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#BULLISH BUILDER CONFIDENCE

Takeaway: Builder confidence has historically trended to 65-78 after crossing positively through 50, making today's reading of 52 noteworthy.

This note was originally published June 17, 2013 at 12:42 in Financials

#BULLISH BUILDER CONFIDENCE  - hous5

Reflexivity

Typically we pay little attention to the builder confidence survey, but given the recent underperformance in the builder complex we thought it was worth some further consideration. Looking at the history of the series, which unfortunately only dates back to 1985, there have been four prior episodes of builder confidence crossing above 50 and then moving on steadily to 65-70. In the first chart below we illustrate this tendency. The four prior peaks were 65 in June, 1986, 71 in November, 1993, 78 in December, 1998 and 72 in June, 2005. We find it interesting that builder confidence tends to autocorrelate (i.e. move in the same, self-reinforcing direction for long periods of time), just as home prices and housing demand do.

 

#BULLISH BUILDER CONFIDENCE  - nahb peaks

 

If we assume that builder confidence continues to trend higher, toward its prior peaks in the 65-78 range, what are the implications for construction activity? The chart below shows the historical relationship between builder confidence and construction activity. There are several takeaways from this chart. The x-axis shows the HMI (builder confidence) reading, while the y-axis is the concurrent level of single family housing starts in thousands of units annualized. Over the history of the series (1985-Present), we've seen a 16k change in SF starts for every one point change in the HMI index. Interestingly, based on today's builder confidence reading of 52, the fair value for SF starts is 1.137 million vs. the current reading of 610k, or 87% above where it is today. If we assume that confidence rises to 65, then SF starts should reach 1.35 million and if we assume 78, we get 1.56 million. 

 

#BULLISH BUILDER CONFIDENCE  - mr

 

Bear in mind, this is single family starts. Historically, as the chart below shows, single family starts have averaged 72% of total starts from 1960-present. The most recent reading was identical at 72%, but if we take the average of the last six months, single family starts have been averaging 67% of total starts. If we divide the above figures by the long-term average of 72%, it translates to high side estimates for total starts of 1.58 million (today's HMI of 52), 1.875 million (HMI 65), and 2.17 million (HMI 78). These rates of construction are generally consistent with the levels we would expect to see given the current rates of new household formation we're seeing coupled with the historical relationship between household formation and housing construction.

 

#BULLISH BUILDER CONFIDENCE  - starts to total

 

It's also worth noting that the recovery in builder confidence remains more parabolic than linear, i.e. supportive of our conclusion that the housing recovery continues to show signs of acceleration. It doesn't hurt that mortgage rates have also backed off their recent highs, ticking down to 3.94% from their recent highs of 4.16%. As the chart below shows, the second order measure of trajectory remains much stronger (0.92) than the first order (0.76).

 

#BULLISH BUILDER CONFIDENCE  - parab

 

Conclusion 

Housing's momentum has been one of the three central tenets of our bullish stance on Financials, alongside the labor market recovery and the Fed's asset purchase program. Today's signs of ongoing recovery, and even acceleration, are a welcome sign suggesting that our bullish intermediate to long term view on the Financials remains on track. However, in the short-run, we remain cautious for several reasons including the predictable deceleration in seasonally-adjusted labor data, elevated uncertainty around the Fed's willingness to continue its asset purchase program, and steadily deteriorating conditions in the credit markets.

 

 

The two charts below look at the long-term as well as the short-term relationship between builder confidence and builder activity levels. 

 

#BULLISH BUILDER CONFIDENCE  - lt

 

#BULLISH BUILDER CONFIDENCE  - st

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen this morning.

Daryl Jones – Macro

Inflation at 53-Year Low Gives Bernanke Time to Press on With QE (via Bloomberg)

 

Morning Reads on Our Radar Screen - radar

 

Keith McCullough – CEO

Brazil sends national security force to quell protests (via BBC)

China Billionaire Invests $1.6 Billion in London Land, Boats (KM note: #EmergingOutflows out of China …  via Bloomberg)


Josh Steiner – Financials

Mortgage-Bond Auction Failures Reach Most in 2013 as Prices Drop (via Bloomberg)


Howard Penney - Resturants

Red Robin Garden Burger Ad Under Fire For Dissing Vegetarians (via Huffington Post)

McDonald's Worker Says She Was Required to Receive Pay on Fee-Laden Debit Card (via ABC News)


Matt Hedrick – Macro

Doctors Call for Halt to Energy Drink Ads to U.S. Youths (via Bloomberg)


"I Got Nowhere Else to Go!"

Client Talking Points

YEN

Keeping a close eye on currencies remains key. Yen vs USD is failing at our 96.17 intermediate-term TREND line of support this morning. This comes after the propaganda of down currency, up exports (Japan reported +10% exports for May, but their 3rd worst monthly trade deficit ever) was being cheered on by Japanese bureaucrats. The #WeimarNikkei gained +1.8%, but failed to close above 13,641 TREND resistance again.

CHINA

#GrowthSlowing in most things Chinese continues... Meanwhile, the rest of Asia (ex-Japan) traded very poorly again overnight. Over in Hong Kong, the Hang Seng led the losers, down another -1.1%. It is now down -5.1% year-to-date. It's bearish TRADE and TREND for most Asian Equity markets now, including Singapore, KOSPI, and BSE Sensex. Be alert here.

RUT

All the while the Russell 2000 quietly (volume was -15% yesterday vs my TREND duration average) clocked a new all-time closing high yesterday of 999. Yes, all-time is a long time. The continuing flows to US Equities (and out of everything Treasuries, Gold, Sovereign Debt, etc) make sense to me. A lot of sense. The world is running out of places to flow capital. That's bullish for US stocks.

Asset Allocation

CASH 53% US EQUITIES 17%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Marty Feldstein on @SquawkCNBC : I think the Fed made a mistake in doing as much as it has ... it's created a bubble in the long-term bond

@beckyquickcnbc

QUOTE OF THE DAY

Be wary of the arrogant intellectual who comments from the stands without having played on the field.

-Ray Dalio

STAT OF THE DAY

The IRS is about to pay $70 million in employee bonuses despite an Obama administration directive to cancel discretionary bonuses because of automatic spending cuts enacted this year.


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 19, 2013


As we look at today's setup for the S&P 500, the range is 38 points or 1.26% downside to 1631 and 1.04% upside to 1669.                       

                                                                                                        

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: 1.92 from 1.92
  • VIX closed at 16.61 1 day percent change of -1.13%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, June 14 (prior 5%)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC seen Fed Funds rate target between zero and 0.25%
  • Release of Fed’s Summary of Economic Projections
  • 2:30pm: Fed’s Bernanke to hold news conference on FOMC

GOVERNMENT:

    • 9:30am: Senate Appropriations Cmte panel on Joint Strike Fighter FY14 budget request
    • 10am: Natl Governors Assn., Natl Conf. of State Legislatures hold discussion of Marketplace Fairness Act, with 7 tech cos. making software to collect remote sales tax online
    • 10am: Senate Commerce, Science and Transportation Cmte hearing on improving passenger, freight rail safety
    • 10am: Senate Judiciary Cmte hears from FBI Director Robert Mueller at oversight hearing
    • 10am: House Oversight and Govt Affairs Cmte holds hearing on biometric ID use in fed govt
    • 2:30pm: Senate Commerce, Science and Transportation Cmte panel on airline industry consolidation, with reps. from US Airways, American Airlines

WHAT TO WATCH

  • Google considering PE alliances amid buying spree
  • Icahn urges Dell to buy back shrs at $14 in revised approach
  • Dish won’t make new Sprint bid by deadline
  • Microsoft said to add Qualcomm as supplier for Surface RT
  • BC Partners to buy Springer Science for $4.4b
  • Shuanghui getting $7.9b financing for Smithfield bid: WSJ
  • Smithfield got another $34/shr bid prior to Shuanghui deal
  • GE sees $20b order tally from Paris Air Show: Aviation CEO
  • Tesla issues recall for some Model S vehicles
  • Netflix to expand streaming service to Netherlands by yr-end
  • GM says China luxury vehicle demand slower than expected
  • U.K. banker bonuses face decade delays in industry overhaul
  • HSBC cuts China growth forecasts to 7.4% in 2013 and 2014
  • Japan’s exports surge by most since ‘10 in boost for Abenomics
  • Porsche $2.6b hedge-fund suit moved to Hanover court
  • King loses final BOE vote as majority sees recovery strength
  • Cuomo said to win agreement for four upstate N.Y. casinos

EARNINGS:

    • FedEx (FDX) 7:30am, $1.95 - Preview
    • Actuant (ATU) 7:30am, $0.59
    • Finisar (FNSR) 4pm, $0.17
    • Steelcase (SCS) 4:01pm, $0.13
    • Jabil Circuit (JBL) 4:02pm, $0.54
    • Red Hat (RHT) 4:04pm, $0.31
    • Micron Technology (MU) 4:05pm, $0.03 - Preview
    • Clarcor (CLC) 5:30pm, $0.67

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Timah Sees Tin Climbing 20% as Supply Curbed From Indonesia
  • Mining CEOs Punished as FTSE 100 Peers Keep Pay: Commodities
  • WTI Crude Advances to Nine-Month High as U.S. Stockpiles Decline
  • Copper Swings Between Gains and Drops Before Fed Meeting’s End
  • Hog Futures Rise in Chicago, Heading for Biggest Gain in a Week
  • Gold Holds Above Three-Week Low Before Fed Concludes Meeting
  • Arabica Coffee Gains as Investors May Start Buying; Sugar Slides
  • Rice Exports From Thailand to Advance as Support Prices Reduced
  • Carbon Rescue Seen Surviving European Panel Vote: Energy Markets
  • Aluminum Contango Widest in Four Years as Stockpiles Swell
  • Singapore Urges Naming of Firms After Worst Smog Since 1997
  • Argentina Banks on Railroads to Prolong Soybean Boom: Freight
  • Copper Slump Longest Since 2001 on Supply Gain: Chart of the Day
  • Corn Falls on Outlook for U.S. Supply and Signs of Weaker Demand

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

 

 

 

 

 

 

 

 

 

 


God's Hands

This note was originally published at 8am on June 05, 2013 for Hedgeye subscribers.

“You hold in your hands, the future of the world.”

-Raymond Poincare

 

Not to be confused with someone who does math (his famous cousin and mathematical genius Henri Poincare), Raymond was a lawyer turned politician. In France, that’s a potent mix. Poincare was President of France from 1913-1920.

 

The aforementioned quote is a friendly reminder that politicians have always thought that they can control your life. It was part of Poincare’s speech that officially opened the Paris Peace Conference in 1919. (Paris 1919: Six Months That Changed The World, pg 62)

 

Setting aside the fact that the Russians weren’t even at the conference, the comment reeks of the kind of political hubris that scares people. Today’s French President doesn’t scare me, but the people advising him and the President of the United States on economic and monetary policy do.

 

Back to the Global Macro Grind

 

I was spending time with clients in Pittsburgh yesterday and throughout the day I kept coming back to the conclusion that the biggest risk to the rally in US stocks is an un-elected central planner who has built a series of unintended consequences into our risk matrix.

 

Un-elected and un-accountable – his name, by the way, is Ben Bernanke. He isn’t a chaos theorist or mathematician either. Bernanke, like most Keynesian central planners who have never traded Global Macro risk in their life (actually Keynes did and lost 90% of his capital speculating on commodities in the late 1920s), fundamentally believes that he can bend and smooth gravity.

 

Markets obviously couldn’t care less what he thinks about defying the laws of physics. We’ve often used the thermodynamic metaphor of The Waterfall. Funds that have flowed into what appeared to be a calm and steady river of yield chasing and fixed income oriented securities are now approaching the point of entropy. A breakout in Treasury yields looks like Niagra Falls to me.

                                                                                                                

Most free market clients agree with me on this: A) we like gravity but B) we’re leerier when it happens to the anti-dog-eat-dog, anti-economic gravity, crowd fast! It’s all about the speed of the water (yields rising) now and there are a series of real-time risk management signals we are monitoring for velocity:

 

1.   US Dollar - #StrongDollar breakouts across intermediate and long-term durations have always front-run central planners and growth bears alike in this country. There has never been a sustainable US economic recovery (think 1983-1989 and/or 1993-1999) when the US Dollar didn’t rip alongside economic growth ripping. Treasury Bond yields rose, in kind.

 

2.   Gold and Oil – these are coincident and highly correlated (on an inverse basis to the US Dollar) real-time signals that anyone with macro historical context (that goes beyond a 5-10yr chart) will acknowledge as pro-growth signals. Gold hates growth. Falling Oil prices perpetuate US #GrowthAccelerating. So think about falling oil as entropy. #Speed

 

3.   US Treasury Yields – since Bernanke has opted to attempt to suspend economic gravity by marking the US Yield curve to model (not clear if he learned this from Tricky Dick Fuld or not), his decision to “taper” (whatever that means) is the equivalent of trying to smooth the flow of the Teton Dam on this day in 1976.

 

Huh? Yep, today in 1976, the Teton Dam collapsed. Big man-made structure built on false premise, evidently, too. Sound familiar? Engineers started to notice the dam was leaking ahead of time (the pool of “steady state” water was rising – real subtle hint!). And then boom! #Waterfall

 

To stay with the metaphor, the leaks are both economic data points and real-time market reactions to them. As US employment, housing and consumption data build the water level of, god forbid, rising growth expectations – both the dam and the government itself starts to leak.

 

Bernanke calls his leaks “communication tools”, or something like that. Since I don’t do the inside information thing from “consultants” in Washington, I depend on my engineers (analysts) who spend their time measuring crazy things like velocity, convexity, etc. at the proverbial dam’s bifurcation point.

 

Just to give you some key water levels on that:

  1. 2yr US Treasury Yield TAIL risk line = 0.27%
  2. 10yr US Treasury Yield TAIL risk line = 1.85%
  3. 10yr Japanese Government Bond TAIL risk line = 0.89%

So, you don’t have to be Raymond Poincare’s cousin or Albert Einstein to understand what is already happening here. And that’s the point – it’s already in motion folks – and if you want to try to arrest the speed of the decline of a waterfall (one that’s been bubbled up for say, 30 years, in this case) with your hands, you might want to dial up God himself for this one.

 

Because Bernanke’s political hands aren’t going to work.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX and the SP500 are now $1355-1424, $100.35-104.29, $82.46-83.51, 98.76-103.06, 2.08-2.22%, 14.17-16.93, and 1624-1648, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

God's Hands - Chart of the Day

 

God's Hands - Virtual Portfolio



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