Monday, March 26, 2007


Ouch. That new home sales data was bloody way to sugar coat that. Macro Man still believes that this is a 1994/5 story rathe than a 1990 story, but concedes that the thesis is coming under a bit of strain. The worst part of today's data was the supply figure, which shows a supply of new homes totalling 8.1 months times the most recent sales data- and that's with the notorious exclusion of cancellations.

The trade here is so obvious that Macro Man could hardly bring himself to do it. He sold 150,000 XHB @ 33.85 and bought 70,000 SPY at 142.75. This should be roughly beta-neutral and is simply a play that homebuilders will underperform the broad market- hardly rocket science given today's data!


wcw said...

1994/5? I really don't see that in the housing markets. Vacancies in the mid-'90s had been dropping for a half-decade off their '89 peak, while currently we just saw a historic spike after a half-decade of increases. Sales rates per occupied unit are coming down, but off historic highs, while in the '90s they were moving sideways in a normal range.

True, mortgage rates and the employment/population ratios have been moving similarly, but I don't think that is enough to overcome the inventory overhang and a possible return to more-usual sales rates. The result probably won't be as ugly as the 1990 collapse, which involved a recession and the aftermath of the S&L debacle. Still, there's a reason I have been shorting the homeys -- off and on, currently off -- for over a year now.

My mistake in the current trade (i.e., not getting short again going into today's number) was that I assumed the market knew it would be bad. I assumed a market that thought the spring selling season was normal would have taken the homebuilders up harder after the market's recent bottom.

Also, one question: why the XHB and not the RUF? I usually short individual names in single-stock futures, but if I wanted to short an index I'd be tempted to sell synthetic RUF.

Macro Man said...

You'll have to pardon my ignorance here, but...what is the RUF? (At least there's your answer as to why I didn't short it!)

OldVet said...

I've been shorting housing on and off too, now off. Longer term the problem won't be inventory, but prices of houses. They starting to fall. Housing bubble downturns are "slow roll" and you might as well just short housing stock and not bother with the SPY hedge. There's a ways to go to the downside for XHB. You can use the 2XShort SRS if you're feeling frisky. Conserves cash, too. But I'm the guy that lost on Shorts last week and is still mumbling in his beard.

Anonymous said...

Mr. Macro Man,
Though the mantra is often repeated, I fail to find any actionable similarity between the present period and 94/95. First and most important is the Treasury market. As the Fed was tightening in '94, market participants continuously overestimated how far the Fed was going to go, causing ten year yields to climb all way to 8%, from which they precipitously declined to 5.5%. Today, the market continuously doubted the Fed on the way up and have preemptively priced in cuts, thus ten years peaked at 5.25% and now sit roughly 12% lower. If we were to experience a similar easing of financial conditions today like we did in 94/95 we would have to see the yield on the ten year around 3.5-3.7%. What kind of economic environment might we expect if treasuries were at such shallow levels? In fact, the last time we were there the Fed was running around worried about falling into the deflationary soup. That 30% fall in yields in 94/95 gave wind to the backs of asset prices, and especially helped real estate (commercial and residential). Is it likely that we are to see renewed vigor from this crucial sector when one obviously is falling from an historic peak and another seems likely to be getting near or at its top (commercial RE)? Second, the 94/95 period was not preceded by an historic bubble in equities and sentiment and then a shallow recession during which interest rates scrapped the bottom of the barrel, but rather by a nasty recession that helped clear the decks of both valuation and sentiment in real estate and equities. It seems reasonable to contend that too many extrapolated the pain of the ’90 downturn and were unduly scared by what appeared to be an overly eager Fed. Today it seems far too many are extrapolating 94/95 and its subsequent run and overly kind Fed w/out taking into account the excess in sentiment, valuation and the close history of very low yields.
Though there are reasonable arguments to be bullish, a reply of 94/95 does not seem to be one.

Great Blog and Cheers,

Macro Man said...

I have to concede that the 1994/5 comment was ill-conceived. What in was getting at was the underlying view that the current slowdown is a mid-cycle pause rather than a tilt into recession. I was also focusing on supply; I thought that we would soon start to see some improvement in the supply figures, as the start:sales ratio was recently at an all time low. So far, I have been dead wrong, and there appears to be little prospect of not being wrong in the relatively near future: hence the trade!

I have long thought that the appropriate parallel is not in the US at all, but
To date, I have seen little to change that view. If the analogue holds, it actually suggests that the homebuilders could underperform for a substantial period of time. I hope to write something on this later in the week.


wcw said...


The former, purveyed by the ISE, is a pure index. Here are the RUF components, and here is the XHB. The former is a homebuilder index, the latter more of a segment index including suppliers.

The problem for the trader is that the RUF exists only to list options. If there were futures, it would be perfect, but there aren't. Naturally, once there are options there are synthetics, which I suggested. Still, synthetics can be expensive with two sets of spreads, and RUF option spreads are not as narrow as you would like. Still, if you must have a pure homey play, the RUF is it for you. Or, as I noted, you could do as I do when I feel like shorting the homeys and sell a basket of single-stock futures, where the spreads *also* aren't great, but at least you have many opportunities to leg into your position gradually, and the option to weight as you choose rather than as the index chooses.

Charles Butler said...

On the other hand, there is a study (no link, and I hope I didn't read about it here) that correlates high rates of home ownership to high unemployment - people unwilling to move in search of work because they like it where they are, would take a loss on the sale of the house, or whatever.

Just to say there's no free ride from statistics.