prev

CHART OF THE DAY: (En Fuego) U.S. Household Formation

CHART OF THE DAY: (En Fuego) U.S. Household Formation - HH formation

 

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.

 

  • Household Formation:  The same survey data showed household formation was en fuego in 4Q.  As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years. 



USA Inc.

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.” T. S. Eliot


Is the USA a good business? 

 

It’s the most fundamental question of all and one of ongoing import for both global capital suppliers and domestic residents as returns to capital increasingly accrue to foreign investors in the wake of decades of cumulative trade deficits and trillions in net capital inflows.  It’s also a topic for a different Early Look.  

 

Considering the “business of America”, however, leads to a question of equal import to Macro investors – and a relevant one alongside the release of the advance estimate of 4Q GDP this morning.    Specifically, does it make sense to model the Macroeconomy as you would a company?

 

Think of it this way:   Would you want to be long a company with accelerating topline, expanding margins and a competent management team while being underweight/short the converse?   No brainer, right.  

 

Conceptually, we view Macro investing in the same way.  In the context of our GIP (Growth/Inflation/Policy) model, we want to be long accelerating topline (GDP), expanding margins (decelerating Inflation) and competent management (policy effective in supporting sustainable growth). 

 

Q:  How do you model companies?...or put differently, how many companies that you follow reported earnings results on a QoQ annualized basis this quarter? …I’ll take the under on “one”.

 

How does the U.S. report/ measure GDP?  Officially QoQ, kinda….it depends

  • BEA: The BEA reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis, but….
  • ....when they report longer run data they report it on a year-over-year basis using an average of the quarterly data
  • FOMC:  The Fed projections typically estimate growth on a Q4-over-Q4 basis
  • Consensus:  Consensus estimates are generally available for both QoQ and full year.  However, attempting to true up quarterly estimates with the full year growth estimate is typically a quixotic pursuit.   Fuzzy math and data collection/sample differences drive the delta and incongruity.   

Conveniently, all this variation lets both policy makers and pundits speak to whichever estimate best fits the narrative du jour and/or writes the best revisionist history.  Same goes for inflation measurement.  

 

We’ve found modeling growth on a year-over-year basis - and backtesting it against equity/sector/asset class performance – to be an effective approach.  It makes intuitive sense to us as well. 

 

Relatedly, how many countries report GDP principally on a year-over-year basis? …. Most.

 

As it relates to this morning’s 4Q14 growth data - Consensus is expecting +2.95% QoQ SAAR and the Fed’s GDPNow model is estimating +3.5%.  For illustrative purposes, if we simply split the difference and assume 3.2% for the quarter, full year growth for 2014 will be ~+2.4% YoY. 

 

So, inclusive of two ~+5.0% QoQ prints, we’re still essentially a 2% plus-or-minus economy.   We think 2% with cyclical oscillations above and below remains the right reflection of our intermediate term reality.  

 

The GDP table below provides a redux ahead of this morning’s data.  I’ll tweet out the updated table after the release (@HedgeyeUSA)

 

USA Inc. - GDP table

 

Yesterday’s Early Look explored the value of asking both a lot of questions and, importantly, the right questions in generating investing insight.  Given some of the (superficially) internal inconsistency in recent macro data it makes sense to extend that discussion.  

 

Consider yesterday’s Housing data:  

 

Pending Home Sales:  Pending Home Sales in December were pretty bad…..or pretty good

  • MoM:  On a month-over-month basis, PHS dropped the most in a year with seasonally-adjusted sales declining -3.7% sequentially .
  • YoY:  On a year-over-year basis both SA and NSA sales accelerated to their fastest rate of growth in 18 months.   Seasonally adjusted sales accelerated +220bps sequentially to +6.1% YoY while NSA sales accelerated to +8.5% YoY from +1.5% YoY in November.  So, from which rate of change metric should you take your cue?
  • Our take:  With Purchase Application accelerating sharply thus far into January, the preponderance of housing data improving as we traverse progressively easier comps, and PHM, DHI and RYL results reflecting positive momentum of late, we’re inclined to maintain our constructive view on housing.  

 

Household Formation vs Homeownership Rate -  A Tale of Two (or Three) Metrics:

  • Homeownership Rate:  Housing Vacancy and Homeownership data released from the Census Bureau yesterday showed the national homeownership rate declining to 64% to close out 2014- the lowest level since 1994.  Doesn’t sound too good, right?
  • Household Formation:  The same survey data showed household formation was en fuego in 4Q.  As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years. 
  • Headship Rate:  Rising household formation rates will show up in a rising Headship Rate.  The Headship Rate represents the percentage of adults who head households (Headship Rate = Households/Population) and is a more comprehensive measure than the homeownership rate.  It’s important to understand the distinction.   Definitionally, Households can be either  1. Owners or 2. Renters and the Homeownership Rate = Owners/Households.  Thus, similar to Unemployment Rate dynamics, the Homeownership Rate could ‘improve’ due to fundamentally negative developments.  For instance, if both the number of owners and the number of renters declines (an obvious negative for housing broadly) the homeownership rate could actually increase if the magnitude of decline in renters is larger than that for owners.   The Headship Rate is less ambiguous. 
  • Our Take:  Accelerating household formation and a retreat from peak in “basement dwelling” is a broad positive for the housing market.  Even if the balance of activity is occurring on the rental side – which it appears to be thus far – the broader recovery in headship rates will ultimately see flow through to single-family purchase activity. 

 

More broadly:  The preponderance of domestic macro data has been slowing from a rate of change perspective the last couple months (retail sales, durable/capital goods, ISM/PMI’s).  Less than 56% of SPX constituents have beaten topline estimates in 4Q thus far and less than a third of companies have registered sequential acceleration in revenue growth.   Corporate earnings estimates are sliding and revenue revision trends are almost universally negative alongside decelerating global growth and the ongoing energy price cratering.   

 

Does a modest deceleration in domestic growth matter for domestic assets in the face of the flood of global capital inflow and relative value reaching?  While the US may benefit broadly from the inflow, with the long bond (TLT) up +7.9% YTD vs. -1.83% for the SPX, its seems that capital deluge is, indeed, discerning. 

 

The YTD performance divergences across equity sectors are equally large…and the year is young.  Performance chases price, particularly in the immediate term, and with the fundamentals rightly supporting deflation leverage and defensive yield flows, we think what has been working continues to work.   

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.82%
SPX 1

Nikkei 179

VIX 16.61-21.98
USD 92.63-96.11
WTI Oil 43.22-46.26

Gold 1 

 

Re-think. Re-work. Reward. 

 

Christian B. Drake

U.S. Macro Analyst

 

USA Inc. - HH formation



CRUISE CALL TAKEAWAYS

Takeaway: Overall, the takeaway is on the margin negative: Wave momentum slowed in Jan Europe is struggling.

Summary from Wednesday's conf call with Mike Driscoll from Cruise Week

 

 

Yesterday, we held a conference call for subscribers Mike Driscoll Editor In Chief of Cruise Week.  From Mike's commentary, we came away with the impression that Wave momentum slowed in January and European demand was softening. Overall, the call seemed to corroborate the findings of our latest cruise pricing survey.  

 

Here are some more thoughts from Mike:

 

Wave 2015

  • Mixed results despite high expectations for Wave North America.
    • December Wave bookings were strong, primarly due to a lot of deals and discounting by the cruise lines.
    • January slowed considerably possibly due to an earlier start to Wave this year

Europe

  • Mediterranean/Baltic both slowing since France crisis  
  • 2014 was a record booking season for Europe.
  • Not seeing cancellations but seeing weakness in ocean cruising. River cruising has held up better.
  • St. Petersburg struggling for quite some time

Caribbean

  • Recovery happening.
    • Last year, many norovirus issues. This year, nothing.
    • Benefiting from cold weather
  • Norwegian started discounting early in December and then put out its Wave package in January

Carnival brand  

  • Expectations from agents was already low
    • Agents think Carnival could be doing much better due to comps but that hasn't materialized. 
    • Agents blame Carnival's heavy direct business for the slow recovery (not surprise that agents would blame the competition)
    • Some reluctance from agents to reestablish trust with the Carnival brand
    • Getting hurt badly on the interior part of the US.  Carnival brand but doing better on the ports (e.g. Galveston, Carolinas etc)
      • Norwegian, however, has grown with its national business
  • Feedback from Vista was underwelming

Asia

  • Question mark market
  • RCL only putting its best ships there. CCL testing its middle ships there
  • In the past, Carnival went into Japan with two ships year round and mgmt didn't speak of Japan on the conference calls. Then they pulled back. When things are going well, mgmt will talk it up, like China for example.

1st time cruisers

  • Cruise lines still having difficulty attracting 1st cruisers
  • Very challenging to increase 1st timers
  • Agents are most helpful in this area but requires more of their time
  • They feel like they’re not getting the deal because they don’t know what they’re looking at
  • Many complexities are holding back first timers
  • Norwegian is doing somewhat well but overall, we are not seeing the bump in first timers as we should 
  • Carnival is losing share of 1st timers

More bundled promotions

  • Retailers love it. It’s the way consumers now shop.
  • Travel agents like it because commissions are higher with bundled deals
  • Norwegian is changing its promotions every month.
  • Sometimes it can undermine the group business.

What do consumers value most today when booking?

  • All inclusive bundles
  • Consumers aren't falling for the price tag
  • Direct business hasn’t grown as much because they know they not getting the best deal
  • Repeat customers know what prices they should be paying 

Loyalty

  • Royal and Princess have a very loyal customer base

Competition 

  • River cruise industry is a serious competitor. Even Seabourn is losing business to river cruises.
  • In the US, the alternative vacation choice is Vegas and Orlando
  • Carnival's biggest competition is all-inclusive packages

Princess

  • Princess is doing 3-4 day cruises out of Los Angeles and Fort Lauderdale to attract first time customers. Prices lower than expected. ~50% of customers were first timers to Princess but not first time cruisers.

Agencies/Commissions

  • Only a few large travel agencies control the business now
  • Viking is coming out with new ocean going ships in the Med with higher commissions
  • Max out at 17% commission with Princess

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Climbing The Wall

This note was originally published at 8am on January 16, 2015 for Hedgeye subscribers.

“We were just us up there – 19 days on the wall.”

-Kevin Jorgeson

 

In case you missed it, two American free-climbers achieved greatness this week. After a 19-day epic #grind of human preparation, teamwork, and perseverance, Tommy Caldwell and Kevin Jorgeson successfully scaled Yosemite’s El Capitan.

 

Since you know I like to think and write in metaphors of historical feats and failures, there are obviously a lot of ways I can roll with this story. But the most important lesson is to have both patience and #process.

 

These guys spent 7 years planning to embrace the uncertainty of the climb… and 7 full days, literally stuck, hanging, on the most difficult face of mountain (Dawn Wall). If you think multi-duration and multi-factor like these guys do, you can achieve excellence too.

 

Climbing The Wall - 99

 

Back to the Global Macro Grind

 

I’m not a fan of excuse making or mediocrity. I know that might rub some people the wrong way but, in case you didn’t notice, I don’t particularly care about what they think. My teammates and I are out here, every day, climbing an Old Wall that we know we can beat.

 

Does that mean that this is easy? Of course not. This is one of the highest paying professions on the planet because excellence isn’t allocated to job titles and/or academic standing – it’s earned out there on The Wall, every day.

 

The toughest climb we’ve had in the last 3 years hasn’t been making the bullish Long Bond (TLT) call. It was in building a #process (for 7yrs as a team) that was flexible and could objectively go both ways, calling for:

 

  1. A breakout in US interest rates in 2013 (as real US economic and employment growth #accelerated)
  2. Then the reversal of rates in 2014 (global #GrowthSlowing + #Deflation)

 

I don’t know if it was the 7 days at the end of September (before the Russell’s JUL-OCT drawdown capitulated at -15%) or the last 7 trading days of December when everything was going the wrong way vs. our plan…

 

But there were plenty of times where I questioned my every premise. I had to review everything I’d written in my notebooks, my teammates models, etc. and ask myself, over and over again, whether or not this was the right path to take.

 

Fortunately, it was.

 

This morning both the inability of central planners to arrest gravity (global #GrowthSlowing) and market expectations for #deflation are reaching an immediate-term capitulation point.

 

No, that’s not just staring at the “Dow 18,000 Bro” futures guys – remember, we do Global Macro – and there’s a lot more to beating this Old Wall than calling out the 50-day in spooz.

 

Today is capitulation day for Long Bond bears. If they didn’t get rates right, they’re going to be feeling plenty of pain in those asset allocations that are directly correlating to crashing bond yields. Their pain is your gain.

 

Follow #Deflation’s Dominoes:

 

  1. UST 10yr Yield = 1.71% (already down 21% YTD, and -43% since this time last yr)
  2. Commodities (CRB Index) = 220 (that’s -29% since June of 2014, at 12 month #deflationary lows)
  3. Financials (XLF) and Regional Bank Stocks (KRE) are already -6.2% and -10.2% YTD, respectively

 

Particularly on that last point (which is just equities following what bonds and commodities already did), that’s a nasty start to the year. And it fundamentally should be, because:

 

  1. Crashing Bond Yields (and widening credit spreads) are clean cut #GrowthSlowing and #Deflation signals
  2. Yield Spread Compression (10yr minus 2yr at a fresh 12 month low of 128 bps today) = #GrowthSlowing
  3. And when 1 and 2 are true, you don’t buy late-cycle stocks like Energy, Financials, and Industrials

 

If all you do is US stocks (we don’t), here’s the YTD score:

 

  1. Energy (XLE) -8.0% YTD
  2. Financials (XLF) -6.2% YTD
  3. Industrials (XLI) -3.9% YTD

 

Vs. the #alpha climbers:

 

  1. Utilities (XLU) = +2.1% YTD
  2. Healthcare (XLV) = +1.0% YTD
  3. Consumer Staples (XLP) = +0.8%

 

In other words, if you are out-front, beating your competition on that absolute and relative performance wall, you are A) short/underweight what we don’t like and B) long what we like.

 

What’s next for bond yields, the late-cycle bank stocks, etc?

 

  1. What if jobless claims (Energy States) breakout to the upside (see Chart of The Day)
  2. What if #Deflation hurts sales, earnings, and margins? (SP500 is coming off peak)
  3. What if European stocks react to Draghi’s plan next wk like Swiss stocks just did?

 

What if you woke up, every day, asking yourself not whether or not you like me as a person… but asking yourself about yourself, your process, and your performance path?

 

This isn’t Yosemite. This is Wall Street. And yes, you need to have a macro view. So #Timestamp it! The plan is always that the plan is going to change. And while you might lose a few fingernails, stressing yourself to not take the consensus route along the way…

 

If you can make that epic performance climb, you can sit up there at the top, smiling all day.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.93%

SPX 1981-2018

VIX 19.78-23.31

Oil (WTI) 44.43-47.93
Gold 1225-1267

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Climbing The Wall - Claims vs Crudel


Timestamping David Tepper

We are big believers in accountability and transparency here at Hedgeye. And, like any truly successful athlete, team, company or organization, we have our fair share of loathers out there. But one thing is for certain ... no one can accuse us of not being transparent or accountable.

 

In that vein, we'd like to take a minute to highlight two big market calls recently made by Appaloosa hedge fund manager David Tepper.

 

As the first graphic below shows, exactly one month ago today Tepper was bulled up on stocks calling for 8-10% upside in 2015. He told CNBC's Melissa Lee the following:

 

"It's not the time to be careful now. Enjoy the ride."

 

The S&P 500 is down approximately -4% since. 

 

Timestamping David Tepper - appa3

 

As the second graphic below shows, Tepper's call on bonds back in September to Bloomberg's Stephanie Ruhle, well, it was  #epically wrong.  

 

“It’s the beginning of the end of the bond market rally,” Tepper said in a telephone interview. “We are done.”

 

Hedgeye CEO Keith McCullough and his macro team took a lot of heat during that time (we were non-consensus and long the long bond via TLT in 2014).

 

For the record, TLT is up over +17% since Tepper declared the end of the bond rally as 10-year Treasury yields flirt with record lows at 1.77%

 

Yes, we remain long the long bond.

 

Timestamping David Tepper - boom1


Cartoon of the Day: Alibubble

Cartoon of the Day: Alibubble - Alibaba cartoon 01.29.2015

 

Very few research firms have been cautious or negative on the BABA, but at Hedgeye, we’ve been on the other side of consensus.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
next