Now that we've reviewed the shallowness that characterized market discourse last year, let's move on to the 10 big themes I've observed in 2012, all of which are poised to remain robust well into 2013.
1. The Housing Resurgence
First, and predominant, is the return of housing as a major driver to the U.S. economy. A lot of different people will give you a lot of different estimates as to how impactful housing is on the U.S. economy. To that I say: If I were an economics professor, I would be all over trying to figure out that correlation. But I am not. I am a stock-picker, and all I care about is what this means to the stocks in the sector -- and, for them, this recovery has been nothing short of amazing.
We had the homebuilders, led by Pulte (PHM) Lennar (LEN) and Toll Brothers (TOL). We had the housing-related retailers -- Home Depot (HD), Williams-Sonoma (WSM), Pier 1 (PIR) and Lowe's (LOW). We had the building-products companies -- Louisiana-Pacific (LPX), Weyerhaeuser (WY), Rayonier (RYN), Plum Creek Timber (PCL), USG (USG) and Owens Corning (OC). We had the suppliers, like Whirlpool (WHR), Newell Rubbermaid (NWL), Masco (MAS) and Mohawk (MHK). All of these will also be helped by the eventual rebuild that must happen in the aftermath of Hurricane Sandy -- which, while not as big as that following Katrina, will help spur the second quarter's gross domestic product growth.
Then you have ancillary plays from new-household formation -- companies like Discovery Communications (DISCA), Time Warner (TWX) and Comcast (CMCSA) -- or from road-building, such as Vulcan Materials (VMC). Finally you have the stealth housing play, Berkshire-Hathaway (BRK.A),which really took off in the fourth quarter because it also participated in the next theme, insurance.
Can this move continue? How many times have we heard that question? How many times has it been answered negatively? How many times have we heard that it is only a matter of time before the Federal Reserve turns off the juice, even though Chairman Ben Bernanke just told you last month that he's going to keep money easy until unemployment reaches 6.5%?
Here's why I am not concerned. During the sector's heyday, homes were being built at a rate of about 1.5 million a year. OK, maybe that's not sustainable. But it dropped to 400,000 a couple of years ago, back to levels of the 1950s, when the U.S. had half as many people as it does today. Talk about unsustainable. That's ridiculous. Of course, the bears told us it didn't matter, given the shadow inventory of homes owned by banks.
But, in about a year's time, a combination of factors ate through that shadow inventory once pricing came back: banks working with underwater lenders, a pro-homeowner Washington and the annual destruction of homes through fire and flood. The rally in the bank stocks tells you fears about the underwater owners will not be realized. Those homes are roaring back in value, too -- and they are still good, affordable buys!
That's especially so given these low rates and high rents. I think that, unless you are in the real estate market, as I am, you have no idea how ridiculously high rents are. It is still quite difficult to get a loan to buy a place. But, as housing goes up in value, you will see the major banks lend again -- just as Bank of America (BAC) CEO Brian Moynihan told you would happen last Friday.
That's why I think we have multiple years -- not one year, but multiple years -- of housing strength ahead of us. This remains the go-to group for 2013, and Washington's debt-ceiling talk will be terrific for opportunities to buy.
2. The Insurance Comeback
I think several things are at work here. First, there have been enough catastrophes out there to take out a lot of capacity, and insurance rates are going up. Second, the group's just done nothing for ages, and it is way behind the broad market. Finally, and most important, the asset side has come back to life with a vengeance. These companies owned a ton of miserable, awful housing-related paper -- and, as housing increases in value, this paper's coming back.
To me, AIG is the best way to play it, because this company has pretty much everything that had been negative, but is now good.
3. Ne'er-Do-Well Banks Recuperate
A third theme is right there with the insurance companies: the banks. I think people don't understand that this group is so far behind the market that we tend to think that it is never coming back -- at least if you think about the book values.
But something happened in this market in the fourth quarter: The book value started to come to relevance as a measure of worth. If that's the case, you're going to see some remarkable moves in everything from Regions (RF), First Horizon (FHN) and Zions (ZION) to Morgan Stanley (MS) and Goldman Sachs (GS), to Bank of America and Citigroup (C). These are the companies for which the book value had been suspect -- and it may no longer be suspect amid recovery in the kind of paper that is also owned by the insurers.
I know that you could argue I am leaving out the best three -- Wells Fargo (WFC), U.S. Bancorp (USB) and JPMorgan Chase (JPM) -- all of which I like. But the theme here is not "best of breed," which is more of an evergreen concept. The theme is the cyclical recovery of the portfolios of the ne'er-do-well banks. I wouldn't overlook Capitol One (COF), either, because its credit-card business is hot. Also recall its purchase, for very little money, of the ING Direct business from ING Group (ING) -- a business that is humming.
4. Ascending Autos
The fourth rising tide? Autos. This group has been tough, because we've been in an American-related renaissance as auto production in the Great Recession has dropped almost 40%. We just can't talk enough about that decline in build, as well, which is almost as shattering as the plunge in housing starts. We just didn't see it in the stocks because the major players, Ford (F) and General Motors (GM), are huge international companies and they were being pulled back by Europe and even China.
In 2013, China stands to be a tailwind and Europe will be cordoned. That means Ford and GM are going to be huge stocks.
They should be terrific -- particularly Ford, which keeps refinancing and refinancing, and just refinanced a gigantic piece of paper last week. No one even notices anymore. They should. They will when the company reports. Meanwhile, GM has bought a big piece of the U.S. government's stake, which is going to set up this stock for a terrific 2013. I would buy both.
The ancillary auto plays make sense here, too -- like Goodyear (GT), Cooper Tire (CTB) and CarMax (KMX). These shares all rise with auto builds, which I think could be up to 16 million this year. The consolidation in rental cars, coupled with destruction from Superstorm Sandy, will mean that Hertz (HTZ) and Avis Budget (CAR) should go still higher as a huge wave of consolidation sweeps over the group.
In part two, I'll hash out the last six themes.