About Everything: The Golden Age of Home Improvement

Takeaway: Buying a home is out, remodeling one is in.

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why consumer spending on home improvement is outstripping GDP growth and the key demographic trends behind this shift.


About Everything: The Golden Age of Home Improvement - z home imp



Three years ago, in a report called “The Boom in Home Remodeling,” I predicted that this was an industry about to take off. Now, it is airborne. Total spending on home improvement, well above $300 billion (and perhaps hitting an all-time high in 2016), continues to grow faster than GDP.


What’s more amazing is that the industry has expanded in the face of a crumbling housing market. Residential construction spending plunged a whopping 60 percent from peak to trough during the Great Recession. Home improvement spending’s fall? Just 13 percent. 


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In housing, single-family homes (not multi-units) have lagged the most in recent years. But in home improvement, single-family is the faster horse.


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Equity prices in the industry reflect this boom—and the big chains are really riding the wave.


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Lowe’s stock prices have more than doubled over the past four years. Home Depot shares have nearly tripled in value. Lowe’s plunked down $2.3 billion to acquire the Canadian giant RONA. And thanks to home services platforms like, even more industry revenue gets funneled to the big guys.


About Everything: The Golden Age of Home Improvement - about everything 4 21 callout



The rising average age of homes. While sprawling infrastructure projects once lowered the average age (and created new housing demand) by demolishing wide swathes of residences, those days are long gone. About 63 percent of the nation’s houses are at least 30 years old, up from 47 percent in 1995. 


Today’s homes, moreover, are better constructed, allowing for indefinite improvements rather than knocking down and rebuilding. Thus, in some ways, home remodeling is actually replacing new home sales.


Falling mobility rates. A dwindling share of Americans move each year (a trend that kicked off in the 1980s). Falling mobility is partly due to an aging population and partly due to lower mobility at each age. More and more homeowners are in their current properties for the long haul—and are incentivized to spend on home remodeling.


Economic recovery. Homeowners who put off large discretionary projects during the Great Recession finally have the cash to take on those projects. Discretionary spending on remodeling is on the rise for the first time in a decade.


Generational change: aging-in-place Boomers. Boomers account for almost half of all dollars spent on home remodeling.


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They’re aging in place, working longer in retirement, and putting up their adult children who are just fine sticking around the nest.


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Generational change: DIY Xers. Most Gen-Xers will gladly save money by buying an imperfect or under-finished home—and then fixing it up on their own over time. They value personalization and often trust their own talents more than those of a homebuilder. In home remodeling (as in any other area of their lives), Xers wonder why they should call a professional when they can do the job themselves.


Generational change: cohabiting Millennials. Every Millennial who lives with mom or dad is one less buyer of a new home and one more excuse to remodel an existing home.


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Even when they do move out, Millennials tend to stay nearby—enabling them to get parental advice or funding when remodeling their own homes or to help their parents when remodeling theirs. When Millennials remodel, they need someone to show them the way: Lowe’s recently released how-to tutorials on Vine for Millennial DIYers. N2Care even builds “granny pods” so that Millennials can have their aging parents within reach. 



Affluent Boomer demand is fueling the industry’s growth. High-end Boomers unfazed by the Great Recession have spent heavily on home improvement even while banks foreclosed on younger and poorer consumers. Affluent coastal metro areas in the Northeast (in cities like Boston, New York, and Washington, D.C.) and in the West (Seattle, San Jose, and Phoenix) continue to be hotbeds for these big spenders.


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Airbnb property owners are renovating their rented spaces. Private residences are taking over a growing chunk of the accommodation market. Homeowners who never had to worry about hotel industry regulations are now rebuilding stairways, constructing windows, and adding insulation to bring their properties up to code. Not to mention the cosmetic upgrades (like repainting and installing new countertops) designed to boost appeal.


Home remodeling firms are betting big on technology. Lowe’s and Microsoft have teamed up to create an in-store augmented reality experience that will allow shoppers to “try out” different cabinets, finishes, and more before buying. IKEA has created an online VR app that allows website visitors to customize a sample kitchen. And Home Depot carries scores of smart home products, from learning thermostats to precipitation-driven irrigation systems. 



Remodeling firms should be mindful of the generation they’re targeting:


  • Boomers are building onto their homes to make room for the kids (and grandkids). They also need “universal design” accessibility upgrades, from wheelchair ramps to widened hallways.
  • Xers spend heavily on no-frills DIY. This generation is the most price sensitive.
  • Millennials want high-touch (as well as high-tech) services. They are looking for an expert to show them the way. 


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For more, watch Neil Howe in the associated About Everything video.


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU)

Soybean market breadth has been strong on the CME – even unprecedented. Speculation behind the move has come from many different fundamental angles relieving U.S. farmers whether it be: 1) Brazilian farmers curbing forward-selling with political uncertainty; 2) Argentina unloading of record soybean stockpiles now being offset by unfavorable weather; 3) China shifting purchases from Argentina to the U.S.; 4) Macro - A weaker Dollar making U.S. crops more competitive in the global landscape.  


Whatever the correct story, the market has seen huge relative volumes and record levels of futures open interest behind the price move (some of it a structural change with ETFs holding futures contracts) off the end of February Lows with a huge long build in net futures and options positioning (table below), which we outlined in Monday’s call-outs. Implied vol. has spike triple digits (3-4x trailing averages in grains). See charts below for the behavioral set-up.


However, with regard to Y/Y farmer economics and FX moves (especially in the Real and Argentine Peso), we would need to see a sustained continuation in the short-term move before we would reconsider farmers’ beaten down propensity to consume crop input expenditures (fertilizer, seed, nutrients) in a time of credit contraction on the farm – farming realities move much slower than the CME, hence our thesis - the price of inputs has been slow to lag real-time grains prices out of the 2012 bubble highs, compressing farmer margins to dire straits. AGU’s retail exposure is more levered to the price of domestic corn, which like soybeans, is only up mid-single digits Y/Y against a U.S. dollar that is down -3.8% Y/Y. Continued unfavorable economics should weigh on the budgets of cash-strapped farmers who have gotten little relief in the price of seed, fertilizer, nutrients since the 2012 bubble highs in grains prices – YET – See last chart below.


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Open interest


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Avg. Volumes


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - price changes


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Implied Vol


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Contract Positioning


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - AGU Retail Exposure


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Seed Expenses 

UA | Huh?

Takeaway: We love most things about UA, but this conference call was just weird.

UA’s numbers proved today why it trades at the multiple it does (65x earnings, 29x EBITDA, 4x sales). Revenue and EPS grew +30% and +62%, respectively, which is pretty much bullet-proof. Cash flow from operations was down 5%, but no one will care about that with this kind of Brand Heat and P&L momentum. Our call on this name is simply to do nothing. We won’t buy it here. Yet on the flip side we think it’s foolish to argue a valuation short – as UA is earning the hype, and the only justifiable fundamental short has to do with rising cost pressures as Nike flexes its wallet and makes it tough to grow in footwear and International – but Nike is clearly focused on bigger and better things. So in the end…we’re a ‘do nothing’ on this – and we’re fine with that.


But we can’t hold off from commenting on Kevin Plank – and just a warning, this is not going to be pretty.  In recent quarters we’ve commented on how far Plank has come as CEO. Not just in his self-given title, but how well he has grown into it and matured as a leader both inside the organization and out. Note, I think we all know that being a CEO, a Manager, and a Leader are all very different things. A select few people can do all of them well. We’ve been growing into the mindset that Plank is, in fact, one of those people.  That may still be the case. It probably is. But to be analytically honest, we need to call out that today’s conference call definitely serves as an argument to us against it.  Here goes…


1) Overall, his tone throughout was just extremely brash and “in your face”. It was reasonably intimidating at times. Is that what people inside the organization see – only more intense? We gotta wonder.

2) It probably started off with his discussion of Steph Curry. Yes, we get it…Curry is unlike anything the NBA has seen in forever. He’s the man. But Saying how the company grew 30% to match Curry’s #30, and his average points for the season was odd. Maybe it was something of a joke, but it came across as flat-out weird.

3) He was more focused on calling out (almost yelling out) athlete victories than talking about what UA is doing to build emotional connections with the athletes REGARDLESS of whether they win or lose. Is UA building these connections? Of course, to a degree. But what happens when Steph Curry loses one day? This reminds me a lot of when Reebok had Allen Iverson under its belt 15 years ago. All Reebok talked about was AI. Then one day he became less relevant. Then it had to merge with Adidas. That won’t happen here. UA is a much better company. But it should never lose sight of what it could become.

4) Case in point, I really can’t stand Kobe. He’s one of the most disliked players outside of LA by the general public. Most basketball players really don’t like the guy. But Nike managed to take the fact that most people hate Kobe and turn it into a “I Hate Kobe” campaign upon his retirement – that actually is helping his popularity. And yes, Nike is backing it with hundreds of millions worth of Kobe product in its direct channels (check out SNKRS app).  Don’t be so focused on the wins. Those are not monetizable. Emotion is.

5) Was I the only one who thought it was weird when Plank cut off an analyst who was asking an otherwise thoughtful question? It’s as if he knew what he wanted to say before he even heard the end of the question and ran right over the person on the other end of the phone.  


Look…we all have our good days, and we have our bad days. Lord knows I have my fair share – likely more than Plank. But I’m not CEO of a $21bn company – yet. Heck, maybe he just worked out with Dwayne “The Rock” Johnson and was still amped up. 


We’re giving him a pass on this. The market obviously doesn’t care. But we’re looking for a more grounded, somewhat humble, and commercially-focused Kevin Plank next quarter.

Go Warriors.


UA | Huh? - 4 21 2016 SIGMA chart1


UA | Huh? - 4 21 2016 Algo chart2

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3 Economic Charts Of Concern

Takeaway: The Fed has little or no juice left.

"This morning's data confirms our view that the economy continues to slow on a trending basis and is set up to slow fairly sharply here in Q2," Hedgeye Senior Macro analyst Darius Dale wrote earlier this morning.

3 Economic Charts Of Concern - GDP cartoon 05.29.2015


Here's more analysis from our Macro team in a note sent to subscribers earlier this morning:


"Since the late-September lows, the S&P 500 has held a reasonably tight positive 0.75 correlation with the Citi U.S. Economic Surprise Index, which itself has rallied hard off it's early-February lows as U.S. economic data stabilized in rate-of-change terms and perpetuated a waning of recession fears.


3 Economic Charts Of Concern - s p citi surprise


Now, a topping process in the latter index appears to have gotten underway over the past two weeks, as most recently highlighted by this morning's meaningful misses in the Chicago Fed National Activity Index and the Philly Fed Business Outlook Survey. We reiterate our view that [pending] dour economic data itself is the catalyst for the market to decline from here." 


Digging deeper into the data...


As you can see below in the "high-frequency" data series that we track for the U.S. economy, many of these indicators stabilized on a sequential (month-over-month) basis but are in the red versus their 3-month average:


Click image below to enlarge

3 Economic Charts Of Concern - U.S. data


As Dale points out, dovish Fed commentary can't add much more juice to the markets. The most recent read on implied yield on Fed Fund futures suggests investors don't see a rate hike until December 2017.


3 Economic Charts Of Concern - Chart of the Day 4 20


"There's no more juice left to squeeze out of rates markets w/ dovish talk," Dale writes. "She actually has to do QE4 to get rates spreads to compress further from here. QE4 before the crash?"


Yet more reasons why we're holding the line on our bearish views.


For more...


Watch Dale in the video below, "U.S. Economy Enters Most Difficult Part of Cycle":

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  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.87 1.69 1.85
S&P 500
2,036 2,118 2,102
Russell 2000
1,089 1,159 1,142
NASDAQ Composite
4,845 4,999 4,948
Nikkei 225 Index
15,583 17,448 16,906
German DAX Composite
9,497 10,544 10,421
Volatility Index
12.82 18.40 13.28
U.S. Dollar Index
93.77 95.18 94.47
1.12 1.14 1.13
Japanese Yen
107.51 110.74 109.79
Light Crude Oil Spot Price
39.41 44.54 43.97
Natural Gas Spot Price
1.86 2.23 2.18
Gold Spot Price
1,225 1,269 1,245
Copper Spot Price
2.07 2.27 2.23
Apple Inc.
105 110 107
586 647 633
McDonald's Inc.
126 130 128
Utilities Select Sector SPDR
47.81 49.65 47.93
Netflix Inc.
92 102 96
Kinder Morgan Inc.
17.02 19.25 19.00

CHART OF THE DAY: S&P 500, Shiller PE & Forward-Looking Returns

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Financials analyst Josh Steiner. Click here to learn more.


"... Now consider the longstanding relationship described by Cliff Asness between current CAPE ratio levels [aka Shiller PE] and forward 10yr market returns (HERE). What he shows is that there’s a near perfect relationship between forward 10yr returns on the S&P 500 and starting CAPE ratio multiples over the last 85 years (see table below).


The market is currently trading at a CAPE ratio of 26.4x, which puts it in the 10th [the most expensive] decile. Forward 10yr real returns from this decile have averaged just +0.5% per year over the 1926-2012 period. The best period saw returns for this decile of +6.3% per year, while the worst saw losses of -6.1% per year."


CHART OF THE DAY: S&P 500, Shiller PE & Forward-Looking Returns - Cliff Asness Guide to CAPE implied future returns

Source: Cliff Asness, AQR (An Old Friend: The Stock Market’s Shiller P/E)

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