I suspect, under normal conditions, Lennar's LEN results augur poorly for home builders tomorrow.

From the Comments Section:

STAFF

34 minutes ago

Lennar lower backlogs on bottom end of unit deliveries, more tomorrow... Gross margin came in at 22.5% v 23% estimate and forecast 4Q margins flat (22.5%) v. 24.5% consensus estimates)

Chart from 4:46 p.m.:

- NYSE volume 13% above its one-month average;

- NASDAQ volume 5% above its one-month average;

I added to the homebuilder shorts because I suspect that sooner rather than later (and trading at nearly 2.5-times book value), investors will realize that mortgage rates are more aligned with the 10-year U.S. note yield than federal funds.

I am leaving early to take care of some family issues.

Thanks so much for reading my Diary today.

Enjoy the evening.

Be safe.

Given that I was so wrong yesterday I was generally inactive today.

I moved back to a small net short.

I am getting this column out a bit earlier than usual today.

* I sold my ARM long at $143.50 in premarket trading.

* I added to MSOS $6.84.

* I shorted more BX $157.31, DHI $200.72 and TOL $155.92. 

* I reduced JOE $60.61 and DIS $94.55 longs. 

* I reduced ELAN $15.10.

* I added to OXY calls.

* I added to GTBIF long $10.30.

I am reducing my ELAN long further ($15.10)

Once again I am seeing a large buyer in Occidental Petroleum OXY.

I added calls today.

skeptcl

Question of the year:

Do you want to be right about the Fed, markets, economy, housing, politics, etc based on your personal feelings and beliefs, or do you want to make money? Yes at some point we will have a recession, but some here have been calling for one for years.

We are 1 1/2 weeks away from the start of what has been in the past the best 3-4 months in the markets. Not saying it will happen again, but things are lining up that way again. For all the pearl clutching about the Fed cutting 50bps, don't forget that gas is below $3/gal in many parts of the country, putting extra cash in consumers pockets---which they will spend, especially the lower-middle class. That spending is multiplied across local & regional economies.

I remember back in the 80s David Stockman had Reagan's ear about the debt & deficit, saying doom, gloom & default were right around the corner. Now I see he's back at it--actually surprised he's still alive--now that the doom & gloom chatter has increased. Couple of market opinions to keep in mind:

1. Investing based on your political beliefs or personal economic views are one of the quickest ways to lose money.
2. Don't fight the Fed...

I am reducing JOE $60.61 and DIS $94.55 longs — as upside reward vs. downside risk deteriorates.

Bret Jensen

STAFF

Just another bubble to watch dept.

Like many risk assets, homebuilder stocks rallied markedly in the months leading up to the Federal Reserve's first interest-rate cut in four years, propelling their valuation to great heights. Bank of America Global Research believes housing demand will need to improve in order to justify current high valuations.

Homebuilder stocks have outpaced the broader stock market this year, with the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) climbing 27% year-to-date vs. S&P 500's 18% ascent. The Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL) jumped 56% over the same period, while the iShares U.S. Home Contruction ETF (ITB) gained 25%.

BofA analyst Rafe Jadrosich pointed out that homebuilders are currently trading near 2.3 times price-to-book, sitting well above the high-end of the historical range.

"The last two times the sector reached the current valuation level (2018 and 2021), stocks pulled back sharply,

As of 10:30 a.m.:

Breadth

S&P 500 Sector ETFs

Nasdaq 100 Heat Map

Oaktree's Howard Marks' new commentary: "Shall We Repeal the Laws of Economics? (oaktreecapital.com)"

From Peter Boockvar:

Claims data/Philly mfr'g/Long rates rising after rate cut on short end

Initial jobless claims fell to 219k from 231k and that was 11k less than expected. The 4 week average fell to 228k from 231k. Continuing claims dropped too by 14k to 1.829 and that is the lowest since June.

Bottom line, as measured here, the pace of firing’s remains modest and with regards to the drop in continuing claims, it’s uncertain whether people are finding new jobs or who have benefits that are expiring. As seen with many data points, hiring has clearly slowed and I’m leaning towards the latter.

Long rates continue to rise as if Powell is going to get aggressive on the short end, the long end is a sale here (rates going higher) I believe and something I’ve said is a big possibility when the Fed starts cutting. This level of 3.65-3.75% continues to hold in the 10 yr, which to say again, was the launch pad for last summer’s rise to 5% when the BoJ got rid of YCC. And if it continues, where the Fed keeps cutting short rates and long rates rise, people’s heads will explode as we’ll see mortgage rates rise and anyone in CRE will just be that much more frustrated. That is NOT the scenario the Fed wants, neither does the Federal Government and foreigners won’t be happy either who hold this paper, especially if the US dollar continues to weaken.

4 week avg Initial Claims

Continuing Claims

Following the upside surprise in the September NY, the Philly index did as well but more modestly as it came in at +1.7 from -7.0 and thus around the flat line. The estimate was zero.

The internals though were pretty mixed as new orders fell to -1.5 from +14.6 and backlogs dropped to -6.7 from +3.2. Inventories rebounded to positive territory after 5 months below. Employment did too at +10.7 vs -5.7 in the month before.

Just as the Fed is ‘confident’ on inflation, prices paid rose 10 pts m/o/m to 34, the highest since December 2022. Prices received is at the highest since January 2023.

The 6 month business outlook was little changed at 15.8 vs 15.4 in August but still 10 pts below the 6 month average. Of note, capital spending plans jumped to 25 from 12, in contrast to the negative print seen in the NY survey.

Bottom line, as seen in the NY and Philly indices, it seems that manufacturing is trying to put in a bottom and we’ll see if the Fed rate cuts will encourage some inventory rebuilding.

Philly Mfr’g

Prices Paid

New Orders

* Sold the balance of my ARM long $143.54.

*Shorted more BX $157.31, DHI $200.72, TOL $155.92. 

* Purchased more MSOS $6.84.

New high:

Buffett Indicator Valuation Model (currentmarketvaluation.com)

It is different this time:

Long rates continue to rise as if Powell is going to get aggressive on the short end, the long end is a sale here (rates going higher) I believe and something I’ve said is a big possibility when the Fed starts cutting. This level of 3.65-3.75% continues to hold in the 10 yr, which to say again, was the launch pad for last summer’s rise to 5% when the BoJ got rid of YCC. And if it continues, where the Fed keeps cutting short rates and long rates rise, people’s heads will explode as we’ll see mortgage rates rise and anyone in CRE will just be that much more frustrated. That is NOT the scenario the Fed wants, neither does the Federal Government and foreigners won’t be happy either who hold this paper, especially if the US dollar continues to weaken.

-Boockvar

Upside:

-MAXN +11% (provides update on detained solar modules from Mexico)

-OMIC +11% (Concentra Biosciences &Tang Capital Mgmt discloses 14.9% stake; Discloses non-binding proposal to acquire remaining shares for $12.00/share cash)

-TRIB +11% (to initiate CGM market study in India in furtherance of intended collaboration with Bayer)

-DRI +7.3% (earnings, guidance)

-GEVO +7.3% (annnounces sale of ~$20M of Investment Tax Credits Generated by the Gevo NW Iowa RNG Facility under Inflation Reduction Act)

-MBLY +7.3% (Intel confirms no plans to divest its majority stake in Mobileye)

-EVAX +6.7% (launches enhanced version of its clinically validated AI-Immunology platform with an update of its EDEN AI prediction model)

-LBPH +4.2% (receives Rare Pediatric Disease Designation and Orphan Drug Designation for Bexicaserin (lp352) in Dravet Syndrome)

-DASH +3.8% (BTIG Raised DASH to Buy from Neutral, price target: $155)

-AIM +2.7% (reports Preliminary Data in Phase 1b/2 Study of Ampligen and Imfinzi as a Combination Therapy for Late-Stage Pancreatic Cancer)

-GLW +2.7% (affirms Q3, issues additional guidance)

-X +2.7% (earnings, guidance)

-CRWD +2.5% (focused on the path to $10B ARR)

-PLTR +2.3% (TRM Labs has achieved FedRAMP Moderate authorization)

-UBER +1.9% (Darden and Uber partner to introduce on-demand delivery)

-CBRL +1.7% (earnings, guidance)

Downside:

-PGNY -24% (discloses a significant client will terminate services agreement, effective Jan 1st, 2025)

-VNDA -14% (receives Complete Response Letter (CRL) from US FDA, declining Approval of Marketing Application for Tradipitant in Gastroparesis)

-CRMT -12% (prices 1.7M shares at $43.00/shr)

-SCS -8.1% (earnings, guidance)

-ALGS -6.8% (announces results from Phase 2a study of ALG-055009 for treatment of MASH)

-DAVA -4.5% (earnings, guidance)

-HESM -2.8% (prices upsized 11M shares (prior 10M) by selling holder)

-FANH -2.3% (earnings)

-HE -2.1% (discloses in tort-related legal claims in the litigation arising out of the Maui windstorm and wildfires, HEI and Hawaiian Electric would contribute a total of $1.91B to be paid in four equal annual installments; files mixed shelf of indeterminate amount)

Charts from 8:24 a.m. ET:

If one is looking for a conservative ETF short, XLU might fit the bill!

Chart from 8:36 a.m. ET:

With S&P futures +93 handles and Nasdaq futures +414 handles, needless to say, markets are cheering the 50 bps rate cut — cancelling out the indecision which characterized trading post FOMC.

To be honest, from here and over the very short term I have little confidence in what direction the markets will take.

Investors and traders will see what they want to see.

Many will be encouraged by the price momentum: Others will view this as an increasingly overbought market (the S&P oscillator remains elevated at 4.86%).

I sold the balance of my ARM long at $143.50.

The shares have rallied by more than +$45/share since the July lows.

Good stuff from Danielle DiMartino Booth:

The Daily Feather — The Smothers Brothers’ Cover Blown

Bonus — Here are some great links:

AlphaTrends

Post Election: Should You Sell in May 2025?

What Happens if the Fed Cuts Rates?

Talking Charts

This is a valuable chart for momentum-based short-term traders:

From JPMorgan:

US: Futs are ripping as part of a global risk-on trade; tip of the cap to Mike Feroli for his excellent call on the Fed yesterday. Similar to past rate cuts in strong macro environments, NDX and RTY are outperforming. Pre-mkt, Mag7 names are all higher by at least 1.6%, Semis are stronger too with NVDA +3.3%. The yield curve is bull steepening though 30Y is unchanged and USD is flat. Cmdtys are higher led by the Energy complex with precious metals outperforming base (Gold +1.3%, Silver +4.0%). The macro data today will be ignored given the dovish press conference from Powell; expect multiple indices and sectors to make ATHs today.

and...

EQUITY AND MACRO NARRATIVE: These bullets were posted into IB chats yesterday morning and the balance of the note is color designed to give additional context to the current trading environment. The TL: DR version is this: the economy is growing above trend, this should have a positive impact on earnings, so the drivers of stocks are stronger than historic trends which should yield more upside to the bull market.

· JPM TRADING DATA (Craig Cohen) – Over the past 40 years, the Fed has cut rates 12 times with the S&P 500 within 1% of an all-time highs. The market was higher a year later all 12 times with an average return of around 15%.

o Aligns with the US Mkt Intel view that this easing cycle will be most similar to the 1995 version where SPX was +2.1% one month after the first cut and +6.3% three months after the first cut. Nasdaq outperformed NDX on both a 1-month and 3-month basis; interestingly NDX underperformed SPX on a 3-month basis. RTY outperformed SPX in both time periods.

o A copy of my team's Trading the Easing Cycle note may be found here.

POWELL SNIPPETS – sourced from Bloomberg

· US economy is in a good place, cut is to keep it there

· Labor market conditions pretty close to max employment

· Retail sales, GDP show economy growing at solid pace

· It feels to me that neutral rate is probably significantly higher than it was pre pandemic

· Don't see anything suggesting downturn chances elevated

· Housing inflation is one piece that is dragging a bit

· Going to take some time, direction of travel is clear

· US MKT INTEL – Our economic hypothesis has been that the US Consumer is in a position of significant strength, certainly there are some that are constrained by cumulative inflation, but overall spending remains robust. The unemployment rate is higher YTD primarily due to increases in labor supply and not due to layoffs meaning that spending will remain higher than expected. There is a strong credit impulse in the market place with additional pent-up demand that can manifest itself in both stronger business formation, hiring, and housing demand. Powell’s press conference supported this hypothesis and the comments on the higher neutral rate mean that the bond market’s expectation for 250bps of cuts by YE25 is too many. Given this context it is not surprising to see bond yields reprice higher and for the intra-day move in stocks to move defensively (see Manish’s comments in the next section). In our view, this macro environment remains supportive of stocks and after this short-term volatility, we expect stocks to move higher, materially so.

o The most pertinent client question may be, “what do we do in October?”. Many clients agree with the macro outlook described in the previous bullet but acknowledging negative seasonality that may last into the Election, this is one of the most common questions. I do not have a strong view on seasonality so for others of the same view, perhaps the best course of action is to do some incremental buying each week into the Election, such that one is fully positioned just before the date as we expect markets to rip higher into year-end with the latest start date the day after the Election.

o MONETIZATION MENU – We favor the barbell with a heavier tilt to the Value/Cyclical side. TMT side = Mag7, Data Centers, and Semis. Value/Cyclical side = Banks, Homebuilders, Autos, Transports ex-Airlines, and RTY. We like using factor hedges of both Beta and Momentum. From a pairs trade perspective gold vs. base and DM EU vs. EM. In derivatives, we like Energy Equity upside and using downside in Chinese ADRs.

From My Friends From Miller Tabak:

Wednesday, September 18, 2024

Despite Powell’s Denial, The Fed Has Declared Victory Over Inflation

We are pleasantly surprised by the FOMC’s decision to cut rates by 50 bps instead of 25 bps, despite recent data being better than expected (more on this later). Once again, the FOMC is getting it right, albeit 3-9 months too late. There is little that could derail the Fed from hitting the 325-350 bps band, forecast in the new Summary of Economic Projections (SEP), by December 2025. The Fed is more likely to cut faster, if the labor market weakens more than we expect, than to cut slower if inflation returns.

We see two reasons for why the Fed moved so boldly. First, it is taking the correct lessons from the scare surrounding the July employment report where unemployment jumped to 4.3%. Although markets initially overreacted, and many analysts tried to resurrect their failed 2023 recession calls, it did illustrate that the U.S. is now more vulnerable to a significant rise in unemployment because job openings are now roughly equal to available workers. As Powell stated, “further declines in job openings will translate more directly into unemployment.” The U.S. remains on solid ground, but we still expect unemployment to peak at 4.5% around the end of the year. That is above its full employment level and compels the Fed to move faster.

The second reason is more surprising. The new SEP forecasts a 2.6% 2024 core-PCE rate. Given the data so far in 2024, core-PCE would have to average around 1.9% annualized between August and December, slightly below target, to match the Fed’s new forecast. Furthermore, if the FOMC is right, then y/y core-PCE inflation will hit its 2% target in March 2025. Along with its 2.1% forecast for 2025 core-PCE, the Fed is announcing that inflation risk is in the past, even though Powell insisted they are not declaring “mission accomplished.” The Fed is correct to do so. Inflationary expectations remain low and there is still no plausible mechanism that would allow for a sustained return of inflation.

Wolf Street howls about Fannie Mae.