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HPI & NHS: Below the Headline

Takeaway: Waiting for Case Shiller to comport with CoreLogic is akin to waiting for Godot. The good news, however, is that this sets up well for 4Q.

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.


HPI & NHS: Below the Headline   - Compendium 082515 


Today's Focus: July New Home Sales & June Case-Shiller HPI

New Home Sales:  NHS in July retraced last month’s dud, rising +5.4% MoM and accelerating to +26% YoY.  As we’ve highlighted previously, and as the 1st chart below illustrates, July represented a quirky month from a comp perspective.  Year-over-year comps begin to steepen considerably in 3Q (July comp =+7% vs June = -12%) but the sequential was easy given last month’s retreat and, on an absolute basis, July 2014 represented the lowest level of sales in 2-years. 


Geographically, sales rose sequentially across all regions except the Midwest while year-over-year sales growth was positive across all geographies with growth of +39% and +29% in the Northeast and West, respectively, leading the gains. As a percentage of the total market, New Home share rose to 8.3% in July from 8.1% in June (LT average =  ~11.4%) as existing sales made another post-crisis high in the latest month.


On the supply side, the inventory of new homes rose 3.8% month-over-month to 221K on a unit basis while decelerating -80 bps sequentially to +7.3% YoY. 


Summarily, in the immediate-term the comp setup for NHS is less favorable while the longer-term mean reversion opportunity in the New Home Market remains both conspicuous and favorable relative the magnitude of upside available in the existing market.  Further, in a global environment characterized by price deflation and 0% +/- growth, a deceleration to low-teen’s sales growth may indeed be the Cyclops in a blind Macro land. 



HPI:  Concentrated Deceleration vs Diffuse Gain, Month 2

The Case-Shiller 20-City HPI for June released this morning – which represents average price data over the April-June period – showed home prices declining -0.12% MoM while holding flat at +4.9% year-over-year.  For a second month, all 20 cities reported sequential increases on an NSA basis while, on an SA basis, 10-cities reported declines.  Performance by City along with associated city index weightings is illustrated in the scatterplots below


Notably, and also for the 2nd consecutive month, the 20-city series and the National HPI (which covers all U.S. Census divisions ) have shown divergent, albeit modest, 2nd derivative trends.  Whereas the 20-city series showed modest deceleration, the National HPI showed modest acceleration.  This dynamic stems largely from the index weighting methodology and the fact that index heavyweights New York, San Francisco and Chicago all showed MoM declines and sequential YoY deceleration.   


The deceleration in the 20-city series also stands in contrast to both the CoreLogic HPI for June and the multi-month trend in the FHFA HPI series which continue to reflect accelerating price growth.   As it stands, we remain inclined to side with the CoreLogic/FHFA data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.   


In our view, the more important release will be next week’s CoreLogic data for July along with the short-term projection for August. 



HPI & NHS: Below the Headline   - NHS Units vs YoY


HPI & NHS: Below the Headline   - CS MoM vs Index Weight Scatter


HPI & NHS: Below the Headline   - CS National vs 20 City


HPI & NHS: Below the Headline   - CS YoY vs MoM Scatter


HPI & NHS: Below the Headline   - FHFA HPI YoY   TTM


HPI & NHS: Below the Headline   - NHS EHS to NHS Ratio


HPI & NHS: Below the Headline   - NHS LT


HPI & NHS: Below the Headline   - NHS Mean   Median Price


HPI & NHS: Below the Headline   - NHS Sales   Starts TTM 


HPI & NHS: Below the Headline   - NHS YoY



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 Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.




Joshua Steiner, CFA


Christian B. Drake


DXJ: Removing Japanese Stocks From Investing Ideas

Takeaway: We are removing Japan from Investing Ideas.

***Please note we are removing Japanese Stocks from Investing Ideas (long side) today.


We will send out a full report explaining our decision later today by Hedgeye macro analyst Darius Dale.


DXJ: Removing Japanese Stocks From Investing Ideas - z ja

Get Out of Japan – For Now At Least

Through August 17th, Japanese shares were handily the best performing DM global equity market since we added to the long side back in mid-December:


  • Nikkei 225 (Japan): +20.6%
  • STOXX 600 (Europe): +19.8%
  • FTSE 100 (U.K.): +6.0%
  • S&P 500: (U.S.) +5.7%


Now, after a week of crisis and turmoil that saw each market give back well over 1,000bps of absolute performance, Japanese shares continue to outperform from our hypothetical cost basis date of 12/16/14:


  • Nikkei 225: +6.3%
  • STOXX 600: +8.1%
  • FTSE 100: -4.3%
  • S&P 500: -1.9%


That being said, however, it doesn’t make a ton of sense to bet that that outperformance continues from here at least not in the immediate-term. Specifically, a confluence of domestic and international factors suggests it is now appropriate for investors to book gains – be they absolute or relative – on the long side of Japanese equities (DXJ) and on the short side of the Japanese yen (FXY):


I) No Easy Money Anytime Soon: Despite that fact that Headline CPI, Core CPI and PPI all continue to slow on a sequential and trending basis, recent commentary out of the BoJ – led by Governor Haruhiko Kuroda – continues to be [inappropriately] sanguine on the outlook for reported inflation in Japan. On top of that, Prime Minister Shinzo Abe was out over the weekend effectively granting the BoJ leeway in its pursuit of the +2% inflation target amid the recent plunge in crude oil prices while also confessing his complete faith in the BoJ’s handling of monetary policy. The key takeaway here is that the Cabinet Office is unlikely to lean on the BoJ to ease in the near term, which, on the margin, reduces the likelihood of QQE expansion in 2H15. Specifically, increased wiggle room in obtaining key policy objectives delays the advent of presumably desired policy support measures from the perspective of Japanese equity market participants.


Get Out of Japan – For Now At Least - 1


Get Out of Japan – For Now At Least - 2


Get Out of Japan – For Now At Least - 3


II) China Headwinds: Clearly the recent devaluation of the Chinese yuan put dour outlook for regional and global growth at the center of investors’ concerns. Last Friday, Chinese growth – in Manufacturing PMI terms – hit a 77-month low with the advent of the flash Caixin-Markit report for the month August. As such, we can reasonably conclude that investors are commensurately worried about the outlook for corporate earnings growth in Japan given the headwinds to exports stemming from Chinese #GrowthSlowing (Japan’s 2nd largest export market at 18.1%), as well as the recent bout of defensive strength in the yen amid global contagion. For more details regarding our structurally bearish outlook for Chinese economic growth, refer to slides 7-19 of our recent presentation titled, “IS CONSENSUS RIGHT ON CHINA?” (7/16/15).


Get Out of Japan – For Now At Least - 4


Get Out of Japan – For Now At Least - 5


Get Out of Japan – For Now At Least - 6


Get Out of Japan – For Now At Least - 7


Get Out of Japan – For Now At Least - 8


Get Out of Japan – For Now At Least - 9


III) Correlation Risk: Speaking of global contagion, the recent melt-up in the Japanese yen (up +3.1% since Thursday’s close) and melt-down in the Nikkei 225 (down -11.1% since Thursday’s close) should remind investors that the Japanese equities remain tightly correlated to monetary policy expectations – despite growing calls for a sustainable decoupling. Specifically, cyclical bouts of global risk aversion have historically proved positive for the Japanese yen. This is largely due to the yen’s status as both a global funding currency and Japan’s status as an international capital allocator. Its net international investment surplus of ~$3.1T is equivalent to 75% of the country’s GDP and compares to a -$6.8T deficit for the US.


Get Out of Japan – For Now At Least - 10


Get Out of Japan – For Now At Least - 11


All told, while we still continue to see long-term upside for Japanese equities amid sustainable higher-highs in the USD/JPY exchange rate as the LDP and BoJ’s +3% GDP and +2% Core CPI targets clash with heinous demographic dynamics that should lead to perpetually easier monetary policy at the margins. Given the immediate-to-intermediate-term headwinds outline above, however, we do consider it prudent for investors to step to the sidelines for now.


Get Out of Japan – For Now At Least - 12


Get Out of Japan – For Now At Least - 13


Get Out of Japan – For Now At Least - 14


Please feel free to email us with any follow-up questions.




Darius Dale


McCullough: It Might Be Worse Than 2008


On Monday’s edition of RTA Live, Hedgeye CEO Keith McCullough talks about where investors should have stopped out of big-cap names like Disney and says 2015 is different from (and potentially worse than) 2008.


Subscribe to Real-Time Alerts today for access to this and all other episodes of RTA Live.


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CHART OF THE DAY: Take a Look At This Volatility Chart | $VIX

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. If you're serious about the markets and economy, you should seriously consider subscribing. Click here to learn more.


CHART OF THE DAY: Take a Look At This Volatility Chart | $VIX - z br cod 08.25.15 chart


...You see, this most recent rout (SP500 and Russell 2000 experiencing 11.1% and -14.2% drawdowns from all-time highs) is, after all, from the all-time highs! And there are compelling things to consider on the long side here that I personally missed (Gold’s most recent ramp) that are coming off 4-yr lows. As you can see in today’s Chart of The Day, the 1st blast higher in US Equity Volatility in 2011 wasn’t its last.

Understanding The Bounce

"Seek to understand more than to be understood.”

-St. Francis


That’s an important quote about one of the most important attributes of a great analyst (or leader for that matter): empathy. Can we find it within ourselves to see someone else’s point of view? If we can, we’ll learn a lot faster – and make less big mistakes, as a result.


In #behavorial psych, one of the glaring risks of not being empathetic and open-minded is called the Fundamental Attribution Error. “At the heart of it is the tendency of human beings to attribute the negative or frustrating behaviors of their colleagues to their intentions and personalities, while attributing their own to environmental factors.” (The Advantage, pg 32)


Sound familiar? It sure does to me. I can assure you that both in my business and life I have made this mistake more times than I can count. Whether or not I’ve had this stage of the “market call” right or wrong isn’t the point this morning. Win or lose, my #1 goal should be to seek and understand the #truth; not data and excuses that support my position.


Back to the Global Macro Grind

Understanding The Bounce - global growth.sick bull cartoon 08.24.2015


Understanding the bounce (in stocks, oil, etc.) this morning has to start with understanding what caused some of these big things to crash to begin with. If we can’t contextualize reality, the mistakes we’ve made along the way are going to compound.


So, like a good Bayesian, reset. Like, every day.


No, it’s not easy. Yes, it’s a grind. And yes you’re going to be humbled many more times than you feel “smart.” Most people in this profession are smart. That doesn’t differentiate us. What does is how you behave into and out of big macro market Phase Transitions.


What were the causal factors behind China, Emerging Markets, Oil, Junk Bonds, Bond Yields, etc. crashing?


1. GROWTH: the #LateCycle is meeting the secular = #Slowing

2. INFLATION: #Deflation continues to win the debate; inflation expectations have crashed

3. EARNINGS: with 480 of 500 companies (SP500) reporting, Q215 Revenues -3.9%, EPS -2.7%


I’d say those are 3 pretty important causal factors that all proved to be A) true and, more importantly, B) non-consensus. And that’s really the other place (alongside risk managing our behavior) to differentiate oneself in this profession - not being a groupthinker.


Alongside ramping SUPPLY and slowing DEMAND (happens at the end of every cycle), what else proved to be causal?


1. CHINA: slowing, panicking, centrally-planning

2. VOLATILITY: undergoing a very bullish Phase Transition from its all-time cross asset class lows (JUL 2014)

3. LIQUIDITY: chart/performance chasing on decelerating volume (higher); puke on accelerating volume (lower)


Ok, there are 6 things we should have had right. I can keep going, but I won’t. Because the point of this morning’s strategy note is to seek truth and position for what happens next.


Since “valuation” isn’t a catalyst in a #GrowthSlowing market where rev/eps forecasts are too high, what (if anything) is going to change what caused this?


1. GROWTH: US and European growth expectations remain way too high given the Q3 and Q4 #LateCycle comps

2. INFLATION: the #Deflation could stop crashing (if the Fed does Qe4), but is that really the bullish camp’s catalyst?

3. EARNINGS: revenue and earnings expectations for Q3 and Q4 remain way too high as well

4. CHINA: oh great, they’re cutting rates this morning – look how well that worked last go-round

5. VOLATILITY: what does “investing” look like in High Beta, High Growth Style Factors in a 29-47 VIX range?

6. LIQUIDITY: yesterday’s US equity volume was +58% and +40% vs. its 1mth and 1yr averages, respectively


Sure, you can blame the “machines”, my brother’s father-in-laws’ son, or we simpleton’s paying “too much attention to the data”? Or you can ask yourself what you missed and question whether or not you should be selling what you should have on today’s bounce.


You see, this most recent rout (SP500 and Russell 2000 experiencing 11.1% and -14.2% drawdowns from all-time highs) is, after all, from the all-time highs!


And there are compelling things to consider on the long side here that I personally missed (Gold’s most recent ramp) that are coming off 4-yr lows. As you can see in today’s Chart of The Day, the 1st blast higher in US Equity Volatility in 2011 wasn’t its last.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.13%


VIX 29.03-47.13

EUR/USD 1.12-1.16

Gold 1131-1168


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


Understanding The Bounce - z br cod 08.25.15 chart


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