Macro Wrap – Housing Market Ahead of Itself, $TOL

by Enis February 20, 2013 7:43 am • Commentary

Toll Brothers reported an earnings miss this morning, reporting 0.03 vs. consensus estimates of 0.10.  The housing sector is one of the most overvalued sectors in the U.S. stock market, for several reasons.  Here are 3 brief points on why I’m bearish on TOL and U.S. homebuilders as a whole:

1)  This is a housing recovery, not a housing boom.  The housing market has clearly improved in the past 12 months, but TOL’s current selling pace in its communities is still below its 25 year average
2)  Meanwhile, the stock is priced for more than a boom.  The stock is trading at 2005 levels, when the stock earned more than $4 per share.  In 2013, it’s slated to earn around $1.
3)  Relative valuation for other sectors much better than homebuilders like TOL.  If you want to get long the U.S. housing market, buy Toyota or Ford.
On a more macro basis, building has gotten very optimistic in the past 9 months, while the actual pace of sales has been more tepid.  As this Business Insider article from yesterday points out, housing completions are rapidly outpacing housing sales in the past year:
Screen Shot 2013-02-20 at 7.36.40 AM
Meanwhile, the NAHB Housing Market Index registered its first drop since Apr 2012 in yesterday’s release.  The XHB ETF was actually down yesterday, even with the broader market strongly higher.  Today’s Housing Starts and Building Permits data at 8:30 am EST holds even more significance than usual given these recent negative indications.
Markets overnight:
  • Asian equity markets were almost all in the green, with Japan and Korea leading the way.  The New Zealand central bank governor said he was “prepared to intervene to influence the kiwi,” another salvo in the currency wars.  
  • European markets opened flat, but are now down about 0.25%, in a quiet session.  Angela Merkel of Germany said the Euro was in its “historical” range.
  • SPX futures are down 0.1%, the dollar is generally higher, and Treasuries are flat.  Commodities are broadly lower, led by precious metals.  
  • In addition to the housing data, PPI will also be released at 8:30 am EST.  FOMC minutes will be released at 2:00 pm.