December 24, 2015

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10-Year U.S. Treasury Yield
2.32 2.12 2.27
S&P 500
1,993 2,079 2,064
Russell 2000
1,108 1,157 1,152
NASDAQ Composite
4,895 5,085 5,001
Nikkei 225 Index
18,507 19,239 18,886
German DAX Composite
10,163 10,823 10,727
Volatility Index
14.42 24.89 15.57
U.S. Dollar Index
97.13 99.41 98.37
1.07 1.10 1.09
Japanese Yen
120.08 121.99 120.88
Light Crude Oil Spot Price
34.94 38.08 37.89
Natural Gas Spot Price
1.69 2.03 2.00
Gold Spot Price
1,049 1,084 1,069
Copper Spot Price
2.02 2.15 2.13
Apple Inc.
104 110 108
642 681 663
Alphabet Inc.
746 778 768
Walt Disney Company, Inc.
102 109 105
Nike Inc.
126 133 128
Kinder Morgan Inc.
13.72 16.91 16.41



Trending Higher vs Trend Consistent | Purchase Apps & NHS

Takeaway: December 2015, as measured by mortgage purchase app volume, is on track to be the strongest month of 2015 by a wide margin.

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.


Trending Higher vs Trend Consistent | Purchase Apps & NHS - Compendium 122315


Today’s Focus: New Home Sales for November & MBA Purchase Apps


New Home Sales:  New Home Sales rose +4.3% to 490K in November against downwardly revised October estimates.  On a year-over-year basis, sales were up +9.1% with accelerating growth in the South and West offsetting declining growth in the Northeast and Midwest.  


Given the serial tendency toward downward revision and a +/-18% margin of error, NHS are one of the most volatile and highly revised housing data series, making it hard to take an overly convicted view of any given month in isolation.  Any TRID related impacts in the November data only adds to the noisiness. 


From a Trend perspective, the gain in November brings sales activity in the New Home Market (currently running at  ~9.3% of the total housing transaction volume) back up to the TTM average with Sales growth YTD running +13.9% YoY relative to the corresponding period last year. 


In short, the November NHS data is largely trend consistent and with total and single-family starts making higher cycle highs in November, the mean reversion march higher in new construction activity and sales remains modestly choppy but ongoing. 



Purchase Applications:  Purchase Demand rose +4.10% sequentially  and accelerated to +37.6% YoY, taking the Index reading to 230.8 – marking the fastest pace of growth YTD and the highest index reading since mid-2010.   The strength in latest weeks extends the streak of elevated activity observed in the back half of November/December to-date to six weeks.    Seasonal and peri-holiday noise in the high frequency data is prevalent this time of year but the persistent strength observed over the last month and a half lends some legitimacy to the reported uptick in purchase demand.   We’ll look for confirmatory evidence out of Pending Home Sales data for November due out next Wednesday. 


It’s also worth noting that continued housing market normalization with further recovery in conventional mortgaged purchases and a decline in distressed/cash/investor sales would be expected to manifest in a drift higher in purchase application activity but with less than a one-for-one flow through to total transaction volume.  




Trending Higher vs Trend Consistent | Purchase Apps & NHS - Purchase Apps Monthly


Trending Higher vs Trend Consistent | Purchase Apps & NHS - Purchase 2013v14v15


Trending Higher vs Trend Consistent | Purchase Apps & NHS - Purchase YoY


Trending Higher vs Trend Consistent | Purchase Apps & NHS - Purchase Index   YoY Qtrly


Trending Higher vs Trend Consistent | Purchase Apps & NHS - Purchase LT


Trending Higher vs Trend Consistent | Purchase Apps & NHS - NHS EHS to NHS ratio


Trending Higher vs Trend Consistent | Purchase Apps & NHS - NHS LT


Trending Higher vs Trend Consistent | Purchase Apps & NHS - NHS Regional YoY


Trending Higher vs Trend Consistent | Purchase Apps & NHS - NHS Sales vs SF Starts


Trending Higher vs Trend Consistent | Purchase Apps & NHS - NHS Total   YoY TTM





About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



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. 



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



Joshua Steiner, CFA


Christian B. Drake


Investing Ideas 'Macro Overlay': Happy Holidays!

Happy Holidays investing ideas subscribers!


In light of the holiday shortened week, we are giving our analysts a much-deserved break to enjoy the holidays with their families. Expect our next Investing Ideas Newsletter update on Januray 2nd.  



In the meantime, on today’s Macro Overlay, Hedgeye CEO Keith McCullough re-ranks our current high-conviction Investing Ideas based on our Macro team's calls for #Deflation and #GrowthSlowing in the U.S. 


On a related note, our Macro team has been highlighting the increasing probability that the U.S. economy tips into a recession during the second half of 2016. Keith shares the #1 way to play the coming economic downturn with tips on how to position for the first half of 2016.



Please enjoy your respective Holidays with family and friends and have a very Happy New Year! 



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Cartoon of the Day: Dunce Cap

Cartoon of the Day: Dunce Cap - Fed dunce cap cartoon 12.23.2015


To be crystal clear, the Fed hiked rates last week into an industrial recession and corporate profit slow-down.   

The Atlanta Fed's New Bullish Narrative? Cutting Its Own GDP Estimate

The Atlanta Fed's New Bullish Narrative? Cutting Its Own GDP Estimate - Fed forecast cartoon 11.13.2015


Yes, Atlanta Fed President Dennis Lockhart voted for a rate hike. And yes, today the Atlanta Fed cut it's own year-end GDP estimate. 




In a speech on Monday, Lockhart just said that U.S. growth next year would be "improved...but not jumping off the charts...I am not going to overstate the momentum of the economy but it is solid and that is the way [the Fed's rate hike] decision should be interpreted." (Emphasis added)


The Atlanta Fed's New Bullish Narrative? Cutting Its Own GDP Estimate - fed atlanta


Here's the exact wording from the Atlanta Fed's GDP estimate press release today:


"... The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.3 percent on December 23, down from 1.9 percent on December 16. After yesterday's third-quarter GDP revision and this morning's personal income and outlays release, both from the U.S. Bureau of Economic Analysis, the nowcast for fourth-quarter real consumer spending growth fell from 2.6 percent to 2.1 percent. The nowcast for real residential investment growth fell from 8.0 percent to 0.9 percent after yesterday's existing-home sales release from the National Association of Realtors."  (Emphasis added)


Well, there you have it. We'll stick with our #GrowthSlowing call.

Downhill | A Slope Story

Takeaway: The late-cycle, deceleration-ary march in the domestic macro data continues. PCE/Income/Durable Goods detail & cycle context below.

The late-cycle domestic macro data continued its slow, deceleration-ary march this morning with the Durables Goods and Income/Spending data for November.  


As we continue to stress, “late-cycle” is a process not some discrete point on a macro sine curve and as the cycle traverses its twilight the rate-of-change peaks across a growing number of metrics continue to roll-in. 


To summarily review the majors:

  • Employment:  Employment growth peaked in February 2015 and has been slowing since.  Employment growth is hostage to the law of large numbers and will invariably slow alongside tighter labor supply and a growing employment base as an expansion matures.  A negative inflection in employment growth doesn’t herald an imminent recession but, empirically, it’s a one way street as the cycles progresses past peak and onto eventual recession.  The labor trend matters insomuch as it’s the principal driver of all things consumption and investment …..
  • Income Growth:  Income Growth peaked in 4Q14/1Q15 alongside peak acceleration in employment growth and modest gains in earnings.  Absent a material acceleration in credit growth, income growth drives the capacity for and trajectory of consumption growth.  Indeed, income growth and the change in the savings rate carrying  >0.95 correlation to household consumption growth across decades of data .   Aggregate wage and salary income remains a particularly pronounced driver of consumption in the present cycle with credit growth remaining modest and the long-term capacity for consumer re-levering to drive incremental consumption growth remaining constrained.  Aggregate income growth will remain positive over the nearer-term but will continue to slow against steepening comps
  • Consumption:  Consumption growth peaked in 1Q15 alongside the peak in employment and income growth.  Again, absent remarkable changes in the savings rate and/or consumer credit growth, consumption growth will follow the slope of aggregate income growth.  Household spending growth will remain “okay” on an absolute basis over the nearer term but will continue to slow alongside slowing income trends and tougher base effects.  (recall – Macro cares about the slope of the line and the 2nd derivative trend will remain negative)
  • Corporate Profitability: Both Corporate Profitability as a % of GDP and S&P500 operating margins peaked in late 2014 and have retreated since.  Past peak profitability, persistent strongdollar deflationary pressures, negative growth/inflation revision trends and a broad expectation for higher labor input costs is not the stuff multiple expansion or lazy long allocations are made of.
  • Confidence Consumer Confidence across all the primary series (Conf. Board, Univ. Mich, Bloomberg) peaked in 1H15 and have since backslid.  Confidence peaks late-cycle and, unsurprisingly, peaks alongside the peak in real per capita disposable income growth (i.e. when the most people are realizing their greatest income flow) and Per Capita DPI appears to have peaked in 2Q/3Q15. 
  • MFG/Industrial: With the ISM printing in contractionary territory and Durable Goods and Capex Orders growth negative for most of the last year, the domestic manufacturing data has been conspicuously recessionary.  The collapse over the TTM, of course, is now the 2016 comp but given further OUS slowing, another step function lower in oil/energy/commodity prices and another wave of investment and labor realignment across the energy and mining spaces, the trend there is likely to get worse before it gets better.    


The November Detail:


Consumption:  Household spending grew +0.3% MoM in November (after declining in October for the first time in 21-months) but decelerated on both a 1Y/2Y basis for a 2nd consecutive month as the savings rate held at a multi-year high (5.5%)  and income growth decelerated further. 


Income:  Both DPI and aggregate Salary and Wage Income decelerated on a 1Y and 2Y basis as the dynamics highlighted above continued to define the 2nd derivative trend.  Income growth should continue to decelerate from here against peak comps into year end. 


Durable Goods:  Headline Durable Goods Order growth decelerated to +0.0% sequentially but managed a second month of modest year-over-year acceleration.  The improvement was largely a comp effect – and one that should remain a support to reported growth as we comp negative growth in 8 of the next 9 months. 


Under the hood, Core Capex Orders continued to slump - recording negative growth for the 10th consecutive month and decelerating on all of MoM/1Y/2Y basis in November.  Much like inflation's 4-year run of below-target "transience", the great capex renaissance remains 'just around the corner' and very much a phantasm.  


Also concerning is the prevailing trend in Durable Goods Ex-Defense and Aircraft - which represents the stuff the average household actually buys – which saw a 7th straight month of negative YoY growth.


Darkness:  In other, random positive inflection news, with the winter solstice now rearview, we're past peak on shortened daylight. Global luminary forces in the northern hemisphere will again marshal Mother Nature and her celestial minions to progressively overtake the oppresive fetters of the darkside ... so there's that, at least.  


A visual tour of this morning’s data along with the historical cycle context below



Downhill | A Slope Story - NFP YoY


Downhill | A Slope Story - PCE YoY LT


Downhill | A Slope Story - Income reported   Implied


Downhill | A Slope Story - Aggregate Salary  Wage Growth


Downhill | A Slope Story - Conf late Cycle Phenom


Downhill | A Slope Story - Confidence vs Real DPI per Capita


Downhill | A Slope Story - Durable Goods LT


Downhill | A Slope Story - ISM


Downhill | A Slope Story - SPX operation Margin


Downhill | A Slope Story - Corp Profits   of GDP


Downhill | A Slope Story - Eco Table


Downhill | A Slope Story - Income Spending Table


Downhill | A Slope Story - Durable Goods table


Downhill | A Slope Story - Confidence Table



Christian B. Drake


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.