Cartoon of the Day: Deflationary Comet?

Cartoon of the Day: Deflationary Comet? - Deflation cartoon 11.24.2015


"If the hawkish tone out of the Fed over the last month was a de-facto tightening, no hike would be the catalyst for an unwinding of deflationary consensus positioning in FX and commodities," wrote Hedgeye CEO Keith McCullough in a note to clients earlier this morning. "That’s a policy risk within our deflationary Q4 view."      

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

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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. 

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.


The Bearish Case Against Healthcare


In this excerpt of RTA Live, Hedgeye CEO Keith McCullough takes a rapid fire selection of subscriber questions about healthcare stocks and articulates the bearish case for the sector.


Subscribe to Real-Time Alerts today for access to this and all other episodes. 


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