Housing: Rapid Growth

Since #GrowthStabilizing began in late November of last year, housing has been one of the leading drivers of recovery in the US economy. Today’s housing data is indicative that the recovery is still on fire and has no signs of letting up anytime soon. New home sales rose 15.6% month-over-month in January to 437,000; December data was revised up from 369k to 378k making the comp more impressive. On a year-over-year basis, new home sales in January are up 28.9%, which is the fastest rate of growth in the last 12 months. Impressive by all means.


Housing: Rapid Growth - nhs 1 normal


The inventory of new homes for sale was flat at 150k. When looking at inventory on a months supply basis, January stood at 4.1 months, down from 4.8 months in December and the lowest level of inventory since March, 2005. For perspective, months supply floated between 4-5 months from 1997-2005. We would expect to see inventory levels rise, as this reflects a strengthening market. We continue to believe that home prices are heading meaningfully higher in 2013. This morning's New Home Sales data, showing a rising sales rate and falling months supply of inventory, supports our thesis.


Housing: Rapid Growth - nhs 2 normal


Housing: Rapid Growth - nhs 3 normal


Housing: Rapid Growth - nhs 4 normal


Housing: Rapid Growth - nhs 6 normal

Proper Risk Management

Client Talking Points

Who Could Have Known?

Sometimes the market just likes to throw in a mid-day switch for good measure. In the case of yesterday, it looked like the S&P 500 was going to test YTD highs (1530) and instead, volatility cranked up and boom: the marker "tanked." We did some smart planning, like selling our short Yen (FXY) position and sold Utilities (XLU) on the high. No one could have predicted that the Italian election would have caused as much global chaos as it did yesterday. The Euro took a nosedive south and now our risk management signals are flashing bearish for the first time since a long time.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"Yesterday's 1-day move (up) in the VIX was the biggest since AUG2011" -@KeithMcCullough


"A cynic is a man who, when he smells flowers, looks around for a coffin." -H.L. Mencken


U.S. home prices rose in December, and saw the largest year-over-year gain since 2006. The S&P/Case-Shiller 20-city composite posted a nonseasonally adjusted 0.2% increase in December, following a 0.1% decline in November.


The Macau Metro Monitor, February 26, 2013




Visitor arrivals totaled 2,312,321, down by 6.1% YoY.  Mainland visitors totaled 1,473,785, with 616,066 travelling to Macau under the Individual Visit Scheme.  The average length of stay of visitors stood at 1.0 day, up by 0.1 day YoY.





Employers will have pay between S$70 and S$400 more in foreign worker levy within the next two years.  For work permit holders, the increase is steepest for the construction sector, of S$400 per worker.  

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Risk Sees Me

“The tiger will see you a hundred times before you see him once.”

-John Vaillant


I’ve never been hunted down by a Siberian Tiger, but I’ll take John Vaillant’s word for it on how that might feel. On page 51 of The Tiger, he partly explains how I felt in very short order yesterday. Risk happens fast. Feelings aren’t what you want to be managing in your portfolio.


How could you not feel this? At 10AM EST yesterday, the SP500 was at 1524, and the Volatility Index (VIX) was at 13.63. I thought we were going to test the YTD high (1530 SPX) and volatility would continue to collapse. I thought wrong.


Actually, if you told me the reason why we were going to have a violent reversal (as in a +39% six-hour energy move in the VIX and the worst US stock market down day since November 7th) was the Italian election, I wouldn’t have changed my position either. I should have.


Back to the Global Macro Grind


Should have, could have, would have – they are all loser excuses people make, so don’t expect me to make them this morning.


We made some good moves yesterday (covered our Yen short at the YTD low, shorted Utilities at the YTD high), but my overall net long position in US Equities was dead wrong. There is no excuse making in my books. The score doesn’t lie; people do.


Whether I think Italy should matter doesn’t matter. It’s what the market says matters that matters. So let’s get on with our day and focus on not making more mistakes.


As I wrote yesterday, I don’t start with the Research View (it actually improved again yesterday with Strong Dollar taking Oil prices down to a 7wk low), I start with the Risk Management Signals – here they are in the USA, across durations (TRADE, TREND, and TAIL):

  1. SP500 broke immediate-term TRADE support of 1502; remains bullish TREND and TAIL with 1463 TREND support
  2. Russell2000 broke immediate-term TRADE support of 901; remains bullish TREND and TAIL with 869 TREND support
  3. VIX ripped through all lines of resistance and moves to bullish TREND provided that 17.18 holds (watch this closely)
  4. US Dollar Index remains in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  5. CRB Commodities Index remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  6. US Treasury 10yr Yield broke immediate-term TRADE support of 1.96%; remains bullish TREND and TAIL with 1.84% TAIL support

Then, if I dig inside that 1st factor (SP500) and break it into Sector Style Exposures (dividing the pie into 9 S&P Sectors):

  1. 5 of 9 Sectors are still in Bullish Formations: Healthcare, Financials, Industrials, Utilities, and Consume Staples
  2. 2 of 9 are bearish on both TRADE and TREND durations: Basic Materials and Tech (AAPL = 14.9% of the Tech ETF)
  3. We bought Financials (XLF) into the close yesterday and shorted Utilities (XLU) on the open – both on signals

So, net net net – not a lot has changed here from a Research View perspective. The only S&P Sector that is down YTD is the one we’d expect to be down (Basic Materials), as we expect to see a Strong Dollar perpetuate A) commodity deflation and B) consumption #GrowthStabilizing.


However, that doesn’t mean the Risk Management Signals are going to let us out of The Tiger’s grasp right here and now. Immediate-term TRADE breakdowns force people to make decisions on intermediate-term TREND positioning. And that’s what we need to do next.


Looking at Global Macro risk more broadly, across Global Equity markets:

  1. Japan was down -2.26% last night (after being up +2.4% the day prior) and remains in a Bullish Formation (no TRADE breakdown)
  2. China’s Shanghai Composite was down -1.4% (broke TRADE support of 2321, but held TREND support of 2209)
  3. South Korea’s KOSPI was only down -0.47% overnight and is holding last week’s bullish TRADE/TREND breakout
  4. Brazil’s Bovespa remains bearish TRADE and TREND (that’s not new, and largely because of the Commodity exposure)
  5. Germany’s DAX broke TRADE support of 7670 again this morning; remains bullish TREND and TAIL with TREND support of 7528
  6. Italy’s MIB Index is a bloody mess, down -4.5% this morning and back into a Bearish Formation

So, do we give up on the Research View? Or do we acknowledge that short-term (TRADE) durations breakdown, breakout, and whip around - always stressing our ability to navigate the markets intermediate-term TRENDs?


Italy and France are dysfunctional economies being managed by a socialist #PoliticalClass (not new news – this is the 62nd Italian government since WWII). Brazil is going down for the reasons we think are bullish for the #1 research factor in our model (commodity deflation is a global tax cut for consumers).


Risk Sees my position. It sees yours too. It’s never “off.” It’s always on, and whether it was a SP500 price of 1524 (10AM EST) or 1487 (4PM EST), evidently it goes both ways, fast. I’ll be doing a lot of waiting and watching for the next few days, to make sure yesterday’s 6hr move wasn’t an emotional head-fake.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1, $112.61-116.38, $80.72-81.98, 91.65-94.41, 1.84-1.96%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Risk Sees Me - Chart of the Day


Risk Sees Me - Virtual Portfolio

Currency Armageddon

This note was originally published at 8am on February 12, 2013 for Hedgeye subscribers.

“Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold are not clothed.”

-Dwight D. Eisenhower


As I was preparing for my week long sojourn over to the United Kingdom, I actually had to think seriously about what type of currency I wanted to bring.  After all, in this day and age of the modern currency war, the movement of currencies can be dramatic and shocking.  If you don’t believe me, just ask those good folks that were long of Venezuela’s Bolivar going into Friday.  In a split second, the government unilaterally devalued the Bolivar by 32% and likely put a few currency traders out of business.


In terms of global economies, according to the CIA Fact Book Venezuela is just the 34th largest economy in the world at just $400BN in annual economic output.  Despite this, there were a number of multinational companies that were impacted by the devaluation.  Specifically, Colgate-Palmolive and Smurfit Stone have taken charges, with comparable companies like Avon, Proctor and Gamble and Kimberly-Clark certainly at risk of a short term hit to both earnings and assets.


Obviously the popular pushback when we stress currency wars with U.S. focused equity managers is that they are a 3rd world type risk and not a concern or issue that will become broadly prevalent. In fact, this consensus view was verified to me as I opened the Irish Times this morning to an article titled, “Fears of an Imminent Currency War Are Wide Of the Mark.”  Of course, many of these money managers have only been managing money for the last 10 – 15 years, so they may have missed this little critter called the Plaza Accord. 


Now admittedly, the Plaza Accord was not a unilateral devaluation or war, but rather an agreement by Germany, Japan, France, the United States, and the United Kingdom.  The agreement by these five nations was to intervene in global currency markets with an objective of devaluing the U.S. dollar in relation to the Japanese Yen and German Deutsche Mark.


Not surprisingly when the world’s largest central banks gang up to achieve a goal, they succeed, and the U.S. dollar depreciated dramatically over the next two years.  In fact, the dollar depreciated versus the yen by almost 50% from 1985 to 1987.   By some economists, this devaluation was heralded as a glorious success as the devaluation was controlled and did not lead to a financial panic.


While the last point is true, the strengthening of the Japanese yen was likely a key catalyst for one of the most significant bubbles of the last three decades, if not hundred years – the Japanese real estate bubble.  Naturally, given that the U.S. dollar was set to decline, the Japanese that had their assets abroad repatriated and began purchasing Japanese real estate, and purchased more, and purchased more.   In fact, at one point choice properties in Tokyo’s Ginza district were trading hands at $20,000 per square foot.


For Japan, the acquiescence to the United States to devalue the U.S. dollar led to an asset bubble of incomparable proportions and then an effective lost decade(s) of economic activity (and then some) as the Japanese economic system de-levered.  My point in highlighting this is simply that devaluations, like much of government intervention in the markets, has unintended consequences.  In hindsight, the Japanese likely never would have signed up for the Plaza Accord had they understood the unintended consequences.  In part, this experience is likely shaping their new policy of going at their currency strategy alone, rather than suffering the beggar thy neighbor option of a Plaza Accord type agreement.


There is obviously a worst case scenario as it relates to currency wars, that scenario in which all nations devalue at once.  Not unlike during the Cold War, when both the Soviets and Americans were armed to the hilt with nuclear weapons, this global devaluation is also likely a race to MAD (Mutually Assured Destruction).  For lack of a better term, we’ll call it Currency Armageddon.


The broad implications of a massive global currency war actually relate back to the quote from Dwight Eisenhower at the start of this note.  In a normal war, goods are taken from the people to create weaponry.  As a result, the average person is worse off during a war.  On some level, a currency war is no different. 


As currencies are devalued, the purchasing power of the average citizen is degraded and as a result so is their ability to purchase basic goods. If you don’t believe me, ask the average citizen of Venezuela whose purchasing power was decimated by this move on Friday.  This quote from a recent Bloomberg article about a rush to buy airline tickets was particularly apropos:


“I came because I heard American Airlines is going to raise fares by 100 percent, that’s to say, above the devaluation.”


Interestingly, there is an alternative to Currency Armageddon and its unintended consequences. This is the exchange rate system implemented post World War II called the Bretton Woods system.  In this period of semi-fixed exchange rates, competitive devaluation was not an option.  Not surprisingly, under Bretton Woods global economic activity thrived and was stable. 


This is not to say that Bretton Woods was an ideal system, but what seems less than ideal is the ability of major governments to unilaterally devalue on a whim, which is the nature of the monetary system today. The most recent example of this is of course Japan and the rampant devaluation of the yen.  This will last until the average retiree in Japan starts to feel the fiat currency squeeze like the Venezuelans have.  Interestingly, Japan is almost half way there with a Yen that is down over -15% in only three months.


Now, on one hand, shorting the yen was an existing idea we re-presented on our Best Ideas call on November 15th and that trade is up ~14% since then, so we are happy about that.  But as we contemplate risk managing future economic shocks, the idea of Currency Armageddon is a risk that every day seems less and less like a tail risk and more like a 2013 type event, despite what we might be reading in the Irish newspapers.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1641-1669, $116.52-118.72, $79.82-80.54, 92.78-94.66, 1.93-2.01%, and 1507-1523, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Currency Armageddon  - Chart of the Day


Currency Armageddon  - Virtual Portfolio

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