Waiting for the Other Shoe to Drop

Sometimes the most difficult thing to do is nothing. Viewing the stock market over the last several days, maybe it’s easier than usual to do nothing since whatever you buy today is likely to go down tomorrow – but from our perspective, looking at ever cheaper prices it’s hard to pass up the opportunity to “buy low”.

Still, there’s a narrative that argues against our favored potential purchases lately: the housing stocks. That narrative goes like this:

  1. Housing stocks are cheap, yes, but earnings have yet to fall so they can get cheaper.
  2. Demand is strong and housing is underbuilt, yes, but cancellations are rising.
  3. Balance sheets are in great shape, yes, but will get worse before this is over.
  4. Dividends have gone up over the last few years, yes, but are still paltry.
  5. Earnings are strong now, yes, but will get worse.

The last argument needs better illumination from new data. We would like to see what happens to Toll, DH Horton, and others once earnings begin to fall.

So the waiting game is on. And that’s true of many segments of the market. We’d like to own more energy stocks; we’d like to own more industrial stocks; we might want another retail stock. But it’s better to stand out of the way for the time being.