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The Trouble With Housing and Oil

Written by Briton Ryle
Posted November 14, 2018 at 3:57PM

Strange day, yesterday...

Beazer Homes (NYSE: BZH) beat earnings and revenue estimates and launched 32% (not a typo) higher... oil got nailed for like 6%... I took my son out for a burger and he got water buffalo with ghost pepper cheese...

Like I said, weird. 

I mean, they farm all kinds of weird animal these days. You can get red deer burgers, emu burgers, wild boar burgers (and really, couldn't we just call that a boarger?)...

Seriously, though — why would anyone take perfectly good cheese and add a pepper that could actually kill you? Must be like the thrill of eating that sushi that will kill you if it's not prepared right. The only reason to do it is to brag about it later. 

OK, OK. I'll try to focus on what's really important here: housing and oil.

Both of these are somewhat significant indicators of economic growth. Housing is probably more indicative of U.S. growth. Because when conditions get tight — like when interest rates rise — people are less likely to take on a 30-year mortgage. Oil gets the unenviable task of acting as a proxy for global growth. You can't run the engine on dew and universe juice...

The financial media has been full of fund manager/strategist types saying oil prices are getting whacked because demand for oil is falling as China's economy hits the skids. These same doom-and-gloom types will tell you that you'll find the ugliest stock charts over in the homebuilders sector. And this is a clear sign that the Fed is driving the U.S. economy into recession.

OK everybody, breathe deep, take a bite of your water buffalo burger, and get comfy... I got some 'splainin' to do.

It's Differ... I Mean, Things Change 

Let's take on oil first. It hasn't even been two months since Goldman Sachs (NYSE: GS) said there was a pretty solid case for oil to hit $110 by year's end. New sanctions on Iran, the Saudi desire to keep prices strong for the Aramco IPO...

But then OPEC has lowered 2019 demand estimates for four straight months. Is that enough to drop oil from $75 to $55 in a little over a month? 

Maybe. But if you add a little oversupply to the demand destruction scenario, well, that'll do it. And that's what's happening. 

Trump slapped more sanctions on Iran, telling them if they don't toe the line, they can't sell oil. Then he granted waivers to eight countries so they can buy Iranian oil. So much for taking that supply off the market. If you don't mind me saying, that's just bad parenting.

The second item is Jamal Khashoggi. 

It is not my intention to minimize what happened to this man. It's horrible, and while it may not be damning for all of Saudi Arabia, it absolutely confirms the notion that factions of the House of Saud are dangerous. Again. And since the early denials came directly from the Saudi Crown prince MBS, I think we know where to look... 

Because we don't want to look. Because the U.S. wanted the Saudis to pump more oil to get prices lower. The U.S. got an opportunity to pressure (read: blackmail) the Saudis. They are pumping more, and prices are falling. The official stance of the U.S. is now "Jamal who?" 

Sad! Very unfair!

Oil hasn't lost its ability to forecast global growth. But the formula has changed. The concern now is supply, thanks in large part to U.S. shale (which is hitting new record output), and the market hasn't figured out how to interpret price yet.

So simply saying that falling prices are a sign of slowing growth and even recession doesn't really cut it these days. In fact, I can imagine that the script can easily flip, and falling oil prices will be seen as supportive of a growing global economy.

Is the Fed Killing the Homebuilders?

Beazer's earnings yesterday were pretty darn good. And the numbers would seem to refute the notion that the housing market is slowing. But the way that stock traded yesterday is more important than the numbers. Stocks don't run like that unless expectations are way out of whack. 

So it's likely fair today that reports of the housing market's demise have been greatly exaggerated. 

Now, for the record, I did get my Real Income Trader subscribers into some Beazer put options yesterday. And we darn near doubled our money as the stock is down 5% today. Yeah, that ramp job was a little much. (If you wanna make some loot trading options, I can help.)

I've looked through earnings estimates for several builders. And while estimates have come down a bit — estimates for DR Horton in 2019 are down 5% — it's not enough to explain the beatings these stocks have taken. The current P/E for DR Horton is 9.5, which is the lowest since early 2013. 

When it comes to the Fed, investors are in "sell first, ask questions later" mode. Once again, this is a script that is likely to flip with a little more clarity from the Fed.

It's hard to believe Thanksgiving is next week. This is the time of year for stocks to get cooking. 

My editor had to look up the word "ripsnorting" when I told my Real Income Trader subscribers that I think we're building up for a strong end-of-year rally. And I'll tell you exactly what I told them: 

I will tell you that I think an end-of-year rally is still very much on the table. I mean, what better way to get everybody leaning the wrong way than a ripsnorting "coast is clear" rally? 

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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