CHART OF THE DAY: Homebuilders: Sector Quant | $ITB

Editor's Note: The chart and excerpt below are from today's Early Look. This morning's note was written by our U.S. Macro Analyst Christian Drake. For more info on subscribing click here.  


Is great not good?   If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?  


Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening.  Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months.  The asset allocation and prospective policy implications are largely implicit. 


CHART OF THE DAY: Homebuilders: Sector Quant | $ITB - HB CoD2

Life's Belt

"In the land of the blind, the one-eyed man is king." 

-Desiderius Erasmus Roterodamus


I haven’t run more than 2 miles in probably 6 years.  I woke up and ran 8 miles at 2:30 am this morning - Because I can. 


My grandmother went into hospice late last week.  By (unfortunate and too frequent) experience, a familiar emotional and mental rhythm accompanies the time between terminal diagnosis and passing.   


The period is profound and is typically characterized by self-reflection and a renewed appreciation for the fleetingness of time and delicacy of life.  Born of that life-contemplation is deepened gratitude and vows of change and self-betterment. 


Remarkably, however, and, again, by experience, the human tendency towards transience is equally profound.  High-entropy life events which, in the moment, carry the impetus for lasting physical/spiritual/psychological transformation rarely result in material personal metamorphosis.


How long until the hum-drummings of daily life scuttle the renewed appreciation for family?  How long until double cheeseburgers again replace early AM exercise sessions or social media supplants meditation?  How long until the mental “this time is different” edifice implodes under the weight of its own artifice?


If there’s an investment parallel in this existential drudgery, it’s probably the shortness of market memory.  “This time is different” and “if everyone is wrong, no one is wrong” are sirenic contrivances of an institutionalized market. 


Anyhow, in other Non-Conventional news, we increased the cash position in the Hedgeye Asset Allocation model to >60% ahead of and through the latest bout of global tumult – Because we can.  


Life's Belt - NHS CoD1


Back to the Global Macro Grind …


Following last week’s higher post-crisis high in Existing Home Sales, we contextualized the current setup for housing in the following way: 


Better than Beta | When Good is Great:  Asset investibility is relative and when growth gets scarce, the growth that exists gets bid.  Housing’s rate-of-change transition from great to good in 3Q has proved a winner relative to the double decrement - from okay to bad -  in global growth and inflation trends.   Further, the recent retreat in rates – stemming largely from OUS turmoil – has further supported the relative case for domestic housing leverage over the nearer-term as affordability can tread water in the face of higher prices.  Even domestically, with business investment (still) flagging and rising personal savings stymieing an acceleration in domestic consumerism, housing and resi investment sit among a select set of absolute and relative macro performers.  Indeed,  the shelter component of inflation which represents ~32% of the CPI basket, remains the singular source of strength buttressing the headline and core CPI readings as disinflation/deflation prevail across the preponderance of goods and services prices.    


Recall, this perfectly subjective gem of a question from the BLS anchors the CPI report and the Fed’s view of Inflation’s reality: 


“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”


Moving on.


Yesterday, we got the July update on the 9% of the Housing market that is New Home Sales.   


  • The Data: New Home Sales = +5.4% MoM and +26% YoY!
  • The Detail: As can be seen in the Chart of the Day above, 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 brick of a print and, on an absolute basis, July 2014 represented the lowest level of sales in 2-years. 
  • The Distillation:  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 to the magnitude of upside available in the existing market (which has already mean reverted back to average levels of activity).  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. 


We also received the latest update on Home prices via the Case-Shiller and FHFA HPI reports.  As we’ve highlighted repeatedly, the trend in HPI is important because it exhibits a strong contemporaneous relationship with housing related equity performance.  


  • The Data:  The Case-Shiller 20-City HPI for June – 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.  On an NSA basis, all 20 cities reported sequential increases while, on an SA basis, 10-cities reported declines.
  • The Detail:  For the 2nd consecutive month, the 20-city series and the National HPI (which covers all U.S. Census divisions ) have shown divergent, 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 Distillation:  The deceleration in the 20-city series 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.   


So … Domestic Residential Housing … a white knight amidst the legion of Global Macro Gloom.  Right?


ITB = -5% on the day yesterday amidst the beta bloodletting (& juiced by TOL earnings)


Is great not good?   If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?  


Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening.  Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months.  The asset allocation and prospective policy implications are largely implicit. 


Tops are processes (not points), valuation is not a catalyst and, conveniently, risk managing the immediate term carries the added benefit of appropriately positioning oneself for intermediate-term risks.  I explained the practical implementation of our process in an Early Look last month, but it’s worth re-iterating as the signal serves to identify when you should be buying the dips and whether you should be buying or selling into strength: 


Fading Beta Redux:  When something is at the top end of its immediate-term risk range, you sell some.  When it retraces to the bottom end of its risk range, you buy some more – provided that the security holds TRADE support.  If it breaches TRADE support to the downside – that’s fine - you are out of the way (or underweight) and can wait for a test and hold of TREND support before buying back the exposure.  If the security breaches TREND support, again, you are out of the way for a potentially large gap down to TAIL support. 


As it stands, every S&P Sector is currently bearish TRADE & TREND in the @Hedgeye model.  Select securities may present compelling short-term long opportunities but, in this setup, attempting to knife-catch beta is not an exercise in fiduciary excellence.   


re-think, re-learn, re-work.


After dropping my son off for his first day of kindergarten this morning, I’ll head back over to the hospital.  Life – and markets – cycle.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.13% 

SPX 1 
RUT 1077-1170 

VIX 24.44-45.42 
USD 93.36-95.79
Oil (WTI) 38.04-40.99


To notches in Life’s Belt,


Christian B. Drake

U.S. Macro Analyst


Life's Belt - HB CoD2


August 26, 2015

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The Macro Show Replay | August 26, 2015


5 Reasons Why the Fed Won’t Raise Interest Rates in 2015

5 Reasons Why the Fed Won’t Raise Interest Rates in 2015 - Fed rates cartoon 04.07.2015


The U.S. Federal Reserve has consistently indicated to investors their intentions to raise short-term interest rates this year. One of the more outspoken proponents of raising rates has clearly been Atlanta Fed President Dennis Lockhart. In a Wall Street Journal interview earlier this month, Lockhart indicated that he expected rates to increase in September. Then, just this past Monday in a speech in Berkeley, California, he once again reiterated the call for short-term rates to increase this year, even if not in September.


Right now, the consensus view of mainstream economists echoes the public statements of Lockhart and his Fed colleagues on rates. In fact, according to a recent survey from the National Association of Business Economics, 77% of economists surveyed indicated they believed the Fed would ultimately raise rates before the end of the year.


So, notwithstanding the strong consensus view that interest rates will increase this year, our firm is sticking with our long-held view that rates will remain both lower and near zero for longer than most people believe. From our analytical perch, there are five key reasons we believe this:


Click here to continue reading on Fortune.

TIF | We Don’t Like It

Takeaway: 2Q looks fine. The back half is a stretch. 2016 needs to come down.

We don’t like TIF into the print as we think 1) back half numbers look too high, and 2) this model is extremely poorly positioned for the consumer climate we’re forecasting. There are definitely redeeming qualities about the name – most notably the Brand (and that’s pretty much it).  But it is trading near a peak multiple (18.5x) on peak margins (21%), peak earnings ($4.24E), peak returns (18%), has the worst cash conversion cycle we’ve ever seen (490 days), while sentiment is sitting at all-time highs. It’s feast or famine – if one of those metrics breaks, then they all do.  


Common perception seems to be that “just because TIF blew up earlier this year, it can’t blow up again.” We simply disagree. The environment has changed significantly, and the company’s guidance for back half growth “in the double digits” is not going to happen. Could the company grow earnings in the 4-6% range? Yes. It can. But that implies at least a $0.15 guide down. Importantly, that could/should cause the consensus to revisit its $4.75 estimate for next year, which we don’t think is achievable. We think a base case is $4.50, with downside to $4.00 as the macro environment worsens.


Historically, TIF’s multiple change has been fairly explosive. As you can see, when earnings have been revised meaningfully up or down, we’ve seen TIF’s multiple relative to the S&P move by up to 40%. The point is that a $4.00 earnings number won’t get a high-teens multiple. It will get something in the low teens while the market waits for earnings to find a bottom. Using that logic, it is not unrealistic to model a $50 stock -- $30 lower. Are we making a call right now for such severe downside? No, we’re not. But that’s where the research initially appears to be headed.


TIF  |  We Don’t Like It - TIF PE NTM EPS


Mother Macro Could Make $4.00 (or less) A Reality?

Consider the following… Domestic economic growth is now well past-peak in rate-of-change terms for this economic expansion, with US GDP growth getting tougher in the 2nd half of 2015 vs. the 1st half. That means, if you held all other risks equal, the probability is higher that growth slows in Q3 and Q4 than Q2.  And the last two cycle tops didn’t have this mother of all demographic secular slowings – and note that this isn’t just the US -- the chart below represents better than 90% of Tiffany’s earnings.


TIF  |  We Don’t Like It - z ben 08.24.15 chart


Modeling Considerations

2Q:  Overall, 2Q looks ok to us. Street estimates imply a slowdown in the 2 year constant currency comp by ~200bps.  That seems fair. LVMH and Kering both noted rebounds in jewelry sales in their second quarters.  Additionally, TIF's comp has directionally followed the organic growth of LVMH watch and jewelry sales for the past 4 quarters.  A potential positive is the Tiffany T collection which could/should boost penetration of the higher margin gold/silver fashion product. TIF’s US e-commerce business implies healthy demand in 2Q – though the trends look problematic into 3Q. It’s only 6% of TIF’s business, but is a good barometer for overall demand. Furthermore, TIF’s SIGMA chart looks very bad. Inventories are out of whack with the P&L in a way that is unlikely to be a 1-quarter fix without a meaningful margin event.


TIF  |  We Don’t Like It - tif sigma


Back Half

Here’s where we think the problem lies. Comp estimates are reasonable against easy compares, but Q3 margin comp is toughest of the year (even worse on 2 year rate).  SG&A growth was just 1% in Q4 last year, yet the street looking for SG&A leverage in this Q4 as the company despite the company putting more capital into its new watch collection and "Will You" engagement campaign.  FX pressure is likely to ease in Q4, but what helps revenue and GM will hurt SG&A. The Street has 11% EPS growth in Q3 and Q4. We see it more as flat Q3 and HSD Q4.


TIF  |  We Don’t Like It - TIF CCC

TIF  |  We Don’t Like It - TIF Rank

TIF  |  We Don’t Like It - TIF reach

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