Today all eyes are on the release of the Federal Reserve's FOMC meeting notes, while our concerns with the struggling consumer appear to be proving out in recent data releases. We'd love to high-five each other, but given the dour news, it just feels wrong.
Yesterday's brutal drop in the Conference Board Consumer Confidence index, falling from 99.8 to 90.9 in July, with the Expectations Index falling even further from 92.8 in June to 79.9 in July, may give the Fed additional cover to hold rates steady past September's meeting. This makes the last real potential rate increase in December, and we doubt the Fed would like to get the Ebenezer award around the holidays, so we're still seeing better than 50% odds for no hike this year. Almost every metric in the Conference Board report painted a consumer looking increasingly pessimistic, with those anticipating more jobs in the months ahead falling from 17.1% to 13.1%, and the proportion expecting growth in their incomes falling from 17.6% to 17%, with those expecting an actual decline rising from 10.6% to 11.2%. Overall it was a bummer of a report, with the index now below its historical average of 93.4 for the first time this year.
Yesterday's release of the quarterly U.S. Census data on household formation also revealed that while household formation continues to rise steadily, homeownership rates continue to fall, now down to levels not seen since the fourth quarter of 1965! This is another reason to suspect the Fed may not raise rates just yet, despite its desperate desire to get to a more normal interest rate environment, since should the economy stumble before it does, it's got hardly any arrows left in the quiver.
This is good news for the longer-term outlook for renter-focused REITs such as the following:
-- Equity Residential (EQR), which for the second quarter matched estimates for funds from operations of $325.3 million ($0.85 per share) vs. $295.9 million ($0.79 per share) a year ago and increased guidance by $0.02 at the low end for funds from operations for the full year to $3.39 to $3.45. Shares are up 2.76% year to date as of Wednesday morning.
-- Avalon Bay Communities (AVB), just reported revenue of $475.5 million, beating estimates for $450.8 million coupled with funds from operations of $2.18 per share, beating average estimates for $1.92 and EPS of $1.29 vs. estimates of $1.16. Shares are up 3.7% year to date as of Wednesday morning.
-- Mid-America Apartment Communities (MAA) will announce its second-quarter results today after the market close. Shares are up 1.7% year to date as of Wednesday morning.
-- Camden Property Trust (CPT) will announce second-quarter 2015 earnings after the market close on Thursday. Share are up 5.5% year to date as of Wednesday morning.
On the other hand, this is a headwind to homebuilders, such as the following, which for those looking for income also happen to provide lower dividend yields, if any, than the apartment REITs:
-- Toll Brothers (TOL), whose current fiscal quarter ends Friday, was up just over 12% year to date as of Wednesday morning.
-- DR Horton (DHI), which sells the most homes among U.S. homebuilders, yesterday announced reports that beat Wall Street's estimates for both earnings and revenues in its 2015 third quarter, with revenue of $2.88 billion and EPS of $0.60 vs. expectations of $2.76 billion and EPS of $0.50. Home sales increased 37% year over year, with sales order backlog rising 12%, proving that even facing headwinds some companies make it work! Shares of the company are up nearly 11.5% year to date as of Wednesday morning.
-- KB Home (KBH), whose current fiscal quarter ends Aug. 31. Shares are down almost 6.5% year to date as of Wednesday morning.
Recently many U.S. indices have been dancing around critical levels, with the S&P 500 recently dipping below a key technical point, its 200-day moving average, and no longer appearing to be in an uptrend. Just one week ago it was within one point of making an all-time high, yet the total number of stocks making new 52-week lows was surging -- never a good sign. In fact, as the market has been making new highs over the past 13 months, each new high has been made with a lower percentage of stocks in an uptrend.
The chart below illustrates this concerning trend with the S&P 500 continually trending upward while the ratio of new 52-week highs to new 52-week lows continuing to degrade. This divergence cannot continue indefinitely, and so far we aren't seeing much that has us thinking the number of 52-week highs is going to start improving. Given the current state of affairs, we are more focused on refining our shopping list of securities rather than entering into new long positions.