Fiscal Cliff 'Game of Chicken' Escalates

Today’s New Home sales report will likely do little to distract the market from the unresolved ‘Fiscal Cliff’ issue. The earlier conciliatory statements aside, the two sides remain poles apart and have yet to tackle the nitty-gritty of what needs to form part of the final deal. Importantly, we are currently in the posturing and grandstanding stage of the ‘Cliff’ negotiations, heightening the market’s vulnerability to unfavorable headlines.

‘Fiscal Cliff’ aside, we get the New Home sales report for October a little later, with expectations of a modest decline from the previous month’s very strong level. September’s sales were the highest in quite a while, which had pushed inventories close to their lowest levels since 2005. Home construction has picked up, as evident from the Housing Starts in recent months.

This virtuous cycle in the housing sector has made homebuilder stocks like PulteGroup (PHM - Analyst Report) and KB Home (KBH - Analyst Report) among the best performers in the market. Many of us are reasonably expecting that housing will be a bigger contributor to GDP growth in the coming quarters, potentially offsetting weakness in export centric activities.

The favorable housing backdrop is likely a major contributor to the improving consumer confidence levels, as reflected in the monthly University of Michigan and Conference Board measures. Business confidence is not showing as much resilience, likely a function of the unresolved ‘Fiscal Cliff’ issue, though Tuesday’s Durable Goods orders reading was broadly positive.

In any case, the favorable consumer confidence level puts us on track for a positive holiday shopping season. All we need now is for the ‘Cliff’ to go away.

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