The market feels like it has reached equilibrium. German bonds are at 0%, which for me indicates nullification of risk. I personally feel that this is the turning point. Most of my money is already invested in the stock market but the returns are diminishing after the crazy returns I made last year. So now I’m wondering, where should I put my money?
I got a form of an answer today when I saw this news headline flashing on my phone:
U.S. February S&P/Case-Shiller Home Prices Rise 9.3% Vs. Year Ago – Bloomberg
Then shortly after, this came out:
U.S. April Consumer Confidence Index Rises To 68.1 from 61.9 – Bloomberg
I’ve been anticipating this news for a while now. To me, this is the perfect storm, as I have been positioning myself heavily in a mortgage-heavy lender bank BAC (Bank of America) and in the housing index fund ITB (iShares Dow Jones US Home Construction Index Fund).
I started buying BAC two years ago when it was still below $8. Most of my ITB purchases were last year, when it was below $20. These two securities make up half of my investment account’s portfolio! (Note: Our retirement account is totally separate.) I have 11% in BAc and 39% in ITB.
So how did I get so heavily invested in ITB? I stumbled on this index fund by chance while researching Home Depot. My experience with hardware stores go way back. As a kid, my dad used to always go to Home Depot on weekends for home improvement projects. Now I understand that he was probably just using these projects as an escape from the family – he loves us but I’m sure power tools have greater appeal than two whiny children at home. My father’s job took us to different places, so he never ran out of home improvement projects because we would be transferring to a new house every few years.
Growing up all over America, I was inadvertently exposed to the real estate market – I knew all about buying, selling, and renovating homes even as early as ten-years-old. Right before the housing market crashed in 2008, I was remodeling a house and even as a single guy I was spending a considerable amount of time at Home Depot (the rejected paint cart is amazing!).
When I finally had some money to invest last year, Home Depot was at the top of my list given the state of the market. Things were starting to pick up again. The housing market naturally lags behind the economy. As consumer confidence increases, lending restrictions are eased and home buying increases, which sets off a chain reaction of housing-related retail purchases. This is good for the bottom line of any company that is in housing or housing retail. ITB is composed of companies like Pulte, Home Depot, Ryland, and Lowe’s. The other thing about ITB is they have negligible exposure to home financing. It’s construction, materials, and home improvement retail.
Home builders have learned after the collapse of the housing market to constrict the supply of new homes in order to force demand, which in turn increases their profit margin. I’ve been hearing all about this in the news today and I expect to see this translate to a continued upward trend for ITB (even though the conflict in Syria is f***ing up the markets).
Performance of banks are directly tied to consumer confidence and lending. I expect that BAC will also be riding the wave.
There are a number of issues that remain unresolved – credit is so tight that even millionaires have a hard time buying a home, so the average family’s only option right now is renting. But as soon as the comfort of recovery arrives, the banking and credit agencies will inevitably open the floodgates and that is when we will reap the greatest gains.
If you want to read more on the housing market recovery, I’ve found these articles interesting: