“I don't know half of you half as well as I should like; and I like less than half of you half as well as you deserve.”
- Bilbo Baggins, Lord of the Rings
One week into the 2nd half of 2020, is your risk management mojo cup half full or half empty?
Do you like more than half of your allocations half as well as you would prefer?
Is the half-life on half-baked long theses rooted singularly in ‘market liquidity’ narratives longer than anyone understands? Or are discriminating, cross-asset, process based allocation decisions simply too clever by a half for modern markets in myopic melt-up mode?
Are you only seeing half the picture? ….
With sovereign yields refusing to break out, volatility refusing to breakdown, Gold rising, High Yield falling, the latest cyclical rotation head fake fully faded, equal weighted benchmarks negatively diverging from their cap weighted, tech heavy brethren and phase transitions in motion across big macro factors (ie. the $USD) amidst emergent Quad 3 dynamics, it’s certainly not a time for analytical half-measures.
A halving in cross-correlations and widening sector/factor return dispersion characterize Quad 3.
In other words, the absolute and relative return path leads to both Mordor and The Shire, and the successful navigation of that dispersion will increasingly favor an alpha fellowship of the disciplined.
Learn, teach, thoughtfully collaborate.
You were given half as many mouths as ears … listen twice as much as you speak is how the saying goes, I think.
Back to the Global Macro Grind ….
There is elegance in simplicity and absent a discrete information advantage, common-sense can still serve as an effective, default filter:
Consider the following rhetorical contextualization we offered last week with respect to the latest Jobless Claims and Capex data:
- Initial Claims: This COVID shock is now nearly a full 4-months old. If you are losing your job now, 3+ months in and with consumers/business still benefitting from residual impacts of unprecedented policy support initiatives, how likely is that your job loss is “temporary”? An important corollary is that the labor recovery curve is already flattening and the longer suppressed demand and new/elevated job loss persists, the higher the likelihood for rising unemployment in adjacent industries and the higher the probability for incurring lasting, structural damage. Consensus is looking for another 1.38M in Initial Claims tomorrow.
- Capex: Would you (durably) accelerate investment spending into declining demand, depression level job loss, already negative earnings growth, an ATH in inventories, an ATH in excess capacity, an ATH in leverage, rising input costs and pervasive domestic/social/political/geopolitical uncertainty?
Again, one needn’t be a quant savant or c-suite virtuoso to conjure correct answers to those questions.
And while June has been blanketed in record rebound activity following the historic careening of the COVID cliff in March-May, one is left to cast a circumspect eye at the improvement in the June Macro data and any optimism or growth/recovery extrapolation associated with it given rising uncertainty and renewed prospects for consumer retrenchment as already flattening economic activity/recovery curves give way to reclosing’s, paused re-openings and a progressively louder clock tick on PPP fund exhaustion and enhanced U.I. benefit expiration.
Anyway, I meant to focus this morning’s discussion on housing … as Mortgage Purchase Applications are the lone high-frequency release of consequence today and as a kind of teaser piece ahead of our 3Q20 Housing Themes call next Monday (email for institutional access).
Purchase Application volume broke a two week losing streak (which followed an epic 9-week improvement run and cumulative gain of 77%), rising +5.3% W/W while accelerating to +18% Y/Y and marking a new cycle high at 325 on the Index in the latest week.
Inclusive of the caveat that Purchase Applications Volume overstates the increase in the underlying transaction closure pipeline (just because you applied for a mortgage doesn’t mean you’ll get one) as the rejection rate has invariably risen as underwriting has tightened, purchase appetite clearly remains strong.
Whether the last few weeks represent the crest in activity remains an open question, but for now we’re content to passively monitor the progression within the broader contextual backdrop:
- Lower for longer has effectively morphed into lower forever and with yield curve control seeming like an inevitability, rates should remain a protracted support to purchase appetite
- The combination of deferred demand and the mechanical rebound in activity associated large-scale reopening efforts and the first thrust of economic renormalization always promised some measure of step-function improvement in purchase demand.
- The initial rebound was further supported by the fledgling de-urbanization push and the reality that the more direct, first-order effects impacted a demographic that was least likely to own in the first place (job loss concentrated among younger, lower-education, lower-income).
- However, given the magnitude of overall job loss, tighter underwriting, and all-time tight supply conditions, both the magnitude and duration of the rebound would ultimately be constrained.
- All-time tight supply conditions in the existing market, while sitting as a limiting factor to volume growth in the existing market, would remain a marginal and relative positive for New Home demand/construction.
- We have traversed the trough in reported volume as May EHS was the final data point to reflect the cratering associated with the April nadir in activity.
- Price growth has continued to reflect modest acceleration as the supply-demand imbalance was maintained during the lockdown period. That is, while demand plummeted, supply fell by even more and thus served to support price. That imbalance remains ongoing and should continue to support HPI nearer-term.
The reported volume data are, of course, lagged and with Mortgage Apps accelerating to a new cycle high in June/July, the Purchase palooza looks set to persist for another month, at least …. which will flow through and manifest in the reported June/July EHS data over the next two months.
For now, the new home market continues to look better to us than the existing home market, boding favorably for the homebuilding industry.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.62-0.71% (bearish)
SPX 3000-3197 (bearish)
RUT 1 (bearish)
NASDAQ 9862-10,505 (bullish)
Tech (XLK) 100.83-107.72 (bullish)
REITS (XLRE) 33.30-36.29 (bullish)
Utilities (XLU) 54.87-58.35 (neutral)
Financials (XLF) 22.03-23.81 (bearish)
Shanghai Comp 3094-3469 (bullish)
Nikkei 210 (bearish)
DAX 110 (neutral)
USD 96.48-97.71 (bearish)
Oil (WTI) 37.56-41.52 (bullish)
Nat Gas 1.55-1.92 (bullish)
Gold 1 (bullish)
Copper 2.63-2.82 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
