Mixed news on Wall Street this morning as we got some big earnings announcements and housing data. Housing starts came in better than expected posting a 3.6% monthly gain. Of course, starts are still off almost 50% year over year, but the sequential improvement is nice to see. I still maintain that much of this is seasonal and housing’s true color’s will come out in the latter half of the year. In addition, the last thing we need is more supply on the market so it’s debatable whether these starts figures are positive at all.
Analyst reactions were mostly bullish:
- With the number of unsold homes for sales already extraordinarily high and set to ramp up further in coming months as foreclosures accelerate and the recent backup in mortgage rates potentially puts some pressure on sales, this recent spike in single-family housing starts certainly seems ill-advised and likely to worsen still massive imbalances in the housing market. Meanwhile, rising apartment vacancy rates, an even worse inventory situation in the condo market than for single-family homes, and the collapse of the commercial real estate financing market are likely to continue to keep multi-family construction badly depressed. –Ted Wieseman, Morgan Stanley
- This is a pleasant surprise; we expected a period of consolidation after the unexpected leap in May — which was revised up. Even better, all the gain in starts was in the single-family sect or, up a massive 14.4%. This was the fourth straight gain, though note that single-family starts need to rise another 20% or so just to return to the trend prevailing before Lehman. We are inclined to reserve judgment on whether this is the start of a re al rebound or just a return to the pre-Lehman trend. –Ian Shepherdson, High Frequency Economics
- Multi-family construction is being restrained by the glut of condominium and apartment projects completed over the past couple of years. Apartment vacancy rates have soared in recent years. Rising vacancy rates are pulling down rents and reducing the incentive to build new properties. –Mark Vitner, Wells Fargo
- The improvement, on the surface, did not appear to be spread evenly across the nation. There were about 30% gains in both the Northeast and the Midwest, a small drop in the South but a large decline in the West. But even in those areas where starts were off, single-family activity still improved. That is a sign that conditions are changing in most of the nation. –Naroff Economic Advisors
- The evidence is growing that housing construction has bottomed out and that single-family housing construction is beginning to recover—although, given the volatility from month-to-month in housing starts and building permits, we would like to see the July data before talking too much about recovery versus stabilization. Moreover, stabilization and modest recovery in housing construction and home sales does not imply stabilization in home prices given the inventory of homes for sales and elevated levels of foreclosures. –RDQ Economics
- Single-family starts have risen at an accelerating rate in every month since March and are up in each of the four census regions. Because starts remain at an extraordinarily low level – below to trough of every other post-war recession – further increases from here look likely. However, the excess inventory of existing homes should slow new investment as starts recover from today’s depressed levels. –Nomura Global Economics
- There is no doubt that today’s report, particularly concerning the single family sector, was considerably better than expected. However, before getting too carried away by the news, bear in mind that the National Association of Homebuilders’ Housing Market Index for July, released yesterday, is still languishing at a very low level of 17, and it has managed to improve by just three points in the most recent three months after bouncing in April from record lows set over the winter. Therefore, while this index (and single family starts) are well off the massively depressed lows set late last year and early this year, this has in all likelihood been a rebound from unsustainably weak results rather than the start of anything resembling a sustained “v-shaped” recovery. –Joshua Shapiro, MFR Inc.
On the earnings front we got news from three big bellwethers: Citi, B of A and GE. Bank of America reported better than expected numbers, but issued a tepid outlook. CEO Ken Lewis said:
“Profitability in the second half of the year will be much tougher than the first half, given the absence of several one-time items that were positive to earnings. I think we have to get through the next couple of quarters and into 2010 before it becomes apparent that the market strength of our various businesses will help us return to more normalized earnings.”
Non-performing loans surged to $31 billion as the banks balance sheet is still rittled with toxic assets. The bank also notes that the deterioration in consumer credit could be leveling out.
Citi had a similar report. They beat estimates mostly due to one time items, echoed calls that the consumer credit situation is not deteriorating as rapidly, but also had to set aside billions to cover loan losses.
If I were going to focus my time on one earnings report of the season it would be General Electric without a doubt. They have, in my opinion, replaced GM in the “so goes General __________ so goes America.” No company represents the diversification of the American economy better than GE. Their quarter was not as pretty as the banks above and quite frankly, I am surprised that the market is holding up this well.
GE beat on the bottom line, but posted a continuing trend this earnings season by missing on the revenue line. And it wasn’t a small miss. GE reported $39.1B in revenues versus expectations of $42.1B. On the conference call CEO Jeff Immelt did the equivalent of cutting guidance when he said the infrastructure and TV units (two of GE’s primary revenue drivers) would be flat, down from the previous guidance of +5% growth: “We see these earnings being flat for the total year,” Immelt said.
All in all, I am a little surprised that the market is holding up so well considering the equivalent of guidance cuts at GE and B of A, but the bulls are back in control and optimism is likely to rule the day until someone important disappoints on the earnings front.