prev

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT

Takeaway: Weakness in August offsets strength in July. Bigger picture, SF is grinding higher at a GDP-like pace of low-single digit growth.

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.

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - Compendium 091814

 

Today's Focus: August Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for August this morning.

 

Total New Home Starts declined -161K, or  -14.4%, sequentially vs positively revised July Data (revised +25K to 1117K) – the largest month over month decline since January of 2007.

 

With single-family starts up just +2% YoY on average YTD vs. multi-family up 21%the concentration in construction activity, and the predominate driver of the recovery in starts, remains well defined. 

 

  • Total Starts:  Total housing starts re-breached the 1MM level to the downside, declining -14.4% MoM (-161K) to +956K SAAR with July revised to +1117K from +1093K SAAR.  Multi-family, which led the upside in July, reversed to drive the downside in the latest month.    
    • Single Family Starts:  SF starts declined -16K MoM (-2.4%) to +643K, essentially in-line with the trailing average. 
    • Multi Family Starts:  MF starts declined -145K MoM (-31.7%) to +313K  
  • Total Permits:  Total Permits declined -59K MoM (-5.6%) to 998K with the -54K decline in multi-family driving the drawdown. Notably, the outsized increase in multi-family permits in July failed to carry-over into the August starts figures.   
    • SF Permits:  Single Family permits declined -0.8% MoM (-5K) to 626K.  Inclusive of the negative revision to July, this marks the 2nd month of decline in SF permits.  The trend in permits continues to suggest minimal upside for the forward starts data
    • MF Permits:  Multi-family permits declined -54K (-12.7%) in August to 372K – the third decline in the last four months. 

 

NAHB HMI vs SF Starts:  Yesterday’s sequential increase in the NAHB HMI is at odds with the fall in SF starts in August and the growing disconnect between builder confidence and SF construction activity over the last few months remains stark.  


As a reminder, there are three factors principally responsible for the ongoing weak performance for housing. First, QM rules that took effect early 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.

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - SF Starts   Permits TTM

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - SF Starts   Permits LT

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - SF starts vs NAHB

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - Total Starts LT

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - MF Starts   Permits TTM

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - MF Starts   Permits LT

 

SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT - SF   MF Starts MoM Change

 

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

 

Joshua Steiner, CFA

 

Christian B. Drake



KSS – Adding To Best Idea List as a Short

Takeaway: 2014 looks fine, but the Street is 20% too high in ‘15. Moreover, KSS might not earn $4 again until the tail end of the next economic cycle.

We’re adding KSS to our Best Idea list as a short. We have not liked this name for a while, but we think the recent strength in the stock is simply unwarranted. We’ve seen sell-side upgrades, Cramer pumping the name due to strength in Izod and Skechers (seriously?), and a general mindset that you can’t short operationally levered retailers like KSS when we’re facing 4-5 months of ‘easy’ compares for US Consumer spending – especially with KSS hosting an analyst meeting in October.  For the remainder of this year, KSS’ estimates ($4.30) are probably OK.

 

But while the Street is looking for 10% earnings growth next year, we’re modeling a -10% decline in earnings for the year. While this is a call on next year, we also think it is a call on the ones that follow. We think that 2014 will mark the last time for at least 4-5 years  -- barring a parabolic acceleration in the US economy -- that KSS will earn anything starting with a $4. That’s not good when the Street is over $5 two years out. Its operational misses should crimp its ability to buy back stock and financially engineer the P&L. We’ll be hosting a call next Wednesday with a full deck to review our thesis (including some preliminary results of the department store consumer survey that we just completed). 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

INITIAL CLAIMS - A POSITIVE REVERSAL

Takeaway: Labor gets its mojo back, reversing the weakness seen in the last two weeks.

Two Steps Back, One Giant Leap Forward

There's a reason why investors are often advised to look at 4-wk rolling averages when it comes to high-frequency economic data (i.e. weekly initial jobless claims). The last two weeks of data were conspicuously soft and we noted as much in our weekly look at the labor market, but this week was very strong. Notably, on a 4-week rolling basis, the data has been fairly steady.

 

Prior to a few weeks ago, the data had been running at a fairly steady rate of ~10% improvement year-over-year. That is to say, claims are lower by 10% this year vs. last. Two weeks ago, however, that rate of improvement slowed to 7% and last week claims actually rose by 2%. This week saw claims better by almost 12%, which puts them back on track with the rate of change seen throughout much of the summer.

 

We're still bullish on the credit card lenders (COF, DFS) as we think the combination of resurgent loan growth and stable credit quality will produce better than expected earnings and should expand the multiple on those earnings. So long as jobless claims are not flagging an inflection in the labor market trends, we're going to stick with this idea.

 

The Data

Prior to revision, initial jobless claims fell 35k to 280k from 315k WoW, as the prior week's number was revised up by 1k to 316k.

 

The headline (unrevised) number shows claims were lower by 36k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.75k WoW to 299.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 2

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 3

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 4

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 5

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 6

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 7

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 8

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 9

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 10

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 11

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 19

 

 

Yield Spreads

The 2-10 spread rose 8 basis points WoW to 205 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -21 bps relative to 2Q14.

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 15

 

INITIAL CLAIMS - A POSITIVE REVERSAL - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes & noteworthy quantitative signals.

CLICK HERE to view the document.

 

If you have a moment, we'd love your feedback on this new product (with thanks to those who have already reached out).

 

Enjoy!

 

Darius Dale

Associate: Macro Team


Failing Successfully

This note was originally published at 8am on September 04, 2014 for Hedgeye subscribers.

“If you try to fail, and succeed, which have you done?”

-George Carlin

 

In theory, investing is very straightforward.  You buy stocks in great companies and the stock prices goes up.  You short stock in bad companies and the stock prices go down.  Practically, of course, that’s never really how it happens, except in fundraising power point presentations. 

 

A real paradox of investing is that there are periods in which the stock prices of “weaker” companies actually dramatically outperform “stronger” companies. Over the last three months, stocks in the highest quartile of short interest have outperformed low short interest stocks by 240 basis points over the last three months - +5.5% vs +3.1%.  In part, this is facilitated by so called short covering.

  

Our lives are, of course, replete with paradoxes, so a little paradoxical market action should on some level be easy to stomach, right?

 

 Some notable paradoxes of different genres include:

  • Paradox of voting - For a rational, self-interested voter the costs of voting will normally exceed the expected benefits, so why do people keep voting?
  • Fenno's paradox  - This is the belief that people generally disapprove of the United States Congress as a whole, but support the Congressman from their own Congressional district.
  • Hedgehog's dilemma – This is the paradox that human intimacy cannot occur without substantial mutual harm (This is maybe the best philosophical defense for long term bachelors like myself!)
  • Archimedes paradox – The paradox that a massive battleship can float in a few litres of water

Lastly is one of my personal favorites - the St. Petersburg paradox.

 

According to the St. Petersburg paradox, a casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The pot starts at $2 and is doubled every time a head appears. The first time a tail appears, the game ends and the player wins the pot.

 

Thus the player wins $2 dollars if a tail appears on the first toss, $4 if a head appears on the first toss and a tail on the second, $8 if a head appears on the first two tosses and a tail on the third, $16 if a head appears on the first three tosses and a tail on the fourth, and so on.

 

What would be a fair price to pay the casino for entering the game?

 

Back to the Global Macro Grind...

Failing Successfully - Putin 09.03.2014

 

As it relates to recent events in Russia, the term circus comes more to mind than paradox.  Yesterday Russian President Putin introduced a hastily patched together seven point peace plan at a press conference.  This came shortly after President Obama upped the rhetoric in terms of the U.S.’s willingness to support Ukraine (and also NATO countries in the region) and ahead of a two day NATO summit that begins today.   

 

By some pundits, this “ceasefire” was perceived positively.  But the ever thoughtful George Friedman from Stratfor (the largest non-government intelligence agency) had a more paradoxical take and wrote the following:

 

“This rapid turnaround on the battlefield (in reference to the recent thwarting of a Ukrainian offensive) had two main purposes. The first was to assert Russian military power and convince the West that Moscow would not be afraid to use it in spite of the economic consequences. The second was for Moscow to use its military gains to make it appear that the West was utterly irresponsible in trying to wrest Ukraine out from Moscow's shadow. Now, by dangling an ambiguous cease-fire before the Americans, Russia is essentially telling the United States that to defeat Russia it must fight Russia directly, knowing that NATO is loath to engage directly with the Russian military.

 

That deal goes well beyond a cease-fire. Russia wants its buffer in Ukraine recognized and respected, along with sanctions lifted so it can get on with repairing its economy. And with winter approaching, Russia also has the means to turn the screws on Europe's natural gas supply at the same time it holds a clear military advantage on the Ukrainian battlefield.”

 

Indeed.

 

Of course, the real news in Europe this morning are the monetary moves from the ECB and not that geo-political move from Russia yesterday.  In an announcement that was a surprise to most, the ECB cut interest rates from 0.20% to 0.05%, cut the deposit rate by 10 basis points to -20 basis points, and also cut the re-fi rate and marginal lending rate by 10 basis points. 

 

Although this isn’t necessarily monetary shock and awe, with the Euro trading down about 80 basis points, Draghi was seemingly able to get his point across with this move on some level.  Practically speaking though, it is not clear that this will necessarily be a catalyst to ignite European economic activity.

 

Certainly a negative deposit rate incentivizes banks to lend out their money and sovereigns such as France, with a negative short term borrowing rates, have benefitted.   That said, at least based on the initial foray into a negative deposit rate early this summer, this policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy.

 

All eyes will now be on Draghi’s press conference where he is likely to now introduce a QE type plan that also surprises to the dovish side.  But the paradox of these surprises moves from such low levels is related to the answer to the St. Petersburg paradox, which is: infinity.   Unfortunately infinite monetary policy moves from zero do not grow an economy.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.33-2.43%

SPX 1988-2007

Shanghai Comp 2232-2316

VIX 11.34-12.95 (bullish)

WTI Oil 92.51-96.53 (bearish)

Gold 1264-1296 (neutral)

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Failing Successfully - Chart of the Day


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next