“There seems to be an unwritten rule on Wall Street. If you don’t understand it, put your life savings into it.”
-Peter Lynch

As folklore has it, Warren Buffet has three boxes on his desk : In, Out or Too Difficult.  Sadly, I’m not nearly as organized as the Oracle of Omaha and my desk is cluttered with piles that have yet to be nicely categorized.  But if you think about it, Buffet’s old school box system isn’t the worst way to process your workflow.

It is also a good way to think about portfolio construction - the investment is either in, out, or it is some version of too difficult.  To Peter Lynch’s point in the initial quote, Wall Street has the tendency to want to sell ideas, and so called “investment products”, that are heavy on the complexity.  The mortgage crisis of course was replete with examples of this: mortgage-back securities (MBS), asset-backed securities (ABS), collateralized mortgage obligations (CMO) and collateralized debt obligations (CDO). The list goes on. 

Ultimately, had you put many of those into the too difficult box, along the with many of the overly complex MLPs we’ve written about over the years, it probably wouldn’t have been the worst decision ever.  Due to the housing meltdown, the financial side of housing has at least simplified to some extent, but housing itself is still a critical driver of individual net worth, discretionary spending, and remains one of the foundations of the U.S. economy.

In, Out or Too Difficult - dj

Back to the Global Macro Grind

On that note, our Housing team will be presenting their Q2 Housing Themes deck TODAY at 12:30pm.  If you are an institutional subscriber and you’d like to obtain access, please email .

They will be focused on a couple of key themes today:

  1. #ManhattanMoveout – A posse of negative influences have rolled into town- namely, demographics, definacialization, outmigration, tax reform, and peak comps. We will break down the mosaic of factors for more thorough contextualization.
  2. Rate Redux - Mortgage rates provided buyers yet another scare in 1Q - what are the implications and the outlook for rates into 2H18?   
  3. Rolling Back Dodd-Frank - S.2155 brings forth a path through which banks will face less regulatory scrutiny, potentially providing broadened access to mortgage financing. We will discuss the details and the implications.

In the Chart of the Day, we’ve zeroed in on Manhattan re-sale unit volume which has been down meaningfully in the last two quarters with a staggering drop of -17.5% in Q1 2018. It's certainly not a seller’s market in the Big Apple!

More broadly this morning, we received the US MBA Mortgage purchase applications for the week ending April 16th.  The purchase applications index was down -2.0%, the re-finance index was down -1.7%, and the total index was down -1.9%.  While not catastrophic for sure, this continues the trend, no doubt driven by higher rates, of more tepid demand.  This dynamic, combined with low inventory, has been to the detriment of home sale activity across the nation. Needless to say, we still like our Best Idea Short call on Redfin (RDFN).

The “news” of the morning, though, is more related to our ever-active Tweeter-In-Chief who blasted out this beauty earlier this morning:

"Our relationship with Russia is worse now than it has ever been, and that includes the Cold War. There is no reason for this. Russia needs us to help with their economy, something that would be very easy to do, and we need all nations to work together. Stop the arms race?”

When he gets back from vacation, Keith will probably put me in the penalty box for giving one of the President’s tweets any air time, but this morning they are moving the markets.  Even if just a re-direct from personal issues, this rebuke to Russia has Treasuries spiking and equity futures getting spanked. Another glorious day of investing in the Age of Trump! 

On the global interest rate front, we have a couple of mildly more hawkish comments out of the ECB:

  • ECB President Draghi was answering questions at a European student conference and noted he “expects wages [and] inflation to rise as the economy improves”; and
  • The ECB’s Hansson speaking at an event at Frankfurt University says the “euro-area economy’s recent improvement is expected to accelerate inflation” and adds “potential side-effects of policy must be monitored.”

Is it a bird, is it a plane... no it’s a European Hawk!

An interestingly positive new development out of Europe, Portugal is expecting to break its 25-year long budget deficit.  According the Portugese Finance Ministry, the country is expecting a budget surplus of 0.25% of GDP in 2020, which is a year ahead of schedule. Imagine that . . . a government beating its fiscal goals to the upside! Keynes must be rolling in his grave.

In the category of “Not Much of A Surprise”, data was released from Moody’s overnight that show global retailers reached their highest level of debt defaults ever (ever being shorthand for a very long time!).  In the months of February and March, a total of four retailers defaulted in each month. This is the most in a single month since . . . . wait for it . . . December 1998!

As we wind down the Early Look today, we’d be remiss, as a “hockey shop,” if we didn’t mention the tragedy that befell the Humboldt Broncos of the Saskatchewan Junior Hockey League.  While traveling to a playoff game this past Friday, their team bus was “t-boned” by a semi-truck and trailer. Sadly, 15 perished in the collision including about half the team. 

Our thoughts and prayers go out to their community. The middle graphic today is a picture of my daughter (Emmy) and I leaving our sticks for the boys ... just in case they need them wherever they are.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.71-2.84% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
VIX 17.31-24.93 (bullish)
USD 88.70-90.38 (neutral)
EUR/USD 1.21-1.24 (neutral)
Gold 1 (bullish)
Copper 2.94-3.16 (bearish) 

Keep your head up and stick on the ice, 

Daryl G. Jones
Director of Research

In, Out or Too Difficult - manhattan real estate