On Friday we get a number everyone fears: the Labor Department's Non-Farm employment report. Ever since the economy turned up we have found ourselves in an environment where the stronger the number the more fears we have that the Fed will accelerate rate hikes and derail the economy.
Now, we know that's good for the banks; they make more money off your deposits with every rate hike. That's got huge bottom line potential for all banks because they basically do nothing on a new rate hike to earn the additional profits.
But higher rates are certainly tougher for business in general and, most important, in particular, housing. In fact, I believe a strong employment number would be met with a massive amount of selling in the homebuilders, the most rate sensitive group.
But, perhaps that view is out of date. Perhaps we are dealing with a different set of circumstances that makes being fearful of a strong employment number just plain old fashioned and antediluvian versus the Great Recession.
What makes me so confident that we may be looking at tomorrow's number the wrong way? Simple: the conference call earlier this week of the largest homebuilder in the country, Lennar (LEN) .
First it was a total tour de force, sending the stock up from 57 to 64..
Second, the main reason for the rise had to do with the explanation that long-time CEO Stuart Miller gave for why his business is so strong: the labor participation rate. That, and not the employment number itself, may be the key 8:30 a.m. figure.
Take a listen to what Miller said: "So look, interest rates tend to be a kind of flashpoint for homebuilding, but it is never properly contextualized." He continues: "Interest rates go up within the context of an environment, and the environment right now is one of low unemployment and generally wage growth. And what is not talked about enough is participation rate. Labor participation rate improvement. What we're seeing in the field is that more of our customers are coming in with confidence. They're coming in with certainty about higher wages." In other words, he's saying that the easier it is to get a job the better the homebuilding business is and those trends "tend to really offset the impact of a higher interest rate," so focus on participation rate not whatever rise that might come from interest rates.
Frankly this was stunning logic to me. I know that we are building far fewer homes than we used to and we are very supply constrained nationwide. I know that only the big homebuilders like Lennar, Pulte (PHM) , KB Home (KBH) , Toll (TOL) and DR Horton (DHI) can really navigate the changes in environmental laws that so restrict new homebuilding. The effect of the new tax law is to stimulate the economy and that is good for the homebuilders, as does the doubling of the standard deduction which Lennar tells us is allowing apartment dwellers to accumulate savings they need for a down payment.
And the changing fortunes among millennials has to be noted given that the ease with which jobs can be found has allowed a new generation to finally move out of their parents' homes and get one themselves, just in time for multiple children.
Yet, the revelation that we are looking at the wrong number tomorrow is what gives me hope that even if we start the surge toward 3% on the ten-year treasurys again, we shouldn't rush to sell these stocks and others connected with the home including retailers geared toward home spending and home investment.
Perhaps, instead, we should be buyers. That's a huge and welcome change, one that is so different from the selloff we got in February on the last hot employment number. I always say that panic should not be a strategy. If we see a large change in the participation rate, and Lennar and the other homebuilders get hit anyway, these all domestic businesses may be just the right stocks for this new anti-international trade environment.