Doug KassDoug Kass- NYSE volume 3% below its one-month average;
- NASDAQ volume 10% below its one-month average
- VIX: down 0.06% to 15.38
BY Doug Kass · Sep 25, 2024, 4:31 PM EDT
As of 3:30 p.m. the market has, for the third day in a row operated in a narrow range.
Today's "things":
* In premarket trading I added to OXY long at $51.99 (later in the day I added at $51.32) and shorted more SPY at $571.02 and QQQ at $484.89.
* With S&P cash +5 handles at around 10 a.m., I reinstituted SPY and QQQ short calls — raising my Index shorts exposure to medium sized.
* Added back to SLB long at $41.89 (-$1.10) after reducing a week ago.
* Also reinitiated energy longs on weakness — CVX at $143.71 (-$3.50) and XOM at $114.25 (-$2.50).
* Added to MCD short at $300.40.
* I covered some BX (-$3) at $154.40 — it's now -$5.10 at $152.45.
* Shorted more TOL at $152.72.
* Added to CURLF long $2.98.
BY Doug Kass · Sep 25, 2024, 3:50 PM EDT
Back long small CVX at $143.71 and XOM at $114.25.
I have a scale to buy lower.
BY Doug Kass · Sep 25, 2024, 2:10 PM EDT
Exactly a week ago, I substantially reduced my Schlumberger SLB position from medium-sized to small-sized.
I am adding back now at $41.89.
BY Doug Kass · Sep 25, 2024, 2:02 PM EDT
* I am a put(z)!
What a difference a day makes
24 little hours
Brought the sun and the flowers
Where there used to be rain
My yesterday was blue, dear
Today I'm a part of you, dear
My lonely nights are through, dear
Since you said you were mine
- Popularized by Dinah Washington, What A Difference A Day Makes
I might have been off by a day — as what a difference a day makes (from yesterday):
Occasionally I make stupid short-term market forecasts — I call them a Ludacris Forecast.
Today's forecast is that the S&P's 6 or 7-day advance comes to an end.
If you really want to be reckless and you agree with me the September 24 0DTE $571 put is trading at $0.68.
I don't trade these speculative weapons of mass destruction but I did buy ONE put.
Because I am a put(z).
By Doug Kass Sep 24, 2024 2:05 PM EDT
BY Doug Kass · Sep 25, 2024, 1:55 PM EDT
I suspect I will get another chance to buy back OIH as well as CVX and XOM.
Meanwhile I just added a slug of OXY at $51.32.
BY Doug Kass · Sep 25, 2024, 1:32 PM EDT
* Just as Powell was wrong on inflation being transitory in 2020-22, housing analysts were wrong in 2022-24 when homebuilding stocks soared (in large measure because of the freezing up of the existing home market).
* Both are likely to be wrong again in this cycle.
* The Treasury curve has been "un-inverting" since the 50-basis point Fed rate cut - but not in the way future homebuyers want (with short rates falling but the 10 year (which mortgage rate is measured upon) inching up. Specifically, despite the half-point cut in rates, the yield on the long bonds have risen for six consecutive days (mortgage rates are tied to the ten year and not to short dated fixed income securities).
* Given the spectacular rise in home prices, home affordability is back to 2007 levels (despite lower short rates).
* With existing home available for sale likely to rise and home prices elevated - homebuilders' incentives will also like rise.
* Homebuilders' pricing power (so strong over the last few years and supportive of EPS), sales, profit and profit margins may be problematic (particularly relative to the optimistic consensus.
* I am short four homebuilder stocks.
As a housing analyst in Kidder Peabody, fresh out of Wharton, I cut my teeth on following the housing and recreational vehicle industries.
After years of research I concluded that there were many reasons why the sector deserved a below market valuation (long lead time, capital intensiveness of land acquisition, interest rate/business cycles weighed on the ability of housing participants to deliver consistent returns, etc.). And that has been the way its been -- as homebuilder price earnings multiples have been over the decades that passed have been well below the market average.
Nearly every analyst was optimistic when the Federal Reserve began its monetary loosening during Covid around 2020 -- as the Fed ultimately took interest rates to zero (and mortgage loans under 3% were abundant). The residential real estate sector stock prices made some progress until late 2021 when, with growing inflationary pressures and supply chain interruptions, lead to the anticipation that Fed policy would reverse and tighten.
In March 2022, as the Fed abandoned zero-interest rate policy (ZIRP), the analysts abandoned their optimism. Initially, over the next three months or so they were right, but about six months after the rate cutting began (late in the second half of 2022) homebuilding stocks embarked upon an unprecedented move higher.
The analysts (and the Fed) failed to understand that in a backdrop of Fed tightening and rising mortgage rates, the extended and near fifteen year period of zero-interest rates would serve to lock out sellers from selling (who wants to substitute a 2.75% mortgage rate with what was at one point over 7.50%?). This rate move set up for an unexpected outcome -- in which housing prices would become among the best market actors, stock prices catapulted higher (and with it homebuilders' profitability) -- amazingly this was not seen or forecast by the Federal Reserve and certainly not by housing analysts who had previously turned bearish.
Indeed this scenario (again, unexpectedly by most) created the ideal position for home builders who, in the absence of existing home inventory, had product available (they are built to build despite the external environment) -- the homebuilders had the land to build on and had the balance sheets to buy down and provide buyers with subsidized mortgage rates well below the market rate.
In summary, homebuilders, despite the near universal negativity (and seeming counter-intuive logic) in the face of the tightening phase that began in March 2022, were in the right place at the right time. As I wrote, homebuilders had the product, while the existing housing market was frozen. And they had the balance sheets (compared to poorly financed and smaller competitors) to buy down mortgages for new buyers (a big competitive advantage).
Seeing this (as a contrarian), about two years ago, I took a meaningful position (long) in Green Brick Partners (which rose from the mid $20s to a high of $83). (Note I have subsequently sold my long of GRBK and I am now short).
Today housing analysts might be making another mistake by maintaining their optimism.
Specifically, the likely turn in Fed policy from tightening to easing could produce another unexpected market condition - freeing up the formerly frozen supply of existing home inventory. Importantly, as I have noted in recent months, this is occurring when housing affordability is poor and back to 2007 levels.
From Wolf Street... Demand for Existing Homes Wilts, Supply Spikes to Highest for any August since 2018, Prices Dip, Despite Mortgage Rates that Have Plunged for 10 Months | Wolf Street
Unfortunately, the favorable supply/demand condition facing homebuilders over the last two years (that I just elaborated upon) has produced record high housing prices just as the domestic economy (and the consumer, in particular) is showing weakness.
With record high home prices and, despite lower mortgage rates - affordability remains my major concern:
Already homebuilders' orders and backlogs have begun to disappoint. We first saw this in DR Horton's recent disappointing results and then, again, after the close when KB Homes new orders were flat (versus +9% projected by the consensus).
KB Home - KB Home Reports 2024 Third Quarter Results
Importantly, third-quarter profit margins were weaker than expected and forward margin guidance was weak at D.R. Horton DHI and KB Home KBH.
With the existing home-for-sale market freeing up, days on the market will likely continue to float higher:
From July:
This week I sold out of a multi-year long holding in Green Brick Partners (GRBK) and I began to short the shares of Toll Brothers (TOL) and D.R. Horton (DHI) .
Once again, this is a contrarian call.
Homebuilder stocks have been league leaders.
The bears on homebuilders over the last two years made the mistake of not realizing that the supply of existing homes would decline appreciably as interest (and mortgage) rates climbed — as basically fifteen years of zero interest rates allowed an opening to refinance at unprecedented low mortgage rates. Why upgrade your home, after all, with a 3% mortgage rate to replace it with a somewhat nicer home with a 7% mortgage rate.
With rates slipping now, the lack of home affordability at record high levels, and employment rising — a squeezed consumer (suffering from high stacked or cumulative inflation since 2020) may result in a reversal in home pricing power and a rapid increase in inventory/supply may lie ahead. (See below)
Moreover, a consequential drop in equities could also reverse the positive wealth effect that was a tailwind for home purchases (particularly the most expensive homes) over the last four years:
The change in mix was very pronounced in expensive markets that depend more on stock prices than on mortgage rates, where many high-end buyers — including those now riding the AI bubble — pay cash, often with funds either obtained from the sale of stocks, or borrowed against their stocks.
For example, the luxury market in the San Francisco Bay Area. Luxury is over $5 million. According to Compass’ luxury report for the San Francisco Bay Area:
It is in the most affluent counties where high-tech industry is concentrated – and the centers of what is being described as the “AI boom” – that luxury home sales truly soared in Q2.
San Francisco County and Santa Clara County (incl. San Jose) “saw year-over-year increases in $5-million+ home sales in Q2 2024 of 54% and 63% respectively.
The circle of seven extremely expensive communities circling Stanford University – on either side of the San Mateo/Santa Clara County line – saw a year-over-year Q2 increase of 92% in $10-million+ sales.
The most affluent households are typically much more affected by changes in stock markets – and in the Bay Area, by the soaring Nasdaq in particular – than by interest rates: Many of these buyers pay all-cash…. And, of course, many employees of companies such as Nvidia have suddenly become very wealthy indeed.
To the homebuilder bulls the stocks remain cheap – after all price-to-earnings ratios are nearly half that of the S&P Index. But this is always the case for the sector (and for cyclicals in general) – the valuations always appear to look inexpensive (e.g., DHI trades with a price/earnings ratio of only 12x) at the top! (We look to CNBC for the consensus, here a panelist advances the conventional notion that homebuilders are cheap (Trade Tracker: Stephanie Link buys more D.R. Horton and Seagate and sells CDW from cnbc.com) because of the conventional view that interest rates will drop!)
As noted in Wolf Street's analysis: Here Comes the Inventory of Vacant Homes: With Buyers on Strike despite Lower Mortgage Rates, Supply Spikes to Highest in 4 Years. Sales Drop Further except at High End | Wolf Street:
Mortgage rates have dropped to about 6.8%, down by a full percentage point from October last year, and yet sales of existing homes have plunged, and vacant homes for sale are coming out of the woodwork, the same vacant homes that the industry said didn’t exist, the second and third homes that people had moved out of but didn’t sell when they bought a new home over the past few years in order to ride the price spike all the way to the top. So now it’s time to sell those vacant homes. And supply in June spiked to the highest level in four years.
Sales of existing homes of all types – single-family houses, townhomes, condos, and co-ops – fell 5.4% in June from May on a seasonally adjusted basis, and also by 5.4% year-over-year to an annual rate of 3.89 million homes, the third-lowest sales volume since the depth of the Housing Bust in 2010, behind only October and December 2023, according to the National Association of Realtors (NAR) today.
“We’re seeing a slow shift from a seller’s market to a buyer’s market. Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis,” the NAR said in its report (historic data via YCharts):
Supply spiked to 4.1 months in June at the current rate of sales, the highest since May 2020, and just a hair below the Junes in 2019 (4.3 months), 2018 (4.2 months), and 2017 (4.2 months).
Inventory for sale jumped by 23.4% year-over-year, to 1.32 million homes, according to NAR data. At the same time, sales dropped 5.4% year-over-year. This surge in inventory combined with the drop in sales caused supply to spike by one-third year-over-year, to 4.1 months in June, from 3.1 months in June last year.
And normally, supply remains roughly stable or declines from May to June, but not this June. This June it spiked. There is a game-changer underway (historic data via YCharts):
Price reductions continued to surge. Of the active listings, 37.6% had reduced prices in June, the highest share of reduced prices for any June, except June 2022, in the data from Realtor.com going back to 2016:
After a spectacular and unexpected rise in homebuilder stocks there is now a universal belief on the sell side that homebuilding stocks are attractive — the analysts were wrong in the upswing (when rates were rising) and they could be wrong again on the downswing (when rates are falling).
* The Treasury curve has been un-inverting since the half-percentage point Fed rate cut, but not in the way future home buyers want (with short rates falling but the 10 year (which mortgage rate is measured) inching up.
* With resale inventories finally rising (with lower mortgage rates), competition with homebuilders (producing new homes) will intensify.
* Homebuilder incentives are likely to expand and — as night follows day — homebuilders' pricing power, sales, profits and profit margins may be in jeopardy.
BY Doug Kass · Sep 25, 2024, 11:45 AM EDT
BY Doug Kass · Sep 25, 2024, 11:26 AM EDT
Masterhedge
Tier 1 Alpha
BY Doug Kass · Sep 25, 2024, 11:11 AM EDT
The shares of investment short Blackstone BX are -$3.50 (or -6%) this morning.
The proximate cause is likely the early morning disclosure of the company's (weaker than expected) preliminary estimate regarding revenue the company expects to record related to realized gains for the July1-September 24 interim interval:
I covered a small amount in the hole at $154.44 but I plan to re-short on any rally. My view is that the shares of BX and the other private equity companies are very overvalued.
BY Doug Kass · Sep 25, 2024, 10:57 AM EDT
BY Doug Kass · Sep 25, 2024, 10:11 AM EDT
With S&P cash +5 handles, I am reinstiuting SPY and QQQ short calls - raising my Index shorts to medium sized.
BY Doug Kass · Sep 25, 2024, 10:06 AM EDT
From JPMorgan:
US: Futs are weaker pre-mkt, with SPX outperforming, but off their overnight lows. Pre-mkt Mag7 is lower with weakness in Semis. Bond yields are mixed, and USD has a slight bid. Cmdtys are mostly lower as it appears there is muted follow-through to China’s stimulus-induced buying. Today’s macro focus is on New Home Sales, 1x Fedspeaker, and the 2Y and 5Y bond auctions.
and...
EQUITY AND MACRO NARRATIVE: Yesterday’s major events were the China stimulus package and the weaker Consumer Confidence print. The market shrugged off a weaker Consumer Confidence print, which pointed to increasing unemployment and presumably lower spending, to close near the highs. The combination of events acted as an anchor on small-caps while Cyclical sectors/sub-sectors outperformed including, Materials, Cyclicals, Semis, Retailers, Autos, Transports, and even ARKK. Chinese ADRs were the clear standouts and 44% of EEM’s 13.2% YTD gains have been achieved in the last five days. Commodities were generally bid with base metals the standout. If China is able to gets its growth trajectory above its target, then will be a boon for global growth but may reverse a key source of US disinflation via Goods/Core Goods. This phenomenon is not a near-term risk factor but likely a complicating variable for 2025 views of Fed activity. Keep an eye on oil and Energy Equities, to see if there is buying there on the back of China stimulus.
BY Doug Kass · Sep 25, 2024, 9:49 AM EDT
“As goes GM, so goes the Nation.”
- Charles Wilson (CEO of General Motors in 1953 congressional hearings)
Our newest short GM, is -$2.72 on the opening (-6%).
BY Doug Kass · Sep 25, 2024, 9:44 AM EDT
Summary from Goldman Sachs:
Despite the more bullish view, with the stock up 28% over the last 6 months vs an average of +20% for the builders under our coverage, we believe much of this is captured in the valuation, leaving us on the sidelines.
Goldman revises its EPS forecasts and price target:
Maintain Neutral Rating: Given guidance
F2024 EPS estimate stays at $8.35, while F2025 moves to $9.65 from $9.60, and our F2026 EPS estimate is now $10.40 from $10.35. As such, our 12-month price target moves to $85 from $82, which is based on 1.5x (unchanged) our NTM tangible book value forecast.
BY Doug Kass · Sep 25, 2024, 9:30 AM EDT
* Added to OXY at $51.99
* Reshorted SPY $571.02 and QQQ $484.89
BY Doug Kass · Sep 25, 2024, 9:27 AM EDT
-EBS +15% (confirms ~$400M in orders for 2024 and 2025 related to vaccinia, smallpox, and mpox portfolio)
-SEEL +11% (signs Material Transfer Agreement with US Army Medical Materiel Development Activity (USAMMDA) to evaluate SLS-002 for treatment of PTSD; files to sell stock and warrants of an indeterminate amount and announces 1-for-16 reverse stock split)
-SLND +9.7% (awarded $132M Water Treatment Plant project for the Bureau of Reclamation)
-HRTX +7.2% (FDA approved Heron Therapeutics' Prior Approval Supplement Application for ZYNRELEF® (bupivacaine and meloxicam) extended-release solution VAN)
-CATX +5.5% (Truist Initiates CATX with Buy, price target: $21)
-FLUT +4.6% (guidance, announces share buyback program)
-ICU +4.0% (reports enrollment momentum in its pivotal adult AKI Trial)
-TCBP +3.5% (announces Site Opening of Guys and St. Thomas Hospital in the ACHIEVE UK Trial)
-CTAS +3.0% (earnings, guidance)
-HPE +2.9% (Barclays Raised HPE to Overweight from Equal Weight, price target: $24 from $20)
-DASH +2.1% (Keybanc/Pacific Crest Raised DASH to Overweight from Sector Weight, price target: $177)
-VTNR -58% (Vertex Energy and its lenders initiate formal Restructuring Agreement)
-SFIX -25% (earnings, guidance)
-TH -24% (disbands its Special Committee, to remain independent; affirms guidance)
-BKSY -19% (files to sell public offering of common stock of indeterminate amount)
-TSVT -10% (discontinues enrollment in Phase 3 KarMMa-9 study with Bristol Myers Squibb)
-WINT -8.3% (announces topline results from Its Phase 2b SEISMiC Extension Study of Istaroxime in Early Cardiogenic Shock)
-TCOM -6.5% (Prosus said to have fully exited stake in Trip.com in a $743M block trade)
-KBH -6.0% (earnings, guidance)
-HYZN -4.5% (enters $50M stock offering agreement with Roth Capital)
-RITM -4.3% (files to sell 30M common share public offering)
-JD -4.0% (profit taking)
-NOW -3.6% (weakness from US probe of SAP and Carahsoft)
-WOR -3.4% (earnings)
-GM -3.3% (Morgan Stanley Cuts GM to Underweight from Equal Weight, price target: $42)
-BABA -2.8% (profit taking)
-BIDU -2.8% (profit taking)
-SAP -2.1% (US said to be probing Co, software reseller Carahsoft and other companies for potential price fixing against US government agencies over a period of a decade)
BY Doug Kass · Sep 25, 2024, 9:12 AM EDT
Chart from 8:19 a.m. ET:
BY Doug Kass · Sep 25, 2024, 9:00 AM EDT
Chart from 8:38 a.m. ET
BY Doug Kass · Sep 25, 2024, 8:46 AM EDT
Bonus — Here are some great links:
What Can Year-to-Date Gains Tell Us About the Fourth Quarter?
Six Things to Know About Rate Cuts
Spotting an Energy Sector Generated Breadth Thrust
Mastermind Preview (When this is your header, you/markets may be in trouble! from DAK)
BY Doug Kass · Sep 25, 2024, 7:12 AM EDT
The Short Range S&P Oscillator has risen from 6.86% to 7.36% overnight — to an increasingly overbought state.
BY Doug Kass · Sep 25, 2024, 6:30 AM EDT
* This is of consequence...
BY Doug Kass · Sep 25, 2024, 6:12 AM EDT
BY Doug Kass · Sep 25, 2024, 5:55 AM EDT
Wolf Street howls about U.S. Treasury holdings.
BY Doug Kass · Sep 25, 2024, 5:45 AM EDT