Hot Money Says a Housing Turn is Coming Soon

We've been talking about the strength in homebuilders of late ... but I wanted to point out the divergence between recent data for another group of stocks and their charts. The data points say "no recovery" and the executives in many cases say "no recovery" but that doesn't stop hot money from piling in, assuming a "recovery in 6 months". Maybe it's true, maybe it's not. If March 2009 marks the bottom in housing I'll come on and say "I was wrong - what an idiot I was, the American consumer is far better than I imagined." But it really doesn't matter if March 2009 will be a bottom because people are making money assuming so today - perception is reality. Remember, there is so much institutional money now, to make any real money, you need to out anticipate the out anticipators and buy ahead of everyone else it appears. Well ahead.

#1 Quanex Building Products (NX) - from last earnings report in August

• Quanex Building Products Corp. on Thursday lowered its forecast for operating income for the fiscal year that ends in October, citing weakness in its aluminum business. Quanex said it expects to generate about $75 million in operating income for the fiscal year, down $5 million from the previous forecast, due mostly to weakness in its Nichols Aluminum unit, where shipped pounds in the third quarter fell 11 percent from a year ago.
• Chief Executive David D. Petratis said the company is still in "a very difficult housing market" and doesn't expect any near-term improvement in the situation.
• Houston-based Quanex updated the outlook as it released results for its fiscal third quarter, in which profit plunged to $8.8 million, or 24 cents per share, from $38.6 million, or 98 cents per share, a year earlier. Sales also declined to $240.3 million from $269.5 million a year earlier.

The stock market says the CEO is wrong in his assessment and things are turning around soon, as the stock is a forward looking indicator

#2 Whirpool (WHR) - from earnings report in July (and yes commodity prices have dropped a bit since)

• Household appliance maker Whirlpool Corp. said Wednesday its second-quarter profit fell 27 percent because of higher material and oil-related costs, and lower U.S. demand.
• "This is a very serious, severe economic environment," Jeff M. Fettig, Whirlpool's chairman and chief executive, said during a teleconference with industry analysts. "We're aggressively trying to manage every part of our business."
• The company expects industrywide demand in the United States to finish the year down 6 percent to 7 percent and down 2 percent to 3 percent in Europe.
• Fettig said the company expects to pay $600 million to $650 million more for oil-related costs and raw materials such as steel during 2008, up from its estimate three months ago of $450 million to $500 million.

The stock market says the turnaround is coming

#3 Sherwin Williams (SHW) - from last earnings report in July

• Sherwin-Williams Co. posted a better-than-expected second quarter, despite a weak housing market and higher material costs that dragged the paint maker's profit down 15 percent.
• Still, the company cautioned investors that it would be forced to raise prices for a third time this year, and predicted the still-souring housing sector will hamper its third-quarter results.
• "We believe the significant challenges we faced in the first half of 2008 will certainly continue into the second half. Demand is likely to continue to deteriorate, and raw material cost pressures will increase as the full impact of recent price increases have yet to be realized."
• Among the hardest hit was the company's consumer group, where profit fell nearly 29 percent to $59 million. Paint stores' segment profit fell nearly 12 percent to $210.4 million. And same-store sales -- an important metric for retailers -- fell 4.5 percent.

The stock market says CEO is wrong once more, the housing rebound is not too far off now (SHW has even been downgraded multiple times in the past month and keeps on ticking)

These are but 3 examples, there are a handful of others in the "related to home building" space. Not to mention the home improvement stores...

As an aside, I am not sure what happened August 11th but whatever it was - it drove 4 of these 5 stocks through resistance. Maybe that was the day a few quant funds all got the same signal that it was time to get in... volume peaked across the board in all these names.... we'll never know exactly "what" was the trigger but it's an interesting pattern.

So reality on the ground says no rebound now, nor in the near future. Logic would dicate no rebound in the near future. The CEOs see nothing great on the horizon. But all the stocks say: rebound in the near future. Or, in a market where there are little advantages with so much money chasing the same ideas, people have to pile in even earlier than usual (instead of looking out 6 months, maybe one needs to look out 15 months) to catch the ride. We'll know better by next spring if these charts lied and this is yet another thesis that fast money is running into to just to try to create return, or if it's signaling to us that we have no idea about how great the housing market will soon be. Or... the last situation is a "game changer" such as what Democrats are now proposing - now that they control Fannie and Freddie - foreclosures should cease for 90 days and then we should allow people to trade their old loans for new "fixed at 6.5% loans"

• They have called for Lockhart to follow the example of Sheila Bair, the Federal Deposit Insurance Corp. head, who has prodded banks to develop comprehensive plans for modifying loans that homeowners can no longer afford. The FDIC temporarily froze foreclosures after it took over the collapsed Pasadena, Calif.-based bank IndyMac. The agency later engineered a plan to allow most IndyMac borrowers who were seriously delinquent or in default on their mortgages to switch into loans capped at an interest rate around 6.5 percent.

This would indeed be a game changer and I'd have to rethink things ... again, I'm still working on free market principles which no longer apply in America. So we have to adjust if things turn like this.

The other question is - do you chase this move or not? From a purely technical perspective (and frankly the only thing working) these are all buys. But so was the S&P 500 in October 07 when people were piling in on "the worst is behind us" thinking, or in technology stocks a few months ago as people were piling in on "technology is a safe haven when oil drops" thinking. So even the "bull markets" are hard to decipher in this market.

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