Gayed to Moneynews: Falling Homebuilder Stocks Bode Ill for Market, Economy

Friday, 19 Jul 2013 07:04 AM

By David Nelson and Dan Weil

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The recent decline in homebuilder stocks bodes ill for the U.S. economy and stock market as a whole, says Michael Gayed, chief investment strategist for Pension Partners.

"If you take a look at homebuilders, they effectively topped out around May, which is really when a lot of this tapering talk started to get into the headlines," Gayed told Newsmax TV in an exclusive interview.

Gayed was referring to comments from Federal Reserve Chairman Ben Bernanke that the Fed may taper its quantitative easing soon.

Watch our exclusive video. Article continues below.



The PHLX Housing Index of stocks related to home construction has dropped 11 percent in the last two months.

"Now homebuilders, when they outperform or underperform tend to precede market moves," Gayed said.

"That should make some sense because homebuilding, housing is a key component to the wealth effect and economic growth overall. The fact that they're weakening might mean this spike in [interest] rates on the taper talk is actually going to cause a slowdown."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

The 10-year Treasury yield hit an almost-two-year high of 2.75 percent July 8 and stood at 2.53 percent late Thursday.

"You have this disconnect of this runaway U.S. stock market, but various inter-market trends . . . [show a lack of belief] in the story of reflation and economic growth," Gayed says.

Elsewhere, emerging market stocks now look attractive after their recent swoon, he says.

The premium of U.S. stock prices over emerging-market stock prices stands at its highest level since 1998, Gayed explains.

"Now, just take a step back: 1998 was after the Asian financial currency crisis of 1997 and was during the Russian default crisis that ultimately led to LTCM," he said. Gayed was alluding to the collapse of Long-Term Capital Management hedge fund.

"In many ways, the spread between U.S. and emerging markets has acted as if an event has occurred in the emerging market space, but there's been no event given how wide that spread is."

Does that mean it's time to dive into emerging market stocks?

"I think so," Gayed said. "And a lot of people are uncomfortable with going into the U.S. market given how much it's advanced."

The Standard & Poor's 500 Stock Index had a total return of 19.2 percent this year through Wednesday. Meanwhile, the iShares MSCI Emerging Markets fund, a proxy for emerging markets, has a negative return of 8 percent in net asset value during that period.

"If you look at any asset allocation model, if you had anything but the U.S. stock market, you've, by definition, underperformed," Gayed said.

"Rebalancing alone means that at the margin managers likely sell the U.S. and buy everything else, which would include emerging markets. . . .  If you believe the U.S. is right, there's no way that emerging markets are not going to participate."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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