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CHART OF THE DAY: Housing Starts & The May-laise

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.

 

"... I’m going to give you a TTM slope and you tell me what macro series it belongs to:

  1. Slope = 0.00
  2. Slope = -0.00
  3. Slope = 0.02
  4. Last 4 Months Change: +0.0, +0.0, +0.0, +0.0

 

Answers:

  1. Housing Starts
  2. Pending Home Sales
  3. New Home Sales
  4. Builder Confidence" 

 

CHART OF THE DAY: Housing Starts & The May-laise - 5.18.16 Starts total zero Slope


May-laise

“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

 

May-laise - occupy

 

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:

 

  1. Slope = 0.00
  2. Slope = -0.00
  3. Slope = 0.02
  4. Last 4 Months Change: +0.0, +0.0, +0.0, +0.0

 

Answers:

  1. Housing Starts
  2. Pending Home Sales
  3. New Home Sales
  4. 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):

 

  1. -2.95%
  2. -3.38%
  3. -3.73%
  4. -3.87%
  5. -2.27%
  6. -1.45%

 

Answers:

  1. 1Q15
  2. 2Q15
  3. 3Q15
  4. 4Q15
  5. 1Q16 (to-date, 460 of 500 companies reported)
  6. 2Q16 Est.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.80%

SPX 2034-2060

VIX 14.66-17.41
USD 93.51-95.26 
Oil (WTI) 46.08-49.98

Gold 1 

 

To effectively risk managing the macro May-laise the balance of the month,

 

Christian B. Drake

U.S. Macro Analyst

 

May-laise - 5.18.16 Starts total zero Slope


Cartoon of the Day: Oh Fudge

Cartoon of the Day: Oh Fudge - FED fudge cartoon 05.17.2016

 

The biggest risk in macro? Believing the Fed's serially overoptimistic forecast.


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Ex-Energy Earnings Still Terrible

Takeaway: A total of 458/500 S&P 500 companies have reported aggregate sales and earnings growth down -2.4% and -8.7% respectively.

Ex-Energy Earnings Still Terrible - oil mlp

 

A total of 458/500 S&P 500 companies have reported aggregate sales and earnings growth down -2.4% and -8.7% respectively.

 

Here's the breakdown by sector:

 

  • So far, 6 of 10 sectors have reported negative sales and earnings growth;
  • Our favorite sector short, Financials (XLF), reported sales and earnings growth down -1.7% and -14.3%;
  • Energy (XLE) sales and earnings growth down -31.6% and -108.7% respectively;

 

Click image to enlarge

Ex-Energy Earnings Still Terrible - s p earnings 5 17


HBI | Black Book - Best Idea Short

Takeaway: Please join us Monday, May 23rd at 1PM ET for our Black Book on Best Idea Short HBI.

Please join us Monday, May 23rd at 1PM ET for a call reviewing our Black Book on Best Idea Short Hanesbrands (HBI). 

 

WATCH THE REPLAY BELOW

 

Call Details:

Toll Free:

Toll:

UK: 0

Confirmation Number: 13636869

Materials: CLICK HERE

 

We added HBI to our Best Ideas list as a short on May 2nd as recent acquisitions gave us higher conviction in our short positioning.  This goes beyond the whole ‘peak margins, low cotton cost, in a weak category’ argument. But rather, a management team that was aggressive, but is now behaving in a borderline reckless manner. Management is aggressively selling stock while it uses shareholder capital to accelerate acquisition activity at increasingly high (and potentially deceptive) multiples at the tail-end of an economic cycle, as its own factories operate near peak utilization. These deals are supporting earnings, while the Street looks right through the special charges. That makes timing on this short difficult, but we’ll provide a roadmap in our Black Book. Ultimately, we see 40% downside from here.

 

 

Below is our note from 5/2 outlining our thesis.

 

05/02/16 09:19 AM EDT

HBI | This Doesn’t End Well

 

Takeaway: We’re adding HBI to our ‘Best Ideas’ Short list. When a company behaves this badly, no one wins.

 

We’re adding HBI to our Best Ideas Short list. We initially put this short on in late March (see note below), but the company’s actions since then have given us greater confidence in the call. Here’s our basic thinking (we’ll have a Black Book out on the name shortly with a deep dive).

  1. This is not a bad business…but it’s not a good one. On the plus side, it’s highly consolidated on the brand side – with Hanes and Fruit of the Loom accounting for 24% share. On the flip side, distribution is even more consolidated with Wal-Mart, Target, Kohl’s, Penny, and (yes) Amazon accounting for ~70%.  That might seem like a push, but we’d also argue that consumer trends are pushing towards the high end (Tommy John, Lululemon, UnderArmour, Nike). All in, the core is probably a 1% long term grower. Nothing to write home about. And unlike a CPG company, it is extremely volatile. A volatile 1%? Not where we want to be.
  2. Margins are at peak. HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?
    Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops. 
    In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.   
  3. The New ‘Jones’? No, we’re not talking about Hedgeye’s illustrious Daryl Jones, we’re talking about Jones Apparel Group – one of the worst companies in retail. Ever. And that says a lot. As its core rolled, Jones took capex down from 2-3% of sales to about 0.7%. That’s bad. It took shareholders’ capital and bought assets/brands – over 25 of them. Then it took special charges almost every quarter obfuscating the real earnings power of the company. It was a great trading stock until it ultimately went private at 30% of peak trading levels.  We’re not certain this is where HBI is headed, but the parallels are uncanny.
  4. Management is investing away from the core. Maybe this is an exceptional idea. Maybe they’re doing what VFC did a decade ago when grew away from its stodgy old slow growing denim business, and sold off its underwear assets. But VFC bought things like Vans, Timberland, Lucy and Eagle Creek. HBI is diversifying into…you guessed it – underwear (and moderate priced sports apparel). Just in other parts of the world. We have no reason to think this category will grow any more outside the US than inside its borders.
  5. These deals are getting more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?
  6. Why didn’t HBI buy Pacific Brands a year ago at half the price? That’s kind of a rhetorical question. I have no idea what the answer is. But it’s a public company…it’s not like it ‘wasn’t for sale’, and it’s also not like ‘HBI wasn’t a buyer’.  Just strange to pay nearly $400mm more for the same asset. That could have otherwise paid down 18% of debt, or bought back 3% of the float.
  7. 2 and 20 is Back! Did we mention that HBI announced two acquisitions in 20 days? One in Europe, and the Other in Australia? I’m sorry, but even if you’re the biggest bull on this name, you’ve gotta be scratching your head over this. Yes, I know, the stock was up on both deals, because people know that the company now has a cookie jar to dip into for a year or two. But we’ll bet against two international deals/20 days any day of the week when we’re at the tail end of an economic cycle.

 

The Bottom Line

We think it’s absurd for a stock like HBI to trade at an EBITDA multiple in the teens. An EARNINGS multiple? Sure. But not EBITDA. We understand, however, that this is the type of name where there will need to be a major event to make people completely revalue the company – the way it did so on the upside as it repaired its balance sheet over the past two years. But until then, will we see the multiple push to 14x, 15x? We have a hard time with that one – unless we’re grossly underestimating a) how much juice it can squeeze out of the lemon in Australia, or b) the sustainability of its positioning in the US market. If we’re right, we’re looking at 7-8x EBITDA, and we’d argue that’s even generous. That’s a stock in the mid-teens, or 50% downside.


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 5 17

 

Daily Market Data Dump: Tuesday - sector performance 5 17

 

Daily Market Data Dump: Tuesday - volume 5 17

 

Daily Market Data Dump: Tuesday - rates and spreads 5 17


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