More Reasons To Buy Homebuilders Now
The Dynamic Wealth Report
June 12, 2009
But What Does It Mean?
This morning was just like every other morning. I woke up,
showered, dressed, and made breakfast. Then I started my commute to the
office. The drive takes anywhere between 20 to 40 minutes – depending on
traffic.
Every morning I listen to the local financial news radio station.
It’s a great source of ideas, news, and general market knowledge. But
sometimes it can be really frustrating.
Let me explain.
After the news break, the regular hosts came back on. They started their
usual discussion of the market. They just droned on and on. Honestly, it
was putting me to sleep.
It was boring talk of what each market, commodity, or stock did.
The Dow was up. Lean Hogs were up. Technology stocks are down. The
longer these hosts talked, the more frustrated I became. I wanted to
yell at the radio.
See, the hardest problems for people in the financial industry isn’t
understanding the market. It’s explaining why the markets are moving
like they are…
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Knowing oil is moving higher is interesting, but not really useful.
Putting information into context is incredibly valuable.
Take lumber for instance.
Lumber trades on the Globex Exchange. It is part of a really interesting
market subgroup called Forestry Products. It includes hardwood pulp,
softwood pulp, and of course, lumber. Each lumber contract is comprised
of 110,000 board feet. It’s priced in dollars per board feet.
So, back to lumber.
What good is knowing lumber prices fell $4 yesterday? Like I said,
interesting, but not very useful.
Now, what if I told you lumber prices are up since the beginning of the
year. But here’s the kicker… they’re not just up a little bit. Nope. The
price of lumber is up 42% in just the last three months.
Take a look at the chart.
Clearly the $140 level is a strong point of support. What’s really
interesting is the jump in prices starting in May.
Again, good information, but why is lumber spiking now?
One of the biggest users of lumber is the housing market. Glance at
recent housing statistics and you’ll notice an interesting trend. Single
family housing permits were up in March and again in April. So were
single family housing starts.
What does this tell me?
It looks to me like more houses are starting to be built. Permits are up,
housing starts are up. Now lumber prices are starting to move higher –
caused no doubt by increased demand from the homebuilders.
The conclusion I’m drawing is a simple one.
It looks like the housing market is starting to turn around. And that
means the homebuilders will probably start seeing more activity. Are we
going to rocket higher right away? Probably not. But that’s not what we
want anyway.
The news on higher lumber prices is telling me the housing market has
hit a bottom. Now is the perfect time to put some money into the
home-building and related industries.
I’m almost out of room for today. Instead of mentioning a homebuilder or
two, let me make this suggestion. Take a look at the
SPDR S&P
Homebuilders (XHB). It’s a great way to get exposure to the entire
industry – not just homebuilders but all the suppliers as well. As
building activity accelerates, this ETF should move significantly
higher.
• Cheesecake Factory (CAKE) was upgraded by Argus from
a “Sell” to a “Buy” rating. The analyst gave the stock a $20 target. If
consumer confidence remains stable, this is a great call.
• Nokia (NOK) was downgraded from an “Overweight” to an
“Equal Weight” rating by Barclays Capital. Recent rumors of the IRS
looking to tax cell phone users might dampen sales.
• Merriman recently initiated coverage on a number of metals companies
including AK Steel (AKS), Commercial Metals
(CMC), and Schnitzer Steel (SCHN). With the recent run
up in industrial metals prices, this looks like a good move.
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