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Housing's Parabola & The Household Balance Sheet Recovery

Takeaway: Corelogic HPI data for April/May showed housing's parabolic recovery remains ongoing. Household net wealth set for new highs in 1Q13.

Yesterday we highlighted the expedited back-up in mortgage rates as an emergent headwind to the sustainability of housing’s accelerating  recovery.  While higher rates do represent a drag on affordability, in the more immediate term, housing’s momentum is showing no signs of deceleration. 

 

This morning’s Corelogic Home Price Index showed home prices accelerating to +12.14% Y/Y in April with the Preliminary May estimate reflecting further acceleration to 13.2% Y/Y.  Moreover, the M/M Home Price changes observed in April and May represented the fastest rates of appreciation in the last 20 years, inclusive of the 2004-2006 bubble period.  In short, the recovery in housing remains almost perfectly parabolic at present.   

 

Relatedly, ongoing home and financial asset price re-flation continue to drive the Household balance sheet recovery and should serve to further support consumption as the wealth effect increasingly manifests (see Here for fuller discussion of housing’s wealth effect) alongside rising confidence and domestic labor market strength.  

 

Collectively, Real estate and Equities (Corporate Equities & Mutual Fund shares), represented ~44% of Household assets as of 4Q12 and have appreciated ~10% and ~12% year-over-year in 1Q13, respectively.  Given the magnitude of Q/Q and Y/Y real estate and financial asset appreciation, even under aggressive assumptions for growth in Household liabilities,  the Fed’s Flow of Funds report scheduled for release on Thursday should reflect further acceleration and another new, nominal high, in Household Net Worth in 1Q13.  

 

In addition to driving some manner of wealth effect, the strengthening of the Household balance sheet and rising net wealth are supportive of credit expansion, on the margin, as household capacity for credit increases alongside rising collateral values.  A positive change in the flow of net new credit would provide an incremental tailwind to consumption growth as well.   

 

We’ll follow up with any notable highlights from the Flow of Funds release on Thursday.  

 

Housing's Parabola & The Household Balance Sheet Recovery - Corelogic May Prelim 060313

 

Housing's Parabola & The Household Balance Sheet Recovery - Household Balance Sheet 1Q13E

 

 

Christian B. Drake

Senior Analyst 



RETAIL: DG ≠ Consumer Spending

Takeaway: DG's blowup is coming at the same time we're seeing the best ICSC reading in yrs. We think the latter is a better barometer for the consumer

This note was originally published June 04, 2013 at 13:59 in Retail

Don't let Dollar General's weak results today fool you. Consumption is not rolling over en masse. In fact, today's ICSC reading -- which is based on a sample of 80 store chains spanning different demographic groups -- reported the best trends we've seen in over two-years. The results on a 1-week, 3-week, and 12-week basis all turned up sequentially with this morning's reading, which supports Hedgeye's bullish stance on the US Consumer.

 

1-WEEK ICSC INDEX % CHG

RETAIL:  DG ≠ Consumer Spending - 1wk

 

3-WEEK ICSC INDEX % CHG

 RETAIL:  DG ≠ Consumer Spending - 3wk

 

12-WEEK ICSC INDEX % CHG

RETAIL:  DG ≠ Consumer Spending - 12wk


RETAIL: DG ≠ Consumer Spending

Takeaway: DG's blowup is coming at the same time we're seeing the best ICSC reading in yrs. We think the latter is a better barometer for the consumer

Don't let Dollar General's weak results today fool you. Consumption is not rolling over en masse. In fact, today's ICSC reading -- which is based on a sample of 80 store chains spanning different demographic groups -- reported the best trends we've seen in over two-years. The results on a 1-week, 3-week, and 12-week basis all turned up sequentially with this morning's reading, which supports Hedgeye's bullish stance on the US Consumer.

 

1-WEEK ICSC INDEX % CHG

RETAIL:  DG ≠ Consumer Spending - 1wk

 

3-WEEK ICSC INDEX % CHG

 RETAIL:  DG ≠ Consumer Spending - 3wk

 

12-WEEK ICSC INDEX % CHG

RETAIL:  DG ≠ Consumer Spending - 12wk


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CHART DU JOUR: THE MOBILE IMPACT ON IGT’S DOUBLEDOWN

Can’t just look at Facebook users anymore

 

  • Despite Zynga’s soft outlook on bookings, we believe DoubleDown is more insulated given its growth opportunities outside of Facebook, particularly in mobile applications
  • Calendar Q2-to date, we believe DoubleDown DAU Facebook users have declined sequentially in the mid-single digits
  • However, we believe the mobile ramp is on schedule, and the divergence between Facebook-sourced DD users and overall DD users will widen in the coming quarters
  • Last quarter, DoubleDown reported 1.69 million Daily Active Users in calendar 1Q 2013, +100k users higher than its tracked users through Facebook  

CHART DU JOUR: THE MOBILE IMPACT ON IGT’S DOUBLEDOWN - dd


CHINA RATE HIKE(S) COMING?

Takeaway: No change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth.

CHINA RATE HIKE(S) COMING? - china

This note was originally published June 04, 2013 at 10:44 in Macro

SUMMARY BULLETS:

 

  • Chinese home prices continue to get away from the Communist Party’s political agenda and we think we are getting close to seeing Beijing issue a new round of macroprudential tightening measures – with perhaps a better plan for local implementation this time around.
  • Additionally, if the PBOC falls behind the curve with respect to draining liquidity, we think they’ll then be forced to tighten RRRs or potentially worse – hike interest rates – in order to combat what is clearly excessive house price appreciation in the context of China’s plans to accelerate urbanization over the intermediate term (think: affordability).
  • All told, there is no change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth. If you’re looking for a more detailed analysis of China’s pending economic trends and the risks embedded across the country’s banking system, we encourage you to review the hyperlinked research notes at the conclusion of this note.

 

Chinese home prices continue to get away from the Communist Party’s political agenda and we think we are getting close to seeing Beijing issue a new round of macroprudential tightening measures – with perhaps a better plan for local implementation this time around.

 

According to data released by the China Index Academy today, the average price of homes in 100 monitored Chinese cities increased in MAY by +0.8% MoM, in line with the SouFun Holdings data yesterday and down slightly from APR’s +1% MoM pace. Both indices registered a twelfth consecutive MoM gain.

 

From a YoY perspective, the SouFun data showed a +6.9% increase in MAY, up from a +5.3% pace in APR and good for the sixth consecutive YoY increase. Looking to the most bubbly markets, the average home price in the ten major cities including Beijing and Shanghai was CNY 17,202 per square meter in MAY, up +1.1% MoM and +9.7% YoY.

 

CHINA RATE HIKE(S) COMING? - 1

 

Amid these growing asset bubble risks, the PBOC has accelerated its draining of liquidity of late,  but a total of CNY202 billion in central bank bills and repos will mature on the open market this week, representing a significant increase of CNY172 billion from the prior week, and good for the highest weekly maturity amount in the YTD.

 

CHINA RATE HIKE(S) COMING? - 2

 

If the PBOC falls behind the curve with respect to draining liquidity, we think they’ll then be forced to tighten RRRs or potentially worse – hike interest rates – in order to combat what is clearly excessive house price appreciation in the context of China’s plans to accelerate urbanization over the intermediate term (think: affordability).

 

CHINA RATE HIKE(S) COMING? - 4

 

Either or, we suspect that participants in the Chinese iron ore and rebar markets (down -9% and -3.4% MoM, respectively) are increasingly sniffing out what we were out front labeling as 2H13 growth headwinds for the Chinese economy.

 

CHINA RATE HIKE(S) COMING? - 3

 

All told, there is no change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth. If you’re looking for a more detailed analysis of China’s pending economic trends and the risks embedded across the country’s banking system, we encourage you to review the following research notes. As always, we are available to follow up offline as well.

 

Darius Dale

Senior Analyst

 

  • IS THE RECENT RALLY IN CHINESE EQUITIES SUSTAINABLE? (5/17): We do not think the recent strength in the Chinese equity market is sustainable, as China’s 2H13 growth outlook appears dicey at best.
  • WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? (5/8): Chinese firms are goosing exports to drive incremental liquidity into the banking system – a phenomenon that appears set to slow from here.
  • TWO CHINAS? (5/1): Financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy.
  • REPLAY: Will China Break? (4/30): The Party’s use of state owned banks to drive economic growth through fixed asset investment has left the financial system loaded with bad assets.  The bad assets mirror bad investments in the real economy.  They also can limit the ability of Chinese banks to make new loans.  Following the financial crisis, the Chinese government pushed too hard on the FAI growth lever, building infrastructure projects “for the next 10 years.” It has also left the banking sector choked with bad debts that may limit future lending.  Those factors should slow Chinese FAI growth and slower Chinese FAI growth should be negative for commodity prices and resource-related profits, all else equal.
  • CAN CHINA AVOID FINANCIAL CRISIS? (4/26): The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.
  • REPLAY: EMERGING MARKET CRISES (4/23): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. China is particularly vulnerable to experiencing a financial crisis.
  • IS CHINA CAREENING TOWARDS FINANCIAL CRISIS? (3/28): Systemic risks are present across China’s financial sector – as is the political will and fiscal firepower needed to avert a crisis.

ECB on Hold This Thursday

Continuing with our call, we believe that Mario Draghi and the ECB will keep rates unchanged this Thursday after making a big splash cutting the main interest rate by 25bps (to +0.50%) last month.

 

Here’s how we’re sizing up our positioning:

  • Draghi has signaled that he expects a gradual recovery in growth in the back half of 2013, and therefore is monitoring the impact of the May 2nd interest rate cut and the current high-frequency data
  • Manufacturing PMIs were better in MAY vs APR (48.3 vs 46.7)
  • May Eurozone Confidence figures (Economic, Consumer, Business, Services, Industrial) all improved month-over-month
  • Sovereign yields remain largely anchored and the majority of European equity markets are positive YTD
  • The ECB needs more time to consider non-standard measures to encourage growth, including initial hints at 1.) Increased lending to small and medium-sized enterprises (SMEs) and 2.) Cutting the deposit rate to negative
  • On SME funding, it’s not clear the channel by which the funding would be carried out, ie from top-down coordination (Brussels/ECB) or bottom-up (at the individual CB/State Government level)
  • On a negative deposit rate, there is mixed discussion about the merits and benefits of such a move. Denmark provides one example of this and its government has claimed that it had no impact in boosting lending, and could negatively distort the property market. The jury is still clearly out on this option
  • Consensus is baking in no change to rates: 41 of 42 economists polled by Bloomberg agree

ECB on Hold This Thursday - yy. rates

 

Our critical TAIL line of resistance on the EUR/USD at $1.31 has not changed over recent months. We’ll be monitoring this level closely into and out of Thursday’s ECB meeting. Our immediate term TRADE range is outlined in the chart below. (The cross can be traded via the etf FXE).

 

ECB on Hold This Thursday - yy. eur usd

 

Matthew Hedrick

Senior Analyst


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