Equities slid on Wednesday morning as an unexpected drop in home construction raised concerns about the pace of the economy’s recovery, say Stephen Bernard and Tim Paradis for the Associated Press. The U.S. Commerce Department reported that the construction of homes and apartments as well as building permits, a key gauge of future activity, fell well short of expectations held by economists. The puts into question Wall Street’s belief in a V-shaped recovery. iShares Dow Jones U.S. Home Construction Index (NYSEArca: ITB) is trading flat this morning.

Inflation figures were also a bit of a surprise to the markets. U.S. inflation accelerated in October as energy prices rose again and car prices rose at the fastest pace since the early 1980s, reports Rex Nutting for MarketWatch. The consumer price index (CPI) rose a seasonally adjusted 0.3% in October, while the core CPI rate, which excludes food and energy, rose by 0.2%.

Meanwhile, gold hit another fresh record high – near $1150 an ounce – in trading today. Another dip in the value of the U.S. dollar added to momentum buying as prices broke through key technical resistance levels, says Jan Harvey for Reuters. The gold market is being underpinned by fresh interest in gold from central banks after a recent major bullion purchase from India and smaller purchases by the central banks of Sri Lanka and Mauritius. The SPDR Gold Shares Trust ETF (NYSE: GLD) is currently trading up by a half percent at $112.50 a share. (For more stories on gold, see our gold category).

In an interesting development, Goldman Sachs (NYSE: GS) is attempting to spruce up their image and generate some goodwill in this holiday season. Goldman is trying a new tack to improve its public image, writes Graham Bowley for The New York Times. The company is apologizing for past mistakes and sharing some of its riches. It will spend $500 million to help thousands of small businesses recover from the recession. (For more stories on the financial sector, visit our financial category).

Tony D’Altorio contributed to this article.

Congress voted to extend the tax credit and President Barack Obama signed it into law this morning, according to The Wall Street Journal. (ETFs get a lift from economic report).

An $8,000 line of credit will apply to contracts entered before April 30, 2010, and closed by June 30 for homes up to $800,000. The law will also create a new $6,500 credit for homebuyers who lived in their previous home for at least five consecutive years.

Income limits for eligible buyers are increased to $125,000 for single buyers and $225,000 for couples.

Economists for the National Association of Realtors calculated that the tax credit has contributed $22 billion to the economy and an estimated 2 million people will use the tax credit this year. NAR president Charles McMillan says the government incentive has helped stabilize the housing market, stimulate the economy and create jobs.

Naysayers think prolonging the tax credit will artificially keep home prices high.

The expansion and extension of the tax credit may also be advantageous for homebuilder ETFs as more house hunters jump into the market. (Positive signals for real estate ETFs)

For more information on homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB): up 18.5% year-to-date

• SPDR S&P Homebuilders (NYSEArca: XHB): up 21.7% year-to-date

• MACROSHS HOUSING UP (NYSEArca: UMM): up 16% since inception

Max Chen contributed to this article.

September pending home sales jumped 6.1% as homebuyers rushed to take advantage of a government tax credit. The $8,000 credit for first-time homebuyers ends at the end of this month. The number of sales of previously owned homes are now at their highest level in more than two years, reports Alan Zibel for the Associated Press. (More stories on the real estate sector).

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)

U.S. manufacturing activity grew at its fastest rate in more than three years in October. The surge was unexpected, although some noted that it’s still improving at a modest pace, reports The Wall Street Journal. Construction spending also rose by 0.8%, although Wall Street expected a decline.

• Industrial Select Sector SPDR (NYSEArca: XLI)

CIT filed for bankruptcy this weekend in a last-ditch effort to keep operating. CIT is a lender to nearly a million small- and mid-size businesses. The lender was also a recipient of $2.3 billion in taxpayer bailout money, which will be wiped out in the bankruptcy, The Wall Street Journal notes. (How to harness the financial sector’s recovery).

Ford surprised Wall Street by announcing $1 billion in net income in the third quarter. The automaker has also forecast a “solidly profitable” 2011. Ford hasn’t posted a full-year profit since 2005, report Tom Krisher and Dee-Ann Durbin for the Associated Press.

Investors this week will be looking at various economic indicators for clues to the strength of the U.S. economy. One of the most anticipated reports is the Labor Department’s October employment report, which is due on Friday. The Federal Reserve is also going to comment on Wednesday after a two-day meeting.

The most disappointing reports came from the manufacturing industry and the jobless sector. Manufacturing activity dipped to 52.6, down from 52.9 in August. It was below analysts’ expectations, but it was the second consecutive month in which the reading came in above 50, indicating expansion, reports Tim Paradis for the Associated Press.

The Labor Department said jobless claims rose to 551,000, which was more than expected. The increase follows three weeks of declines. Economists expect that the unemployment rate will rise to 9.8%, up from 9.7% in August.

Construction spending rose 0.8% in August, thanks to higher outlays for homes, reports Rex Nutting for MarketWatch. But the increase really only offset a downward revision to July’s spending numbers, which declined 1.1%.

In better news, pending home sales rose to a two-and-a-half-year high, jumping 6.4% from July. The number beat forecasts, and the jump was the seventh straight increase, reports Alan Zibel for the Associated Press.

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB): up 26.1% year-to-date

Consumer spending has also jumped sharply in August thanks to things like the “cash for clunkers” program. The 1.3% jump was the largest in nearly eight years, but economists caution that this jump isn’t laying any foundation for an economic recovery. Automakers are already girding themselves for a drop in September sales, reports Jack Healy for The New York Times.

For more stories on consumer activity, visit our retail category.

Last week, a solid majority of fund types reported their best weekly inflows of the year while money market funds experienced large outflows, writes Joe Morris for Ignites.

EPFR Global data shows where all the money has moved: $1.62 billion went into global bond funds, $540 million found its way into emerging-market bond funds, $925 million funneled into the real estate sector, $1.74 billion flowed into global equity funds, and money funds lost $47.2 billion.

Some ETFs representing these areas include:

• SPDR Barclays International Treasury Bond Fund (NYSEArca: BWX): up 6.6% year-to-date

• PowerShares Emerging Mkts Sovereign Debt (NYSEArca: PCY): up 37.7% year-to-date

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB): up 37.2% year-to-date

• SPDR S&P World ex-US (NYSEArca: GWL): up 25.9% year-to-date

• WisdomTree U.S. Current Income Fund (NYSEArca: USY): up 2.1% year-to-date

Commodity sector funds also added $1 billion last week, accumulating more than $9 billion in year-to-date inflows.

• iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG): up 2.8% year-to-date

Investors are becoming more confident, but many still remain cautious about the market. U.S. bond funds have seen net inflows every week this year and recently saw an increase by $2.79 billion. Global bond funds have seen inflows for 23 straight weeks.

• iShares Lehman 7-10 Year Treasury Bond Fund ETF (NYSEArca: IEF): down 5.4% year-to-date

Value funds are outperforming growth funds for the first time since late August. U.S. stock funds received $340 million, mid-cap ETFs, U.S. sector funds and actively managed big-cap growth funds all raked in new money as big-cap blend ETFs saw outflows.

• Vanguard Total Stock Market (NYSEArca: VTI): up 22.8% year-to-date

• Vanguard Large-Cap ETF (NYSEArca: VV): up 20.8% year-to-date

Max Chen contributed to this article.

What are the arguments in favor of recovery?

• Homebuilder confidence is up. The National Association of Home Builders/Wells Fargo confidence index climbed to 18, the highest since June 18, reports Bob Willis for Bloomberg. A reading below 50 means most respondents view conditions as poor. Builders will eventually begin to start construction back up from record lows.

• Government credits and lower prices may have helped those first-time homebuyers to heal the broken housing market.

• Home prices notched their first quarterly increase in three years today, reports J.W. Elphinstone for the Associated Press. The reading is, however, still down nearly 15% from last year.

• Things have stopped getting worse, and this is the first step to getting better. The marketplace is glutted with inventory, he says, which puts further pressure on prices and total sales — not to mention the need for new houses. This will create more buying opportunities, writes Dan Burrows for SmartMoney.

• Burrows also notes that the bottom or low point in valuations and sales is past, however, there is still a ways for falling prices in areas such as California and Florida. When prices truly stabilize, home builders’ gross and operating margins will improve – and so too will their bottom lines.

• Same-store sales growth in the key markets of Florida, California, Nevada and Arizona where housing has been hit hardest, in such stores that are based on home improvement.

• SPDR S&P Homebuilders (XHB): up 28.6% year-to-date



• iShares Dow Jones U.S. Home Construction (ITB): up 33.2% year-to-date

For more stories about homebuilders and real estate, visit our real estate and homebuilder category.

When Gary Gordon wrote about the three most impressive ETF movers in the last month, we thought we could expand on his premise and include some other areas that investors are picking up on during dips in the market place.

In Taiwan, tech companies are leading the economy. This sector in Taiwan is increasing job opportunities to grow the burgeoning firm’s global name brands such as Asustek, innovator of the “netbook,” and Acer, manufacturer of powerful yet cheap PCs that may become the world’s second largest PC maker.

• iShares MSCI Taiwan Index (EWT): up 44.7% year-to-date; up 14.4% in the last month

Turkey has some factors in its favor: the central bank has reduced rates to its lo a record low, consumer confidence is on the rise and jobless claims are declining. But the country is not completely out of the deep yet.

• iShares MSCI Turkey Invest Mkt Index (TUR): up 46.9% year-to-date; up 12.2% in the last month

Spain’s GDP will drop but not as severely compared to the first quarter, according to Reuters. The Spainish economy contracted 1.9% in the first quarter and is expected to shrink 3.6% in 2009 and 0.6% in 2010. Economic stimulus plans are likely to have increased public deficit above 10% of GDP this year.

• iShares MSCI Spain Index (EWP): up 12.3% year-to-date; up 10.5% in the last month

The semiconductor sector is on the mend with demand picking up once again, but has yet to reach numbers previously seen. Overall, the industry is still cutting back to do away with the excess fat and build up efficiency. Tech companies are lowering their forecasts.

• Semiconductor HOLDRs (SMH): up 21.8% year-to-date; up 1.7% in the last month

Homebuilders should have been elated to hear that June housing construction rose to its highest level in seven months as builders rushed to pour foundations to enable first-time homebuyers to take advantage of tax credits. Commerce Department reported that construction of new homes and apartments jumped 3.6% last month. New housing starts and permits have risen for the second straight month in June.

• iShares Dow Jones US Home Construction (ITB): up 6.8% year-to-date; up 8.7% in the last month

Max Chen contributed to this article.

The most recent good news first: New housing starts and permits have risen for the second straight month in June. Starts climbed 3.6%, reports Reuters.

And now the bad news.

According to new research from the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management, a study found that 26% of foreclosures are actually calculated and strategic, thanks to “negative equity.”

The decision to bail out of loans by owners who actually have the money to make the payments but can’t handle the negative equity they’re carrying caused by local property value declines are causing people to simply mail their house keys back tot he lender, reports Kenneth Harney for The Los Angeles Times. In certain parts of California and Nevada, more than half of all households have negative equity right now.

Real estate investment trusts (REITS) also face potholes ahead.

• SPDR S&P Homebuilders (XHB): up 3.5% year-to-date

• iShares Dow Jones US Home Construction (ITB): up 4.6% year-to-date

For more stories about real estate, visit our real estate category.

Builders are beginning to see their losses shrink compared to their levels a year earlier. Lower prices because of foreclosures have baited homebuyers back into the market, as home prices have fallen at an annual rate of 2.2% in the first quarter, reports James R. Hagerty and John Spence for The Wall Street Journal.

The bottom of the housing market is a way off, but at least some signs of stabilization are in place. The biggest factors that are keeping the housing market down are the continuing unemployment and the increase in foreclosure rate.

Builders have been able to buy big land parcels from banks at lower prices, giving homebuilders a foundation from which to go.

• SPDR S&P Homebuilders (XHB): up 2.8% year-to-date

• iShares Dow Jones U.S. Home Construction (ITB): up2.8% year-to-date

On the other hand, however, the National Association of Home Builders/Wells Fargo Housing Market Index rose to 16 from 14 in April, in line with market expectations, reports the Associated Press.

The current market conditions led the NAHB to say that homebuilders seem to be feeling that a bottom is in sight, and that the climate for buying homes were the “best home buying conditions of a lifetime.”

Two major home improvement dealers have reported earnings this week:

• Home Depot (HD), reported a 9.7% decline in first-quarter sales.  Regardless, the company was still able to beat Wall Street’s expectations reporting earnings of $0.35/share as compared to analysts’ forecasts of  $0.29/share.
• The nation’s second-largest home improvement chain, Lowe’s (LOW), posted a 22% decline in first-quarter earnings, but still beat Wall Street’s expectations.

Could the outpacing of expectations have something to do with a new wave of DIYers taking on their own home improvement projects? Just be careful – there are some things that should be left to the pros.

• SPDR S&P Homebuilders (XHB): up 7.3% year-to-date

• iShares Dow Jones U.S. Home Construction (ITB): up 9.8% year-to-date