This note was originally published
at 8am on May 07, 2014 for Hedgeye subscribers.
“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.
Below is a bit of an analytical teaser but it captures a few of the central tenets of our short case on the company. If you’d like to discuss the idea further please contact email@example.com
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