Updated from 2:08 p.m. EST
To be fair to
, this rallying market probably would have ignored the homebuilder's disappointing outlook, were it not for the dearth of news on Tuesday.
But in the absence of other notable news, everybody paid attention and Toll plummeted along with fellow homebuilding stocks. The Philadelphia Housing Sector Index closed down 5.4%, led by Toll's 13.6% plunge, a 10.4% drop in
and an 9.7% drop in
The broad market fell in sympathy although the damage was limited. The
Dow Jones Industrial Average
fell 0.4% to 10,542, the
was off 0.4% to 1219, and the
lost 0.3% to 2171.
The reaction to Toll is telling of the high expectations in the overall market following the tribulations of October. The Philadelphia Housing Sector Index had plunged to a five-month low of 465 by Oct. 27, a 20% decline from its all-time high of 586 on July 28. But it had rebounded 9% to 508 as of Monday's close following the broader market's rising optimism; the S&P 500 had rebounded 3.8% from its Oct. 12 low to Monday's close.
But "the market might have been expecting a bit too much from the homebuilders recently," says Arthur Oduma, housing sector analyst at Morningstar. Homebuilders "themselves have been making the point that the level of home price appreciation over the past two years has been unusual."
Of course, before making that point completely clear to the market, executives at these firms were
selling their shares at record levels during the summer as reported here in August.
Pessimism about the consumer's resilience to high energy costs and a
hell-bent on raising interest rates were believed to be priced into stock prices during October, allowing for the recent bounce. But with the energy sector seemingly to have fallen to the wayside since last week, the stock market may be running out of leading sectors.
Crucially, the fate of the housing sector cuts deeper than the simple performance of housing sector stocks. Home price appreciation and the accompanying home equity extraction have been a critical fuel to U.S. economic growth over the past few years.
Last week, residential mortgage-provider
said that consumers refinanced their home equities to the tune of $60 billion in the third quarter. Add to this second mortgages and equity lines of credits and consumers should draw $240 billion in income from their homes this year, according to Stephanie Pomboy, founder of economic research firm MacroMavens.
This trend, she wrote in a research note, explains why businesses have not been pressured to raise wages and have been able to accumulate stockpiles of cash. "I mean, what's the urgency to increase wages when your workers are receiving a massive income supplement by sucking the air from Alan Greenspan's bubble?"
Much has been said about how the low long-term interest rates of the past few years reflected low inflation expectations. Some, including Greenspan, attributed this in part to a global pool of cheap labor acting as a huge deflationary pressure.
But it would make sense to include contained U.S. wages as a key factor. Now that home prices are cooling and that energy and food prices are much higher, demands for higher wages are likely to become more common.
In other words, the popping of Greenspan's final bubble will likely fuel inflation -- the nemesis of any central banker. This reflection didn't seem to bother the bond market on Tuesday, as the 10-year bond rose 14/32 while its yield, which moves inversely to price, fell to 4.57%.
The bond market rallied in part due to hopes that a cooling housing market will slow down the economy and in part due to hopes that quarterly Treasury auctions this week will attract fresh buying. (That said, results of Tuesday's $18 billion, three-year note auction were "mixed," according to Miller Tabak. The bid-to-cover ratio was better than expected, the firm reported, but only 29.9% of bids awarded went to indirect bidders vs. the long-term average of 40%. That suggests less-than-stellar demand from foreign buyers, although Wednesday's $13 billion, five-year note auction will have "bigger implications," according to Miller Tabak.)
Prior to this week, the 10-year's yield had been rising steadily for the past two months amid rising inflation expectations. The 10-year yield, which hit a 2005 high of 4.67% on Friday, may have become so attractive that it started to attract buyers. According to a Raymond James strategist, a 10-year yield nearing 4.75% and worse-than-expected holiday sales are the two factors that may derail a fourth-quarter rally in stocks, as detailed in
my column yesterday.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.