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Starts & Permits | The Crawl Continues

Takeaway: New Highs are still new highs, even if they're slightly less impressive than we thought they were a month ago.

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.

 

Starts & Permits | The Crawl Continues - Compendium 091715 

 

 

Today’s Focus:  August Housing Starts & Permits

Last months hangover in permits following the NY tax exemption pull-forward in May/June was acute.   The Starts data for August released this morning, which saw MF and SF starts in July revised lower by -5.9% and -2.6%, respectively, reflected a more significant flow through to starts activity than originally estimated.

 

The positive framing to the negative revision is that a post-crisis high in new SF construction activity being negatively revised to a slightly lower post-crisis high is largely inconsequential.    

 

The same conclusion probably holds for the August data as well.  Single-family permit activity rose to the strongest level since January 2008 and, while starts declined -3.0% MoM to +739K, they remain at current cycle highs and offer some solid justification for the 10-year high in builder confidence recorded in yesterday’s HMI print for September (Note: HERE).  On the multi-family side, Starts dipped -3% while permits rose +4% following last month’s cratering. 

 

In short, August saw a sequential but unremarkable dip while the positive, albeit crawling, trend of improvement in the New Home market remains ongoing.   

 

Looking ahead to the Existing Market, we’ll get the EHS data for August on Monday.  Relative softness in PHS in both June and July along with flat-to-down trends in Purchase Applications continue to argue for modest downside risk to reported EHS over the next month or two.

 

 

Starts & Permits | The Crawl Continues - Starts Total LT

 

Starts & Permits | The Crawl Continues - SF Starts TTM

 

Starts & Permits | The Crawl Continues - SF Starts LT

 

Starts & Permits | The Crawl Continues - MF Starts TTM

 

Starts & Permits | The Crawl Continues - MF Starts LT

 

 

 

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.” 

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK

Takeaway: Labor Day makes this week's reading on the labor market not especially useful. Meanwhile, the lateness of the cycle remains the focus.

Recently, we've been writing more frequently about the environment being late cycle. For instance, here's our comparison of the current environment to Taleb's Turkey. This morning's numbers, while very good optically, should be taken with a grain of salt as they reflect the holiday-shortened week and the holiday fell on a different week this year. We'll hold off judgement until we see next week's print.

 

The bigger picture remains that of #tick-tock, tick-tock .... 

 

In energy states, the spread between claims in our basket of energy states and the country as a whole was little changed in the week ending September 5, widening from 9.5 to 10.2.

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims18

 

The Data

Prior to revision, initial jobless claims fell 11k to 264k from 275k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.25k WoW to 272.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.6%

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims2

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims3

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims4

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims5

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims6

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims7

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims8

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims9

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims10

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims11

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims19

 

Yield Spreads

The 2-10 spread rose 3 basis points WoW to 149 bps. 3Q15TD, the 2-10 spread is averaging 155 bps, which is lower by -4 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims15

 

INITIAL JOBLESS CLAIMS | WAITING FOR NEXT WEEK - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Rate Hike?

Client Talking Points

# VOLATILITYEXPECTATIONS

The VIX index continues to be pushed lower, down -48% from the August 24th highs. OVX, the WTI equivalent, remains at a 50-handle, down -13% from its September 1st highs. The MOVE index is -10% off the August 24th highs in the VIX. The VIX suggests the FED can talk things under control. We’ll see today with the decision at 2:00PM ET and the press conference following.

#FEDERALFUNDS

Probability of a 25 basis points rate hike is at 32% this morning, which suggests a lot of repositioning as the market digests the news in the event of a surprise (What would the VIX do on that?). If not, what does it say about the strength of the U.S. economy? Slower for longer. The traditional trigger for tighter policy is aimed at extinguishing heightening inflation expectations. Yesterday’s CPI print was anything but, printing +0.2% year-over-year for AUG. and -0.1% month-over-month. 

HOUSING

Builder Confidence in September made a new post-crisis high of 62.   From a macro perspective, the gain is interesting as builder confidence has, historically, served as a solid lead indictor for consumer confidence more broadly (which has slide in recent months) and the larger economic cycle.  We continue to think the housing recovery remains early-mid or mid-cycle and the complex should remain a source of solid relative outperformance over the intermediate term. 

 

**Watch a replay of today's special Financials edition of The Macro Show with Financials analyst Jonathan Casteleyn - CLICK HERE

Asset Allocation

CASH 73% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 21% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

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.

PENN

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.

TLT

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

TWEET OF THE DAY

NEW VIDEO | Why Housing May Be Set To Outperform The Broader Market https://app.hedgeye.com/insights/46379-why-housing-may-be-set-to-outperform-the-broader-market… via @HedgeyeFIG @HedgeyeUSA $ITB #markets

@Hedgeye

QUOTE OF THE DAY

If a man does not know to what port he is steering, no wind is favorable to him.

Seneca

STAT OF THE DAY

On Wednesday the Census Bureau reported that the median American household made just under $54,000 in 2014, essentially unchanged from a year earlier after adjusting for inflation. Nearly 47 million Americans are living in poverty, unchanged since the worst of the recession.


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.

CHART OF THE DAY | Case Study: U.S. Dollar Index

Editor's Note: The chart and excerpt below are from today's Early Look which was written by our U.S. Macro Analyst Christian Drake. Click here if you're interested in getting a step ahead of consensus with our morning market note.

 

CHART OF THE DAY | Case Study: U.S. Dollar Index - z z Dollar CoD

 

A few other pre-FOMC considerations:

 

  • $USD:  As can be seen in the Chart of the Day, in prior cycles, most of the gains in the dollar have come in anticipation of policy tightening with the currency typically weakening once rates hikes actually commence. #Frontrunning
  • Fed Fund Futures:  As has been well highlighted, Fed Fund futures are only pricing in a 23% chance of a rate hike as of this morning and, given the Feds unprecedented predilection for managing market expectations, an unanticipated rate hike could propagate unwanted volatility.  The hawkish rejoinder is that the fed fund futures market can be thin and the front end of the curve (3M-2Y treasuries) is positioning for a policy shift.
  • Lags:   The outside lag on policy – the Feds view of how long it takes enacted policy to flow through the real economy – is something like 6-18 months. Broadly, this (loosely) argues for pre-emptive policy followed by a lot of wait-and-see.

 


Mom Test

“So, what should I be doing [investment-wise] now?”

-Barbara Drake (my mom) - passive/unsophisticated investor, 9/13/15

 

The Mom Test is great.

 

First of all, everyone has one or, at the least, a reasonable mother-figure proxy. 

 

Second, our capacity for intentionally misleading Mom to probable personal and/or financial harm is, generally, diminishingly low. 

 

From an investment management perspective, answering the inquiry has a sneaking ability to distill out the willful blindness and fuzzy narrative framing, laying bare your true inner conviction. 

 

Take the Mom Test – it’s a refreshing and surprisingly simple exercise in noise reduction and thesis clarity .… unless you’re Robbie Akerlof (go ahead, look it up!)

 

Back to the Central Planning Grind …..

 

The FOMC coverage today will be manic and ubiquitous.  Having raised cash for Mom, we’ll stay long of waiting and watching into the open-the-envelope risk, then respond accordingly.

Mom Test - Fed in a box cartoon 09.16.2015

We can, however, provide some context around the current dynamics: 

 

First, remember the basic goal and mechanics of policy.  The core conceptual underpinning is straightforward but that simplicity tends to get lost in the endless nuance and theoreticals.

  

  1. Expansionary policy aims to lower the real interest (widening the spread between the real rate and the marginal product of capital) in an attempt to support growth via investment and consumption (interest rate effects) and net exports (currency effects).  *Mom, c’mon, don’t you know the model says you’re supposed to be a rational, intelligent agent who actually knows what the real rate is and makes decisions on what you expect that real rate to be in the future!
  2. Contractionary policy aims to tighten financial conditions in order to quell emergent inflationary pressures. The mechanism is the obverse of expansionary policy with higher rates lowering investment, debt financed consumption and net exports.

 

Macro markets are a moving target and, at times, market events can serve as a substitute for policy in both directions.  Given that current discussion centers on policy tightening, consider the impact of recent events on financial conditions:  

 

  1. $USD:  ↑ U.S. Dollar = ↓ Inflation = ↑ Real Rates:  Remember, policy is focused on the real rate (real rate = nominal rate – inflation) with declining inflation driving real rates higher.  Strong Dollar deflation serves as de facto tightening.
  2. Equities:  Equities have benefitted from ZIRP via the Present Value effect:  ↓ Rates = ↓ discount factor = ↑ present value = ↑ equities.  Fundamentally the conclusion is the same: ↓ Rates = ↑ investment/consumption = ↑ Spending = ↑ Profits.  Higher rates, in theory, should have the opposite effect.  Further, with hundreds of billions of market value lost in the last month, valuations and “financial imbalances” have seen a modest correction.
  3. Credit:  Global Turmoil + attempted policy front-running have driven credit and risk spreads higher and pushed rates on the front-end up.   

 

Translating those tightening financial conditions into rate hike equivalents (i.e. does it equate to a 25 bps hike, 50 bps hike, etc) is tricky but, collectively, conditions have tightened in recent months. 

 

A few other pre-FOMC considerations:

 

  • $USD:  As can be seen in the Chart of the Day below, in prior cycles, most of the gains in the dollar have come in anticipation of policy tightening with the currency typically weakening once rates hikes actually commence. #Frontrunning
  • Fed Fund Futures:  As has been well highlighted, Fed Fund futures are only pricing in a 23% chance of a rate hike as of this morning and, given the Feds unprecedented predilection for managing market expectations, an unanticipated rate hike could propagate unwanted volatility.  The hawkish rejoinder is that the fed fund futures market can be thin and the front end of the curve (3M-2Y treasuries) is positioning for a policy shift.
  • Lags:   The outside lag on policy – the Feds view of how long it takes enacted policy to flow through the real economy – is something like 6-18 months. Broadly, this (loosely) argues for pre-emptive policy followed by a lot of wait-and-see.

 

Janet’s Jinx:  The majority of policy maker consternation centers on the Sisyphean fight for above target inflation.  Yesterday’s CPI data for August which showed headline inflation declining -0.1% MoM only reinforces that reality.

 

While deflation will, indeed, be transient in the sense that we will lap the energy price collapse and strong dollar/slowing global growth drag on import prices, September will mark the 41st month of sub-2% price growth in the Fed’s preferred Core PCE inflation reading. 

 

Further, and unfortunately, price growth problems also carry real consequences for the populace.

 

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the series used for adjusting payments made to Social Security and Supplemental Security Income (SSI) benefits.  The Cost-of-Living Adjustment (COLA) is the government’s attempt at maintaining the purchasing power of social security and SSI payments.   

 

The COLA adjustment calculation methodology is as follows:

  • Reference Period:  The reference period =  the 3rd quarter of the calendar year (July-Sept)
  • Calculation:  Adjustment Calculation = ave 3Q15/ave 3Q14 -1 (in words:  growth in the average price level in 3Q15 relative to the average price level recorded in 3Q14)
  • Caveats:  If growth in the cost of living is greater than 0.10%, then an adjustment is applied (i.e. social security benefits go up).  If growth is less than 0.10% or negative, there is no adjustment.

 

With one month left to go in the quarter, 3Q15 is tracking down -0.3%.  In other words, price growth in the CPI-W would have to be +1.2% month-over-month to reach the +0.01% threshold for the quarter and trigger any increase at all. 

 

Q:  How many times in the last 10 years have we seen a +1.2% MoM increase in the CPI-W?

A:  0 (as in zero)

 

So, while you’re explaining to Mom how bank assets re-price faster than liabilities (i.e. return on savings will probably stay at 0% even if Janet pulls the normalization trigger) also tell her that the price of living is not rising.  In fact, it’s in outright decline and, with prices falling and Social security payments flat, her real income (i.e. the amount of goods & services she can buy) is actually up +0.30%. 

 

It’s true, BLS says!

 

How about the Census Bureau … that paragon of positive macro data flow …. What say you about the household income statement seven years into this expansion?

 

Yesterday, the Census Bureau released its 2014 report on Income and Poverty in the United States – the annual report that provides the official household income numbers.  The result was not unexpected but it’s still disheartening:

 

Median household income in the United States in 2014 was $53,657, not statistically different in real terms from the 2013 median income. This is the third consecutive year that the annual change was not statistically significant, following two consecutive annual declines.

 

LIFE ALPHA:  Mom-ing (to make it a verb) isn’t measured in monthly P&L but in quantum’s of caring and selflessness.  No opening or closing bell, no holidays, no headlines or accolades.

 

Fortunately, however, and unlike the luck and accidental billionaires of market randomness, “parenting alpha” is largely just a choice and reachable by anyone committed to it.    

 

Congratulations to Keith and Laura – proud Mom and Dad to a healthy new baby girl and a beautiful growing famille. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1
Spain’s IBEX 9

VIX 21.67-29.77
Oil (WTI) 43.51-48.95 

Gold 1097-1140

 

To family and real (non-monetary) wealth,

 

Christian B. Drake

U.S. Macro Analyst

 

Mom Test - z z Dollar CoD


The Macro Show Replay | September 17, 2015

 


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