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Is US Housing Bottoming?

I can almost guarantee you that nobody is making this call today. I believe that the worst of the housing crisis is behind us. Economic bottoms are processes, not points. Keith McCullough and I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, and apparently Ben Bernanke agrees. Earlier today Mr. Bernanke suggested that “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." The timing of Bernanke’s 2009 bottoming process is in line with ours.

It was reported that the S&P/Case-Shiller 20-city index fell 18.5% year-over-year, the biggest drop since the study began. Every headline you read about today’s data will focus on the year-over-year numbers. Yes, it was the worst month on record, but the rate of deceleration continues to slow. The quarterly sequential change in year-over-year home price declines slowed to -1.5% in 4Q08 versus -5% in 1Q08. On the margin, this is a positive. As we noted early this year, we believe that as we reach the spring, we will have reached the peak in declining home prices. Home prices will continue to decline but at a much lesser rate.

The market is looking for leadership that can get us out of the downward spiral we are in. Many have relied on leadership coming from Washington to lead us to better times. It now appears that partisan politics will not let a leader emerge from the rubble in Washington. Therefore, we need to look elsewhere for something that will give consumers increased confidence that the worst is over. The political debate over the solvency of the nation’s leading financial institutions is not instilling confidence that there is a clear direction on how to fix the system, which is causing the market to set new lows. So can real estate be the asset that brings us out of the decline?

The bubble in residential real estate is the root cause for the problems we face today. Therefore it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow the assets to obtain higher prices and ultimately, a higher valuation.

The bears point to the fact that home values will continue to decline contributing to what’s already been the biggest destruction of American household wealth in many generations. Consequently, the decline in home prices makes banks even more reluctant to offer mortgages. Yes, that is true, but there is a significant amount of money being thrown at the issue, helping to form the bottom.

Devalue the Dollar:

Stocks, House Prices, and This Chart Will Stop Going Down!

HBI: Quote from a Winner

“Had I known that the recession was coming months ago I would not have changed any one of our strategies that are currently in place.” Closing quote from Rich Noll, CEO.
“Had I known that the recession was coming months ago I would not have changed any one of our strategies that are currently in place.” Closing quote from Rich Noll, CEO.

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HBI: The Price Increase is Real

The $100-$125mm (~2%) benefit from 4% price increase that mgmt is talking about is absolutely real. Wal*Mart is giving the higher price. My intel suggests 4-5%.
The $100-$125mm (~2%) benefit from 4% price increase that mgmt is talking about is absolutely real. Wal*Mart is giving the higher price. My intel suggests 4-5%.

Bernanke Does Macro!

He finally just admitted that managing through this crisis, proactively, will require a "more Macro approach."

Amen, Chairman Bernanke, Amen!
KM

HBI: Quick Hit from Analyst Day

The Street does not like the numbers. I like how the company is proactively managing its balance sheet. HBI’s forecasts are mixed, but as of now are netting out better than I previously modeled.
Here are some quick nuggets…

1) Could see low to mid teen unit volume declines in Q1 and Q2, improving to flat vs. last year – this could be mitigated by incremental promotion opportunities in spring and BTS. (Bill Nictakis noted that outerwear orders are up 25% for Spring and BTS. Outerwear is 28% of total.)
2) Net net is annual sales decline of 4-5% (Street is -7%) assuming similar consumer behavior with scenario of down 8% if Q4 has similar decline as 2008.
GM:
3) Goal for GM rate to increase 10-100bps above 2008
4) Cotton costs easing after 1Q
a. Q1 +$15mm ($0.74/lb)
b. Q2 -$8mm ($0.49/lb)
c. Q3 -$12mm (0.49/lb)
d. Q4 30% locked at $0.45 could save $20mm
Annual tailwind of $25mm (+$0.20 to EPS)
SG&A:
5) Pension expense of $21mm in 2009 (~$0.18 EPS impact) compared to $12mm income in 2008 – will remain at these levels until market conditions improve
6) Goal to reduce media and IT by $40mm – mostly in 1H
Restructuring:
7) $250mm over 3 yrs after spinoff
8) $222mm announced to date
9) Goal in 2009 to announce final restructuring charges during year

Interest details will become available when amendment is solidified.

LT tax rate 22%-25% (bottom of range in 2009)

2009 1H operating profit depressed below 2009

D&A ~$100mm

CapEx: $300-$350mm over 3 yrs
2009: $100-$130mm in 2009
WC: needs now ~$50-$75mm reduce Inventory to $1.15B by early 2010


Casey Flavin
Brian McGough

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%
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