Economic Signs Point to a Good Holiday Season

This past week saw a string of economic data that all pointed to modest signs of strength among consumers. Foremost among the numbers was the Consumer Confidence Index, which rose to 72.2 in October from 68.4 in September. This was the best reading in the index since February 2008. The improvement in the index was led by the gain in consumers' assessment of the jobs market, which rose to minus 29.1 - the highest reading since November 2008.

In addition, data from the big box retailers confirms the improved sentiment among consumers. Same-store sales (excluding Walmart) rose 4.7% in October, above most estimates. Economist Chris Christopher of his Global Insight in a note to the firm's clients stated "It [retail sales] serves as a positive signal that the holiday retail sales season is looking significantly brighter." His firm expects holiday retail sales to rise 4.5% above last year's figures.

The gain in retail sales seemed to be fairly widespread. Among the larger retailers reporting better-than-expected sales for October were Macy's, Nordstrom, Kohl's, and TJX. These companies' sales increases versus estimates were impressive: 4.1% vs. 3.1%, 9.8% vs. 6%, 3.3% vs. 1.1%, and 7% vs. 4.3%, respectively.

Most retailers remain optimistic too, despite the wide ranging effects of Hurricane Sandy. Brian Sozzi, chief equity analyst at NBG Productions, said he believes Sandy is being viewed by most retailers as an "interruption" in a sales trend that has been running above consensus and internal company plans year-to-date.

Three ETFs to Watch in Hurricane Sandy's Aftermath

Although it is still hard to say just how long lasting the impact from Hurricane Sandy will be, the storm has met expectations so far. The major weather event has knocked out power to millions across the broad Mid-Atlantic and Northeast regions of the U.S., potentially costing the area billions in economic activity, not just during the storm, but possibly for a longer period.

Beyond the damage, power outages, and the potential loss of life, the so-called “Frankenstorm” has also impacted stock markets in a very important way. The storm has knocked out stock trading for two days in a row, marking the first time in more than a century that weather has been the cause for a two day trading suspension of the New York markets.

Although a number of key financial products are being watched closely, there are undeniably some sectors of the broader economy that look to be especially impacted by the massive storm.

Insurance

With Hurricane Sandy impacting some of the most valuable and densely packed real estate of the United States, insurers could be in for a rough time this quarter. Damage is expected to reach well into the billions and looks to hit a number of insurance companies in the process.

Due to this, a host of insurance ETFs could be in for some down days. While KBWP looks to be the most directly impacted ETF by this storm, the iShares Dow Jones US Insurance ETF (IAK) looks to be a more popular ETF play on the situation.

This fund has about $70 million in AUM and sees volume of roughly 17,000 shares a day, making it extremely more popular than KBWP. The product also holds about 60 securities in its basket, giving it wide exposure to the firms in the Dow Jones US Select Insurance Index.

Construction

Assuming that the storm does a great deal of damage, firms in the construction sector could benefit from the cleanup afterwards. "This will show up in increased spending at hardware and home stores," Diane Swonk, chief economist at Mesirow Financial wrote in a recent note. "There should also be an increase in spending, once damages from the storm are assessed and repairs get underway. That spending could borrow a bit from traditional holiday sales, depending on how much insurance is paid on those claims."

Given this trend, construction-based firms could continue their solid run heading into the ending part of the year, adding to their non-storm related gains from earlier in 2012. While there are a number of ETFs to play this scenario, one that stands out is the iShares Dow Jones Home Construction Index Fund (ITB).

Mid caps and small caps dominate this product, while home builders account for roughly two-thirds of exposure in this popular fund. Not only has this ETF been a top performer so far in 2012, but the product has a Zacks ETF Rank of 1 or Strong Buy, suggesting that there could be more strength in this product even without the storm acting as a tailwind.

Gasoline

Much of the storm is centered on Philadelphia and the broader metro region around this important city. While many Americans probably know that Philly was vital to the country’s founding, they might not know that it is today a major center of gasoline production.

Ports that service tankers have been shut across the Northeast while major refineries in the region are also closing down or operating at reduced levels. Given that other pipelines and various other gasoline related businesses are poised to shut down or see reduced output thanks to the storm, we could see a huge short-term reduction in gasoline for this key region of the nation.

While it is true current demand is probably reduced to a lack of economic activity right now, the real test will be when the storm passes. If the damage is severe and there is a struggle to bring back production, gasoline could have some legs as we approach November.

An easy way to play this trend is with the United States Gasoline Fund (UGA). This product tracks RBOB futures and charges investors just 60 basis points in fees.

US Home Prices Rise
at Faster Pace

Home prices have been rising in nearly all U.S. cities, and many of the markets hit hardest during the crisis are starting to show sustained gains. The increases are the latest evidence of a steady housing recovery.

The Standard & Poor's/Case Shiller index reported Tuesday that national home prices increased 2 percent in August compared with the same month a year ago. That's the third straight increase and a faster pace than in July.

The report also said that prices rose in August from July in 19 of the 20 cities tracked by the index. Prices had risen in all 20 cities in the previous three months.

Cities that had suffered some of the worst price declines during the housing crisis are starting to come back. Prices in Las Vegas rose 0.9 percent, the first year-over-year gain since January 2007. Prices in Phoenix are 18.8 percent higher in August than a year ago. Home values in Tampa and Miami have also posted solid increases over the period.

Seattle was the only city to report a monthly decline. Still, prices there fell just 0.1 percent in August from July and are 3.4 percent higher than a year ago.

"The sustained good news in home prices over the past five months makes us optimistic for continued in the housing market," David Blitzer, chairman of the Case-Shiller index, said.

The steady increase in prices, along with the lowest mortgage rates in decades, has helped many home markets slowly rebound nearly six years after the housing bubble burst.

Rising home prices encourage more people to put their homes on the market. They may also entice would-be buyers to purchase homes before prices rise further.

The S&P/Case-Shiller index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The August figures are the latest available.

The figures aren't seasonally adjusted, so some of the gains in August reflect the benefit of the summer buying season.

Stan Humphries, chief economist at the housing website Zillow, expects the monthly price figures will decline in the fall and winter.

"This doesn't mean the housing recovery has been derailed," he said. "This is exactly what bouncing along bottom looks like."

Other recent reports show that the housing market is improving, albeit from depressed levels.

Home builders started construction on new homes and apartments at the fastest pace in more than four years last month. They also requested the most building permits in four years, a sign that many are confident that home sales gains will continue. Home building is still far below the pace that economists say is consistent with a healthy housing market.

New home sales jumped last month to the highest annual pace in the past two and a half years.

Sales of previously-occupied homes dipped in September but have risen steadily in the past year.