EHS | What Goes Up?

Takeaway: Structurally tight existing home inventory remains a blessing and a curse. It helps price resilience, on the margin, but constrains volume.

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 | What Goes Up? - Compendium 022316 


Today's Focus: January Existing Home Sales, December Case-Shiller HPI

Existing Home Sales rose +0.4% MoM to 5.47MM Units, marking the 2nd highest level of activity in the current cycle outside of the 5.48MM level recorded in July of last year.  On a year-over-year basis, sales growth accelerated to +11.0% YoY, marking the fastest pace of growth since mid-2013.


On the inventory side, unit supply rose +3.4% sequentially to 1.82MM but remained -2.2% YoY (recall, inventory is non-seasonally adjusted so the year-over-year trend offers the cleanest read).  Months-supply, meanwhile, held just below 4.0-months for a second consecutive month – the first such instance since January 2005 when unit sales were running over 7-million. 


Inventory tightness, along with the decline in mortgage rates, should remain a modest support to HPI over the nearer-term but will increasingly serve to constrain the upside in transaction volume.  Indeed, at +8.2% YoY, median home prices accelerated to the fastest rate of growth in a year and continue to grow at a multiple of income growth.  


Generally, supply and price could be expected to move in tandem but embedded in that relationship are a number of key assumptions.  First is that people want to move. Boomers - who represent a significant percentage of the homeownership base - entering retirement will weigh on housing turnover broadly.  Aging in place remains an emergent trend and moving-out will not become an outsized driver of supply for another decade when the Boomer bulge starts moving beyond 80 YOA.   Second is whether they can afford to move.  A significant percentage of would-be trade up buyers remain in negative or near-negative equity positions and fledgling millennial household formation is running almost exclusively through rental demand presently.  Third, do they have access to credit?  The credit box is slowly expanding but remains notably tight relative to historical averages.  Fourth, low rates locked in during the post-crisis period remain a disincentive to selling/moving and an inertial headwind to rising inventory.


In short, there are real structural headwinds to a meaningful rise in supply and we don’t expect them to resolve in the nearer term.  On the demand side, absent a large rise or positive revision in Pending Home Sales (Jan PHS on 2/29), the risk to EHS in February is to the downside as closed transaction volume recouples with the trend in signed contract activity. We continue to expect sales in the existing market to decelerate through 1H16 with a strong possibility for negative volume growth against peak PHS comps in April/May.  


Still Bearish on HPI in 2016

Elsewhere, Case-Shiller HPI trends for December came in mixed.  The 20-City index, which had shown 5 consecutive months of acceleration, was flat sequentially at +5.74% YoY as index heavyweights San Francisco, New York, Los Angeles and Boston (collectively = 48% weighting in the index) all decelerated modestly to close out 2015.  Conversely, the National HPI accelerated for a 6th consecutive month, accelerating +20bps sequentially to +5.43% YoY.   


Home price growth follows the slope of demand growth on a variable 9-to-12 month lag and Pending Home Sales are currently in month 7 of deceleration.  While ongoing supply tightness will provide some buoy, we expect HPI trends to flat-line and begin to roll as we move through 1H16.  As a reminder,  the Case-Shiller HPI series is a 3-month rolling average which is released on a nearly two month lag.  In other words, the data released this morning is really a reflection of market pricing conditions back in Aug/Sep/Oct of last year.



EHS | What Goes Up? - EHS vs PHS 


EHS | What Goes Up? - EHS Inventory Months Supply


EHS | What Goes Up? - EHS Inventory Units


EHS | What Goes Up? - EHS LT


EHS | What Goes Up? - EHS Regional HPI YoY


EHS | What Goes Up? - EHS Regional YoY


EHS | What Goes Up? - EHS Units   YoY TTM


EHS | What Goes Up? - CS 20 City   National YoY TTM




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.



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.



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

M | “Move Along, Nothing to See Here”

Takeaway: If we were forced to craft a genuine bullish argument on M, we couldn’t. Almost nothing to like, and the print confirms that – and more.

For every reason we find to own Macy’s, we find another five against owning it. This quarter was just horrible for Macy’s, and what’s even more concerning is that it’s the best-managed name in the ‘space’. Last night Dillards printed its biggest EBIT decline in 5 yrs. What does it mean for KSS? JCP? What especially concerned us with Macy’s was the lengths it had to go to find earnings outside of what we’d consider its core business.


Things That Caught Our Attention In Macy’s Quarter

  1. Remember this print when looking at Retail for 2016. We think much of retail will look like Macy’s in 2016. After a serious guide down (and 33% draw down), the company came back with a significant headline beat. As the release hit the wires this morning we saw ‘Blowout Quarter’ by one unnamed news service. The reality is that companies are guiding down more than they have to, simply because they can’t plan the demand side of their businesses.  That’s not because of lack of competency, but simply because this is Retail (and sometimes lack of competency). Then they come in and print a horrible earnings/cash flow algorithm, but it’s viewed as being ‘better than expectations’. Our concern has been that the market will still trade these names higher. The Macy’s print – thankfully – argues against that.  
  2. What Business is M In Anyway? For the first time ever, real estate and credit were the largest part of consolidated EBIT. And that’s a big statement. On a GAAP basis, including the asset impairments/restructuring costs, credit card income and real estate transactions amounted to $1023mm for the year – that’s 50.2% of EBIT vs. $860mm or 30.7% of EBIT last year. Though we think there are risk associated with each piece (credit and real estate), the fact is that M has them and the rest of its peer group and other retailers do not.
  3. Credit profitability guided down for 2016. In FY15 we saw credit income up 7%, and +17% in the 4th quarter. The big bump in 4Q was due to the conversion of new system allowing M to reach lower in the credit standard barrel. But, Karen was very explicit that about the embedded risk to profitability in the Credit segment as we come off all-time lows in charge offs and delinquencies. For M, credit amounted to an $831mm offset to SG&A for the year or 36% of EBIT vs. 27% of EBIT last year. Put another way, that’s 94% of the FCF generated by M this year.
  4. The bigger callout here is KSS. Which, unlike M doesn’t have the benefit of taking its credit standards any lower – it already did that under the partnership agreement with CapOne as it took credit as a percent of total sales from 50%-60%. Its own credit portfolio will fall victim to the same profitability concerns expressed by M’s CFO today. Plus, we see additional credit risk because of the introduction of the Y2Y rewards program nationwide in the fall of 2014.
  5. Outlook for the first nine months of the year notably bearish. There is a mismatch here between what the company could say because of the sentiment surrounding the department store space and what it’s actual outlook is for the year. But, either way we slice it, M guided to negative comps for the first 3 quarters of the year, and we expect to see more of the same from retailers in this earnings season. Though consensus numbers don’t reflect the guidance revisions.
  6. Huge ‘Real’ Earnings Delta. We can’t remember a quarter where the difference between adjusted earnings numbers and GAAP numbers were more pronounced. We’ve never agreed with M’s adjusted financials where it sheds the bad (restructuring/store closing charges) and keeps the good (asset sales) in its calculation of adjusted EPS. Neither has proved to be one time in nature. When we boil it all down we get to an earnings growth rate of -22% in the quarter vs. -14% reported, that excludes the asset benefit and restructuring charges. SG&A growth was flat vs. -5% reported (ex. credit benefit, restructuring, and asset sales).  Neither of which provides a good omen for the rest of the space.
  7. In a Hole. We understand that business improved as the quarter progressed due to added markdowns and better weather, but why do inventories remain so out of whack? SIGMA chart below suggests that inventories are not being cleared fast enough, or that price cuts are not deep enough. This definitely puts Macy’s in a hole in 1Q.

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 1

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 2

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 3.3

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 4

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 5

RTA Live: February 23, 2016


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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Beware The Coming Crash: An Earnings Season Reality Check

Takeaway: Fade the Wall Street storytelling.

Beware The Coming Crash: An Earnings Season Reality Check - Bubble bath 9.9.14


A lot of people out there still believe the old Wall Street storytelling that "the U.S. economy is fine" or "the stock market has bottomed."


We disagree.


Here's Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:


"With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits – w/ 435/500 S&P companies reporting total revs are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% y/y."


A few important things to note:


  1. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  2. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  3. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%


"In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been," Hedgeye CEO Keith McCullough wrote in the Early Look this morning.


Here's the sector performance breakdown:


Beware The Coming Crash: An Earnings Season Reality Check - sector performance 2 23


Watch out for this precarious earnings setup. "Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters," McCullough writes.


Commit the chart below to memory.


Click to enlarge.

Beware The Coming Crash: An Earnings Season Reality Check - EL profits


... And get the heck out of stocks. 


Here's Why Now Is A 'Great Spot' To Short Oil

Takeaway: Oil prices are headed lower despite rumors of an OPEC production freeze.

Here's Why Now Is A 'Great Spot' To Short Oil - oil fallen and can t get up


"Great spot to get more aggressive on the short side of Energy (again)," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning.


"Oil ripped to the top-end of my immediate-term risk range and failed (again); no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!"



Our Potomac Research Group colleagues Joe McMonigle and former Energy Secretary Spencer Abraham have nailed the call that oil prices are headed lower despite rumors of an OPEC production "freeze."



Here's what McMonigle wrote in a recent note to institutional subscribers:


"As the energy world gathers in Houston this week for IHS' CERA Week conference, Russia announced that talks with OPEC members on a production freeze will continue. The Russian energy minister said he expects an agreement by March 1. 


We are highly skeptical that an agreement will be reached or that it changes the outlook for oil markets. There is nothing new here."


Watch McMonigle in the 3-minute video below explaining why this will remain a 'painful' year for oil.


The Macro Show Replay | February 23, 2016