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PHS & Purchase Apps | Mehhh ...

Takeaway: Summer doldrums have set in with July PHS +0.5% M/M, but decelerating Y/Y for the third consecutive month. Aug MBA #s show more of the same.

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.

 

PHS & Purchase Apps | Mehhh ... - Compendium 082715

 

Today's Focus: July Pending Home Sales & MBA Mortgage Applications

Pending Home Sales rose +0.5% sequentially in July following last month’s notable -1.7% retreat off the post-crisis highs recorded in May.  On a year-over-year basis growth decelerated -100 bps sequentially to +7.4% YoY, marking a 3rd consecutive month of 2nd derivative slowing. 

 

The takeaways are pretty straightforward:

  • From Great to Good: In rate-of-change terms, growth in activity is slowing and that trend should continue as comps steepen considerably through the balance of the year  (see charts 2/3 below).  
  • EHS Downside: PHS is a strong leading indicator for EHS and the prevailing tendency has been for EHS to re-couple in favor of PHS following short-term dislocations.  PHS softness in June and today’s uninspiring print for July suggest downside risk to reported EHS over the next month or two (see 1st chart below).   
  • Purchase App Corroboration:  The recent trend in Purchase Applications has been similarly lackluster.  Inclusive of the +1.7% gain in the latest week, Purchase Demand is tracking -2.4% MoM in August and -1.6% QoQ for 3Q.     
  • New vs Existing:  New and Existing Sales face similar (i.e. tougher) comp dynamics over 2H15 but, given where each is in their respective cycle, the MT/LT opportunity for new construction activity remains more compelling.  The mean reversion opportunity to average levels of activity in the new home market is ~20% while it's modestly negative in the existing market.  Upside to 6.0MM or greater in EHS is reachable (from 5.59MM last) but would require full market normalization and full resurgence in 1st-time buyer share to average historical levels. 
  • Rates:  Rates remain the lead swing factor for the complex and while rampant rate volatility has characterized most of the YTD, the expedited rate retreat over the last month has supported the relative case for domestic housing leverage.  At 3.83% on the 30Y FRM, affordability remains +4.5% better than the 2014 average and sits as a modest tailwind for HPI.

 

 

PHS & Purchase Apps | Mehhh ... - PHS vs EHS

 

PHS & Purchase Apps | Mehhh ... - PHS YoY TTM

 

PHS & Purchase Apps | Mehhh ... - PHS Comps

 

PHS & Purchase Apps | Mehhh ... - PHS Regional YoY

 

PHS & Purchase Apps | Mehhh ... - PHS LT

 

PHS & Purchase Apps | Mehhh ... - Purchase Apps Monthly YTD

 

PHS & Purchase Apps | Mehhh ... - Purchase Index   YoY Qtrly

 

PHS & Purchase Apps | Mehhh ... - Purchase Apps 2013v14v15

 

PHS & Purchase Apps | Mehhh ... - 30Y FRM 

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


INITIAL JOBLESS CLAIMS | TALEB'S TURKEY

Takeaway: Claims persist below the 300k Maginot Line, but, like Taleb's Turkey approaching Thanksgiving, real risk rises while perceived risk falls.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief. 

- Nassim Taleb, The Black Swan

 

Just like Taleb's Turkey, initial jobless claims appear on solid footing below 300k and the longer they stay there, the more comfortable/complacent markets tend to get. After all, the bull market is now six and half years old and we're at/near full employment with an accommodative Fed. The reality, however, is that we're drawing inevitably closer to Thanksgiving day ... and the market is, of course, the Turkey.  

 

Initial jobless claims came in at 271k last week, falling for the first time since hitting a 42-year low in the week ending July 18. Meanwhile, the year-over-year change in NSA claims continues to trend towards zero. That figure deteriorated slightly last week from -9.9% to -9.5%. 

 

In energy states, initial jobless claims maintained their position versus the country as a whole in the week ending August 15. The spread between those two indexed series in the chart below remained stable at 11. With the price of oil hitting new lows, we expect this spread to widen going forward.

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims18 normal  1


The Data

Initial jobless claims fell 6k to 271k from 277k WoW as the prior week's number was not revised.

 

The 4-week rolling average of seasonally-adjusted claims rose 1k WoW to 272.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.9%

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims2 normal  2

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims3 normal  2

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims4 normal  2

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims5 normal  2

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims6 normal  2

 

 INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims7 normal  2

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


INITIAL JOBLESS CLAIMS | TALEB'S TURKEY

Takeaway: Claims persist below the 300k Maginot Line, but, like Taleb's Turkey approaching Thanksgiving, real risk rises while perceived risk falls.

Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief. 

- Nassim Taleb, The Black Swan

 

Just like Taleb's Turkey, initial jobless claims appear on solid footing below 300k and the longer they stay there, the more comfortable/complacent markets tend to get. After all, the bull market is now six and half years old and we're at/near full employment with an accomodative Fed. The reality, however, is that we're drawing inevitably closer to Thanksgiving day ... and the market is, of course, the Turkey.  

 

Initial jobless claims came in at 271k last week, falling for the first time since hitting a 42-year low in the week ending July 18. Meanwhile, the year-over-year change in NSA claims continues to trend towards zero. That figure deteriorated slightly last week from -9.9% to -9.5%. 

 

In energy states, initial jobless claims maintained their position versus the country as a whole in the week ending August 15. The spread between those two indexed series in the chart below remained stable at 11. With the price of oil hitting new lows, we expect this spread to widen going forward.

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims18

 

The Data

Initial jobless claims fell 6k to 271k from 277k WoW as the prior week's number was not revised.

 

The 4-week rolling average of seasonally-adjusted claims rose 1k WoW to 272.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.9%

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims2

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims3

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims4

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims5

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims6

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims7

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims8

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims9

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims10

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims11

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims19

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 150 bps. 3Q15TD, the 2-10 spread is averaging 158 bps, which is consistent with 2Q15.

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims15

 

INITIAL JOBLESS CLAIMS | TALEB'S TURKEY - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


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 80.64%
  • SHORT SIGNALS 78.61%

REPLAY | Live Q&A with Healthcare Sector Head Tom Tobin on Market Turmoil (Plus a New Short Idea)

In CASE YOU MISSED IT...

 

Here's the live Q&A with Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman. They discussed:

  • Analysis of recent market turmoil's impact on Biotech fundraising 
  • Update their best ideas including MDSO
  • Unveil a new short idea based on their #ACATaper theme

 


WSM | Key Takeaways From The Print

Takeaway: Limited sq. ft. growth. Declining EPS growth rate and returns coming down. Tough to find a reason to own this name at 23.5x earnings.

 

Overall, not an impressive quarter for WSM. EPS was about in-line, but the company got there in a low-quality way. We have a hard time laying out a bull case on this one – as it has virtually no square footage growth in any concept except West Elm, and even that leaves us with consolidated growth of less than 3%. WSM has proven grossly incapable of improving its operating margin over the last three years, with annual margin sitting right in line with where it was at pre-recession peaks. So why own it? Cash flow margin is reasonably healthy, but the current stock repo rate is driving about 300bp in earnings growth. Nice, but nothing to write home about. In the end, we have a hard time building up to a double digit EPS growth rate in our model, and it comes with declining returns. Tough to find a reason to own this name at 23.5x earnings.

 

What We Liked

 

1) Top line – though every concept decelerated sequentially on a 2yr basis except for PB Kids (flat) the company beat lowered expectations by 200bps or $19mm. 25-50% of this was due to the guided port strike revenue issues ($5-$10mm) which didn’t materialize during the quarter (sandbag?). That’s good news for RH who a) isn’t reliant like WSM on seasonal merchandise and b) product flow should start to normalize.

 

2) West Elm continued to hum along with a 15.7% comp in the quarter. To be fair that was a 90bps deceleration sequentially in the underlying trend, but it’s been a fairly good barometer for RH over the past few quarters and the current consensus numbers assume that West Elm outperforms RH in the numbers the company will report in 2 weeks. West Elm has only outcomped RH twice since 2012 in 1Q14 and 2Q14 when the company changed up its source book strategy. We expect to see a bifurcation in growth trends as RH top line growth accelerates in back half of the year as it rolls out Modern and Teen.

 

WSM | Key Takeaways From The Print - wsm comp

 

3) Unit growth accelerated to 32.9% at the West Elm concept (3.2% for the company) – the highest growth rate for West Elm since 1Q09 and the company will add another 9 units before the year is over. The runway for growth appears to be running out with new doors in Grand Rapids, MI, Rochester, NY, and Charleston, SC not what we could consider ‘A’ MSAs.

 

What We Didn’t Like

 

1) Last quarter was the first time in the past 17 that WSM had printed down EBIT growth YY. At that point in time the company attributed all of that loss and then some to the port delay issues. 2Q15 marks the 2nd quarter in a row where EBIT was down and Earnings growth was made up entirely by tax rate (which wasn’t assumed in the company’s guidance). The port strike negatively affected EBIT by 50bps and pressured earnings by ~$0.04 and increased labor hours added another ~30bps of pressure.

 

2) Op margins were down for the 2nd straight quarter and are guided to a range of 10.2%-10.5% for the year. We give the company credit for being able to offset 8 straight quarters of gross margin declines headed into this fiscal year and still hit a peak EBIT margin of 10.5%. That trend has continued into FY15 and now the company is going back into investment mode (i.e. less SG&A leverage) as it continues to rejigger its e-comm capabilities and clean up its supply chain. Some of the port related costs roll off after we clear 3Q. But, WSM operates at a 10.5% EBIT margin under the BEST conditions, i.e. mid to high singled digit comp growth. What happens when the top line slips to the LSD?

 

3) The company guided the mid-point of the 3Q range 6% below street expectations implying an earnings growth rate of flat to +7% on 4-6% comps and 6.5% revenue growth. Not heroic by any stretch, but the company needs to prove that it can offset added cost pressures on both the GM and SG&A lines from lingering port issues and investments. For the full year we need to assume that margins get back to flat or +50bps to hit the 10.2% -10.5% range for the year after a 70bps contraction in 1H. We have a hard time getting comfortable with that. 


FLASHBACK | Tiffany's $TIF: We Don’t Like It

This is a brief excerpt from a research note published Tuesday night by our retail team ahead of this morning's print. Tiffany shares were down -5% as of this posting. If you would like more info on how you can subscribe to our institutional research please email sales@hedgeye.com.

We don’t like Tiffany & Co. 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.

 

FLASHBACK | Tiffany's $TIF: We Don’t Like It - z bri mcgough

 

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.

 

FLASHBACK | Tiffany's $TIF: We Don’t Like It - z ben 08.24.15 chart large

 

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.

 

Ping our sales team for more info on our research.


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