Client Talking Points
What a year it was! Worst year for U.S. stocks since 2008; worst year for FX funds since 2011; worst year for Commodity funds ever – and no, it wasn’t “transitory” – we think it’s all just pricing in the end of what was a mediocre economic cycle.
There’s a big difference between a regime of 10-14 VIX and 15-30; provided that the latter prevails, we think we’re going to see equity markets continue to trade choppy at best and continuing to crash at worst to start 2016.
Now that the rate hike is out of the way, our “best idea” in Global Macro right now is the Long Bond – if we’re right on the economic cycle call, the Fed is going to have to back off the rhetoric and acknowledge the super #LateCycle slowing data.
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Top Long Ideas
Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.
In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.
In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.
We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, 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 Restoration Hardware (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.
In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!
High Beta Stocks were +3.5% last week to -12.0% YTD
High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
Small Cap Stocks were +3.2% last week to -12.4% YTD
*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)
In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.
In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular.
Three for the Road
TWEET OF THE DAY
VIDEO (2mins) Our Best Idea Right Now https://app.hedgeye.com/insights/48313-mccullough-this-is-our-best-idea-right-now?type=video… via @hedgeye
QUOTE OF THE DAY
We must use time as a tool, not as a couch.
John F. Kennedy
STAT OF THE DAY
The peak in non-farm U.S. payroll growth was FEB of 2015 at 2.34% year-over-year, the most recent jobs print was 1.9% year-over-year.
- Bullish Trend
- Bearish Trend
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"The probability of a recession continues to rise as we head into 2016," Hedgeye CEO Keith McCullough wrote earlier today in a note to subscribers. "If the Fed keeps tightening into the slow-down, they’ll perpetuate it."
Takeaway: Existing home sales volume is stalling as a dearth of supply coupled with reduced investor demand offset growing 1st time buyer activity.
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.
Today’s Focus: November Pending Home Sales & October Case-Shiller
Pending Home Sales declined -0.9% in November against upwardly revised October estimates while accelerating +110bps sequentially to +5.1% YoY (NSA). While year-over-year growth accelerated against modestly easier comps (a dynamic that should persist next month), total signed contract activity recorded a 6th month of retreat off the May 2015 cycle peak.
Perhaps the obvious question is whether May did, indeed, reflect the peak in activity in the current cycle. From a rate-of-change perspective, sales growth in the existing market is very likely past peak – growth in 2015 benefited from both easy comps and mean reversion upside as demand in 2014 was down significantly and total sales volumes still had upside back to long-term historical averages. Both of those dynamics are now rearview.
While construction in the New Home market continues to hold significant upside to normalized levels of activity, on an absolute basis, higher highs in sales volumes in the existing market will require further normalization in entry level demand and some measure of supply-side support. Growth in first-time buyer demand has been growing +12.2% YTD and we’d need to see a similar pace of demand recovery continue out of that cohort (along with ~static investor demand) to drive EHS back above 6.0MM Units.
On the pricing side, the Case-Shiller HPI data for October released yesterday confirmed the multi-month acceleration trend observed across all three primary price indices (CoreLogic, FHFA, Case-Shiller). Tight Supply and Trailing demand trends should continue to support HPI over the nearer term and serve as a modest tailwind for housing related equities. Price-Supply-Demand dynamics in the existing market remain delicate as rising prices help to improve the position of underwater and low-equity owners (with positive flow through to supply) while further challenging affordability for marginal buyers on housing’s bottom rung.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
About Case Shiller:
The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.
Frequency and Release Date:
The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.
Joshua Steiner, CFA
Christian B. Drake
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