“I’m not Mr. Right, I’m Mr. Right Now!”
- Anonymous
If you played the dance floor or the parking lot outside the club in the 90’s or 00’s, you or someone you know definitely def spit that line.
Inebriated, late night cringe game may rarely, but occasionally, work wrt personal romantic pursuits.
In professional life, however, it’s all about macro promiscuity.
Going both ways (L/S), ‘getting around’ and rotating through exposures as the cycle churns.
Committed, but only to the process associated with courting your next ex-long.
Always dating, never wed.
Back to the #Quad4 Macro Grind…
Fortunate favors the macro aware my friends and the fundamental Quad 4 fodder was heavy indeed yesterday…
Philly Fed Expectations & New Orders fell to the lowest level since 2008, Mortgage Rates rose to highest since 2010, Existing Home Sales sit at the lowest level since the heart of the pandemic, rates implied vol made a higher cycle high (a multi-decade high if you exclude the short pandemic spike & retrace), 10Y Breakevens (inflation expectations) breached new all-time highs, real yields went positive for the first time since before the pandemic, the 5Y-30Y curve reinverted, Crypto’s correlation to legacy assets (particularly during mkt hours) remains at an ATH, Israel opted to unload dollars in favor of Yuan reserves, QQQ/XLC/IWM smiled down from atop the Hedgeye Sector Short hierarchy and, all the while, the Dunning-Kruger effect remains in overdrive as the democratization of information gets mis-synonymized with ‘informational alpha’ while process-driven curation/contextualization remains secularly undervalued.
Meanwhile, Jerome “soft landing” Powell was back on the nebulous commentary circuit while James “75 bps” Bullard used his zillionth speaking appearance in the past two weeks to push rate hike expectations for both May and June above 50bps.
Among the “insights” on offer from Powell yesterday were “a soft landing is our goal” and “price stability is essential”.
Again, what is the opposite of that? … a soft landing is not the goal and we are unconcerned about price stability. Reframing tautological fed commentary to more conspicuously reveal its hollowness is endlessly amusing.
Anyhow, I’ve been shilling this Climate (Trend) vs Weather (Trade) metaphor for months now in an attempt to convey the idea that we are traversing a Macro Phase Transition and that the TREND will define the underlying reality for both fundamentals and asset prices even while the Weather (shorter-term countertrend moves) fluctuates on an hourly/daily/multi-day basis.
Hopefully you’ve internalized that by now.
I don’t have any groundbreaking epiphanies this morning so we’re just going with straight up blocking and tackling (& some extra visuals) to close the week ….
We’ll start wide then narrow ….
What If? …. Is always a favorite question. Fortunately, uncertainty is endogenous to our process and the answer is always some version of the same thing. The chart below from 2Q Themes deck is an attempt to simplify and front-run that inquiry in the context of current cycle dynamics.
Daryl touched on housing yesterday so I’d like to round out the context with both some broader framing and some specifics:
Here’s the Broader Framing:
THE PAST: Housing, both the fundamental market and the equities, saw a largely uninterrupted rally from Spring 2020 through 2021. The lone caveat was the mid-May through September 2021 period that reflected our Quad 3 Stagflation. Notwithstanding that period of generally sideways action, Housing registered among the strongest equity returns across the broader market for three years straight. That regime is now rearview and in dramatic reversal alongside the macro and policy inflection.
THE PRESENT: The transition to Deep Quad 4 with a still significant stagflationary impulse and the associated Hawkish policy response have deflated housing equity momentum and are beginning to impact fundamentals. While strong demand and a benign rate environment supported the sector in the face of secular supply tightness over the past 18-months+, the decelerating macro backdrop in combination with deteriorating affordability stemming from both ATH HPI growth and rising rates have shifted the balance of momentum.
THE FUTURE: While valuations are increasingly compelling and the medium/longer-term outlook for housing remains favorable you just can’t be long Housing during the heart of Rate Shock or Deep Quad 4 periods. Until fundamentals deteriorate more conspicuously, we get the collective market realization that policy has fully deep sixed the growth and inflation outlook, the long end capitulates (rates ↓) and a policy reversal begins to get more discretely priced in, we’ll likely remain in a hurry-up-and-wait stasis.
Here are the Specifics with respect to Negative Rate Shocks:
- October 1993- December 1994: Mortgage Rates rose +240 bps over the span of 14-months. The S&P 500 Homebuilding index lost 33% of its value over that 14 month span. By contrast, the S&P 500 was flat over the corresponding period.
- October 1998 - May 2000: Mortgage Rates rose +180 bps over the span of 19-months. The S&P 500 Homebuilding index lost 29% of its value over that 14 month span, but the S&P 500 was up 44% making the relative underperformance a whopping 73%.
- December 2012 – September 2013: Mortgage Rates rose +120 bps over the span of 10-months. The S&P 500 Homebuilding index lost 3% of its value over that 14 month span. By contrast, the S&P 500 was up 19% over the corresponding period so the relative underperformance was 22%.
- JANUARY 2018 – NOVEMBER 2018: Mortgage Rates rose +100 bps over the span of 11-months. The S&P 500 Homebuilding index lost 34% of its value over that 11 month span. By contrast, the S&P 500 was DOWN 18% over the corresponding period so the relative underperformance was 16%.
- August 2021 – Present: Mortgage Rates have risen +187 bps over the span of 9-months. The S&P 500 Homebuilding index is down -26% off peak over that span. By contrast, the S&P 500 was DOWN 3% over the corresponding period so the relative underperformance is 24%.
And with respect to incrementals:
- MBA Purchase Applications ↓: High-frequency numbers continue to tell the tale of a slowing-on-the-margin US resi housing backdrop. MBA purchase applications were down -3% W/W and are down -14% Y/Y in the latest week. This brings the April MTD to 258, a decline of ~14% from the Jan level of 300. No surprise, obviously, in light of the ~+200 bps move in mortgage rates in 4 months combined with record low supply and worsening affordability due to the aforementioned rate dynamic in combination with still nosebleed levels of HPA.
- Vacation Home Demand ↓: Harder comps, asset price deflation and the sharpest backup in rates ever is not the winning factor constellation for ‘discretionary’ housing consumption. Vacation home demand has cratered in the past couple months and with rates continuing to surge in April and Fannie/Freddie implementing pricing changes (higher upfront points/costs), the pressure does not appear set to relent nearer-term.
I’ll craft a more crypto-centric note next time, but here’s a few for the road….
- ETH Supply ↓↓: ETH is moving off exchange at an accelerating rate ahead of the merge. As we’ve highlighted recurrently, there is no overly clean interpretation. It could be nothing, it could be headed to other defi applications, it could be tea leaf on conviction, it could be ____ . The simplist and broadest interpretation tilts bullish and = 'it can't be sold if it’s not for sale (sent to cold storage)'
- BTC STH Capitulation: The Cost basis for Short-term holders (<155 days)has declined by of 3 standard deviations, eclipsed only slightly by the worst phase of the 2018 rout. In other words, short-term holder capitulation has already occurred.
- Hodler Activity ↑: While we’ve seen some capitulation among long-term holders (>155 days), the percent of coins held for > 1 year just hit a new all-time high. The current realized price distribution (at what price coins were mostly recently moved) shows perceived value sitting within the 35K-42K range.
- From a Risk Management Perspective BTC/ETH/SOL/AVAX are all BEARISH TREND while LUNA is currently NEUTRAL.
As the macro voyeurs know, Mr. Right Now is always a moving and risk managed target. And every move we make remains #TimeStamped in RTA. …. we love to ‘kiss and tell’!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.61-2.98% (bullish)
UST 2yr Yield 2.32-2.72% (bullish)
High Yield (HYG) 79.15-80.97 (bearish)
SPX 4 (bearish)
NASDAQ 13,004-13,775 (bearish)
RUT 1 (bearish)
Tech (XLK) 143-152 (bearish)
Gold Miners (GDX) 37.91-41.60 (bullish)
Utilities (XLU) 74.24-77.14 (bullish)
Healthcare (PINK) 26.89-28.29 (bullish)
REITS (XLRE) 48.40-50.81 (bullish)
Shanghai Comp 3051-3232 (bearish)
Nikkei 26,318-27,721 (bearish)
DAX 13,847-14,602 (bearish)
VIX 19.96-25.88 (bullish)
USD 99.37-101.21 (bullish)
Oil (WTI) 94.05-107.80 (bullish)
Nat Gas 6.09-7.82 (bullish)
Gold 1 (bullish)
Copper 4.58-4.81 (bullish)
Silver 24.31-26.49 (bullish)
TSLA (bullish)
Bitcoin 38,405-43,517 (bearish)
Best of luck out there today. Enjoy your weekend,
Christian B. Drake
Macro analyst
