In the recent market rebound from the early January massive slide, both the homebuilders and the financials have risen quite sharply. The catalyst for both of these groups has been the Federal Reserve interest rate cuts, which are seen as a major wind to the back of both homebuilders and financials, which have been hurting for so long.
Let's take a quick look at why I believe these two groups are completely different stories.
The major homebuilders such as DR Horton (NYSE:DHI), KB Home (NYSE:KBH), and Lennar Corporation (NYSE:LEN) deal in housing and mortgages alone. These are companies that are completely dependent on the housing and mortgage markets for their bottom line profits. While these homebuilding companies have financial service units, these units make the majority of their money from mortgage financing, which moves in step with the housing market. The housing market quite obviously is an absolute disaster at this point. Some experts are even predicting an additional 25% drop in the average price of a home. The point is, the homebuilders are entirely dependent on an industry that is in a whole heap of trouble, and the end isn't in sight.
The major financial institutions such as JP Morgan Chase (NYSE:JPM), Wells Fargo NYSE:WFC), and Bank of America (NYSE:BAC) are a little different. These companies have certainly had significant issues because of the mortgage market crisis and the subprime meltdown, but they do have plenty of other businesses and healthier balance sheets. These banks get income from wealth and retirement planning, investment advisory, and investment banking just to name a few. While some of their businesses have been in severe trouble, others will hold them up through these hard times.
The point here is this, while both the homebuilders and the financials are bouncing back quite nicely right now, they are two completely different stories.
If you enjoyed this article please consider signing up for the RSS Feed from GrowYourFunds.
Comment Preview