"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
-Charles Dickens
Do you ever feel that you just don’t know what to believe after reading the news? We certainly have that challenge at Hedgeye when reviewing reports from both the mainstream and non-stream media. Love him or hate him, but President Elect had a fair point when calling out the media and their tendency to report #FakeNews earlier this week.
The most recent example comes from the website BuzzFeed and a decision to publish a series of memos that have been floating around for months. These memos allege all sorts of misconduct by the President Elect and his team related to their relations with the Russians and unique sexual interests. Unfortunately, the memos contain literally no evidence and were widely considered a hoax, but, hey, anything for some clicks!
We’ve decided to take matters into our own hands and are starting a Washington, DC based news bureau, which will leverage the research and media assets in place, but we will also be bringing in new talent, including a bureau chief, to drive this effort. It’s time to turn the partisan era of #FakeNews into the Epoch of Belief.
Back to the Global Macro Grind…
Unlike the media generally, our job as an investment analysts is to get to the truth. Literally our jobs, performance, and compensation are tied to finding the truth. So, what is the truth so far about the Trump economy?
One truth is certainly that expectations for a strong(er) economy are being priced into the market. The SP500 has now gone 64 days without a -1% down day and is up just 6% since Trump was elected. The small cap Russell 2000 is up almost 14% in that span. Meanwhile, the VIX, a measure of equity market volatility, is literally at a 10-year low. Hmmmm.
That is not to say there aren’t reasons to be excited as stock market operators. Less regulation, lower taxes, and some form of stimulus won’t be bad in the short run. But if there was one takeaway from Trump’s press conference Wednesday it is that clarity on Trump’s economic policies may take some time. The other takeaway is that you don’t want to be long the drug makers.
After Trump said pharmaceutical companies are “getting away with murder,” as it relates to pricing and tax inversions, the stocks got crushed. Literally, in the span of 20 minutes the nine largest pharmaceutical companies in the SP500 lost more than $24 billion in market cap. If you don’t know, now you know: Trump doesn’t like big pharma business practices.
In the land of real analysis and data, our Housing team gave their Q1 themes presentation yesterday (ping if you’d like the replay). They noted in their presentation quite accurately that consumer confidence and small business confidence have both spiked since Trump’s election. Not surprisingly, so has builder confidence, which based on the NAHB HMI index actually reached a new cycle high.
So, all is good in housing land, right? Well, not so fast. The consumer confidence readings related to house purchases intentions saw no bump since the election. In fact, the University of Michigan Home Buying Conditions Index is continuing to make lower multi-year lows. This is also corroborated by the Fannie Mane’s monthly survey of 1,000 households which shows home purchasing sentiment has declined for 5 straight months with no post-election bounce.
The housing team boiled down their 133-page presentation to three main thematic investment conclusions:
- Long Mortgage Insurers - The mortgage insurers are the most positively exposed to rising rates because it brings about increased persistency in their portfolios. Also, rising rates are positively correlated with good credit performance. ESNT, RDN and MTG
- Short Title Insurers - The title insurers are the worst performing subsector in the entire Financials/Housing complex when rates are rising. Rising rates, in addition to suppressing refi activity, also weigh on affordability, i.e. home prices. STC, FAF and FNF
- Short Homebuilders - The builders have historically been very negatively correlated to rates from an equity price performance standpoint. We also see little incremental fundamental momentum arising from the new administration. The core businesses, meanwhile, remain under pressure from tight lot supply and skilled labor shortages.
Despite what policies Trump might implement, it is going to be difficult to arrest the economic reality of rising rates on the housing sector and we still think that raising rates will be the key factor to watch as it relates to housing sector performance.
But as the facts change, so shall we and it is possible that the new administration does come up with some big ideas because as the President-elect has been quoted as saying:
“I like thinking big. If you’re going to be thinking anything, you might as well think big.”
Indeed.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.52%
SPX 2
VIX 10.13-13.69
EUR/USD 1.03-1.06
Oil (WTI) 50.80-54.84
Gold 1145-1210
Best regards,
Daryl G. Jones
Director of Research
