Volume, Housing and Europe

Client Talking Points


The relationship between volume and volatility (relative to price) remains core to how we model trending risks. As they chased the charts to another lower-high (price) yesterday (SPX), total U.S. Equity Volume (including dark pool) was -13% vs. its 1 month average as front month equity VIX held the 12-14 level it held during JUL and OCT.


Another bad U.S. #HousingSlowing data point yesterday (Existing Home Sales -7.1% month-over-month and -1.4% year-over-year) keeps what we liked most at this time last year (Housing, Healthcare, Consumer – all #LateCycle consumption + employment peaks) on the short side this year. Housing stocks (ITB) are +20% “off the lows” from FEB with the data only getting worse.


Disgusting act of terror aside, it’s important to contextualize where European Equities were ahead of this news – DAX, MIB Index, and IBEX all just failed @Hedgeye TREND resistance (again) yesterday. Italy was -2% last week to -13% year-to-date, tried the bounce yesterday and is down -1.6% this morning as the Draghi #BeliefSystem breaks down.


*Tune into The Macro Show with Housing and U.S. Macro analyst Christian Drake at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).


General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.


Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road


VIDEO (2mins) Joke of the Year? Fed Data Dependence



The difference between the impossible and the possible lies in a man's determination.

Tommy Lasorda


Yesterday, Apple announced that 93% of its facilities run on renewable energy, including 100% of its facilities in the U.S., China, and 21 other countries.

LNKD | Tracker Update (Talent Solutions)

Takeaway: Our tracker suggests that LNKD isn't seeing the recession that its guidance is calling for. However, we remain on the sidelines for now


  1. SEASONAL BUT MARKED IMPROVEMENT: Our LNKD JOLTS tracker improved sequentially into the first month of 1Q16, which is expected given seasonality in LNKD's selling environment.  But as we've mentioned previously, 4Q15/1Q16 is more about magnitude than direction; the former is fairly strong QTD.  As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  Note that LNKD will no longer be reporting its Talent Solution customer counts, so we will not be able to calculate ARPA anymore (but that doesn't mean we can't use the tracker).   
  2. BUT DEAD MONEY FOR NOW: LNKD's 2016 guidance is basically implying a recession since it essentially calls for declining ARPA and/or net new LCS account growth.  Our tracker update suggests LNKD wasn't seeing the recession that its guidance is calling for when it issued it.  We expect a beat/raise on the 1Q16 release is even more likely now, but we're not sure the street will chase the print.  We suspect it will take more than one positive earnings release to regain the trust of the street after mgmt tattooed its holders on the 4Q15 release (especially after deciding to pull its LCS account metric).  We remain on the sideline for now.   

See the note below for additional detail on LNKD's 4Q15 release.  Let us know if you would like to discuss further.  


Hesham Shaaban, CFA




LNKD | Tracker Update (Talent Solutions) - LNKD   ARPA vs. JOLTS 1Q16  Jan

LNKD | Tracker Update (Talent Solutions) - LNKD   TS 2016 Guid Scen 1


LNKD: Guidance = Recession
02/05/16 09:50 AM EST
[click here]


Cartoon of the Day: Nuclear Decay

Cartoon of the Day: Nuclear Decay - radio activist cartoon 03.21.2016


Shares of embattled Valeant Pharmaceuticals (VRX) are down 89% since July much to the chagrin of (radio)activist investor Bill Ackman, whose firm Pershing Square Capital owns a 9% stake.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.




Hedgeye and the Potomac Research Group are proud to present our first annual Spring Health Policy Conference.  This special, invite-only event will be held at The Benjamin Hotel in New York City on Monday, April 4th, 2016 from 9:30am - 4:00pm.



Please note that space is limited.  RSVP to  to attend.


Our lineup of health policy experts will offer an insider's view on their policy outlook and how as practitioners policy is influencing their decision making process.


This exclusive event will be moderated by Hedgeye Healthcare sector head Tom Tobin and feature in-depth presentations and panel discussions.  There will be ample opportunity for interaction throughout the day.







CHIP KAHN - Hospital Industry Outlook


Chip Kahn, President and CEO of the Federation of American Hospitals, will shape the regulatory environment for hospitals heading into the Presidential election.  Mr. Kahn’s extensive health policy expertise and lengthy Capitol Hill experience make him one of Washington, D.C.’s most effect and accomplished trade association executives.


NEIL HOWE - Demographic Outlook & Healthcare Reform


A historian, economist, and demographer, Neil is also a recognized authority on global aging, long-term fiscal policy and migration.  He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.


ANDREW MCKECHNIE - Health Reform Under Republican Administration


Andrew McKechnie, former policy advisor to the Senate Finance Committee, will discuss Republican efforts to repeal the Affordable Care Act and what the law may look like under a Republican controlled White House.  Mr. McKechnie was a key negotiator in bipartisan efforts to pass health reform in 2009, with an area of expertise in Republican politics and strategy.


YVETTE FONTENOT - Health Reform Under Democratic Administration


Yvette Fontenot is a partner at Avenue Solutions, a democratic government affairs firm that offers strategicadvice, policy development, and counsel in federal legislative and executive areas. She previously held theposition of Deputy Director of the Office of Health reform at the Department of Health and Human Services(HHS) and has helped to draft and implement the Affordable Care Act (ACA).


ROBERT LASZEWSKI - Managing Transition to Value Based Payment Models


Robert Laszewski, president of Health Policy and Strategy Associates (HPSA), will address the issues facing key stakeholders (Hospitals, MCOs, Physicians and Pharma) as we the transition to value based payment models focused on delivering better quality at a lower cost.  HPSA is a policy and marketplace consulting firm specializing in assisting its clients through the significant health policy and market change afoot.


DR. BABER GHAURI - Policy in Practice


Dr. Ghauri, Interim East Division CMIO for Trinity Health, will discuss how policy influences the decision making process of the second largest nonprofit health system in the nation.  Dr. Ghauri’s has a deep background in medical informatics and will also discuss how Trinity is using technology to pursue quality and value initiatives.


DR. RICHARD IORIO - Bundled Payments (CCJR)


Richard Iorio, MD, is the William and Susan Jaffe Professor of Orthopaedic Surgery at New York University Langone Medical Center Hospital for Joint Diseases and Chief of Adult Reconstruction at NYU Langone HJD.  Dr. Iorio was involved in the Medicare pilot program that led to expansion of the of bundled payment initiative for total knee replacements.

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.



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.

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