Takeaway: Existing home sales volume was flat for the sixth month in a row, but inventories are showing early signs of recovery.

This note was originally published May 22, 2013 at 11:14 in Financials

Inventory "Green Shoots"

One of the gates on volume upside in housing is a lack of inventory. We're starting to see indications that that constraint may be easing.


The number of existing homes for sale in April rose to 2.16 million, an +11.9% increase vs. March's inventory of 1.93 million. For perspective, the average April MoM change from 2007-2012 has been +9.1%, and today's +11.9% print is the largest we've seen since 2006. 


Inventory growth of existing homes for sale grew in April at its fastest rate since 2007. This follows a March increase in inventory that was +1.6% MoM, which was 310 bps ahead of the 2007-2012 average change of -1.5%. So in the last two months, we've seen increases above trend of 310 bps and 280 bps, respectively. In other words, inventory is creeping back. Another way of framing this is to look at the YoY trend in inventory. April inventory is down 13% YoY, but that's a marked deceleration from the 20-25% YoY declines we saw throughout 2012.


The paradox of inventory is that low inventory correlates with rapid price gains, but constrains growth in transaction volume. We suspect the recent upticks in inventory reflect the falling share of underwater homes amid double-digit home price increases. An inventory recovery is also another sign that the market continues to heal. Rising home prices are continuing to alleviate the pressures of the distressed market through lower loss severity and improved cure rates (i.e. lower frequency).


Home Price Implications

On balance, to the extent this inventory recovery continues, we would expect to see rates of home price appreciation decelerate, though likely only modestly. Inventory is at 5.2 months supply right now, which has historically correlated with future annual home price increases of +9.2%. Alternatively, raw inventory levels of 2.16 million correlate with forward rates of home price appreciation of 8.1% YoY. These rates of appreciation are slightly below current rates, but still very strong by almost any measure.


Overall, this data is consistent with our ongoing bullish stance on housing.


Transaction Volumes

In other news, sales volumes were basically flat in April at 4.97mn units (SAAR) vs. 4.94mn in March. This marks the sixth consecutive month that inventories have been in the 4.9-5.0mn range.


















Joshua Steiner, CFA


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

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Bernanke, Bernanke and Bernanke

Client Talking Points


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. 


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).


#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


Top Long Ideas

Company Ticker Sector Duration

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 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. 


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


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


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


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.

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


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.             










  • 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


    • 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


  • 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


    • 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.


  • 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






















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