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HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS

Takeaway: Mortgage volume finally catches a bounce, but post-holiday week data isn't terribly reliable. We'll see what next week brings.

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.

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Compendium 061114

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 6. Mortgage purchase application volume rose +9.3% week-over-week, which improved the series to -13.6% YoY vs -17.2% YoY in the week prior. The QoQ is currently running at +3.4%.

 

Prior to last week, the purchase index had declined for four consecutive weeks. The Memorial Day holiday week was the week that preceded last week so it's possible/likely that there was demand that was time shifted.

 

As a general rule of thumb, anytime there is a holiday involved we tend not to get overly excited by sharp turns in the data in either direction. Next week should be a better indicator of the underlying trend in demand. 

 

Activity heated up on the refi side as well. Consistent with lower rates  - current 30Y FRM contract = 4.34%, up from 4.26% prior but still at best levels in a year - refi application volume rose +11.0% W/W, reversing the trend of the prior two weeks. 

 

We're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.

 

Our expectation remains that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase and Refi YoY

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase Index Qtrly

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase Apps LT w Summary Stats

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Composite Index Qtrly

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Composite Index LT w Summary Stats

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - 30Y Mortgage Rates Mo Ave

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

Joshua Steiner, CFA

 

Christian B. Drake

 



What We Don't Know

This note was originally published at 8am on May 28, 2014 for Hedgeye subscribers.

“Only when we admit what we don’t know can we ever hope to learn it.”

-Ed Catmull

 

That’s another fantastic leadership quote from a new book I introduced in yesterday’s Early Look – Creativity Inc. Overcoming The Unseen Forces That Stand In The Way of True Inspiration.

 

“The best managers acknowledge and make room for what they do not know – not just because humility is a virtue but because until one adopts that mindset, the more striking breakthroughs cannot occur… They must accept risk… and engage with anything that creates fear.” –Ed Catmull

 

I can tell you that I wake up every morning living in fear of one simple thing – losing. I hate losing. And I refuse to allow my team to lose for extended periods of time. If and when we are wrong, we either double down or change our mind. We get paid to take a line and be held accountable to it.

 

Back to the Global Macro Grind…

 

Being long slow-growth and #YieldChasing in 2014 (i.e. being long bonds and/or anything equities that looks like a bond) has not only been the winning position YTD, but it was yesterday too.

 

With SP500 busting out (on no volume – US Equity Volume -29% vs the 3mth avg) to all-time-bubble highs intraday, bonds reversed from opening down to closing at their highs of the day. The 10yr UST Yield has ticked down yet again this morning to re-test a fresh 2014 low of 2.49%. Bond bears are losing.

 

But, but, Biotech (IBB) +2.5% yesterday was winning. Yep, nice trade. I just hope you didn’t own it the whole way down, because that “growth” sub-sector of the SP500 has been a certified train wreck this year. Most things high-multiple, high-beta have been.

 

“So” do we buyem because they were up?

 

Let’s get real here folks. I left Career Risk Management Inc. in 2007 so that on days like this I could double-down on my team’s hard work and process. If you want to beat a monthly bogey, great – chase the wabbit. If you want to win a championship in 2014, stay with the fundamental trends.

 

In the US, here are the big intermediate-term TRENDs that have been winning for the last 5-6 months:

 

1. US #InflationAcclerating

2. US #ConsumerSlowing

3. US #HousingSlowdown

 

Winning being defined as the score:

 

1. CRB Commodities Index, Food, and Oil +8-22% YTD #InflationAcclerating

2. US Consumer Discretionary Stocks (XLY) = DOWN -2.1% YTD #ConsumerSlowing

3. US Housing Stocks (ITB)= DOWN -3.0% YTD #HousingSlowdown

 

That’s not to say that I didn’t feel like the NY Rangers last night. However magical a playoff run they’ve had, getting lit up for 7 goals in Montreal feels like I did at yesterday’s market close. Kreider went to de penalty box in the first minute of the game. Canadiens scored. He felt shame.

 

“So” why shouldn’t I change our entire Macro Theme Deck (6-12 month view) and positioning this morning?

 

1. Why isn’t it “different this time” (i.e. bond yields going down aren’t an explicit sign of US growth slowing)?

2. Why isn’t it time to giddy up and buy stocks like Facebook, Twitter, and Yelp that blew up into the thralls of April?

3. Why isn’t it time to pretend that no-volume and an 11 VIX doesn’t matter as a risk management signal anymore?

 

Why Mucker? Why can’t you just change everything you and your team have done YTD and join a crowded consensus long-growth US Equity Multiple Expansion (and bearish on inflation and bonds) view that almost everyone else on the sell-side has?

 

What would change my mind? That’s easy. Going back to what we loved about our US #GrowthAccelerating call in 2013:

 

1. #StrongDollar

2. #RatesRising

3. #DeflatingTheInflation

 

In fact the Swiss have some of that this morning. As the Swiss Franc ripped to new highs, Swiss Exports ramped +2% year-over-year and so did Switzerland’s GDP growth rate. Sound familiar, Mr. Krugman? Same thing happened this year in the UK. #StrongCurrency tax cuts for The People.

 

“So”, other than a lot, what else don’t we know that could be driving spooos higher with the Russell 2000 -1.9% YTD?

 

1. How many hedge funds came into 2014 levered long growth, got smoked, then shorted the April lows?

2. How many people have Yellen and Bernanke whispered to that if growth continues to slow, that they go Qe6?

3. How many one-legged ducks can avoid swimming in a circle?

 

What we do know is that with the VIX at 11.51 (testing YTD lows) and the II Bull/Bear sentiment spread at its YTD highs (58.3% Bullish, 17.3% Bearish = +4100bps wide to the Bull side) that the buy in May, chase performance, and pray thing is alive and well.

 

Our immediate-term risk ranges are now (12 Global Macro Ranges are in our Daily Trading Range product):

 

UST 10yr Yield 2.48-2.60%

SPX 1888-1924

RUT 1089-1144

VIX 11.09-13.79

WTIC Oil 102.99-105.27

Gold 1261-1315

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

What We Don't Know - Chart of the Day


STRONG CURRENCIES ACROSS THE POND

Client Talking Points

UK

FTSE down -0.5% on good news (UK unemployment 6.6% vs 6.8% last as Keynesians crawl into caves with #StrongPound perpetuating the recovery); Pound holding all lines of @Hedgeye support – upside to $1.69 vs USD.

EURO

Re-testing our long-term TAIL line of $1.35 support vs USD this morning and we think that will hold as the next Big Central Planning event is the Fed meeting next week where we believe they’ll be dovish, on the margin (Dollar bearish).

OIL

European bureaucrats want moarr cowbell (inflation) and they’re going to get it; Brent up another +0.5% to $110.46 this morning and continues to signal a bullish TREND breakout in our model #InflationAccelerating.

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

UAE (Dubai kind) stock market -1.9% and -10% in June #interesting

@KeithMcCullough

QUOTE OF THE DAY

“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.”

-Dale Carnegie

STAT OF THE DAY

Wells Fargo study showed 4 in 10 millennials are overwhelmed by debt and almost half spend at least 50% of their paychecks paying off debt.


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CHART OF THE DAY: Consensus Macro Coming Our Way on GDP

 

CHART OF THE DAY: Consensus Macro Coming Our Way on GDP - Chart of the Day


Self-Evident Brats

“We hold these truths to be self-evident: that all men are created equal.”

-Thomas Jefferson

 

A big government central planning bureaucrat got his butt whipped down in the heartland of American Constitutionalism last night. Not unlike in the 1970s, when Nixonian Republicans and Cartering Democrats all started to sound the same on economic matters, Americans voted for change.

 

If Eric Cantor doesn’t make your skin crawl, you and I probably won’t be having beers at the Rangers/Kings Stanley Cup tilt tonight in NYC. This guy isn’t a free-market-liberal-conservative like me. On economic matters, he is a raging Keynesian.

 

Bring on the self-evidence that is the Policy To Inflate crushing at least 80% of Americans via cost of living and The Dave Brat. The winner of the 7th District of Virginia is a free-market economics professor! How cool is that? On days like this, even this proud Canadian wants to be American.

 

Self-Evident Brats - brat

 

Back to the Global Macro Grind

 

This is not a political statement. I don’t support the Tea Party inasmuch as I don’t support either the Republican or Democrat parties. This is an economic statement that is ringing as true in the United Kingdom today as it did in the Unites States of America in 2013. Strong Currency; Stronger Country.

 

If you have a Policy To Inflate (weaken your currency via both monetary and fiscal policy), you get what Harvard’s Marty Feldstein finally explained (WSJ Op-Ed yesterday) to the central planning wonks at the Fed: #InflationAccelerating.

 

And when you get inflation accelerating the cost of living in America to all-time highs, you aren’t going to get re-elected by lying to people and telling them otherwise. The truth is self-evident.

 

BREAKING: World Bank Cuts US GDP Growth Forecast

 

#nice

 

Finally someone, somewhere, in the land of officialdom-nod took their US GDP forecast closer to Hedgeye Risk Management’s. While the World Bank didn’t cut its GDP outlook by enough, the point is they had the spine to do what Consensus Macro research won’t, until it’s too late.

 

To review our call on US GDP Growth slowing into Q3 of 2014 – it’s math:

 

  1. Top line (GDP) acceleration in US GDP growth peaked in Q3 of 2013
  2. Inflation (the Deflator, which you subtract from nominal GDP) bottomed in Q2/Q3 of 2013

 

In other words, the year-over-year comparisons put Q3’s probability of inflation slowing US consumption growth at its highest level since Q1 of 2008.

 

“So”, don’t ask a linear-economist who missed calling either the Q1 of 2008 or Q1 of 2011 US #InflationAccelerating calls for their Top 10 reasons why they are still using the same models that haven’t proactively predicted real-world consumption slowdowns. Ask the bond market.

 

At 2.64% on the 10yr US Treasury Yield (down hard from 3.03% on January 1st, 2014), the entire construct of #OldWall consensus still thinks “it’s different this time” (i.e. that they were only wrong on both rates and GDP rising in Q1 because of the weather).

 

Every time the bond market sells off to higher-lows, you buy it. Every time US domestic consumption growth gets bid up to no-volume-lower-highs, you sell it. That is the Hedgeye Macro Playbook for US stocks vs bonds investing in 2014, and we are sticking to it.

 

Another way to position for what I just wrote is as follows:

 

  1. Buy Bonds via TLT, BND, or anything equities that looks like a bond (XLU, VNQ, etc.)
  2. Sell US Domestic Growth like Consumer Discretionary (XLY) and Housing (ITB)

 

If you didn’t buy puts on Cantor’s political message, you could have bought #InflationAccelerating via Oil and Gold futures too.

 

In other news, the SP500 had its 38th day of not moving more (+/-) 1% yesterday. That’s the 2nd longest streak of compressed complacency in 15 years. No worries though, everyone will be able to get out, at the same time, because “this time is different.”

 

In case you aren’t yet convinced that it is different this time:

 

  1. Fear (VIX) has never held below 10, ever (it’s at 10.99 this morning)
  2. II’s Bull/Bear Spread (survey) just hit fresh YTD highs at +4540 basis points wide to the Bull side
  3. One legged ducks still swim in a circle

 

Whether you are a bond bull, US growth bear, or a Brat from Virginia this morning, we stand together fighting the tyranny of mediocre minds trying to centrally plan us into thinking we need their inflation policies to live freely. We hold these free-market truths to be self-evident. They always have been.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44-2.65%

SPX 1

RUT 1136-1184

VIX 10.78-13.34

Pound 1.67-1.69

Brent Oil 109.10-110.96

Gold 1

 

Best of luck out there today,

KM

 

Self-Evident Brats - Chart of the Day


June 11, 2014

June 11, 2014 - Slide1

BULLISH TRENDS

June 11, 2014 - Slide2

June 11, 2014 - Slide3

June 11, 2014 - Slide4

June 11, 2014 - Slide5

June 11, 2014 - Slide6

June 11, 2014 - Slide7 

BEARISH TRENDS

 

June 11, 2014 - Slide8

June 11, 2014 - Slide9

June 11, 2014 - Slide10

June 11, 2014 - Slide11
June 11, 2014 - Slide12

June 11, 2014 - Slide13


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