Case of the Shingles

Everyone looking at today's abysmal housing starts, building permit and mortgage application data is getting a painful case of the shingles.

It hurts to see starts decline to six-month lows amid all the renewed optimism we've witnessed with respect to the economy. While I still believe that the optimism is justified, this economy will not recover in a straight line.

That is why I recently suggested taking the long view now that buying the banks, homebuilders, asset managers and using a barbell strategy around high- and low-end retailers will reap rewards over the next 12 to 24 months.

What's extremely interesting about the action in the builders is that they are up sharply on such bad numbers. The bottoming process in housing continues. True, we are bumping along the bottom, but the bright side to the surprisingly weak housing starts number is that it holds the Fed in place.

Given the volatility in the data, from housing to retail sales, the Fed can hardly afford to snug up interest rate policy, remove critical monetary props to the economy or listen to grumblings from Beijing about our excessively easy monetary and fiscal policies.

In case no one noticed, on a proportional basis, the Chinese have done more to stimulate their economy than we have done to stimulate ours.

Indeed, it is quite hard for China to argue that our fiscal and monetary policies are creating asset inflation in China, despite the fact that China's monetary policies are tied to ours by virtue of a pegged currency. The Chinese have engaged in enough rate-cutting and pump-priming to create a very dangerous asset bubble of their own making.

For those exposed heavily to Chinese stocks and other assets, I would lighten up on the expectation that their bubbles will burst long before ours.

The biggest issue between the U.S. and China remains the relative value of our respective currencies. China wants a weak yuan, and we want a weak dollar. The "competitive devaluations" are a very sore spot between the two countries, but we need a weaker dollar more than China needs a weak yuan. So, as Martin Wolf suggested in today's Financial Times, President Obama should have made it very clear how Washington and Beijing can solve problems together and that China should quit carping about our currency and take steps to redress this issues on its side of the ledger.

The president should also, in my humble opinion, tell Dr. Hu that China is living off the kindness of strangers just as much as we are -- namely the U.S. consumer -- in a more forceful way than he did. I don't mean that he should threaten protectionist actions, but China, at least domestically, is more mirage than miracle. China's greatest economic strength is its ability to export inferior and sometimes dangerous products overseas, thanks to a weak currency that gives the country competitive edge on world markets.

The blog Zerohedge had an interesting piece about a zombie community in Inner Mongolia, called Ordos, where China has poured countless dollars and tons of cement to create a shining city on a mountain of sand. The place is beautiful but almost completely uninhabited. (Thanks to a former colleague for that insight.)

I suspect China's vaunted infrastructure building will come back to haunt the country as the glut of unoccupied properties creates a real estate problem somewhere down the road that could make the U.S.'s residential and commercial bubble look tame.

I continue to believe that a balanced, all-domestic equity portfolio comprised of banks, builders, asset managers, low- and high-end retailers (along with other consumer discretionary stocks), industrials and late-cycle stocks will do very well over the next two years.

There will be an inevitable (and scary) setback somewhere along the line, but that's the time to double-down. At this point in the cycle, don't let one month's number force you to sell or swap stocks that will be higher a few years from now, the builders and banks in particular.

Don't subtract, add. This is the time to build the size of your equity portfolio within your overall asset allocation. It takes the courage of your convictions to buy and hold when everyone is saying buy and hold is dead.

As I said, with regard to my own portfolio, it is currently being driven by more short-term tactical considerations, but my long-term strategy is no different than what I just described, despite some year-end housekeeping strategies that I must engage in when running a real money, rather than model, portfolio.

Regards,

Ron Insana

Send email to ron.insana@thestreet.com