Chart of the Day: The Homebuilder Boom….

Here’s a great statistic that I think has a good lesson behind it.  If you look at actual home prices this year they’re not up all that much.  The Case Shiller index is up about 4.5% year-to-date.  But the S&P Homebuilders Index ETF is up almost 55% year-to-date.

Now, this might sound baffling to some, but it makes complete sense.  Corporations ultimately represent the leveraging of some resources in our world.  I often discuss how silly it is to think you’re “investing” in commodities because the long-term real returns are atrocious.  If you want to leverage a commodity price increase you don’t want to buy the asset that is increasing in price.  What you really want to “invest” in is the ingenuity in the way that resource will be leveraged to generate output and ultimately profits.

Now, homebuilders aren’t a perfect corollary here because they’re not commodity companies (well, in a sense they are), but the idea is the same.  Homebuilders don’t need a huge increase in price for their profits to become multiplied due to the boom in the underlying asset they primarily deal in.  In essence, homebuilders are leveraging this underlying asset in various ways to generate a profit.  Obviously, some firms do this more efficiently than others.  But that’s the basic power in understanding why corporations sit atop the hierarchy of assets.  They are ultimately where the ingenuity and leveraging of resources translates into real profits and real wealth increases.

(Chart via Orcam Investment Research)


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I recall Mccellan showed that Lumber leads the stock market, employment and FFR by 1 year in one of his reports. I don’t see FFR rising (maybe a slight up tick in inflation) but do you think the view that future US growth will be low maybe wrong?

    And is your blog ever addicting :-)

  2. They don’t call the process “adding value” for nothing.Unfortunately,there’s this kind of ethos on comms built up based upon scarcity value that thinks this has more value than the pocess the comms get utilised for.

  3. There is that dirty word “invest” again… When I buy XHB, arguably I’m not investing, I’m just trading stock (or re-allocating savings).

  4. Cullen,

    When I read this piece I thought somebody esle wrote it – it is not up to your level! First of all, a house is not a commodity, it is a durable good. So, this particular example does not prove anything in commodity/corporation trade. The appropriate commodity here would be lumber and copper as the second distant. You provided no analysis of these two, you have not even mentioned them.

    To analyse commodity/corporation relationship, it would be prudent to look at a number of industrial commodities (coal, copper, iron, oil) and, maybe, some non-industrial (gold?). No analysis of these is provided. And if you just take a look at them, the relationship would not be that straightforward….

    And thrirdly, you absolutely should have mentioned, that the commodity/corporation relationship works just as well (and probably even better) in the opposite direction!!! When commodities go down, shares of related corporations go down even more. And while a corporation equity value can go to zero, you can not say the same about a related commodity. More than that, once stock is zero, it is zero (banruptcy, recovery went to bonds, for example). Yet, the related commodity can easily preserve value, and rebound, net of storage costs.

  5. Totally disagree.

    oil is up over 400% from 2002 low. OIL producers 250%.

    gold is up 600%. Gold producers 300%

    platinum is up 400%. Platinum producers are actually down.

  6. This was in reply to spam. You can probably delete that one and this one as well.