Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation

Conclusion:  We’ve been pretty vocal about our view of Housing Headwinds and the data is now suggesting that the headwinds may actually be worse than our street-low expectations.  While Billy Ackman’s best idea might be to buy U.S. homes, ours certainly isn’t.  Substantial downside remains in the housing sector.


We’ve had both massive pushback and substantial amount of compliments on Hedgeye’s Housing Headwinds call, which was orchestrated by our Financials Sector Head Josh Steiner and his team.  Steiner gave his presentation on June 25th.  In that time period, the SP500 is up 11.2%.  Conversely, we have in the table below highlighted the stocks that Steiner was bearish on:


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 1 


Alpha anyone?


Setting aside my doing a victory lap on Josh’s behalf, the bearish case on housing continues to play out and be validated.  Even if Billy Ackman’s best idea is to buy U.S. Housing, ours still isn’t (email if you are an institutional client that wants to see Steiner’s 101 page presentation on Housing that lays out the bear case). 


Some recent data highlights from Steiner and his team include:


Housing Takes A Dive, but the Worst is Yet to Come ...

Today's two negative housing data points on mortgage applications and housing starts add to yesterday's lackluster housing market index report. Next week we'll get new home sales, which we expect to be anemic as well. The week after that we'll get Case-Shiller, which should show the largest sequential decline we've seen this year. We expect these headwinds will keep a lid on near-term upside in housing-related names.


Bigger picture, we think the trends we're seeing in today's data are consistent with both our cumulative displacement theory under which we expect housing activity to remain heavily subdued for the next decade and our outlook for material further downside in home prices throughout the rest of this year and 2011.


Mortgage Demand Falls Sharply As Rates Rise

MBA Purchase Applications fell 5% versus last week. The MBA's data showed that mortgage rates backed up by 18 bps WoW (4.46% versus 4.28% the previous week).  The effect was more pronounced in the Refinance Index, which plummeted 16.5% WoW in response to the rate move. 


The real takeaway from this series is just how high the elasticity of demand is to even modestly higher interest rates. A backup in rates to 4.46% from 4.28% took refis down 16.5% and purchase activity down 5%. The point is that if we've already seen the lows in rates put in from QE2, then there's no reason to expect to see any improvement going forward.


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 2


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 3


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 4


Housing Starts Plunge to New Lows

Housing Starts fell -11.7% to 519k in October, the lowest level since April of 2009. The September Starts print saw a large downward revision, taking the level down to 588 from 610. Permits inched up slightly in October to 550k from the revised level of 547k.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 5


Starts and Permits are correlated with New Home Sales (better than .90 r-squared over the last ten years), suggesting that this month's New Home Sales number released a week from today will be worse than last month.  Perhaps counterintuitively, there is not a lag in this correlation - Starts and Permits in a given month best predict the New Home Sales number that same month.  This implies that all three series respond to varying degrees of confidence in the housing market.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 6


While it is widely believed that permits lead starts, in fact, the two series move simultaneously.  The chart below shows both series back to 1959.  Clearly, by any historical standard, the current activity level is very low. 


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 7


Housing Market Index Essentially Flat

The National Association of Homebuilders (NAHB) released their monthly Housing Market Index yesterday.  The composite index rose one point to 16, but this was after a downward revision of the prior week. Excluding that revision the series was flat sequentially. Confidence remains extremely low is the bottom line.  The chart below shows the relationship between homebuilder confidence as measured by the HMI and single-family starts.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 8


Daryl G. Jones
Managing Director


Josh Steiner, CFA

Managing Director


Allison Kaptur



TODAY’S S&P 500 SET-UP - November 17, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.11% downside to 1177 and 0.99% upside to 1190.  Equity futures are trading higher tracking a rebound in European equities. The developments on the Irish debt situation are being closely watched, with a joint European-IMF team expected to visit Ireland to prepare for a bailout.


In important economic data today: October CPI, October Housing Starts and October Building Permits.

  • Bob Evans Farms (BOBE) boosted year oper. income forecast to $108m-$112m (ex $13.9m charge) from $105m-$110m
  • Comerica (CMA) boosted dividend to 10c-shr from 5c-shr, said it will buy back up to 12.6m shrs
  • CVR Energy (CVI) said shareholders including affiliates of Goldman, Kelso will sell 15m shares in secondary offering
  • Giant Interactive (GA) reported 3Q rev. $50.6m vs est. $50.9m
  • Human Genome Sciences (HGSI), along with GlaxoSmithKline, won FDA advisory panel backing to sell Benlysta lupus drug
  • Woodward Governor (WGOV) forecast 2011 sales $1.55b-$1.65b, vs est. $1.53b


  • One day: Dow (1.59%), S&P (1.62%), Nasdaq (1.75%), Russell 2000 (2.03%)
  • Month-to-date: Dow (0.85%), S&P (0.42%)%, Nasdaq (1.50%), Russell (2.03%)
  • Quarter-to-date: Dow +2.18%, S&P +3.25%, Nasdaq +4.27%, Russell +4.31%;
  • Year-to-date: Dow +5.71%, S&P +5.67%, Nasdaq +8.84%, Russell +12.78%
  • Sector Performance: Materials (2.16%), Energy (1.87%), Tech (1.81%), Financials (1.67%), Industrials (1.61%), Consumer Disc (1.36%), Healthcare (1.45%), Utilities (1.16%), Consumer Spls (1.11%).
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Urban Outfitters +11.73%, Mattel +3.27% and Honeywell +1.79%/First Solar -6.42%, Jacobs Engn -5.04% and Kimco Realty -5.03%.


  • ADVANCE/DECLINE LINE: -2249 (-2604)  
  • VOLUME: NYSE - 1354.34 (+53.99%)
  • VIX: - 22.58 +11.78% - YTD PERFORMANCE - (+4.15%)
  • SPX PUT/CALL RATIO: 1.80 from 1.46 +23.24%  


  • TED SPREAD: 15.35 -0.304 (-1.943%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.34 from 2.39


  • CRB: 296.22 -3.20%
  • Oil: 82.34 -2.97% - BULLISH
  • COPPER: 373.10 -4.93% - BULLISH
  • GOLD: 1,337.35 -2.51% - BULLISH


  • EURO: 1.3486 -0.94% - BEARISH
  • DOLLAR: 79.210 +0.88%  - BULLISH



European markets:

  • FTSE 100: (0.13%); DAX +0.37%; CAC 40 +0.47%
  • Shares are trading slightly positive following a weak open and a poor show yesterday and as the market waits for a resolution to Ireland’s debt situation.
  • Further support comes from GlaxoSmithKline after it found support for its key lupus drug.
  • Technology, banks and Insurance sectors are among the gainers today, while Telcos, Retail sectors are weak.
  • UK Sept ILO unemployment +7.7% vs consensus +7.7% and prior +7.7%
  • UK Oct claimant count (3.7K) vs cons. (5.0K)
  • BoE minutes: 7 MPC members voted for unchanged policy In Nov
  • Posen voted for £50B more QE, Sentance voted for 25bps rate hike

Asian markets:

  • Nikkei +0.15%; Hang Seng (2.0%); Shanghai Composite (1.97%)
  • Asian markets apart from Japan followed the US and Europe down today.
  • Resource shares fell on lower commodity prices.
  • Japan fell at the start of the day, but a weaker yen encouraged dip buying and allowed the market to finish barely up. Megabanks outperformed the market.
  • South Korea darted in and out of positive territory but ended down on the day.  Shipbuilders gained after falling yesterday.
  • Resource shares led Australia lower by (1.62%).  Qantas fell 2% as another airplane turned around in midflight, this time after a problem with its electrical system.
  • Blue chips extended China’s recent decline on a report that Premier Wen Jiabao said the government is preparing steps to fight inflation.
  • Hong Kong fell again on fears of higher interest rates in China.
  • Singapore and Indonesia were closed for Hari Raya Haji and Idul Adha, respecitvely.
  • Japan September revised composite index of coincident economic indicators (1.2 points) m/m to 102.1 vs preliminary (1.3 points) m/m.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













TGT: Bullish Quote of the Day

Target's 3Q press release includes the bullish quote of the day:


"Based on our merchandising and marketing plans, combined with the expected impact of REDcard rewards and our newly completed remodel program, we expect Target’s fourth quarter comparable-store performance will be the best of any quarter in the last three years.”


So what does that mean exactly? Expect same store sales to exceed the prior three year peak comparable store sales performance of 2.8% achieved in 1Q10. While a low to mid single digit comp was once commonplace for TGT, this confidence has been elusive for at least three years. Interestingly, both WMT and TGT expect to see a sequential acceleration (with confidence from both) in sales during the most promotional, competitive, and IMPORTANT quarter of the year.


More details to come from the 10:30AM conference call, but it's safe to say that this commentary may have taken some of the suspense out of CFO Doug Scovanner's quarterly guidance ritual. 


Eric Levine



The Macau Metro Monitor, November 17th, 2010



CEO Chui said yesterday that the government  will monitor more closely its auditing of the casinos, enhance gaming-related laws and regulations, and restrict the opening of new casinos through measures like a cap on tables.  IM thinks the a tighter supply policy is good news for SJM and MGM Cotai ambitions.  The bigger news is the Great Handout:

  • 5,000 patacas for every elderly person;
  • 4,000 patacas for permanent residents;
  • 2,400 patacas for non-permanent;
  • 1,500 patacas for students with Macau identity cards;
  • 6,000 patacas for every central provident fund account;
  • 25% tax reduction;
  • Medical voucher worth 500 patacas for all permanent residents;
  • Rent subsidies for low income families awaiting public housing; and
  • Pay rise for civil servants.

IM thinks the new cash handout  is a positive step towards a looser policy on labor imports and steady growth prospects for Macau.  While noting that the cash handout is lower than the one instituted from the March policy address, Chui said the new scheme "is no longer part of a temporary policy. We want to provide long-term protection."  The cash handout will be launched in early 2011, instead of the usual Summer distribution.


Chui repeated his previous commitment to build 19,000 public flats by 2012 and the creation of a task force to establish the ceiling income to buy affordable housing.  He said the Government will try to maintain a stable and healthy real estate market by curbing real estate speculation.   "Up to 72% of Macau residents own properties; we want to prevent a real estate bubble," he said.


VIP promoter, Asia Entertainment & Resources Ltd, has completed its acquisition of KGP, King's Gaming Promotion.  KGP had operated one room with five tables at the Venetian Macao, gneerating US$129MM per month under a fixed 1.25% commission rate.

The Courage to Listen

“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.”

-Winston Churchill


For those of you unfamiliar with the story of Aung San Suu Kyi, she is a widely admired opposition politician in Burma and a former General Secretary of the National League for Democracy in her country.  The ruling military junta has oppressed Suu Kyi and her allies in order to maintain political control of the country. 


I am not a student of South East Asian politics but in the past few days I have found Suu Kyi’s story fascinating to delve in to.  What is most striking is her unwavering courage and commitment to serve her country; she refused to leave Burma for fear of being denied reentry by her political opponents.   After spending fifteen of twenty-one years in captivity, that courage and commitment is still as strong as ever. 


Upon her release from nearly 15 years of house arrest, Suu Kyi was quick to focus on making progress, saying of junta leader Senior Gen. Than Shew, “We have got to be able to talk to each other…real genuine talks, not just have some more tea or this or that”. 


Needless to say, Suu Kyi could offer a lesson in leadership to many politicians in the rest of the world.  Coincident with events in Burma, politicians throughout the West have been hastily passing blame, prematurely accepting plaudits, and wantonly pleading ignorance in accordance with the direction of the political winds.  From the Irish and Greeks to the Americans, it has been a tough time for political leadership in the Western Hemisphere. 


We have now witnessed a “compressed crash” of 3.87% in the S&P 500 since 11/05 and the carnage is even worse in some of the commodity markets: 


(1)    Gold -4.22%

(2)    Corn -10.26%

(3)    Oil -5.19%

(4)     Wheat -13.56%


The three worst performing sectors have been:


(1)    Financials -5.30%

(2)    Materials -5.09%

(3)    Technology -5.06%


The “compressed crash” is partly a function of the “blow off QE2″ euphoria that has been building since Bernanke’s speech in Jackson Hole, the David Tepper CNBC interview and the embarrassing Bernanke op-ed in the Washington Post which was nothing more than the FED admitting their intention to manipulate the stock market --no matter what the consequences.   


Following an open letter from a group of stock market practitioners and economists that was published in the WSJ demanding the FED to end QE2, the FED deployed two of its most senior officials to defend its policies on TV.  Both Janet Yellen and William Dudley (Federal Reserve Vice Chairwoman and President of the New York Fed, respectively) dismissed concerns that quantitative easing was aimed at Burning the Buck or that it could ignite inflation. 


It’s truly embarrassing what we are witnessing from some of the leaders of this country.  The perfunctory denial of what has been shown in real-time market prices for weeks now is a disgrace and an affront to our intelligence. 


The QE2 debate has been divisive in this country but its implications are global.  If it were solely another example of partisan politics why would Germany, China and Brazil all oppose the move too?  What is even more embarrassing is Representative Barney Frank having accused Republicans of “lining up with China and Germany in opposing the Fed’s credit easing!”  You couldn’t make this stuff up even if you wanted to! 


Overnight China declined 1.92% (now down -7.51% from 11/05) as Premier Wen Jiabao is now drafting measures to curb inflation, which means higher interest rate and slower economic growth in China.  I don’t think Wen picked up the phone to call the republican leadership to seek counsel on his inflation problems.  This becomes a problem for the USA because our “sick” economy cannot survive a slowdown in the economic engine of emerging markets.


We shouldn’t feel special, though; our friends across the pond are receiving the same treatment.  European Unity, the dream of Jean Monet, lies in shambles as “fellow Europeans” are turning out to be fair-weather friends with fingers pointing en masse across the once-again obvious borders that divide the 27 nations.  Whether it’s Greece “reclassifying” statistics or Ireland clinging to hope of retaining some vestige of autonomy throughout this episode, tensions are fraying.  Unelected politicians in Brussels are most distressed; Herman Van Rompuy, President of the European Council, struck a tone of desperation yesterday when he said “we’re in a survival crisis”. 


From a U.S. perspective though, the spotlight will be back on America’s problems soon enough.  Obama, by the sheer volume of the message the American people sent him from the polls earlier this month, has been forced to become somewhat more conciliatory in tone.  The Republicans, for their part, have been emboldened by their recent success, which is likely to be detrimental to getting anything accomplished in Washington.


Sadly, America’s ills are grave and should take precedence over the perpetual campaign for fame that politicians are now engaged in. 


These are important days for the United States and the ability of the country’s leaders to inspire confidence for a sustained period of time will be imperative for any real recovery to stand the test of time.  While the history of American Leadership is not without its blemishes, it is true to say that this country has been fortunate to find, more often than not, great leaders at the helm of political and social movements in times of national strife.  Abraham Lincoln, Franklin Roosevelt, John F. Kennedy, and Ronald Reagan are just a few of the Presidents that come to mind when one thinks of courage in a time of difficulty.


Sadly, our political system is broken and it seems gridlock is what we are faced with.  Gridlock is not good for equity prices.  Since November 2006, voting in Congress has become more and more tied to party lines.  There is no political leader with the courage and the backbone to bring together the needed cooperation to enact the change that can right size the listing ship. 


I will end with a thought from Jean Jacques Rousseau, a man who lived through times of crises: “The inflexibility of laws, which keeps them from bending to events can in some cases render them pernicious, and through them cause the ruin of a State in crisis”. 


From the FED, to Congress, to the White House, “politicking” is making a difficult situation very grave indeed.  Sadly, none lack the courage to speak.


Function in disaster; finish in style,


Howard Penney


The Courage to Listen  - HP EL

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