Housing - Easy Money and Affordability


Our call on the housing market bottoming in Q2 continues to play out. Now we must answer the question-what's next?


The first thing I thought of when I saw the pending home sales number was that the government has gone too far trying to stimulate the housing market.   


The number of people signing contracts to buy previously owned homes climbed 6.7% in April, the fourth increase in five months and significantly more than consensus.


The National Association of Realtors said the index of signed purchase agreements was the biggest in more than seven years.  Importantly, the April reading was up 3.2% year-on-year. 


Significantly lower home prices, historically low interest rates and tax incentives are an aggressive stimulant to the housing market.  This is good news and provides the supporting evidence to the 40% move in the S&P 500 since the March 9th low.  Where do we go from here? 


First, mortgage rates are not going any lower and have been climbing of late.  Second, while confidence is off the lows, the unemployment rate is still climbing.  Third, today's number contrasts sharply with the muted  0.3% rise in new home sales, which suggests deeply discounted used homes are providing stiff competition for the  home builders. 


The positive trends in the housing market are now being priced into the equity markets, however what has not being prices in is the next move from the FED - higher rates!


Howard Penney

Managing Director 


Housing - Easy Money and Affordability - homepend


"I made my money by selling too soon."
-Bernard Baruch
I doubt I made anyone money yesterday. I'd been selling into May's month-end markups last week, and I kicked off the new month making more sales. In the face of a pending US Dollar crisis, I didn't think that the US market could make higher-highs. That was obviously wrong.
The US stock market took continued US Dollar weakness yesterday and did with it what it has been doing for the better part of the US Dollar's recent -12% crash - it REFLATED. Fundamentally, that makes sense to me... in the immediate term.
So what do higher-highs mean? Well, for one, they provide one more rear-view reason for stocks to go higher. Although many market players like to call it something else, the reality is that since the 2002 lows, the US market has been populated with investors who literally buy high with the hope of selling higher. Where do you think CNBC came up with the name Fast Money?
Not recognizing that plenty of investors chase using a one-factor model (price momentum), is plain ignorant. Over the years, I have learned the lessons of price momentum the hard way. Today, I have my own process to measure price momentum within a multi-factor model that considers other critical data like volume and volatility. This isn't rocket science. It's math. And anyone who has proven to be able to make money in the last 18 months is using it, as they should, in order to proactively manage risk.
Risk, as the short sellers of everything Roubini Depressionista low can explain, works both ways. To ignore a +39.3% price move in the SP500 since March 9th and/or to waive it off as "not being based on fundamentals" surely provides the basis for one to have assets under management redeemed. Redemptions also work both ways - and don't underestimate the tail risk associated with an all-out resurgence of the redemption cycle in the hedge fund community where guys are getting squeezed.
I have had my fair share of dances with the bear. I have also been squeezed, royally. But I have learned from those experiences - live ammo leaves a mark. So what does that do for me today? Well, for starters, it makes me wait... acutely address the probability of risk versus reward... and deal with exposures at a measured pace.
In the last few weeks I have made one major move - selling longs. I have taken the number of long positions in the virtual portfolio down from 38 to 13. On the short side, I have done a whole heck of a lot of nothing, keeping the number of short positions I have held in the last 3-months in the range of 8-12. No, that's not a lot of short positions. And yes, that's why I have had such a good 3-month run. Not being short was actually a better call than being long. At this stage of the market's 2009 game, a clanging monkey could perform the former strategy.
Yesterday's game is over - today we are tasked with playing the game that's in front of us - so here are some things to consider in terms of how to manage risk from here:
1.      In the immediate term, I have SP500 upside at 955 and downside at 906 - that's a negative risk reward on a very short term duration

2.      In the intermediate term, I have SP500 upside at 989 - that's 5% left in the trough-peak intermediate term rally

3.      In the intermediate term, I have a significant range of downside support for the SP500 between 828-895 - that's nowhere near the March 9th low

Altogether what does this mean? Well, top to bottom (989 to 828) I see a 16% trading range. And basically it means that, on both sides of the bullish to bearish debate, the BIG moves are behind us, for now...
The Volatility Index (VIX) and the TED Spread (3-month LIBOR minus 3-month Treasuries) are telling you the same this morning, and so is the yield curve. Managing risk towards an October 2008 risk management setup is, for now, plain wrong.
Can these facts change? Certainly. And I'll be right there changing alongside those prices. Every morning we hold an 830AM conference call for our Research Edge Macro subscribers where I go through all 27 factors in my macro model. Market prices are leading indicators, and they dominate that dialogue. There is responsibility in daily recommendation.
Right here and now, the US Dollar moving into crisis mode is what worries me most and I am not alone. Yu Yongding, former Chinese central banker and interviewer for the China Daily, told Investment Banking Inc. President, Timmy Geithner, point blank last night that "I worry about details. We will be watching you very carefully."... "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds"...
This is a game has gone global folks. Big time. Within it, higher-highs should be risk managed as acutely as the US Dollar and Treasury market's lower-lows.

Happy Birthday Dad,


CAF - Morgan Stanley China Fund- A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on 5/11 to get long the safety trade.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.4170. The USD is down versus the Yen at 96.0850 and up versus the Pound at $1.6397 as of 6am today.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. TRADE and TREND remain bullish. We're wrong so far.

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

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It Takes a Bull to Know.....


Am I a bull or a bear at this point? I actually have no idea. So far, today's traverse to higher highs in the SP500 makes me wrong - that I know. I thought we'd continue to make lower-highs in the SP500. On the margin, any close above the 934 line (January 6th closing high) will be a bullish US equity market factor...


If you're looking for the rest of the sobriety check, don't worry - the facts don't lie. The ISM number that was printed this morning for the month of May came in at 42.8 (see chart below). While that's the best number we have seen since September of 2008, it is still a lower-high. New orders actually accelerated to 51, which is the best report we've seen on that front since November of 2007 (everything that happened after that was just bad).


Can the ISM reading, consumer confidence, etc. charge higher yet again in June? For sure - but can these sentiment readings breakout to levels above the red line in this chart? Or will they fail? These are some of the questions that will dominate the debate in my head as to whether or not the SP500 can make a move beyond 991. The easy REFLATION money on the long side is 3-months behind us.



Keith R. McCullough
Chief Executive Officer


It Takes a Bull to Know..... - a1


The following chart shows recent Intermediate Fuel Oil (IFO) 380 fuel prices.  IFO 380 is the type of fuel that comprises 90% and 80% of the consumption of CCL and RCL, respectively.  As shown in the graph, IFO 380 prices are up huge in the last two months.




Since CCL last issued guidance on 3/24/09, IFO 380 has spiked up 36%.  Prices have increased 27% since RCL issued guidance on 4/23/09.  RCL is in a better spot, however, since they are about 40% hedged for 2H 2009.  Assuming prices stabilize at current level, we estimate 2H 2009 estimates/guidance need to be reduced by $0.12 each for CCL and RCL, respectively.  However, West Texas Intermediate (WTI) prices are up significantly more over the past few months.  Should lagging IFO prices converge to WTI, the impact could be greater.  RCL actually provides guidance based on WTI prices.


FUEL COULD MAKE THE GLASS LOOK HALF EMPTY - cruise fuel cost eps impact


Fuel prices are not hard to track.  Calculating the EPS impact of a change in fuel prices is certainly not complex math.  However, falling estimates could focus investors on 2010, where capacity increases, a still difficult consumer environment, and now higher fuel costs could make for an ugly year.  Indeed, we are currently 35% and 40% below the Street on our 2010 EPS estimates for CCL and RCL, respectively, including higher fuel cost assumptions.   

Chart Of The Week: US Dollar Moves Into Crisis


Given my concerns with this chart, I have been getting a lot of questions as to why I have not yet shorted US Equities. The answer is obviously one of timing. Dollar down = REFLATION. Breaking The Buck has been one of our 1H09' Investment Themes, and I am very respectful of this global macro factor's influence on asset prices. Three months ago was the time to get invested on this Theme, not three hours ago.


So far, I have sold down gross long exposure as opposed to selling short aggressively into strength (taking the number of long position in our virtual portfolio down from 38 to 12, and holding short positions around 12 all the while). The most emotionally charged part of the REFLATION trade can be the most powerful. If you have a solid year-to-date performance, selling up here is a very easy decision to make. If you don't, you're forced to chase. When people are forced to chase, I like to sit back and watch.


In the chart below, Andrew Barber has shown the US Dollar on two durations:


  • 1. Long Term TREND, breaking the $81.60 line of support (red line), going back to 1971 (when Nixon abandoned the Gold Standard)
  • 2. Intermediate Term TREND, highlighting the last year of US Dollar pricing


In the longer term chart, we shine a flashlight on the crisis period of the US Dollar = Q407' to Q209'. This is where we see the impact of 3 camps Breaking The Buck:


  • 1. Bernanke - a politicized Federal Reserve cutting rates to zero (economic crisis)
  • 2. Bush/Obama - socializing the country's losses (credibility crisis)
  • 3. China - getting upset (Client crisis), countering with USD replacement rhetoric as world's reserve currency


With the US Dollar down again today (despite Geithner galloping to the rhetorical rescue), my currency crisis questions remain. After paying out every politician and holder of the almighty petrodollar, when will our Chinese creditors and American savers get paid?



Keith R. McCullough
Chief Executive Officer


Chart Of The Week: US Dollar Moves Into Crisis - usd1

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