#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate

Takeaway: The Housing data continues to confirm our bullish thesis while consumers are shrugging off higher taxes & rising gas prices.

Yesterday’s fire and brimstone gave way to more of what we’ve been expecting on the bullish side of housing and the consumer.   Today’s major econ releases showed housing continues to accelerate while the consumer is largely shrugging off the payroll tax increase, rising gas prices, and continued fiscal policy uncertainty. As we move past mid-quarter, we remain constructive on our 1Q13 Macro Investment themes of #HousingsHammer and #Growthstabilizing.  


Below we provide summary takeaways for today’s New Homes Sales & FHFA Data, Consumer Confidence, and the Richmond Fed Manufacturing survey.     



#HousingsHammer:  Today’s data continues to confirm our bullish housing thesis as the New Home Sales and FHFA HPI both came in extremely strong. 

  • New Home Sales:  New Home Sales rose 15.6% MoM and +28.9% Y/Y, marking the fasting rate of growth in 12 months.  Inventory was flat sequentially at 150K, while monthly supply dropped to 4.1 months, the lowest level since 2005.  The combination of Accelerating Demand (sales) and Declining Supply (months inventory) remain supportive of our expectation for meaningful home price appreciation in 2013. 
  • FHFA Home Prices:  The FHFA home price data for December showed home prices increased 0.6% M/M, accelerating to +5.81% Y/Y, marking the highest level since November 2009.
  • To the extent pricing and construction activity can accelerate from here, the confluence of housing wealth and fixed investment growth stand to serve as a discrete offset to impending fiscal policy decisions. 

Chart Source: Hedgeye Financials

#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - nhs 1


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - nhs 2 


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - fhfa 1


Consumer Confidence:  Consumers apparently shrugged off both the payroll tax increase and rising gas prices as the Conference Board Consumer Confidence reading surprised to the upside, printing 69.6 vs expectations for 62.0 and 58.4 prior.  The sub-indices told a cohesive story with present conditions and expectations readings gaining sequentially while measures of current and expected employment conditions both improved.  Today’s reading agrees with beat out of the prelim Univ of Michigan sentiment index which came in at 76.3 vs expectations of 74.8 and 73.8 prior.   


While Economic and Market Price Correlations to Consumer Confidence have broken down significantly in the years since 2009, historically, measures of consumer confidence have served as strong leading indicators for economic activity.  For example, on a 10Y basis, lagged correlations to New Manufacturing Orders, PCE Services, and M2 velocity (the hereto unrealized goal of Fed Policy) are all > 0.85.   


With confidence readings beginning to show some upside to close the year, labor market trends remaining healthy, reflation in distressed housing inventory supporting bank capital positions and credit standards showing incremental loosening, we’ll be watching for any re-tightening in the relevant confidence-econ activity correlations a little more closely.  


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - Conference Board Consumer Confidence table


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - Confidence vs M2   New Orders


The FED SPREAD:  The Richmond Fed printed +6 on expectations of -4 and -12 prior.  Under the hood, the Shipments, New Orders and Employment components of the Current Conditions Index all improved sequentially, while Prices Paid decelerated 50bps M/M. 


On balance, the regional fed manufacturing indices have been surprising to the upside in February with the Dallas Fed reading holding positive and Empire State Mfg printing +10 after 6 consecutive months of negative readings and vs. expectations of -2.   The Phili Fed index was the negative outlier printing -12.5 on expectations for +1 in February.  


Across the active history of the collective Regional Indices, the breadth of strength/weakness has served as a decent indicator for growth, particularly when the spread moves towards the extremes.  The read through to growth is largely equivocal thus far in 1Q13 with the spread sitting at -1.   


 #Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - FED SPREAD vs GDP


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - FED SPREAD vs Ave GDP bar



Christian B. Drake

Senior Analyst 


Italy’s Uncertain Footing

With no one party receiving a true majority across both houses of parliament in yesterday’s vote, it appears we’re set for either another round of elections or the initial days to formulate a grand coalition. We give the latter significantly less probability because we believe the strong voting results for the Berlusconi and Grillo parties across the upper and lower houses will create more polar factions (particular on the fiscal agenda) and therefore less opportunity for fruitful coalition building, that is to say a coalition not hampered by political gridlock. Remember the party platform of Grillo’s Five Star Movement has been one to not form a coalition.  


Below we refresh a number of charts to highlight the broader, challenged economic fundamentals of the country. Our call here is that the uncertainty around the election (another vote or a grand coalition), especially with the likely prospect of Berlusconi renewing his political powerbroker license, should add further downside pressures to many of the charts. 


Given that coalition talks are officially not supposed to take place until the presidents of the lower and upper houses have been elected on March 15, there’s a good runway of political uncertainty ahead that we expect should lead to more downside across Italian capital markets and put pressure on the EUR/USD.



Growth Slowing - As the data from Reinhart and Rogoff shows, when a country’s sovereign debt load exceeds 90% (of GDP) growth is dramatically impaired. We think the market will continue to punish Italy at 120% via higher servicing costs. Interestingly Italian yields have ticked lower since ECB President Mario Draghi called to buy “unlimited” sovereign debt via the OMT program on 9/6/12.  We think the political uncertainty should boost yields and may materially challenge investors’ perception that Europe is 'healed'.


Italy’s Uncertain Footing - 11. italy gdp


Hockey Stick Risky Profile – Yields and CDS have popped since the election results became more clear yesterday (2/25). The 10YR yield is at 4.90% and the spread over German Bunds is up 57bps since Friday (2/22).


Italy’s Uncertain Footing - 11. yields


Italy’s Uncertain Footing - 11. cds


Underperforming Growth - A major leading indicator for growth is derived from PMI surveys. As the two charts below indicate, Services PMIs are well under the Eurozone averages and along with Manufacturing have been under the 50 line that divides expansion (above) and contraction (below) for 13 and 18 straight months, respectively. 


Italy’s Uncertain Footing - 11. services pmi


Italy’s Uncertain Footing - 11. manu pmi


Labor Cost Inefficiencies - A major factor behind Italy’s slower growth profile is stagnation in its productivity, witnessed by higher unit labor casts, while wages, despite declines, have yet to turn negative.


Italy’s Uncertain Footing - 11. unit labor cost


Industrial Production – Slowing and underperforming continued.  In a European Commission paper reviewing Italy, the report noted that stagnation in production is the key factor behind Italy’s loss of cost competitiveness since the euro adoption.


Italy’s Uncertain Footing - 11. IP


Unemployment Hooking - Another grave dynamic is the underemployment across Italian youths at 37%. While short of the 52% for Spanish youth, combine “a lost generation” with Italy’s demographic headwinds of an aging population (near oldest in Europe) and you have a cocktail that puts great pressure on social services, and the debt and deficit loads in the years ahead.


Italy’s Uncertain Footing - 11. unemployment rate


Smashed Piggy Banks - The Italian household savings rate moved from a high of 17.8% in mid 2002 down to 11.6% as of Q3 2011. The chart shows that Italians leveraged their savings in the upturn and in the downturn. The tapping of savings in the last three years demonstrates to pay off debt and the resilience of the Italian consumer to maintain previous spending levels.


Italy’s Uncertain Footing - 11. savings rate


Confidence Down  - Italian economic sentiment has trended lower since mid-2011.


Italy’s Uncertain Footing - 11. economic sentiment


Retail Sales Down  - decidedly down.


Italy’s Uncertain Footing - 11. retail sales


New Car Registrations  Down - Yet another metric we follow. Here again, no surprise, underperformance vs the EU average.


Italy’s Uncertain Footing - 11. car registrations


Square Stagflation - While we expect inflation to moderate in 2013, but currently at +2.4% Y/Y, sticky stagflation continues to be a tax on a citizenry already feeling crushed by austerity.


Italy’s Uncertain Footing - 11. cpi


Matthew Hedrick

Senior Analyst

Quick thoughts on BUD and STZ into BUD EPS

Anheuser-Busch InBev is set to report Q4 earnings tomorrow morning – we don’t expect much in terms of surprises in the quarterly result.  Our estimate is broadly consistent with consensus – slightly lower on revenues (consensus is $10.26 billion), recognizing that the constant currency organic revenue comp in the lapping period is the most difficult comparison of ’11 (+5.7%).  We are close to consensus with our EBITDA estimate of $4.37 billion (consensus of $4.39 billion).

We don’t expect any material commentary on the proposed transactions between Anheuser-Busch InBev and Grupo Modelo.  Our view is that the parties, including the Department of Justice, continue to negotiate, and that the outcome will be consistent with our belief that the new transaction satisfies the concerns expressed by the DOJ when it filed suit to block the transaction.


Having said that, we recognize that the risk/reward profile on one of the parties to the transaction, STZ, is asymmetric.  We believe that STZ, with approval of the beer transaction, can continue to rerate toward $50/share.  However, there is a good bit of air underneath the name and even a 5% probability of further illogic on the part of the DOJ (downside to $30/share) makes us hesitant to be aggressive on STZ at this point.


ABI, on the other hand, still has significant free cash flow support (approximately $6 per share on 2012 numbers) and can be defended on weakness – which is exactly what we would do should any material weakness develop in the wake of the company’s Q4 earnings release.


Call with questions,




Robert Campagnino
Managing Director


Matt Hedrick

Senior Analyst

Early Look

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Bullish TREND: SP500 Levels, Refreshed

Takeaway: The bullish intermediate-term TREND we have been amped up on for Asian and US Equities since late-November is still very much intact.



After the biggest 1-day move in US Equity Volatility since August of 2011 (+39% intraday), the VIX is coming in fast today. If it continues to come in (and holds below my TREND line of 17.18) we may have just witnessed another government sponsored head-fake (#Italy).


Lower-highs in long-term volatility make as much sense as lower-highs in Gold and Treasuries. It’s all the same thing to me. People are freaking-out about what we didn’t have from March to November of 2012 – global growth. I still think Strong Dollar Commodity Deflation stabilizes that.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1499
  2. Immediate-term TRADE support = 1479
  3. Intermediate-term TREND support = 1463


In other words, the bullish intermediate-term TREND we have been amped up on for Asian and US Equities since late-November is still very much intact. We are experiencing an immediate-term TRADE headwind however (1499 support is resistance until it is support again).


A close above 1499, puts the YTD highs (1530) back in play, probably as fast as yesterday’s lows were. Especially if the VIX breaks down hard in March (like it did after the late DEC government sponsored volatility scare – that time it was Congress).




Keith R. McCullough
Chief Executive Officer


Bullish TREND: SP500 Levels, Refreshed - SPX

Reviewing Italian Election Results

This note was originally published February 25, 2013 at 17:32 in Macro

Yesterday's results (which are still being tabulated) suggest a hung parliament in Italy, with Berlusconi taking the upper house and Bersani winning the lower house. Given that both houses have equal powers, the stalemate suggests that today’s results will force Italy’s President to call for an interim government and another round of voting.


The results show that Italians voted against the fiscal reforms under Monti. The Italian 10YR yield increased 12bps versus to 4.49% and the spread versus German bunds increased 14bps as the EUR/USD fell -0.89% to $1.3076 on the day.


Broadly, today’s results show that economic uncertainty breeds political uncertainty, a case we seen time and time again across the Eurozone. We think this power vacuum should put upward pressure on Italian sovereign and bank spreads, a drag on the country's already weak economic fundamentals.



While final votes are still being tabulated, the key take-aways of today’s results are:

  • Strong support for Peppe Grillo and his anti-austerity party (The Five Star Movement, M5S) and increased support for Silvio Berlusconi’s center-right People of Liberty Party (particularly in the upper house) took needed support from Pier Lugi Bersani and his center-left Democratic Party alliance to led to a mixed upper and lower house result.
  • Since Grillo’s party is not looking to form a coalition with anyone, his support is simply creating a wedge in coalition building

In the Lower House (630 seats) -

  • Bersani took majority control, gaining some 340 seats, on 29.2% of the vote, according to projections
  • Berlusconi got 28.7% and 121 seats
  • Grillo received around 111 seats on 26.1%
  • Monti took a mere 8.4%


In the Upper House (315 seats) -

  • Berlusconi may have "won" the Senate race with 113 seats, according to RAI forecasts by gaining the key swing regions of Sicily, Campania and Lombardy
  • Bersani – 105 seats
  • Grillo – 63 seats
  • Monti – 20 seats


Matthew Hedrick

Senior Analyst

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


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


Housing: Rapid Growth - nhs 3


Housing: Rapid Growth - nhs 4


Housing: Rapid Growth - nhs 6

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