Housing Sector Shows Signs of Life

by George Leong, B. Comm.

Markets are currently trading cautiously, with some topping on the charts. The trading volume is relatively light, indicating an absence of mass market participation in the buying. We appear to be seeing a near-term topping in stocks in the absence of a major catalyst to buy. The positive is that the market is holding.

Yet there remains risk in the current investment climate, specifically with some of the smaller banks and mortgage lenders. So far this week, real estate broker Colonial BancGroup Inc. (Pink Sheets/CBCG.PK) filed for Chapter 11 bankruptcy protection. In addition, independent mortgage banker Taylor, Bean & Whitaker Mortgage Corp. also filed for bankruptcy protection, as Colonial has been its primary bank.

The financial sector has been rallying in the recent month, with buying in the banks helping to drive the market and offering some leadership. But while the picture looks more encouraging now, there remain some outstanding issues that need to be dealt with, namely the toxic assets on the balance sheet of the major banks. Without a clean-up of the balance sheet, there will continue to be questions regarding the stability of some banks.

On the positive side are some encouraging signs from the housing sector. Positive news that the Standard & Poor’s/Case-Shiller’s U.S. National Home Price Index has risen is helping stocks. The news is encouraging, as we need to see sustained growth in housing prices and property wealth in order for consumer confidence to improve and drive spending with confidence. This would drive the economy and GDP growth and pull us out of the recession.

The Consumer Confidence Index jumped to an expansionary 54.1 in August, above the estimate of 47.9 and up from 47.4 in July. I’m encouraged by the positive reading, but emphasize that it does not mean consumers will rush out to the malls in masses.

In all of the economic optimism, we may be forgetting about the country’s mounting deficit and debt load. According to the White House budget office this week, the cumulative deficit could be $9.0 trillion from 2010-2019. The national debt could double by 2019. Moreover, the report also predicted that the unemployment rate could reach 10% this year and fall to 9.8% in 2010. The jobs area also needs to improve to give consumers more confidence towards buying.

In all, there are some bright spots in the economy. President Obama’s stimulus plan is helping, but the mounting deficit and debt could pose problems down the road. There may also be the need for additional stimulus to keep the economic renewal going and avoid a setback, but this will require more funds, and again will add to the country’s weak balance sheet, which could pressure the greenback.

For the investor, you will need to continue to be vigilant in monitoring your portfolio. Take some profits on some of your big winners or on positions that have made quick moves in a short period.

I expect the trading volume to pick up in September, with the end of summer. The third quarter will be important for seeing if the economy continues to strengthen and if companies post stronger results.