A better-than-expected report on durable goods, a lowering of the government's terror alert level, and some apparent concessions from Saddam Hussein helped send stock proxies higher early Thursday.
But President Bush poured cold water on the notion that Hussein's pledge to destroy banned al-Samoud missiles would be enough to avoid war. Later, U.N. weapons inspector Hans Blix was quoted as saying Iraq's disarmament has been "very limited" to date, buttressing the president's hard-line stance. The reality that war is probably unavoidable didn't totally squelch the advance, but major averages started going sideways at about 11 a.m. EST, and were recently trading well below intraday highs.
As of 2:53 p.m. EST, the
Dow Jones Industrial Average
was up 0.3% to 7829.87 vs. its earlier best of 7924.62. The
was higher by 0.5% to 831.69 after having traded as high as 842.19 and the
was up 0.8% to 1314.50 vs. its apex of 1331.80.
Following a similar path as U.S. stocks, the dollar rallied early following the strong durable goods orders report but had since pared its gains. The U.S. Dollar Index was lately up 0.31 to 99.93 vs. its earlier best just above 100.
Meanwhile, crude futures reflected the seeming inevitability of war, trading as high as $39.99 per barrel early on, the highest level since Oct. 12, 1990. Of late, crude futures were down 0.9% to $37.35.
Gold, conversely, was unable to benefit from any concerns about possible war and retreated in the face of a rising dollar and U.S. stocks. Gold futures were lately down 3% to $346.20 while the Philadelphia Stock Exchange Gold & Silver Index was off 1%.
Built for Durability
If it were possible to ignore geopolitical developments, traders might have focused on the day's economic data, which featured a 3.3% rise in January durable goods orders vs. expectations for a 1% rise and December's decline of 0.4%, revised from an original drop of 0.2%.
The report can be viewed as "corroborating recent signs of better manufacturing momentum and perhaps indicating some increased business confidence in the capital spending area," wrote Peter Kretzmer, senior economist at Banc of America Securities.
Orders for nondefense capital goods, excluding aircraft, rose 5.4%, while shipments of similar goods rose 4.1%, the largest monthly gain in three years, Kretzmer noted. "While a good sign, there have been false upswings in recent quarters, and the data will have to be watched closely."
The Treasury market dipped in reaction to the strong economic data and strength in stocks, but not by much. Of late, the price of the benchmark 10-year was unchanged at 100 29/32, the yield at 3.76%. (This column took
a more detailed look at the bond market earlier Thursday.)
As was the case with Tuesday's strong existing home sales report, Thursday's weaker-than-expected new home sales did not greatly influence shares, beyond homebuilders. New homes sales dropped 15.1% last month to a annualized rate of 914,000, the slowest pace since January 2002 and vs. expectations for a rate of 1.05 million.
Additionally, November and December sales were revised downward. Homebuilders such as
were down in reaction and the S&P Homebuilding Index was lately off 1.
Thursday's setback aside, Brad Ruderman, managing partner at Ruderman Capital Management in Los Angeles, is bullish on the homebuilders. His $140 million hedge fund currently has long positions in
"The media missed by a mile the greatest bubble of all time, so understandably they want to nail the next bubble if they can find it," Ruderman said. But, like
Chairman Alan Greenspan, he sees no
Meanwhile, "the companies are run by smart managers who have seen all cycles -- thus you'd think they'd be prepared for the next down leg," he said.
On a more fundamental note, the fund manager noted the industry's leaders sport strong balance sheets. Also, the homebuilders are "extraordinarily cheap," he claimed, noting "you can't find a stock in the group
trading for more than nine times trailing
earnings per share, and 1.5 times book value."
It's been a while since I've written on this subject, but recalled that about a year ago, Barbara Allen, senior analyst at Arnhold & S. Bleichroeder,
declared here that: "Two times book value and 8 to 9 times trailing earnings has been the norm in peak valuation at the end of cycles."
Clearly, the negativity expressed last year about homebuilders by Allen (and I) was off base, especially on a relative strength basis. In the past 12 months, the S&P Homebuilding Index is up 6% while the S&P 500 is down 25%. (For the record, I later acknowledged that any housing "bubble" is on the
consumer credit side vs. the builders themselves.)
Still, I can't help but wonder if we're not closer to the end of the homebuilders' impressive run vs. the beginning or middle.
Ruderman, for one, does not believe the group is a "value trap," noting earnings have continued to rise but valuations for his favorites have come down vs. early 2002 levels. "I'm not even close to suggesting
homebuilders deserve market multiples, but it's not much to ask them to trade to 10 times
EPS and two times book" value, he said. "In some stocks, that's good for a 30% move with very little downside."
The hedge fund manager also noted the possibility of higher dividend payouts from the group, something Seabreeze Partners' Doug Kass has been musing about lately on
. Kass, of course, being one former homebuilding short who's more recently come around to a bullish mode of thinking.
Consider Ruderman's comments the price of his earlier success, sort of a "what have you done for me lately?" situation.
Last summer, he waxed optimistically here about cable companies, at a time when the whole group was being tarred by the
Shares of some of his favorites, including
, did fall further during the July swoon and late Summer, at which time he doubled (and in some cases tripled and quadrupled) down, on convertible bonds and senior debt as well as shares.
Six months later, those holdings are all significantly higher and Ruderman feels (justifiably) vindicated, and enriched. His fund maintains long positions in Cablevision and Comcast, the latter a hedged one, but has sold its Cox stake.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.