1. The Housing Resurgence
First, and predominant, is the return of housing as a major driver to the U.S. economy. A lot of different people will give you a lot of different estimates as to how impactful housing is on the U.S. economy. To that I say: If I were an economics professor, I would be all over trying to figure out that correlation. But I am not. I am a stock-picker, and all I care about is what this means to the stocks in the sector -- and, for them, this recovery has been nothing short of amazing.
We had the homebuilders, led by Pulte (PHM), Lennar (LEN) and Toll Brothers (TOL). We had the housing-related retailers -- Home Depot (HD), Williams-Sonoma (WSM), Pier 1 (PIR) and Lowe's (LOW). We had the building-products companies -- Louisiana-Pacific (LPX), Weyerhaeuser (WY), Rayonier (RYN), Plum Creek Timber (PCL), USG (USG) and Owens Corning (OC). We had the suppliers, like Whirlpool (WHR), Newell Rubbermaid (NWL), Masco (MAS) and Mohawk (MHK). All of these will also be helped by the eventual rebuild that must happen in the aftermath of Hurricane Sandy -- which, while not as big as that following Katrina, will help spur the second quarter's gross domestic product growth.
Then you have ancillary plays from new-household formation -- companies like Discovery Communications (DISCA), Time Warner (TWX) and Comcast (CMCSA) -- or from road-building, such as Vulcan Materials (VMC). Finally you have the stealth housing play, Berkshire-Hathaway (BRK.A), which really took off in the fourth quarter because it also participated in the next theme, insurance.Can this move continue? How many times have we heard that question? How many times has it been answered negatively? How many times have we heard that it is only a matter of time before the Federal Reserve turns off the juice, even though Chairman Ben Bernanke just told you last month that he's going to keep money easy until unemployment reaches 6.5%? Here's why I am not concerned. During the sector's heyday, homes were being built at a rate of about 1.5 million a year. OK, maybe that's not sustainable. But it dropped to 400,000 a couple of years ago, back to levels of the 1950s, when the U.S. had half as many people as it does today. Talk about unsustainable. That's ridiculous. Of course, the bears told us it didn't matter, given the shadow inventory of homes owned by banks. But, in about a year's time, a combination of factors ate through that shadow inventory once pricing came back: banks working with underwater lenders, a pro-homeowner Washington and the annual destruction of homes through fire and flood. The rally in the bank stocks tells you fears about the underwater owners will not be realized. Those homes are roaring back in value, too -- and they are still good, affordable buys! That's especially so given these low rates and high rents. I think that, unless you are in the real estate market, as I am, you have no idea how ridiculously high rents are. It is still quite difficult to get a loan to buy a place. But, as housing goes up in value, you will see the major banks lend again -- just as Bank of America (BAC) CEO Brian Moynihan told you would happen last Friday. That's why I think we have multiple years -- not one year, but multiple years -- of housing strength ahead of us. This remains the go-to group for 2013, and Washington's debt-ceiling talk will be terrific for opportunities to buy.