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PHS | Better Sequentially But Not “Better”

Takeaway: Existing home sales are stalling with tougher comps on the horizon.We continue to expect volumes to be flat to down Y/Y for the bulk of 2016

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.

 

PHS | Better Sequentially But Not “Better” - Compendium 012816

 

Today’s Focus: December Pending Home Sales 

Sales in the existing home market continue to underwhelm.  Signed Contract activity rose +0.1% MoM and accelerated +170bps to +4.2% YoY as a softer comp supported the rate-of-change improvement.   There are probably four notable takeaways:

 

  • First, the step function rise in Purchase Application demand beginning in Mid-November has not similarly manifested in signed contract or closure activity reported by the NAR. In other words, you can take the recent strength in MBA numbers with a grain of salt. 
  • Second, with sales activity basically flat sequentially, mild weather doesn’t appear to have been an outsized driver of activity – and if it was, its masking further softening in the underlying trend.  For a broader discussion of the dynamics at play in the Nov-Jan housing data please see yesterday’s note  Watch The Trees, Not The Bark
  • Third, flat growth isn’t going to cut it against progressively steepening comps into mid-2016.  Demand growth will have to show some resurgent mojo to avoid negative YoY growth against Apr/May compares.  For reference, the average on the index over the last 4-months = 107.2 – almost -5% lower than the 112 level recorded in Apr/May of last year.
  • Fourth, The TRID backfill and PHS re-coupling dynamics that supported the strong rebound in EHS last month should reverse and augur a soft or similarly underwhelming Existing Home Sales release for January (release on 2/23).

In short, better sequentially but not “Better”.  The positive 2nd derivative trends observed over much of 2015 will continue to reverse as we head through 2016. 

 

 

PHS | Better Sequentially But Not “Better” - PHS vs EHS

 

PHS | Better Sequentially But Not “Better” - PHS Index   YoY

 

PHS | Better Sequentially But Not “Better” - PHS Regional YoY

 

PHS | Better Sequentially But Not “Better” - PHS LT

 

 

 

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.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


INITIAL CLAIMS | JURASSIC MARKETS

Takeaway: The cycle is late. We know it. Michael Crichton knows it. You should know it too.

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims1 normal

 

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

PAST PEAK: While consensus still regards the labor market as strong and improving, the simple fact is that the labor data is getting less good from a rate of change standpoint. This matters, as second derivates are the natural precursor/harbinger to first derivate changes. Initially, things get less good, then they get bad.

 

Initial jobless claims have hit their frictional lower bound and we're coming up on the anniversary of that lower bound meaning that the best they can do going forward is not get any worse. Imagine if that were a company at full earnings power/potential and the best it could is not see earnings decline going forward.

 

Not to digress, but what would that be worth? Obviously, not much of a growth premium and yet the market is still trading at its 9th highest decile on CAPE since 1926. The analog here for Financials is peak earnings from a credit standpoint for balance sheet-intensive Financial companies. We've finally begun to see credit costs stop falling, and in some cases they have begun to rise. Even with some late-cycle loan growth, this spells peak earnings. Stairs up, elevator down.

 

Meanwhile, rolling SA claims are in their 23rd month below 330k. The last three cycles saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. Any way you slice it, the hour is late and there's a faint glow of asteroid on the horizon. 

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims6 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims17 normal

 

The following three charts show the continued labor market deterioration in energy states. The Y/Y rate of change in energy state jobless claims continued at a +13% pace in the week ending January 16 versus the -7% rate of improvement in the Total U.S. excluding those 8 energy states.

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims13 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims14 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims12 normal

 

The Data

Prior to revision, initial jobless claims fell 15k to 278k from 293k WoW, as the prior week's number was revised up by 1k to 294k.

 

The headline (unrevised) number shows claims were lower by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 283k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -3.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.2%

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims2 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims3 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims4 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims5 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims7 normal

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Initial Claims | Jurassic Markets

Takeaway: The cycle is late. We know it. Michael Crichton knows it. You should know it too.

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

Initial Claims | Jurassic Markets - Claims1

 

While consensus still regards the labor market as strong and improving, the simple fact is that the labor data is getting less good from a rate of change standpoint. This matters, as second derivates are the natural precursor/harbinger to first derivate changes. Initially, things get less good, then they get bad. Initial jobless claims have hit their frictional lower bound and we're coming up on the anniversary of that lower bound meaning that the best they can do going forward is not get any worse. Imagine if that were a company at full earnings power/potential and the best it could is not see earnings decline going forward. Not to digress, but what would that be worth? Obviously, not much of a growth premium and yet the market is still trading at its 9th highest decile on CAPE since 1926. The analog here for Financials is peak earnings from a credit standpoint for balance sheet-intensive Financial companies. We've finally begun to see credit costs stop falling, and in some cases they have begun to rise. Even with some late-cycle loan growth, this spells peak earnings. Stairs up, elevator down.

 

Meanwhile, rolling SA claims are in their 23rd month below 330k. The last three cycles saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. Any way you slice it, the hour is late and there's a faint glow of asteroid on the horizon. 

 

 

Initial Claims | Jurassic Markets - Claims6

 

Initial Claims | Jurassic Markets - Claims17

 

 

The following three charts show the continued labor market deterioration in energy states. The Y/Y rate of change in energy state jobless claims continued at a +13% pace in the week ending January 16 versus the -7% rate of improvement in the Total U.S. excluding those 8 energy states.

 

 

Initial Claims | Jurassic Markets - Claims13

 

Initial Claims | Jurassic Markets - Claims14

 

Initial Claims | Jurassic Markets - Claims12

 

 

The data

Prior to revision, initial jobless claims fell 15k to 278k from 293k WoW, as the prior week's number was revised up by 1k to 294k.

 

The headline (unrevised) number shows claims were lower by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 283k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -3.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.2%

 

Initial Claims | Jurassic Markets - Claims2

 

Initial Claims | Jurassic Markets - Claims3

 

Initial Claims | Jurassic Markets - Claims4

 

Initial Claims | Jurassic Markets - Claims5

 

Initial Claims | Jurassic Markets - Claims7

 

Initial Claims | Jurassic Markets - Claims8

 

Initial Claims | Jurassic Markets - Claims9

 

Initial Claims | Jurassic Markets - Claims10

 

Initial Claims | Jurassic Markets - Claims11

 

Initial Claims | Jurassic Markets - Claims19


Yield Spreads

The 2-10 spread rose 1 basis point WoW to 116 bps. 1Q16TD, the 2-10 spread is averaging 119 bps, which is lower by -17 bps relative to 4Q15.

 

Initial Claims | Jurassic Markets - Claims15

 

Initial Claims | Jurassic Markets - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

HedgeyeRetail (1/28) | Brands Competing With Wholesale Partners

Takeaway: Brands putting the screws to Wholesale partners by upping E-commerce agenda

Specialty Retailer Christy Sports tired of competing with its vendors as they make DTC push 

(http://www.sportsonesource.com/news/spec/spec_article.asp?section=9&Prod=2&id=59197)

 

This is a major trend developing in retail as brands make the DTC push. Essentially competing with its historical wholesale partners on price to push growth through a direct agenda. And, the brands have a lot of margin dollars to work with in the DTC channel by eliminating the wholesale markup.

 

Take Nike, for example, which generates about a 51% Gross Margin when it sells a $100 pair of shoes to Foot Locker. But it garners about a 68% margin when it sells on nike.com. That’s nice, but it’s not what we care about. We care about the Gross Margin dollars – not the rate. On that very pair of sneakers, Nike gets about $23 in Gross Profit from that ‘wholesale’ sale to Foot Locker. But it gets about $85 (by our math) when it sells direct. In other words, there is a magnifier effect, and the dot.com margin dollars go up by a factor of 3-4x.

 

All it takes is a few sales hiccups for retailers to the give the stiff arm to vendors who are selling the same product behind their backs. But, that doesn't work when one brand is 75%+ of sales volume.

 

For a full run down on how the DTC push affects the traditional wholesale model, especially Foot Locker, see our note: NKE/FL | Critical Context on NikeLocker.

 

 

WMT - Walmart is taking its battle with Amazon to the cloud -- its new OneOps cloud management and application lifecycle platform is being released

(http://www.retailingtoday.com/article/walmart-offers-amazon-alternative-cloud)

  

M - Macy’s will offer limited-edition merchandise, promotions and in-store events to benefit Go Red For Women next month -- customers who purchase $3 pin will receive 25% off most items storewide

(http://www.retailingtoday.com/article/macys-wants-shoppers-go-red-women)

 

TIF - Coty, Tiffany Ink Fragrance Licensing Deal

(http://wwd.com/beauty-industry-news/fragrance/coty-tiffany-fragrance-deal-10330639/)

 

UA - Under Armour will sell $500 Cam Newton cleats if he is named Super Bowl MVP

(http://www.baltimoresun.com/business/under-armour-blog/bal-cam-newton-to-debut-500-gold-cleats-at-super-bowl-if-he-wins-mvp-20160127-story.html)

 

FINL - Retailers bet big on retooling supply chains for E-commerce after Finish Line's warehouse system fails

(http://www.wsj.com/articles/retailers-bet-big-on-retooling-their-supply-chains-for-e-commerce-1453977002)

 

AMZN - Free Shipping is no longer enough -- Amazon and other online retailers go for speed

(http://www.wsj.com/articles/free-shipping-alone-isnt-enough-online-retailers-go-for-speed-1453919673)

 


UPDATE | Our Best Macro Ideas (And The Nasty Equity Reality)

Takeaway: With the Fed tightening into a slowdown, stock market declines haven’t been transitory.

UPDATE | Our Best Macro Ideas (And The Nasty Equity Reality) - liquidity trap cartoon 01.25.2016

 

For those of you keeping score, here's the year-to-date breakdown of S&P 500 sector performance:

 

 

Not pretty.

 

Making matters worse for long-only perma-bulls, volume has been lackluster (at best) on up days and rips on the down days.

 

 

This doesn't bode well for anyone who's doubled-down on Old Wall "wisdom" of buying the dip as equities went down, down, down.

 

Our subscribers? They're doing just fine.

 

People invested in the truth see our calls for what they are.

 

 

Here's a snippet from a note Keith sent to subscribers this morning. 

 

"... Our Top 3 Long Ideas in Macro right now remain: USD, Utilities (XLU), and The Long Bond – 10yr in the US about to break the 2.00% yield level again as German and Japanese 10s chase to lower-lows of 0.42% and 0.21%, respectively."

 

Incidentally, XLU is crushing it year-to-date (up +1.3%) compared to the S&P 500 (down -7.7%). Check out sector performance in the chart above ... the sole green line ... Yup --> Utilities.

 

Checking in on U.S. Treasuries. After today's Durable Goods bomb, the 10-year broke 2%. A nice call from McCullough earlier this morning.

 

Stick with accountable and transparent 2.0 sources. Stick with us. We're the only Wall Street firm to nail this #GrowthSlowing data. We're just getting started. 


LVS | Q4 CALL SUPPORTS LONG TRADE

CALL TO ACTION

Déjà vu, rerun, we’ve seen this movie before, replay, Rocky X. After re-reading our LVS Q3 analysis, I was struck by the similarity with last night’s release. Hedgeye was positioned long on the stock. What we thought would happen did indeed happen. The stock still looks like a long but, just like last quarter, only for a trade.

 

Believe me, I want to make the long recommendation, call the turn, be the maverick. In meetings with clients in New York, Boston, and London I laid out conditions I was looking for to go long for more than a trade: 1) multiple compression, 2) lower Street estimates more in line with Hedgeye, and 3) a belief that Mass has stabilized. For the first time in our 2 year-long short call 1) and 2) have occurred but it’s that fundamental point number 3 that brings us back to our keep a trade a trade recommendation.

 

PLEASE SEE OUR DETAILED NOTE | HERE 


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