Our Macro team's favorite sector short, Financials (XLF), is the second worst performing S&P sector year-to-date at down -0.7%.
Takeaway: We added GLD to Investing Ideas on the long side on 5/19.
Our Macro team’s proprietary Growth, Inflation, Policy Model (GIP Model) is a proven model that accurately front-runs the second derivative direction of inflation-adjusted growth. The most important call-out is that our growth estimates for 2016 (year-over-year) remain WELL BELOW Wall Street and Central Bank consensus forecasts:
In conclusion, the Fed remains out to lunch with their expectation for growth, and once they come around the Hedgeye view, the policy playbook calls for incremental easing on the margin. The Fed may be running out of bullets on this front, but they can always print money (which may be the ultimate endgame – see below for more details).
From a quantitative perspective Gold (GLD) is flashing a BULLISH signal on both a TRADE (three weeks or less) and a TREND (3 months or more) duration in our proprietary risk management model.
If growth continues to surprise to the downside (discounted in the Treasury curve) and the Fed moves to devalue the U.S. dollar on the margin, gold outperforms. Gold performs best when interest rates and the U.S. dollar are both moving lower at the same time.
Looking at the longer-term picture of the U.S. dollar may be the best argument for owning gold. Global central bankers are printing money, expanding balance sheets, and pushing rates to zero.
We are reaching a point where leverage is at unprecedented levels (think Fed balance sheet, corporate debt, and pension/municipal liabilities), and interest rates cannot move lower (no incremental easing available – “Big Bang Theory”). A deleveraging manifests when leverage and the ability to ease are exhausted which would likely end in a combination of debt forgiveness and money printing. Under this scenario when the Central Bank moves to print its way out of debt, you’ll be hung out to dry if you don’t have some exposure to gold. Scary stuff.
Takeaway: After a string of 0-2% Y/Y growth prints, PHS showed a pulse in April, fueled by strong growth in the Northeast.
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: April Pending Home Sales
Pending Home Sales posted its largest sequential increase in 5 ½ years in April, taking the Index to a new 10Y high. On a seasonally adjusted basis, year-over-year growth accelerated to +4.6% YoY from ~+0% over the last 3 months. In contrast, year-over-year growth on a NSA basis decelerated for a 2nd consecutive month to +2.9% YoY. Regionally, the +6.8% rise in the South and the +10.1% increase in the West drove the sequential strength while the 10.1% YoY gain in the Northeast supported the YoY acceleration.
Frankly, we were surprised by the magnitude of strength in the April data as we were looking for something in the -2% to +2% range. The key question out of the print is whether we have, in fact, rebased to a higher level of activity or whether April represents an outlier. The preponderance of domestic macro, where stall speed remains the predominant trend, suggests the latter while the similarly strong (albeit distorted) NHS report on Tuesday hints at the former. For sure, rates remain low, labor trends decent and the longer-term opportunity for housing compelling but that’s been broadly true for most of the last four years and why that confluence of factors would suddenly manifest in multi-year/multi-decade high growth rates precisely in April isn’t obvious.
A few other quick considerations:
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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Takeaway: Ryan Tip Toeing Toward Trump; Dems Dropping Debbie; Almost There
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
Looks like Speaker Paul Ryan will take his time deciding when to endorse Donald Trump despite rumors that he was on the verge this week. Ryan and Trump remain deeply divided over major policy issues, particularly free trade and immigration, but Ryan allies feel the longer he holds out, the more damage he may inflict on the party’s chances this fall.
Republicans have chosen to name three conservative members to lead the committee that will decide this summer’s convention platform. Moves were made after Trump mentioned he’d like to see changes made to the agenda that has essentially stayed the same since the days of Ronald Reagan. Look for issues that have united Republicans in the past to be highlighted; a strong party platform is important for unity going into July as well as corralling corporate convention sponsors and major donors already agitated by Trump’s views and commentary.
High level Democrats are discussing whether or not Rep. Debbie Wasserman Shultz (FL) should step down as DNC chairwoman before the big blue party in July. Democrats feel that Shultz has been too disruptive in uniting the party and whether her continued and veiled support for Hillary Clinton muddies the water for future discussions and negotiations. Adding to that, her most recent squabble with Bernie Sanders (we lost count) over rigging the system only adds fuel to the fire.
For those of you keeping score...with his win in Washington State, Trump finds himself just a handful of delegates shy of the Republican nomination. He now holds 1,229 of the 1,237 delegates needed to clinch.
Takeaway: "When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem."
Editor's Note: Below is an institutional research note on Tiffany (TIF) written by Hedgeye Retail analysts Brian McGough and Alec Richards following the company's earnings this week. They outline why a combination of horrible results and arrogance have caused the stock to decline over -3% so far this week.
We don’t know what’s more surreal…Tiffany’s horrible results, its forecast accuracy, its seemingly blasé attitude towards consistently missing forecasts, the arrogance of its management team in addressing its issues, or lastly – it’s multiple. What we are sure of, however, is that this stock is still a short barring a massive correction today that erases a third of TIF’s market cap. Here’s our brief thoughts on each of the aforementioned points…
1) Horrible Results. There’s no ifs ands or buts about this. The company comped down 9% (or -16% on a 2-yr stack), with sales down in every region (excl. Japan easy comp). Margins were off by 256bp, and pre-tax income was down by 29%. Virtually every line of the P&L eroded sequentially in a very material way. But the balance sheet was no better. The days in inventory was 612, which was up 52 (!) days versus last year. To put that into context, TIF has to wait longer to convert a dollar of earnings into cash than Kohl’s, Target, JC Penney, Macy’s, Nordstrom and Wal-Mart -- combined. There are absolutely no redeeming financial characteristics here.
2) Forecast Accuracy. There are too many examples to fit here, but let’s look at the last two annual updates. On the Jan 2015 holiday update, TIF guided to FY15 $4.15-$4.20 in earnings, which was 15% below expectations at that time. By year end they reported $3.83. On this year's holiday update, it gave initial 2016 guidance of ‘minimal growth in earnings’, which just 4 months later is now guided to a mid-single digit decline, assuming back half improvement. Needless to say, we don’t think that back half improvement will come.
3) Complacency in Missing. Is it me, or has management grown seemingly comfortable in missing numbers? It really does not seem to bother them anymore. The only other management team we can think of that is this comfortable missing numbers is Kohl’s. KSS can’t be the affiliation a once-great company like TIF aspires to keep. But by its actions, you’d never know.
4) Arrogance. Ok…you just missed – AGAIN, guided down for the seventh time in two years, which just happens to be just two weeks after your CFO resigned. And all we get is what was likely a pre-recorded message by IR with no Q&A? TIF has one of the most stand-up IR programs in the business, but let’s face it…when you miss by this magnitude – and this frequency – you get the CEO on the phone, take your lumps, and stand accountable to your business. Heck, when Macy’s dropped a lousy quarter on the Street last November, Terry Lundgren (CEO) jumped on the call for the first time in almost a decade to show his confidence and support. So…we can’t expect this from Tiffany, but we can from Macy’s? The question here is whether TIF management really wants this to be a public company.
5) Multiple. First we heard from people that a ‘low 20s’ multiple is fair. Then ‘20x’. Then 17-18x was ‘cheap’. But what’s really the appropriate multiple for a company that is shrinking earnings at a mid-teens rate, and seemingly has no strategy to ever grow again sans a rebound by spending in US Tourist markets? The best we’d give it is a 10% discount to the market – or 15x. We’re well below the Street next year, which we think will be another down year. We’re looking at earnings of $3.25, vs the Street at $4.15. Give our number a 13-14x multiple and we’re looking at a stock about $20 lower than what we’ve got today ($40-$43).
Takeaway: Headline Durable Goods orders jumped +3.4% MoM and improved to +1.9% YoY but the internals were less sanguine.
Hiding in plain sight behind Wall Street's fallacious "all is good" narrative is U.S. economic reality. A deep dive into today's durable goods data confirms our dour outlook for U.S. growth.
Below is analysis from Hedgeye U.S. Macro analyst Christian Drake in a note sent to subscribers earlier this morning:
"Headline Durable Goods orders jumped +3.4% MoM and improved to +1.9% YoY but the internals were less sanguine with the bulk of the gain stemming from the +65% MoM increase in commercial aircraft & parts. Durables ex-Defense and Aircraft, which is most aligned with what actual households buy, rose +0.6% MoM but remains down -0.4% YoY.
Meanwhile, Core Capital Goods fell MoM for a 3rd consecutive month, dropping -0.8 sequentially and holding at -5% YoY - continuing the epic run of declining capital spending with negative year-over-year growth in 15 of the last 16 months."
Here's the detailed breakdown in the chart below
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