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CHART OF THE DAY | Housing: Behind The Treasury's Shell Company Crackdown

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.

 

"... A couple weeks ago, I highlighted a Treasury Department initiative aimed at tracking high end real estate transactions in Miami and Manhattan in an attempt to crackdown on money laundering in the ultra high-end real estate markets.  

 

With foreign demand having an outsized impact on prices in select markets and nearly 50% of foreign buyers purchasing properties over $5mn doing so through shell company LLCs, someone thought illegal activity was getting a little too frothy."

 

CHART OF THE DAY | Housing: Behind The Treasury's Shell Company Crackdown - 7 28 16 CoD2


High-Frequency Flopping

“When all is said and done, more is said than done”

-Lou Holtz

 

Unfortunately, when your primary “tool” is communication, “saying” pretty much = “doing”. 

 

In the last 6 months, the Federal Reserve has pivoted from Hawkish (DEC hike) to Dovish (on market down), to Hawkish (April), back to Dovish (May Jobs Report bomb), and now Hawkish again!

 

For High-Frequency Flopping enthusiasts that equates to a rhetorical policy pivot approximately every 6 weeks. 

 

And for a Fed pre-occupied with dampening volatility and pro-actively leading markets via carefully crafted rhetorical gradualism, they certainly seem to be running the uncertainty promulgation machine near full productive capacity. 

 

As a thoughtful reader opined about the prevailing, domestic productivity malaise yesterday following the Fed Minutes:

 

Imagine all the collective speculation, all the sunken search and research costs, all the spurious activity surrounding “fed watching” was, instead, directed towards innovation and tangibly productive activity.   

 

Then do the same for all the superfluous activity surrounding the manic forecasting of the unforecastable monthly NFP figure. 

 

Viola, step function increase in productivity.

 

Doing instead of saying …. whoda thought!

 

Back to the Global Macro Grind

 

Dude, you’re not long Latvia!  

 

C’mon, everyone’s doin’ it. It’s a no-brainer, I think it’s in Central America too, so its gotta be good. I know a guy if you wanna get some!

 

The table below, which we recently tweeted out, is a simple reminder that “the market” ≠ 1 domestic equity index. Macro investing is cross asset class and global.

 

High-Frequency Flopping - 7 28 16 CoD1

 

Q. What do you call Helen of Troy after sunset?

A. Nitrogen (night Trojan)

 

Chemistry humor is rare, you take it where you can get it.

 

Q: What’s the most ironically named macro metric YTD?

A: Durable Goods ... where the early 2016 improvement has proved neither Durable nor Good?

 

Headline Durable Goods for June reported yesterday declined -4.6% sequentially and -6.4% YoY. 

 

While the -59% MoM/-60% YoY decline in private sector aircraft orders was an outsized drag, most of the subaggregates mirrored the headline.

 

Indeed, Durables ex-Defense and Aircraft – which aligns most closely with what actual households buy – remained negative year-over-year (-1.8%) for a 4th consecutive month. 

 

Core Capital Goods Orders, meanwhile, declined for the 17th time in the last 18 months, dropping -3.7% YoY while extending the most epic non-recessionary run of negative capex growth ever.    

 

That number will drive a downward revision to tomorrow’s advance GDP estimate for 2Q but only modestly. With Retail Sales having its best quarter since 2014 (up +7.2% QoQ annualized), the growth juice remains in household spending as Consumption remains the only GDP Expenditure Bucket game in town.

 

Elsewhere across domestic macro yesterday, we got the latest update on sales activity in that forgettable, $22.5T asset class that is residential real estate.

 

We provided a summary update on Housing to Institutional clients yesterday. Since I haven’t touched on it in a bit in the Early Look, below is a recap of that note:   

 

Pending Home Sales: Pending Home Sales rose +0.2% sequentially and +1% YoY. On an NSA basis, year-over-year growth decelerated to a 19-month low at +0.3% YoY.

 

With growth making new lows the last couple months, it’s worth quickly reviewing our expectations around demand in the 90% of the market that is existing sales.  

 

Our Call: Our process is generally rate-of-change centric as being lazy long a negative 2nd derivative trend and an expectation for a conspicuous deceleration in growth is typically a losing proposition, as is the converse setup.   

 

Our expectation since the beginning of the year was for demand growth in the existing market to continue to converge towards 0% against peak comps and subsequently run +0-2% during the mid-year period. With PHS printing negative YoY growth for the 1st time in 2-years on a seasonally-adjusted basis last month and NSA growth printing a 19-month low in June, that expectation has largely been realized. 

 

So now what?

 

Comp-sternation: From here, PHS comps get modestly easier over the next 6-months which, at current levels of activity, equates to ~2.4% YoY growth over the balance of the year. While the potential for further reemergence of entry level buyers may provide some modest support over the nearer term, sales in the existing market having already mean reverted back to average levels of activity and the inventory environment will remain an upside constraint. In other words, what we think you’re playing for over 2H in a neutral-to-bullish case is low to mid-single digit demand growth. Also, notably, June PHS suggest modest downside risk to July EHS when the data are officially reported next month (8/24)

 

Reality's Reflection: If we were to Occam’s razor an explanation on the prevailing trend in housing it’s that it is largely reflecting the current underlying macro reality - which remains an underwhelming, stubbornly crawling expansion. Flat-to-mid single digit growth doesn’t necessarily make for a sensational fundamental “call” but it probably correctly characterizes current domestic fundamental macro and housing conditions. 

 

With a relatively benign near-term comp setup, without a discrete large-scale catalyst (regulatory, fundamental or otherwise) and absent another outsized move in rates, we’d expect housing fundamentals and housing related equities to trade largely in step with economic and market beta over the nearer term.            

 

And a last quick highlight…  

 

High-End Hit List Expansion: A couple weeks ago, I highlighted a Treasury Department initiative aimed at tracking high end real estate transactions in Miami and Manhattan in an attempt to crackdown on money laundering in the ultra high-end real estate markets.  

 

With foreign demand having an outsized impact on prices in select markets and nearly 50% of foreign buyers purchasing properties over $5mn doing so through shell company LLCs, someone thought illegal activity was getting a little too frothy.  

 

After just 4-months of investigation and evidence of significant criminal activity, the Treasury department announced yesterday that it will expand the program to all the boroughs of New York City, Miami-Dade and surrounding Counties, Los Angeles County, San Francisco and surrounding Counties, San Diego County and Bexar County in Texas. An Order that will take effect on August 28th.

 

Notably, the Treasury Department announcement came just a day after the British Columbia government unveiled a new 15% tax on Vancouver-area property purchases made by foreigners along with a capacity to tax vacant properties. (note: Vancouver = ground zero for speculative foreign capital flow). As our financials team highlighted, the impending foreign buyer fallout in the Vancouver area sits as a key component of the future deflation of the Canadian housing bubble.

 

Governments taking action, eh.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.47-1.62%

SPX 2134-2176
RUT 1185-1221

VIX 11.71-15.35
USD 96.47-97.97

Gold 1

 

To action above oration … and a shot for every time the media says what Janet will say at Jackson Hole over the next few weeks. 

 

Christian B. Drake

U.S. Macro Analyst

 

High-Frequency Flopping - 7 28 16 CoD2


JT TAYLOR: Capital Brief

JT TAYLOR: Capital Brief - JT   Potomac banner 2

 

“Things don't turn up in this world until somebody turns them up.”

-        James A. Garfield

 

PASSING THE TORCH: Day three was immensely important for Democrats as it signified a passing of the party torch from President Obama to Hillary Clinton. In his speech, Obama emphasized Clinton’s vast experience as a leader in public office, touting her ability to adapt to any situation, while imploring voters to defend his legacy by electing her as president. VP Joe Biden vouched for Clinton’s character, recalling weekly breakfasts with Clinton, where he learned her true passions, intellect, and toughness. Both hit on Donald Trump for his lack of substance and reluctance – even inability – to expand his limited knowledge of policy and international affairs, despite the information being at his fingertips. But the most vital speaker of the night was veep pick Tim Kaine, who introduced himself to an unfamiliar nation and highlighted the reasons why he was the right choice to round out the ticket.

 

TALKIN’ TRADE: VA Governor Terry McAuliffe is one of Bill Clinton’s closest friends, and like the former president, he speaks expansively about topics more wisely left undiscussed. McAuliffe told reporters that Clinton might not have been entirely serious about her opposition to the Trans-Pacific Partnership trade deal, a core Sanders and Trump economic-populist article of faith. We’ve touched on McAuliffe’s blunders before, including how him being the subject of an FBI probe for foreign campaign donations could negatively impact Clinton’s campaign, but new issues like this have us feeling the Clintons would rather keep their distance. Whether it was a miscommunication or not, the press and Trump have eaten it up. We can only think that this will add to Clinton’s trust issues as trade is a touchy subject for both candidates.

 

MARK OF KAINE: In a year when the veep choice matters so much, two questions remain – can Kaine make enough of a positive impact and is he liberal enough to woo leftist voters? Clinton took the safe route by tapping Kaine as her running mate, but it’s yet to be seen if he’s too safe of a pick. His style is anything but electric and he really doesn’t ignite progressives or other party factions. The Wall Street crowd is pleased with him because he is not Warren, and his pros ultimately outweigh his cons since VA is a highly contested swing state, his moderate views can corral undecided voters, and he speaks fluent Spanish. However, the pick is still a direct slap in the face to progressives as they feel they are not adequately represented.

 

CLIMBING CAPITOL HILL: Veep pick Mike Pence, a former congressman with close ties to the Hill, has helped Trump and his campaign step up its courtship of wary Republicans - and the efforts appear to be fruitful. The charm offensive comes after months of Trump picking on other Republicans and is aimed at rewarding surrogates who make the case for him around the Hill. Pence is working hard to reel in Republicans who’ve kept an arm’s length – even extending an olive branch to those once against Trump. If this is any indication of how Pence will perform in the future, Trump has made the right decision in choosing him. It’s imperative he grows his army as he will need all the backup he can get in the coming months.

 

WE COULDN’T MAKE THIS UP IF WE TRIED: In the last 6 months, the Federal Reserve has pivoted from Hawkish (December) to Dovish (March, on markets down), to Hawkish (April), back to Dovish (May Jobs Report bomb), and now Hawkish again! And we quote (because this is going to make them look really bad come the Q3 GDP report), “near term risks to the outlook have diminished”… ex-Durable Goods, ex-Capex, ex-Labor, ex-Profits… yes, until the next jobs report? The Fed is more short term now than a Connecticut prop trader pounding six Starbucks per day. If we’re right, Friday’s Q2 GDP report is going to be up big sequentially (we’re at +4.8% q/q SAAR), then down hard, sequentially, in Q3 (right before the election). Godspeed to them as they prepare to pivot back to Dovish (again). This is a professional and national embarrassment.

 

DISSECTING THE PARTY PLATFORMS: The Republican Convention concluded last week and the Democratic Convention officially kicked off this week. We put together a comparison of each party’s platform to help you better understand the differences and similarities in the policy agendas for the coming year. You can read the comparison here.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%

Big run for Tech (XLK +6.6% MTD) vs. a bad one for Energy and “Reflation” (XLE -2.3% MTD)…

Client Talking Points

USD

It wasn’t fun missing the Oil move (off 3yr lows) in Q2, but we're sure happy we’re not long it now (long Gold instead); USD continues to signal bullish TREND after a hawkish Fed yesterday (they’ve pivoted from dovish to hawkish 5x in 6 months, which is embarrassing) and ahead of a hot GDP report tomorrow (we’re at +4.8% q/q SAAR – that’s +2.3% y/y).

Europe

When Janet proclaimed global risks have abated yesterday, we guess that’s Ex-Spain and Ex-Italy – both stock markets down another -1.5-1.7% this morning and both remain in crash mode, -28% and -31% from their 2015 Global Equity #Bubble highs, respectively; we maintain our bearish Macro Theme of #EuropeImploding.

UST 10YR

Worldwide long-term yields lower in the last 48 hours and with the UST 10yr at 1.50%, we'd be a seller of long-term bonds into this GDP report (hoping to buy the 10yr back again around 1.65-1.70%); plenty of people will get sucked into this GDP print if it’s as big as we think it’s going to look (for Q3 we’re straight back down to 0.8%).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/27/16 64% 2% 4% 12% 10% 8%
7/28/16 66% 2% 6% 8% 8% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/27/16 64% 6% 12% 36% 30% 24%
7/28/16 66% 6% 18% 24% 24% 30%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency.

TLT

Long Bonds (TLT) = #GrowthSlowing, yield curve compression.

TIP

Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures.

Three for the Road

TWEET OF THE DAY

The Fed Is More Short Term Now Than a CT Prop Trader Pounding 6 Starbucks Per Day app.hedgeye.com/insights/52666… @federalreserve

@KeithMcCullough

QUOTE OF THE DAY

“Life is short. Smile while you still have teeth.”

-Mallory Hopkin                           

STAT OF THE DAY

in 2004, Barry Bonds was walked 232 times, 120 were intentional.


ICI Fund Flow Survey | New Lows

Takeaway: Domestic equity mutual funds lost -$10.3 B last week, breaking the prior week's record for the largest withdrawal so far in 2016.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending July 20th, domestic equity's -$10.3 billion withdrawal set new lows for the largest outflow year-to-date and contributed to the total equity mutual fund category losing -$12.6 billion. The only equity fund category to take in funds last week was emerging markets with a +$505 million subscription which assisted equity ETFs which gathered +$3.1 billion in new funds. However all bond categories had net positive flows in the past 5 days, bringing the total fixed income mutual fund flow to +$7.6 billion with bond ETFs also tacking on an additional +$1.1 billion. This +$18.2 billion net difference between all equity products and all fixed income (-$9.4 billion lost in all stock products against +$8.7 billion in total fixed income subscriptions), was the widest margin for investor asset allocation in a weekly period all year.


ICI Fund Flow Survey | New Lows - ICI1

 

In the most recent 5-day period ending July 20th, total equity mutual funds put up net outflows of -$12.6 billion, trailing the year-to-date weekly average outflow of -$3.3 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$7.6 billion, outpacing the year-to-date weekly average inflow of +$2.5 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$3.1 billion, outpacing the year-to-date weekly average outflow of -$297 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.1 billion, trailing the year-to-date weekly average inflow of +$1.9 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | New Lows - ICI2

 

ICI Fund Flow Survey | New Lows - ICI3

 

ICI Fund Flow Survey | New Lows - ICI4

 

ICI Fund Flow Survey | New Lows - ICI5

 

ICI Fund Flow Survey | New Lows - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | New Lows - ICI12

 

ICI Fund Flow Survey | New Lows - ICI13

 

ICI Fund Flow Survey | New Lows - ICI14

 

ICI Fund Flow Survey | New Lows - ICI15

 

ICI Fund Flow Survey | New Lows - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | New Lows - ICI7

 

ICI Fund Flow Survey | New Lows - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the financials XLF ETF gained +$425 million or +3%, likely due to better than expected earnings announcements.

 

ICI Fund Flow Survey | New Lows - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | New Lows - ICI17

 

ICI Fund Flow Survey | New Lows - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$18.2 billion spread for the week (-$9.5 billion of total equity outflow net of the +$8.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$3.7 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | New Lows - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | New Lows - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

Patrick Staudt, CFA







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