The Economic Data calendar for the week of the 26th of May through the 30th of May is full of critical releases and events. Attached below is a snapshot of some of the headline numbers that we will be focused on.
We are adding Gold on the long-side to investing ideas. The quantitative set-up is what we call a Bullish Formation (i.e. bullish on all 3 of our core risk management durations, TRADE, TREND, and TAIL).
Back on our Q2 Macro themes call we highlighted our #consumerslowing theme by showing a visual of the annual income and expenditure picture for the average American. Reiterating some notable statistics since hosting the call on April 8th, the average American spends more than 20% of after-tax income on food and utilities and nearly 30% on housing. One-Third of Americans rent and as Keith McCullough noted in today’s morning look:
“On US rents (34% of Americans have to rent, and like it) and cost of living hitting all-time highs this week, this is what one of the most uninformed members of the US Federal Reserve, Bill Dudley, had to say:
"prices look likely to firm, somewhat"
Taking the New York Fed president’s word to heart, the wealth-effect must finally be “trickling” down to rescue the consumer. Unfortunately, the average American only gets 1.38% of income from interest, dividends, and other property related income (although 34% spends on inflated rent). Adding to the pain, wage growth is nowhere to be found (which we have been told signals that inflation is non-existent)
How does this have anything to do with Gold?
Consumption is 70% of GDP, and on what items do Americans spend their depreciating dollars?
When commodity inflation squeezes the consumer, a spending slowdown ensues which is a leading indicator of economic activity. When consumption slows on the margin, growth slows. In turn GDP, one of the most-anticipated measures of economic activity globally, surprises to the downside:
The bond market, a proxy for the growth expectations, reflects this change. Once the slope of forward expectations turns downward (2nd derivative negative), linear growth expectations many periods into the future become very unrealistic when you take this convexity into account. Gold remains highly sensitive to monetary policy and tightly negatively correlated with the USD. As growth surprises to the downside, the problem is met with an increase (relative to expectations) in the money supply. This is a fact of global central planning today.
Gold historically has a -.65 correlation to arithmetic mean of the USD-UST 10-year dating back to 1980. The correlation becomes stronger as growth expectations decrease.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
To explain the behavioral expectation for fed tapering moving into 2014, net long-short futures and options positions in the ten-year treasury market as reported from the CFTC showed a net short position of -175,641 contacts on 12/31/2013. Going into this week the market was now net long +23,948 contracts.
As growth slows (with the bond market confirming this slowdown), the expectation for the monetary response/dollar devaluation increases over the intermediate-term.
The market was net long +58,316 Gold futures and options contracts on 12/31/2013 and moving into this week was now long +119,077 contracts. As expectations for more dollars infiltrating into the system (lower chance of tapering than consensus expected), the Gold market stays true to its historical sensitivity to monetary policy. The fed model gets easier and easier when growth surprises to the downside.
The market has confirmed this inverse correlation in our quantitative set-up. The ten-year yield broke its TAIL line support of 2.60% while Gold broke out above its previous TREND line and now sits in a bullish formation. In a note from last week we highlighted this broken level on the ten-year:
LONG-TERM (TAIL) (the next 3 years or less)
Unless an ideological change manifests at the Federal Reserve, the predictable policy response to growth slowing data points will continue from our viewpoint. As growth slows, the fed becomes more dovish and perpetuates the cycle, creating more and more inequality between those who benefit from the “wealth-effect” and those who get squeezed (the average American consumer).
Ironically, we have continuously shown that the classes of people who are modeled to spur demand and spend more money in the Fed’s Keynesian framework ultimately get squeezed. Our long-term directional stance is always subject to change, but our view on Gold’s interaction with the U.S. Dollar via the treasury market as growth surprises on the margins continues to drive our macro process.
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Jim Lacamp, portfolio manager at Macroportfolio Advisors at UBS, discusses the Fed, U.S. economy, and how Keynesian economics is leading the U.S. down the Road to Perdition with Hedgeye CEO Keith McCullough.
Here's the question-and-answer portion from our daily institutional Morning Call hosted by Hedgeye CEO Keith McCullough and Senior Macro Analyst Darius Dale. Keith answers questions on markets, hedge fund performance and even youth hockey.
Hedgeye CEO Keith McCullough walks us through what the markets are telling us about growth, inflation, yield spreads and more.
Click here to subscribe to Cartoon of the Day.
While lies about inflation in Washington can most definitely live, they can’t live forever.
We’ve been hitting you with this DOWN-volume-UP-day thing square in the head this year.
Oil prices are surging – meaning higher prices at the pump – just in time for Memorial Day weekend when Americans are being taxed six-ways to Sunday from rent to food. It’s just another sign of#InflationAccelerating. So while every car-owning American who fills up the tank may be feeling the pinch, we wanted to know how it’s affecting your holiday. Click here to view the poll and results.
10 More Signs of #InflationAccelerating
US rents (34% of Americans have to rent, and like it) and the cost of living hit all-time highs this week, so alongside #RentRipping, here’s more year-to-date #InflationAcclerating data. Click here to continue reading.
Hedgeye Energy: Why $BPT Is A One Dollar Bill Selling For Two
I'll pay you $1 per year for the next 8 years. The payments are not guaranteed, they have equity-like risk. How much would you pay me today for this deal? A BPT long would give me $10. Click here for more.
Mortgage Demand Falls Again This Week
Wednesday’s MBA mortgage purchase application data shows housing demand dropped for a second week in a row in spite of falling rates. Click here to read more.
Hedgeye Retail: Target Execs Should Be Afraid For Their Jobs | $TGT
Normally we wouldn't characterize the opinion of one disgruntled employee as indicative of the corporate culture, but the fact that Target's CMO, Jeff Jones, personally addressed the anonymous letter in public is telling. Click here to continue reading.
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Today we added to the EUR/USD via the etf FXE to our Real-Time Alerts on the long side. We view the cross trading oversold, and for good reason – nearly every polled economist according to Bloomberg thinks the ECB will issue some sort of easing program when it next meets on June 5th. This positioning is grounded in ECB President Mario Draghi’s shift in tone in the last meeting (on 5/8), suggesting the bank would act to address the low inflation and strong EUR/USD.
Since that meeting, sentiment from policy makers towards action has only increased the speculation about the Bank’s willingness to issue both conventional and unconventional measures to counter low inflation and a strong common currency. What’s on the table?
While it’s unclear if Draghi will in fact act and by which means (tools), our positioning is informed by the US Dollar Index trading below its long term TAIL line of resistance at $81.17 (currently at $80.39) according to our quantitative model. We’re buying these oversold levels ahead of the meeting, and note that despite such overwhelming sentiment that Draghi will act, he has shown time and again over recent years to hint, but ultimately keep policy tools in his back pocket until conditions worsen, and/or he believes he’s incapable of influence simply through rhetoric.
After all, Draghi was successful in talking down the EUR/USD since his last meeting, when the cross was pushing $1.39. His other challenge, the inflation rate, which currently stands at 0.7% in April Y/Y, will be much more challenging to influence rhetorically.
Below we outline our quantitative levels for the EUR/USD. We’re keying off the TAIL line of $1.35. If price holds above this level (and the US Dollar remains broken on the TAIL duration), we’ll remain bullish. If the cross breaks this level (and the US Dollar overcomes its TAIL resistance level), look out below!
Enjoy your long weekend!
Takeaway: New Homes Sales were up M/M in April off a conspicuously weak March print. Y/Y growth held negative & the overall trend remains sideways.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: April New Home Sales Report
The Census Bureau released its monthly New Home Sales report for April earlier this morning. Not surprisingly, following last month's extreme weakness (March was down 14.5% month-over-month before a subsequent upward revision) this month's number was up, rising 6.4% month-over-month.
The big takeaway is that New Home Sales are running sideways to down since January, 2013. We show this in the chart below. Remember that New Home Sales are different than Housing Starts in that the number excludes condos, apartments and owner-built homes.
While the print is less bad on a year-over-year basis at -4% (vs -8% y/y last month), it's still going the wrong way. Moreover, sales were down across all regions again except for a seasonally-adjusted bounce in the Midwest. It's also worth noting that the inventory of new homes for sale ticked higher again this month.
The following is our recent take on the Starts & Permits data for purposes of comparison:
While total starts and permits bounced sharply in April vs March, the bounce was entirely attributable to multifamily. Single family starts and permits did not show any bounce from normalizing weather and continue to show slug-like progress in renormalizing back to pre-crisis levels. Multifamily starts and permits remain strong and are showing a nice, weather-related bounce, suggesting that rental demand continues to benefit from the conjunction of a strengthening labor market, ongoing household formation and QM’s negative effects on would-be first-time buyers.
Taking a look at the data, single family starts grew 5k month-over-month or 0.8% to 649k, while single family permits grew 2k, or 0.3% m/m to 602k. Multifamily starts, however, grew by an impressive 120k m/m (+39.6%) to 423k and permits were up 78k m/m, or +19.5% to 478k. Said differently, multifamily accounted for 96% of the growth in Starts and 98% of the growth in Permits month-over-month.
We think three factors are principally responsible for this weak 1H14 performance. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.
About New Home Sales:
Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.
Joshua Steiner, CFA
Christian B. Drake
As we enter the Memorial Day weekend, we have some sobering statistics from the housing market. Demand for existing home sales fell 6.8% in April on a year-on-year basis while housing supply saw its biggest sequential (month-on-month) ramp ever. So, our question is simple.
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