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They Are Who We Thought They Were | New Highs in Starts & Purchase Apps

Takeaway: Housing Starts & Permits made a new post-crisis high in November while MBA purchase apps are running +34% Y/Y.

“They are who we thought they were”

-          Dennis Green (Arizona Cardinals head coach), infamous rant

 

Today’s Focus:  November Housing Starts/Permits & MBA Purchase Apps

 

The current macro and housing cross-currents are many, the monthly data deluge is ceaseless and, at times, mind-numbing and the propensity for taking a myopic view of every incremental data point is acute -  so let’s take a step back:

 

STEPPING BACK: The housing recovery started almost a full three years after the broader recovery.  Inclusive of this morning’s Starts data, new single-family construction activity remains 34% below historical averages (and ~90% below average peak levels – remember, housing tends to be autocorrelated, running fully from troughs to peaks).  Affordability continues to favor ownership, the labor recovery is late-cycle but ongoing and the labor/income recovery in housing’s key demand demographic (20-40 year olds) has only recently matured beyond the 3Y mark and just begun to drive ownership, household formation and headship rates higher.  Lending is pro-cyclical and resi lending standards continue to ease while the regulatory pendulum, after hitting peak tightness in 2014, has begun to swing the other way with the credit box baby-stepping towards expansion.  Those dynamics continue to drive crawling but ongoing market normalization (↑ entry level demand, ↑ conventional mortgaged purchases, ↓ distressed/investor sales, etc) alongside the recovery in equity values and underwater/negative equity share. 

(Note: We’ll fully detail the opportunity & challenges facing the market in our 2016 Outlook and Themes call on January 8th)

 

Given that broader, prevailing reality, how would the Trend line in the housing data be expected to look?

 

Probably exactly like the trend line in the Single Family Starts activity below with construction continuing to stair-step higher.  In other words, it is what a common sense expectation of the cycle thought it would be.

 

Given the magnitude of mean reversion upside back to average levels of activity, how would one expect the MT/LT Trend line in construction activity to look from here?

 

Single family starts rose +7.6% MoM in November to +768K, accelerating to +15% YoY and marking the highest level of activity since January 2008. Single-family permits followed suit, rising +1.1% MoM, making a new 8-year high. 

 

On the multifamily side – which was responsible for last month’s headline decline (see:  Starts & Purchase Apps | Neither One Is As It Appears) - activity rebounded, rising +16.4% MoM and accelerating to +20% year over year. 

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts SFl 3Y 

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts   Permits SF LT

 

Purchase Applications: Purchase activity declined -2.8% on the latest week but at 221.7 on the Index, the elevated level of demand observed over the last 5-weeks persisted.  On a year-over-year basis, purchase demand accelerated to the fastest rate of growth YTD at +34% YoY with 4Q15 currently tracking

+3.4% QoQ and +25% YoY. 

 

 

Now that we’ve got you all bulled up, let’s handicap next week’s EHS release. 

 

November Existing Home Sales (reported next Tuesday, 12/22) will largely reflect October contract activity and Purchase Application demand was relatively soft in October following TRID's implementation. 

 

Further, the first evidence of any TRID related delays to closings would show up in the November EHS data - we don’t have any hard quant on the magnitude of impact but anecdotal commentary suggest some impact and the risk to the reported numbers is asymmetrically negative. There also exists some modest downside to a full-re-convergence with the trend in Pending Home Sales. 

 

It’s also worth noting that while the longer-term upside in new construction activity off still-depressed levels remains conspicuous, activity in the existing market has already mean reverted back above average historical levels. 

 

Volume growth in the 90% of the market that is existing sales should be more moderate with further market normalization, ongoing improvement in entry level demand, flow through demand from the rental market and credit box expansion anchoring incremental gains from here.

 

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Compendium 121615

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Purchase YTD Monthly

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Purchase YoY

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Purchase Index   YoY Qtrly

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Purchase 2013v14v15

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Purchase LT

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts   Permits MF LT

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts   Permits MF TTM

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts   Permits SF LT

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts   Permits SF TTM

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts Total 3Y

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - Starts Total LT

 

They Are Who We Thought They Were | New Highs in Starts & Purchase Apps - 30Y FRM

 

 

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Another Round Of (Recessionary) Data? Hike Away Janet!

Takeaway: Today's data confirms our #GrowthSlowing Macro theme. But the Yellen Fed wants to hike interest rates anyway.

Another Round Of (Recessionary) Data? Hike Away Janet! - fed tightening noose

Fed Day has finally arrived.

 

We're pleased to announce that at 2:10 pm (directly following the FOMC decision) Hedgeye CEO Keith McCullough will host a live, unadulterated Q&A with viewers offering insight and analysis on what it all means for investors. 

 

Did we mention it's free? Click here to join him this afternoon.

 

Here's some food for thought while we wait with bated breath for our omnipotent central planners at Yellen & Co. to tell us precisely (or perhaps not so precisely) what the future path of interest rates will be.

 

Another Round Of (Recessionary) Data? Hike Away Janet! - mccullough production

Another Round Of (Recessionary) Data? Hike Away Janet! - indus 

Another Round Of (Recessionary) Data? Hike Away Janet! - treasury

 

Here's an excerpt from a note sent to subscribers earlier this morning written by Keith:  

 

"Rates both locally and globally, in 10yr Yields, are higher into the Fed hike event risk – 2.27% on the U.S. 10yr with an immediate-term risk range of 2.13-2.36%; Swiss 10yr +19bps month-over-month (off all-time lows) to -0.17%; Italian and German 10yr yields +11bps m/m."

 

Another Round Of (Recessionary) Data? Hike Away Janet! - yields

 

In related news, on "Fed Hike Into a Slowdown" day, the Bank of England's Mark Carney reversed his hawkish course saying the data has changed (so he will).

 

Another Round Of (Recessionary) Data? Hike Away Janet! - BoE

 

Carney was asked, by the Financial Times, about whether the prerequisite "conditions" had been fulfilled to raise rates:

 

"In an interview with the Financial Times, the BoE governor showed no sign of wanting to follow the Federal Reserve, which on Wednesday is widely expected to raise rates for the first time in nearly a decade. The Bank of England, rather, is focused on curbing excessive credit growth in a “low for long” interest rate environment, he said.

 

With little sign of inflation, Mr Carney said the priorities for the central bank were to increase the resilience of the banking system in the event of a downturn and reassess the safety of the buy-to-let lending market..." *Emphasis added*

 

Sound familiar? We've been warning subscribers about #LowerForLonger (rates) and #Deflation for a while now. So Carney is actually paying attention to the #GrowthSlowing data.

 

Meanwhile, everything the Fed didn't forecast in the past year (see deflation and slowing growth) is just "transitory." It all will pass, Yellen says. So why not hike interest rates?

 

Transitory? Hmm...

 

Remember today's Industrial Production numbers? 

 

Another Round Of (Recessionary) Data? Hike Away Janet! - industrial production info

Another Round Of (Recessionary) Data? Hike Away Janet! - industrial production 2

 

Or how about today's PMI Manufacturing Index Flash which slowed to 51.3, with new orders printing their slowest pace in more than two years? 

 

Not good... 

 

Hike away Janet!

 

Another Round Of (Recessionary) Data? Hike Away Janet! - Titanic 03.31.2014


Retail Callouts (12/16): Gary, Chip, Tory stirring up the pot -- some better than others.

Takeaway: Gary, Chip, Tory stirring up the pot -- some better than others. Buy RH, short LULU ahead of next blowup/CEO sack, Buy KATE into a big '16.

RH - Gary Crushed it on Cramer

We have to give Gary Friedman props for his approximately nine minute segment on Cramer last night. Let's face it, him going on what's arguably the most volatile and biased financial media platform in an unscripted way is not what we wanted to see.  The risk of fireworks was high. But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at RH -- growth in product concepts, and RH's real estate transformation.  The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

 

LULU - Watch This Video. There's a Lot of Chip-isms here.

(http://www.bloomberg.com/news/videos/2015-12-14/lululemon-founder-i-thought-of-buying-under-armour)

 

Chip popped on Bloomberg to talk about his new venture with his wife and son -- Kit and Ace, but naturally the conversation focused entirely on the direction and problems at LULU. Chip held his tongue, most likely because of the gag order agreed upon when Advent bought half of his stake, and attributed LULU's problems to a 'culture problem'. You could argue that it was exactly this that got LULU into the mess it has found itself in the first place. Chip's belief that LULU was a talent incubator resulted in a management team that wasn't qualified to run a company with $12bn in market cap. And we are not convinced the new team in place today is much better.

Chip all but confirmed that he was pushed out by board politics, and we think the catalyst there was the hiring of Laurent Potdevin as CEO. He pushed for Laurent to be hired as CEO. The Board knew Laurent was unqualified, so Chip traded his Chairman title/power for the CEO appointment. That led to Wilson being effectively neutered on the Board, and to him selling his stock.

And yes, we stand by our statement that Potdevin will be fired within six months in conjunction with another blowup and restructuring for LULU.

Those are the biggest takeaways from the interview from where we sit, not the idea that LULU could/should have purchased UA. The thought that Kevin Plank would allow a deal like that to even be discussed when he has two-thirds of the voting stock is almost comical.

The video is actually worth a watch -- if for no other reason than to see the journalists ask the worst questions we've ever heard asked of an industry veteran.

 

TORY BURCH LAYS OFF 100 EMPLOYEES

(http://www.hollywoodreporter.com/news/style-notes-derek-zoolander-poses-848731)

 

This story is a few days old, but we got a few questions on it yesterday. So here's our take.  It's interesting to us that people view Tory Burch as a preeminent  brand in the luxury space. Consider this...the footprint of the brand was around $1.9bn last year. That compares to Michael Kors at nearly $9bn, and Coach at $7bn. Kate Spade was only $1.4bn in 2014. So yes, Tory is bigger than Kate -- for now.  Tory Burch's layoffs are just the culmination of issues it's been having with its business for 2-years...the same issues that led to hiring Roger Farrah (RL) as Co-CEO in late 2014. Our prediction -- KATE will surpass Tory Burch in size and profitability (forever) within two quarters.

 

TGT - Tech security firm says it's easy to hack Target gift registry apps

(http://www.startribune.com/tech-security-firm-says-it-s-easy-to-hack-target-gift-registry-apps/362582411/

 

Over the past 2+ years we've seen a collection of execution/security gaffes at TGT. Running through them in order... 1) Data breach in 2013. 2) e-commerce site malfunction during the Lily Pulitzer launch in April 2015. 3) e-commerce site malfunction during Cyber Monday 2015. 4) Gift registry app allows hackers access to personal information. Most of the issues have been centered on the e-comm channel and that's no surprise given that TGT didn't assume full control of the business until 2011 when it kicked its former partner AMZN to the curb. To catch up we think TGT needs invest heavily in this channel if it wants to grow this business at a 40% CAGR (something its been unable to do 2015 YTD). For context, WMT is spending $1.1bn on e-commerce investments in 2016 alone. With the closure of the CVS pharmacy deal announced today, the low hanging fruit for Cornell is all but gone.

 

TGT, CVS - CVS Health and Target Announce Completed Acquisition of Target’s Pharmacy and Clinic Businesses

(http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle&ID=2123024)

 

AdiBok - Adidas sees +8% growth in sales in North America, two-digit growth in the following year. But Nike too good to be messed with

(https://epaper.handelsblatt.com/vhb_epaper_neo_p/?ticket=ST-161570-gM4eMV16XNbGsoQFIs2X-s02lcgiacc01.vhb.de#article/11/Handelsblatt/2015-12-16/1/5766838)

 

Prada Makes Adjustments Amid Slow Sales

(http://www.wsj.com/articles/pradas-net-profit-plunges-26-1450190933)

 

Rakuten to Set Up Shop on China’s JD.com

(http://www.wsj.com/articles/rakuten-to-set-up-shop-on-chinas-jd-com-1450258024)


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CHART OF THE DAY: Long-Term Rates Don't Lie About Growth

CHART OF THE DAY: Long-Term Rates Don't Lie About Growth - 12.16.15 chart

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.

 

"... You don’t have to be the Wright Brothers to understand the very basic physical nature of long-term bond yields vs. the rate of change in real-growth:

 

  1. When GROWTH is accelerating on a TREND basis, long-term yields rise
  2. When GROWTH is decelerating on a TREND basis, long-term yields fall

 

That’s why the longest of “long-term investors” have been right to bet on Lower-For-Longer at every long-term-lower-high in the 10yr Yield. It’s Slower-For-Longer, eh."


Can She Fly?

“Gentlemen, I am going to fly.”

-Wilbur Wright

 

And that, the Wright Brothers did.

 

But will Janet Yellen?

 

Ladies and gentlemen, you are about to see an exhilarating political liftoff whereby a dove will pretend to look like a hawk. Then, (within minutes maybe) you’ll be considering a dove being a dove again. I’ll have LIVE analysis @HedgeyeTV at 2:10PM EST.

Can She Fly? - Yellen cartoon 09.17.2014NEW

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 

 

Back to the Global Macro Grind

 

Ahead of this historical Fed decision, I’m running out of original content, so bear with me while I update you with yet another data-driven perspective – that of the Bank of England (BOE).

 

Mark Carney (head of the BOE) stole some headlines this morning by reversing his hawkish course, saying that “rate hike conditions are unfulfilled.” Yep. He told the truth and said that both the growth and #deflation data has slowed since July.

 

Ultimately, you don’t need a central-planner who is analyzing data (and market moves) on a political lag to remind you what part of the world has already had precipitation. But it is nice to see that some of these people are somewhat objective.

 

Dollar Up, Pound Down on that…

 

And what you’d expect to happen on the 1st US rate hike day in 9 years (1st hike into a corporate profit slow-down since 1967), in FX and Rates markets, is happening right now too:

 

  1. US Dollar +0.1% vs. the Euro to $1.09 EUR/USD with bearish TREND resistance for EUR/USD = $1.13
  2. US Dollar +0.3% vs. British Pound to $1.50 with bearish TREND resistance for GBP/USD = $1.54
  3. US 10yr Yield +3 bps on the day to 2.27% (after dropping to 2.13% on last week’s US #GrowthSlowing news)

 

Interestingly, Global Bond Yields have “bounced” off the lows into this Fed hike too:

 

  1. Swiss 10yr +19 basis points (bps) month-over-month to -0.19%
  2. German 10yr +11 bps month-over-month to 0.64%
  3. Italian 10yr +11 bps month-over-month to 1.67%

 

Notwithstanding the basic observation that all of the aforementioned 10yr Yields remain below that of the US 10yr Yield, it’s important to note that British Yields are actually down (1 beep on the 10yr) in the last month on this dovish BOE pivot.

 

When the growth and inflation data slows, I pivot – what do you do, Sir (and Madame)?

 

So, let’s say that after an hour (or day) of rate-hiking, the market forces Yellen to pivot. Yesterday’s 0.0% CPI (consumer price inflation reading) and this morning’s US Industrial Production report (reminder, it’s in a recession) definitely support that.

 

Then what?

 

Does the Dollar go down? What if it doesn’t (because the Euro, Pound, and Yuan are being centrally planned down)? What if the Dollar doesn’t do anything but rates start going down (again)?

 

Damn that data. It’s been crashing those who have been betting on higher-rates for almost 2 years.

 

For those of you who are new to following Hedgeye, we were bullish on US #GrowthAccelerating and bearish on the Long Bond (bullish on #RatesRising) for all of 2013. That, incidentally was the year consensus was actually bearish on rates!

 

You don’t have to be the Wright Brothers to understand the very basic physical nature of long-term bond yields vs. the rate of change in real-growth:

 

  1. When GROWTH is accelerating on a TREND basis, long-term yields rise
  2. When GROWTH is decelerating on a TREND basis, long-term yields fall

 

That’s why the longest of “long-term investors” have been right to bet on Lower-For-Longer at every long-term-lower-high in the 10yr Yield. It’s Slower-For-Longer, eh.

 

With neither growth nor inflation accelerating, you’re probably going to witness the most dovish “rate hike” in US history today. Ladies and gentlemen, she is going to fly alright – in 10yr Yield terms, if she’s lucky maybe 10 beeps.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.36%

SPX 2003-2060
RUT 1105--1163

VIX 17.98-25.21
USD 97.01-99.54
Oil (WTI) 34.08-37.97

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Can She Fly? - 12.16.15 chart


The Macro Show Replay | December 16, 2015

 


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