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Case-Shiller | HPI Acceleration & Key Man Risk

Takeaway: CS HPI registers a 3rd month of acceleration. Secular and cyclical factors continue to constrain supply. Comps steepen for some key cities

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.

 

Case-Shiller |  HPI Acceleration & Key Man Risk - Compendium 112415

 

Today’s Focus: September Case-Shiller HPI 

 

The Data: The Case-Shiller 20-City HPI for August released this morning – which represents average price data over the July-September period – showed home prices rose +0.61% MoM while accelerating +32bps sequentially to +5.45% year-over-year.  On an NSA basis, 18 of 20 cities reported sequential increases while, on an SA basis, 19-cities reported increases.  The gain in September was the largest in 7-months and marked a 3rd consecutive month of acceleration.  Notably, the Case-Shiller National HPI  (which covers all U.S. Census divisions) accelerated for the 7th straight month, accelerating +30bps sequentially to +4.86% YoY.   

 

Inventory ↓, HPI ↑ | As was again highlighted yesterday in the EHS data for October, inventory remains very tight relative to the historical average and should continue to support positive HPI trends.  Improving second derivative price trends have augured outperformance in the housing complex historically as rising prices are margin supportive and help perpetuate the Giffen Good dynamic that characterizes housing demand. 

 

Supply Stagnation:  We reviewed the lead factors underpinning the supply stagnation in housing a few months ago but they are worth a quick recapitulation:

  • Low Rates:  Low rates locked in during the post-crisis period remain a disincentive to selling/moving and an inertial headwind to rising inventory.
  • Demographics:  Top heavy demographics with Boomers (which are a significant % of the homeownership base) entering their peri-retirement period will weigh on housing turnover broadly.  Aging in place remains an emergent trend and moving-out will not become an outsized driver of supply for another decade when the Boomer bulge starts moving beyond 80 YOA. 
  • Equity:  If Boomers are dragging on inventory and Millennial demand is just beginning to percolate,  what’s left?  Mostly Gen X’ers.  Those aged ~35-50 represent a significant source of potential supply in the form of trade-up buying.  A meaningful percentage in this group, however,  remain in negative or near-negative equity positions, serving as weight to both entry level supply and mid/upper market demand. 
  • Credit Box:  Tighter standards for would be purchasers have constricted the mortgage credit box and have dissuaded and/or been prohibitive for low equity homeowners looking to move up the housing ladder.   

The last quick highlight is that the 10 and 20-City Indices carry “key man risk” over the medium-term as index heavyweights such as L.A. (15.2% Weight) and San Francisco (8.4% Weight) and to a lesser extent New York (19.4% Weight) bump up against progressively tougher 1Y and 2Y comps. 

 

In summary, the Case-Shiller HPI continues to track the CoreLogic HPI data on a lag with both series displaying modest acceleration in recent months.  We’re more interested to see the CoreLogic data for October due for release next week.  

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS HPI 20 City and National YoY

 

Case-Shiller |  HPI Acceleration & Key Man Risk - EHS Months Supply

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS MoM vs Index Weight

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS MoM vs YoY Bubble Scatterplot

 

Case-Shiller |  HPI Acceleration & Key Man Risk - Case Shiller HPI MoM

 

Case-Shiller |  HPI Acceleration & Key Man Risk - HPI 3 Series

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Today's Economic Data Bolsters Our 2016 Recession Call

Takeaway: Don't believe Wall Street's storytelling.

Today's Economic Data Bolsters Our 2016 Recession Call - storybook

 

While third quarter GDP was revised up to 2.1%, bubbling beneath the economic surface are some worrisome signs. In fact, two of the top three leading indicators for a U.S. recession were confirmed today:   

 

1. Corporate Profits—the most important component of this GDP report slowed to -3.2% year-over-year. Why does that matter? Take a look below.

 

Today's Economic Data Bolsters Our 2016 Recession Call - eps inflection

 

2. Consumer Confidence—dropped almost 10% in November to 90.4. Note: The top was 106. That ain’t coming back anytime soon.

 

Today's Economic Data Bolsters Our 2016 Recession Call - consumer confidence inflection

 

On a related note, retailers are getting shellacked by falling Consumer Confidence. There was this "gem" from Tiffany’s (TIF) Q3 earnings release this morning after the company missed expectations and cut its outlook.

 

“… We believe that volatile, uncertain economic and market conditions in the U.S. and other regions are affecting consumer spending, causing us to maintain a cautious near-term outlook.”

 

CEO Frederic Cumenal also cited the U.S. dollar strength, which “continued to put pressure on our financial results.” 

 

We’re not exactly sure why, but investors appear a bit confused. Shares of TIF popped as investors ate up management's suggestion that it would increase prices to compensate for the stronger dollar.

 

Our Retail analyst Brian McGough has been particularly bearish on TIF. In a note to institutional subscribers earlier today, McGough wrote that "there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks." TIF was added to the short side of Investing Ideas in October.

 

The data on consumer confidence slowing is unequivocally red. But don't take our word for it. Ask TIF shareholders. In the past year, the stock is off 27%.

 

Today's Economic Data Bolsters Our 2016 Recession Call - tif past year

 

None of this bodes well for Wall Street equity bulls peddling the mid-cycle economic story. But that’s not our call or our problem.

 

Today's Economic Data Bolsters Our 2016 Recession Call - Keith GDP


TIF | TIF Will Miss Again

Takeaway: The market might be blowing off this ugly print, but we’re not. TIF will miss again.

We’re staying short TIF in the wake of the company’s 3Q results. Simply put, in the absence of 2016 guidance, the consensus will remain too high – likely in the range of $4.30-$4.40. We’re clocking in about $0.30 lower. Is that a huge miss? No. But

a) we also don’t assume a material worsening in the economy in our model, which could push numbers closer to $3.50.

b) After last holiday’s blow-up, the Street was at $4.45 for FY15, and now is at $4.02. Not a huge earnings miss by our standards – yet the stock is down 28% year to date.  There’s no reason we can’t, and won’t, see that again.

 

The key question we ask is why earnings NEED to grow next year. If TIF is going to have a flat year in FY15 in an otherwise decent US and Global economy, what kind of consumer climate do we need to assume in 2016 to get earnings higher? That’s especially the case given the following…

a) Sales productivity at historical peak of ≈$3,450

b) A Brand that might be Great to the person typing this note, but one that is simply ‘very good’ to Millennials.  

c) Minimal square footage opportunity (2% long term)

d) A business that structurally does not lend itself to online (only 6% of sales)

e) Gross Margins currently at peak levels of 60%

f) EBIT margins still at 19% this year despite the company’s challenges – with 2-3 points of potential downside.

 

Ultimately, while we have no doubts in the quality of the management team, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks.

The price has come off, but so have earnings. It is trading near a peak multiple on our numbers (18x) on peak margins (21%), and peak earnings that are not likely to grow for 2-3 years. 


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On Fox Business: The Global Growth Slowdown Threat

On Fox Business’ Mornings with Maria, Hedgeye CEO Keith McCullough discusses Q3 U.S. GDP, slowing global growth and the ramifications of radically divergent monetary policy around the world with Cumberland Advisors CIO David Kotok and Vining Sparks’ Craig Dismuke.

 



Risk

Client Talking Points

#RATEHIKE EXPECTATIONS

Expectations for liftoff have creeped right back into the equation. The bid yield of December Fed funds futures is higher than it’s been since before the September meeting at 22.5 bps. In addition to the risk the Fed hikes into a late cycle slowdown, the risk to consensus positioning is that it looks similar to late August. If the hawkish tone over the last month was a de-facto tightening, no hike would be the catalyst for an un-winding of deflationary consensus positioning in FX and commodities. That’s a policy risk within our deflationary Q4 view.      

GEOPOLITICAL RISK

Brent crude oil up nearly +2% on news of Turkey downing a Russian fighter jet near the Syrian border. Turkish officials reported having warned the plane to exit Turkish airspace nearly 10 times in the five minutes preceding the strike. Russian officials may or may not react in kind, but the country's benchmark RTSI Cash Index is down over -3% (leading declines in the Emerging World) and signaling an escalation in the conflict emanating from the Middle East. Can the the U.S. economy handle the 1-2 punch of a #StrongDollar tightening cycle that has been bearish for manufacturing, exports and corporate profits AND rising fuel prices that is bearish for the consumer?

EUROPE

The German IFO business survey showed month-over-month improvement in November (Expectations rose for a 3rd straight month to 104.7 vs 103.9 in the prior month). Meanwhile, the ECB’s Executive Board member Sabine Lautenschlaeger said that the central bank shouldn’t undertake any further monetary stimulus measures for now, saying that “data in the last few weeks indicate that the euro-area economy has so far shown itself to be resistant to uncertainty in the global economy.”  Lautenschlaeger’s views are clearly divergent from those of ECB head Mario Draghi who is supportive of increased QE to support ailing growth and inflation. We reiterate our #EuropeSlowing theme and expect the 12/3 ECB meeting to be a catalyst for Draghi to signal additional supportive measures for the region. 

Asset Allocation

CASH 68% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 20% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.

 

Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.

 

Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.

RH

Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.

 

West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 

TLT

The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.

 

Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road

TWEET OF THE DAY

$CMG claims to be the first non-GMO restaurant but the @NonGMOProject (the gold standard) does not recognize them as non-GMO! #problems

@HedgeyeHWP

QUOTE OF THE DAY

The less men think, the more they talk.

Baron Montesquieu

STAT OF THE DAY

The NTF estimates that in 2013, more than 240.0 million turkeys were raised, more than 200 million were consumed in the U.S. According to the NTF 46 million of those turkeys were eaten at Thanksgiving, 22 million at Christmas and 19 million at Easter.


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