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Builder Confidence | Lots, Labor & Yellow Lights

Takeaway: Lots, Labor and Rates drag on Builder Sentiment for a 2nd month. We profile the HMI-Rates connection across prior cycles below.

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.

 

Builder Confidence | Lots, Labor & Yellow Lights  - Compendium 121515

 

Today's Focus: December NAHB HMI (Builder Confidence Survey)

 

THE DATA: Builder Confidence dropped -1pt in December to an index level of 61 as all regions and all survey indicators declined modestly and labor and lot costs again headlined builder concerns.   The decline in December marks a 2nd month of retreat off the cycle high reading of 65 recorded in October. 

 

Across the sub-indices, Current Sales fell -1pt to 66 while Current Traffic and 6M Expectations declined -2pts to index readings of 46 and 67, respectively. 

 

Geographically, the South was flat sequentially while the West (76) and Northeast (49) declined –1pt and the Midwest lost -5pts.   

 

HMI & RATES | CYCLE CONTEXT:  Yield Spread compression (10Y-2Y) has characterized every post-war tightening cycle with curve flattening discounting lower future growth/inflation.  Mortgage Yield spread compression has displayed a similar pattern although curve flattening has stemmed largely from the rise in the short end outpacing the concomitant shift higher in 30Y mortgage rates.

 

All else equal, higher rates = ↓ affordability = ↓ pricing power for builders.  Empirically, across cycles, builder confidence is negatively correlated with rates with inflections in builder confidence and housing/builder performance occurring alongside changes in the policy rate and flow through shifts in mortgage financing costs.

 

We profiled HMI and builder equity performance across the prior two cycles last month (See: Builder Confidence: Headfake or Harbinger?). 

 

Broadly, the trend in HMI has served as a good lead indicator for housing fundamentals and the broader economy and a decent coincident indicator for housing related equities.  Historically, there have been multiple instances in which HMI weakened for 1 or 2 months only to bounce back.  However, successive months of weakness have generally signaled further, ongoing softening.    

 

YELLOW LIGHTS & DURATION SENSITIVITY:  Given the historical precedent around multi-month softening in sentiment and the apparent certainty of Janet & Co. pursing policy normalization into decelerating growth, we’d take the 2nd month of decline in the HMI as a cautionary signal. 

 

In the nearer-term, both interest rate and market volatility should continue feed investor angst arund interest rate sensitive exposures and higher beta/higher leverage style factors.  Beyond the knee-jerk and shorter-term reactions, we expect a shallow hiking cycle (if any at all) with curve flattening and a modest drift in mortgage rates – similar to the 1988 and 2004 tightening cycles  where rates on 30Y FRM contract largely traded sideways.

 

We show the trend in HMI alongside inflections in policy and 30Y FRM rates across prior cycles in the series of charts below.  

 

Builder Confidence | Lots, Labor & Yellow Lights  - HMI Tech Buble Cycle

 

Builder Confidence | Lots, Labor & Yellow Lights  - HMI Housing Bubble Cycle

 

Builder Confidence | Lots, Labor & Yellow Lights  - 30Y FRM vs Fed Funds

 

Builder Confidence | Lots, Labor & Yellow Lights  - 2004 Cycle

 

Builder Confidence | Lots, Labor & Yellow Lights  - BUilder vs Cons Conf

 

Builder Confidence | Lots, Labor & Yellow Lights  - Yield Spread vs Fed Funds

 

Builder Confidence | Lots, Labor & Yellow Lights  - NAHB LT

 

Builder Confidence | Lots, Labor & Yellow Lights  - NAHB Survey Indicators

 

Builder Confidence | Lots, Labor & Yellow Lights  - NAHB Regional

 

 

 

About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


DM Asia/Emerging Markets Investment Strategy Update

***The roundup below is an example of our data-driven internal research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list. Also, the summaries below are designed to be just that, so to the extent you'd like additional color on a given economy(ies), please reach out with any requests.***

 

___

 

In China, economic growth decidedly stabilized in NOV per the preponderance of high-frequency data. Obviously there are holdouts (e.g. manufacturing PMI, FX Reserves), but it’s important to call a spade a spade here: Chinese economic growth is clearly no longer “rolling down the cliff”, but rather “descending down the stairs” in an orderly fashion – for now at least. The big risk in China remains the CNY and it continues to be revalued lower on a daily basis by the PBoC, as it seeks to transition its reference rate to a “basket of currencies” from just the USD. PBoC officials are guiding towards exchange rate stability, but we can’t help but think the stealth devaluation we are seeing on our screens now is likely to remain ongoing for years to come; the CNY likely needs to decline by 10-20% vs. the USD to fully quell capital outflow pressure. As such, we reiterate our underweight bias on China in the context of previously identified structural headwinds to growth and inflation – i.e. perpetual #Quad4.

 

DM Asia/Emerging Markets Investment Strategy Update - China Economic Summary

 

In Japan, the 4Q Tankan Survey results came in light – particularly on the growth and inflation outlook components, which, on the margin should perpetuate a pull-forward in QQE expansion expectations. Curtailing this is data that shows the BoJ is projected to hold over 30% of JGB s by year-end, higher than the almost 20% of Treasuries held by the Fed, as well as news of BoJ officials gaining increased confidence in the economy. All told, we reiterate our overweight bias on Japan amid a lack of viable alternatives and an expectation that our #Quad3 outlook perpetuates expectations of increased policy support, at the margins.

 

DM Asia/Emerging Markets Investment Strategy Update - Japan Economic Summary Table

 

In India, NOV trade and export data are confirmatory of our stagflationary #Quad3 outlook, on the margin. As such, we reiterate our underweight bias on India.

 

DM Asia/Emerging Markets Investment Strategy Update - India Economic Summary

 

In Australia, 3Q house price data and NOV auto sales data are incrementally confirmatory of the remarkable resilience of the Australian economy. The latest policy developments are supportive as well: the minutes of the RBA’s DEC meeting reiterated scope to ease further – an outcome that is not being priced into various AUD rates markets – while the government’s mid-year fiscal and economic outlook saw a substantial revision higher in projected budget deficits in conjunction with negative revisions to GDP growth forecasts. All told, we reiterate our neutral bias on Australia amid opposing domestic trends (i.e. #Quad2) and international forces (i.e. Global #Deflation).

 

DM Asia/Emerging Markets Investment Strategy Update - Australia Economic Summary

 

In Brazil, the country’s stagflationary recession and political crisis continues deepened, on the margin, with the advent of the NOV consumer confidence data, as well as news of nationwide protests against the government of Dilma Rousseff. While the latest protests were not as well attended as the August and March versions, they do speak volumes to the level of popular discontent with the current administration – something that could make the ongoing impeachment proceedings worse off for the national’s capital and currency markets. Recall that Rousseff has had a change of heart regarding fiscal and monetary policy; opting to preserve the country’s credit ratings over incremental stimulus. A Rousseff impeachment could be a credit negative event if 2014 runner-up Aecio Neves doesn’t immediately become the front-runner. Regarding the outlook for Brazilian fiscal policy, it’s still too early to tell whether or not things will get worse before they get better – insomuch as it’s still too early to allocate capital to the country. As such, we reiterate our underweight bias on Brazil.

 

DM Asia/Emerging Markets Investment Strategy Update - Brazil Economic Summary

 

In Russia, the NOV industrial production data is confirmatory of our #Quad4 outlook, on the margin. As such, we reiterate our underweight bias on Russia.

 

DM Asia/Emerging Markets Investment Strategy Update - Russia Economic Summary

 

In South Africa, the ZAR overtaken the BRL as the major currency that options traders are most bearish about, with 3M 25-delta risk reversals up +1.26ppts. WoW to 3.76. This comes as investors are now repricing the outlook for South African fiscal policy in conjunction with Zuma firing two finance ministers in five days. South African capital and currency markets are celebrating the restatement of former finance minter Pravin Gordhan (2009-14), but we expect that enthusiasm to be short-lived amid the country’s stagflationary #Quad3 setup. As such, we reiterate our underweight bias on South Africa.

 

 

DM Asia/Emerging Markets Investment Strategy Update - South Africa Economic Summary

 

Recent publications: 

 

 

Best of luck out there,

 

Darius Dale

Director


[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting

Takeaway: The domestic equity outflow streak has maintained the fastest pace on record and is now the third longest running.

Editor's Note: Below is a complimentary research note which was originally published December 10, 2015 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending December 2nd, investors withdrew another -$8.0 billion from domestic equity mutual funds, bringing the year-to-date total outflow to -$155.0 billion. Additionally, the table below shows that the current streak of redemptions is running at -$3.9 billion per week, the fastest pace on record which has now aggregated to -$157.8 billion in total drawdown, the second largest in history (we define a streak as being intact unless broken by 4 consecutive weeks of subscriptions). Meanwhile, equity ETFs continue to mop up flows with +$6.6 billion in subscriptions in the most recent 5 days as investors favor passive exposure. We continue to recommend a short position in shares of T. Rowe Price as a way to express this ongoing shift out of active products (see our TROW reports).

 

In other asset classes, total fixed income flows (including mutual funds and ETFs) were moderately weak at -$206 million following Fed Chair Yellen's hawkish testimony. Additionally, investors displayed some risk aversion by shoring up +$18 billion in money market funds last week.

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI19

 

 

In the most recent 5-day period ending December 2nd, total equity mutual funds put up net outflows of -$8.9 billion, trailing the year-to-date weekly average outflow of -$1.0 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$890 million and domestic stock fund withdrawals of -$8.0 billion. International equity funds have had positive flows in 42 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$1.0 billion, trailing the year-to-date weekly average inflow of +$75 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$918 million and taxable bond funds withdrawals of -$2.0 billion.

 

Equity ETFs had net subscriptions of +$6.6 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$829 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI1 large  2  12 15

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI2

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI3

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI4

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI5

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI12

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI13

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI14

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI15

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI7

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -$367 million or -6% from the long treasury TLT ETF following Fed Chairwoman Yellen's testimony that signaled a high probability of a rate hike later this month.

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI17

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.0 billion spread for the week (-$2.2 billion of total equity outflow net of the -$206 million outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$857 million (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] ICI Fund Flow Survey | 40 Weeks and Counting - ICI11 


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REPLAY | Fed Day Live with Hedgeye CEO Keith McCullough

In case you missed it... outspoken Hedgeye CEO Keith McCullough hosted a live, in-depth discussion following the FOMC announcement today featuring no-punches-pulled insight and analysis, interactive Q&A, and how to position your portfolio going forward.

 

 


BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling

BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling - Deaflation cartoon 12.09.2015

 

Wall Street is finally waking up to our view on #Deflation. (That call is now 18-months old.) Not by choice, of course, they had to wake up... deflation is pervasive.

 

Hedgeye CEO Keith McCullough ran through some of the deflationary data in a note to subscribers earlier this morning:

 

"The 19 Commodity CRB Index hit a fresh 2015 low of 174 (-24.3% YTD) yesterday, so you’re going to see one of the many dead-cats that have bounced this morning- WTI led that, +1.8% yesterday and +0.5% this am w/ a risk range of $34.05-38.15."

 

Here's the chart...

 

BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling - CRB index twitter 

The Fed calls these falling prices "transitory." Transitory? Don't forget that the Fed's forecasts are wrong around 70% of the time.

 

Deflation proof? Take a look at the 0.0% CPI month-over-month print this morning. That didn't come as a big shocker to our macro team. We'll see whether deflation proves transitory or not.


Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt

Takeaway: Hedgeye Retail Idea List. Keep an eye on Primark. KSS open 170 hours straight. HBC's Gilt deal not transformative.

Hedgeye Retail Idea List

Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt - 12 15 2015 chart1

 

Primark - Can Cool Clothes Get Any Cheaper Than This?

Link: CLICK HERE

Here's one of the better articles we've read about Primark. There's not a whole lot of info in this article that we don't already know. But if you are interested, long or short, in any company that has anything to do with designing, marketing, manufacturing or retailing apparel, footwear and accessories in the US (or globally, for that matter), you pretty much have to read this. How can you NOT keep a constant eye on what will likely prove to be the most deflationary force in softline retail in the next economic cycle?

 

KSS - To open for 170 Straight Hours up from 100 hours last year

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=2122581)

Our take: We still don't get why KSS keeps its doors open 24hrs a day leading up to the Christmas holiday. For a company that openly admits that it has a problem a) getting people through the turnstiles, b) selling items in categories that people actually want to buy, and c) keeping e-comm from cannibalizing in-store sales, it doesn't seem to make a whole lot of sense to stay open for 170 hours straight. This is the 3rd year now that KSS has kept the doors open all night, starting on the 20th in 2013, 19th in 2014, and the 17th in 2015. Plus it added a whole host of Door Buster deals on the 19th, as if retail needed another dose of Black Fridayesque deals. Allowing a person to shop at 3am (and paying store labor 3x wages for shift differential) is simply not a value driving strategy.

 

Gilt, HBC - In Proposed Sale to Saks Fifth Avenue Owner, Gilt Groupe’s Value Is Slashed

(http://www.wsj.com/articles/hudsons-bay-near-deal-to-buy-online-retailer-gilt-groupe-for-250-million-1450131724)

Our take: HBC taking a page out of the JWN playbook with this proposed acquisition of Gilt Groupe. One thing that has become abundantly clear is that the flash sale model isn't scalable when it can only offer 25 units of a specific product. Maybe the combination of Off 5th inventory will help to alleviate that issue, but there is also the secular trend away from Flash Sales to consider. But at 0.4x ev/sales, it seems like HBC should be able to get some value out of the name brand. But this would by no means be a transformative deal that would launch HBC's on-line platform into the 21st Century.

 

TUES - Tuesday Morning Corporation Announces The Appointment Of Steven R. Becker As CEO

(http://ir.tuesdaymorning.com/releasedetail.cfm?ReleaseID=946840)

 

MW - Moody’s revised its ratings outlook for Men’s Wearhouse to negative from stable.

(http://wwd.com/retail-news/specialty-stores/mens-wearhouse-moodys-10297086/)

 

Ayr to Spin Off From Bonobos

(http://wwd.com/retail-news/direct-internet-catalogue/ayr-bonobos-spinoff-andy-dunn-10297102/)

 

No surprise, Mobile traffic up this Holiday season.

Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt - 12 15 2015 chart2

 

Toys ‘R’ Us - New Strategy 'Full and Chunky'. Sounds like a great margin strategy.

(http://www.wsj.com/articles/toys-r-us-plays-with-a-fresh-strategy-1450141526)

 

UPS, FDX, AMZN - Holiday Online Orders Taking Longer

(http://www.wsj.com/articles/holiday-online-orders-taking-longer-study-says-1450102912)

 

VFC - The North Face uses artificial intelligence to engage with customers

(http://www.retailingtoday.com/article/north-face-uses-artificial-intelligence-engage-customers)

 

Neiman Marcus hit by department store slump

(http://www.retailingtoday.com/article/neiman-marcus-hit-department-store-slump)

 

 


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