocks higher. Both management teams expressed confidence that the mortgage rate situation this summer was/is a speed bump. In Lennar's case, they actually say that July was their worst month but that August came back to be their strongest of the quarter. They continue to like the fundamental long term view of the housing market, and see a multi-year recovery.

Tomorrow brings the Census' new home sales report for July, where we'll get a little more info about the state of the housing.

Home Prices

We also got the latest Case Shiller home price report for July showing a 1.8% monthly increase (non-adjusted). That was a little bit below the +2.0% consensus estimate but no need to be nitpicky, it was a 12.4% year over year increase; the best annual gain yet during the recovery. That being said I maintain as always that the Case Shiller index is a highly lagging indicator (being from all the way back in July while also being a 3-month average) and to be fair it doesn't yet reflect the brunt of the interest rate headwinds.

Stocks: LEN, KBH