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FHQ (Friday Housing Quant)

Takeaway: Rate fears and oil patch concerns have pushed the builders lower in the short term.

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



  • Performance Roundup: Housing has become a bit of a bifucated beast in the last week or two. Interestingly, ITB is +5.3% QTD, trailing only slightly the S&P 500 at +6.9%, but this is a bit of cherry pick as ITB contains only 10 stocks and its largest 3 holdings: DHI, LEN and NVR happen to be the three best performing builders. XHB is +2.3% for the QTD and the average builder we track is -1.6% with the median builder down -2.9% QTD. We think the weakness is a confluence of rate-driven concerns ahead of the Fed meeting next week, ongoing jitters around the Houston market and residual profitability angst following TOL's 4Q. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +8.9%, +3.4%, -6.9%, and -4.1%, respectively. The three best performing builders thus far this quarter are DHI (+10.2%), NVR (+8.9%) and LEN (+3.4%), while the three worst performing builders are TMHC (-13.8%), BZH (-6.9%), and MTH (-5.8%).
  • Insider Buying: Other than the Director at Hovnanian (HOV) who purchased 20k shares (~$45k) in late October, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.55), KBH and BZH which are at 1.32 and 1.35, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.65), MDC (0.97) and TOL (1.00).
  • Short Interest: CAA, HOVand DHI have seen SI creep higher, rising by the most in the group in the last 2 wks. TMHC, KBH & BZH have seen SI fall by the most.
  • Sell Side Sentiment: Brokers have become marginally more bullish on TOL (+2.4%) and less bullish on NVR (-0.8%) in the latest month.
  • Valuation: The cheapest names in the group currently are BZH (6.9x), MTH (9.4x) and TMHC (8.9x), while the most expensive are NVR (15.3x), LEN (13.1x), and DHI (12.3x). Incidentally, NVR, at 5.3x TBV, is currently at 97% of its peak 5-year valuation. DHI and LEN, both at 2.0x P/TB are at 85% and 81% of their 5-year peak multiples.



FHQ (Friday Housing Quant) - BQ 1


FHQ (Friday Housing Quant) - BQ 2


FHQ (Friday Housing Quant) - BQ 3


FHQ (Friday Housing Quant) - BQ 4 


Joshua Steiner, CFA


Christian B. Drake

Hemorrhaging: America's Energy Economy

Takeaway: Jobless claims in energy-dependent states are rising much faster than the broader U.S. economy.

Hemorrhaging: America's Energy Economy - z oil


The main takeaway on the labor front this week is that while the US more broadly muddles further along, the energy economy is hemorrhaging.


The chart below shows the spread continuing to widen between our energy state basket and the rest of the US. For reference, we use 8 states: AK, LA, NM, ND, OK, TX, WV & WY to derive our energy state basket. The gap between our two indexed series widened another 4 points to 46 for the week ended November 28th.


The most recent dip in energy prices has yet to be reflected in the numbers.


Hemorrhaging: America's Energy Economy - Claims18


***This is an excerpt from our institutional research. For more information on how you can become a subscriber please send an email to sales@hedgeye.com.

[Unlocked Early Look] Conviction Sells

Editor's Note: The Early Look below was originally written on 12/9 by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more about the Early Look and to subscribe.

* * *

“We are all so wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.”

-Jim Cramer


Amen to that, Jim. The scientific art of investing is a very humbling exercise indeed. From setting asset allocations to factor exposure selection all the way down to security section on the long and short side, there’s a lot that can go awry at various intervals of that process.


As such, we investors are forced to constantly ask ourselves a series of risk management questions including, but not limited to:


  • Is my fundamental research view becoming more or less accurate, at the margins?
  • Is said view at risk of becoming fully priced in?
  • Am I big enough or too big in this position?


As you are already well aware, the risk management checklist list goes on and on – effectively leading to a never-ending exercise of fact-checking and aggregating consensus. Indeed, it’s a strenuous task that can leave even the most thoughtful of investors feeling insecure and restless – not unlike how I feel about my waistline two weeks after Thanksgiving…


Back to the Global Macro Grind


In spite of the aforementioned insecurity – which Keith has affectionately and jokingly termed “Hedgie Performance Anxiety Disorder” (or #HPAD for short) – we agree with Cramer’s assertion that we mustn’t let such insecurities detract from our level of conviction. Most of you will note that it can be extremely hard to run money, raise capital or sell research without a high degree of conviction.


Take Hedgeye Energy Sector Head Kevin Kaiser for example. Last night, Kinder Morgan (KMI) – the bellwether of MLPs and dividend-paying energy companies – cut its dividend by -74% to 12.5 cents/share. If you’re reading this note, you’re probably already familiar with Kevin’s singlehanded destruction of the levered upstream MLP space – see the unit prices of LINN, BBEP, VNR, ARP, LGCY – as well as his consistent criticisms about the business models and valuations in the broader MLP sector. His work is now paying off, with the Alerian MLP Index down -40.4% YTD; KMI itself is down -55.5% from 9/4/13 (when Kevin introduced his short thesis) through yesterday’s close.


Ranging from analytical critiques that at least attempted to poke holes in his analysis to thoughtless ad hominem attacks, the amount of pushback Kevin has received over the past 2+ years regarding his bearish research in the MLP space has been nothing shy of legendary. Maintaining conviction in his analysis was the only thing that allowed him to overcome the rash of criticism that accompanied being the lone bear on a few of the most beloved stocks and management teams in modern U.S. equity market history.


Click to enlarge

[Unlocked Early Look] Conviction Sells - kaiser reuters


Among the most high-profile of such criticism was, in fact, Jim Cramer’s consistently scathing, ad hominem attacks on Kevin and our firm. Quick to defend the compensation schemes of his “friends” (i.e. Rich Kinder of KMI and Mark Ellis of LINN) and slow to actually do the work on the actual business models, Cramer and everyone else who chirped Kaiser for being [only] a “26-year-old analyst” – including a very high-profile hedge fund that fired him for being right – deserves to feel shame today. We all win and lose in this industry and I, for one, won’t tolerate those who do either without class and humility.


While Kevin’s work on KMI has been and continues to be as detailed and thoughtful as any equity analysis you’ll come across, the core fundamental conclusion was actually quite simple:


The company doesn’t generate enough cash flow to pay its dividend and its dividend is the #1, #2 and #3 reason why most investors own the stock.


While we have plenty of other examples of the Hedgeye research team helping clients profit from high-conviction, non-consensus long and short ideas throughout the YTD (e.g. KSS, YELP, MCD), I specifically want to highlight Hedgeye Healthcare Sector Head Tom Tobin’s recent win on the short side of Valeant (VRX) – which is down -22.1% since he introduced his short thesis last July 11th – as another example of maintaining conviction amid elevated criticism.


The -64.3% plunge in the stock from its 8/5/15 all-time high to yesterday’s closing price probably felt very rewarding for someone like Tom who is sure to avoid the grey area of what’s legally and/or morally acceptable – unlike some of Valeant’s high-profile shareholders.


Perhaps more than any Sector Head at our firm, Tom’s process is extremely differentiated from the herd and quantitatively oriented to a significant degree – two qualities that allowed him to maintain conviction in his thesis despite what must’ve felt like the entire hedge fund community rooting against him. To the extent you’d like additional color on Tom’s current bench of long and short ideas, please email sales@hedgeye.com.


For what it’s worth, I recently had a client tell me that Tom’s #ACATaper and Healthcare #Deflation themes were unlike anything he’d seen from the sell-side. I couldn’t think of a more deserving duo than Tom and his analyst Andrew Freedman as it relates to their winning their first ever “Pucks” at the Hedgeye holiday party last week, which is akin to sharing our firm’s MVP honors for 2015.


Sticking with the theme of conviction, it’s important to conclude this note with an update of the non-consensus thesis that our macro team currently has the largest degree of conviction in:


“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”


Fortuitously, we haven’t had to endure the rash of criticism levied upon our colleagues Kevin Kaiser and Tom Tobin. This is probably because we’ve been right as rain on the slope of domestic and global economic data since introducing our #LateCycle theme in 2Q15 or since introducing our #Quad4, Global #Deflation view back in early August of last year.


While we certainly haven’t gotten every market move right (far from it, in fact), the factor exposure biases we’ve adopted as a result of our fundamental views have been far better than bad throughout the duration of the aforementioned [and associated] calls:


  • Within U.S. Equities: LONG Mega Caps, Low Beta and Low Debt vs. SHORT Small Caps, High Beta and High Debt (KMI? VRX?) at the style factor level. LONG Healthcare (now defunct), Utilities and REITS vs. SHORT Energy, Materials, Industrials, Financials and Retailers at the sector level.
  • Within F.I.C.C.: LONG Long-term Treasuries and Muni Bonds vs. SHORT High-Yield Credit within U.S. fixed income. LONG the U.S. Dollar vs. SHORT basically everything else including the Euro, Japanese Yen, Commodity Currencies (e.g. CAD, AUD and BRL) and EM FX (e.g. KRW, TRY and KRW) within foreign exchange. We’ve occasionally held a LONG bias on Gold (now defunct) vs. SHORT everything else – Energy and Base Metals in particular – within the commodity complex.
  • Within Global Equities: LONG Japan vs. SHORT Europe and Emerging Markets – LatAm in particular – at the regional level.


In terms of addressing the first of the risk management questions introduced at the onset of this note, we continue to thoroughly review what has generally been a fair amount of incrementally confirming evidence in support of our bearish outlook for the domestic and global economies:


  • Ongoing deterioration in the Chinese economy: “The Real Reason You Should Be Concerned By China’s Recessionary Trade Data” (12/8/15);
  • Ongoing deterioration in the global economy: “Are You Paying Enough Attention to the Global Economy?” (12/5/15);
  • A negative inflection in U.S. consumer demand: “Can’t Sneak #GrowthSlowing Past the Goalie” (11/25/15); and
  • A refutation of our competitor’s “global growth has bottomed” view: “What's Driving Our Bearish Forecasts for Domestic and Global Growth?” (11/9/15)


Proceed accordingly from here – with conviction, of course.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.31% (neutral)

SPX 2049-2109 (bearish)
RUT 1152--1177 (bearish)

VIX 15.91-19.21 (bullish)
USD 97.36-99.33 (bullish)
EUR/USD 1.05-1.09 (bearish)
YEN 122.08-123.46 (bearish)
Oil (WTI) 37.03-40.84 (bearish)

Gold 1049-1089 (bearish)
Copper 1.99-2.10 (bearish)


Keep your head on a swivel,



Darius Dale



[Unlocked Early Look] Conviction Sells - Chart of the Day Darius

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  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.13 2.24
S&P 500
2,033 2,072 2,052
Russell 2000
1,131 1,172 1,149
NASDAQ Composite
4,987 5,092 5,045
Nikkei 225 Index
19,010 19,447 19,046
German DAX Composite
10,308 10,856 10,598
Volatility Index
16.85 20.47 19.34
U.S. Dollar Index
96.70 98.73 97.93
1.05 1.10 1.10
Japanese Yen
121.24 122.69 121.61
Light Crude Oil Spot Price
35.41 39.25 36.58
Natural Gas Spot Price
1.95 2.13 2.00
Gold Spot Price
1,049 1,084 1,071
Copper Spot Price
2.01 2.12 2.06
Apple Inc.
113 119 116
Amazon.com Inc.
653 682 662
Alphabet Inc.
754 772 760
Netflix, Inc.
120 127 124
Kinder Morgan Inc.
13.23 18.64 16.81
Restoration Hardware
85 93 87



Retail Callouts (12/11): Online #contentwins. RH | Lost in Translation, KSS

Takeaway: UPS, FedEx, Online Sales #contentwins. RH Lost In Translation, KSS lowering shipping threshold for rest of Holiday.


UPS Struggles to Keep Up With Surge in Web Orders -- Bearish For Retail Pricing Power



On the heels of 9 consecutive days of over $1bn+ in online sales (for the first time in history according to comScore), it's no wonder that UPS and FedEx are at capacity. It'll be interesting to see if the rest of the Holiday plays out like 2013 when packages promised on the 24th showed up well after Boxing Day or the understaffed shippers can somehow find a way to handle the volume -- or just flat out shut down the spigot.


What this means for retail...We think it's becoming abundantly clear that Brick & Mortar retailers who don’t have a REALLY profound value proposition to draw people into their stores are likely in the early stages of going away. Consumers can now go directly to the brands -- we all know that, or the best overall shopping experience (like Costco, where content does not matter, but assortment and price do).


Specifically, our strong sense is that if UPS and FDX came to the retailers or brands and demanded another price increase to secure capacity for on-time delivery, the retailers would pay it in a heartbeat, and they would have close to zero leverage in passing that through to you and me in the form of higher prices.


RH - Lost in Translation

Conclusion: This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. On one hand, the key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+). On the flip side, the Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Even though the 30% short interest already captures a whole lot of bad news, this print won’t make people cover – and probably validates the pressure the stock came under earlier this week. We’ll respect it for what it is, but based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy. The market combined with noise around the evolution of this story gives you a shot at buying it on the cheap every six months or so. We’re thinking that this is one of those times.

For our full note CLICK HERE


KSS - Kohl's Shipping Threshold


KSS is running a Free Shipping promotion under $50 through the rest of the Holiday down from the $75 norm, and this is the second time we've seen the company go to the Free Shipping well this Holiday season. For a company where the only part of the top line that is growing is dot.com and competitors (Target) have gone completely free, this makes sense. But it's important to keep in mind that KSS dot.com sales come at a margin 1000bps below a Brick and Mortar sale, not to mention that management previously said that a $25 threshold wouldn't work economically over the longer term. If $25 threshold does not work long-term, then $0 definitely doesn't work short-term. 

Retail Callouts (12/11): Online #contentwins. RH | Lost in Translation, KSS - 12 11 2015 chart1


WMT - Wal-Mart Marketing Chief to Step Down. Company hiring Michael Francis one of the architects of Target’s cheap-chic image.



DKS - Dick’s Sporting Goods Agrees To Pay $10mm Settle Overtime Pay Lawsuit



LOW - Lowe’s is including a “Santa Tracker” feature on its Iris by Lowe’s app that connects to the retailer’s Iris automated smart home system.



VRA - Vera Bradley Adds Mary Lou Kelley, Best Buy VP of e-Commerce, to Board of Directors



KR - Former Disney executive joins Kroger board



Belk - Sycamore Partners has completed its acquisition of Belk Inc.


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