Bookkeeping: Cutting Back Meritage Homes (MTH) Pending this Week's Mortgage Applications

While I think there is far too much knee jerk reaction to day to day economic reports, as if 1 number changes the face of the game - the bulls have been leaning heavily on the weekly mortgage application data as some sort of green shoot. Notwithstanding that applications are NOT approvals - most weeks 70%+ of the applications have been for refinancing; not home purchases. I will repeat what I said last week... despite the consumer discretionary stocks flying today, at some point higher commodity costs are a negative. Both for producers (it hurts their profit margins) and consumers (for obvious reasons). But obviously we are not at that point of cognizance now. In fact this feels very similar to the game in late 2007 when commodity stocks flying up was "great" because it signaled "decoupling" ... while we were typing it would be destructive for profit margins (and the consumer) in the coming quarters. That logic was ignored - until it showed up in the data in a very large way. Then it mattered. Starting to see a lot of parallels, and the economy is in far worse shape now that at that time... just remember this when the same folks jumping up and down and clapping at the strength in oil prices as a green shoot are whining about how its hurting the consumer at "some point" in the future ;) One of our favorite sayings in the stock market is "it only matters when it matters."

While I am not one for reliance on minutia economic reports that change week by week, I am going to be very curious how mortgage applications fared last week as interest rates finally moved away from Ben Bernanke's grasp. We wrote about this late Friday...[May 29, 2009: Bloomberg - Bernanke's Bid to Lift Housing Scuttled by Rising Rates]

While all news is good news in this current mood the past 3 months, if mortgage applications skewer downward just because 30 years went from an abnormal 4.7-4.8% up to a still historically low 5.2%ish maybe this will cause a point of recognition that higher interest rates and higher commodity prices are not just green shoots. But we'll see.

Ahead of this I am going to lock in gains in Meritage Homes (MTH) while I still have them (unlike the title insurers where a lot of gains were lost to the ether). I am basically cutting this back to a 0.2% stake and awaiting the mortgage data to re-assess. The homebuilders are not really participating in this melt up and last I checked one tenet of the 3 legged stool of recovery was "housing".

Here are a few leading names I picked randomly - any stock that is "red" today or near flatline you have to question what is going on. Same for any sector that is struggling. While MTH has a still fantastic chart compared to peers there is some relative weakness in the group.

Long Meritage Homes in fund; no personal position