Homebuilders Buck Stock Weakness; Top Bet on Rebound | By: Trang Ho

Investor’s Business Daily


Homebuilder ETFs defied the stock market’s sell-off Tuesday on news that new-home construction rose to its highest rate since July 2008.

IShares Dow Jones U.S. Home Construction (ITB) rose 2.51% to 20.39. SPDR S&P Homebuilders (XHB) added 2.15% to 25.93. Both regained their 50-day moving averages after pulling back from new highs. They’re both in solid up trends and sport Relative Strength Ratings of 95 and 93, respectively. That means they’re outpacing 95% and 93% of the market. As this year’s market leaders, they’ve rallied 73.31% and 53.56% year to date.

Housing starts rose by 3.6% in October from September, while the market had expected a drop of 4.5%, the Commerce Department reported. Total starts were 41.9% higher vs. the year-ago period. Single-family homes fell sequentially by 0.2%, but were still 35.3% higher year over year.

Existing home sales rose 2.1% to a 4.79 million annual rate in October, according to Ned Davis Research.

Inventories fell 1.4% to 2.14 million, or 5.4 months’ worth of supply — the fewest number of homes on the market since December 2002.

Home prices rose in every region across the U.S. The median home price soared 11.1% over a year ago — the most in nearly seven years — to $178,600, owing to increased sales of higher-priced homes.

“The housing market is clearly undergoing recovery,” Joseph Kalish, chief global macro strategist at Ned Davis Research, and his colleagues wrote in a client note. “Moreover, we think the recovery is still in its early stages and should last for several years.”

However, “difficult appraisals, tight lending standards and shortages of lots in certain areas remain obstacles to the recovery,” Kalish and his colleagues noted.

After an impressive gain this year, homebuilder stocks in ITB and XHB could be vulnerable in 2013, says the Jerome Levy Forecasting Center in Mount Kisco, N.Y.

“Moreover, with the homeownership rate still in decline, the recovery in housing construction is likely to be tilted toward multifamily units,” said “The Levy Forecast” released last week. “This does not play to the strengths of most of the major publicly traded homebuilders, whose focus is on construction of single-family units.”

Top Housing Investment Idea

Steven Roge, a portfolio manager with Long Island-based R.W. Roge & Co. with $200 million in assets under management, recommends playing the housing recovery with Apollo Residential Mortgage (AMTG), which currently yields a fat 16.8%. The New York-based firm invests in U.S. residential mortgage assets and offers agency and nonagency residential mortgage-backed securities. Agency bonds are mortgage-backed securities issued by government-sponsored firms such as Ginnie Mae, Fannie Mae or Freddie Mac. Apollo’s shares appreciated 7% since its initial public offering in July 2011. It appears to be looking for a bottom at its 40-week moving average line, 13% below its all-time high.

Roge wrote in a client note: “We have the opportunity to purchase AMTG at a 30% discount to book value. AMTG targets 60% (asset allocation) in agency (bonds), 30% non-agency, and 10% cash.

“The agency position has pre-payment protection, so any policy change with regard to forced refinancing, would leave AMTG’s portfolio relatively unaffected.

“The market for agency bonds should have a floor under it. The Federal Reserve announced quantitative easing 3 (QE3) this past September. Under this plan they have the ability to purchase $40 billion in mortgage-backed securities every month.”

Major Indexes End Flat On Bernanke Comments

SPDR S&P 500 (SPY) edged up 0.04% to 139.19. It regained its long-term 200-day moving average after surging 2.02% the prior session.

PowerShares QQQ (QQQ), tracking the 100 largest nonfinancial stocks on the Nasdaq, added 0.03% to 63.80. SPDR Dow Jones Industrial Average (DIA) ticked up 0.06% to 127.71. Both QQQ and DIA fell below their 200-day lines two weeks ago, which is very bearish.

In a speech at the Economic Club of New York, Federal Reserve Chairman Ben Bernanke said the fiscal cliff was a big threat to the economy and urged Congress to resolve it and the debt-ceiling issues.

“Bernanke held out the prospect that if lawmakers can deliver fiscal clarity — a plan for long-term deficit reduction without harming the recovery — the New Year could be a very good one for the U.S. economy,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “We agree with Bernanke that the fundamentals for stronger growth are falling into place. But we doubt that we’ll have full fiscal clarity early in 2013.”

“We’ll probably have a short-term agreement with some limited tightening, to avoid going off the cliff, plus an agreement to put a longer-term plan in place later in 2013,” Gault added. “So we suspect that the uncertainty over fiscal policy will linger well into 2013.”


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