Ouch. That new home sales data was bloody awful...no 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!
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!
7 comments
Click here for comments1994/5? 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.
ReplyTrue, 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.
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!)
ReplyI'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.
ReplyMr. Macro Man,
ReplyThough 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,
RJ
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ReplyOn 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.
ReplyJust to say there's no free ride from statistics.
CB