Corner of Wall & Main: China, Homes

 | Apr 23, 2014 | 3:00 PM EDT
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There is a host of information that hits during the trading week and I do my best to point out most of it in my weekly column "The Week Ahead." What's been missing is what to do once that data hits the tape.

What Corner of Wall & Main will try to do is put some of the data -- economic, earnings, etc. -- into perspective and point out companies and their shares that are poised to benefit, as well as those that are vulnerable.

Flash PMI's not good for FXI, but positive for EWG. So far this week, it's been a little quite with only the leading indicators and a bunch of housing-related data. The March reading for Leading Indicators was pretty much as expected and reflected the fall off of extreme winter weather and suggests economic activity should pick up in the June quarter compared with the March one. That's not that surprising. We saw further signs of slowdown in China in the form of the Flash PMI data for April, which reported a continued dip in orders and backlogs. On the ETF front, we've seen some weakness of late in iShares China Large-Cap ETF (FXI) shares and today's data are likely to continue that trend.

On a positive note, the flash reading for the Markit Eurozone PMI Composite Output Index for the eurozone rose to 54 in April from 53.1, marking the tenth month above the all-important 50 line. Digging into the data, there was growth across the region, but as has been the case, it was once again led by stronger economic activity in Germany. One way for Real Money subscribers to play that rebound is the iShares MSCI Germany ETF (EWG).

More right-priced product needed by homebuilders to curb sticker shock. On the housing front, existing home sales data for March came in at 4.59 million units on a seasonally adjusted basis, pretty much in line with the 1Q 2014 average of 4.6 million units, but down from 4.94 million in 4Q 2013. Even though winter weather abated in March, we didn't see a meaningful pickup and I attribute that to the continued march higher in existing home sale prices, which climbed nearly 8% year over year in March. 

That follows a string of high-single-digit year-over-year increases and likely means that first-time homebuyers are being priced out of the market. It's easy to understand why, with only five month's supply of existing homes for sale. As anyone who's tried to buy a house lately will tell you, it is a big seller's market simply because there are too few homes on the market. We're seeing the same issue with new home sales, which, according to Census Bureau data, stood at a six-month supply in March.

In many respects this screams of a supply-demand imbalance that needs to be at least partially corrected. We've started to see a rebound in single-family housing starts in February and March off of the January lows and March building permits of 990,000 were ahead of the trailing 12-month average of 972,000.

All of the above confirms what I have been sharing with Real Money Pro subscribers over the last few months. In order to spur the housing market higher, homebuilders need to bring more supply at more affordable levels to market. We've already had recent and solid earnings reports from Hovnanian Enterprises (HOV), Lennar (LEN) and KB Home (KBH), all of which reported favorable backlog comparisons. Because we're deep into earnings season this week, we'll get confirmation from the order and backlog reports from D.R. Horton (DHI), Ryland Group (RYL), M/I Homes (MHO) and Pulte Group (PHM) tomorrow (Thursday). I continue to favor Toll Brothers (TOL) shares over most of the builders given the geographic exposure, as well as the move into more affordable housing and active adult/retirement community space.

RUSHA confirms heavy truck growth for PCAR, VOLVY, CMI and more. The other piece of economic data we'll get this week is durable orders for March, but given mixed to positive earnings reports from General Electric (GE), Honeywell (HON) and Rockwell Collins (COL) the recovery in U.S. manufacturing appears to be intact. Rush Enterprises (RUSHA), which operates the largest network of commercial vehicle dealerships in North America, shared the upbeat outlook for heavy duty and medium duty trucks in 2014, which echoes the improving manufacturing outlook. Per ACT Research, U. S. retail sales for Class 8 vehicles are expected to reach 217,000 units in 2014, a 16% increase over 2013. ACT Research also forecast U. S. retail sales for Class 4-7 vehicles to reach 193,500 units in 2014, an 8% increase over 2013. This bodes well for shares of truck manufacturers like Paccar (PCAR), Volvo (VOLVY) and Navistar (NAV), as well as engine companies Cummins (CMI) and Caterpillar (CAT).

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