Housing Bottom: TOL Reports Tomorrow

Stocks are down this morning after a "surprise" drop in new housing starts and a fall in new building permit applications. This shouldn’t really be a surprise. After all, we are in a recovering economy, and that means progress will come in fits and starts. And since housing was the underlying cause of the last run-up and a major contributor to the market slide, there should be no question that we’ll see "surprises" like this going forward. 

Recall that we’ve seen some upside surprises from the housing market in recent weeks. Yesterday’s big move was attributed, in part, to an improvement in a homebuilders confidence survey. A little bad news to balance out the good should be expected. 

Still, the data from April represents a new all-time low for housing starts on an annualized basis. Year over year, housing starts are down 54%, and the housing market was already headed down then. 

If there is a bright side, it’s in the understanding that economic sectors, like the stock market, have to bottom out before they can improve. We could be seeing the housing market bottoming out now. 

Bell-weather homebuilder Toll Brothers (NYSE:TOL) reports tomorrow. Toll Brothers is a major player in new home construction so look to them as a bellwether for the industry. You know I’ve been following Hovnanian Enterprise (NYSE:HOV) on and off for the past few months. They’ve been trading upward over the past month from $1.85 on April 20^th to a high of $3.25 on May 5^th and settling back to $2.84 with yesterday’s close. We’ll see if they follow TOL’s lead. 

*****President Obama is set to release new fuel efficiency standards for cars and trucks. I know many are chafing at the new environment of regulation from the federal government, but some things must be regulated by the government when particular industries don’t have the will to do it themselves. I mean, does anyone not want to see a new regulatory environment for the financial sector? 

It should be noted that former president George W. Bush succeeded in raising efficiency standards in the face of much resistance from the auto industry. Pushing those standards higher is a good thing, even if it does add to the cost of new cars. 

Obama’s new standards will require cars to hit 35 mpg between 2012 and 2016. Emissions would also be cut by 35%. Congress is considering legislation that would give consumers a $4,500 credit to trade in older cars. 

Germany has had a plan in place to pay the equivalent of $3,400 to auto owners who turn in their nine year old cars for new models. Predictions call for at least 200,000 additional cars to be sold from this effort. The government’s intention is to get high emissions cars off the road, but the side benefit is increased car sales during a recession. Perhaps there’s something to consider in the U.S. 

One of the small oil exploration companies recommended in the March 30 issue of SmallCapInvestor PRO at $2.50 a share is now trading for $4.25, a gain of 70%. We’ve got our eye on another inexpensive oil exploration stock now. If you’d like to catch this stock before it runs and to find out more about other oil sector stocks I’m following, click HERE for details. 

******The Treasury Department may be getting a $40 billion windfall in the next few weeks. If Goldman Sachs (NYSE:GE), JP Morgan (NYSE:JPM) and American Express (NYSE:AXP) are truly on the verge of repaying TARP money, the total would be near $40 billion. 

If these and other financial institutions begin repaying TARP money, I would expect investors to take this as a bullish sign. But will it actually be good for investors and the economy? 

Much of the money that could be repaid has come from equity sales. It’s not as if business has been so good that the banks are earning the money. 

We also know that TARP money has helped some banks resume lending. So long as demand for loans is on the rise, banks may be OK. But if the economic recovery reverses, even with a temporary "double-dip" scenario, the banks could suddenly struggle and be right back to the government with hat in hand. 

*****Bloomberg reports that many hedge fund managers are selling stocks and other assets to increase their cash position in expectation of a move lower for financials. Some are even getting short financial stocks. 

As you know, I’m not ready to sell out and sit in cash. But investors would be wise to keep a close eye on key support levels on the major indices. 

That’s it for today, I’ll talk to you tomorrow.

P.S. The PPIP plan to buy toxic assets from the banks has been off the radar for a while, but I have a strong suspicion that at some point this summer, this will come back into the limelight. It’s a pretty complex plan, but I found a great video on YouTube.com where a very smart young guy going by the handle of khanacademy explained all the details. It’s a little long, but well worth your time. You can check it out HERE.