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Cartoon of the Day: "Rarified"

Cartoon of the Day: "Rarified" - No volume cartoon 08.23.2016

 

Total equity market volume continues to tumble on up days and rip on down days.


McCullough: The Yield Spread Doesn't Lie - People Do

 

In this excerpt from the Macro Show earlier today, Hedgeye CEO Keith McCullough explains why the coming quarter will be "the best time to short the Financials."

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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Keeping Up With The Sauds

Takeaway: Reports about Iran cooperating on OPEC production freeze is just public relations. September sequel ends the same:no agreement and no freeze

The OPEC rumor mill is in hyper-drive with today's Reuter's report citing sources that say Iran is "sending positive signals" on a production freeze. Like a marionette, the market follows.

Iran may actually attend this informal OPEC meeting but only because it will be held on the sidelines of the International Energy Forum (IEF) and attended by potential customers for its crude.

But this freeze sequel ends the same as last April's attempt - no agreement & no freeze.

This is just public relations so Iran doesn't look like the bad guy after the Saudi's made comments earlier this month about cooperating with other OPEC members "if necessary." 

In our view it is still too soon for any change in OPEC production policy. Saudi Arabia is more nervous about oil at $50 than $40 because they know it keeps US shale alive. The Saudi's only care about declining US production and need to see more of it.

Iran is just eight months into ramping up exports and regaining market share. So they simply can't agree to any limits on production now. Arguments that Iranian production is plateauing will fall on deaf ears in Tehran. 

Throw in other recent news reports that Iran plotted to assassinate the Saudi ambassador to Iraq -- and we don't have the makings of a productive meeting in September.


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Oil/Iran: Sell The "News"!

Takeaway: In our view it is still too soon for any change in OPEC production policy.

The OPEC rumor mill is in hyperdrive with today's Reuters report citing sources that say Iran is "sending positive signals" on a production freeze. Like a marionette, the market follows.

 

Iran may actually attend this informal OPEC meeting but only because it will be held on the sidelines of the International Energy Forum (IEF) and attended by potential customers for its crude.

 

But this freeze sequel ends the same as last April's attempt - no agreement & no freeze.

 

This is just public relations so Iran doesn't look like the bad guy after the Saudis made comments earlier this month about cooperating with other OPEC members "if necessary."

 

In our view it is still too soon for any change in OPEC production policy. Saudi Arabia is more nervous about oil at $50 than $40 because they know it keeps US shale alive. The Saudis only care about declining US production and need to see more of it.

 

Oil/Iran: Sell The "News"! - OPEC cartoon 04.24.2015

 

Iran is just eight months into ramping up exports and regaining market share. So they simply can't agree to any limits on production now. Arguments that Iranian production is plateauing will fall on deaf ears in Tehran.

 

Throw in other recent news reports that Iran plotted to assassinate the Saudi ambassador to Iraq -- and we don't have the makings of a productive meeting in September.

 

*  *  *  * 

 

Editor's Note: Here's a recent interview where McMonigle explains why Saudi Arabia and Iran will once again dash OPEC oil production “freeze” discussions.

 


Capital Brief: Hillary's Hopes & Trump's Tribulations

Takeaway: Republicans On The Rise; Fundraising Frenzy; Hillary's Hope For Change

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 sales@hedgeye.com.

 

Capital Brief: Hillary's Hopes & Trump's Tribulations - JT   Potomac under 1 mb

 

“History and experience tell us that moral progress comes not in comfortable and complacent times, but out of trial and confusion.”

-Gerald R. Ford

HILLARY’S HOPE FOR CHANGE

With Hillary Clinton’s growing lead and clearer path forward, the Clinton camp is beginning to refine policy plans - and Republicans are already expressing aversion to them. Though rumors are swirling that Clinton, Speaker Paul Ryan and wannabe Senate Majority Leader Chuck Schumer are open-minded to a package to build on infrastructure spending and reform corporate taxes, nothing is set in stone. Some Republicans say they could go along with it, while others keep their distance. But remember - even if Clinton wins the White House, and the Senate turns Democrat, the House is likely to stay in Republican hands, and is likely to become more conservative.

REPUBLICANS ON THE RISE

Trump has watched his poll standings in battleground states plummet in the past few weeks, but he can point to at least one glimmer of hope for a possible turnaround – Republicans are gaining ground in voter registration in FL, PA, NC, and IA. Sure, Clinton is ahead by an average of six points nationally, and Trump is losing ground with millennials, women, and minorities, but registration increases in eastern and midwestern battleground states are welcome news for Trump, who is coming off his first controversy-free week since the convention. The RNC has done a lot of the legwork on voter registration, and they’re stepping in to fill other voids within the Trump orbit as he’s almost completely ignored a ground operation instead relying on earned media and, of course, his rowdy rallies to win over supporters.

FUNDRAISING FRENZY

Last month, Trump looked to be even with Clinton’s fundraising efforts (mostly), but August isn’t shaping up to be as positive. To make matters worse, of the cash that was raised, he’s barely spent any of it, forcing the RNC to step up and step in (see above). The lack of staff, dearth of advertising, and frugal spending is worrisome for the RNC and can only get better. To add to that, Clinton is a campaigning machine – she’s recently reserved over $80 million in advertising for the fall season, while Trump has fallen short on future ad buys. Trump and his camp should be deeply concerned about the inequity and needs to prioritize outreach to pro-Trump groups, because without additional resources, Trump’s chances in November will not improve.


NHS | New High Gained, Asymmetry Lost

Takeaway: NHS marked a new cycle high in July. The mean reversion upside in both the New and Existing Markets is now rearview.

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.

 

NHS | New High Gained, Asymmetry Lost  - Compendium 082316

 

Today’s Focus: New Home Sales for July 

New Home Sales rose +12.4% MoM in July to +654K, marking the fastest pace of sequential growth in over two years and a new cycle high in total sales.  On a year-over-year basis, NHS growth accelerated to a 42-month high at +31.3% YoY.

 

Some notable context:  

 

Comps:  2Q/3Q comp dynamics are favorable so the reported strength in year-over-year growth in New Home Sales hasn’t been particularly surprising.  The same favorable dynamics characterize the next few months as well so reported RoC should remain reasonably solid.

 

Support Trifecta: In addition to the broadly conducive low-rate environment a couple primary factors have supported relative activity in the New Home market. Until July, New Home Sales activity still carried some mean reversion asymmetry with double-digit upside to the longer-run average and asymmetric upside to average peak levels of activity.  This setup stood in contrast to that in the existing market where activity has already full mean reverted.  Additionally,  the price spread between new and existing homes has begun to compress in recent months as growth in new home inventory has been improving roughly in line with sales and builders have progressively focused more on entry level supply.  We’ll get the EHS sales & price data tomorrow but it should reflect further compression in the median price spread.

 

Asymmetry Lost:  The negative rejoinder to the point above is that July gain brings NHS back to its LT historical average and collapses the former asymmetry (see 1st chart below).  Housing cycles do tend to be long and autocorrelated – playing out fully in both directions – but the easy, mean reversion upside is now rearview.  The existing-to-new home sales ratio also breached its long-term average to the downside for the first time in the expansion in July as relative strength in the new market over the last  couple quarters has driven a rising share of total transaction volume (2nd chart below).

 

KISS Principles & Low Vol Narratives:  As we highlighted last month, the simple reality is that, absent a regulatory or geopolitical shock or other outsized externality, labor will remain the primary demand lynchpin and so long as the employment recovery remains intact, we’re likely to see further trudging improvement in new construction sales & starts.  Of course, at the all-time high in equities and with VIX back to sub-12 and complacency in crescendo the ‘long-term recovery/upside’ narrative is always easier to pitch.  

 

NHS | New High Gained, Asymmetry Lost  - NHS LT cycle context

 

NHS | New High Gained, Asymmetry Lost  - NHS to EHS price spread

 

NHS | New High Gained, Asymmetry Lost  - NHS Units   YoY TTM

 

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NHS | New High Gained, Asymmetry Lost  - NHS by Region

 

NHS | New High Gained, Asymmetry Lost  - NHS by Price Tier

 

NHS | New High Gained, Asymmetry Lost  - NHS Mean   Median Price

 

NHS | New High Gained, Asymmetry Lost  - NHS Inventory

 

 

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


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