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CANADIAN FROTH: Monitoring Stress in the Canadian Housing Market

Takeaway: The Canadian Housing Market is coming under increasing stress. Watch the Trends in home price growth and commodity price deflation.

Canadian non-seasonally adjusted Existing Home Sales declined 3.1% y/y in April while  home prices grew +2.0% according to the Teranet-National Bank 11-City composite Index  – marking the 17th consecutive month of deceleration.   

 

As a reminder, in our view of housing as a Giffen good, demand and price interact reflexively driving the self-reinforcing feedback loop characteristic of both vicious or virtuous cycles.  Within this framework, the negative demand growth and sustained price deceleration currently prevailing in the Canadian housing market is not a bullish setup.  

 

Admittedly, Canadian housing has, arguably, been overvalued for some time.  With home price appreciation still positive and Canadian and global growth marching along modestly there has been no discrete catalyst for precipitating a market correction. 

 

Now, however, with employment growth and household consumption accelerating to the downside, consumer confidence flagging, household debt ratios near peak, commodity prices deflating, and housing price growth moving towards the zero line, emergent stress in the Canadian housing market appears to be a situation worth stalking more closely on the short side.    

 

Below we highlight the recent trends in the Canadian Housing market along with key income and balance sheets trends for Canadian Households. 

 

Home Prices, Sales & Starts:  The Teranet-National Bank Home Price Index (analogous to the Case-Shiller HPI in the USA) decelerated to +2.0% Y/Y  –  the 17th consecutive month of deceleration.  New Housing Starts, meanwhile, continued to implode in April, declining 30.9% Y/Y.  Existing Home Sales activity was also weak again in April with non-seasonally adjusted sales declining -3.1% y/y.    

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Housing Starts CA 052113

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Home Prices CA

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Existing Home Sales April CA

 

Canadian Housing Market Value:  The first two bar charts below are from The Economist (Link) and show housing market under/over-valuation by country relative to both rental prices and disposable personal income.  In rank order of overvaluation/risk, the Canadian housing market remains one of the most overvalued versus historical averages for both measures.    

 

The third chart compares home price growth vs wages indexed back to 1999.  The divergence between home prices and wages has been stark over the last 15 years with prices holding 36% downside to parity with earnings.  

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - CA Housing over undervaluation Economist

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Canadian HPI vs Wages

 

Canadian Employment:  Longer-term, home prices have shown a strong relationship to labor market trends.  Payroll growth decelerated to +0.9% y/y in April and the growth trend has been slowing on both a 1Y & 2Y basis.  Household consumption growth has shown a similar, notable deceleration while Household debt growth continues to outpace income growth (discussed further below).   

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Canada Employment vs HPI

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Canadian Household Consumption

 

 

CANADA vs USA:  Household Debt, Income, & Housing Downside

Current Household Debt levels look increasingly unlikely to drive incremental consumption growth or asset price inflation.   Canadian Household Debt/GDP continues to rise while debt growth continues to grow at a positive spread to earnings/disposable income growth.  As a comparison, below we show the longer-term Household Debt/GDP trends for both Canada and the USA.  

 

Broadly, Canadian household debt growth is following the same trajectory as the U.S. prior to the financial crisis whereby debt growth went exponential, driving declining marginal consumption, before peaking and inflecting at 97.6% of GDP.  At 91.1% of GDP as of 4Q12, Canadian household debt capacity is moving towards an upper bound and an asymmetric setup in which some manner of household deleveraging becomes increasingly likely relative to incremental, debt catalyzed consumption growth.    

 

Indexing the Case-Shiller 20-City HPI to the Canadian home prices provides an illustration of the magnitude of peak-to-trough pricing downside for Canadian home prices from here.  Using the U.S. experience as precedent, prices hold ~40% downside from current levels.   

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Canadian HPI vs Case Shiller

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - Household Debt to GDP

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - USA HH Debt vs Consumption Exp vs linear

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - HH Debt vs Consumption Exp vs linear

 

CANADIAN FROTH:  Monitoring Stress in the Canadian Housing Market - CA Debt Growth vs Income Growth

 

In short, the ingredients  - overvalued Housing Market, slowing employment and Income growth, Household over-indebtedness, negative housing demand and decelerating price growth  - are there for a housing correction or even a broader deleveraging.  A move to negative price growth could serve as a trigger catalyst for a market correction as could further, significant strong-dollar driven commodity deflation for the energy/commodity-oriented Canadian economy. 

 

In the case of negative home price growth, and from a Giffen cycle perspective, negative price growth would drive a further decline in demand in a successive, self-reinforcing fashion.  On the credit side, absolute declines in home values would driver tighter lending standards, reducing the pool of qualified borrowers, serving as an additional headwind to demand and overall transaction activity.    

 

As it relates to the commodity price deflation prevailing currently, total  Canadian exports are ~$500B (on total GDP of ~$1.8T) with Energy Products, Mining/Metals, and Forestry collectively representing ~38% of total exports.  If #StrongDollar continues to perpetuate broad and significant commodity deflation, the impact to the Canadian economy would not be immaterial.  If this occurs concomitant to negative house price growth, slowing employment, and peak debt, it’s not a factor cocktail you’d want to be long of. 

 

Moving forward, we’ll continue to monitor trends as we dig on the idea further.  Stay tuned.  It’s getting increasingly interesting here.   

 

Christian B. Drake

Senior Analyst 

 

 


Corn - Last Week's Planting Surge - Perspective in a Single Chart

Corn - Last Week's Planting Surge - Perspective in a Single Chart - Top Corn Plantings


Bernanke, Bernanke and Bernanke

Client Talking Points

Japan

Abe is finally acknowledging the increase in implied volatility in the JGB market. That’s new – which means it’s probably going to continue and the Japanese central planning duo of Abe/Aso are going to now have to jawbone 3 markets all at once – Weimar Nikkei, Yen, and JGBs – Godspeed with that. Nikkei rips another new high +1.6% to +51.5% YTD as the Yen hits a new low at 102.88. 

Copper

Get the dollar right, get commodities right. Copper up 1.2% (making a lower high here this morning) and Gold is trying to bounce again too – watching both very closely into and out of the Bernanke testimony; acknowledging economic gravity would be nice – that would give us a green light to do more of the same (buy Dollars, short commodities, short treasuries, buy consumption stocks, etc).

USD

#StrongDollar been front-running a subtle shift in Fed policy for months; US Dollar Index remains in a Bullish Formation with a risk range of $83.57-84.69; if Bernanke does the right thing today, shorting EUR/USD probably signals go to me today too; we’ll see; $1.30 big resistance there.

 

***We are obviously keeping a very close eye on Bernanke’s testimony today.  Good chance he panders to the Keynesian doves. What we expect him to do, and what he will likely do, remain on opposite ends of the spectrum. Meanwhile, we had all-time SPY highs in the USA again yesterday – housing data, Bernanke testimony, and jobless claims all on our 48 hour radar screen.

Asset Allocation

CASH 36% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

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.

Three for the Road

TWEET OF THE DAY

If u feel better going to bed thinking about how many people like u vs how many wins u have, I want to play against u @keithmccullough

QUOTE OF THE DAY

“I may be crazy, but it keeps me from going insane.” – Waylon Jennings

STAT OF THE DAY

In an Internet minute there are 6 million Facebook views, 2+ million search queries in Google, 1.3 million video views and 100,000 new tweets on Twitter.


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Marking LINN Energy's Granite Wash to Market

Takeaway: The LPI/EnerVest Granite Wash deal suggests a value on LINN's Granite Wash play ~90% below LINN's internal NAV case... #MARKtoMARKET

LINN Energy (LINE, LINCO) holds 95,000 net acres prospective for the Granite Wash play on the border of the TX Panhandle and SW Oklahoma (according to the Company's website).  The majority of the acreage is in Hemphill County, TX, Wheeler County, TX, and Roger Mills County, OK.

 

Marking LINN Energy's Granite Wash to Market - linn1

Source: LINN Energy Presentation

 

In LINN's 4/1/13 presentation, "LINN Energy Response to Another Round of Short Seller Comments," the Company shows its "NAV Schedule (Internal Case)" on slide 9:

 

Marking LINN Energy's Granite Wash to Market - linn2

Source: LINN Energy Presentation

 

LINN states that it has 6.2 Tcfe of unproven volume in the Granite Wash, or 44% of its total unproven volume.  The value that LINN has put on this total unproven value is $6.5B - $11.2B.  If we take 44% of that (that's the best we can do), LINN values its Granite Wash unproven volume at $2.9B - $4.9B.  LINN also has 0.4 Tcfe of PUD reserves in the Granite Wash, or 20% of its total PUD reserves.  The value that LINN has put on its total PUD reserves is $1.9B.  If we take 20% of that, LINN values its Granite Wash PUD reserves at $380MM.  In total, LINN assigns $3.3B - $5.3B of value to its non-producing Granite Wash play.

 

We showed in our 4/5/13 presentation Response to LINN Energy's 4/1/13 Presentation & Additional Research that recent Granite Wash transactions like the Apache/Cordillera, Noble/Unit, and LINN/Plains deals suggested a value only a fraction of what LINN was representing to investors, and those deals were struck around $6,000 - $7,000/acre (after backing out the production).

 

Yesterday we got our latest mark on Granite Wash acreage as Laredo Petroleum (LPI) sold its Anadarko Basin properties to EnerVest (private) for $438MM.  The properties produced 58 MMcfe/d (94% liquids-rich gas) in 1Q13.  Included in the deal were ~37,000 acres in the Granite Wash and ~67,000 acres in the Eastern Anadarko and Central TX Panhandle.  LPI's Granite Wash play borders Hemphill County, TX and Roger Mills County, OK, as pictured below:

 

Marking LINN Energy's Granite Wash to Market - linn3 

Source: Laredo Petroleum Presentation

 

If we assign a value on the production at $5,000 per flowing Mcfe (standard for gassy volumes), and 0 value to the non-Granite Wash acreage, that leaves us with a market value on Granite Wash acreage of $3,999/acre.

 

Putting that metric on LINN's 95,000 net acres gives us a non-producing value of $380MM.

 

So LINN's internal NAV of its Granite Wash play is ~$3.3B - $5.3B, and the market says its worth $380MM.  That's quite the bid/ask...

 

Kevin Kaiser

Senior Analyst


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 22, 2013


As we look at today's setup for the S&P 500, the range is 31 points or 1.09% downside to 1651 and 0.77% upside to 1682.             

                                                                                                                  

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.69 from 1.69
  • VIX closed at 13.37 1 day percent change of 2.69%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 17 (prior -7.3%)
  • 10am: Existing Home Sales, April, est. 4.99m (prior 4.92m)
  • 10am: Existing Home Sales M/m, April, est. 1.4% (prior -0.6%)
  • 10am: Fed’s Bernanke testifies to congressional panel of economic outlook
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 12:30pm: ECB’s Praet speaks on monetary policy in Washington
  • 1pm: Fed’s Fisher speaks on economy in Nacogdoches, Texas
  • 2pm: Minutes from April 30-May 1 FOMC meeting

GOVERNMENT:

    • Financial Industry Regulatory Authority holds final day of conf. on regulatory developments, FINRA’s priorities
    • 9am: Secretary of the Army John McHugh; Army Chief of Staff Gen. Raymond Odierno testify at Senate Appropriations panel hearing on FY2014 budget estimates for U.S. Army
    • 9:30am: House Oversight and Government Reform Cmte hearing on IRS w/ Treasury Deputy Sec. Neal Wolin; former IRS Commissioner Douglas Shulman
    • 10am: Treasury Sec. Jack Lew speaks to House Financial Svcs about FSOC’s annual report
    • 10am: Senate Energy and Natural Resources Cmte forum on LNG officials from cos. incl. Sempra, Cheniere
    • 10am: Congressional-Executive Commission on China hearing on “Food and Drug Safety, Public Health, and the Environment in China”
    • 10am: House Judiciary Cmte hearing on constitutional rights during war on terrorism
    • 10am: House Foreign Affairs Cmte considers Nuclear Iran Prevention Act
    • 2pm: House Financial Services’ oversight panel holds hearing, “Who Is Too Big to Fail: Are Large Financial Institutions Immune from Federal Prosecutions.” w/ Mythili Raman, acting assistant attorney general of DOJ’s criminal division
    • 2pm: House Judiciary Cmte hearing on Senate immigration bill and the 1986 immigration overhaul

WHAT TO WATCH

  • Irish official says country didn’t give Apple tax deals
  • U.S. sales of existing homes may rise to 3-year high
  • Ford adding capacity for 200,000 new units on Fusion, F-150
  • Microsoft unveils new Xbox; has deals with NFL, Halo TV
  • Co. to hire “several thousand” Chinese workers: CEO
  • Sony board discussing Third Point’s entertainment IPO plan
  • Starbucks pays no tax in Germany, Rheinische Post reports
  • U.K.’s Miliband to tell Google CEO to change tax culture
  • Nintendo, peers winning patent infringement, royalty cases

EARNINGS:

    • Lowe’s (LOW) 6am, $0.51 - Preview
    • Staples (SPLS) 6am, $0.27
    • Booz Allen Hamilton (BAH) 7am, $0.37
    • Target (TGT) 7:30am, $0.84 - Preview
    • American Eagle Outfitters (AEO) 8am, $0.17
    • Eaton Vance (EV) 8:39am, $0.52
    • Hewlett-Packard (HPQ) 4pm, $0.81
    • PetSmart (PETM) 4:02pm, $0.96
    • Synopsys (SNPS) 4:05pm, $0.63
    • Workday (WDAY) 4:05pm, $(0.18)
    • HEICO (HEI) 4:10pm, $0.40
    • L Brands (LTD) 4:30pm, $0.46
    • Semtech (SMTC) 4:30pm, $0.47
    • Bristow Group (BRS) 5:05pm, $1.02
    • SeaWorld Entertainment (SEAS) Aft-mkt, No est.

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Gains Amid Stimulus Speculation Before Bernanke Testimony
  • Death in Parched Farm Field Reveals Growing India Water Tragedy
  • WTI Crude Drops a Second Day as U.S. Supplies Gain a Fourth Week
  • Copper Reaches Five-Week High on Supply Concern After Accident
  • Wheat Gains on Weather Concern as Import Demand Seen Picking Up
  • Cocoa Falls on Speculation Prices Climbed Too Far; Sugar Rises
  • Gold Demand at Degussa Is About Double Average in First Quarter
  • Wheat Exports From India May Plummet as Farmers Hoard Harvest
  • Cotton Moving Average Signals Further Slide: Technical Analysis
  • Freeport Reviews Safety as Copper Rallies Amid Mine Suspension
  • Crude Supplies Decline a Second Week in Survey: Energy Markets
  • Rebar Rises First Time in Three Days on Iron Ore Price Increase
  • Ukraine Counters Russian Cargo Grab With Bond-Sale Cash: Freight
  • Gold ETP Outflows in 2013 Top Additions Over Past Two Years

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


Bucked Up!

This note was originally published at 8am on May 08, 2013 for Hedgeye subscribers.

“I feel quite bucked up!”

-George F. Kennan

 

I’m half way through reading John Lewis Gaddis’ biography of this great American strategist’s life. The aforementioned quote came from Kennan in 1947 (Gaddis, pg 242). He was 43 years old at the time and was just coming off one of the biggest wins of his career – shifting US foreign policy towards Russia in what is well known by historians now as “The Long Telegram.”

 

Kennan’s character resonates with me because he was quite a moody fellow. He was authentic. He thought for himself and didn’t particularly care about what people thought about him. While he didn’t make as many mistakes as I have at his age, he was still very introspective about his research process. He never stopped questioning himself or his premise.

 

Whether you are a strategist, athlete, or professional in any other field where performance is measurable in real-time, you get it. Performance is fleeting. As a result, conventional wisdom suggests you should always err on the side of caution when things are going well. I disagree with that. Confidence is contagious. Seize it when you have it. Make as much progress as you can.

 

Back to the Global Macro Grind

 

As the SP500 was holding all-time highs into yesterday’s close, I was feeling rather bucked up myself. It is, after all, all about #StrongDollar. When the US Dollar Index was basing in mid-November (at $79-80), that was our signal. We’ve seen higher (all-time) lows in the Dollar and lower-highs in Commodity prices ever since.

 

There’s measurable entropy in something that’s rising off a 40yr low (USD hit an all-time low in 2011 when Commodities (CRB Index) hit an all-time high). It’s critical to contextualize the asymmetry associated with that entropy. Remember, long-term bottoms are processes, not points. By the time everyone and their brother is bucked up on #StrongDollar, we’ll be getting out of the way.

 

The good news (if you are Long Dollars, Short Commodities, and Long US Consumption stocks) is that we are still in the early innings of what could be a long telegram of Early Look notes anchoring on this fundamental point. So, please – I beg you to be patient with both our thesis and the American recovery in confidence, birth rates, and household formation. It’s all born out of the same thing.

 

What’s up since the US Dollar gave us the green light (quant signal) in November 2012?

  1. SP500 is +20% now (vs 1353 on November 15th, 2012)
  2. Weimar Nikkei is +65% (vs 8661 on November 15th, 2012)

Yep, Bernanke spent the 1st half-decade of his reign as USA’s Central Planner In Chief (2007-2012) Burning The Buck. Ever since his epic “print to infinity and beyond” moment (SEP 2012 FOMC meeting), the Japanese dudes have taken the torch.

 

Everything in currency markets is relative. On the margin, former BOJ Chief (Shirakawa) was actually the most hawkish of the Big 3 Central Currency Commanders going back to 2006. That’s what most guys who got squeezed being short Yens to 40yr highs in 2011-2012 had wrong. To get the timing right in big currency moves, you need to get the relative policy shifts right.

 

Again, this is just how we roll. So if our GIP (Growth, Inflation, Policy) framework sounds a little foreign to some, that’s cool too. Don’t forget that we did the unthinkable here and thought for ourselves in building our models and macro strategies this way.

 

Back to 1-month CTRL+SQUEEZE move in everything Global Equities this morning…

 

Here are 3 big things jumping out of my notebook:

 

1.   CHINA – just as it looked like Chinese stocks were going to hell in a hand basket again, China joins the party printing a +14.7% Export print for April; it’s not just the US data that has accelerated sequentially m/m – most of the Asian and European data stopped slowing in March too; Shanghai Comp +4 days in a row, back above 2206 TREND support to 2246

 

2.   COMMODITIES – SP500 +0.5% yesterday w/ the CRB Index deflating -0.4% (-2.4% YTD); #CommodityDeflation remains the outlier call of 2013; it is bullish for inflation adjusted consumption growth (particularly US #GrowthAccelerating). Will Oil start to look like Gold does next? Prices at the pump falling Q2 vs Q1 for the first time in 4 years

 

3.   SP500 – 1626-1630 is not where you want to be chasing US stocks; you have -1.4% of immediate-term downside to my 1st line of support (1599); that said, higher-lows and higher all-time highs in my model are what you want to be net long of, unless you have a bearish catalyst

 

As I have been asking my sparring partners Doug Kass and Dennis Gartman since January, what is your bearish catalyst? Will it be a reversal of last week’s raging bull catalyst (US Jobless Claims dropping to 324,000, a 5 year low)? Since we’ve ripped for 4 consecutive up days since that data point, I wouldn’t be surprised if we sold off on it being less great this week (Thursday).

 

Who knows? And, if it’s legal, what is it they know? All I know is that the more I read about history and repeatable market strategies, the less I know altogether. The only thing I am 100% certain about is that I will be getting something very wrong soon. That’s just the game. In the meantime, I’ll play it confidently. That’s the only way to win.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Shanghai Composite, and the SP500 are now $1421-1481, $99.36-106.11, $81.87-92.98, 98.25-99.98, 1.71-1.82%, 12.36-14.51, 2169-2265, and 1599-1630, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bucked Up! - Chart of the Day

 

Bucked Up! - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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