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The French rating downgrade reminds investors about the still-unresolved Euro-zone situation, and will likely take the sheen off the market’s optimistic view of the ‘Fiscal Cliff’ situation over the last two trading sessions. Offsetting the French overhang today is the very strong October Housing Starts report, providing another reassuring look at the improving housing scene.

In corporate news, Hewlett-Packard’s (HPQ - Analyst Report) reference to accounting ‘improprieties’ related to its Autonomy acquisition drown out everything else in its quarterly report. The PC maker's earnings numbers are not that bad. But the mere mention of accounting issues has prompted investors to flee. Best Buy (BBY - Analyst Report) also came short of expectations in its earnings report.

The October Housing Starts data came in better than expected, up 3.6% to a seasonally adjusted annual rate of 894K (872K). The prior month’s Starts tally was modestly revised down to 863K from 872K. Permits were roughly in-line with expectations, coming in at 866K vs. permits level of 890K in September (revised lower from 894K originally reported). Single-family permits increased to the highest level since July 2008, while multi-family permits dropped.

On the Starts front, single-family starts modestly declined from the preceding month’s pace, while multi-family starts increased 11.9%. Two of the four regions showed gains, with the West showing a 17% jump and the Midwest increasing by 8.9%. Starts were down 6.5% in the Northeast and 2.5% in the South.

Sandy reportedly had minimal impact on the data.

Monday’s homebuilder sentiment report for November and the Existing Home sales report for October showed similar strength, with sales reaching their highest level of the year to the seasonally adjusted annual rate of 4.79 million. This was the 16th consecutive monthly gain in sales, with the October tally up 2.1% from the preceding month and 10.9% from the year before.

The gains have started to show up in positive momentum in median home prices and a drop in available-for-sale inventories. About a third of the October sales represented homes that had been on the market for a month or less, while current inventories are the lowest since February 2006.

The level of the homebuilder sentiment index has historically showed a strong correlation with Housing Starts data. Some analysts estimate that the current level of the index is consistent with housing starts that are double the current pace. This implies significant upside potential to construction activities even if the sentiment indicator levels off in the coming months.

This bodes well for the contribution of residential construction activities to economic growth in the coming quarters, partly offsetting the slowdown in manufacturing and exports. Bottom line, housing has emerged as a bright spot for the U.S. economy.

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