Around the Street

Signs of Hope for Housing?


by BW Staff

This St. Patrick's Day, even the economic data reports were wearing green. In a welcome surprise, U.S. housing starts jumped 22% in February, according to a report released Mar. 17. The news helped boost various housing-related stocks, including builders Ryland (RYL) and KB Home (KBH), as well as retailer Home Depot (HD). Another Mar. 17 release on wholesale inflation was also encouraging, as it showed inflation remains well under control — something to comfort Federal Reserve policymakers as they kicked off their two-day policy meeting.

What did Wall Street economists and strategists have to say about these and other developments on Mar. 17? Here's a sampling, as compiled by BusinessWeek staff:

Ted Wieseman, Morgan Stanley

Housing starts were much stronger than expected, with overall starts surging 22% to a three-month high of 583,000 annualized, to partly recover from a 38% plunge over the prior three months. While improved weather and some stabilization following the extraordinary rate of decline in recent months helped marginally boost single-family starts, almost all of the upside came from what is likely a largely temporary spike in the volatile multifamily component.

Incorporating these results, we boosted our forecast for first-quarter residential investment to -30% from -32%. This component is such a small share of GDP at this point, however, that this had no impact on our -4.8% GDP forecast.

David Greenlaw, Morgan Stanley

The headline producer price index (+0.1% [over January and] -1.3% year-over-year) came in below consensus (and much lower than our own estimate) due to a surprisingly sharp plunge in food prices and a smaller than anticipated gain in energy. Meanwhile, the core [rate, excluding food and energy] (+0.2%, +4.0% year-over-year) was close to expectations even though there was some surprising elevation in categories such as light trucks and tobacco.

The core PPI is still running +4.0% on a year-over-year basis, quite close to a 20-year high. However, we expect a very rapid deceleration as the declines in commodity prices are passed through to finished goods and as severe weakness in the global economy reduces operating rates and pressures pricing power for a wide range of items.

Action Economics

Obama economic adviser [Lawrence] Summers argued for a "resolution regime" for large financial institutions, similar to the FDIC's role with banks, in a CNBC interview outlining the Administration's economic and tax policies. He said that Treasury Secretary Geithner is pursuing all legal means to rein in the "outrageous" AIG bonuses, but would not abrogate contract law in the process. The main focus is on breaking the economic down-cycle and strengthening the economy via job creation and "fast, aggressive actions," said a strident Summers.

He offered few specifics, however, when pressed on Geithner's public-private partnership on toxic assets. He denied that taxes would be raised this year or next and said that even when previous tax cuts expire, taxes on the wealthy and cap gains would still be lower than in the heyday of the 1990's, and would be lower for the vast majority of citizens.

Richard Dickson, Tracy Knudsen, Lowry's Reports

Yesterday's mixed market did not appear to provide a clear warning that last week's rally had fully run its course. However, investors should closely monitor the intensity of the selling on further decline that might develop in the days ahead, as a significant expansion in Supply could provide the evidence that the recent big gains were simply another short-lived bear market rally. At the same time, jumping to the conclusion that the rally has, in fact, ended could prove misguided. Keep in mind, almost all the pieces for a market bottom are now in place… It may also be notable that the recent March low was the first time in this bear market that all these indications were simultaneously in place. We should emphasize this is not a call that a major low has arrived, as there needs to be a continued sharp contraction in Supply and expansion in Demand to indicate this rally is something more than another rebound in an ongoing bear market.

Once again, investors should pay special attention to the intensity of the selling on any follow-through decline to yesterday's sell-off. A significant expansion in Supply could negate all these positive indications of a potential bottom and point to the likelihood of new lows in the weeks ahead.


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