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At the Edge of Chaos: Why Homebuilders Have a Long-Term Advantage but Face a Short-Term Bumpy Ride

The working premise for 2023 is that, as long as the Federal Reserve continues to raise rates, stocks will struggle. In fact, there is a high level of…



The working premise for 2023 is that, as long as the Federal Reserve continues to raise rates, stocks will struggle. In fact, there is a high level of speculation about the so-called "terminal rate," the interest rate to which the Fed is willing to go in order to whip inflation. As of the most recent Fed "dot plot", the central bank has communicated that it may raise rates above 5%.

It doesn't take a whole lot of imagination to pencil in a whole lot of damage to the stock market and the economy if they go much beyond that. That said, there are still some sectors of the stock market that will, more likely than not, outperform others due to the state of the supply and demand balance in their business. One of them is housing.

Housing Will Likely Surprise to the Upside

I've been bullish on the homebuilder stocks for quite a while. I was even bullish when the sector crashed and burned in the middle of 2022 as the summer blowoff in prices for existing homes imploded. And I remain long-term bullish.

Of course, as the Fed continues to raise interest rates, mortgage rates will likely retain their recent upward bias. This will have a negative effect on home sales and create short-term difficulties for homebuilders. The recent rebound in mortgage rates will not be helpful.

At the same time, it's important to delineate the important differences between the homebuilders (new housing), the existing home markets, and the rental markets. That's because even though they are all related, each has its own set of internal dynamics which influence how they operate.

The Brave New World of Housing

To understand the U.S. housing markets, it's important to review the two seismic events in recent history which have shaped the current supply and demand balance: the 2008 subprime mortgage crisis and the COVID-19 pandemic. Although they were 12 years apart, they are irreversibly intertwined and, together, created the environment which favors homebuilders the most for the present and likely for the future.

After the 2008 crash, many homebuilders faced near-death experiences as their overbuilt inventory sat idle for years. As a result, they stopped building homes. This created a long-term supply crunch for new homes. Moreover, when the overall situation improved, they still didn't overbuild. This perpetuated the undersupply of new homes, even as populations grew and shifted.

The pandemic caused a population shift from cities to suburbs and, in many cases, to other states, especially the sunbelt, where COVID-19 restrictions were fewer and jobs and economies recovered faster compared to states which kept pandemic restrictions in place longer.

Meanwhile, the Federal Reserve's massive QE and zero interest rates added to the demand for housing, as buyers fleeing cities looked to own their homes instead of renting apartments. This demand was very pronounced in the sunbelt and states with lower restrictions, due to the large numbers of people who moved there. Initially, this also favored landlords in those areas, as the short supply of homes drove many to rent.

When the Fed began its interest rate increases, all segments of the housing market stumbled. But as time has passed, both realtors who deal in existing homes and landlords have struggled more than homebuilders. In fact, homebuilders have remained in the driver's seat, as a low supply of existing homes in preferred locations, persistently high rents from landlords, and a continuation of the migration to the sunbelt, combined with a limited supply of new homes, have perpetuated the most favorable conditions for homebuilders in a generation.

Perhaps the take-home message is that, even after a huge increase in interest rates in 2022, homebuilders are still in a profitable position.

REITs and Rentals: Online Brokers and Existing Homes

For stock investors, the rental market is best traded via real estate investment trusts (REITs). These are fairly easy to trade because they will usually rally when interest rates fall, and fall in price when interest rates rise. They're particularly sensitive to the Federal Reserve's interest rates and to the trend in yields in government bonds, especially the U.S. 10-Year U.S. Treasury Yield ($TNX).

In the current market, corporate entities own a disproportionate amount of rental units. This dominance of the market, combined with low supply in attractive locations, has kept rents at high levels for an extended period of time. But as the economy has slowed, landlords in high tax, high-regulation states have seen their vacancy rates rise, while those in low tax, low regulation states have seen high occupancy rates.

Existing homes are equally interest rate-sensitive, but are a bit harder to trade via the stock market. One way to trade the trend in existing homes is via the shares of companies, which own real estate brokerages such as online broker Redfin (RDFN).

Generally speaking, these types of stocks do well when existing home sales are rising and interest rates are falling. 

Homebuilders Beat to a Different Drum

Homebuilder stocks are also interest rate-sensitive, as mortgage rates are tied to bond yields. As a result, the price of stocks such as D.R. Horton (DHI) and Lennar (LEN) often follow the same price trend as REITs and online brokers.

But the current situation is slightly different. You can see that shares of DHI and LEN fell for several months in 2022 as $TNX rose. However, the stocks responded well when the yields reversed. You can see that RDFN shares have yet to recover.

The reason that homebuilder stocks responded more favorably to the yield reversal is multifold:

  • There are fewer new homes available than there is demand. That's because homebuilders stopped building after the 2008 housing crash and never quite picked up the rate of building to the levels prior to the crash.
  • Demand for new homes remains high because there is a migration from high-tax states to low-tax states with higher availability of jobs—especially sunbelt states such as Texas, Florida, and Georgia.
  • Older homes are often less attractive than new homes due to their outdated amenities, location limitations, and, in many cases, poor upkeep. Moreover, in some states, rents are so high that it makes more sense to own a home.

These factors make new homes more attractive than existing homes. As a result, homebuilders remain in a more favorable position than real estate brokers and landlords.

Of course, that doesn't guarantee uninterrupted up trends in these stocks. And, if interest rates rise significantly, they will have an adverse effect on homebuilder stocks. Yet, when they eventually fall, the homebuilders will be in a better position than many sectors in the stock market because supply is on their side.

Higher interest rates are never good for most stocks. But it's still possible to make money in stocks during periods of rising interest rates if you know where to look. You can see when and how to fight the Fed and win in my latest video here.

I own shares in DHI and LEN. 

Welcome to the Edge of Chaos:

"The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder." – Complexity Labs

NYAD Remains 200-Day Moving Average

The New York Stock Exchange Advance Decline line (NYAD) remained below its 50- and 200-day moving averages, but really went nowhere in the final week of the year.

A similar picture can be seen in VIX, which means no major bets from put buyers materialized. When VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying. The lack of rise in VIX has been the reason for the lack of a complete meltdown in stocks.

Liquidity remained surprisingly stable as the Eurodollar Index (XED) has been trending sideways to slightly higher for the past few weeks.

The S&P 500 (SPX) seems to have found temporary support at 3800, but remains below its 20-, 50-, and 200-day moving averages. Accumulation/Distribution (ADI) has stabilized, but On Balance Volume (OBV) remains near its recent lows. ADI suggests short sellers are making quick profits and getting out, while OBV suggests that sellers are not quite done yet.

The Nasdaq 100 index (NDX) may have made a triple bottom, with the 10,500-10,700 price area bringing in some short covering.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I've made my NYAD-Complexity - Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…



By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.



Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250

Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  


3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 

From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:


In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…



Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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