Permabulls are desperately hoping and praying that a dovish Janet Yellen will continue devaluing the U.S. Dollar to keep propping up stocks.
Takeaway: "They are destroying America. They just don't realize it."
In honor of Fed Day, we highlight this Rickards gem from the HedgeyeTV vault.
Here's a short excerpt of a wide-ranging conversation Hedgeye CEO Keith McCullough had with best-selling author James Rickards a while back as part of HedgeyeTV's Real Conversations series.
Takeaway: Mild weather helped juice the March PHS print, but even so total contracts signed for existing homes only rose 1% Y/Y.
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.
Today’s Focus: March Pending Home Sales
Pending Home Sales in March rose +1.4% sequentially and accelerated +70bps sequentially to +1.4% year-over-year. Much of the strength was driven by the strong +18.4% comp out of the Northeast, which likely has weather written all over it.
That +1% YoY growth could be considered “a beat” speaks well to the prevailing environment.
If there was an official Hedgeye Housing Manifesto, the primary prescriptive notion would be that everything that matters happens on the margin. That is, the forecasting goal centers on divining better/worse not good/bad and front-running those inflections.
The current challenge – with HMI, NHS, Starts, & PHS all flat for the last year - is that nothing is really happening at the margin and a crawling 2nd derivative convergence to zero isn’t alpha’s playground.
To frame-up and put some quick context around the nearer-term setup: Demand comps in the existing market get harder the next few months and, at current levels of activity, transaction volumes would be down ~-1% in Apr/May. If continued sequential improvement were to persist, demand growth would run 0% to +2% YoY over the next quarter+.
So, -2%-to-+2% is your fundamental demand backdrop through the balance of 1H16. Note, also, that (unlike NHS/Starts) existing sales have already fully mean-reverted back above average historical levels of activity so the easy asymmetry/upside has already been captured.
Summarily, with demand stagnating, price growth beginning to roll, supply constraints persisting, the preponderance of domestic macro data decelerating and no discrete, large-scale catalysts we're not seeing much for housing bulls to hang their hat on here presently.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
Joshua Steiner, CFA
Christian B. Drake
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Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
Trump is batting 1000 after winning the past six states, and is now just a handful delegates shy of reaching 1000 - leaving him approximately 250 away from clinching the nomination. His victory last night was the most commanding to date winning by larger margins and expanding his support across all voter demographics - even surprising Trump and his team. Next week's contest in IN becomes the next (and last?) battleground for the anti-Trump forces; the latest polls show Trump with a single digit lead over Ted Cruz and Trump will pour everything he has into winning the Hoosier state. He knows his chances of winning the nomination without 1,237 delegates could wreak havoc in Cleveland just as he'll be looking to unify the party. If Trump wins big in IN, it eases the pressure to dominate CA - but if he loses IN, then he'll have to grind it out until the very end.
Yesterday's results extinguished Bernie Sanders' hopes to win the Democratic nomination. Hillary Clinton dominated the Northeast primary - winning four out of five contests and racking up more delegates than Bernie Sanders and is now sitting on 2,117 delegates and super delegates (with 2,383 needed to win). Sanders cannot surpass Clinton, though it doesn't look as if he's going quietly into the night - his goal now is to impact the Democratic platform and prevent Clinton from moving to the center potentially handicapping her going into the general election. Clinton is now rounding third with hopes of crossing the plate well-before the convention starts in Philly, and will work to convince Sanders - and more importantly his followers - to support her.
Billionaire Democratic donor Tom Steyer has committed to spending $25 million through his climate change focused superPAC to drive turnout for Hillary Clinton in general election battleground states. The campaign will focus on younger voters - who so far have been reluctant to back Clinton and have flocked to Sanders - but whose support is vital to ensuring she can reassemble the coalition that carried Obama to victory, especially if Trump is able to overwhelmingly carry older, white voters. We expect to see similar voter drive campaigns launch into full swing as the primaries wind down.
In the final stretch of the Republican nomination battle, the clash over the Party's soul is starting to ramp up. As we mentioned earlier in the year, Speaker Paul Ryan's task forces are finalizing concrete legislative proposals on health care, taxes, and national security to be released prior to Cleveland. This will help Ryan and Co. recapture the Party narrative from Trump or Cruz, and also give vulnerable Republicans a platform to run on in November separate and apart from the potentially toxic campaign of whoever becomes the Republican nominee.
Takeaway: Average working Americans get hammered by a weak U.S. Dollar, while Fed-fueled monetary policy enriches wealthy investors.
Ahead of today's important Fed announcement, permabulls are desperately hoping and praying that a dovish Janet Yellen will continue devaluing the U.S. Dollar to keep propping up stocks.
Below are two charts showing why a weak dollar is perpetuating a massive wealth gap.
***You can follow Darius Dale on Twitter @HedgeyeDDale
Takeaway: COH might be batting only 0.0833, but momentum is building in an otherwise investable Retail tape.
Investment Conclusion: There’s a lot of bad things you can say about Coach’s quarter – its poor quality of earnings, lower than expected tax rate, 7th consecutive quarter of special charges, NA comps still not positive, and all indications that the brand is still in ‘Outlet Mall/Department Store purgatory’. But for the first time in a while, you can add a few positive comments to the narrative as well. The biggest of which is that this is the first quarter in 12 where GAAP earnings actually grew for Coach (even on a full tax rate). That carried through to the balance sheet as well, with a 14 day improvement in the cash conversion cycle. Clearly not all is horrible at COH, which for years could do nothing right. Look at the SIGMA below, which shows that COH has one of the best sales/inventory/margin trajectories in all of retail (that’s a pretty massive statement), which is very bullish heading into next quarter. We put COH on our Long bench in March for many of these reasons. It’s 5 tickers removed from our top idea, and deservedly so. But this is a management team that took control of the company when it was a complete disaster – yes, two-three years ago (when EPS growth turned squarely negative). These guys learned the hard way, and appear to be figuring it out. If there’s one thing I learned about Retail in 20+ years, it’s that a 3-year stretch of value destruction does not end, only to start all over again. Quite the opposite -- in a sea of uninvestable names in retail, this is one where we think you can arguably take above consensus EPS growth to the bank. It’s still sixth on our idea list – but with an upward bias.
DETAILS OF THE QUARTER
Whack-A-Mole: This is the first quarter in 3 years that the Coach brand grew organically, with sales growth of 3% (4% C$) and earnings growth of 17%. Margins still haven’t found a floor, down another 70bps in the quarter, or maybe put a better way, down 14 percentage points in 3 years. North America comps were flat with the road-map in place towards positive comps in 4Q16. We give management a tremendous amount of credit for laying out the road map for the recovery and delivering on the promises. But, now that the mole has poked its head out of the sand – we’re at a critical inflection point in the COH story.
From here – the story is less centered on the quarterly cadence of comparable store sales, but sustained organic growth and a material inflection in the margin trends over the near term, and margin stabilization in the long term. Merch margins have been more or less stable throughout the entirety of the three year decline (down just 220bps on a $900mm revenue decline). The kicker must be SG&A leverage as the company returns to a more stable top-line outlook. But, gone are the days of double-digit/high-single digit comps as the company all but admitted it is no longer a market share taker, instead just not a market share ceder.
The SG&A leverage story makes us inherently uncomfortable, especially since its associated with an equally aggressive (in the case of COH) topline acceleration growth story in the low-to mid single digits. Sure there is some occupancy deleverage to recapture (about 300bps of the 13 percentage point decline from 2011-2015), but most of the charges COH recognized as part of its restructuring have been written off as one-time. Meaning there isn’t a lot of low hanging fruit to grab without a commensurate return to excellence on the top line. Management has talked about $150mm in annual run rate cost savings once we hit the conclusion on 2016. Though today’s new cost cutting/employee reorg plan speaks to that fact that COH has more wood to chop.
True House of Fashion Design: In fairness, this is a nit-picky observation, but we can’t totally get behind’s COH new ‘True House of Fashion Design’ mantra. The fact is that COH is a company with a new footwear asset (Stuart Weitzman), and an average handbag business highly weighted to the outlet channel. By itself, COH has never proven it can scale what at a time was a highly relevant product in one geographic region across the globe or categories. Management seems focused on acquiring new category exposure (a la Stuart Weitzman), that will produce the illusion of growth and diversify away from handbags. But, nearly anything COH could acquire, while accretive, will damage the profitability profile of the parent.
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