As it was at
midday, so it was at day's end: Stock proxies fell today on modest trading volume.
Bears were no doubt encouraged by today's session, but bulls could take solace that major averages closed either right at or slightly above key short-term support levels.
Dow Jones Industrial Average
breached the psychologically important 10,000 level, falling 1.2% to 9981.58, but remained above its 200-day moving average of 9903.
closed down 0.9% to 1074.55, a marginal break of its near-term support at 1075, which represents the downtrend line from the mid-March highs. The index traded as low as 1070.31 intraday, so its ability to recover some lost ground was key to those watching the 1075 level, even if
Helene Meisler suggested 1050 is far more crucial. (Perhaps, but a definitive break of 1075 would suggest a retest of 1050 is more likely.)
closed down 0.6% to 1652.17 after having traded as low as 1632.75 and violating near-term support at 1650.
All that may sound like technical mumbo-jumbo or, at best, a hollow victory. Those totally dismayed by recent market action might wish to consider the recommendations of Merrill Lynch chief U.S. strategist Richard Bernstein, who today reiterated a view that long-term investors should focus on yield.
Bernstein reported the S&P Utility index outperformed the Nasdaq Composite on a total-return basis from the latter's inception in February 1971 through May 23, by 11.6% to 11.5%. Meanwhile, the Comp only outperformed the RMS REIT index by 12.2% to 11.7% on a total-return basis since the REIT index's inception in December 1994.
The strategist questioned "whether it was rational for investors to flock to Nasdaq stocks and that market's volatility," when they could have achieved similar long-term returns from utilities and, more recently, nearly as good returns from
REITs. "Simply put, we believe that dividend yield is a vastly underappreciated concept," Bernstein concluded.
Forecasting that investors will become "incrementally more conservative" in the next five to 10 years, he recommended the following income-producing stocks:
Among utilities, Cinergy (dividend yield 4.9%), Dominion Resources (3.9%), DTE Energy (4.4%), FPL Group (3.6%), and TXU (4.4%).
Among REITs, Kimco Realty (dividend yield 6.5%), ProLogis Trust (6%), Reckson Associates Realty (6.9%), Simon Property (6.5%) and Vornado Realty Trust (6%).
Merrill has done underwriting for Cinergy, Dominion Resources, DTE Energy and TXU.
Bernstein's commentary recalled that of Jeffrey Saut, chief equity strategist at Raymond James, who has long focused on investors' desire for "
unearned income." In that vein, Saut today recommended
Equity Securities Trust I
, with a stop at $20.875.
The convertible preferred securities, which fell 1.4% to $23.72 today, were created by
to monetize its equity stake in
and automatically convert into CVC shares on Nov. 15, 2004.
The level of CVC shares at maturity will determine the exchange rate, but Saut's point is the securities have a current dividend yield of more than 9% and present "an interesting way to get at the CVC story."
Where the Heart Is
Amid today's latest low-volume selloff came more news of robust activity in the housing sector.
Defying expectations for a small decline, existing home sales rose 7% in April to an annual rate of 5.79 million units, the third-highest reading ever, the National Association of Realtors reported.
Today's existing home sales report followed a similar strong release Friday on new-homes sales. The Commerce Department said new-home sales rose 1% in April to a 915,000 unit pace, up 1.6% from year-ago levels and well ahead of expectations.
The notion of real estate being an alternative to stocks, tax laws making homeownership more attractive, more creative financing, and Baby Boomer demographics have clearly aided the housing market. But the biggest factor has been low mortgage rates, which have followed the trend of the benchmark 10-year Treasury note.
After reaching as high as 5.42% on April 1, the 10-year entered the week yielding 5.17%. Similarly, average 30-year fixed-rate mortgages have fallen to 6.81% for the week ended May 24 from solidly over 7% in late March and early April, according to
"So long as mortgage rates remain subdued, the housing market is likely to retain its relative strength," commented Peter Kretzmer, senior economist at Banc of America Securities, who noted mortgage applications have surged again.
What's good for the housing market is, invariably, good for homebuilding stocks, which have recently regained their footing after stumbling in March (not coincidentally when mortgage/interest rates were rising. Last week, the S&P Homebuilding index rose 3.1%, although it dipped 1.3% today.
Homebuilders' resurgence has stymied critics, myself included. I continue to believe we're heading toward an environment that will be difficult for housing and related stocks. Recent developments in gold (rising) and the dollar (falling), evident again today, suggest the risks of the higher inflation part of a "
stagflationary environment" are rising.
However, the economy itself remains stable, as today's consumer confidence and personal income reports suggest (along with the aforementioned housing data). Thus, it's been too early to get negative on homebuilders, much less short them, which I'm not allowed to do (see below).
Investors should be wary about any industry (or stock) in which insider sales are rising and the fundamentals may be worsening. But there are at least two sides to every story, and the bullish one for homebuilders has recently reasserted itself.
Donald Straszheim, president of Straszheim Global Advisors in Westwood, Calif., recently made the following observation: Since 1985, the compound annual growth rate (CAGR) of net sales is 14.2% for 10 big homebuilders. These are:
Over the same time period, the CAGR for gross domestic product is 5.7%, Straszheim observed, noting few industries have outperformed the overall economy by such a large margin.
During the past four years, average net sales for the aforementioned companies have risen between 16% and 30% per year, and the economist believes more market-share gains are coming for the industry's biggest players.
"We think housing has peaked for the cycle, but the big firms are well capitalized -- and well suited and situated -- to remain rapid growers, to gain more market share and to become ever more dominant," Straszheim wrote.
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.