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From Their Lips: 5 Recent (Head-Scratching) Fed Statements

Takeaway: We think the hawkish tone from policymakers sets up a potential April policy mistake. Watch out.

From Their Lips: 5 Recent (Head-Scratching) Fed Statements - Fed cartoon 12.21.2015

 

Are the omnipotent central planners at the Fed losing touch with economic reality?

 

Hedgeye CEO Keith McCullough offered his thoughts in a Real-Time Alerts note to subscribers earlier this morning:

 

"... I am officially concerned the Fed makes yet another Policy Mistake (either raising rates in April or signaling they're raising in June in the April statement).

 

The US Dollar has done nothing but go up this week post multiple Fed heads making hawkish statements, and there's obviously a lot of market risk in that (see "reflation" on Down Dollar trades for details!).

 

While the Fed shouldn't be raising rates into a slow-down (remember what happened to markets post the DEC hike), that doesn't mean they won't. One of the biggest markets risks has always been the Fed's forecasts."

 

In short... post-rate hike stocks tumbled and Long Bonds (TLT) rallied...  

 

From Their Lips: 5 Recent (Head-Scratching) Fed Statements - s p 500 rate hike

 

With the recent stock market rally and hawkish commentary from the Fed, markets are standing on the precipice of yet another precarious setup.

 

Here's a brief recap of (head-scratching) Fed president statements this week that (we think) raises the specter of a policy blunder:

  • Chicago Fed head Charles Evans said U.S. economic fundamentals are "really quite good," citing improving manufacturing activity. (3/22)
  • San Francisco Fed head John Williams said the U.S. economy is “looking great” and the Fed would raise rates faster were it not for global factors. “All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates." (3/21)
  • St. Louis Fed head James Bullard said a case could be made for rate hike in April, sounding a hawkish tone. "The odds that we will fall somewhat behind the curve have increased modestly... We are going to get some [inflation] overshooting here in the relatively near term that might cause the committee to have to raise rates more rapidly later on." (3/23)
  • Philadelphia Fed head Patrick Harker said "I think we need to get on with... This economy is really quite resilient to a lot of the headwinds (including the strong dollar).... I am not a two (rate) rise person... I'd rather see [more hikes this year]." (3/22)
  • Atlanta Fed head Dennis Lockhart said U.S. economic growth has "sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April." (3/21)

 

 

Consider our Macro team's insights from a note sent to subscribers earlier this morning:

 

"Federal Reserve Bank of Chicago President Charles Evans said yesterday that economic fundamentals are “really quite good.” We aren’t sure if he said this immediately after existing home sales was reported being down -7% month-over-month or what he was precisely talking about.

 

People who have no idea what is going on are preparing to do something that they already did that didn’t work…RAISING RATES. What has led the market higher is USD dollar down and reflation, so what happens in April if the Fed raises rates or indicates that they will raise in June?

 

That will be a destabilizer in markets."

 

Investors can choose to double-down on the Fed's wrongheaded economic projections. But two words of advice .. remember December.

 


NHS | Cohesive Deceleration

Takeaway: Feb New Home Sales mark the second consecutive month of negative Y/Y growth, mirroring the trend seen in Existing Home Sales. Up next: HPI.

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.

 

NHS | Cohesive Deceleration - Compendium 032316
 

Today’s Focus: New Home Sales for February

The NHS data is volatile and subject to significant error and revision which is why we don’t take an overly convicted view of any given month in isolation, giving deference to the larger trend.  This morning’s New Home Sales data for February wasn’t good in isolation and continued the broader trend toward decelerating activity.    The 1st three charts below capture that prevailing trend.

 

A few highlights:  

  • Sales:  Sales rose +2.0% sequentially but fell to -6.1% YoY, marking the worst pace of growth in 21-months and the first consecutive months of negative year-over-year growth since 2011.  This month went against the hardest comp of the cycle (Feb 2015 = +31% YoY) and compares ease the next couple months so the rate-of-change trend will probably see a modest bounce in March.  That said, the trend has clearly been one of stalling demand as Sales, like Starts, have been flat to down on an absolute basis for the past year.
  • Price Tier Pervasive:  Deceleration characterized all price points with demand at the high end (>$500K) falling to -28% YoY with the lower end (sub-$300K) dropping to -8% YoY. 
  • Price & Supply:  Median Prices rose +2.6% while months-supply was 5.6-months as unit supply rose +17% YoY to the highest level since October 2009.
  • So …. With sales in the existing market (~90% of the market) slowing and looking increasingly likely to print negative YoY growth in the coming months (for more see: EHS | "Meaningfully" Weak) and trends in the new home market softening, housing demand is telling a cohesive story of deceleration – and one we expect to continue over the nearer-term.

 

As an aside, the WSJ reported yesterday (HERE) that the GSE’s (Fannie Mae and Freddie Mac) – after years of back & forth on the issue - are set to announce a principal forgiveness program for a select group of ~50K underwater homeowner’s. 

 

There was little in terms of hard details on the proposal but the program, as it was described, carries a couple of notables:

  • There are still 4.3 million borrowers with negative equity positions. No matter how theoretically justified the programs parameters, forgiving principal balances on just 50K of those will carry an air of arbitrariness/unfairness. 
  • Only forgiving balances for borrowers who have been delinquent is a slippery slope and probably sends the wrong message to the balance of underwater borrowers. 
  • In the unlikely scenario that every single one of these 50k homes came onto the market as a result, it would only increase inventory by 2-3% and do little to resolve the prevailing supply problem. 
  • Perhaps fully expanding the program evolves towards political viability but that potentiality probably sits intangibly long out on the timeline at present.

 

 

 

NHS | Cohesive Deceleration - NHS YoY TTM

 

NHS | Cohesive Deceleration - Sales   Starts Wave

 

NHS | Cohesive Deceleration - NHS By Price Tier

 

NHS | Cohesive Deceleration - NHS to EHS ratio

 

NHS | Cohesive Deceleration - NHS LT

 

NHS | Cohesive Deceleration - NHS Median   Mean Price

 

NHS | Cohesive Deceleration - NHS Supply Units

 

NHS | Cohesive Deceleration - NHS regional YoY

 

 

 

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

   

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Intraday Call On Fed Policy Risk

Long-term Bonds Yields are down after yet another US #HousingSlowing report (New Home Sales for FEB -6.1% year-over-year).

 

So I want to take this green day (in the Long Bond) as a selling opportunity as I am officially concerned the Fed makes yet another Policy Mistake (either raising rates in April or signaling they're raising in June in the April statement).

 

The US Dollar has done nothing but go up this week post multiple Fed heads making hawkish statements, and there's obviously a lot of market risk in that (see "reflation" on Down Dollar trades for details!).

 

While the Fed shouldn't be raising rates into a slow-down (remember what happened to markets post the DEC hike), that doesn't mean they won't. One of the biggest markets risks has always been the Fed's forecasts.

 

This isn't a "sell all" call on the Long Bond. It's a book some gains call as you've had a great YTD being long TLT instead of SPY.

 

KM 

 

Keith R. McCullough
Chief Executive Officer

 

Intraday Call On Fed Policy Risk  - 1


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The Fed, USD and Gold

Client Talking Points

FED

Federal Reserve Bank of Chicago President Charles Evans said yesterday that economic fundamentals are “really quite good.” We aren’t sure if he said this immediately after existing home sales was reported being down -7% month-over-month or what he was precisely talking about. People who have no idea what is going on are preparing to do something that they already did that didn’t work…RAISING RATES. What has led the market higher is USD dollar down and reflation, so what happens in April if the Fed raises rates or indicates that they will raise in June? That will be a destabilizer in markets.

USD

The USD is up for the 3rd consecutive day in a row - the dollar signaled oversold last week, gold signaled overbought, they have roughly 96% correlation inversely. And now we are in this position where the Fed could easily jam the USD up another 3%. The immediate-term risk range for USD is 94.59-96.69.

GOLD

Gold is up ~19% for the year, the USD going up and interest rates going up could cause gold to fall. Around 1,225 is an interesting spot to buy more gold but we are going to be a little more patient in the face of all the rate rise commentary. The immediate-term risk range for gold is 1225-1279.

 

*Watch the replay of The Macro Show with Keith McCullough and Darius Dale - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 24% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

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).

GIS

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.

TLT

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

TWEET OF THE DAY

I can no longer summarize the problems this Co. has in 140 characters $CMG #ShortStoryChallenge no more 

@HedgeyeHWP

QUOTE OF THE DAY

You yourself, as much as anybody in the entire universe, deserve your love and affection.

Buddha

STAT OF THE DAY

CEA issued report in February 2015 claiming that broker-sold mutual funds (infected by “conflicted advice”) under-performed other funds by at least 100 basis points, $17 billion in extra costs for mutual funds alone.


Gen X | The Lost (Housing) Generation

Takeaway: Home Sweet Home for Generation X? Not so much.

Editor's Note: Below is a brief research excerpt from Hedgeye's Housing sector team. Our analysts recently hosted a call with our new sector head of Demography, Neil Howe, titled: "Get Ready For the Demographic 'New Normal' In Housing."  If you'd like more info on how you can access our institutional research email sales@hedgeye.com.

The Lost (Housing) Generation

 

Homeownership and net wealth among Gen X’ers suffered the most during the Great Recession. A large number never formed households or became homeowners and many that did ended up in negative or near negative equity positions. Their disadvantaged position limits their capacity for “trading up” and will continue to weigh on housing turnover broadly. Whether this generation eventually transitions to ownership to the same extent as previous generations remains an open question.

 

Gen X | The Lost (Housing) Generation - GenX Net Worth

 

***A 3-minute clip from our recent call with demographer Neil Howe.


CHART OF THE DAY: The Big Picture On Fertility & Immigration

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... Big Picture | Fertility & Immigration: Fertility rates in both North and South America (a key driver of domestic immigration trends) are falling with significant consequences for domestic population growth. As the Chart of the Day below illustrates, Natural population growth is expected to trend toward 0% over the next 30 years with net immigration becoming an increasingly important growth driver. Declining fertility rates across Mexico and key source countries in Central/South American broadly suggest the past will not be prologue for the long-term forward trend in immigration."

 

CHART OF THE DAY: The Big Picture On Fertility & Immigration - CoD Pop Growth


Early Look

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