As February draws to a close, take a look at the last three months shown below.
Things have seemed substantially better since December. Everything from jobs to housing…. Wait was that about housing?
Supply has been declining, but prices have not been improving. This suggests either a decrease in demand or a real underlying issue (housing has not bottomed).
Remember last year when we were all tricked into everything being better? Well it seems the trickster has just changed its name from housing to jobs. Below is the S&P from last year. Investors seem to have forgotten the market can go down. Below shows that the market can decline and do so very rapidly.
Investors have forgotten that a calendar year has 12 months. We are merely two months in. With so much of the year still unknown and having come so far, this momentum cannot be sustained. As the recent home data has been hinting at, things are not 100% better. This correlates to your returns in 2011 not being 100%. Hate to be the bearer of bad news, but things are likely to get worse before they get better. It seems investors are counting their chickens before they hatch, and in reality 2012 has 10 more months to play out. Beware that 2012 sounds more and more like 2011 and as we all know history has a tendency to repeat itself.
“The Truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.” – Winston Churchill
Both Lowe’s and Home Depot report a good quarter supporting the story of housing recovery. The true reason that the winter quarter was good for these companies was renovations. Americans have quit moving out of their homes and instead have been upgrading aggressively. The previous statement does not suggest a housing recovery, but instead a fear of Americans getting back into the housing market. Gary Balter a Credit Suisse analyst states: “We encourage investors to look past the near term and think about double-digit margins for all when housing recovers.” Not only is he wrong, he is dead wrong. My Anything But Housingarticle brought attention to the massive revisions downward of existing home sales, which don’t bode well for the housing recovery. If homes aren’t moving, then the good numbers of Lowe’s and Home Depot are merely suggesting mom and pop upgrading their kitchen or bath.
Where do these stocks go from here? If you are a believer in the housing bottom and full fledged recovery, then these stocks are going to double and we are going to Dow 17,000. In the real world where fear finally slips back into this market, these stocks could be risky. The good housing data that has been coming out since the beginning of the year will turn negative sooner then later. As we saw last week the numbers are no longer stellar and this suggests the housing bottom may not be here yet. If the housing data turns negative, these stocks will be hit the hardest. Both Lowe’s and Home Depot have had stellar runs in the past 6 months and they may have gotten substantially ahead of themselves.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett
During the end of last week housing once again came into focus. The housing data were not as glorious as the bulls had expected. The price of homes was a key data point, and was not positive for the housing story. With home prices at the lowest they have been in 10 years the housing recovery lacks a key component. With the endless depreciation of the real estate market, investors and consumers alike must ask; Why would I buy a house if it will continually to loose value?
No investor, no competent consumer would buy an asset with a declining value. This is not only a basic investment policy, it is mere common sense. Not only were the home prices low last week, but existing home sales were also revised negative for January as referenced in my previous housing article
. Treating declining home prices as an asset; would you purchase real estate? Evaluating home prices in an equity sense, they are not at the point in which a purchase would be wise. We all have heard the saying, “don’t try to catch a falling knife.” This quote references that idea that if you try to pick a bottom in a market you will likely get financially hurt (in this case it looks as though you might knick an artery). This undefined bottom results in a housing market that does not support a recovery and instead supports continual economic turmoil.For those more economically minded readers, the housing market can be broken down into a simple supply and demand explanation. With the value of homes decreasing into the future, consumers will buy less of this product, decreasing demand (becasue even the average american knows not to loose money. Builders are beginning to produce more houses (as references in multiple news sources) and that along with the current supply will cause an increase or stagnant supply. With demand decreasing and supply fluctuating minimally prices will decrease or remain stagnant in the future.
“Americans now know that housing prices can go down and they can go down by 10, 20, 30 and in some cases, 40 or 50 percent. We know they can go down. But for five years, we thought they could only go up.” – Bill Gross
Oil has been just up, up, and away in the recent weeks. With major concerns of Iran and the possible threatening of supply, oil traders are worried and running up the prices. The indices are still threatening the bear by attempting to break through the resistance levels. With such great performance from the restaurants over the past few months, one should wonder: Will they be the leg that drags us down? Take a look at Buffalo Wild Wings and Chipotle.
What do those graphs tell us? They tell us a very simple idea; that the restaurants perform well when Americans have money to burn, and they perform poorly when oil is expensive.
With cheap gas prices and a cheap winter (cheap oil, not very cold) restaurants have fared well. This will all change momentarily with the new increased price of oil. Many forget that the recessionary consumer has been plagued with a tight budget before and has learned how to pinch pennies. As I referenced in The Real Walmart Story (Featuring Dollar General)
the consumer knows how to combat these higher prices by changing their shopping habits. So those that expect continued good results from their restaurant picks, need to either reconsider their positions, or buy some oil to hedge.
“If you or me go to the gas station to fill up our car and it costs us much more than we expected, it will zap our discretionary income. We won’t have the extra money to buy that washing machine or new winter coat-all big ticket items that are important to economic growth.” – Maria Bartiromo
Go out to dinner. Go to your local park. Go to any suburb in America. What do all these places have in common? They have young children playing on the iPad. That is right. Those of you who don’t have children may have missed the trend. The new toy of choice has a huge price tag and it isn’t matchbox cars. Many parents build their lives around their children; that also remains true when dealing with their purchasing habits. The iPad is not just for business or Facetiming your family. The iPad has many uses, and as announced recently will have its future place on college campuses. The existence of the world of apps with many children oriented games have truly captured the spirit of the youth.
That being said, now my concerns must be raised. What has got me nervous is the fact that neither the failure of a dividend or the lack of a stock split. My fears find merit in the recent faltering of Apple. Steve Jobs was meticulous in standard and the preciseness of his product and its creation. This allowed him to revolutionize Apple. Now that Apple has become the giant that it is, we need to see Tim Cook revolutionize with the times. As mentioned earlier, the iPad has a huge pull with children and the youth. Apple may have realized this to a certain extent, though they fail to revolutionize the style or amenities of the iPad. Wouldn’t it revolutionize the tablet market if they changed the size or made the product waterproof?
As a bull on Apple, my only fear is not that they fail to keep up with the times, but rather fail to stay ahead of the trend. Steve Jobs made his name by creating the trend, if Tim Cook doesn’t do the same in the coming years, we will be speaking of Apple as we speak of Research In Motion today. If you support the bull theory on Apple, remember what made Apple a giant (creating new markets, the smartphone and tablet) and make sure that they still are actively doing what makes them great.
Steve Jobs was set in his ways, and by being so he made Apple an economic force to be reckoned with. Though as anyone who has studied the history of the American icon Henry Ford, he was similarly set in his ways, and this led to the near end of the great motor company. Ford motor company was eventually saved by Henry’s heir, when the company eventually stepped outside its comfort zone. Tim Cook must show the world that he is not only capable of leading Apple down new avenues, but that he can succeed in doing so.
Many die hard apple supporters may think the above analogy has no merit to it. If Apple was to reorient its strategies, thus changing the size of the iPad, or to implement another device some other company will capture that market.
“You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.” – Steve Jobs