Housing Prices Are Way Up, But Experts Disagree on Why

Photo courtesy of thejewishdenver.com

Photo courtesy of thejewishdenver.com

What is driving the recent rapid rise in housing prices? And is this a sign of a sustained economic recovery? Those were among the questions during a segment covering U.S. housing on CNBC May 28 (http://www.cnbc.com/id/100769361). Home prices during the first quarter of 2013 were up by 10.2 percent nationally, according to the S&P/Case-Shiller Index, the highest since 2007. Phoenix and Las Vegas, two of the regions hit hardest by the recession, were up the most.

Experts point to the very low mortgage rates (held artificially low by the Fed) and the low inventory of houses as among the reasons for the increase. Very few new houses are being built so sales are cutting into the inventory, increasing demand for the few left for sale.

Those who believe the housing market will continue to prosper say population growth will be a driver: One million new households a year are being created. Naysayers, who believe the price increases are not sustainable, say the market is being driven by investors who are buying and renting. They also point to still low construction employment numbers and the fact that college graduates, who should be a major factor in first time homebuyers, are not getting jobs and are shackled with $1 trillion in student loan debt.

While there is little doubt that houses are being appraised at higher prices, the small cap home builders, who had been on a tear since last summer, have seen their valuations flatten out. Here is an update on the home builders we have been following for the past year:

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services.  As recently as October 2011 HOV was trading for $0.89. But since March HOV has been hovering around the $6 mark. HOV closed May 28 at $6.15, up 11 cents for the day with a market cap of $856 million. Its 52-week trading range is $1.52-$7.43.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. As recently as last Aug. 31 KBH traded for $11.04 with a market cap of $851 million. It closed May 28 at $23.16, up 5 cents for the day with a market cap of $1.9 billion. Its 52-week trading range is $6.46-$25.14.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. It also had a run up into March and closed March 20 at $26.03 with a market cap of $584 million. MHO closed May 28 at $26.47, up 29 cents for the day. Its 52-week trading range is $12.24-$29.07.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Back in mid-September BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. On May 28, BZH closed at $21.79, up 44 cents for the day, with a market cap of $547 million. Its 52-week trading range is $3.46-$23.29.

Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes and targets a wide range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. SPF closed March 20 at $9.07 with a market cap of $1.9 billion. It closed May 28 at $9.52 down 16 cents with a market cap of $2.1 billion. Its 52-week range is $4.39-$9.97.

Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) is a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. RYL closed March 20 at $42.16 with a market cap of $1.9 billion. It closed May 28 at $47.60, down 86 cents, with a market cap of $2.2 billion. Its 52-week trading range is $19.25-$50.42.

David Fondrie from Heartland Advisors: A Glass-Half-Full Guy Looks at the Sequester and Economic Growth

David Fondrie is a Senior Vice President and Portfolio Manager for the Select Value Fund at Heartland Advisors in Milwaukee (www.heartlandfunds.com).   He joined Heartland in 1994 and subsequently served as Heartland’s Director of Equity Research for ten years from 2001 to 2011.  He also held the position of CEO of Heartland Funds from 2006 to 2012.  He’s a Badger from the University of Wisconsin and served with the armed forces in Korea.  He started his career with Price Waterhouse and is a CPA.  Our paths have crossed repeatedly over the years since we had interests in some of the same companies.  Like many Midwesterners, he is a plain-spoken man.

Dave Fondrie, Heartland Advisors Inc

Dave Fondrie, Heartland Advisors Inc

We had an opportunity to chat on March 1, the day the much-discussed government spending sequester went into effect, and I asked him what he thought would happen as a result.

DF:  The headline effect is likely to be worse than the real effect.  It’s not going to be as devastating as the articles in the press would have us believe.  There will no doubt be some pain inflicted on defense stocks, for instance.  But for the most part people have been expecting this to happen, so it is not a surprise, and it is built into the market.  There are too many green shoots in the economy now for something like the sequester to knock them all down.

JA:  Are you seeing it more like a speed bump than a brick wall?

DF: Yes, exactly.  I think Congress will get around to the budget and the cuts, adjusting them to what makes more sense.  If you look around at the United States economy right now, what is striking is what is going on in the oil and gas field.  Suddenly we are one of the lowest-cost energy producers and consumers in the world.  Not only does that have a direct effect on business, it is creating a new industry that is building out the infrastructure that will allow us to provide low-cost natural gas energy to industrial America.  This has put us in quite a positive situation.

We are paying $3.50 for natural gas, where Europe is paying $12.00 and Japan is paying  $16.00.  So to me that means that companies that rely on energy for their operations are much better off here than in other major developed economies around the world.  A steel forge, for instance or a company like Precision Castparts Corp (PCP), which use enormous amounts of energy in making parts, are a lot better off here than anywhere else.  Fertilizer plants.  The renaissance in chemicals here is extraordinary.  There are 12 new ammonia plants on the drawing boards, and they all will have a reliable and lowcost stream of natural gas as both energy and raw material.  We can use that ammonia domestically and stop importing it from other economies.

LNG.  There are a number of proposals for LNG plants.  These days we are talking about exporting LNG, where we never thought about anything but importing it in years gone by.  I think this low-cost energy source is underappreciated.  In fact it will spur the continued development of oil and gas, infrastructure, chemical plants, and other types of industrial expansion.   All of that is good for the economy.  Add to that some continued improvement in employment and housing, with home prices increasing, and we foresee stronger consumer confidence, especially as a result of higher home prices.  Already 401(k) values have been improving, and it is undeniable that we are in a low interest-rate environment as well.

All this headline talk about the sequester risk is overblown.  There is no doubt that federal spending and the size of the national debt have to be brought under control.  Entitlement plans have to be rationalized.  But add to the overall situation the fact that China is clearly recovering.  Chinese electrical usage is up, their industrial consumption of materials and energy is up, and as China grows, their growth is good for the other economies that feed her growth.  Europe is not likely to get any worse.

We’re looking for 2.5% to 3% GDP growth in 2013.  The stock markets continue to be reasonably valued.  Corporate balance sheets are good; earnings are good and continuing to improve modestly.  The S&P 500 is trading at 14 times earnings, where in the past it has traded at an average of 16 times earnings.

The wild card is what happens with interest rates.  People have not yet abandoned bonds, but the inflows have receded after several years.  There have been outflows from the equity markets for five years.  Now we are seeing a trickle-back return to the equity markets.  Sadly there is a pattern that is repeating itself, with many buyers entering at the midpoint of an equity run, not at the beginning.  But this is the way cycles go.  We are in the 4th or 5th inning if you take a long view of this bull market over the last three years.

JA:  So are you buying energy companies?

DF:  Not particularly.  Low energy prices are not particularly favorable for exploration and production companies.  But we are looking closely and buying companies that supply goods and services to the energy patch.  For the last two or three years, for instance, it has been apparent that there will have to continue to be huge investments in the energy patch.  If you are drilling in North Dakota, you may have no infrastructure to bring the liquids you are pumping to the refineries, which all tend to be downriver by quite a distance.  We have huge backups in Oklahoma because there is not enough pipeline to carry all the energy.  One company we have owned for 2 to 3 years is Mas Tec Inc (MTZ).  We bought it in the 12s and it closed Friday at $30.78.  Part of their business is in pipelines, and they have also done well at the gathering systems in areas where energy is being produced at the wellhead.  Those are both high-growth areas; the stock was trading cheap two years ago, and it has given us a reward.  Quanta Services Inc (PWR) is very much the same story – we used to own that stock as well, but we sold it when its valuation reached what we thought was a sensible level; in their case they are exposed to pipeline development and new high-voltage lines.

JA:  How about life sciences companies?

DF:  The FDA has been problematic as they have increased their oversight of the industry resulting in complex regulations and inspection observations (commonly called 483 observations).   We own Hospira Inc (HSP), which was a spinout a few years back from Abbott Laboratories  (ABT).  They have run awry of the FDA at a manufacturing facility in Rocky Mount, North Carolina.  In Hospira’s case, addressing the 483 observations and revising processes and procedures has resulted in over $300 million in costs and reduced output of drugs that are already in short supply.  We are all concerned with safety; however those concerns should be balanced with a sensible and timely regulatory process.

JA: Does that put a caution flag out?

DF:  I can’t speculate on what kinds of furloughs the FDA will have to put into effect.   I doubt that we will have chickens rotting on processing lines waiting for FDA inspectors as the press and certain congressional members have suggested, but the big issues around drug approvals will continue to be important, and is likely to be slowed down even further with the automatic budget cuts.  Hopefully they will prioritize their cutbacks and the expense reductions will have less impact than we might expect.  But government does not always work very efficiently.  We hope they will be smart and furlough the poor performers instead of just following  a LIFO pattern.

JA:  How do you feel about ObamaCare and stocks?

DF:  I do sense that there is a bit more thought being given to the impact of ObamaCare.  We just reviewed the 2014 Medicare Advantage benchmark payment rates by the Centers for Medicare and Medicaid Services (CMS), and the cuts were more draconian than expected.  But the government was clear that they are not trying to cripple the HMOs because they are a vital part of the new program.  I am a glass-half-full guy most of the time, and I think if people sit down and talk they can get to some reasonable results; let’s hope that happens.  There is always give-and-take with reimbursement rates, and they end up meeting someplace in the middle.  US businesses are resilient; once they know where the boundaries are, what the rules are, they adjust.  What happens is what you expect in a capitalist system: change comes quickly.  Capitalism works pretty well.

JA:  Where do you think people ought to be looking in the equity markets this year?

DF:  I am in the camp that says we will continue to have a modest economic recovery.  In that kind of environment you have to look at cyclical companies.  We are overweight in industrials and information technology companies.  Everyone is going to look at productivity, and technology is important there.  People will continue to invest in technology to improve productivity.  We are going to be hooking up all kinds of machines at home and in factories to the Internet.  We think tech plays work.  We might stay away from actual PCs, but mobility will continue to expand, and downloads will continue to grow, keeping  Internet growth robust.  Probably financials are good, due in large part to a stronger housing market.  We are a little more cautious on that because the interest rate environment does not allow much net interest rate gain to banks.  But housing will drive loan growth, and the banks have plenty of capital to lend.  With business loans at 3.5%, it is hard for banks to make money.  If we got an uptick of half a percent, it would do wonders.

In tech companies, we like Cisco Systems Inc (CSCO).  We see Cisco as a chief enabler of the infrastructure of the Internet.  Cloud computing is driving a lot of internet traffic.  Cisco is cheap at 12 times earnings, and there is that nice dividend yield of 3% too.  The balance sheet is pristine; altogether it is a very attractive risk-reward proposition.  I run a value-oriented multicap fund.  Cisco is seen as a growth stock, but right now it is also a value stock.  They have gotten their act together after some unwise acquisitions a few years back; we think the downside is minimal.

JA:  What about social media?

DF:  Social media doesn’t really fit our style.  Even Google is not in an area where we play.  Thematically I like agricultural plays like Archer Daniels Midland Company (ADM).  It is trading a bit above book value, and the dividend yield is 2.4%.  If we have a big corn crop, ADM is going to benefit from processing all that corn.  I believe we will have a big corn crop this year, and we need one.  ADM’s PE is under the S&P 500.  I can’t predict the weather, but we are getting moisture that we badly need in the Midwest, so the water table can support strong crops this year.  We’re looking at fertilizer companies, seed companies, and farm equipment (especially on a dip).  Railroads are a bit expensive right now, but it is worth noting that the number of rail cars carrying oil is growing at 25%, which makes those cars part of the infrastructure for moving energy.  Oil companies and refiners are buying those cars and the rails are moving them.  We’ll buy rails on dips too.

One final area that is more in the later innings is deepwater offshore.  We are particularly interested in drilling off the east and west coasts of Africa.  We like the companies that build out those platforms and subsea infrastructure to bring that oil to market.  We like the boat companies that service those rigs.  These are long-cycle investments; the big international oil companies don’t start-and-stop those projects.

JA:  What about shipping companies?

DF:  There may be too much capacity there.  OSG went bankrupt.  What has happened in the US is that we are importing less oil than we were five years ago, and the amount we are producing here has increased.  Our demand for oil from overseas has decreased.  So tanker ship demand has decreased as well.  If China starts to really boom again, that could absorb some of the excess capacity, but I don’t see that as near-term.

JA:  How about the greenback?

DF: The euro is at risk, but the dollar should hold its own.  If the Chinese let their currency float more that might affect the dollar, but for now the dollar is fine.

JA:  Is there an upside to the 2.5% to 3% GDP growth you mentioned?

DF:  Maybe in the back half.  If we resolve our government problems, that might restore more confidence.

JA:  Thanks, Dave.

Allen & Caron owns none of the stocks mentioned in this interview, and Joe Allen owns none of the stocks mentioned in his personal accounts.  Please do your own research.  JA

Mary Lisanti: Continued Corporate Earnings Growth in 2013 (When the Federal Government Resolves the Budget)

Mary Lisanti is president and portfolio manager of AH Lisanti, an investment management company currently focused on small cap growth companies. She is a 33-year veteran of small cap growth research and investing. For the first 12 years she was a small cap analyst and strategist on Wall Street. During the past 18 years, she has managed small cap portfolios at premier asset management companies. As CIO of ING Investments LLC, (1998-2003) she was responsible for building the active equity management team, and assets under management in her area grew from several hundred million to several billion dollars. Prior to ING, Mary was at Strong Capital Management as Senior Portfolio Manager for both the Small Cap Growth and Mid Cap Growth Strategies and was Managing Director and Head of the Small/Mid Cap team at Bankers Trust Company. Mary was named Fund Manager of the Year in 1996 by Barron’s. She was named #1 small cap analyst in 1989 by Institutional Investor’s All-Star Research Team. In addition, she was ranked #2 and #3 in 1987 and 1986 respectively.

Mary-headshot

I had the pleasure of talking to Mary just before the New Year’s holiday at her office near Rockefeller Center.  We had first met in the late 1980s when she was interested in a technology company that proposed the radical idea of a keyless car ignition or computer security system using a fingerprint.  Interesting how what seemed futuristic now seems almost as old hat as, well, men on the moon.

JA:  How are you feeling about the year ahead?

ML:  Undecided.  I’ll give you some positives and some negatives.  One big positive is that corporate profit growth will still be decent.  Corporations are at very high profit margins, but when you break down what’s going on, there’s no reason they shouldn’t go higher.  Virtualization – the use of cloud computing, and other aspects of today’s high tech should help them cut costs.  For that trend to stop, two things would have to happen: a long period of negative revenue growth, accompanied by fast-rising wages.  Neither of those things is happening.

That will be a positive for the market.  Corporate profits are growing 8-10% and we believe that can continue, and that is widely dispersed across the board.  Small caps can grow even more,we believe, although again there will be wide dispersion in individual results.  This will be a classic stockpicker’s market.

The biggest negative for the market is that we cannot seem to govern ourselves.  That weighs on multiples.  That’s why, four years into this recovery, multiples are still low, particularly when you take into account where interest rates are and how  GDP growth, although below trend, continues to chug along at 2% or so.  In that scenario, logic would have it that multiples would be in the range of 18-19, but they are not.  Why not? I believe it is because of our inability to govern. Politicans are behind the curve;as they usually are, in addressing our structural issues to bring the long term deficit issues under control. Will they address the longterm issues or not?  If they do so now, it will require only modest changes to entitlements and spending. The extent to which we address those issues will affect the performance of the market going forward.

It is psychologically important to multiples: if you can slow the growth in spending at least a bit, you give people more confidence.  In the Clinton years they managed to slow the rate of growth in spending, and Clinton left office with a surplus.  I believe we will spend most of 2013 arguing about entitlements and other budget issues.  Next year it will be the Democrats saying no to entitlement reform, just like this year it was Republicans saying no to taxes.  I don’t know how much it is possible to get done, because it is being done in a fishbowl and from ideological positions that don’t accommodate compromise.

If they do not get something done, I fear that US debt will get downgraded again.

JA:  And would any of the DC politicians feel responsible if that happened?

ML:  I do not believe so, no.  Politicians, in my opinion, are in the business of passing the blame.  If there were another downgrade, it would affect President Obama’s legacy, and I don’t think he wants to be the president who oversaw two debt downgrades in his time in office.  Both sides will have an incentive to compromise and hopefully they will.  The biggest risk to all of us, and to the market, is that the dollar loses a bit of its luster as the currency of last resort.

When you look at Japan and China and Europe, they are getting their act together with regard to being attractive places to invest and could even potentially be attractive as reserve currencies in a few years.  My biggest concern is that we permanently change corporate behavior: if you have a climate of uncertainty for long enough you make people afraid.  Business overall has been clear with Washington that the uncertainty is damaging.  R&D tax credits, farm and agriculture bills, accelerated depreciation – Congress has been handling these as though they were annual issues, and they’re not.  They affect multi-year planning.  When the R&D tax credit was put in place in the early 1980’s, it was in place for 4.5 years.   That would be better—it would give businesses the ability to plan longer term..

These and other things are casualties of this ideological warfare in Washington.

JA:  What do you see as strengths in 2013?

ML:  It is an enormous positive that housing is recovering, and the recovery should continue, assuming Washington does not cut the mortgage deduction..  Unemployment is declining, although it is declining too slowly.  And we have cheap sources of energy.  . A number of industry sources believe that we will be energy independent in the next decade or so, which is a huge positive for our manufacturing competitiveness.

When you look at these things, once we make it through this budget and debt-ceiling problem, things look a lot better.

Governments all over the world have been spending money to fix the problems that caused the recession, and odds are that things will not fall apart again soon.  Over the past several years, we have had a major issue every year that has “terrified” us: last year it was the potential breakup of the Euro and Greek debt default, and this year it was the budget crisis in the U.S. Beyond the budget crisis, I do not see an issue that has the potential to scare investors as much as these two issues have. We should enter a period of more “normalcy,” where macro issues take a backseat to fundamental issues, and that change should allow multiples to increase. But belief in a more stable future will come slowly.

JA:  What should we look for in 2013 when we look at investments?

ML:  As small cap growth investors, we look for earnings growth.  But one of the great positives in this market is that there are many ways to make money in the market.  When I came into the business in the late 1970s, you could make get 7-8% returns several ways.  You could make money with yields –- those companies with no earnings growth offered very high dividend yields, say about 7%; those companies with earnings growth offered more modest dividends, say 2-4% dividends and 4-5% annual growth in earnings.  Growth stocks offered  very little in the way of dividends, but you could get capital appreciation as earnings would increase 10% to 15%.annually. Then, as we moved through the great bull market of the 1980’s and 1990’s, we got to the point where dividends were out of favor and capital appreciation was the only way to make money.. Now dividends are back and once again there are multiple ways to make decent returns in the stock market, depending upon one’s tolerance for risk..That is very, very positive for the equity markets.

JA: How about sectors?  Any of special interest, or any you would avoid?

ML:  There are good companies in every sector.  I would not recommend the utilities, but there are very good opportunities in materials, energy, consumer products and services, industrials and financial services,  In most of these the small caps usually have something unique about the way they do it, or the technology they apply to it.

Tech spending is not forecast to be up much in 2013.  There will be winners and losers.  We need to keep in mind that the corporate world is moving toward Software as a Service, which allows them to stop buying perpetual licenses, and to pay as they use software.  They are going from buying licenses and maintenance contracts, and now are basically paying just for what they use.  Same with cloud computing.  So they are going from spending $20,000 on software and a server to paying $1,000 month.  So even though tech spending is forecast to be close to flat, the companies that will be winners will have SaaS and cloud computing.  These trends will hold down spending.  It’s hard to see how the semiconductor companies are going to prosper in that environment, unless it is the specialty chipmakers who are specialized in populating ever-smaller chips with ever-larger amounts of circuitry for tablets and smart phones – or those companies that are specialized in the ability to manage the signals for those tablets and phones.  But other than those two, I don’t see a lot of growth there.  And I would be careful about traditional license-oriented software companies.  .

JA: What about healthcare companies?

ML:  Interesting.  It’s hard to guess how ObamaCare will play out.  There are some longterm secular trends in healthcare that are worth keeping in mind.  Keep your eye on the value proposition: better, faster, cheaper, more automated.  One of the most interesting areas is the second generation biotechs.  Think about AIDS, for instance.  Over the last 25 years it has become a livable disease – that is, we haven’t cured it, but we can make it possible to live with it, and to do well, not just to survive for a few more months.  Now the industry is working to make cancer livable in the same way; there are whole new classes of drugs that enable people to live with cancer, and not to just be blown away by it in a short time.  Possibly we are spending the same amount of money making cancer livable as we used to, but now we’re spending it over a longer period, and not all at the end of life.  Diabetes monitoring, for instance – the closer we get to continuous glucose monitoring, the better for diagnosis and treatment; One of our investments is Dexcom (DXCM), which has a promising technology for that.  All those big diseases are interesting, and medicine is getting its arms around them too.

JA: How about healthcare IT?

ML:  It has historically been mostly about billing and insurance, but now the future is to move on to quality of care.  Since we have had health insurance as a society, the focus has been on what you might call “industrial metrics,” such as how many patients you can process.  Now the quality of the outcome is more important, and best practices are more important.  There will have to be penalties for readmissions of the same patient.  Mobile apps for monitoring things like blood pressure, glucose, heart problems and blood gases – these things are going to become standard practice over the next 5 to 10 years.

JA:  You mentioned the impact of technology on industry.

ML:  There are lots of new beginnings now, along with outmoding of old things.  Software as a service and the use of the cloud – this is the biggest piece of cost to cut.  If you can cut your IT costs you have overall better margins, and better processes too.  And industrial automation is interesting too.  The first generation of automation concentrated on, for instance, lasers to cut steel.  Now automobiles are being made with lighter materials, so new lasers are needed, lasers to cut nonsteel materials.  Aerospace is an interesting area for this.  Two things that are driving aerospace are new materials that lower weight and cost, and a continuing cutback on oil-based materials.  There is a bit of a renaissance going on in aerospace.

One of our investments is IPG Photonics (IPGP) for the new lasers needed to deal with new lighterweight materials.  Another is Polypore International (PPO), which is making the membranes needed for new electric vehicles like the Chevy Volt and the Nissan Leaf. By the end of 2013, they are expected to be supplying membranes for 24 models of cars.  That goes back to the fact that fuel efficiency standards by 2025 will be at 54.5 mpg.

Another of our investments is Aspen Technology (AZPN), which basically supplies SaaS for factories and plants.  If you are a refinery, for instance, you are required by law to take your systems down every so often for maintenance and test for a number of things such as safety and pollution.  Doing that manually is difficult; it can be done, but it is hard, and if you are global it is harder.  Aspen automates all of that, and they are in a field by themselves basically.

JA:  And energy?

ML:  The shale revolution will be a big job creator, and the move toward natural gas for vehicles is important.  Fleets will be moving to Compressed Natural Gas (CNG), and we believe the infrastructure will be built out for CNG refueling.  Federal Express, UPS and the other big fleets will be the drivers.  We are interested in Westport Innovations (WPRT) for the CNG engines.  And we are watching Clean Energy Fuels Corp (CLNE) for the CNG supply chain, but big oil will be the installer.  We also believe solar will become economical to use, with panels on the roofs, for instance, of warehouses, and power being sold back to the grid when it is not needed.  Between the increased supply of natural gas, shale energy, coal, oil and renewable, we can get to be energy independent.

JA:  How about housing?

ML:  Housing is fascinating.  What happened with housing is what happened with autos.  Now after a period of low sales, we probably need as a nation to do some catching up.  We could need 1.7 million new housing starts for a couple of years.  That would double the current rate.  The Echo-boomers (who used to be called Generation Y) are starting to buy houses; their demand for houses is growing at 5% per year, and will grow at 10% per year soon.  My personal opinion is that this housing cycle will be a long one, similar to what we saw after the housing collapse in the mid 1970’s. In the first few years, we will see a catchup in pricing, but after that we believe housing prices will probably go up a couple of percentage points per year. If they implement the rules on mortgages that are being talked about, the housing market will become a lot steadier and more stable, more like the Texas market, where they tightened the downpayment requirement and favor 30-year-fixed mortgages.  That will be positive for the housing market and for consumer confidence.

There is nothing better for consumers than to have their biggest asset become more valuable every year.  Three years ago if you hadn’t already lost your job, you were still afraid you might lose it.  Your 401(k) and your house were devaluing.  This recovery is more like the late 1970s than the 1990s.  People got burned in the mid-70s and it took a long time to feel better.  When we are operating at full potential, we should have 3-1/2% to 4% GDP growth, and that will come eventually.

JA:  And in 2013?

ML:  I think GDP this year will be 2-1/2% overall because of federal and state problems, but corporate GDP growth will be a good bit better than that, assuming there is a budget deal at some point.  The first half of the year if we watch the government argue about spending, it could be a bit of a damper on growth.  If we regain faith that the politicians will be able to compromise and come up with some answers, the market will go higher.  Having our debt downgraded shook everyone’s confidence.    So the market is at 12-13 times earnings as a result.

If we get a budget deal we could get much stronger investor confidence, but in the short term, our ability to govern ourselves is the big issue.  Once that is resolved, the market will lift.

JA:  Thanks, Mary.

For AH Lisanti:  For financial intermediary use only.  Not for use with investing public.

The information provided should not be considered a recommendation to purchase or sell any particular security.  It should not be assumed that any security transactions, holdings, or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein.  The views expressed reflect those of the portfolio manager as of 12/31/2012.  The portfolio manager’s views are subject to change at any time based on market and other various conditions. The performance reflected herein is not representative of performance of AH Lisanti individually managed accounts or comingled vehicles that AH Lisanti advises.

 

Buzz Zaino: Royce Fund Manager Sees Strong Growth Upside for 2013, Boosted by Housing, Transportation, IT Spending

ZainoB_gBoniface A. (“Buzz”) Zaino is a portfolio manager advising several of the high-profile Royce Funds, to wit, the Royce Opportunity Fund and associated funds. By any measure a veteran of the industry, Buzz has more than 40 years of experience in the financial services industry, the last 14 with Royce. I first met him when he was managing the Value Added Funds for Trust Company of the West more than 20 years ago, but prior to that he was president of the Lehman Capital Fund and a principal of the “original” Lehman Brothers. He went to school at Fordham, and took his MBA from Columbia. In 44 years, Buzz has seen enough economic cycles to offer an MBA from the University of Zaino.

Buzz agreed to talk about his 2013 outlook from his home in Aspen which, like much of the US snow belt, has seen little of the white stuff so far this year.

JA: It seems generally agreed that the US economy is growing at a slower pace than it has coming out of previous recessionary periods. What is your outlook for 2013? Will the economy continue to grow, and if so, will it grow at the same rate, faster or slower?

BZ: The reason that the US economy has had a slow lift-off has been that coming out of recessions in the past, the Fed has lowered interest rates, and people took that opportunity to buy houses and cars. This recession was different, because the banks were not giving out money, because money was scarcer and because bank lending standards were significantly more stringent. So there was a hiatus and it took a lot longer for the economy to recover. The recovery finally started this year, 2012, and it is finally beginning to give a boost to the economy, especially as construction gets going again. That boost is going to continue, and it will help us accelerate in 2013. But the recovery was complicated by the fact that Europe went into recession. American companies tend to be worldwide in scope, and caution at the top levels helped bring inventory levels down due to the European recession. That meant that capital spending was also muted. I think that capital spending is also constrained in anticipation of the budget settlement that is still out in the future. A “normal” recovery was delayed until 2012, and then delayed again by the European recession. But those delays now give us the opportunity to accelerate as 2013 progresses.

JA: Will we get a budget?

BZ: Sooner or later, yes. We will get a budget deal out of Congress. Once we have that deal defined, we can go forward from there. That will be a positive, and will be on top of the acceleration we can expect from normal factors like housing and auto sales. We could get a nice surprise in 2013. But we’re cautious about January.

JA: Why is that?

BZ: Most managers will make their January decisions based on their December orderbooks, and we don’t think the December orderbooks will be strong enough to give them confidence, but as we go into February and March, a lot of the inventory build-up will have started to occur, so the orderbooks will look better. And the trade between China and the US is expanding again, after a period of slower growth. We think that could have an increasing effect, especially after the Lunar New Year. By the end of the first quarter, growth could be looking quite good.

JA: The harsh talk by Washington DC and Beijing won’t slow down that growth?

BZ: The China-US trade is too big a market for both sides, and politics will not interfere with it. Certainly the Chinese government’s expansion plans are not going to be held back. There are Chinese hotel companies looking for hotel properties in the US – to build or to buy. Very smart people, and I don’t think either side is going to let politics inhibit our trade relationships. Nothing is going to come of the yelling.

JA: Will the growth rate be higher going into the second quarter then?

BZ: I think we could have a weak-ish economy and market in January, like I said. Everyone will be paying higher taxes, at least with FICA deductions back in everybody’s paychecks. With orderbooks in December that may not be strong, managers and consumers could still have their hands in their pockets. If we have a warm winter like we had last year, we could have more construction starts. If we have a cold, snowy winter, those starts could be delayed, and the weak period could extend through January. We are looking very favorably at housing. Housing is still somewhat depressed, but the housing stock is aging — and mortgage money is more available than it was a year ago. And the automobile fleet is aging and will need to be updated, as will the commercial truck fleet.

JA: Do you think the growth rate will exceed 2%?

BZ: Yes, better than 2%, but maybe not in January. But after that it could be substantially more than 2%. Four to five percent would not be out of the ballpark, although 5% would be at the high end of probability. And the market would react to that. If the market is down – and cheap – they don’t want to buy, but if it goes up 15%, everybody wants to buy. If UPS starts to replace its fleet and buys trucks, all the others will update their fleets at the same time. It’s much cheaper to run your truck or your fleet on CNG (compressed natural gas) too. A town near Aspen has converted their entire bus fleet to CNG, and although they can fuel up at the bus barn, there are additional CNG stations being built. Boone Pickens and his group are encouraging these new CNG fueling stations. We’re surprised that trucking companies are not moving faster than they are toward natural gas. We have an investment in a building materials company and I asked them if they are considering CNG, and they said they had not looked into it, but they would. Conversions to CNG are not expensive. Ford and GM are now offering pickup trucks with CNG engines.

JA: Is there going to be a fiscal cliff solution?

BZ: Eventually. Whether or not it happens before December 31, there’s no way to tell. But the congress can pass a continuing resolution to postpone the cuts and tax increases while they work on it. Eventually this Mexican standoff will be resolved. And by the way, the fiscal cliff does not seem to be a big motivator for the American consumer. They need to replace things, and they are not overly concerned with the big picture as long as the economy seems to be getting healthier.

JA: What sectors are going to do better as the economy improves?

BZ: IT spending will pick up. There is a big pent-up need factor here, and it has been a relatively easy way to postpone expenditures for the last couple of years. Windows 8 is very much under-rated. It takes a while for people and corporations to decide to make a big change like the change to Windows 8, but it will be very good for PC companies. Corporations need to have the latest and fastest. Technology in corporate environments needs to be the newest and most capable. Areas like IT are why you can think of higher growth rates. After this hiatus, there is enough pent-up need to start a new momentum.

JA: How about healthcare IT?

BZ: I went to see my physician in New York, and he is one of the best, highest-rated doctors in his specialty. He was really annoyed that he was going to have to convert my file, which is a manila folder with all kinds of paper and bits of paper in it – to computer files. I thought, hey, this is 2012, get with the plan.

JA: How about housing? Any areas there where investors ought to be looking?

BZ: We have had a good run with housing companies, and we think that will continue. One area that may have real potential is mortgage insurance companies. It is a fairly narrow field, and some people infer from the papers that these companies may not be able to cover their losses. The reality is that housing prices could be moving up at a rate of nearly 1% per month in the near future, and as a result those liabilities would be decreasing. Mortgage applications for refinancing were up last week 47% year over year. That’s a meaningful number. Apparently not everyone is under water. Those areas that have dropped the most are improving the fastest in some cases. California is one of those.

JA: Any areas where you would be wary going forward?

BZ: Defense companies. We think there will be lots of cutbacks, lots of programs cancelled. Defense personnel contractors may do better as the armed services cut back their personnel. Company by company there may be some good bets in defense, but we believe the sector will be down.

JA: And in summary?

BZ: Other than defense, it is going to be a broad-based recovery. If we have a growing, recovering economy, interest rates would rise, and inflation would rise. Commercial banks will do better. They will use their asset bases to increase lending. The moderating factor will be that regulations will add some cost, but that will not be an inhibitor for the larger banks looking to expand regionally. If I were a larger bank and wanted to expand regionally, it would be attractive to me to buy a regional bank and expand my profitability without appreciably expanding my regulatory exposure.

JA: Thanks, Buzz.

Note: Buzz prefers not to name specific companies in his portfolios. The interviewer has no investments in the sectors discussed, and does not intend to initiate such investments in the next few days or weeks.

Nick Galluccio on Economic Recovery Outlook for 2013, Equity Valuations, Sectors to Watch

Nicholas F. Galluccio is President and CEO of Teton Advisors, Inc. (www.tetonadv.com), based in Rye NY, which runs a family of listed mutual funds under the family name of TETON Westwood, and representing a range of investment strategies. Teton Advisors is itself listed under the ticker “TETAA.” It is affiliated with GAMCO Investors, Inc. (NYSE: “GBL”), a large and well-known diversified asset manager and financial services firm (www.gabelli.com).

Nick was a journalist early in his career, starting as a staff writer at FORBES, and moving into the financial services business as a semiconductor analyst at Lehman Brothers Kuhn Loeb. He and I first met during the 25 years he spent at Trust Company of the West, where he was Group Managing Director and headed smallcap value and midcap value funds. Seven years after TCW was acquired by Societe Generale, he joined Teton Advisors, and has built the platform to $1.2 billion in assets under management (AUM). Today he is at the helm of Teton, and runs the TETON Westwood SmallCap Equity Fund.

I asked Nick before the national election if we could talk after the election in broad strokes about the state of the economy, the vigor of the recovery, his outlook for 2013, and generally about which sectors he finds most promising going forward. He agreed, and we met shortly after Thanksgiving at his offices in Rye.

JA: To start off, I wonder if you have some thoughts you could share about the overall economy, the fiscal cliff or other issues, and what your crystal ball says about 2013.

NFG: We think the US economy will get stronger as we go through 2013. Capital spending was constrained during the extended campaign as business managers and investors put off spending until the outcome of the elections was known. And of course there was a long-running debate over the fiscal cliff. Now we believe that the pent-up need for capital expenditure, which had been delayed during the campaign, will begin to be implemented, which will have a positive effect on the economy.

We are seeing a recovery in housing, underscored not only by the builders themselves, but by good results from companies like Home Depot (NYSE: HD), which had strong comps up 4.3%, and Lowes (NYSE: LOW); both of those are riding at 52-week highs.

The tech sector has been impacted by slow spending by consumers and a slight inventory build throughout the supply chain, but we think that spending will be stronger in 2013. And we think that the Christmas season will show good retail sales comps this year, better than it has been in many years.

It’s important to recognize that the European economic situation has been a drag on the US economy, as consumption of US products by Euro-zone consumers dropped. We believe the biggest declines from the downturn in the European Community are now behind us, which may not be much of a plus, but it will be less of a minus or a drag on the economy.

Finally we are seeing a very accommodating Federal Reserve, with all signs pointing to QE3, which will actually expand the capacity of the Fed’s balance sheet. We’re speculating that Chairman Bernanke may be replaced by someone like Janet Yellen, current Vice Chair of the Fed and head of the San Francisco Fed. If she were to succeed Chairman Bernanke, we believe her leadership would continue to foster the accommodative monetary policy established over the past several years under Bernanke.

JA: Does that mean you see a strong recovery in 2013?

NFG: We believe we will see a somewhat stronger economy, with growth improving from sub-2% to better than 2%. That still represents a rather anemic economic outlook, which will change for the better when we get some major tax and entitlement reform, which would instill the confidence among business leaders necessary for them to jumpstart capital spending. And let’s not forget that the consumer needs to believe the country is on the right path. We need exemplary leadership from both our President and his Republican counterparts.

JA: Do you think Washington will come up with a solution for the fiscal cliff? Will they just kick the can down the road?

NFG: My gut says that they will do something this time. The Tea Party was partially discredited in the election, and that means that the extreme right wing of the Republican party may lose some clout, with the likelihood being that the Republicans will regroup right of center. It behooves the Republicans to work out a compromise with the Democrats. On the other hand, Obama only won by a margin of 2.4% of the popular vote, not what you’d call a mandate. He wants to leave behind a legacy, and will move from far left to just left of center, in order to get things done. He has to make some changes, and I believe he will. He hasn’t shown the kind of leadership that Clinton and even Bush did. If he wants to leave a legacy in four years, he is going to have to cross the aisle toward compromise.

JA: And Grover Norquist and the tax pledge?

NFG: Outdated.

JA: What is it going to do to the market?

NFG: We have been in a bull market since the bottom in about March of 2009, Since then the market is up over 100%. We have had a correction since the election, and that correction has discounted a lot of the negatives. If we make any progress toward resolution of the fiscal cliff, we will enter the next phase of the  bull market in 2013. I believe we are in a secular bull market. It is ironic that as the market moves up on relatively low volume, retail investors have continually sold equities. Retail investors have had net redemptions every month of 2012, even with the market moving higher. Over the past five years, domestic equity mutual funds have had $500 billion of net redemptions. At some point the retail investor will come back to the market and money will start to move back into equities. That would be a driver of the next phase of the bull market.

For several years, money has been flowing out of the equities and into the bond market. Money keeps coming into fixed income, and at some point that will turn. As rates move up, investors at the lower rates will get burned, and many will move back to equities. Many fixed-income investors are actually losing money, adjusted for inflation. If rates were to move back above 2-1/2%, there would be many reasons to be bullish on equities. Overall sentiment among retail investors is still bearish, but valuations are very cheap, at decades-low levels. The S&P is selling at 14 times earnings and smallcaps are at 8 to 12 times earnings. Even though retail investors don’t yet have an interest in small caps, it is a great opportunity for contrarian-minded investors.

JA: Would this be a second leg of a bull market then?

NFG: Coming out of a recession, small caps usually lead the market higher. Small caps get sold down hardest in a downturn, and then they gain faster coming back out of a downturn. We believe that in 2013 we could have a credible strong fundamental underpinning to surge in small caps, because their valuations have fallen further than large caps. And when liquidity comes back into the market, it acts as a slingshot with small cap equities.

JA: What sectors would be the most interesting if that happened?

NFG: The hardest-hit sectors have been industrials and technology, because they are the most sensitive to economic changes. Likewise,  as car companies and auto parts companies had a good 2010 and 2011, inventories built up. After we exited 2011 we had a destocking of inventory, but now those inventories have come back into balance. With housing picking up, the economy will begin to restock in earnest, which will create the next leg up in the cycle. Stocks have already discounted a weakened economy, so valuations are very good for buyers.

In the industrial sector we like suppliers to the commercial aircraft industry. The global aircraft industry has designed more fuel-efficient planes, which the airlines badly need. The buyers, however, are both the aircraft leasing companies and the airlines, which have restructured over the last several years with some big bankruptcies. The backlogs of Boeing and Airbus show a growth in demand for many years. Remember that the international carriers are healthier. The order book is full, and no one wants to drop out of the queue because it is hard to get back in line. We own Woodward Inc (NYSE: WWD), Hexcel Corp (NYSE: HXL), Moog Inc (NYSE: MOG.A and MOG.B), Carpenter Technology (NYSE: CRS), and the smallest market cap of the group, AAR Corp (NYSE: AIR).

JA: Any other sectors?

NFG: Energy is very interesting, particularly oil and natural gas. We believe there is great promise in horizontal drilling, as well as in hydraulic fracturing, both of which will be essential to move the US to be the largest fossil fuel energy producer in the world by 2035. Fraccing may have problems state by state, but overall there is too much national need for it to get stopped. We believe it will go ahead in Ohio, Pennsylvania, upstate New York, Wyoming, Montana. In the energy space we own Patterson-UTI Energy (Nasdaq: PTEN), which is a major high-tech horizontal driller that is hired by energy majors and independents. On the E&P side, we own Energy XXI Ltd (Nasdaq: EXXI), which is a beneficiary of Exxon divesting energy assets in the Gulf of Mexico. We also own Approach Resources (Nasdaq: AREX), a natural gas exploration company with properties in the Permian Basin in West Texas. And we own Comstock Resources (NYSE: CRK), which has most of its assets in the Gulf of Mexico, Texas and Louisiana. We believe that natural gas will be the energy of the future.

JA: How about one more?

NFG: Financial services. We have about 14% of our portfolio in regional community banks that are primarily home and small-business lenders. Most of  the charge-offs in that industry have already been taken, so going forward the provisions will decline and the bottom lines will improve. We see a pickup in demand, both from small businesses and from homeowners. These banks will see profits from mortgage origination, mortgage servicing, and mortgage refinance, even if the mortgages themselves are securitized and sold to others. In addition, these smaller banks will be making car loans, home equity loans, and small business loans.

I read the FDIC reports, and a few quarters ago we saw the first pickup in several years in loan demand, although that pickup was rather small, in single digits.

In that area we like ViewPoint Financial (Nasdaq: VPFG), an over-capitalized Texas bank that has a balance sheet that needs to be converted to loan volume. We also own Washington Trust Bancorp (Nasdaq: WASH), a clean Rhode Island-based bank that has a significant trust department and an attractive lending franchise in the corridor including Connecticut and Massachusetts. We also own Oriental Financial Group (NYSE: OFG) which, in spite of its name, is the best-capitalized bank in Puerto Rico.

JA: So I take it you believe there will be a meaningful step taken on the fiscal cliff before Santa Claus gets here?

NFG: We think there will be a first step toward a solution before the end of the year, yes. Even so, investors are braced for the worst, which is reflected in their redemptions from equity funds, and the bears that caused the correction after the President was re-elected. Since then all indications are that both sides are willing to compromise.

JA: Many thanks for your time and for sharing these thoughts with us, Nick.

Editor: None of the companies mentioned in this interview is a client of Allen & Caron, the publisher of this blog.  We do not make recommendations with regard to investments; please do your own research. 

Unexpectedly Positive Housing Results Prompt New Looks at Homebuilder Stocks

No doubt the publicly-traded homebuilders were among the hardest hit stocks when the housing bubble burst in 2008. The ensuing rash of bankruptcies and home foreclosures devastated the housing market, dropping many of the once high-flying builders into the ranks of the small and micro caps.

For many investors, the question now remains: when is the right time to get back into these homebuilding stocks? In

New home construction photo courtesy of singerreo.com

recent weeks, thanks to some positive and unexpected results in new home sales, housing starts and existing home sales for the month of May, various bloggers and journalists have suggested that the slumbering housing market is beginning to awaken.  Indeed, housing stocks as a group, including some of the larger cap companies such as Toll Brothers (TOL), Lennar (LEN) and PulteGroup (PHM) are up more than 60 percent this year, well above the S&P 500 which is up only 8 percent so far in 2012, according to Forbes.com (http://www.forbes.com/sites/greatspeculations/2012/07/02/dont-lose-your-home-betting-on-housing-stocks/?partner=yahootix).

Forbes contributor Christopher Versace warns that while the housing results in May were better than expected, there are many other indicators suggesting the results “may not have been as great as first thought.” Whether housing is on the upswing, or just experiencing a temporary blip, it’s certainly time to start watching some of the small cap homebuilders.

Indeed, many U.S. homebuilders are apparently raising cash on Wall Street to prepare for what they believe will be a recovery in new home sales, according to the Wall Street Journal (http://online.wsj.com/article/SB10001424052702303292204577519091363274160.html?KEYWORDS=robbie+whelan+dawn+wotapka).

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services. HOV delivered 4,216 homes in fiscal year 2011. The company’s 52-week trading range shows it was trading for as low as $0.89 last October and then went on a tear, going as high as $3.31 in early February and remains nearly double in value since January. Its market cap is currently about $350 million. The stock trades very actively, about 4.3 million shares a day. At mid-day July 11 it was trading for $2.65, down 5 cents for the day.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com) is also a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. KB delivered 5,812 homes in fiscal year 2011. Its market cap is now $754 million and 52-week trading range is $5.02-$13.12. At mid-day July 11 it was trading for $9.74, down 29 cents for the day.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. Its market cap is $331 million and its 52-week trading range is $5.08-$18.62. It has been setting new 52-week highs lately, but at mid-day July 11 it was trading for $17.50, down 13 cents for the day.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Beazer is one of the companies cited by the WSJ (see above) as raising money, due to a regulatory filing announcing it would raise about $75 million by selling shares of common stock. Its market cap is about $283 million and its 52-week trading range is $1.35-$3.98. At mid-day July 11 it was trading for $2.86, down 13 cents for the day.

Recession? Hmm. Is the Talk Shifting to Recovery?

The most eye-catching headline I came across this weekend was titled “Is the Recession Over?” Authored by Paul LaMonica, it was on money.cnn (http://money.cnn.com/2009/06/19/markets/thebuzz/index.htm?postversion=2009062008).  Mr LaMonica consults various credentialed people and presents a fair case for both yes and no answers, and then observes with his experts that for most people the question is not whether the recession has ended, but when the pain will end.

Of course for us at SmallCapWorld, we are pretty interested in the stock market, especially the smallcap stock market, which has had its own pain cycle over the last 10 months.  We tend to suspect that the market can be an early indicator of recovery, especially when indicators are broad, and reach most of the major segments.

At the same time, in a more optimistic universe, Motley Fool’s Adam Wiederman was looking for “The Best Stocks for the Next 4 Years,” the sort of headline (and article) that presumes that the sun’ll come out tomorrow.  He even quotes Sir John Templeton about investing at “points of maximum pessimism,” which, aside from calling up the spirit of Benjamin Graham, is about as close as you can get to scripture-reading for investors.  http://www.fool.com/investing/small-cap/2009/06/20/the-best-stocks-for-the-next-4-years.aspx.  Not to ruin the suspense, but the 4 stocks that people he talks to have picked are (1) Insmed (Nasdaq: INSM, a development stage biomed company headquartered in Richmond VA), which closed Friday at $2.47 vs a 52-week high of $2.57, and a market cap of about $309 million; (2) Satyam Computer Services (NYSE: SAY, a diversified software and services company in Hyderabad, India), which closed at $3.65 Friday vs a year-high of $3.71, and a market cap of just over $1.2 billion; (3) Allied Irish Banks (NYSE: AIB, as you might guess headquartered in Dublin), which closed Friday at $5.35 vs a year-high of $32.48, but up from $1.44 on March 30, 2009; and RF Micro Devices (Nasdaq: RFMD, from Greesnboro NC), which closed Friday at $3.69 vs a 52-week high of $3.98 and with a market cap of about $980 million.  Note the lack of niche industry orientation and broad geographic interest.

Of course Wiederman also quotes a bear saying the bottom could fall out —  to keep things well balanced.

No one seems to have an unqualified opinion about whether we are still headed down, whether we are sitting on the bottom, or whether we have started back up.  There are numerous favorable indicators, like a drop in overall unemployment claims; a slight revival of housing prices in a few areas that may be bellwethers like Orange County and San Diego, CA; more buoyancy in the market in general; more roadshows and more deals (though most are still PIPEs, registered-direct and discounted sales to PE investors — and a dizzying array of warrants are being issued). 

Monday morning Apple announced that it sold 1 million new iPhones over the weekend, twice what it expected — impulse purchases every last one.  And bring on more media stories about the best car under $18,000 and how to refi your mortgage at these low rates.  I was particularly amused this weekend with stories that bigname luxury stores are stocking cheaper merchandise —  who knew?  And there was a network news story on WalMart’s aisle endcaps showing a one-cup coffee brewing system for $109.95.  I beg your pardon?  Payback period on that, please?

Either the price of oil going up is good news (increased demand) or bad news (gonna hit the consumer at the pump), but it is definitely a sign that one industry is beginning to move again.  The same is true of the general fascination of the press with greentech issues — many of which are beckoning investors to rather small companies with rather sketchy performance histories (but interesting IP, of course).

BioMedReports.com issued a report on adult stem cell companies, a bit esoteric, but right in the middle of the policy liberalizations of the Obama administration with regard to biotech research.  If that interests you, have a look at http://biomedreports.com/articles/most-popular/1423-next-big-boom-adult-stem-cell-stocks.html for commentary on 5 stem-cell companies we can almost guarantee you have never heard of (but may want to know about). 

We are not investment advisers, and it’s a good thing, because the wobblies might have come even sooner if people had invested in everything we wrote about.  We write about interesting and newsy companies, many not even publicly traded, not just stocks we think will surely go up.  But we have the feeling that the market, while it operates to a certain extent on hard, quantifiable things like news and earnings, interest rates, currency movement, energy &  commodity prices, same-store sales, etc — is equally a critter that moves on instinct.  Isn’t “consumer confidence” an essentially fake extrapolation expressed as a percentage to make us trust it more? 99 and 44/100ths percent pure.

So when we saw an article with the title “Wall Street Looks to Refuel Rally in Week Ahead” on Sunday morning, it made the coffee taste a whale of a lot better: http://money.cnn.com/2009/06/21/markets/sunday_weekahead/index.htm?postversion=2009062107.  It is for SURE not a cockeyed optimist’s view of the world, but it is an almost 180-degree switch from headlines we got used to seeing in the cold, cold winter of our 2008-2009 discontent.  The more people ponder whether the worst has passed, the more likely it may be — it seems to us untutored folk — that attitudes may be able to act as a self-fulfilling prophecy.  Many of the companies we have written about over the last 6 months have done really well, and very few have missed big on something important (yes, there is always a laggard here and there — HURRY UP NOW, KEEP UP WITH THE CLASS!).

Point being that it seems that the basic palaver has changed from “how bad can it get?” to “how soon can it get better?”  And that may signal more to us than the basically historical numbers that we hold our breath for every week.