THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Consumer Staples Select Sector SPDR Fund (XLP)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- SPDR Gold Shares (GLD)
- iShares 20+ Year Treasury Bond ETF (TLT)
- iShares U.S. Home Construction ETF (ITB)
- LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)
Short Ideas/Underweight Recommendations
- SPDR Barclays High Yield Bond ETF (JNK)
- iShares MSCI Emerging Markets ETF (EEM)
- Industrial Select Sector SPDR Fund (XLI)
- SPDR S&P Regional Banking ETF (KRE)
- iPath S&P GSCI Crude Oil Total Return ETN (OIL)
- SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)
QUANT SIGNALS & RESEARCH CONTEXT
Housing #Working: Among the most staunch of intellectual pushback against our current macro themes is our team’s bullish view on U.S. housing and homebuilder stocks. We definitely understand the nature of the resistance given that we continue to contend that the U.S. economy is in the early innings of a late-cycle slowdown – which effectively means we believe the topping process has begun for all things late-cycle (i.e. employment, inflation, earnings, manufacturing and CapEx).
But how can we be bullish on housing if we think the labor market is cresting?
The easy answer is that the housing market and homebuilder stocks both sucked last year when employment growth ripped to the upside. The more nuanced answer is as we laid out in the 1/16 edition of the Macro Playbook:
“[Our bullish view on housing] is threefold: 1) macroprudential regulation is being unwound, at the margins, which should perpetuate a positive inflection in mortgage demand growth; 2) demand growth leads home prices by ~1yr and demand growth troughed in early 2014, which implies home price appreciation is poised to positively inflect [soon]; and 3) the comparative base effect for home price appreciation – which carries a +0.90 correlation to housing equities since 2008 – gets incrementally supportive throughout 2015. Lower interest rates are a nice kicker as well as it relates to stimulating incremental demand. The 30yr fixed rate mortgage is now 3.8%; it was 4.42% one year ago. Many headwinds still exist in the U.S. housing market (e.g. low household formation, student debt bubble, etc.), but more [factors] are shifting into the tailwind category, at the margins.”
As Josh Steiner and Christian Drake highlighted in a note yesterday:
“CoreLogic HPI data for December released this morning showed home prices growing +5.0% YoY – a modest sequential acceleration relative to the +4.9% growth reported for November. Price trends in the Ex-Distressed series were moderately better, accelerating to +4.9% YoY from +4.6% last month… Net-net-net, however, the conclusion is largely unchanged. The 2nd derivative trend remains one of stabilization even as we traverse the hardest 1Y and 2Y comps into the February peak. Stable-to-improving home price growth stands in stark contrast to the marked deceleration in HPI (& significant Housing underperformance) that characterized the February-Sept period last year and should support the complex alongside improving demand trends.”
Looking to our Hedgeye Housing Compendium – which aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume – it’s clear to see that demand trends have inflected materially from last year’s prolonged trend of deceleration. Specifically, Mortgage Applications, Existing Home Sales and New Home Sales are all accelerating on both a sequential and trending basis. To top that off, both Single-Family Starts and Single-Family Permits are accelerating on a sequential and trending basis as well.
Generally speaking, the general hue of green across the table is in stark contrast to the sea of red we saw into the mid-October lows on the ITB ETF (from 10/16):
Since our 12/17 conference call on housing in which we outlined our bullish thesis, the ITB ETF has gained +4.43%, besting the performance of the SPY ETF by 292bps.
All told, we anticipate the recent outperformance of the homebuilders to continue over the intermediate term. Investors got a great opportunity to buy the homebuilders in mid-to-late January. Since we’re not so sure they’ll get a better chance than that, that effectively increases the propensity for eventual “panic buying” of this sector exposure by those investors that missed the move off the lows.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.
#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.