The Evening Read & the US Housing Market

It's Friday. Grab a beer and have a look.

• Small investors jump back into the trading game - WSJ (a thought comes to mind: "uh-oh")
• Executing insider trades in an account set up under baby mama's name - Dealbreaker
• Whole Foods stock is expensive even after selloff - Barron's
• Brazil pledges $18.5b cuts in effort to woo investors - FinancialTimes

"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely."

-Joseph P. Kennedy, after liquidating his position in the market in 1928

In true non-jobs-report-Friday-fashion, US market action was fairly quiet. After a brief move higher in early trading all major indices faded lower - Dow closed down 30 points to 16,103, S&P down 3.5 to 1836 and the Nasdaq shed 4.1 to settle at 4,263. Riveting stuff, folks.

To anyone reading my weekly research notes, it should come to no surprise to you that I am bullish on the home-builders. Specifically XHB, TOL, PHM, and KBH. Today's lower-than-expected existing sales numbers were received with a resounding "whew" as the weather had a smaller impact than some feared. Housing stocks outperformed, much to my delight.

While my bullish call on housing was as much technical as it was fundamental, I read a very interesting piece of research that leaves me even more constructive on the fundamental side. The following is an excerpt from TD economist Thomas Feltmate's note, released today:

"Not withstanding the recent weather related shocks, the housing recovery still remains well intact. Existing home sales are well above their recessionary lows, while affordability still remains at a historically elevated level. Furthermore, significant underbuilding has led to widespread pent-up demand, which taken alongside the exceptionally low level of available supply, will lead to a ramp-up in residential construction in 2014-2016."

I was intrigued with this comment, and reached out to Thomas via e-mail;  I asked to see his data backing up this assessment. He responded with a wealth of information. I will summarize it for "blog etiquette" purposes - those of you who read my weekly note will get a more detailed analysis. Below are some key takeaways.

• Construction average hours worked at all-time high (data back to the 1950s) - this means more construction employment
• Millennials are the largest population cohort in U.S. history, NOT baby-boomers (surprised me, too!)
• Based purely on demographics alone (i.e. new household formations), new housing units of 1.6m units/year through 2016 are virtually required
• Construction employment gains have strong implications for spillover employment gains in other sectors, especially transportation, manufacturing, and consumer goods and service 

All told, the 8-page report was very well thought out and provided some strong foundations with which to be bullish on housing. For you active traders and investors out there, I will have more for you in Sunday's research note.

Heads or tails, make it a great weekend, folks.