Today we shorted Freeport-McMoRan Copper & Gold (FCX) at $30.30 a share at 10:22 AM EDT in our Real-Time Alerts. Hello darkness, my old friend. Nice to see you back up here at lower-highs as the Commodity Bubble continues to pop.
Recent data from CoreLogic and the Federal Housing Finance Agency (FHFA) shows that home prices continued to rise through March with CoreLogic estimated 10.2% year-over-year growth, up from flat growth in February at 9.41% year-over-year in January. The FHFA Home Price Index reflects similar trends with prices accelerating month-over-month to 7.07% year-over-year growth in February. That's the fastest rate of growth since November 2009.
CCE reported Q1 2013 EPS this morning in which the company saw meaningful volume improvement in the quarter, yet we believe persistent economic weakness and a challenged consumer will remain headwinds in the coming quarters. The announcement to walk away from acquiring the German bottling business will equate to $1 billion in share repurchases in 2013; future expectations around how the company may position itself with a strong balance sheet (net debt/ebitda of 2.5-3x) may further stoke the stock. We remain neutral on the stock until there’s more clarity on the sustained improvement in the underlying business. That said, easy Q2 2013 revenue comps of -8.3% may make CCE attractive into the print.
We expect that the decision to walk away from Germany will disappoint some investors - there is certainly some percentage of the shareholder base that is special situation/merger oriented in its investing style. However, while this deal moves into the rear view mirror, KO certainly isn't through re-imaging its global bottling network and CCE is very likely in those plans, perhaps even as a target at some point down the road.
What we liked:
What we didn’t like:
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Both existing home sales and new home sales are showing positive trends in housing as one of the drivers of US growth. Existing inventory was largely unchanged in March at 1.93 million units but median home prices rose 11.8% on a year-over-year basis. That kind of growth hasn't been seen since November of 2005.
Organic demand is helping drive sales on the new home sales front. New home sales rose 18.5% year-over-year in March to 417,000 units. We believe that over time, new home sales could double based on current levels as household formation trends show increased demand combined with a jump in new housing starts.
Mortgage Purchase Applications hit another year-to-date high this week and have yet to slow down. Demand for home purchases rose 0.2% week-over-week and with the 15-year fixed-rate mortgage at an all-time low rate, housing continues to be one of the primary drivers of growth in America. It's clear that homebuyers are anxious to lock in rates while they remain low as mortgage demand ticks up.
Takeaway: Housing and Labor Market Trends, core inputs to our view on domestic consumption, both continue to improve.
Belying the broader slowdown in the domestic macro data in March is the continued improvement in the principal Household Balance Sheet and Income Statement metrics we've been focused on relative to our view on consumption – specifically, Housing & Employment.
Housing: Home prices have continued along their path of parabolic acceleration while the prevailing trend of strong demand and tight supply continues to support our bullish expectations for ongoing Home Price Appreciation over the intermediate term.
While Home price acceleration has been discrete, the market has shown some recent (apparent) disappointment with the volume of residential real estate activity. As our head of Financials, Josh Steiner, recently commented following the release of the March Existing Home Sales data, we think this concern is misplaced:
“There's a paradox of inventory right now. On the one hand, low inventory precipitates rising prices, while on the other hand low inventory marginally constrains volume growth. All things equal, low inventory helps the housing market far more than it hurts. In other words, the market should be more focused on prices rising due to tight inventory than on volume going sideways for the same reason”
So, in the context of our view of Housing as a Giffen Good, price should be the key metric of investor focus as price growth serves to drive demand in a reflexive cycle. Capacity will follow rising demand on a lag in the new home market and rising prices should drive existing home transaction volumes as housing equity turns positive for underwater borrowers alongside rising home values.
Recapping the recent housing data:
source: Hedgeye Financials
INITIAL CLAIMS: This week’s Initial Jobless Claims data was again positive with both the SA and NSA series showing sharp sequential improvement. We consider the 4-week rolling average in NSA claims to be the more accurate representation of the underlying labor market trend and on that metric, the trend improved 250bps w/w as the y/y change in 4-wk rolling claims went from -6.3% Y/Y from -3.8% Y/Y the week prior. The headline number fell 13K to 339K w/w versus the prior week’s unrevised number while the 4-week rolling average in SA claims dropped 4.5K w/w to 358K.
So, despite initial sequester related impacts beginning in April and the seasonal distortion in the seasonally adjusted data shifting to a headwind, labor market trends continue to show steady improvement. We continue to expect a ~10K drag on claims on a smoothed basis (with the potential for a negative shock to any given release) related to sequestration alongside the slow build in the negative seasonal impact through August.
source: Hedgeye Financials
Positioning: Strong Dollar – Strong Domestic Consumption remains the simplified Macro strategy playbook. The Dollar remains in Bullish Formation (Bullish across TRADE, TREND & TAIL Durations) in our Risk Management model and we expect further upside given our bearish view on the Yen, slowing growth and an increasingly dovish policy outlook in Europe, decent domestic economic data, declining federal deficit spending and an incrementally hawkish fiscal and monetary policy stance.
Continued USD appreciation should drive ongoing energy/commodity deflation, further relative underperformance in commodities and commodity levered exposure (XLB, XLE, Russia, Brazil, Peru, etc), and relative outperformance for domestic consumption oriented exposure (XLY, XLV) as discretionary share of wallet rises.
Keith bought the Dollar (UUP) and shorted Oil (OIL), Gold Miners (GDX), and Freeport-McMoran (FCX) in our Real-Time Alerts this morning.
Christian B. Drake
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