Takeaway: The -74% M/M drop in Northeast MF Permits (NY Tax-fueled) was overshadowed by a fresh 8-yr high in Single Family Starts.
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: July Housing Starts & Permits and August NAHB HMI (Builder Confidence Survey)
The hangover in permits in July following the NY tax exemption pull-forward was acute. The notable gain in SF Starts offset the MF disappointment, continuing the trend of organic improvement and further supporting the crawling but durable nature of the recovery
The 10-year high in builder confidence recorded in yesterday’s HMI print for August found positive confirmation in the July Starts data with single-family starts rising +12.8% MoM to +782K – the strongest level of new SF construction activity since December 2007. Permits were less remarkable, declining -1.9% MoM (+6% YoY).
On the multi-family side, Starts and Permits declined -17% and -32%, respectively, as the hangover from the May/June pull-forward in MF permitting in New York State ahead of the impending tax exemption expiry was fully manifest in the July figures. State level permits data is released on a 1-month lag but the NY impact is reflected in the regional data which is released alongside the headline figures. Indeed, Multi-family Permits in the Northeast declined -74% sequentially, falling from 234K in June to 61K in July.
On net, today’s release was a positive for the housing complex as the upside strength in single-family starts probably trumps the decline in permits which the market had begun to (under) discount the last couple weeks (consensus had ratcheted down permit expectations to 1217K, -9% MoM). Looking ahead to the Existing Market - where mean reversion back to average levels of activity has already occurred - we’ll get the EHS data for July on Thursday where weakness in Pending Sales in the latest month and flat-to-down trends in Purchase Application activity augur sequential softness in existing sales. We’d view the consensus expectation for a -1.2% retreat in EHS as ballpark correct.
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.”
About the NAHB HMI:
The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.
Joshua Steiner, CFA
Christian B. Drake
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Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors continued to pull money from financial markets last week. All asset classes experienced redemptions except for international equity funds, which took in +$3.5 billion, and equity ETFs which were only slightly above break-even at +$85 million in contributions. While an exodus from domestic equity has been in progress since 2014, a newer trend of fixed income outflows has developed. So far this year, domestic equity mutual funds have lost a cumulative -$90.8 billion in withdrawals, including a massive -$7.3 billion outflow last week (the worst start to the first 31 weeks to any year this cycle running at over -$18.0 billion worse than 2012, the prior softest start to an annual period). Meanwhile, total fixed income mutual funds and ETFs have experienced negative flows in 7 of the last 9 weeks, including a -$5.0 billion outflow last week.
Investors appear to be using a significant portion of domestic equity withdrawals for their contributions to international equity funds, as international equity has experienced an almost mirror inflow of +$92.0 billion. Additionally, the chart below displays the generally inverse relationship between domestic stock outflows and international equity inflows. Our preferred proxy for these growing domestic redemptions is shorting T. Rowe Price (TROW) stock with over 60% of its assets-under-management in mutual funds (see our TROW report HERE).
In the most recent 5-day period ending August 5th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average inflow of +$36 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.5 billion and domestic stock fund withdrawals of -$7.3 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net outflows of -$4.4 billion, trailing the year-to-date weekly average inflow of +$1.5 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$106 million and taxable bond funds withdrawals of -$4.3 billion.
Equity ETFs had net subscriptions of +$85 million, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$582 million, trailing the year-to-date weekly average inflow of +$868 million and the 2014 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors continued to make significant withdrawals from the long treasury TLT ETF given worries over a possible rate hike by the Fed. The TLT lost -$365 million or -7% in redemptions last week. Meanwhile, the XLB materials ETF experienced the largest inflow last week on both a percentage and dollar basis. Investors contributed +$122 million or +5% to the XLB.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (-$3.8 billion of total equity outflow net of the -$5.0 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.9 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Daily Trading Ranges
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Takeaway: Money fund yields are making their most buoyant move all year, already up 5 basis points or +38% over 2Q15 averages.
- Money funds yields are putting in their fastest ascent in 2015 with an already 5 basis point or +38% increase thus far in 3Q from the second quarter. Our short yield tracker of LIBOR, 3 Month Treasuries, and Reverse Repos registered 18.0 basis points over night, closing in on close to a +40% move higher from the 13.0 basis point average of 2Q15. Simply put, the market is not waiting for the long waited announcement of the plight of the Fed Funds rate and is instead moving higher quickly.
- We calculate that for every basis point increase in our short yield proxy that Federated nets an additional penny or $0.01 per share in quarter earnings. While most of Federated's biggest money fund portfolios have 40 days of duration within their holdings, the blend to higher yielding portfolios is underway. Longer term we see Federated normalized earnings opportunity at between $2.43-$2.63 per share and with the Street at $2.22 for 2016/2017, we continue to see positive risk/reward.
- In combination with improved profitability as yields move higher, we remind investors that money fund balances should also increase into the back half of the year. With tax season now out of the way which historically has pulled down money fund balances in the first and second quarters, money funds are soon to be entering the fourth quarter which has averaged a +3.7% increase sequentially since 2008. Federated stock is one of only two asset management stocks up for the year (Wisdom Tree is up +57% in '15 with Federated up +4.0%, with the rest of the sector now down year-to-date). FII stock still screens as one of the lowest rated in our proprietary Sentiment Monitor (see latest report HERE) with 8.9% short interest and low sell side sentiment. With a 2.9% dividend yield and improving fundamentals in the money fund business, the stock continues on our Best Ideas list as a Long position. We estimate fair value at $42 per share.
Not waiting one Minute (Fed). Money fund yields are bolting substantially higher in 3Q already up 5 basis points or +38% from 2Q averages:
While investors will have to wait for current spot rates to blend into quarterly averages, duration is very short in these portfolios. Within 39 days, higher spot yields will blend into quarterly averages:
We calculate that every 1 basis point of average increase in yields is $0.01 or a penny per share in incremental quarterly earnings:
Our short rate proxy and FII's money fund fee waivers continue to maintain a very robust R-squared at 0.89:
In addition to rising yields, money funds are now out of the seasonally weak tax season and onto the back half of the year where historically balances have grown for the industry. Thus the company will enjoy the double leverage of improving profitability and higher fund balances:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Client Talking Points
After telling the world “volatility in the Chinese stock market is over”, central planners got tagged with a -6.2% drop in the Shanghai Comp overnight – rest of Asia slowing, faster, too – in the last month: Taiwan -9.6%, Singapore -8.8%, Thailand -8.3%
Reflation (and high beta, high leverage, style factors) helped US equities bounce off last Wednesday’s lows, but were right back in the soup this morning with both WTI and Copper making fresh 3-month lows – and the Fed is going to “hike” into this?
With a yield of 2.14% this morning does the round trip and then some – so what the market is telling you is that even if the Fed does hike into a slowdown, probability is rising that growth and inflation slow at a faster pace – I remain bullish on the Long Bond.
|FIXED INCOME||25%||INTL CURRENCIES||7%|
Top Long Ideas
"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."
Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.
"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says.
"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."
The set-up for the September FOMC meeting is as follows:
Three for the Road
QUOTE OF THE DAY
“I didn’t get over 1300 walks without knowing the strike zone.”
STAT OF THE DAY
With a 719–477–45 record as of the conclusion of the 2014 football season, West Virginia University ranks 14th in victories among NCAA FBS programs, as well as the most victories among those programs that never claimed nor won a National Championship.
Editor's Note: The chart below was featured in this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber.
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