Builder Confidence | Boom Goes the Dynamite

Takeaway: Builder confidence in September records a new post-crisis high of 62, but remains well below the prior cycle highs of 71, 78 and 72.

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.


Builder Confidence | Boom Goes the Dynamite - Compendium 091615


Today's Focus: September NAHB HMI (Builder Confidence Survey) & Mortgage Apps


Builder Confidence:  New Highs | Builder Confidence made another post-crisis high in September with the HMI rising +1pt to 62, marking the strongest reading since October 2005. 


Across the Sub-indices, 6M Expectations dipped -2 pts sequentially while Current Sales and Current Traffic both rose +2pts.  Geographically,  builder optimism in the West was flat MoM while the South, Midwest and Northeast all recorded gains sequentially. 


Builder vs Consumer Confidence: Given the low base of new construction activity, continued low rates, ongoing labor market improvement and the steady gains observed across Pending, Existing and New Homes sales YTD, the sustained build of positive sentiment is not particularly surprising.  Under the hood, the decline in 6M Expectations in September accords with the steep drop observed across the same category in the University of Michigan’s preliminary September reading (see confidence table below) although the headline HMI doesn’t appear to be impacted by the global turmoil and equity market correction that seemingly weighed on the broader measure of consumer confidence.   


The divergence is interesting given the tendency for builder confidence to lead both Consumer Confidence and broader macro inflections over recent cycles.   Any emergent bifurcation between the two confidence measures could also be reflecting the divergent short-to-medium term paths being tread by housing and the larger economic cycle.  As we’ve highlighted (see: Resi Construction & the Cycle), while we’re late or mid-late cycle more broadly, we’re probably somewhere closer to early-mid or mid cycle in housing itself given the significantly lagged recovery in the sector.  


With respect to NAHB commentary around the September data: 


NAHB Chairman Tom Woods commented: 

"The HMI shows that single-family housing is making solid progress ….However, our members continue to tell us that they are concerned about the availability of lots and labor.”


NAHB Chief Economist David Crowe added

"NAHB is projecting about 1.1 million total housing starts this year ..Today's report is consistent with our forecast, and barring any unexpected jolts, we expect housing to keep moving forward at a steady, modest rate through the end of the year.”



Purchase Applications: Mostly Noise | Purchase application demand fell -4.2% in the latest week while decelerating to +15.9% YoY.  Given that it was a holiday shortened week and the holiday was shifted relative to last year, the noise level in this week’s data is substantial.  The prevailing read-though on the trend in the data remains largely unchanged, however.  Purchase demand remains lower by ~1% QoQ in 3Q while reported year-over-year growth remains (& should remain) solid as compares remain easy through the balance of 2H.   


Monetary policy and the flow through impact to rates will likely remain the largest externality for housing in the nearer-term.  Beyond any nearer-term volatility associated with the attempt at policy normalization, our macro call on both growth and inflation remains slower-and-lower-for-longer and would view a flattening of the curve and flat-to-lower long-term rates as an increasingly likely by-product of a sustained attempt at tightening.   


(h/t to Brian Collins for today's note title inspiration)


Builder Confidence | Boom Goes the Dynamite - NAHB LT


Builder Confidence | Boom Goes the Dynamite - Confidence table


Builder Confidence | Boom Goes the Dynamite - NAHB Indicators


Builder Confidence | Boom Goes the Dynamite - NAHB Regional


Builder Confidence | Boom Goes the Dynamite - Builder vs Cons Conf


Builder Confidence | Boom Goes the Dynamite - Purchase   Refi YoY


Builder Confidence | Boom Goes the Dynamite - Purchase 2013v14v15


Builder Confidence | Boom Goes the Dynamite - Purchase Index   YoY qtrly


Builder Confidence | Boom Goes the Dynamite - Purchase LT


Builder Confidence | Boom Goes the Dynamite - 30Y FRM



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.


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. 



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



Joshua Steiner, CFA


Christian B. Drake


Why Housing May Be Set To Outperform The Broader Market


In today’s edition of The Macro Show, Hedgeye analysts Christian Drake and Josh Steiner discussed our (contrarian) call that while the broader U.S. economy is in a late-cycle slowdown, housing remains early to mid-cycle and why we expect the housing sector to be a major relative outperformer vs. the rest of the market.


Subscribe to The Macro Show today for access to this and all other episodes. 


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We're Keeping Our Exposure Low

After six tries in as many months, the UST 2YR yield ripped through 0.75% resistance to 0.82%.


What does it mean?


Moreover, what did it mean when it ripped to this same level in October 2011 (see chart below), before crashing to 0.16%? Looked like a big asset allocation move to me.


German and Swiss 10s are at their 1-month highs as well.


We're keeping our exposure low heading into this very risky Fed event day. Reacting at extremes? It has not worked.


We're Keeping Our Exposure Low - z sod


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CHART OF THE DAY: Confused? Stick With What You Know

Editor's Note: The chart and brief excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. For more information on how you can subscribe click here.


CHART OF THE DAY: Confused? Stick With What You Know - z zod 09.16.15 chart


...And, while I can assure you that I’m more confused today than I was on Friday (in terms of how this all plays out in the very immediate-term), I’m still as confident as I can be in both the gift of life and staying true to our process.

Get The Drill?

“I’m not confused, I’m just well mixed.”

-Robert Frost


Wow. What a macro move that was yesterday!


While I have a lot on my plate personally this morning (God willing, the pending birth of our 4th child), markets have a lot to deal with, generally. I haven’t seen this kind of confusion ahead of a Fed meeting since this entire 0% rates experiment started.

Get The Drill? - Bull and bear extra cartoon


Back to the Global Macro Grind


To review what happened intraday (on slow Total US Equity Market Volume of -8% and -11% vs. the 1-mth and 1-yr averages, I might add) yesterday – here’s how I scored it:


  1. US Equity Futures were DOWN after Chinese stocks retested the lows on a -3.5% drop
  2. US Economic Data SLOWED (Retail Sales and Industrial Production for AUG)
  3. USD and Rates DROPPED on the econ DATA, US equity futures RALLIED on “Dovish Fed”

*Then, intraday, FX and Rates REVERSED, taking USD, YIELDS, and STOCKS straight up on the day


The “reasons” on the reversal were many. Being the guy who can’t front-run your desk with mine (I don’t have one), I tend to get a lot of real-time, trusting, client intel on what people think is going on. Here were the big ones yesterday:


  1. “The Chinese are selling Treasuries” (implying they had to defend their stock market and raise money to do it)
  2. “A big asset allocation trade” (out of bonds into stocks)
  3. “That was the low in US economic data” (US data should accelerate to the downside in Q4, not bottom in Q3)


I could go on and on with the less impressive rumorings, but you get the point – these are not only dramatic reasonings, but highly debatable ones that I think macro markets have been pricing in, for a long time now.


What makes the debate intense are the performance problems out there. With a large % of “Long Onlys” underperforming their “bench” (and that equity benchmark being down YTD) and plenty of hedgies losing moneys, that is what it is.


For those of us writing this strategy letter (who haven’t had to make excuses for the last 3 months), we’re happy to be well mixed after a tough day of trading, and readying our good wife to give birth!


What to do from here?


  1. Answering that question with more questions is where I’m going and I’ll…
  2. Probably do a whole heck of a lot of nothing… as I
  3. Wait and watch for this Federal Reserve EVENT RISK to play out


In terms of this move in rates, for those of you who follow my signaling product (Real-Time Alerts), you know that, fortuitously, our risk management #process signaled to get out of some Treasury exposure, on Friday (TLT was at $122).


Since I’m short on time this morning here were the highlights of that “call”:


“With TLT doing it's job (again) +1% on the day in another down US stock market tape, this is not an easy signal for me to send out - and maybe that is precisely the point... I spend a lot of time thinking about what our GIP Model (Growth, Inflation, Policy) is signaling. When we have heightening convictions on what we call a Phase Transition(going from bearish to bullish TREND or vice versa), we make that call. Updated examples of that are as follows:

1. GROWTH - signaled bullish (growth accelerating) coming out of 2012, then bearish (slowing) here in 2015

2. INFLATION - signaled #Deflation in Q3 of 2014 and have not yet signaled anyPhase Transition from that TREND

The problem with making a call on POLICY (from here into the Fed meeting next week) is that I have no idea what the Fed is going to do. My confusion on POLICY risk should not to be confused with:

A) What they should have done - started raising rates in SEP 2013, so that they'd have room to cut, eventually and/or

B) What they should do now - nothing as tightening into a slowdown isn't modern day monetary policy rules 

What scares the hell out of me is that they still don't know what they want to do - and they have to decide within a week.

Will that decision be based on what the US Equity Futures do in the next 3 hours or 3 days of trading? Or will it be based on "proving they can" despite Fund Fund Futuressaying they shouldn't? Consensus Macro may not, but we know growth (globally and locally) is slowing. We don't know what Janet Yellen is going to do with that. So I'd rather take down some Treasury Bond market exposure to an open-the-envelope event, then revisit on the event.”


Yep. I just quoted myself.




And, while I can assure you that I’m more confused today than I was on Friday (in terms of how this all plays out in the very immediate-term), I’m still as confident as I can be in both the gift of life and staying true to our process.


Sometimes it gives us conviction. Sometimes it gives us pause. Waiting and watching for something you cannot control is a humble position to take. But after my first 3 kids (and 3 #LateCycle slow-down calls in the last 15 years), I get the drill.


UST 10yr Yield 2.12-2.29%

VIX 21.03-29.07
USD 94.68-96.48
Oil (WTI) 43.19-48.90


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Get The Drill? - z zod 09.16.15 chart

Macro Reversals

Client Talking Points


After 6 tries in 6 months, the UST 2YR Yield ripped through 0.75% resistance to 0.82% - what does it mean? Moreover, what did it mean when it ripped to this same level in OCT 2011, before crashing to 0.16%? Looked like a big asset allocation move to us – German and Swiss 10s at their 1 month highs as well – we’re keeping exposure low into this very event risk Fed day; reacting at extremes has not worked.


Ironically, nothing in equity volatility space really changed on the latest U.S. stock market rip. Our immediate-term risk range for VIX is still implying 21-29 and intermediate-term it’s 18-41. The rates move wasn’t driven by good economic data – and if a Fed Hike was leaked, why is Oil +1.7% this morning (and Oil & Gas stocks +1.8% yesterday)?


The most unnerving part about the equity/commodity move is that A) it still had a lot of Dovish Fed expectations embedded in it and B) it came on very slow volume (Total U.S. Equity Market Volume -8% vs. the 1 month average); bearishness (net SHORT position in SPX Index futures/options contracts) alone could have explained the pop – but there’s a lot going on here, so we’re going to wait/watch.


**Tune into a special Housing edition of The Macro Show with Housing analysts Josh Steiner and Christian Drake - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.


Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.


Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.


In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.


In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):


  1. Treasuries (TLT)
  2.  “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road


NEW VIDEO (1:30 min)

The Death of U.S. Exceptionalism… via @KeithMcCullough



Concentration is the secret of strengths in politics, in war, in trade, in short in all management of human affairs.

Ralph Waldo Emerson


Total U.S. Equity Market Volume yesterday was down -8% and -11% vs. the 1-month and 1-year averages.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.