FMHQ (Friday Morning Housing Quant)

Takeaway: The builders, under pressure for the last 3-4 weeks, are now roughly flat QTD, while the housing ETFs remain up 3-4% QTD.

Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume. 



  • Housing Macro | Rates:  Alongside the labor supply consternation coming out of 3Q builder earnings and some incremental softening in the demand data over the last month, the primary macro factor impacting the space has been the rise in rates.  Rates on the 10Y TSY are up +34bps over the last 20 trading days as the market priced in a rising probability of movement in the policy rate out of the Fed in December.  The shift in 30Y Mortgage Rates has been notably more muted, rising just +11bps over the same period.  Outside of (what have become) recurrent bouts of rate volatility, our late-cycle macro expectation on rates remains lower-for-longer – a view finding some further confirmation this morning with domestic retail sales disappointing and wholesale price inflation missing expectations and accelerating further into the negative at -1.6% YoY. 
  • Performance Roundup: It's safe to say that the housing stock complex has been weak of late. Interestingly, in spite of a spate of weak earnings prints and subdued outlooks, the average builder stock remains roughly flat QTD. QTD absolute returns for ITB and XHB stand at +3.9% and +3.1% vs the S&P 500 +6.6%. Meanwhile, the average builder from our tables below is -0.9% QTD. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +6.9%, +1.2%, +5.3%, -3.5% QTD. The three best performing builders thus far this quarter are NVR, DHI (+5.6%) and BZH. The three worst performing builders are TMHC (-13.6%), PHM (-5.0%) and MTH (-4.2%).

  • Insider Buying: A Director at Hovnanian (HOV) purchased 20k shares (~$45k) in late October. Outside of that, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.51), KBH and BZH which are at 1.34 and 1.36, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.60), MDC (0.92) and TOL (0.99).
  • Short Interest: CAA, KBH and DHI have seen SI creep higher, rising as a % of SO by 5.0%, 4.2% and 1.5%, respectively in the latest month. TMHC, HOV & MTH have seen SI fall by 2.3%, 2.0% and 1.8%, respectively.
  • Sell Side Sentiment: MTH has seen the largest drop in sell side support (-10.1% 1M change), while BZH has seen the largest bump in support (+9.1% 1M change).
  • Valuation: The cheapest names in the group currently are BZH (7.4x), TPH (9.3x) and TMHC (8.7x), while the most expensive are NVR (15.0x), LEN (12.5x), and TOL (13.1x).


FMHQ (Friday Morning Housing Quant) - BQ 1

FMHQ (Friday Morning Housing Quant) - BQ 2


FMHQ (Friday Morning Housing Quant) - BQ 3


FMHQ (Friday Morning Housing Quant) - BQ 4




Joshua Steiner, CFA


Christian B. Drake

Commodities, Europe and Retail Sales

Client Talking Points


The CRB does NOT like rising rate hike expectations vs. Draghi who said “downside risks are now clearly visible … and inflation dynamics have weakened.” The CRB Index is down -6.5% on a 1-month window. The USD ended lower yesterday but the move from the mid-October Fed meeting and jobs report remains one of deflation. We re-iterate the slower for longer deflation view.    


Got #GrowthSlowing? Europe does! We reiterate our Q3 2015 macro theme of #EuropeSlowing (published on July 7, 2015). Today, Eurostat released Q3 2015 flash estimates:The Eurozone and Germany both slowed to 0.3% Q/Q (vs 0.4% Q/Q prior), while France surprisingly gained steam to 0.3% Q/Q vs 0.0% in the prior quarter. As a classic lagging indicator, the GDP data confirms our proprietary GIP (growth, inflation, policy) model that suggests the Eurozone sits squarely in Quad 3, equating to growth slowing as inflation accelerates, into the end of the year. 


Headline Retail Sales and all the sub-aggregates missed consensus estimates with growth decelerating modestly year-over-year as the new cycle high in auto sales (18.12MM) in October failed to offset disappointing growth elsewhere.  The “control-group” - which feeds into the GDP calculation - was up +0.2% MoM (vs +0.4% est) while decelerating -30bps sequentially to +2.9% year-over-year.  In short, the #late-cycle consumer continues to disappoint as the data continues to confirm the dour commentary out of softline retail in 3Q EPS season.   


**Watch The Macro Show replay (special Gold edition) - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's November 10th analyst meeting. The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.


Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.


The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L. 

Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle.

Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position. If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year.

Three for the Road


VIDEO: Ponzi Policy? The Incestuous Mechanics of Quantitative Easing… via @hedgeye



Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein


Demand for Chinese steel is down 8.9% compared to a year ago and the country’s rail freight volume is down 10.1% compared to last year.

This One Picture (Still) Captures Everything Wrong With Wall Street (Nothing's Changed) | $VRX

We took Wall Street analysts to task last week for suggesting beleaguered Valeant Pharmaceuticals (VRX) shares still had 150% upside. Sadly, not much has changed.


This One Picture (Still) Captures Everything Wrong With Wall Street (Nothing's Changed) | $VRX - VRX consensus update


VRX is trading around $74. Shares are down almost 72% from its August high. Here's the current breakdown of the 25 Wall Street analysts covering the stock:

  • 65% currently rate VRX a Buy (unchanged from last week)
  • The average analyst price target is $180 (versus $199)
  • That implies approximately 144% upside (down from 150%)



To be clear, the negativity surrounding Valeant is worse today than it was when last we checked in on Old Wall. Concerns about insider selling, no update from management on VRX's longer-term outlook, and the legal question mark surrounding its partnership with pharmacy Philidor loom large over the stock. 


Hedgeye's Healthcare analysts released a research note to institutional subscribers last week outlining why we think shares are worth $20. To be clear, we’ve long been skeptical.


CLICK HERE to read their original Short thesis on VRX from 7/22/14.



CHART OF THE DAY: Strong Income Growth? Think Again

Editor's Note: Below is a chart and excerpt from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to subscribe.  


CHART OF THE DAY: Strong Income Growth? Think Again - EL CoD1 Income Growth


"... At the aggregate level, total labor income is just the product of aggregate hours and earnings. As can be seen in the 1st Chart of the Day below, if we do that exercise with the October employment report, income growth was largely flat sequentially despite the big sequential increase in net payroll gains and the acceleration in hourly earnings.


Flattish income growth is what we should expect to see when the official data is reported on 11/25." 


DIY Macro

“Every generation has underestimated the potential for finding new recipes and ideas.  We consistently fail to grasp how many ideas remain to be discovered.”

-Paul Romer


I love big ideas.


Elegant, intuitively appealing big picture epiphanies resulting from restless minds finding “harmonious resolution in dissonant details”.     


Paul Romer had just such an idea when he conceptualized the “Romer Model” in the early 90’s. Up to then, conventional growth theories followed some Solow variant whereby capital & labor combined to produce output while some exogenous (i.e. external and unexplained) productivity factor acted as an offset to diminishing returns in support of sustainable long run growth. 


Romer added a crucial third factor to the productivity formula – #Ideas. At a most basic level, the interplay between ideas and objects (capital, labor & everything else) can be summarized like this:


Objects can be viewed as all the atoms, elements and raw materials of the universe. Ideas represent the recipes and instructions for using those raw materials. 


That’s it. Simple, obvious even.  


But in formalizing the idea (about ideas), macroeconomics found a tractable explanation for sustainable growth. Ideas, unlike capital, are non-rivalrous (i.e. anyone can use them and one person’s use doesn’t restrict its use by anyone else) and when combined with capital and labor provide for increasing (not diminishing) returns.


The number of different ways of combining and employing the atoms of the universe is virtually unlimited. And adopting this very fundamental perspective – Objects & Ideas, Raw Materials & Recipes - makes the scope for ongoing innovation feel almost infinite. 


Moreover, as China & India (i.e. a third of the world’s population) continue to come up the sophistication curve and bring their collective acuity to bear on the edge of frontier research, the rate-of-change of growth in ideas stands to benefit. 


Increasing returns, Sustainable growth, Unlimited innovative capacity …. Not your grandfather’s dismal science. 

DIY Macro - light


Back to the Global Macro Grind …. 


Ideas don’t have to be revolutionary to strike a chord. Simple, “new to me” ideas can be similarly satisfying.


Case in Point: In discussing domestic Income & Credit trends on yesterday’s Macro Show, I walked through the math on front-running the official income and spending figures from the BEA using the relevant data from the employment report. 


Multiplying three terms is elementary school math but, based on my inbox flow, the Macro DIY base we’re hoping to empower seemingly finds satisfying utility in “the little things”.


Here’s the deal: 


Income growth anchors the capacity for consumption growth and total spending is what matters in a modern, Keynesian consumption economy. Divining the slope of income growth, therefore, is of obvious import - and in the very near term, it’s also relatively straightforward. 


The aggregate income data is reported alongside the Household Spending data about a month after the Employment report. But income – and the likely path of consumption, by extension - can be well inferred from the BLS Employment data.


At the aggregate level, total labor income is just the product of aggregate hours and earnings. 


In other words: how many people are working * how many hours each person works per week * how much they get paid per hour (all of which is in the NFP release)


As can be seen in the 1st Chart of the Day below, if we do that exercise with the October employment report, income growth was largely flat sequentially despite the big sequential increase in net payroll gains and the acceleration in hourly earnings. 


Flattish income growth is what we should expect to see when the official data is reported on 11/25.


The absolutist read-through on consumption is that it will remain “good” in October. From a pro-cyclical investors perspective, the slope of the line for both income and consumption will hold negative off the 1Q15 peak and will remain so through the balance of the year as we lap peak payroll gains recorded in 2H14. 


How can consumption growth be supported in the face of decelerating wage income growth?


#Credit homie!


Credit 101: Generally, credit is pro-cyclical with banks loosening standards and extending credit in response to rising demand and improved credit risk.   


The reason for the pro-cyclicality is rather straightforward: Household capacity for credit increases as incomes rise alongside positive employment growth and as net wealth rises alongside the rise in real and financial assets that typically accompanies an expansionary economic phase. 


Thus, cash flows to service debt and the collateral values backing the debt both support incremental capacity for credit and serve to drive an upswing in the credit cycle, which can serve to jumpstart and/or amplify the economic cycle.   


The 2nd Chart of the Day below shows revolving credit growth (i.e. credit cards). Household appetite for credit card debt went negative following the financial crisis and remained in hibernation for ~3-years before inflecting positively in April 2014. The latest September data showed a 3rd month of acceleration with revolving credit growth making a new cycle high at +4.73% YoY.


Accelerations in revolving credit growth typically show up in rising higher ticket, discretionary durable goods consumption. If the current pace of revolving credit growth persists in the coming months then durables consumption in 4Q would remain pretty healthy and would help support aggregate consumption growth.


In other words, the Keynesian spending coin has two sides and, if the collective domestic consumer is so inclined, credit growth has some modest runway to offset decelerating income trends over the nearer-term. 


Over the medium and longer-term, however, given already zero bound rates, the initial debt position (HH debt/GDP still = ~77%), and negative consumption demographics, we certainly aren’t in position to jumpstart a repeat of the prior credit based consumption cycle. 


So, that’s the current set-up and immediate-term outlook for Income, Credit and Consumption. We’ll get the latest update on the state of domestic consumerism with November Consumer Confidence and October Retail Sales (remember Retail Sales only = Spending on Goods) this morning. 


None of the analysis and context above requires black-box sophistication. It’s mostly just doing the work and passing the output through a commonsense filter.   


We consistently fail to grasp how many ideas remain to be discovered …. and our own capacity for insight and productive application. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.38% 

SPX 2036-2089 

VIX 15.55-19.02 
Oil (WTI) 41.08-44.64 

Gold 1065-1105 


Be the change you want to see. Have a great weekend.


Christian B. Drake

U.S. Macro Analyst


DIY Macro - EL CoD1 Income Growth

DIY Macro - EL COD2 Credit Growth 

November 13, 2015

We've made some updates and enhancements to Daily Trading Ranges. You'll now receive risk ranges for 20 tickers each day -  the last five of which will be determined by what's flashing on Keith's screen and by what names you're asking about. Contact if you have any questions or feedback.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.38 2.09 2.32
S&P 500
2,036 2,089 2,046
Russell 2000
1,141 1,176 1,155
NASDAQ Composite
4,933 5,102 5,005
Nikkei 225 Index
18,996 19,990 19,698
German DAX Composite
10,582 11,001 10,783
Volatility Index
15.55 19.02 18.37
U.S. Dollar Index
98.05 100.23 98.71
1.06 1.08 1.07
Japanese Yen
121.33 123.99 122.59
Light Crude Oil Spot Price
41.08 44.64 41.60
Natural Gas Spot Price
2.19 2.39 2.29
Gold Spot Price
1,065 1,105 1,085
Copper Spot Price
2.12 2.24 2.16
Apple Inc.
114 119 116
1,255 1,366 1,314
Valeant Pharmaceuticals International, Inc.
68.60 84.85 73.77
Facebook, Inc.
103 110 108
Macy's Inc.
38.91 45.07 40.82
Kohl's Corp.
41.22 47.09 45.79



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