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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


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.


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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


U-N-I-T-Y

“The World Must Unite”

-President Obama, 3/22/16

 

My son’s elementary school is one street over from my office. As updates on the Brussels attack flooded yesterday’s newsflow, a 5 minute chorus of gunshots came from the direction of the school.   

 

I grabbed my gun and headed over. Thankfully, the shots were coming from somewhere behind the playground. 

 

A false alarm close to home isn’t comparable to yesterday’s real-life tragedy. The incident, however, left me further despondent about our new actuality of risk but heartened that I wasn’t the only one who showed up at the school.

 

Someone was going to walk out of that building and it wasn’t going to be the wrong person.   

 

The ‘heightened risk’ message has been ubiquitous over the last year+ – to the point where it’s easy to tune out. 

 

But verbal posturing chased by indifference or inaction can’t be our model or legacy.  

 

Now is truly a time, not for passive or fearful “insouciance”, but for hardened acceptance of a new exigent reality.  

 

That’s not a political point and I’m talking less about the official government response or bureaucratic action than about the personal metamorphosis required for effectively operating within that new reality and its contingencies.

 

Less superficial manic reactionism, more durable proactivity. Empathy substituted for apathy, humanism for self-absorption. 

 

Back to the Global Macro Grind ….

 

40% of Fortune 500 companies in the United States were founded by immigrants or their children (The Economist (Here)).

 

From an economic perspective, “unity” and the efficient flow of capital (human and physical) remains the right recipe for innovation – particularly as the domestic economy becomes increasingly reliant on productivity improvements and immigration trends to drive growth.

 

Remember, at a most basic level, real GDP per person is a function of: “how much stuff each person can make” * “how many people are making stuff”

 

… and with the Boomer population bolus having made its way through the working age population and female entre into the workforce now a rearview phenomenon we’ve already cashed in our golden ticket with respect to growth in “how many people are making stuff”.

 

I wouldn’t call it a love-hate relationship necessarily, but I have mixed feelings about demographics.

 

On the one hand they are crawlingly glacial and incapable of backstopping a thesis over most investible durations. 

 

On the other hand, it’s hard to argue that knowing whether a particular industry’s demand demographic over the next decade is going to be +5% or -5% doesn’t matter or that the secular drivers of slower (growth) and lower (rates/inflation) for longer are practically inconsequential. 

 

In talking with clients – even macro-centric ones – it’s clear that immigration is a vastly underappreciated dynamic. 

 

Indeed, over the last four decades, net immigration has accounted for 30% of total population growth in the U.S. And because 2nd generation immigrants are counted as native born (and immigrants tend to have higher fertility rates, foreign born contribution to population growth is generally understated.

 

On the Housing side of Macro, we recently hosted a call with our new sector head of Demography, Neil Howe, titled: Get Ready For the Demographic “New Normal” In Housing. 

 

U-N-I-T-Y - housing cartoon 03.02.2016

 

Below is a selection of key takeaways (ping if you’d like access to the call or are interested in Neil’s research):

  • 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.  
  • Gen X | 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.  
  • The Demand Sweet Spot | The millennial wave is currently driving rental demand and will support starter home demand over the next half decade+ and trade-up home demand in the following decade. Demand for “mid-life luxury” homes will see a drought as the baby bust generation reaches 50-64YOA. Boomers and the emergent trend towards aging in place will continue to drive a boon in remodeling over the next decade and accelerating demand for senior and assisted living units after that as the boomer bulge moves into their mid-80’s.

 

Elsewhere on the housing front, 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 were few 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. 

 

On the fundamental side, we got the brick of a print we’ve been warning you about out of Existing Home Sales on Monday as closed transaction volume made a new 13-month low. 

 

Looking forward, we’re more interested in the Pending Homes Sales (PHS) data for February next Monday as it will give us the lead read on March Existing Home Sales. 

 

As it stands, PHS have decelerated for 9-months off the April 2015 rate-of-change peak and we continue to expect sales in the existing market to decelerate through 1H16 with a strong possibility for negative mid-single digit 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. 

 

Your analytics need not have gone through puberty to understand that slowing price + slowing volume is not a bullish fundamental factor set. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-2.01%

SPX 1

Nikkei 168

VIX 13.57-20.39
USD 94.59-96.69 
Oil (WTI) 35.40-42.90

 

Best of luck out there today, 

 

Christian B. Drake

U.S. Macro Analyst

 

U-N-I-T-Y - CoD Pop Growth


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