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TRADE OF THE DAY: CAG

Today we bought ConAgra Foods (CAG) at $34.60 a share at 3:13 PM EDT in our Real-Time Alerts. ConAgra remains one of Hedgeye Consumer Staples Sector Head Rob Campagnino's best ideas, we bought it back down here as it tests and holds immediate-term TRADE support.

 

TRADE OF THE DAY: CAG - CAG


Housing Is The Ultimate Giffen Good

Takeaway: Key housing demand drivers & Demand-Supply dynamics should continue to support prices. We expect a modest Wealth Effect on NTM consumption.

#HousingsHammer was one of our two bullish, domestic-centric Macro Investment Themes in 1Q13 and a key support to our view on domestic #GrowthStabilizing.   

 

Ahead of a more comprehensive update to our intermediate term outlook for housing (2Q13 theme perhaps?), below we summarily review the current trends in key housing fundamentals, highlight the relevant pricing model dynamics and discuss the potential for rising home prices to flow through to consumer spending and consumption – the so-called Wealth Effect

 

 

THESIS:   In our view of housing as a Giffen good, demand and price interact reflexively as demand chases price higher which, in turn, drives further price appreciation in a virtuous cycle.  Employment, Household Formation, Birth Trends & Demographics sit as principal drivers of housing demand and trends across each of those metrics remain favorable.  Rising demand alongside ongoing inventory tightness should continue to support further home price appreciation over the intermediate term.    

 

 

DEMAND & DRIVERS

 

Demand – Pending, Existing, and New Home Sale Metrics all continue to reflect rising demand.  Credit demand for residential real estate continues to rise while credit standards for prime borrowers continues to ease according to the FED’s Loan Officer SurveyGrowth in Mortgage Purchase applications, one of the better lead indicators for housing activity, showed further acceleration in 1Q13. 

 

Employment – Labor market trends continue show modest improvement as payroll numbers have accelerated and Initial Jobless Claims continue to show year-over-year improvement.   Broad employment growth is of obvious import to aggregate consumer demand, but the age demographics that have characterized the jobs recovery remain particularly supportive of housing demand.   

 

The BLS employment by age data shows that, to a large extent, we are still experiencing a barbell recovery in employment with 20-34 and 55-64 year olds remaining the primary beneficiaries of business hiring.    With New Household formation centered on the 20-40YOA age demographic, positive employment trends and income stability should provide ongoing support to housing demand on a lag.    

 

Births – After the biggest decline in over 40 years, Birth trends are beginning to turn.   The correlation between Female Employment growth within the 20-34 Year old cohort and U.S. births is strongest on a 3 quarter lag – the lagged relationship makes common & economic sense as the decision to have a child follows the change in employment status, the initiation of insurance coverage, and a high enough comfort level with job security to take maternal/paternal leave.  The acceleration in 20-34 YOA female employment that began in 1Q12 should drive positive birth trends from here. 

 

Household Formation – Household formation fell well below the historical average into and following the great recession, going negative in 2009.   Household formation growth has been a good leading indicator for the housing market as the late 2Q11 acceleration presaged the positive inflection in the housing market into 2011 year end.  Following its initial positive inflection in 3Q11, household formation growth has accelerated over the last year and remains positive for forward housing demand.   

 

Demographics – from a secular perspective, growth in the 30-40 YOA cohort sits as one of the few population demographic bright spots with that age demographic facing a secular upswing for the better part of the current decade.  Accelerating population growth in this key demographic for housing should provide a positive baseline of organic demand growth.   

 

Housing Is The Ultimate Giffen Good - U.S. Housing Demand

 

source: Hedgeye Healthcare

Housing Is The Ultimate Giffen Good - Births vs. Employment Model   1Q13 normal

 

source: Hedgeye Financials

Housing Is The Ultimate Giffen Good - 2yr comps Household Formation

 

Housing Is The Ultimate Giffen Good - 30 40 YOA Population 

 

 

SUPPLY:   Rising demand and falling supply is price positive and Inventory tightness has only increased since the start of the year.   New Home inventory remains near all time lows, Existing home inventory is down >50% since the July 2007 peak and months supply is at the low end of the historical average from 1

 

There may exist some capacity constraint as builders work to fill rising demand, but housing starts could still compound at double digits for the next three years just to get back to the longer term average.  While any emergent capacity constraint may marginally dampen upside potential in transaction volume, it remains supportive of price appreciation.   

 

Housing Is The Ultimate Giffen Good - Housing Supply 2

 

Housing Is The Ultimate Giffen Good - Housing Starts   Permits

 

PRICE:  The FHFA Home Price Index, Case-Shiller HPI, and Corelogic home price data all continue to register price acceleration.  The latest Corelogic data, tracked by our Financials team, estimates home prices grew 10.2% y/y in March, flat with growth in February, and up from 9.41% y/y growth in January.  So long as inventory remains low and the core drivers of housing demand remain positive, we continue to expect demand-price reflexivity to support housing market strength over the intermediate term.   

 

Housing Is The Ultimate Giffen Good - U.S. Housing Prices 

 

 

WEALTH EFFECT  

Pundits and Policy makers like to casually interject the “wealth effect” term into discussions around financial and housing asset appreciation/depreciation impacts on consumer demand – the term is self-descriptive and, intuitively, the idea that if you have more ‘resources’, your capacity for consumption increases is a fairly digestible concept.  There are, however, some key conditions underneath the wealth effect phenomenon that need to be met for increased housing wealth to manifest in increased spending and consumer consumption.   

 

Below we take a quick, didactic tour of the wealth effect and the important considerations as it relates to the flow through impact on consumption. 

 

Wealth Effect – What is it:  When home prices rise at a premium to inflation, real housing wealth increases.  The wealth effect ‘theory’ posits that when real housing wealth increases, consumer spending permanently increases by some fraction of that wealth increase in every subsequent year.   It’s the “some fraction” part of the theory that sits at the center of ongoing research and debate.  

 

Consumers, on balance, don’t immediately convert 100% of a wealth increase into current consumption.  Instead, in annuity like fashion, they tend to spread that ability for increased consumption out over their lifetime.  Economists attempt to quantify this phenomenon - how consumption changes following changes in housing wealth  - by measuring “Marginal Propensity to Consume” – the term used to describe how much consumer spending increases for each additional dollar of housing wealth.  In general, studies examining the marginal propensity to consume show that consumer spending increases between 2 and 7 cents for each dollar of housing wealth increase.   

 

Actual increases in housing wealth as well as expectations around future price appreciation are thought to be the lead factors driving consumption and spending decisions.   The important, if obvious point, here is that even if home price appreciation is positive, if it’s less than what consumer were expecting (& basing spending decisions on) then the impact to go-forward consumption would be negative, and vice versa.  Households would increase/decrease their savings rate to close the delta between expected and actual housing wealth changes.     

 

 

Key Conditions It makes intuitive sense that an increase in real wealth, be it from housing or financial asset appreciation, lends itself to increased consumption.  However, a number of key, practical conditions must be satisfied for increased housing wealth to translate into higher consumer spending on non-housing related goods and services.    

  1. Non-housing Assets:  Rising home values don’t serve as direct means for increased consumption.   Housing wealth increases need to displace other savings and investment for it free up cash flow to drive higher discretionary consumption.  Put differently, an increase in housing wealth only drives increased consumption if households hold fewer non-housing assets than they would otherwise have held.  Historically, real increases in housing wealth have been associated with a decrease in the personal savings rate.  In effect, individuals let their home do their saving for them while diverting  would-be savings into greater current consumption.
  2. Equity Extraction:  Home price appreciation can help drive non-housing related consumption if it causes households to extract equity via increased borrowing, generally via cash-out refinancing’s (the technical term for this is Net Mortgage Equity Withdrawal, or MEW).  Additionally, households can extract equity by simply moving to a cheaper residence with the dollar delta between the two homes representing the increased capacity for non-housing related consumption.         

In short, if real housing wealth increases but households don’t decrease savings/other investment, increase home equity backed borrowing, or downsize to a cheaper residence, then that wealth increase will be largely ineffectual in driving higher consumption growth.   

 

 

Net-Net, What Kind of Impact Will Increased Housing Wealth have on Consumer Spending and Consumption Growth? 

The idea of the Wealth effect remains a working theory with the net impact to GDP beholden to a host of situational specific and idiosyncratic economic and behavioral/psychological factors. 

 

Despite the inherent uncertainty, applying a few simplifying assumptions allows for a reasonable estimation of the net impact to consumption stemming from a real housing wealth increase.

 

In the scenario analysis below we applied the range of historical estimates for Individual’s Marginal Propensity to Consume (MPC) against the actual increase in aggregate, gross housing market value from 2011 to 2012 (Fed Flow of Funds Data).  Across the range of MPC’s, on a nominal GDP base of $15.86T, the realized $1.4T increase in gross housing market value translates to 27-62 bps points of incremental growth.   

 

Against this estimate of gross wealth effect impact, we then applied a series of discounts:

  1. Negative Equity discount:  Is a rising home price really going to drive incremental spending for an individual going from very negative equity to less negative equity?  As of 3Q12, approximately 14% of all homes were underwater – implying that 85% of homeowner are subject to the wealth effect.  We applied a 15% discount to the Gross Wealth Effect impact to account for negative housing equity in the analysis below.
  2. MEW Discount:  Net Mortgage Equity Withdrawal peaked at ~$140B during the housing bubble and subsequently went negative into and after the great recession.   Here, we take a conservative view and side with the preponderance of data that says the consumer still isn’t in a mood to re-lever.  We applied a 10% discount for MEW with the expectation for a depressed impact versus historical precedent.   
  3. Confidence/Psychological Discount:  Expectations around wealth increases play an important part in marginal spending decisions.   Similar behavioral dynamics tend to characterize positive and negative price/wealth inflections, but they tend to play out in converse – a phenomenon which is largely tied to expectations.  Individual expectations around future price changes are generally biased by ‘State Dependence’ (ie. how you feel now) whereby recent price trends color expectations around future price changes.   Applied to housing,  as home prices rise/accelerate, consumers generally extrapolate forward similar levels of price appreciation. Conversely, coming out of a period of declining prices, expectations around future price changes are probably conservative with consumer needing to see sustained stability/appreciation to drive incremental spending.  We applied a 10% discount for this dynamic in the scenario analysis below.     

Triple-Net, a quasi-conservative approach at quantifying the flow through impact from increased housing wealth to consumer spending suggests we see 25-40bps of incremental consumption growth over 2013.   

 

Housing Is The Ultimate Giffen Good - Housing Wealth Effect

 

 

Christian B. Drake

Senior Analyst 

 


#QuadrillYen Evolves

With the announcement being made that the Bank of Japan would begin a $1.4 trillion stimulus project over the next two months aimed at boosting Japan's economy and inflating its stock market, the Yen is essentially destined for devaluation. As soon as the news hit, the Yen fell in value relative to other currencies (you can see the USD/JPY pair below). Since late 2012, one of our key global macro themes for 2013 has been #QuadrillYen. The BoJ will continue to print money similar to the Federal Reserve's policy of quantitative easing and the currency will be devalued even further as time goes on. That's the name of the game.

 

#QuadrillYen Evolves - YENMACHINE


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INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS?

Takeaway: Labor conditions in the latest week slowed significantly on a seasonally adjusted basis and slightly on a non-seasonally adjusted basis.

Below is the detailed breakdown of this morning's claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

 

This morning's awful seasonally adjusted initial jobless claims print appears to have been negatively impacted by the Easter week holiday. Taken together with the weak ADP report and the weak Challenger report, the market is clearly developing a bearish bias in the short term around labor conditions. We'll see what tomorrow's river card brings.

 

The non-seasonally adjusted claims number was essentially flat week-over-week. Looking at the trend in the non-seasonally adjusted data, it's still trending better year-over-year, but only just barely. This week's print was better by just 0.5% vs. the same week last year. The trend in this dynamic over the last five weeks has been: -0.5%, -2.4%, -5.8%, -6.1%, -8.9%. Clearly the rate of year-over-year improvement has been slowing notably over the past month. A silver lining is that the trend in rolling NSA claims YoY is less negative, as we show in the second chart of this note. 

 

The bottom line is this: labor conditions aren't as bad as they appear (in the SA numbers), but are, in fact, showing signs of genuine cooling.

 

 

The Data

Initial jobless claims rose 28k to 385k from 357k WoW. The previous week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.75k WoW to 354.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -5.9%

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 1

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 2

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 3

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 4

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 5

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 6

 

Joshua Steiner, CFA


Consumer Staples and Volatility

One consistent theme in the market in 2013 has been lower volatility – except for random, brief events the trend in the VIX (CBOE Volatility Index) has been lower to start the year.  As an exercise, we have been following a couple of ETF’s that seek to track lower volatility:

  1. SPLV – PowerShares Low Volatility Portfolio
  2. USMV – iShares USA Minimum Volatility Index Fund

As one would expect, both ETFs have performed extremely well in 2013 (I know, blinding glimpse of the obvious).  Both have also seen significant inflows – SPLV $903 million YTD (versus $2,067 million in all of 2012) and USMV $1,728 million YTD (versus $735 million in all of 2012).

 

Consumer Staples and Volatility - ETFs and the VIX

 

The top holdings of each are interesting as well for the purposes of our analysis.

 

SPLV

  • ·         PEP (#2)
  • ·         CLX(#3)
  • ·         GIS (#4)
  • ·         CPB (#7)
  • ·         KMB (#12)

USMV

  • ·         GIS (#3)
  • ·         PEP (#11)
  • ·         KMB(#12)

Since the start of the year, the performance of a number of consumer staples names has been highly correlated to the performance of these low volatility ETFs and, by extension, the VIX.  No doubt, the associated money flows into these ETF's have been partly responsible for the significant outperformance of names such as CLX, GIS, CPB and KMB.

 

Consumer Staples and Volatility - CPB.CLX Low Vol

 

Consumer Staples and Volatility - GIS.KMB Volatility

 

We offer this analysis as another data point to suggest that something other than business fundamentals are driving the share prices of these companies and that someone (or something) other than fundamental investors are buying them.  It's hard to fight these kind of moves, but it will end, and when it does dedicated staples investors will be left with names that have far outstripped any reasonable valuation metric.

 

Unfortunately, we don't know when this will end, but perversely, these ETFs are now likely faultily constructed, as these names at these levels don't represent (to us at least) "low volatility".  At some point, the long-term betas used in the construction of these ETFs will catch up to the reality of the recent move.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS

Takeaway: Stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”.

SUMMARY BULLETS:

 

  • The Bank of Japan did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is now officially (as opposed to rhetorically) home to the G10’s most dovish central bank.
  • In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing” (details below). In addition to these seismic shifts monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items (details below). Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint (statement below).
  • We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out
  • To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us
  • In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.
  • All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

 

All eyes were on the Bank of Japan this AM, which did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is nowofficially (as opposed to rhetorically) home to the G10’s most dovish central bank. To recap their monetary policy phase change (all quotes from the accompanying BOJ statement; emphasis is our own):

 

In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing”:

 

  • “The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases.”
  • “With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base… The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.” [unanimous vote]
  • “With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen.” [unanimous vote]
  • “… JGBs with all maturities including 40-year bonds will be made eligible for purchase, and the average remaining maturity of the Bank's JGB purchases will be extended from slightly less than three years at present to about seven years – equivalent to the average maturity of the amount outstanding of JGBs issued… The monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.” [unanimous vote]
  • “The Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively.” [unanimous vote]
  • “The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” [8-1 majority vote; board member Takahide Kiuchi dissented against the firm two-year commitment]

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - BOJ Balance Sheet Projections APR  13

 

In addition to these seismic shifts in monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items:

 

  • The Asset Purchase Program will be terminated. The purchases of JGBs conducted for facilitating money market [rinban] operations – including the amount outstanding of JGBs already purchased – will be absorbed into the aforementioned JGB purchases.
  • The aforementioned JGB purchases are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits. In addition, the government – in the joint statement released with the Bank in January – stated that "in strengthening coordination between the Government and the Bank of Japan, the Government will steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management." Based on such recognition, the Bank will temporarily suspend the so-called banknote principle as it pursues the quantitative and qualitative monetary easing.”
  • The terms and conditions under the Securities Lending Facility (SLF) will be relaxed for the time being in order to ensure that the market liquidity of JGBs is maintained.”

 

Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint:

 

  • “The quantitative and qualitative monetary easing, introduced by the Bank today, will underpin the Bank's commitment, and is expected not only to work through such transmission channels like longer-term interest rates and asset prices but also to drastically change the expectations of markets and economic entities.”

 

Evidence of muted expectations among consensus can been seen in the USD/JPY cross and Nikkei 225’s respective intraday bounces on the BOJ announcement(s). The former jumped from a low of 92.76 to today’s high of 96.40 and the latter swung from being down -1.8% on the day to closing up +2.2%! Again, the JPY is down over three full percent vs. the USD intraday! It’s hard to express in words how truly remarkable that is in the context of G3 currency fluctuations.

 

We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out.

 

To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us

 

In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.

 

More from that 3/15 note:

 

  • “Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past ~20 years. Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come."
  • "In a research note on Monday, we detailed exactly why we think consensus among the buy side, the sell side and Japanese corporations is not even in the area code of being bearish enough on the Japanese yen." 
  • "... What people like Mr. Sakakibara are missing is that the BOJ now has the baton as it relates to being the most aggressive DM central bank. Currencies crosses are inherently relative, so as Japan accelerates its easing measures, keep in mind that the US will be doing the exact opposite – both fiscally and monetarily – as #GrowthStabilizes in the good ol’ U-S-of-A.”

 

All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

  

Darius Dale

Senior Analyst

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - 2

 


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