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EHS | "Transitory"

Takeaway: A negative factor cocktail made for a Perfect Storm in November Existing Home Sales. Importantly, December should see the weakness reverse.

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. 

 

EHS | "Transitory" - Compendium 122215 

 

Today's Focus: November Existing Home Sales 

We knew the risk was to the downside for Existing Sales in November (see:  They Are Who We Thought They Were) as Purchase Application demand was relatively soft in October, the 1st TRID related impacts would be manifest and some modest downside still existed to full re-convergence with Pending Home Sales.  In short, we knew it would be disappointing but the extent of TRID related delays and thus the magnitude of decline remained a wild-card. 

 

With Existing Sales down -10.5% MoM and -3.8% YoY, the decline was, indeed, remarkable.  It should also, however, be (to quote Team Janet) “transitory”.  

 

Looking to next month, the negative trinity of factors highlighted above reverses as Purchase Applications saw a notable uptick in Nov/Dec, TRID related delays resolve and recoupling to PHS should all conspire to drive a reversal in this month’s reported weakness. 

 

As Lawrence Yun, NAR chief economist, noted:

 

"As long as closing timeframes don't rise even further, it's likely more sales will register to this month's total, and November's large dip will be more of an outlier."

 

We infrequently side with stakeholders with an embedded panglossian bias but, in this instance, we’d agree with that expectation.   

 

What has not been transitory is the tight inventory environment.  Units of inventory declined for a 4th straight month, retreating -3.3% MoM and -1.9% YoY to 2.04MM Units (note – inventory is not seasonally adjusted so the YoY change is relevant, particularly around seasonal shifts in activity).  On a months-supply basis, the noisy decline in sales more than offset the inventory retreat, driving months-supply +8.1% MoM to 5.14-months – marking the 39th consecutive month below the traditional balanced market level of 6-months.  Ongoing supply tightness in the 90% of the market that is EHS remains supportive of stable-to-improving HPI trends in the nearer-term.

 

As always, we’re more interested in the Pending Home Sales data (Nov release = next Wednesday, 12/30) as a cleaner, more real-time read on the underlying trend in purchase demand in the existing market. 

 

 

 

EHS | "Transitory" - EHS vs PHS

 

EHS | "Transitory" - EHS Units and YoY TTM

 

EHS | "Transitory" - EHS months supply

 

EHS | "Transitory" - EHS Inventory units

 

EHS | "Transitory" - EHS LT

 

EHS | "Transitory" - EHS Price Regional YoY

 

EHS | "Transitory" - EHS Regional YoY 

 

 

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

 

  

Joshua Steiner, CFA

 

Christian B. Drake


CALL TODAY (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES

Please join us TODAY (Tuesday, December 22, 2015 at 11AM EST) for a review of the bear case on Newmont Mining.

 

Dial-in

  • Toll Free:
  • Toll:
  • Confirmation Number: 13627484 

For the corresponding slides please reply to the reminder email, and we will send them along. 

 

CALL TODAY (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES - Marketing Image

 

Overview

 

NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing.  Long-term, NEM has been a secular underperformer; we expect that underperformance to continue.  NEM may struggle with comparatively high costs in a declining gold price environment.  We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.

 

 

Highlights

  • Assumption vs. Reality:  A look at key assumptions behind NEM’s costs and those of competitors
  • Charges Coming:  NEM may need to again adjust asset values lower, potentially with broader implications
  • Likely Value Trap:  Cyclicals in a downswing typically look cheap as conditions deteriorate
  • No Gold Cure:  With mine production likely to exceed estimates and gold continuing to move out of favor with investors, we expect gold prices to decline in most major currencies. 

Hedgeye Materials

 


CALL TODAY (NEM) | Happy Assumptions vs. Sad Realities

Please join us TODAY (Tuesday, December 22, 2015 at 11AM EST) for a review of the bear case on Newmont Mining.

 

Dial-in

  • Toll Free:
  • Toll:
  • Confirmation Number: 13627484 

For the corresponding slides please reply to the reminder email, and we will send them along. 

 

CALL TODAY (NEM) | Happy Assumptions vs. Sad Realities - Marketing Image

 

Overview

 

NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing.  Long-term, NEM has been a secular underperformer; we expect that underperformance to continue.  NEM may struggle with comparatively high costs in a declining gold price environment.  We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.

 

 

Highlights

  • Assumption vs. Reality:  A look at key assumptions behind NEM’s costs and those of competitors
  • Charges Coming:  NEM may need to again adjust asset values lower, potentially with broader implications
  • Likely Value Trap:  Cyclicals in a downswing typically look cheap as conditions deteriorate
  • No Gold Cure:  With mine production likely to exceed estimates and gold continuing to move out of favor with investors, we expect gold prices to decline in most major currencies. 

Early Look

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RTA Live: December 22, 2015

 


NKE | Key Issues

Takeaway: Here’s what we care about headed into the print. There are broad implications not just for Nike, but for its US retail accounts as well.

Here’s a quick overview as to what we’re looking for from Nike tonight.

  1. A Big EPS Beat: We’re at $0.93 vs the Street at $0.86. This company has not missed a 2Q in well over 10 years. It’s not gonna start now.
  2. Futures. We all know that 9 out of 10 times, the consensus futures estimate is +1/-1 the prior quarter’s 2-year trend. But that only proves to be correct 4 times out of 10. So the question is…are we plus, or minus. Let’s keep in mind that this is an unaudited number that management does not even know until 1-2 weeks before the print. That said, we’re looking for 15% Global C$ growth in Futures, including 10% growth in North America. The latter would represent a 400bp sequential slowdown from 1Q results.
  3. Bifurcation in Futures and Results. One of the key factors behind our long term call on Nike (and our short on FL) is that Nike is likely to build its e-commerce business from $1.2bn last year to $11bn by 2020. That’s nearly 60% ABOVE the e-comm target Nike gave the Street at its analyst meeting earlier this year. This means two things…
    • Futures: At some point, futures will become extremely less relevant, as futures only applies to Nike’s wholesale business. Naturally, we’ll likely hear the company talk about this when there is the inevitable downturn in futures.
    • Gross Margins: Gross margins are likely headed well over 50% vs the 46% it reported last year, as e-commerce margins are about 20 points above wholesale.
  4. E-commerce: We need to see growth this quarter of at least 40%. We’re modeling 50%. It’s going up against a tough comp vs last year (65%), but lets face it…when we’re making a case that e-comm will grow from $1bn to $11bn, going up against a ‘tough comp’ is absolutely irrelevant. Every quarter should be a tough comp, otherwise we’re simply wrong in our thesis.
  5. US Commentary: Here are a few points that matter a lot, both for Nike and for retailers like FL, FINL, DKS, HIBB, etc..
    • Saturation: If we were to ask only one question on the call (we generally don’t ask our questions publicly on conf calls) it would sound something like this, “Over the past six years, Nike has increased its penetration in key wholesale accounts from 40-50%, to 60-80%. At the same time it used the resulting cash flow to invest in the plant, people and systems needed to aggressively grow the leg of distribution – Nike DTC (e-comm) -- that will propel Nike from $30bn in sales to $50bn.  With zero square footage growth opportunities for the traditional retailers in the US, and Nike incrementally taking higher ASP product for its proprietary distribution network, how can the traditional retailers actually grow? We understand the ‘innovation agenda’, and the ‘category offense’, but unless Nike convinces the consumer to break out of a 35-year paradigm of per capita purchasing patterns – it seems like we’re at a point where it’s all about price for the legacy retail models. No?”
    • Basketball: Not hugely relevant to Nike, but relevant to retailers like FL where about 40% of sales are basketball. FL recently said bball sales slowed, despite a 4% increase in the number of Nike launches during its reporting period, and a 7.4% boost in average price point?
    • Inventory Levels: US inventories were elevated at Nike last quarter, and the company noted that it should be cleaned up by the end of Q3 (Feb). We need to see meaningful progress towards this goal, or at least increased confidence that it is being fixed. Reminder, Nike’s confidence in clearing out inventory might be bullish for Nike, but not necessarily the wholesale channel.
  6. On-site Manufacturing: Nike has kept this out of the forefront of the discussion for two years now. But it’s going to be a very relevant, very soon. Aside from driving the DTC model, it will gain even more leverage over retailers who will pay top dollar (in raw cash, working capital, or in margins) to have this technology in stores. We don’t think Nike will talk about this specifically, but we think it becomes a part of the discussion in the next calendar year.

INSTANT INSIGHT | Why Treasury Yields Are Down

What is happening to the 10-year Treasury?

 

The fact that yields are coming down, following last week's rate hike by the Yellen Fed, seems counterintuitive. Below is a brief excerpt from a note sent to subscribers earlier this morning by Hedgeye CEO Keith McCullough explaining why:

 

"... The U.S. 10-year Treasury yield was down to 2.18% yesterday and is holding 2.19% so far this morning with Yield Spread compression (10yr minus 2yr) still testing YTD lows as #GrowthSlowing in Q4 remains obvious to anyone who is rate of change driven and data dependent."

 

INSTANT INSIGHT | Why Treasury Yields Are Down - 10 yr treasury

 

Got it? #GrowthSlowing.


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