NEIL: THERE IS A RULE OF THUMB,
NOT GOOD FOR CYCLICAL INDUSTRIES
THAT DOMINATE THE DOW, WHEN DOW
FEELS PARTICULARLY WHEN AUTO
STOCKS ARE GETTING HAMMERED,
PREDICTABLY HOMEBUILDER STOCKS,
ANYTHING HAVING TO DO ANYTHING
WITH THAT.
LOOKING AT I-SHARES, TRADE
WEIGHTED FUND, THAT IS DOWN IN
EXCESS OF 20% THIS YEAR, WELL
INTO BEAR MARKET TERRITORY.
SPYDERS ON HOME BUILDING ETF,
DOWN ABOUT 22% YEAR-TO-DATE.
AGAIN, THAT SHOWS YOU WHAT WAS
BUILDING AS INTEREST RATES WENT
UP AND BECAME MORE DIFFICULT
NORFOLKS TO AFFORD A HOME, EVEN
THOUGH THE RATES ARE STILL
HISTORICALLY LOW, THE EFFECT WAS
REAL.
WE'VE SEEN IT IN AUTO AND AUTO
RELATED STOCKS AS WELL, THAT
WHOLE SECTOR, NOT TO THIS
DEGREE.
WHAT TO MAKE OF THAT, FIRST REAL
TANGIBLE EFFECT OF BACKUP IN
INTEREST RATES.
KEITH, WHAT DO YOU THINK OF
GOING ON IN HOUSING AND THAT
ARENA, DOES THAT PRESAGE TROUBLE
IN THE MARKET OR IS IT AND A
ANOMALY?
>> I DON'T THINK IT IS AN
ANOMALY, NEIL AND HERE IS WHY.
THEY HAVE INTEREST RATE PRESSURE
AND THESE THINGS HAVE RAW INPUT
COSTS, COST OF WOOD, ALL THE
MATERIALS GO INTO IT,
HOMEBUILDERS TRADITIONALLY HAVE
NOT BEEN ABLE TO DO A LOT OF
MARGIN PROTECTION.
THEY'RE PRETTY MUCH AT THE WHIM
OF THE CONSUMER, IF THE CONSUMER
IS NOT BUYING IT IS ONE WAY RIDE
SOUTH.
NEIL: IF IT IS RIDING SOUTH, YOU
COULD MAKE THE ARGUMENT IT WILL
CONTINUE TO RIDE SOUTH, FEDERAL
RESERVE WILL CONTINUE HIKING
RATES, WE'RE BEHIND THE CURVE,
WE HAVE A LONG WAY TO GO FOR
NEUTRALITY, PUT IT MORE
SUCCINCTLY.
IF IT IS INHOSPITABLE NOW FOR
HOUSING STOCKS, IT WILL GET MORE
SO, RIGHT?
>> DEPENDS WHAT YOU THINK
HAPPENS WITH THE 10-YEAR
TREASURY YIELD.
REMEMBER, NEIL IN 2004 TO 2006,
THE FEDERAL RESERVE RAISED RATES
17 TIMES.
WE HAD A BUMP UP AND REALITY THE
ECONOMY IS DOING VERY WELL.
THIS DOESN'T MEAN WE'LL KEEP
GOING UP.
EVEN IF THE FED RAISES RATES WE
COULD SEE THE 10-YEAR-YEAR-OLD
BACK DOWN.
WE COULD SEE A BIGGER ISSUE WE
HAD 0% INTEREST RATES FOREVER.
WHAT DOES MA MEAN?
PICKED UP BOND PRICES, STOCK
PRICE, COLLECTIBLE CARS AND REAL
ESTATE VALUES, TO A POINT PEOPLE
SAID I DON'T WANT TO BUY AT THAT
PRICE.
AT THE SAME TIME WE HAVEN'T SEEN
PRICES COME BACK DOWN TO WHERE
DEMAND IS.
MILLENIALS HAVEN'T MADE ENOUGH
MONEY WHERE THEY COULD AFFORD A
NEW HOME.
SO WE HAVE ALL THESE FORCES THAT
JUST SUGGEST SOME PRICE
ADJUSTMENT NEED TO BE MADE.
IT SUGGESTS THAT IT MAY BE A
WHILE.
I DO THINK THAT THE COST OF
INPUT IS BIG DEAL AS WELL.
THESE FORCES STAGNATE THE
HOUSING MARKET.
HOUSING MARKET HAD A GREAT YEAR
LAST YEAR.
NEIL: YOU'RE RIGHT.
>> REALITY THE INDUSTRY IS
LAGGING AND HAS BEEN LAGGING ALL
YEAR.
I THINK MORE ADJUSTMENT NEED TO
BE MADE.
I DON'T THINK IT SUGGESTS WE'LL
HAVE A LONG-TERM BEAR MARKET.
NEIL: JIM, THANKS FOR REMINDING
FOLKS A 10-YEAR NOTE.
THAT IS NOT A RATE WHERE FEDERAL
RESERVE CAN PEG.
THEY CAN PEG SHORT-TERM RATES
AND OVERNIGHT LENDING RATE WHICH
AFFECTS ONE YEAR BILL AND TWO
YEAR NOTE, WHAT HAVE YOU, IT HAS
VIRTUALLY KNOW CONTROL WHAT THE
MARKET PERCEIVES OF INFLATION
ARE OR LACK THEREOF.
ACCEPTING THAT AT FACE VALUE, WE
COULD SEE A YIELD CURVE
LONGER-TERM RATES DESPITE
PUNCTURING TO SEVEN YEAR HIGHS
COULD SORT OF SETTLE IT A LITTLE
BIT, NOT MOVE AS AGGRESSIVELY
WHAT IS HAPPENING ON THE
SHORTENED, AND THAT COULD
PORTEND A SLOWDOWN, DO YOU AGREE
WITH THAT?
>> I DO, I DO, ABSOLUTELY NEIL.
NOT TO GET ALL WONKY BUT TO PUT
IT IN VERY SIMPLE TERMS THE
YIELD CURVE IS LIKE A SEESAW.
THE 10-YEAR IS KIND OF A PIVOT
POINT.
WHEN YOU HAVE A MARKET THIS WAY
OR THAT I WITH DOESN'T REALLY
MATTER.
IT IS FLATTENING OUT.
THAT IS MEANS IT WILL BE NORMAL
FUNCTION OF TRADING AND RATE
ASSESSMENTS.
NEIL: I KNOW WHAT ITS HAPPENING
WITH REVERSE, LONGER-TERM RATES
IS ALMOST RECESSIONARY OR WILL
BE, WHEN IT IS FLATTENING
THOUGH, AT WORST IT CAN PORTEND
JUST SORT OF LIKE A FLAT
ECONOMIC ENVIRONMENT TO MIMIC
THE CURVE ITSELF, RIGHT?
>> WELL, IT CAN BUT DON'T
FORGET, AS LONG AS THE EARNINGS
CONTINUE TO BE GOOD WE'RE SEEING
THINGS WE SIMPLY HAVEN'T SEEN IN
A GENERATION.
THAT TELLS ME THERE IS STILL
MORE MONEY COMING IN AND RISING
TIDE RACES ALL BOATS EVEN IF
THERE IS NOT A LOT OF WAVE
ACTIVITY.
WHY YOU WANT TO BE INVESTED IN
THE BEST COMPANIES AS OPPOSED TO
WORST ONCE RIGHT NOW.
NEIL: AN ARGUMENT, JIM, RAISED
IN "THE WALL STREET JOURNAL" OR
FINANCIAL TIMES PICKED UP THIS
THEME A FEW WEEKS AGO A RISING
RATE ENVIRONMENT CAN AFFECT
MULTIPLES ON MARKET AND THOSE
EARNINGS END UP NOT BEING AS
GOOD AS THEY WOULD NORMALLY BE.
IN OTHER WORDS IT CHANGES THE
EQUATION A BIT.
ARE YOU WORRIED ABOUT IT
CHANGING THE EQUATION TO THE
POINT THAT IT DRAMATICALLY
AFFECTS EARNINGS MAYBE NOT IN
THE QUARTER JUST COMPLETED BUT
IN THE QUARTERS TO COME?
>> IT DOES CHANGE THINGS.
A LOT OF EARNINGS COME FROM
SHARE BUYBACKS AND MERGERS AND
ACQUISITIONS AND AS INTEREST
RATES RISE, IMPACTS WHAT YOU CAN
DO.
YOU CAN'T BORROW MONEY CHEAPLY
FOR THE SHARE BUYBACKS.
CDs RISING A LITTLE BIT.
THE ON THE FENCE INVESTOR MAY
BUY A FEW CDs FIRST TIME IN
YEARS.
I DOUBT THAT WILL BE A BIG
THING.
I THINK THE BIG ISSUE, NEIL, THE
ECONOMY IS GROWING FASTER.
THE GDP IS GROWING FASTER THAN
LEVEL OF INTEREST RATES.
CORPORATE EARNINGS ARE GROWING
FASTER THAN THE MARKET IS
GROWING.
THE ECONOMY IS VERY STRONG.
LOOK AT ISM, SERVICE AND
MANUFACTURING SIDE, COMBINE THE
THINGS FOR LAST WEEK, HAD THE
STRONGEST READING IN YEARS.
SO THE ECONOMY IS STILL DOING
VERY WELL.
WAGES ARE GROWING AND THIS IS
ANOTHER REASON WHY I'M NOT
CALLING FOR THE DEATH OF THE
HOUSING MARKET.
PEOPLE ARE WORKING, WAGES ARE
GROWING, THEY'RE SPENDING A
LITTLE MORE MONEY.
I THINK THE HOUSING MARKET MAY
EVENTUALLY BE OKAY, MAY HAVE
SOME SHORT-TERM PRESSURE BUT
BEYOND THAT I THINK THE RISING
LONG-TERM YIELDS DO HAVE AN
IMPACT.
I DON'T THINK THEY OVERRULE THE
ENTIRE SET OF TAILWINDS THAT THE
MARKET HAD WITH EARNINGS, WITH
ECONOMIC GROWTH, WITH EMPLOYMENT