Some things aren't supposed to happen. Take the homebuilders. As rates are going up, homebuilders stocks are supposed to go down. As the Fed steps away from its bond buying, we are supposed to see some serious losses in the group.
But what if the market figured that out ahead of time? What if the stocks refused to go higher simply because there would come a day of reckoning and then a smashing of their valuations.
Yet here, in a nutshell, is what happened to the group.
First, it was a leader coming out of the Great Recession as it was a one-for-one beneficiary of low rates.
That led for some tremendous outperformance, particularly by Pulte (PHM), which dominated the contingent. But as home prices increased in value nationwide, two things happened that were supposed to hurt the group. The banks and Fannie Mae, which were stuck with massive amounts of inventory, and the hedge funds, which had bought a lot of housing to play the bottom, were supposed to be liquidating like mad, depressing the prices of homes and crushing the homebuilders.
So they got hit and the multiples shrank. Who would want to own the stocks of companies that get hurt when rates go higher as well as get overwhelmed by a supply of houses about to hit the market?
But, three things happened that the housing bears didn't count on.
First, there was no reason for the hedge funds to sell. Turns out that running rental homes for a profit, if your cost basis is low enough and your mortgage cheap enough, is a recipe for success, not failure. Second, the banks weren't suicidal and didn't dump all at once. Third, we had a rate scare in the summer that temporarily froze the market, but then it recovered and sales picked up again.
All of these positives came at a time when the rest of the market had gone up enough that people were looking for something new to buy. The terrific Lennar (LEN) quarter spurred it all and now the group looks good to go for the rest of the year.
