Takeaway: "One of the most epic US stock market days I’ve witnessed in my career," Hedgeye CEO Keith McCullough wrote about BABA's Friday IPO.
Takeaway: Existing Home sales decline for the 1st time since March w/ distressed & cash sales making multi-year lows as investor activity retreats.
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: August Existing Home Sales
As we've highlighted, there's limited usefulness in the EHS report on the sales side since the data is well-telegraphed by the Pending Home Sales report. We show this in the 1stchart below, where we've offset the EHS data by one month to show its correlation to PHS on a 1-month lag.
Interestingly, however, since the trough in transaction volume in March, the relationship has exhibited more volatility and a longer lag with Existing Home Sales re-converging to PHS in a recurrent, every other month periodicity (2nd chart below).
Despite the limited real-time utility in terms of demand trends, there is value in the data on inventory and the composition of sales (first-time buyers, cash buyers, investor share).
TOTAL EXISTING HOME SALES: Total EHS fell for the first time in five months as sales declined -1.8% MoM against downwardly revised July figures with the year-over-year rate of change deteriorating to -5.3% in August from -4.5% in July.
Pending home sales have advanced +12.4% since the trough in March vs +10% for EHS and, given the recent pattern highlighted above, its likely we see a modestly better sequential EHS print in September. From a growth perspective, comps continue to get progressively easier through the balance of the year.
REGIONAL: The South and West regions registered sequential declines in sales while the Northeast and Midwest saw modest gains. Sales across all regions remain negative on a YoY basis.
INVENTORY: On a unit basis, existing home inventory declined -1.7% MoM, marking the 1st month of sequential decline in supply since December of last year. On a months supply basis, inventory was flat sequentially at 5.49 in August and up +10.3% YoY
HOME PRICES: Median Home prices declined sequentially across all regions while continuing to rise in the mid-single digits YoY across the South, Midwest, and West.
OTHER: The decline in investor activity is tangible evident in the data now as Distressed sales declined to 8% of the market (down from 12% last year) and cash sales declined to 23% - their lowest level since December of 2009 and down from 29% in July. First-time homebuyers held at 29% of the market while median time on the market fell to 53 days from 49 and 43 days last month and last year, respectively.
About Existing Home Sales:
The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.
The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.
Joshua Steiner, CFA
Christian B. Drake
Takeaway: The bubble in illiquid, small cap stocks will only be clear in hindsight.
The Russell 2000 finished down -1.4% this past Friday, which of course was Ali-Bubble’s epic IPO day. It’s down another -1% today, bringing its total year-to-date decline to -2.4%.
While the bubble in illiquid, small cap stocks (over 50x trailing earnings) will only be clear in hindsight, we remain bearish of it in the meantime vs. big cap liquidity on the long side.
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.
We're hosting a call today, September 22nd at 11:00am EDT to review our thesis in depth.
Amid a very favorable fundamental backdrop for domestic hotels, RHP is the REIT with the greatest exposure to the group lodging segment. Our research indicates the group trends could be stronger than investor expectations this year and next. Indeed, we expect Q3 and Q4 earnings beats for RHP and we enter the 2015 fray above the Street once again. RHP appears undervalued versus its comp space and with the potential for major dividend increases and better earnings. As a result, we see the potential for a total return of 40% over the next 12-18 months.
- Investors should be bullish regarding RHP's leading exposure to the group lodging segment
- Our primary research suggests the group outlook is stronger than the current consensus view and should lead to positive 2014 and 2015 earnings revisions
- Street overestimating share count, resulting in a $0.25-0.45 AFFO/share understatement on the incorrect share count alone
- Marriott affiliation is an advantage that offsets the single tenant risk
- EV/EBITDA valuation discount of over 3 turns looks attractive
- A likely dividend hike that should improve current yield of 4.8% - already above industry average
Attendance on this call is limited. Please note if you are not a current subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping for more information.
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email
European Financial CDS - Swaps mostly tightened in Europe last week as 25 banks saw swaps tighten vs just 11 that widened. Conspicuous moves came from Banco Espirito Santo in Portugal (+55 bps w/w to 385 bps) and Sberbank of Russia (+9 bps w/w to 340 bps).
Sovereign CDS – Sovereign swaps were largely unchanged last week. Italy and Spain tightened by 1 and 4 bps, respectively, while the US, France and Portugal widened by 1, 2 and 4 bps.
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 13 bps.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The COTTON, LEAN HOGS, CORN, and LIVE CATTLE markets experienced the most BULLISH relative positioning change in the CRB week-over-week:
After a pullback from the YTD highs, both Live Cattle and Lean Hogs have rallied again with the market chasing the move:
- 1-month: Cattle +3.4%, Lean Hogs +11.8%
- 3-month: Cattle +5.2%, Lean Hogs -17.2%
- YTD: Cattle +15.7%, Lean Hogs +24.1%
Lean hogs contracts trading +2.9% this morning after finishing the week +26bps last week. The market is positioned more bullish week-over-week (z-score +1.48x 1-year average), but the forward looking expectation 1-year down the road is pricing the largest drop in prices of all commodities in the CRB
The SUGAR, SILVER, and GOLD markets experienced the most BEARISH relative positioning change in the CRB week-over-week:
- USD Bulls: Consensus chasing the USD move (+6.9% move off the May lows) on the back of multiple ECB Easing measures
- EURO Shorts: CFTC data shows a market that is -2x standard deviations short of the Euro
- Gold: Gold tracking closely with the dollar:
- -5.9% vs. USD +6.9% from May 8th USD YTD low
- GOLD/USD r-squared correlations: -0.91, -0.94 1/3-month duration
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The SUGAR, CORN, WHEAT, and COFFEE markets are positioned for HIGHER PRICES near-term
- The LEAN HOGS, COTTON, and RBOB GASOLINE markets are positioned for LOWER PRICES near-term
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
- The SUGAR, CORN, WHEAT, and COFFEE markets are positioned for HIGHER PRICES in 1-year
- The LEAN HOGS, RBOB GASOLINE, and COCOA markets are positioned for LOWER PRICES in 1-year
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
Base Metals: Decrease in open-interest last week showing large capitulation/covering in aluminum, copper, and nickel on the sell-off (all three finished lower on the week). The entire base metals complex is breaking down.
We like copper on the short-side from both a fundamental and quantitative perspective (Bearish TREND set-up in our model):
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