Jan. 23, 2013
-- As earnings season moves into its second full week, the early results (101 companies) have shown a surprising 60.2% beat rate on revenues. This is well-above the last two full quarter results of sub-50%. The bottom line numbers show a 50.4% beat rate that is in line with the totals for the past seven quarters. These results are too sketchy to draw any conclusions but should they sustain or be near these levels, earnings will add to investor confidence as the year unfold,” said David Minor of Hutchens Investment Management.
Perhaps the story of 2013 will be the resurgence in housing, adding ½ to 1 percentage point to real GDP. We have documented on these pages for the past year the anecdotal evidence of the bottoming and the clear signs the residential housing market is recovering. Zillow Inc., a real estate information provider, just reported that home values rose 5.9% during 2012, the highest level since the summer of 2006. Also last week the Census Bureau reported housing starts begun in December were 954,000, above the estimate of 889,000 units, and 36.9% better than December 2010. However, these are substantially below the 2 million plus levels during the 2003-2005 period. Housing remains week, but the tide has changed. Bumps like the existing home sales data released today are to be expected at this early stage of recovery.
Housing, for years a drag on economic growth, may provide the catalyst to move real GDP above the 3% level and unemployment below 7%. The employment cycles of construction should turn decidedly upward in the spring and could add as many as 800,000 jobs annually at a 1.5 million starts pace. (These jobs numbers include construction, supply chain and secondary benefits.) Currently, private residential investment is 2.5% of GDP, a return to the 4.5% average of the past 40 years would add ½ percentage point to GDP. Couple this with a 6% annual rise in home prices and incremental wealth would increase $1 trillion annually. Past studies show that consumers spend about 4.4% of housing wealth creation in the near-term. Could this be what is boosting auto sales and lifting other retail sales beyond expectations?
Our investment strategy remains cautious short term but decidedly bullish long term. The Washington cloud overhanging the market has not negatively affected stocks to date but could as legislators lock horns in the next few weeks. We believe that eventual small tax increases and minimal spending cuts will satisfy stock investors and the economy will improve as housing continues to recover and investment spending accelerates later in the year. Washington will remain quiet until a crisis develops, which with a growing economy may be some years down the road. Sophisticated investors, looking ahead are slowly beginning to shift asset allocation toward equities. We maintain a balanced portfolio of domestic equities, fixed-income, ETFs, including housing (ITB), MLP’s, gold (GLD) and silver (SLV).