We are putting Legg Mason back on Investing Ideas. We will provide a more detailed summary later this week.
Takeaway: August New Home Sales get a shot of adrenaline from the West, adding to the seeming conflict in various housing-related data series.
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.
Today's Focus: August New Home Sales & MBA Mortgage Applications
August New Home Sales
Taking a quick survey of the current landscape and the prevailing ping-pong match in housing data: New Home Sales hit a 6 year high in August alongside a big miss out of KBH and soft guidance out of TOL. Meanwhile, in perfect in-congruency, builder confidence hit a new high in September as both New Home Starts & EHS declined sequentially, Mortgage Purchase demand continues to plumb multi-decade lows, and the rate of change across the primary HPI measures (Case-shiller, Corelogic, FHFA) have begun to diverge for the first time in quite a while.
The ITB took its cues from KBH earlier this morning, but has been rallying since the release of this NHS report. Bigger picture, at -6.5% for the year, housing remains one of the worst performing asset classes YTD in an otherwise largely-teflon tape.
MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended September 19th.
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.
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.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
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Takeaway: It's 'Groundhog Day' at the Fed according to Hedgeye CEO Keith McCullough.
Hedgeye CEO Keith McCullough spent the full hour with Fox Business host Maria Bartiromo on “Opening Bell” this morning. In this clip, McCullough explains his non-consensus call on why the Yellen Fed is set to get easier, why the Russell 2000 is in an epic bubble and how to position yourself right now.
Yesterday, Starbucks announced that it will acquire the remaining 60.5% share of Starbucks Japan in a two-step tender offer process that should be fully completed in the first half of calendar 2015.
There are two ways to view this transaction.
On one hand, this is good news for shareholders. Japan is a large market for Starbucks accounting for approximately $1.2 billion in revenues, boasts high store-level profit margins (20-25%) and will immediately be accretive to adjusted EPS, although to what extent is unknown. Longer-term, this makes strategic sense as well as it will allow the company to capture the significant growth opportunity left in that region.
One the other hand, however, we believe the timing of the deal confirms our view that growth in the core business is slowing. The company could've done this deal at any time in the past three years, but did not need to given strong sales trends and a significant commodity tailwind. With these trends reversing, expectations for 18% EPS growth in FY15 looked aggressive, at the very least.
On the call last night, management said they would update FY15 guidance when they report earnings in late October. Given the immediate accretion from the deal, 18% EPS growth next year now looks achievable and we suspect they will move guidance from the low-end to the high-end of the 15-20% range. Given aggressive estimates for next year, it is comforting to know that they will, in all likelihood, not be revised higher from here. Another important point is that this acquisition will, for now, help mask the margin decline that the company was facing.
Despite this news, if the core of our thesis is right (same-store sales decelerating, commodity costs increasing), it will have a bigger impact on the stock than this well-timed transaction.
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