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How Slowing Chinese Housing Demand Is Affecting Global Real Estate Markets

Takeaway: The bottom just dropped out of Vancouver, as the home sales Y/Y growth rate fell from +0.6% in June to -18.9% in July.

Editor's Note: Below is a brief excerpt from the second edition of our Hedgeye Canada Tracker research product. Spearheaded by Josh Steiner, the goal is to help investors understand the trends and spot inflection points in the Canadian housing market by tracking 10-12 different housing data series across Canada and 8 different series at the metro level in Toronto, Vancouver, Calgary and Montreal, and presenting them in a hyper-simple format. Email sales@hedgeye.com for more info and how you can subscribe.

 

How Slowing Chinese Housing Demand Is Affecting Global Real Estate Markets - for sale

 

As Steiner writes:

 

“We track Chinese FX reserves as a proxy for foreign real estate demand. The view is that $2.75 Trillion is the threshold above which China needs to maintain its FX Reserves in order to prevent a disorderly devaluation of the Yuan. As those FX reserves converge on that threshold, the pace of money leaving the country -- our proxy for foreign real estate demand -- will slow out of necessity as China clamps further down on loopholes and avoidance of the $50,000/per person/per year limit.”

 

How Slowing Chinese Housing Demand Is Affecting Global Real Estate Markets - china forex

Why does this matter?

 

According to recently released Canadian economic data for the month of May, real estate has emerged as the third largest component of the Canadian economy, accounting for half of all GDP growth.

 

As such, housing sector weakness could negatively impact growth.

 

And it’s happening. “Vancouver home sales put up a massive deterioration, as the bottom dropped out of the Y/Y growth rate,” Steiner writes. “The Y/Y rate went from +0.6% in June to -18.9% in July. Importantly, this decline occurred even before the August implementation of a 15% foreign buyer tax, which should further drag down sales.”



It Ain't Over Till The Fed Lady Sings But...

It Ain't Over Till The Fed Lady Sings But... - Fed lady cartoon 06.25.2016

 

It ain't over 'til the Fed lady sings (at Jackson Hole on Friday) but it seems like a hawkish consensus if emerging on the FOMC.

 

In a speech at the Aspen Institute in Aspen, Colorado on Sunday, Federal Reserve Vice Chairman Stanley Fischer told reporters “we are close to our targets” in the jobs market and inflation. Not growth, though. On that front, the Fed's long-run GDP estimates have been consistently revised to the downside.

 

It Ain't Over Till The Fed Lady Sings But... - 2 dj

 

No matter, Fischer says, everything's great. In the footnotes to Sunday's speech, the vice chairman writes, “Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes.” 

 

Fischer's comments are generally in-line with his colleagues. Last week, New York Fed head Bill Dudley also laid out a case for ignoring lackluster growth and hiking on "strong" labor market data. (We question just how strong the labor market is here.) On that, the market has bid up rate hike probabilities for December back to pre-Brexit levels. 

 

It Ain't Over Till The Fed Lady Sings But... - fed hike brexit

What do you do with that?

 

Here you go. 

(Buy Long Bonds)


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Foot Locker: Sticking To Our Guns, Short More

Takeaway: Solid effort by mgmt to torpedo our Short call. But beneath the surface, the warning signs are there. This pop is a great oppty to press.

Editor's Note: Below is an update from Retail analyst Brian McGough following Foot Locker's 2Q results released Friday. 

 

Foot Locker: Sticking To Our Guns, Short More - footlocker

INVESTMENT CONCLUSION 

The long-term short call is one of the more powerful ones in retail, though such TAIL calls are far from linear. This will be a ’three steps forward, one step back’ call for 1-2 years, as the natural ebbs and flows of even the best/worst retailers offer temporary windows challenging conventional wisdom — we’ve said this all along. That said, we still take very seriously our fiduciary responsibility to Hedgeye customers to navigate the TRADES and TRENDS that build to the TAIL duration. Did we think they’d beat this quarter and we’d take a step back? Definitely not. We thought the opposite — so at a minimum we need to drill down on what changed and why. The comp was strong, and it warrants some serious thought on our part as to where we could be wrong. So that’s what our team did over the past two days.

 

We challenge anyone to find us a fully valued stock (17x earnings and 7.1x EBITDA) that did not go down precipitously when returns were cut in half, and consensus estimates prove aggressive by as much as 30% for next year. The only stocks that would prove us wrong are take-out candidates. And mark my words, no strategic buyer or private equity investor that can even spell ‘due diligence’ would take a look at buying this outright. If anyone is reckless enough to buy it, then we'd love nothing more than to debate the pathetic merits of such a transaction in any public forum with the moderator of their choice. I don’t mean to sound arrogant there, but taking-out Foot Locker is as absurd as the occasional rumor of Nike buying UnderArmour. 

 

The TREND call should definitely support that premise/math directionally, particularly with ERODING incremental margins with greater capital intensity (i.e. lower returns). As a kicker, we’re looking at no more QTD guidance from the company (a wise move by management, we think) at a time when the Street is largely playing a wicked game of ‘extend the trend’ in its financial models and that the strength we’re seeing today remains in place — or stronger — pretty much in perpetuity. We’re probably looking at Short Interest at about 5% after last week’s rally, and everyone we talked with who buys into the disintermediation theme largely ran for cover on this print.  

 

We think this story will mutate into a full-on Bear within two quarters, and more likely by the end of the year. Here’s your chance to short more of one of the most structurally-flawed names we can find — but one that is temporarily suggesting, to skittish/scared investors, otherwise. We think that if RNOA goes from 28% to 14% in 2-years and EPS loses $1.50 instead of gaining $1.00 over 2 years (a massive $2.50 delta) then we’re looking at something closer to a good ol' zero square footage growth retailer with eroding comps, peak margins, meaningfully higher SG&A and working capital requirements, that has 72% of its product coming from one vendor that says all the ‘pro-Foot Locker' things in public, but truly does not care if its FL business shrinks by 2,000bps over 3 years (or sooner). When a 40+ year paradigm of designing, sourcing, manufacturing, distributing, selling and marketing shoes is being turned on its head — there is absolutely no way Foot Locker, Finish Line, Hibbett and any retailer other than Dick’s (a temporary winner) will come out in its happy place.

 

If we’re right on the model, we’re looking at nearly 50% to be made on the short side — 9-11x a $3 EPS number, which assumes 4x EBITDA and an 8% FCF yield which given the downside to earnings we see from here is the most important metric. That’s about $35 downside. 


PREMIUM INSIGHT

About Everything: Credit Cards Lose Their Charge

About Everything: Credit Cards Lose Their Charge - cards

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the future of the credit card industry. Howe breaks down the key takeaways and explains the broader implications for investors.


The Jackson Hole Jawbone: A Good Spot To Be Buying Long Bonds

Takeaway: The world will be reminded of reality on Friday when US GDP comes in at 1%.

The Jackson Hole Jawbone: A Good Spot To Be Buying Long Bonds - Fed bunny cartoon 08.19.2016

 

In case you missed It...

 

BREAKING: Fed’s Fischer Signals Close To Targets On Jobs and Inflation (ex-GDP)

 

Yeah. Definitely. As a central-planning smoother of the US economy, you definitely have to back out 1% GDP if you’re going to proclaim to have nailed it. Reminder: if they actually use their “target” (+2% as the Deflator) real GDP will fall closer to 0% than rise to +2-3%.

 

But have no fear, the latest Fed forecast is here! Fischer “expects GDP to accelerate in the next few quarters”… which is almost mathematically impossible if inflation continues to rise (in rate of change terms) and real consumption slows from its cycle peak.

 

Good luck with that!

 

That's why this is a good spot to be buying bonds (and stocks that look like bonds) ahead of Jackson Hole, as the world will be reminded of the 1% USA GDP reality on Friday (GDP report). The risk range on the 10-year US Treasury is 1.48-1.61%.

 

The Jackson Hole Jawbone: A Good Spot To Be Buying Long Bonds - GDP cartoon 02.29.2016

 

*Editor's Note: The snippet above is from a note written by Hedgeye CEO Keith McCullough and sent to subscribers this morning. Click here to learn more.


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