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“Do you want a hamburger or pasta for dinner?”
- To my toddlers, 5/6/14
Parenting is a delicate art of subtle, positive perturbation.
Many times, it’s what you don’t say that matters. And much like investment and macro narratives, it’s very much about the #Frame-up.
For the non-parents, the key to coaxing positive behaviors often lies in framing up the optionality. As it relates to the quote above, note that I didn’t say, “do you want dinner?” or “are you hungry?”.
The simple goal of exhausting, thrice daily adventures in toddler nutrition is usually to just get them to eat…something.
By offering two options in the manner above you maintain the illusion of choice but, in reality, it’s the same choice. To a fledgling mind, if not eating is not presented as a choice, it doesn’t exist as an option.
That little psycho-persuasive device isn’t full-proof, but it should be a staple in any multi-factor, volatility sensitive parenting model.
Back to the Global Macro Grind…
If there’s a quasi-relevant take-away from that intro perhaps it’s that the act of getting older doesn’t immunize one from the trappings of effective framing. Indeed, lawyering and political strategy are critically dependent on that reality.
Q: Would you rather invest in stocks or housing here?
If you answered #Neither to that ‘framed-up’ question, you get it.
Let’s stick with housing and extend this Socratic dialogue we’ve got going….
Q: The Case-Shiller HPI data came out last week, the Corelogic HPI data came out yesterday, and the NAHB HMI data comes out on the 15th. What period do those respective data releases cover?
A: NAHB data = May, Corelogic = April, Case-Shiller = February
Q: Which one should you care about?
Everyone cares about Case-Shiller right? After all, Professor Shiller is a Nobel prize winner, the media makes a big deal about the indicator every month and analysts and pundits use it as the primary gauge of the state of housing.
In fact, the Case-Shiller HPI is one of the most lagging housing indicators there is. The Index measures the change in market value of residential real estate across 20 defined MSA’s and is calculated as a three month moving average.
So, last week’s release represented average home price gains over the Dec/Jan/Feb period. In other words, while we are getting the (real-time) Corelogic Home price data for April, Case-Shiller enlightened us as to housing’s temperature back in January.
The simple reality is that unless it’s central to your core coverage or positioning, and even if it is, keeping tabs on the breadth of housing metrics (we have 22 in our core model), the prevailing trends, and notable shifts on a monthly basis can be time intensive and onerous.
We think we’ve solved for that onerosity with the forthcoming launch of comprehensive, but hyper-consumable, housing coverage led by Josh Steiner, our head of financials research, and myself. More on that to come.
If you’ve followed us with any consistency you’re aware that after getting explicitly bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly bearish at the start of this year and elevated #HousingSlowdown to a top macro theme for 2Q14.
Indeed, the reported housing data since our themes call has reflected continued deterioration and the demand data released over the last few days has offered further positive confirmation to our expectation for an intermediate term slowdown.
Corelogic HPI: Corelogic home price data released yesterday showed home prices decelerating -70bps in March to +11.1% YoY. More notably, the preliminary April estimate reflects another, significant sequential deceleration of -190 bps to +9.2%. If the preliminary estimate holds it will be the slowest rate of growth since December of 2012 and the largest sequential deceleration in growth since January 2007.
Mortgage Purchase Applications: After last week’s decline of -5.9%, this morning’s data showed the composite MBA Mortgage Application Index bouncing +5.3% WoW. The Refinance Index made another new low in YoY growth, declining -1.4% sequentially to -75.2% YoY! The Purchase Applications Index was up +8.9% WoW, but note that the bounced came off its worst growth number of the year last week and purchase demand remains down -16% YoY.
It’s worth repeating that the demand deceleration has been geographically pervasive and has persisted in the face of both the positive inflection in the weather and declining interest rates.
So, the housing slowdown has already commenced – what do you do with that?
At the individual security level, one way we’ve played housing from the short side has been via the mortgage services.
The Hedgeye Financials team added NSM to our Best Ideas list on the short side on 1/8/2014 (after being positive and long the name from 2/27/13 to 9/27/13). It’s down -14.5% since Jan 8th. We think there is further downside.
NSM: BEST IDEA SHORT - The core of our argument is that when you figure out what servicing a single loan is worth and you multiply that by the number of loans NSM services you arrive nowhere near a valuation consistent with where NSM shares are currently trading
Originations = Great Expectations. We're truly confounded by guidance vs reality in the company's originations business. The company earned 14 cents in 3Q13 originating mortgages. In the fourth quarter it lost 80 cents originating mortgages, and that's on a core basis. The company lost $131-136 million on a pre-tax basis, which we'll split the difference on and call a $133.5 million PT loss. After tax, this works out to $82.8 million. NSM identified $10 million in one-time expenses after-tax. If we add that back and divide by 90.4 million shares, we get to a loss of 80 cents (core) in the quarter from originations. Moreover, the company indicates that it has identified the opportunity to reduce expenses in the originations business by $15 million per quarter. This works out to 10 cents per quarter. My question is a simple one. How does a business that made 14 cents in 3Q13 and lost 80 cents in 4Q13 produce $1.35 - $1.80 in FY14 earnings (that's guidance) by identifying 10 cents in quarterly expense savings?
#CREDIBILITY: Fool Me Once .... So, to recap, the company started 2013 (post-BofA) with a guidance midpoint of $4.02, raised that to $4.40, lowered it to $2.88 and ultimately did $2.13 (or less).
Now, to expeditiously bring this food and kid themed missive full-circle…..
Q: What do you call spaghetti in disguise?
A: An Impasta!
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.56-2.68%
Happy Humpday Hunting!
Christian B. Drake
This note was originally published at 8am on April 23, 2014 for Hedgeye subscribers.
"For a very long time everybody refuses and then almost without a pause, almost everybody accepts."
That’s the closing quote to David Einhorn’s quarterly letter for the 1st quarter of 2014. Fully loaded with social bubbles and burrito gas, it is vintage Greenlight Capital – self effacing and straight up:
“Our longs were modestly profitable, our shorts lost a bit more than we made on our longs, and macro lost a little. The net result was a small loss in a market where some indices were up a little and others were down a little.”
In the March-April performance period, down a lot more than a little is how I’d characterize some of these social media and biotech bubble stocks. Having spent a lot of time with hedge fund investors, I don’t think Einhorn’s view on some of these balloons losing 90% of their value is anywhere in the area code of consensus either. Make no mistake, lots of hedgies are long these things.
Back to the Global Macro Grind…
There is a lot more than a little hedge fund supply in the marketplace today. HFR (Hedge Fund Research) confirmed that in Q1 of 2014, hedge fund assets under management hit a new peak of $2.7 Trillion. Not ironically, as hedge fund assets under management peak, performance starts to underperform a little too (Q1 2014 was the worst performance quarter for the industry since Q1 2008).
This was one of the main reasons why I was bearish on the US stock market in Q1 of 2008 (when Hedge Fund AUM peaked last time). Too many mo mo funds were long of the same names with the same catalysts. Back then it was an LBO “takeout” bubble. In 2000, it was a tech bubble. Today you can tell me how many funds are long Yahoo (YHOO) for the Alibaba IPO, but that looks a little bubbly too.
To be clear, being long of bubbles can be cool (as long as they don’t start to go down more than a little). Once they start to go down a lot, there’s this thing called draw-down risk that most hedge funds aren’t allowed to let ride anymore. Having toiled as a PM at some major US hedge funds in my day, I can tell you the only long-term strategy to survival is not getting smoked when everyone else does.
Einhorn rarely gets smoked.
Technically, a hedge fund should be hedged. But the super secret reality about the 2 and 20 business (or whatever Stevie was running at 5 and 50 back in the day) is that a lot of hedge funds get smoked, not when the market goes up – but when it goes down.
Yep. I wrote that. Been there, done that too. I’ve made every mistake you can make.
So, are you a consensus hedge fund or one like Greenlight who is willing to give up a little on the short side in order to make a lot? This common quest for the almighty alpha (on the short side) is called #asymmetry. And I like it.
Enough about what I think about this profession – I’m only a battered and bruised product of it. Here are some of the favorite quotes my teammates pulled from Einhorn’s quarterly letter. In terms of both style and substance, they are timeless:
Yes, it’s my entire team’s job to read, write, and learn about how the best players in this game think. The alternative to that would be depending on what I think (which would easily be the most dangerous thing for our business over time).
So, if you run a hedge fund and you’re having a tougher time than last year out there, don’t get upset with me writing about it. Think about the why and learn/do something about it.
Accepting that little bubbles are going to start to pop bigger ones (like, say, the US stock market’s all-time high price) is a process, not a point. While I agree with David that “what is uncertain is how much further the bubble can expand, and what might pop it” I don’t think the “what” is a silver bullet that can be legally obtained.
Having survived (made $ at a hedge fund in down tapes - 2000, 2001, 2002) the Tech Bubble, The LBO and Oil Bubbles (2008), and The Gold and Bond Bubbles (2011-2012), what I have learned about risk managing these suckers is quite simple:
First, they start to make lower-highs. Then the volume on down days eclipses the volume on the bounces (up days to lower-highs)… then bearish catalysts start to pile up… then what was happening slowly starts to happen more than a little – it happens all at once.
Our immediate-term Global Macro Risk Ranges are now as follows:
Brent Oil 108.48-110.79
Natural Gas 4.62-4.79
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – May 7, 2014
As we look at today's setup for the S&P 500, the range is 21 points or 0.63% downside to 1856 and 0.50% upside to 1877.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
We recently added BOBE to the Hedgeye Best Ideas list as a LONG.
We’re hosting a brief conference call TOMORROW at 11am EST to run through our thesis and field questions.
If you haven’t been following the Bob Evans / Sandell saga closely, we suggest you begin to. We like Sandell’s relentless resolve and believe they have identified several, feasible opportunities to unlock shareholder value. As such, we believe BOBE represents an attractive entry point on the long-side for investors that don’t mind seeking strong returns from special situations. During the call, we plan to hit on several key topics including, but not limited to:
Toll Free Number:
Direct Dial Number:
Conference Code: 988314#
Materials: CLICK HERE
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