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EHS | "Meaningfully" Weak

Takeaway: When the Chief Cheerleader (Economist) of the National Association of Realtors says the data is weak, you know you have a problem.

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 | "Meaningfully" Weak - Compendium 032116

 

 

Today's Focus: February Existing Home Sales

Existing Home Sales were down -7.1% sequentially and decelerated to +2.2% YoY in February.  We’ve known for over a month that February was going to be soft (see: PHS | Leaping ...Downward! or EHS | What Goes Up?) as EHS recoupled to PHS so the print was of little surprise. 

 

Still, there are a number of callouts from this morning’s release: 

 

Leap Year Distortion:  Sales grew +2.2% year over year in February but the extra day in the period provided a +3.5% benefit.  Net of the extra leap day, EHS were actually down -1.4% Y/Y

 

Even Lawrence Yun, NAR’s chief economist, highlighted:  “[The February decline] was Meaningful”

 

Supply Stagnation:  On the inventory side, unit supply rose +3% sequentially to 1.88MM but remained -1% YoY (note: inventory is non-seasonally adjusted).  The net of declining volume and rising supply drove inventory on a months-supply basis to 4.44-months – marking a second month of rising months supply but still well below the 2015 average of 4.81-months and the 42nd month below the traditional balanced-market level of 6-months.

 

1st-time Buyers/Investors: 1st-time buyers fell to 30% of sales, implying a volume of 1.52MM units which was down -12.9% sequentially and decelerated to +5.7% YoY (vs +15% YoY in Dec/Jan).   As Yun notes, investor sales have actually increased in recent months after trending consistently lower over the last few years, 

 

"Now that there are fewer distressed homes available, it appears there's been a shift towards investors purchasing lower-priced homes and turning them into rentals. Already facing affordability issues, this competition at the entry-level market only adds to the roadblocks slowing first-time buyers."

 

Big Picture | Tail Chasing:  A dynamic and sustainably fluid housing markets requires a delicate supply-demand-price balance.   The imbalance prevailing in the existing market currently stems primarily from the supply side. 

 

A tight supply--rising price spiral resolves when:

 

  1. Declining affordability drives increasingly weaker demand which, at some critical threshold, acts as an anchor on further price growth or catalyzes a negative inflection in HPI.
  2. Rising prices incentivize inventory and the imbalance resolves from the supply side.   
  3. Some combination of the two

 

Historically low rates, top heavy demographics (↓ mobility/turnover), low equity positions and tight credit continue to sit as both cyclical and secular constraints on supply.  Alongside stagnant income growth, low equity (trade up buyers), tight credit, and demographics (lagged improvement in millennial employment/income trends) have similarly served to constrain activity from the demand side. 

 

Inventory tightness does not act as a ceiling on transaction activity when volumes are depressed but becomes a more tangible constraint as we push past average historical sales levels as we have over the past year.  As yet, rising home values have not been sufficient to drive meaningful enough gains in equity to incent incremental supply.  Instead, tight supply has manifest primarily in rising HPI  - a trend whose negative impacts compound over time so long as price grows at a premium to affordability (f(x) = incomes & rates). 

 

Empirically, the data in recent months suggests we are operating in a version of scenario 1 above whereby tight supply is/has driven declines in affordability in a negative tail-chasing feedback loop and is now constraining further upside in volumes as demand has already mean reverted.  Low equity positions will continue to improve alongside price gains and the credit box can expand pro-cyclically (should the expansion continue) but rates, demographics and the trickle through of millennial renter households to single-family purchase demand all remain secular overhangs.   In short, supply conditions may show gradual, partial improvement but are unlikely to resolve in the short-to-medium term. 

 

Looking Ahead:  We’re more interested in the Pending Home Sales data (Feb release = next Monday, 3/28) as the cleaner, more real-time read on the underlying trend in purchase demand in the existing market.  As it stands, PHS have decelerated for 9-months off the April 2015 RoC peak and 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.  Given the lagged relationship of home prices to volume (rate-of-change in home prices lag  the rate-of-change in demand by 9-12 months) we expect HPI trends to flat-line and begin to roll as we move through 1H16, representing an addition fundamental headwind for housing related equities. 

  

 

EHS | "Meaningfully" Weak - EHS units   YoY TTM

 

EHS | "Meaningfully" Weak - EHS Inventory MosSupply

 

EHS | "Meaningfully" Weak - EHS vs PHS

 

EHS | "Meaningfully" Weak - EHS 1st Time Buyers

 

EHS | "Meaningfully" Weak - EHS HPI by region

 

EHS | "Meaningfully" Weak - EHS Inventory Units

 

EHS | "Meaningfully" Weak - EHS YoY regional

 

EHS | "Meaningfully" Weak - EHS LT

 

 

 

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


McCullough: Joke of the Year? Fed Data Dependence

 

In this animated excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough pulls no punches on San Francisco Fed President John Williams’ head-scratching contention that he’s data dependent. If you like this excerpt, you’ll love The Macro Show.


The Whims, Wishes and Rumors Driving Markets

The Whims, Wishes and Rumors Driving Markets - Bull and bear cartoon this time different 7.08.2014

 

The story that drove markets last week was Dollar Down, Rates Down on the Fed move. 

 

Here's a quick update on what's happening in early morning trading today via Hedgeye CEO Keith McCullough in a note sent to subscribers

 

"Dollar Up, Rates Down this morning – as opposed to the reflation trade (many head-fakes in the last 18 months), that’s the #Deflation risk on move. I'm watching that closely this week with USD signaling immediate-term oversold on Friday."

 

 It's worth noting, over the past two weeks, the USD has been inversely correlated with oil. 

 

"Oil was down -2% this morning (it has a -0.8 inverse 15-day correlation to USD) after a +2.4% wk (WTI) with an immediate-term risk range of $34.65-41.53 and OVX (Oil Volatility) holding @Hedgeye TREND support with a risk range of 42-56."

 

 

But then ... oil speculation (insert: "rumors") took over.

 

Oil prices have rebounded sharply up 1.5% today on talks of an OPEC/Russia oil production "freeze." Potomac Research Group Senior Energy Analyst Joe McMonigle continues to point out, Iran plans to ramp up its oil production and that is in no way bullish for the price of oil, freeze or no freeze.

 

Click the image below to watch McMonigle's recent interview on this subject.

The Whims, Wishes and Rumors Driving Markets - mcmonigle pic

 

Here's the deal. Macro markets are getting whipped around by frenetic wishes and whims of traders. Meanwhile, economic fundamentals continue to deteriorate. So what happens once reality sets in?

 

It could get really ugly. 

 


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The 'Dimon Bottom': Massive Conflict Of Interest? | $JPM

Takeaway: Below is a chart of JPMorgan's stock price showing the interesting proximity of Dimon's purchase and JPM's buyback announcement.

Remember the "Dimon Bottom?"

 

On February 11, it was widely announced that JPMorgan CEO Jamie Dimon snapped up 500,000 of his company's beaten-up shares. The stock moved sharply higher on the news. Last week (just five weeks later) JPMorgan said it would boost its stock buyback authorization by $1.88 billion. (Note: On Feb 11, JPM stock is at $53. Today? $60.) 

 

Do we sniff a massive conflict of interest?

 

We'll let you be the judge. Here is the year-to-date chart of JPM's stock:

 

The 'Dimon Bottom': Massive Conflict Of Interest? | $JPM - jpmorgan jamie dimon

 


KSS | The Kohl's Recession

Takeaway: Two distinct earnings streams -- one is at peak. One is at trough. Both are hopeless.

In typical KSS’ fashion, the company released its 10K after the close on a Friday. The biggest item that caught our eye was – you guessed it – credit income. The precise numbers are disclosed once a year, despite the fact that it has grown in to KSS’ single largest profit center.  A few points…

 

1) KSS’ share of income from its partnership with CapitalOne clocked in at $456mm. That’s now 29% of EBIT a level that we think is flat-out unhealthy for a company like KSS at this point in the economic cycle.

2) Consider this…KSS’ EPS was down 5.2% for the year to $4.04 (which includes credit income), but EPS from the operating business was down by 13% -- not good.

3) KSS core business earned $2.54 last year. As a frame of reference, that’s right where earnings came in circa 2008-2009.  In other words, right now its earnings are spot-on with where we were in the Great Recession. But…we’re clearly not in such a climate.  That begs the question – what if we actually enter a severe downturn (or even a moderate one) again?

4) Note that Macy’s delinquency rate ticked up materially in the fourth quarter. We also see CapitalOne’s charge-off rate ticking steadily higher.  We’re not making the call for a collapse in the credit cycle, but it’s pretty irrefutable that it is eroding rather than improving.

 

We still think that KSS is a 3-Stage Short Call. Stage 1) Starting with the weakness we see today by being such a bad retailer with poor competitive and geographic positioning, then Stage 2) morphing into a story where it jeopardizes its own credit income due to its own cannibalistic rewards program – without a roll in the broader credit cycle, and then Stage 3) a weakening economy having an outsized negative impact  on KSS’ consumer, its’ top line, margins, and credit income. 

 

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS   of Total


MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM

Takeaway: The US market, especially HY credit, reacted positively to the Fed's dovish tone, but negative readings outweighed the positive short-term.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM11

 

Key Takeaway:

The U.S. market reacted positively to the Federal Reserve's dovish announcement last week, especially with high yield YTM coming in -17 bps to 7.67%. However, more risk measures flashed red than green; European CDS widened by 5 bps week over week, retracing some of the prior week's tightening, the TED spread (an indicator of contagion risk) rose by +2 bps to 33, and the price for Chinese steel dropped by -3.8%.

Current Ideas:

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 1 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM15

 

 

1. U.S. Financial CDS – Swaps were mixed among US Financials. The banks  specialty lenders saw nominal tightening, while the insurers saw large tightening.

Tightened the most WoW: AIG, LNC, AXP
Widened the most WoW: JPM, WFC, AON
Tightened the most WoW: AIG, LNC, HIG
Widened the most MoM: AGO, RDN, MBI

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM1

 

2. European Financial CDS – Swaps mostly widened across European banks last week. The median spread widened by +5 bps to 109, giving back some of the prior week's 25 bps tightening.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM2

 

3. Asian Financial CDS Swaps tightened across Financials in China and Japan last week while Indian bank swaps mostly widened.

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -9 bps to 242.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM18

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM3

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM4


5. Emerging Market Sovereign CDS – Emerging markets swaps mostly tightened last week as the dovish Fed announcement allowed for a more positive outlook on EM currencies; a weaker dollar makes it easier for emerging markets to pay back dollar-denominated debt. Brazilian swaps tightened the most, by -25 bps to 366. Meanwhile, on the other end of the spectrum, Indian sovereign swaps widened by 10 bps to 156. 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM16

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 17 bps last week, ending the week at 7.67% versus 7.84% the prior week.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 15.0 points last week, ending at 1848.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM6

8. TED Spread Monitor  – The TED spread rose 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM7

9. CRB Commodity Price Index – The CRB index rose 2.4%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have increased 10.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 4 basis points last week, ending the week at 1.99% versus last week’s print of 1.95%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM10

12. Chinese Steel – Steel prices in China fell 3.8% last week, or 93 yuan/ton, to 2365 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 104 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 40 bps.


MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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