Corner of Wall & Main: Housing Revival?

 | May 21, 2014 | 5:00 PM EDT  | Comments
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The big news coming out of the first half of this week was the dismal retail results from the likes of Dick's Sporting Goods (DKS), Urban Outfitters (URBN), Target (TGT), American Eagle Outfitters (AEO), and TJX (TJX), which owns TJ Maxx, Marshalls and HomeGoods.

Electronics and appliances retailer hhgregg (HGG) broke with issuing formal guidance and instead forecasted same-store sales growth to be "between negative low single digits to flat, with the first half of the fiscal year below this expectation and the second half of the fiscal year above this expectation." 

Even though results from Home Depot (HD) and Lowe's Companies (LOW) were not stellar for the quarter itself, commentary from both companies pointed to a stronger May. While this points to a potential pickup in housing and repair-and-remodel spending, there remain several issues plaguing the housing market, including job creation, wages, low inventories and high prices.

Chris: While I agree there are factors impacting demand (job creation, wages, other rising costs and high student debt), the housing industry also suffers from a supply issue. Single family housing inventories remain near historically low levels, while prices have climbed significantly over the last few years. Friday's new home sales report will give us the latest snapshot on those inventory figures.

In my view, this will be corrected as homebuilders bring on more supply of more affordable housing. Make no mistake, I'm not expecting the housing market to return to 2007 levels. Rather, I see it continuing to grow though out 2014 and into 2015. That's why we are long both Toll Brothers (TOL) and Fortune Brands Home & Security (FBHS) in the Thematic Growth Portfolio.

Lenore: You have a point but, I think you're coming up a little short on the big picture. Real median household income is back at 1995 levels. Household savings rates are below 4%, which is lower than in the 1930s, and continuing to fall. Student loan debt is exploding in size and delinquencies are rising. The percentage of the population that is actually employed is back to where it was 30 years ago. So, families incomes levels are abysmal, they've got very little savings, young people are already saddled with unprecedented levels of debt and fewer and fewer people have jobs, but we expect more people to buy homes. Go figure.

As part of its earnings miss, Dick's Sporting Goods pointed out there was no weakness in sports and apparel sales -- good news for Nike (NKE) and Under Armour (UA) -- but that was a different case in golf and hunting, which suggests some softness, if not sluggish sales, at companies like Callaway Golf (ELY), Smith & Wesson (SWHC) and their competitors. One thing to note on firearm sales, looking past Dick's rearview mirror comments that likely reflect year-on year-declines, in FBI firearm background checks the data show a solid rebound in March and April. Also, Smith & Wesson already reported its quarter ending this past January, which means its results have already started to move past those year-on-year declines.

Even though it was a very slow start to the week on the economic data side of the equation, we again received confirmation that growth slowed in the March quarter. This time it was the Organization for Economic Cooperation and Development (OECD) that revealed to us what we have been hearing and living for some time now. The OECD said the combined gross domestic product of its 34 member countries increased by 0.4% in the first quarter from the final three months of 2013. That marked a slowdown from the 0.5% rate of growth recorded in the fourth quarter of last year and the 0.7% rate of growth recorded in the third quarter.

As we have heard several times over from a variety of sources -- economists, companies like Home Depot and Lowe's above -- severe winter weather impacted the U.S. economy as China's economy continued to cool. Offsetting that was the surge in Japan's growth rate, which surged to 1.5% from 0.1%, but that was more due to a pull forward in consumption ahead of the April sales tax increase. The ideas of a pull forward in Japan and potential pent-up demand in the U.S. will be tested tomorrow when Markit Economics and HSBC report their various flash PMIs for May.

The balance of the week is retail heavy on earnings with Gap (GPS), Ross Stores (ROST) and Foot Locker (FL), as well as technology companies Hewlett-Packard (HPQ) and Marvell Technology (MRVL). Given the AT&T (T) deal for DirecTV (DTV), TiVo's (TIVO) management discussion as part of its earnings call could provide some interesting listening. 

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