Takeaway: September Housing Starts offer further evidence that Housing continues to trend in the right direction.
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.
Today’s Focus: September Housing Starts & Permits
With the residual distortion in the July/Aug Starts data following the NY tax exemption pull-forward in May/June now rearview, this morning’s data for September provides the first (largely) noise-free read on the underlying trend in new resi construction activity in 5-months.
Total Starts rose +6.5% month-over-month and accelerated to +18% year-over-year with activity rebounding back to the 8-year highs recorded in June. Multi-family activity led the advance, rising +18.3% month-over-month (not overly surprising given the post-pull forward hangover) and +28% year-over-year. MF permits, which have been exceedingly volatile on a month-to-month basis, dropped -12.1% sequentially while retreating to +1% YoY.
The gain in single-family starts was more muted with activity rising just +0.3% sequentially with year-over-year growth holding at +12%. SF activity continues to hold near post-crisis highs, growing +11% YoY on average YTD and flirting with 700K in average starts annually for the first time since 2007.
The crawling but continued rise in new resi construction activity continues to accord with the ongoing advance in Builder Confidence which made another new 10-year high in yesterday’s HMI print for October (HERE). With ~38% upside left to LT average levels of SF construction and 250% upside to the prior peak, the MT/LT mean reversion and cycle opportunity for the sector remains conspicuous.
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
We are taking Sonic (SONC) off the Hedgeye Restaurants Best Ideas list as a SHORT and moving it to the SHORT bench.
Current trends are tracking better than expected. Depending on how the trends play out, we will look to re-short it. We still expect MCD to make life difficult for a number of players in the space.
Yesterday after the close SONC reported 4Q15 earnings. Same-store sales (SSS) results were no surprise given they already released this information back on September 14th (see our note HERE). These results show an initial decent from SONC’s recent strong performance, and comps are not getting easier. As they head into the 1H of 2016 they will face an 8.5% comp in 1Q16 and an 11.5% comp in 2Q16, not an easy mountain to climb in an increasingly competitive environment.
This quarter represents the calm before the storm in our opinion. SONC reported revenue of $175.3mm which was in line with consensus street expectations. They reported SSS of 4.9% marginally beating consensus estimates of 4.8%. The comp consisted of a 4.9% SSS increase at franchise drive-ins and an increase of 4.5% at company drive-ins. SONC beat bottom line expectations as well, reporting EPS ex-items of $0.43 versus consensus estimates of $0.42.
FISCAL YEAR 2016 OUTLOOK
The biggest news today arguably was the acceleration of share repurchases due to favorable market conditions. Due in large part to this acceleration the company now expects EPS to grow 16% to 20% in FY2016 as compared to the previous outlook of 14% to 18%. The remainder of the guidance is as follows:
- 2% to 4% same-store sales growth for the system
- 50 to 60 new franchise drive-in openings
- Drive-in-level margin improvement between 75 to 125 basis points
- Capital expenditures of $35M to $40M
- Free cash flow of $70M to $75M
- The planned repurchase of $126M of stock across the fiscal year, with a higher concentration of share repurchases in 1H of the fiscal year
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Client Talking Points
Are we entering an earnings recession? After a Q2 where S&P 500 earnings declined -2.1% in aggregate, earnings growth thus far in Q3 is down -9% after 15% of companies have reported. Consumer Discretionary is the only sector that has registered positive earnings growth thus far. It’s early, but don’t get roped in from the bull-market storytelling. As we outline in our Q4 macro deck, earnings recessions have preceded economic recessions in the last 3 cycles.
The ECB meets this Thursday for an interest rate decision. The cross is down 11% year-over-year…look for it to dive lower if ECB President Mario Draghi issues incremental QE (easing), a real prospect as inflation at -0.1% is ways away from its 2.0% target. The immediate-term risk range for the EUR/USD is 1.11-1.14.
This morning’s Housing Starts & Permits data for Sept. is likely to reflect continued crawling improvement as we hold near post-crisis highs in new, single-family residential construction activity. Looking forward, the Implementation of TRID (TILA-RESPA INTEGRATED DISCLOSURE) regulations on Oct. 3rd is likely to continue to drive excessive chop in the high frequency data (weekly Purchase Applications) over the next few weeks as lenders go live with implementation and purchase agents attempt to risk manage any early bottle-necks. Moreover, the demand pull-forward we saw to close out September will likely serve to juice both the New and Pending Home Sales figures for September as the bolus of pre-TRID demand flows through the reported volume figures. We’ll get the New and Pending Homes Sales data on 10/26 and 10/29, respectively.
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Top Long Ideas
McDonald’s reports 3Q15 earnings Thursday, October 22nd before the market opens, with a conference call at 11:00am ET. We are expecting strong sequential improvement in performance globally. We look forward to giving you an update on the company’s performance next week, but this week we wanted to focus on the ‘Looming Crash in Beef.'
On Thursday, October 15th, we held a thought-leader call regarding the declining price of beef and how long it will continue. Prices have sky rocketed in recent years and are now standing at more than two standard deviations above the 30 year average. We believe a 50% decline down to historical averages is well within the realm of possibilities. Declining beef prices will be a major tailwind for McDonald’s as they navigate their turnaround.
Restoration Hardware opened its new Full Line Design Gallery at the Cherry Creek Shopping Center in Denver this week. This is another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek.
RH is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.
The #SlowerForLonger theme from Hedgeye Macro has been consistent and straightforward. Our pivot in advance of the most recent jobs report to get long of gold and stay out of the way short-side on commodities turned out to be a good position.
Growth expectations have been correctly revised, but there’s still a good amount of room between Hedgeye estimates and consensus. We are expecting GDP in a range of 0.1%-1.5% for Q3 and another 1-handle in Q4. If that proves accurate, flatter goes the Treasury curve (TLT, EDV), wider goes high yield spreads (bad for JNK), and down goes the USD (GLD).
Three for the Road
TWEET OF THE DAY
VIDEO (2mins) The Most Important Thing I Learned In California Last Week https://app.hedgeye.com/insights/46978-the-most-important-thing-i-learned-in-california-last-week?type=video… via @hedgeye
QUOTE OF THE DAY
Along with success comes a reputation for wisdom.
STAT OF THE DAY
75% of the world’s supply of maple syrup that comes from Quebec.
Editor's Note: Below is a chart and brief excerpt from this morning's Early Look written by Hedgeye Director of Research Daryl Jones. Click here if you'd like more information on how you can subscribe.
"For those of you not familiar with Canadian political history, the "Trudeau salute" was a middle-fingered gesture former Canadian Prime Minister Pierre Trudeau gave to protestors in Western Canada in the early 1980s. To Western Canadians at the time, it was symbolic of years of policy that undermined their commodity laden economies.
...it is difficult to see in the short run how Trudeau will have a positive impact on the Canadian dollar or economy. In part, of course, the Canadian dollar has front run this and is down about 11% over the last year, but with a deficit that is likely to expand, the floor has probably not been established for the Loonie.
“The essential ingredient of politics is timing.”
For those of you not familiar with Canadian political history, the "Trudeau salute" was a middle-fingered gesture former Canadian Prime Minister Pierre Trudeau gave to protestors in Western Canada in the early 1980s. To Western Canadians at the time, it was symbolic of years of policy that undermined their commodity laden economies.
Yesterday, Canadians elected Justin Trudeau, the 43-year old former son of Prime Minister Pierre Trudeau, as their next Prime Minister. This was as much an election that rejected Prime Minister Stephen Harper as one that voted in the relative neophyte, Trudeau.
Trudeau’s victory marks the biggest political rebound in Canadian history. The Liberals become the first third-place party to win an election, and the party’s seat gain from the prior election of around 150 is the largest ever. In fact, the Liberals, who had governed for about two-thirds of the 100 years before Harper came to power, won just 34 districts in the 2011 election, the worst result in their history.
After almost 10 years of Conservative rule, the Canadians wanted change. And change they have elected, in an epic way. Some would even argue with an emphatic middle finger to the departing Prime Minister.
Prime Minister-elect Trudeau has basically indicated that his economic policies will be built around two key points: raising taxes on those making over $200,000 and increasing government spending on infrastructure. (Incidentally, he also intends to legalize marijuana quickly, which is clearly a priority for a nation in recession.) By and large, Trudeau will be taking a page right out of the Keynesian playbooks of many European countries.
Back to the Global Macro Grind...
From our purview, it is difficult to see in the short run how Trudeau will have a positive impact on the Canadian dollar or economy. In part, of course, the Canadian dollar has front run this and is down about 11% over the last year, but with a deficit that is likely to expand, the floor has probably not been established for the Loonie.
There is a more significant issue facing Canada than a collapsing currency, which is the state of the Canadian banking system. Our financials team introduced their call to short the Canadian Banks this summer and in an update note in late September wrote the following:
“You would think that with the Canadian economy in recession, energy prices tumbling, Oil & Gas loan impairments skyrocketing, and the whole Canadian housing market sitting atop an historic bubble, the Canadian banks would be at Defcon 4: building reserves, speaking cautiously, slowing loan growth. Instead, however, management(s) couldn't be more unconcerned, disinterested, and generally indignant at the mere suggestion that risk is rising.
Over the last two weeks the big six Canadian banks (BMO, RY, NA, CM, TD, BNS) and CWB reported their fiscal 3Q15 earnings. Generally speaking the results were not terrible. There were four beats, two misses and one in-line print.
Part of the reason the results weren't terrible is that the banks continue to avoid taking reserves against future losses. There's no better example than in the Oil & Gas patch. A major focus of Canadian bank earnings conference calls over the past two weeks was the effect (or supposed lack thereof) of low oil prices on the Canadian economy and on bank earnings. The consensus from management teams is that it’s no big deal, and their lack of concern concerns us. We can't help but be reminded of Aesop's The Ant and the Grasshopper fable. In a word, the Canadian banks are Grasshoppers, all.”
In light of yesterday’s election results, we’d recommend you email to review our work on the Canadian banking system and set up a call with our financials research team. The short thesis is timely this morning.
Canada isn’t the only sovereign we have concerns about in the current environment of political change. In fact, tomorrow we will be doing a call on Spain, which has been a perpetual weak economic link in the Eurozone. Similar to Canada, Spain has an important election scheduled on December 20th. On the call, Hedgeye contributor Daniel Lacalle, a former buy-side PM at PIMCO and Citadel, will talk through his scenario analysis on Spain.
In contrast to Canada, Spain has been under Conservative rule for the last four years. In that time period, the Conservative Party (PP) unwound years of deficit spending from the previous administration. In fact, the PSOE had left a deficit of 9% of GDP after promising a maximum of 7%.
As Lacalle has written, when the socialist government left office, Spain had more than 40 billion euro in unpaid invoices from the public administrations to the private sector, the public savings banks presented a capital requirement of 100 billion euro and the regions and municipalities faced a bailout of 125 billion euro. To many, this was seemingly an insurmountable situation.
However, after a large austerity plan that was split 50% in tax increases and 50% in spending cuts, and a very substantial set of reforms, including the financial sector, labor market, entrepreneurship programs and early payment schemes, Spain recovered.
Between 2014 and 2015 Spain started to grow well above the EU average. It led job creation in the Eurozone, with more than one million jobs, and brought unemployment rates back to September 2010 levels. It went from a massive trade deficit to a balance by 2015.
In summary, Spain undertook the largest adjustment seen in an OECD economy, 15 points of GDP, and managed to do so growing and creating jobs. But as austerity is prone to do, it does make some folks unhappy. As a result, much like in Canada, the December 20th election in Spain will be referendum on the Conservatives. And with political change, comes investment opportunity. After all, the great thing about being stock market operators is that we can go both ways.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.98-2.08%
Oil (WTI) 45.08-47.99
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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