“The 1st step to being great is being grateful.”
Quants call it complexity, Soros would call it (social) reflexivity, Ray Dalio calls it The Truth.
The populace struggles to define it explicitly, but its early essence was captured in the American zeitgeist that percolated below the surface of Occupy Wall street.
They feel it in a decade of underemployment, stagnate real wage growth and massaged government inflation calculations. They feel it in the broken promises of “the great moderation” and broken bubbles in equities, tech, real estate, and central planning.
They feel it in protracted financial repression, negative real rates of return on savings and fixed income and in the volatility of their 401K. They feel it in multi-year monetary policy initiatives discretely designed to drive a wealth effect which perversely, only serves to drive a bigger delta between the 99% and 1%.
It’s expressed in lower lows in congressional approval, in the exodus of retail equity inflows, and the fragility of confidence about the future and the dismay in the declining prospects of upward social and economic mobility for their children.
It’s manifest in Sanders’ primary success and Trump’s ascendency. In the glacial but real “Fourth (generational) Turning”
In finance, the Wall Street 2.0 promise of transparency and an information/investment meritocracy is sounding the death knell for a financial services industry drowning in a pool of hindsight bias, overcapacity and cumulative distrust (outflows) of its own creation.
I work at a financial firm, but I’m certainly not a millionaire. Maybe a thousand-aire but I’m pretty sure that doesn’t get me into the 1%. And most of the people I associate with regularly are trying to decide if they can save $10 or $30 this paycheck while keeping pace with excess inflation in key cost centers of housing and healthcare, let alone feasibly plan for the $1M in tuition costs for their two kids in 16 years.
Democracy and Capitalism don’t promise equality but they should, holistically, breed opportunity and humanism and strive towards an ideal of frictionless social mobility.
Thank you to everyone involved in making our Hedgeye Cares Fundraiser for the Bridgeport Caribe Youth League a huge success yesterday. It was a great opportunity to help support deserving families. We had a record turnout and we are grateful.
Back to the Global Macro Grind…
Let’s start with a little game that I think well ‘microcosm’s’ the current domestic Macro state.
I call it: Name That Slope (as in the slope of the line, the “m” in y = mx + b)
I’m going to give you a TTM slope and you tell me what macro series it belongs to:
- Slope = 0.00
- Slope = -0.00
- Slope = 0.02
- Last 4 Months Change: +0.0, +0.0, +0.0, +0.0
- Housing Starts
- Pending Home Sales
- New Home Sales
- Builder Confidence
I haven’t explicitly touched on Housing in the Early Look in a couple months but those data points sufficiently characterize the state of the sector. The malaise that has blanketed domestic housing data over the TTM continues to manifest.
The challenge for rate-of-change centric analysts concerned with marginal change is that nothing is really happening at the margin and a crawling 2nd derivative convergence to zero isn’t generally alpha’s playground.
Next up for Housing is April Existing Home Sales data on Friday and our expectation is for modest sequential improvement as Existing Home Sales keep pace with the Trend in Pending Home Sales.
Recall, Pending Home Sales (PHS) = contract signings while Existing Home Sales (EHS) = closed transactions. PHS leads EHS by ~1-month and while the two series don’t always track precisely month-to-month, any multi-month divergences have resolved via a recoupling of EHS to PHS.
While existing sales should improve sequentially, the trend over the last year has been one of deceleration and demand comps in the existing market get harder the next few months.
To quickly contextualize the nearer-term demand setup: At current levels of activity sales volumes (PHS) in the existing market (the existing market = ~90% of the total market) 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.
Given the sizeable underperformance for the housing complex QTD, “cover in May and go away” isn’t an un-compelling option but we don’t have a catalyst for reversing our outlook, yet.
To close, lets Oakum’s razor why the SPX has done nothing (net) in the last ~18 month.
Name That Sales Decline (S&P500):
- 1Q16 (to-date, 460 of 500 companies reported)
- 2Q16 Est.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.70-1.80%
Oil (WTI) 46.08-49.98
To effectively risk managing the macro May-laise the balance of the month,
Christian B. Drake
U.S. Macro Analyst