This note was originally published at 8am on April 24, 2014 for Hedgeye subscribers.
“If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us shall we not revenge?”
For those who called it a bubble, the tech sector is seeking its revenge this morning. Two of the mighty horsemen of technology, namely Facebook and Apple, exceeded expectations and as a result the Nasdaq is trading 1.5% higher this morning according to the futures market.
One of our top contrarian sources, The Street (known as the street.com in the last tech bubble) actually predicted this rally. Specifically, two days ago the headline on The Street was, “What Will Cause Tech Stocks to Plunge?” Funnily enough, Jim Cramer from The Street (retire already Jimbo!) actually critiqued one of the world’s top hedge funders yesterday for not making enough money on the social media swoon in March.
But, enough talk of side shows and carnival barkers, we actually had some legitimate questions on yesterday’s Early Look on this idea of bubbles and an insightful subscriber from London emailed us back with the following question:
“I’m also not sure why you’re so convinced that we’re in a Social Media bubble. Some Internet stocks are highly valued sure but for the likes of FB and LNKD these are real businesses with major competitive advantages, why are you so bearish on these too?”
Our Internet Analyst Hesham Shaaban had a thoughtful response, which included the following:
“The reason why valuations are so high is because of elevated growth expectations, which you can see in the table below. The market sees Social Media as one collective industry, assuming the rising tide will carry all ships, and historical growth is a sign of things to come.
Social Media is not one industry. These players have varying business models, revenue sources, and growth prospects. We see at least 2 big losers in the group (TWTR and YELP), and once growth expectations come in, their multiples will collapse with it.”
In the table directly below, we’ve included a summary of the growth expectations and valuations of $FB, $LNKD, $TWTR, and $YELP. Certainly if there is a bubble, it is not that all of these companies have broken business models (though we believe some do), but rather, as Shakespeare also said, that expectations are the root of all heartache. (Email us at email@example.com if you’d like to be added to an institutional trial of our internet research.)
Back to the Global Macro Grind...
One of our other favorite contrarian sources, Peter Tchir from TF Markets, actually made a great contrarian statement on Twitter the other day (you can follow him @tfmkts if you’d like access to the contrarian signal) when he tweeted that he wasn’t a bear on housing.
Ironically, in many ways, the housing market and the principal supply-demand-price dynamics underneath it are rather straightforward. Admittedly, in other, sometimes very mechanical ways, understanding the prevailing trends in the housing market can be challenging for the uninitiated or marginally interested.
So, what’s the current state of housing?
Across the 22 primary metrics we track as part of our housing compendium monitor, 15 have worsened sequentially and 18 have worsened from a trend perspective.
Indeed, the housing data released over the last few days offered further support to our expectation for an intermediate term #HousingSlowdown as current demand metrics (Existing & New Home Sales) continued to wane, while mortgage application data is signaling a further deceleration in forward transaction activity.
That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable.
To quickly review this week’s data:
- Mortgage Applications: The composite MBA mortgage application index declined -3.3% WoW as the Purchase Applications and Refinance sub-indices hit new lows in YoY growth. As it stands, Purchase Applications are down -19.3% off the May 2013 peak and -18.5% YoY while refinance activity is down -71% YoY!
- Existing Home Sales: Existing Home Sales declined -0.2% MoM and -8% YoY. The March decline marks the 3rd month of negative year-over-year growth and a third straight month of accelerating decline. Sales were down across all geographies with the West region again leading the declines
- New Home Sales: New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011. The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.
So, the demand deceleration has been both significant, geographically pervasive and has extended through March / April – all of which confute the "it’s the weather" in isolation thesis.
While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term.
Home price growth, which follows the slope of demand on ~18mo lag, will follow the demand deceleration. Given that home prices have a very high correlation to discretionary spending and the U.S. economic output is 70% driven by the consumer, we see the slowdown in housing as a looming headwind for economic growth domestically. Aye, there’s the rub!
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.59-2.73%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research