This note was originally published
at 8am on March 07, 2013 for Hedgeye subscribers.
“Hello out there, we're on the air, it's 'Hockey Night' tonight.
Tension grows, the whistle blows, and the puck goes down the ice.
The goalie jumps, and the players bump, and the fans all go insane.
Someone roars, "Bobby Scores!" at the good old Hockey Game.”
-Stomping Tom Connors
It is a sad day back in my home country of Canada. Iconic Canadian singer Stomping Tom Connors passed away from natural causes. For those that were born south of the 49th parallel, his name is probably not all that familiar, but in Canada his songs are unofficial national anthems.
I know, I know only Canadians would idolize a singer that called himself Stomping and sang about hockey. To be fair, Connors also sang about more complex topics like potatoes (Bud the Spud) and Saturday evenings in small Canadian outposts (Sudbury Saturday Night). On some level this simplicity is the beauty of Canada, although one does have to wonder what would be worse – listening to Stomping Tom on repeat for 12 hours or a 12 hour Rand Paul filibuster.
As many of you know, one of Canada’s most significant industries is mining. Our Industrials Sector Head Jay Van Sciver will be presenting his in-depth view of the global mining and construction sector on March 27th in a black book presentation. We will circulate the information closer to the date. The most controversial name in this sector is Caterpillar Tractor (CAT).
A primary reason we are negative on the global mining sector, and CAT in particular, is simply reversion to the mean. Mining companies have dramatically over spent for the last decade, as highlighted in the Chart of the Day, and as much as some sell side bankers would have you believe otherwise - mining is not a growth industry. Margins will revert to the mean, spending will revert to the mean, and so too will capital investment. After all, cyclicals are cyclical.
Switching gears, between Keith and myself, we have been on the road for the better part of the last month from London to San Francisco, and most spots in between. If there is one consistent theme, it is that most large investors are still very cautious as it relates to equities. Now I realize this is anecdotal, but it has been a striking observation for us.
In that vein, as I was reviewing the New Tape (aka Twitter) this morning, I noticed this tweet from Ralph Acampora:
“This is still the “most hated” bull market I have ever seen in my close to 50 years in this business. This disbelief is very bullish.”
I don’t know enough about Ralph’s history to know whether he has a good record of forecasting stock market direction, but I do think that tweet was apropos and consistent with what we are seeing and hearing.
A key theme underscoring our relatively bullish call on the U.S. economy and U.S. equities has been what we call #HousingsHammer. In effect, this is the idea that home prices will improve not at a linear pace, but at a parabolic rate. This was a thesis developed by our Financials Sector Head Josh Steiner and we continued to see support in this week’s Core Logic numbers.
Corelogic released its January home price data Tuesday morning as well as its early look at February 2013. The data was very strong. January 2013 saw home prices rise +9.7% YoY, which was upwardly revised from the preliminary estimate for January one month prior of +7.9%. The preliminary estimate for February is that prices rose +9.7% YoY, unchanged vs. January.
Excluding the distressed segment of the market, the story is more bullish. January prices for the non-distressed market rose +9.0%, which was up materially from the +6.7% increase in December 2012. Interestingly, the early read on February prices shows the non-distressed market up +11.3%, a sequential acceleration of 230 bps. So in two months, the rate of appreciation on non-distressed homes has accelerated 460 bps. This is what we call a parabolic recovery.
In our models, housing is a critical variable to the U.S. economy because more than 70% of the U.S. economy is driven by consumption. In a paper last year, Charles Calomiris, Stanley Longhofer, and William Miles found that the wealth effects from housing “vary depending on whether the homeowner is old or young, poor or rich—but their overall estimate is that a dollar of extra housing wealth triggers five to eight cents in additional spending.”
On a high level, the math is compelling in terms of the housing benefit to GDP. If we assume there are 75 million owned homes in the U.S. and the average price is $175,000, then that is a total housing stock value of $13.1 trillion. That value of that housing stock would increase by $1.3 trillion if home prices are up 10% this year. Assuming the midpoint ($0.065) in the study above is accurate, the appreciation in home value at 10% this year will lead to an incremental $85 billion in consumer spending. On a GDP base of $15 trillion this is an incremental tailwind tail wind of 0.6% growth.
Clearly, these are all rough numbers and estimates, but we do feel very good about the fact that the home price appreciation will continue to accelerate and this will be additive to consumer spending. Given that Bloomberg consensus for 2013 U.S. GDP growth is 1.8%, an additional 0.6% could very well lead to an actual GDP number that “stomps” the consensus estimates.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1559-1589, $109.01-111.98, $81.88-82.66, 91.89-94.69, 1.91-1.97%, 11.91-15.18, and 1519-1551, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research