It was a once in a lifetime opportunity ...

... to ask Charlie and Warren some tough questions...

RIP Charlie -- you have been a witty voice of reason and a god to us value investors.

New York Stock Exchange volume was 370 million shares, 14% below its one-month average;

Nasdaq volume was 3.61 billion shares, 2% below its one-month average;

NYSE: Highs : 20 Lows : 12

Nasdaq: Highs : 40 Lows : 66

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Market on close is $3.4 billion to the buy-side.

I have a 3:45 pm research call.

I should be back by 4:30 pm.

Radio silence in the interim.

I moved to very large in OXY today.

Housekeeping item.

Out of Verano Holdings VRNOF for a profit.

From Peter Boockvar:



7-yr Auction Weak

After a soft 2 yr auction and a mixed 5 yr, today's 7 yr Treasury auction was weak. The yield of 4.399% tailed by more than 2 bps. Also, the bid to cover of 2.44 was below the one yr average of 2.53 and the lowest since April. And, dealers got stuck with 20% of the auction which is the most since November 2022.

A few dynamics here that we need to consider if the Fed starts to cut rates next year. What happens if 1)long rates go up in response as the long end doesn't want the Fed to get soft on the inflation fight, 2)the dollar really sells off resulting in a jump in oil prices and other import costs and 3)foreigners sell US assets, particularly Treasuries, all at the same time maybe 4)the Fed continues with QT even as they cut short rates?

I believe that is a serious risk for long term Treasuries and after this rally runs it course, I think in 2024 we'll retest 5% again, and then above that. Short term Treasuries remain our favorites along the curve, TIPS too.

The 10 yr yield is off its lows as is the dollar in response. By the way, you see gold today? Maybe another test coming at the record highs as it's just $15 away.

* Market structure remains an underappreciated risk... as it did in October, 1987

The Wizard of Oz, 1939 

Every day we meet the market's wild animals. 

Not lions, tigers and bears... but risk parity, machines and algos. 

The market's structure - towards passive investing that worships at the altar of price momentum - remains an underappreciated market risk. 

Yesterday I posted this, another risk - the proliferation and expansion of zero days to expiration options in gold, oil and treasuries. 

Watch the unpredictable and random intraday market moves, today and in other days, and you will get a sense of their outsized influence. 

The nice thing about being a fundamentalist and thinking you have a sense of value - these sort of violent swings provides the unemotional and opportunistic trader and investor with frequent opportunities.

I added to St. Joe JOE on the recent drop from its highs. 

There is no sell-side research on the company but one can get some sense of the level of business by going through the Florida county's originations activity. 

In October, sales were robust with over $35 million of homes sold (65-70) at an average price of about $525k. 

Cash buyers represents about 2/3 of the unit sales and the average loan to value was over 50%.

That first time home buyer got no relief in September in terms of getting a break on home prices according to S&P CoreLogic as prices rose another .7% m/o/m and by 3.9% y/o/y. Their home price index from December 2019 thru September is up 47% and now buyers have the curse of not just paying this high price but to do so with a 7.5% mortgage rate if they can't pay in cash. 

To state again, the only reason why the new home sale median price was down yesterday was mostly mix as there was a drop in the number of homes priced above $500,000 relative to those priced below which in turn lowers the median. Builders are certainly discounting but that has not led to any drop in existing home prices.



At some point, home prices I would think would drop as buyers pause in response to sticker shock but the stubbornness of the continued rise has certainly surprised me, notwithstanding the lack of supply. Those who own homes, about 65% of households, of course don't want prices to fall but we need the first time home buyer in the market to create a more fluid supply/demand dynamic and one that doesn't choke them financially. 

S&P CoreLogic Home Price Index

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The November Conference Board's consumer confidence index was 102 after a downward revision of 3.5 pts to October which took it to 99.1, the lowest since July 2022. The Present Situation was little changed m/o/m while Expectations did pick up by 5 pts but after falling by 3.7 pts last month and by 7 pts in the month before. One year inflation expectations fell two tenths m/o/m to 5.7% after rising by two tenths last month. About all of the confidence gain was in the 55 and over aged group. 

The answers to the labor market questions were mixed. Those that said jobs were Plentiful was up 1.4 pts but after dropping by almost 2 pts in October. Of note, those that said jobs were Hard to Get rose 1.3 pts to the highest level since March 2021. My good friends at QI Research had this great stat that Jobs Hard to Get have an .88 correlation to the US unemployment rate since 1967. With regards to expectations of employment, 'more jobs' rose .8 pts but fell by .9 pts in October. Income expectations also rose but after falling by a similar amount last month. 

The same story was with spending intentions in that the drop in October partly was recaptured in November with buying a vehicle, home and major appliance. 

This was the bottom line from the Conference Board, "Despite this month's improvement, the Expectations Index remains below 80 for a 3rd consecutive month - a level that historically signals a recession within the next year. While consumer fears of an impending recession abated slightly - to the lowest levels seen this year - around 2/3rds of consumers surveyed in November still perceive a recession to be 'somewhat' or 'very likely' to occur over the next 12 months." 

And, "write-in responses revealed consumers remain preoccupied with rising prices in general, followed by war/conflicts and higher interest rates." Remember, the average consumer is not celebrating no change in CPI for October relative to September instead of rising by one tenth as expected. They are dealing with the almost 20% rise in this index over the past few years where their wages are at best just keeping up.



Also, when it comes to the consumer there was no better read on them than what we've heard over the past three weeks with retail earnings reports. About the only bright spot was spending at discounters at TJX and Burlington and spend on sporting goods, along with health/beauty and food. 

Consumer Confidence

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Jobs Hard to Get

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The Richmond Fed's manufacturing index fell back under zero to -5 from +3. The component titled 'Local Business Conditions' fell to the lowest since May. On the labor market front now that this should be a big focus, fell 7 pts to zero, a 3 month low. Capital spending was mixed. 

Bottom line, expect another below 50 manufacturing print from ISM on Friday. 

Richmond Mfr'g

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The averages waffle a bit in a narrow range around the unchanged line.

The Dow is helped by Boeing, which was upgraded in a report. Also, aiding the bulls is a mild downtick in bond yields, but the overall theme is basically uncertainty. They will be taking their own pulse and temperature as they move about.

The bond yields remain a key point of interest to equity traders, but the changes, so far, are mild to moderate.

The calendar has a handful of Fed speakers. No one expects a major market mover out of any, however. Waller, who is thought to have a slightly hawkish bias, but certainly less hawkish this morning.

So, continue to watch the yields, which so far are having an impact, but moderate.

There is some speculation that Israel is expressing some dissatisfaction with Hamas compliance with temporary ceasefire, but again, no market impact yet.

Stay alert and stay safe.

Arthur

I added to my XOM and OXY longs.

I have added to my SPY and QQQ shorts at $455.18 and $389.435, respectively.

Here is a list of my Seabreeze longs and shorts mentioned in my Diary (as I have mentioned I am long and short other names): 

Longs



AMZN (VS) EWZ (S) ELAN (S) BAC (M) TSNDF (S) VRNOF (VS) CNPOF (VS) GTBIF (S) DIS (S) GS (S) MS (S) GRBK (S) NKE (S) FRPT (S) MSOS (M) OXY (L) JOE (S), XOM (M).

Shorts



SPY (M) calls (M) QQQ (L) MSOS calls (M) CHGG (VS) FIGS (S) HOOD (S) WOOF (VS) FRHC (S) FMC (S) RILY (S) MCD (S) SNBR (VS) CRLBF (VS) IOT (S) WGO (S) MPW (VS) FXLV (VS) XPOF (S) BITO (S) XOM puts (S).

From Peter: 

What is hotter than private credit right now in picking out an asset class? Everyday I get multiple fund offerings in my email inbox with the same sales pitch, 'with banks pulling back the lending reigns, we'll step in and give you equity like returns.' Imagine the other side of that trade though, the business that has to pay 13-15% on a loan.



Speaking today at the FT Global Banking Summit in London, the UBS Chairman Colm Kelleher said "There is clearly an asset bubble going on" in private credit and "What it needs is just one thing to trigger a fiduciary crisis." Now bubbles can last for years but understand money is flooding into private credit and while some will make prudent underwriting decisions, many won't.

The new Apartment List National Rent Report is out this morning and they said rents fell .9% m/o/m in November as the "seasonal slowdown continued this month." They say 'seasonal' because around the winter holiday things slowdown in the apartment business as people aren't looking to move right now. The y/o/y change is down 1.1% but "the national median rent is still nearly $250 per month higher than it was just three years ago."



On the supply side, "our national vacancy index stands at 6.4%, slightly higher than the pre-pandemic average" and they said, as we know, "with the construction pipeline of new apartments still near record levels, we expect that there will continue to be an abundance of vacant units on the market in the year ahead."

In terms of rental breadth, they fell in 89 of the country's 100 largest cities m/o/m and are down in 68 of them y/o/y with the "sharpest rent declines over the past year...concentrated in California markets like Oakland, San Francisco, and Long Beach, where apartment demand remains sluggish."

Year to date new rents are little changed, up .2% which compares with the spike of 18% in 2021 thru November and compares with the average of 2.9% in the three years between 2017 and 2019. Bottom line, rental growth will pick up again in the spring seasonally but it's obvious the deceleration is here and which will eventually flow thru the CPI data.



Again though, while inflation here will further cool in 2024, we are setting ourselves up for a reacceleration in the years after. That said, markets we know only care about the here and now and renters will certainly appreciate the slowdown when mortgage rates are above 7% and affordability to buy a home is tough.

In the week ended 11/8 we saw the largest decline in C&I loans outstanding since the SVB blowup in March, by $15.8b. In the following week ended 11/15 the dollar amount fell by another $2.5b to the least since September 2022 and by looking at the chart, you can see that it has essentially flat lined. So, everything going on with the US banking system, on top of the lessened demand for loans in this higher cost of capital world, and we can see there is no business loan growth.

With regards to auto loans outstanding, they stand at the least since September 2021, something surely to note if you're long anything related to the auto sector.

C&I Loans Outstanding

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Auto Loans Outstanding

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I didn't write on the Treasury auctions yesterday because I'm more interested in the longer term ones and today qualifies with the 7 yr. The 2 yr auction was weak and the 5 yr was mixed.

Likely confirming another below 50 print in Friday's ISM manufacturing index, yesterday the Dallas manufacturing index was -19.9 in November vs -19.2 in October. It was April 2022 the last time there wasn't a negative sign in front. Here were some industry comments:

Chemical Mfg:

"The chemical industry seems to be in a recession now."

Computer & Electronic Product Mfg:

"We are seeing a lot of price and lead time increases with aluminum products."

"We are working our way through a cyclical bottom as customer demand has slowed in most markets, and customers work to right-size inventory. Growth is resuming in PC/handsets, other markets are still correcting, and auto has yet to show any signs of slowing."

Fabricated Metal Product Mfg:

"I think we are on the downside of the through cycle for building products. While the professional-level activity has been somewhat consistent throughout the year, the end users are just now returning to the market."

"New orders are slow coming in."

"Our customer base is very slow to release orders. It is not a price-point issue but rather customers' concerns surrounding their uncertainty."

Food Mfg:

"Sales orders have increased here at year-end, which is a good sign after a slowdown this fall. Raw material prices have decreased, leading to improved profit margin. We raised employee wages 5 percent, with the last increase 18 months ago. We need to retain good employees, as labor turnover is still a concern. Our minimum wage is $14 an hour."

"Orders are getting pushed out. Sales volume is down since last month and earlier this year."

Furniture and Related Product Mfg:

"The Dallas area continues to be a bright spot in construction, particularly in health care and hospitality. Our largest business threats are a lack of skilled tradespeople and replacing our older workers who are retiring."

Machinery Mfg:

"Business remains slow, and we see no signs of improvement."

Paper Mfg:

"We are still in a holding pattern, with business not good but not bad either. Planning is cautious at this point."

Plastics and Rubber Products Mfg:

"Our retail sector is reeling somewhat. We'll wait and see how bad Christmas goes, but the consumer is heavily burdened."

Primary Metal Mfg:

"Customers' inventories are lower, yet they are not buying. This means their customers are slow."

"Incoming orders continued to decline over the last six to eight months. Now that we have worked through our backlog, it is affecting our ability to reach breakeven and has affected our employment number. We do not see that this situation will improve into first quarter 2024."

Textile Product Mills:

"We are seeing a good increase in sales as people do holiday shopping. It's hard to gauge how the rest of the holiday season will go, and uncertainty is high."

Transportation Equipment Mfg:

"There is nothing encouraging on the horizon."

In Europe, out today were the consumer confidence figures from Germany and France. The GFK German figure improved slightly, by .5 pt to -27.8, still of course deeply negative and compares with +9.1 seen in February 2020. So it is not just us in the US that has seen a sharp drop in consumer confidence over the past 3+ years. GFK said "After three consecutive months of decline, consumer sentiment is stabilizing as the year draws to a close. The mood is still characterized by uncertainty and concern." Fingers crossed that Europe has another benign winter weather wise.

French consumer confidence improved by 3 pts m/o/m to 87 and that happens to be the best since April 2022 but still compares with 105 in February 2020. An improvement in the jobs outlook and the 'personal financial situation' led the way even though there was no gain in the outlook for prices. Neither of these figures are market moving but a tell that consumers around the world are dealing with many of the same challenges we are here as stated above.

German Consumer Confidence

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French Consumer Confidence

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Just as we heard yesterday from BoE head Andrew Bailey telling the markets to cool their engines on hopes for rate cuts, the German head of the Bundesbank Joachim Nagel is basically doing the same to his constituency today. "It would be premature to lower interest rates soon or to speculate about such steps. It is not just the level of interest rates that matters for the stance, but also expectations about the future path of interest rates.



The main effect of the policy tightening on inflation is yet to unfold...While headline inflation has fallen significantly over the last months, we cannot take it for granted that this decline will continue...And we expect a bumpy road ahead, with ups and downs in inflation over the near future."

The Bank of France head Francois Villeroy said something similar today too, "It's not a question of raising the dose. Barring shocks or surprises we'll keep rates at their current level rather than raising again, but we need a length of treatment to ensure the proper transmission of monetary policy."

Expect to hear a similar tone from Fed members. At least for now the attitude seems to be that they are going to keep their foot on the neck of inflation because the last thing they want to see is they get soft and inflation flares up again. Either way, when the time comes for short term interest rates to drop, I think there is a very good possibility that long term rates rise in that scenario which is not what most expect.



There are a lot more market and economic trade offs to changes in monetary policy right now and will continue to be the case I believe in the coming years.

From Arthur Cashin: 

It did not take very long for Wall Street traders to realize that Monday's trading session would not resemble anything like a Saturday evening at an overcrowded nightclub. If anything, it was a rather quiet, almost séance-like session from relatively early on. We noted that in the late morning update. In fact, it was so boring that we had the opportunity to recount some of the political conversations that had arisen over the Thanksgiving holiday.



We covered a good deal of that early on, but got into how relatively boring and lethargic things were as you will notice in this late morning update:

Late Morning Update 11.27.23 - Before we get into this morning's action, we thought we would like to offer a reflection on some Thanksgiving chatter among family and friends (both Wall Street and non-Wall Street types). Given the seasonality, it naturally ran to football, the holidays and lots about politics with many believing that 2024 might have some strong similarities to 1968 and a lot of that has to do with what some saw as similarities between the incumbent President Johnson and today's incumbent, Joe Biden.



Much of the discussion centered on the New Hampshire Primaries, where in 1968, Johnson was not officially on the ballot, just as Biden is not officially on the New Hampshire ballot, hoping to get the first heavy push in South Carolina. To quickly refresh your memory, in 1968, much to the surprise of everyone, especially Lyndon Johnson, Johnson was unable to win in New Hampshire. They needed to push for write-in votes. While he did gain a plurality, he came up short of a majority and that brought a real twist in his career and later stepped down with what you may recall as the April Fool's Day speech. It actually happened the day before April Fool, but it was such a surprise at the time that many expected him to end the speech with the line - "April Fool!"

If I recall correctly, the drift of this year's commentary was not looking for such an immediate reaction if and when Biden were to lose New Hampshire and several saw him wrestling with that fact and then, ultimately, pulling himself out of the race before the convention and turning the selection over to the Convention. In 1968, the party chose the sitting Vice President, Hubert Humphrey and that raises questions about the interesting parallel with the current Vice President.



There were some that felt waiting to hand the choice over at the convention might be a little too late in the campaign. It certainly makes a lot of sense to us, but it also raises a question - if there were a late Biden withdrawal, that would present a surprise candidate to run against Donald Trump (the presumed Republican nominee) and what that might mean to the chances of both Democrats and Republicans. I am sure the conversation will go on through year-end and we will keep you up to date on what we hear, and we will try to figure out what changes at that time near 2024 and what it could mean to a stock market or bond market. As they say, may you live in interesting times.

Okay. Let's get back to this morning's market. This morning's trading is somewhat lethargic and in a kind of post holiday hangover style. There is no particular news driven tone and, in fact, they are engaging in an inverse tug of war between the ten-year yield and the stock market. We say inverse because it is slightly the opposite of that same tug of war that we saw on Friday. In essence, the yield on the ten-year has been staying below 4.50%, which is putting a mild, somewhat weak bid under equities and keeping the weakness from turning it into any real kind of selloff yet.



We will see if they remain lethargic and semi-comatose or if some news event tends to catch traders' eye. While the overall volatility has been limited, the index that seems to be the most flexible this morning remains Nasdaq. So, keep your eye on that and see if they go any further and again, keep your eye on the yields. Below 4.50% seems to allow for some of those halfhearted bids under the market. The VIX trading below 13 bothers some traders as a possible contrary indicator, but it has been contrary for nearly two weeks now. Stay alert and stay safe.



The market continued in that general fashion and moved along, only changing a bit in the early hours of the afternoon portion of the session and that is because it was influenced, in some large part, by the bond auction at 1:00 p.m. as you will notice if you re-read this late afternoon recap:

11.27.23 LATE AFTERNOON RECAP - The treasury auction at 1:00 p.m. was somewhat a better bid than expected. That allowed yields to inch a bit lower and that, in turn, and in an almost reflexive reaction, put a slightly better bid under stocks, taking us from the low level of the day, up to near the intraday highs. So, once again, it's all about yields. Stay alert and stay safe.



They continued to almost drone on in that fashion with altering the key indices, closing with mild negative results and that led to the fact that there was little major change in both attitude and even amplitude in the market's range. They managed to close with somewhat mild losses and that was enough to put it back into the record books as a very quiet post-holiday trading session with limited range that was, in fact, hardly enough to keep the attention of traders as the day wore on.



While all that relative action or, perhaps, I should say inaction was droning along here, in the land of Thanksgiving, there was not a heck of a lot doing and gaining attention with our brethren offshore, whether in Asia or in Europe. Therefore, it is best to now go back and review and see if they, in fact, began to respond a little differently in reflection as to what was going on.

Overnight, global equity markets are trading somewhat nervously with a slight edge to the downside. In Asia, Tokyo closed mildly lower, down about 50 points in the Dow. Hong Kong, on the other hand, was off about 300 points in the Dow. Mainland China managed to make it up about 70 points in the Dow. India was also up maybe about 120 points in the Dow. As we go to press, London is leaning lower, down about 160 points in the Dow. Paris is off about 180 points in the Dow and Frankfurt is a little less negative, down about 100 points in the Dow.



Today's U.S. economic calendar is moderate with a handful of Fed speakers due. Just before the opening, we get the Case/Shiller Home Price Index with a follow-up a few minutes later in the FHFA Home Price Index. At midmorning, we get Consumer Confidence and quickly followed by the Richmond Fed Manufacturing Index. Shortly thereafter, Goolsbee of the Fed will speak, followed almost immediately by the Fed's Waller and in late morning, we will hear from the Fed's Bowman. At 1:00 p.m., we will look to the results of the seven-year auction, which historically, has been somewhat of a market mover.

We will get to see some data on the money supply, shortly after that seven-year auction, followed rather quickly by Barr of the Fed, who will talk of the general economy and then come back as the equity markets are closing to give a more extensive speech, perhaps touching on the money supply. It is, as I say, a moderate calendar, but we will be watching those Fed speakers because bond yields continue to be a major factor with what is going on. We think the markets will once again be following the yields. If they get up above 4.50%, we may begin to see some pressure on equities and if they move down below 4.40%, that may provide for a mild bid or so.



While the calendar is moderate as I said, the geopolitical rumors seem to be running about and some debate as to how long the hostage exchange will be continued and that could be something traders will be watching, but I think, the primary indicator that most will continue to focus on is that yield pattern.

You know the current drill. Stay close to that newsticker. Keep your seatbelt fastened. Stay nimble and alert, but most of all in these somewhat fractious times, please stay safe. 

8:45 AM: Fed Board Governor Bowman (Voter) speaks on "Monetary Policy and the Economy" before a Utah Bankers Association breakfast, Salt Lake City, UT (Text available. Audience Q&A expected. No webcast); 

10:00 AM: Fed Bank of Chicago Goolsbee (voter; non-voter in 2024) gives Opening Remarks at the Midwest Agriculture Conference, Chica- go, IL; 

10:05 AM: Fed Board Governor Waller (Voter) speaks on the economic outlook before an American Enterprise Institute event, "The Federal Reserve and the Economic Outlook: A Con- versation with Federal Reserve Governor Christopher J. Waller." (Text available. Q&A from moderator. Webcast at https://www.aei.org/events/the-federal-reserve-and-the-economic-outlook-a- conversation-with-federal-reserve-governor-christopher-j-waller/); 

1:05 PM: Fed Vice Chair for Supervision Barr (Voter) speaks virtually on the Community Reinvestment Act before event, "Modernized Community Reinvestment Act and Indian Country," Washington, DC (Text available. No Q&A. Livestream at https://youtube.com/live/aKTaSa3N2mw); 

3:30 PM: Fed Vice Chair for Supervision Barr (Voter) participates virtually in discussion on the Community Reinvestment Act before the Opportunity Finance Network Fireside Chat on the Community Reinvestment Act Regulations, Washington, DC (No text. Q&A from moderator and audience)

Upside



-RNA +31% (expands cardiovascular collaboration with BMY for up to five targets utilizing Avidity's proprietary AOC Platform Technology)

-DMK +16% (regains full rights from US WorldMeds for SYMJEPI)

-PDD +14% (earnings)

-SWTX +9.5% (receives US FDA NDA Type 1 approval for OGSIVEO (nirogacestat) as first and only treatment for adults with desmoid tumors)

-ICAD +5.8% (AI-powered solutions to Help Accelerate Breast Cancer Detection in New Collaboration with GE Healthcare)

-SNAX +5.4% (announces major distribution expansion into leading retailers across the US, including Lowes Foods)

-LASR +4.3% (Benchmark Company Raised LASR to Speculative Buy from Hold, price target: $17)

-TWLO +4.1% (hedge fund Anson reportedly builds stake in Twilio worth ~$50M, pushes Twilio to explore sale)

-IMVT +3.7% (positive IMVT-1402 initial 600 mg MAD results confirm best-in-class potential)

-NNOX +3.2% (earnings)

-CROX +2.4% (Raymond James Raised CROX to Strong Buy from Outperform, price target: $115)

-ACRV +2.1% (FDA Grants Breakthrough Device Designation for ACR-368 OncoSignature Assay for Ovarian Cancer)

-AWH +2.1% (secures reimbursement at a rate of $897 for Ova1Plus from California Medicaid)

-NNDM +2.0% (earnings)

-PCG +2.0% (reinstates dividend, issues guidance)

-BA +1.6% (RBC Raised BA to Outperform from Sector Perform, price target: $275 from $200)

-AFRM +1.0% (Jefferies Raised AFRM to Hold from Underperform, price target: $30)



Downside



-BTTX -4.8% (amends debt facility and implements cost reductions)

-ZS -4.5% (earnings, guidance; announces management changes)

-SHOP -3.1% (Piper/Sandler Cuts SHOP to Underweight from Neutral, price target: $56)

-AMAM -2.0% (provides update on APEX-01, an on-going Phase 1 / 2 Dose Escalation Study evaluating ARX517, a Proprietary PSMA-Targeting ADC)

-BNS -1.6% (earnings, guidance)

-ALDX -1.2% (receives Complete Response Letter from US FDA for Reproxalap NDA for Treatment of Dry Eye Disease)

At 8:42 am:

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* Or so says BMO's Brian Belski

So said uber-confident perma-bull BMO Capital Markets' Brian Belski on CNBC's Halftime yesterday.

Though this is something he also said at market high points in September, 2007, January 2020 and December 2021 -- or just about always -- the reality is that Belski captured the mantra of momentum-based investors these days (as I mentioned in Monday's opener, The Animal Spirits Erupt).

To me, however, such an emotional outblast -- while perhaps an excellent marketing ploy as it attracts eyeballs -- is typically not healthy for your portfolio.

I consider myself an intelligent and responsible contrarian, not someone oppositionally defiant. I would rather be measured and dispassionate -- seeking equities and markets that have compelling upside reward vs. downside risk with a dose of "margin of safety" as:

"Price is what you pay, value is what you get."

- Warren Buffett

More on the housing recession from Danielle DiMartino Booth:

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Since the dawn of Disco, "Funkytown" by Lipps Inc. (pronounced Lip Synch) has been a staple of funk parties. Released in March 1980, the song speaks to a young musician's quest to achieve greatness with funky grit in the face of uncertainty and doubt. "Funkytown's" timelessness resonated with music enthusiasts.



According to Billboard, the song has been covered more than 40 times and sampled in more than 80 songs. Some of the most notable covers include those by Pseudo Echo, Kylie Minogue and QI's in-house favorite - Alvin and the Chipmunks. The song has been featured on the small screen, in Everybody Loves Raymond, Will & Grace, Malcolm in the Middle and Friends as well as in these big movies, History of the World: Part I, North Shore, Shrek 2 and The Dictator.



Back then and today, what's not to love about the destination of "Funkytown," a fantastical place where the party never ends, and all its inhabitants are driven solely by spontaneity without a worry in the world?

In early 1980, a record number of Baby Boomers were forging paths to their own funky towns, poised to push the homeownership rate to 66% before it drifted down to 64% in 1989. The demographic tailwind that blew through the 1970s propelled speculative homebuilders to complete 119,000 in 1980's second quarter, which stood as a high point before being eclipsed in 1995. Of course, the 2000s housing boom raised the mania in residential real estate to a whole new level.

It took Boomers about 15 years through 1980 to hit their peak homeownership levels (yellow line). In the case of today's biggest generation, the Millennials, their journey has been compressed. From a low in 2016 of about 63%, this cohort's coming of homeownership age was turbocharged by the pandemic, which shot the rate up to 68% by the end of 2020 before it drifted back to 66%, about a third of the time the Boomers took to hit that same apex.

You'd be correct in deducing a dramatic demand pull forward. Builders may soon regret their bravado. As Zelman & Associates noted after yesterday's October New Home sales release, completed speculative inventory has hit a three-year high (blue line). When combined with specs under construction, the absolute figure of 342,000 in October was up 1% sequentially and is "well above the monthly average of 267,000 in 2018-19."

What's critical is how this trend fits into the overall supply backdrop. In September, months' supply -- the ratio of homes for sale to homes sold at the current sales rate - fell to 6.9 (purple line), the lowest since February 2022. October's decline to a 679,000 seasonally adjusted annual rate was chased by downward revisions to July, August, and September, which grew from -8,000 to -14,000 to -40,000, respectively.



Cancellation momentum can be inferred from this rewrite of recent history. The current 7.8 months' supply (light green line) harkens back to the climb before the Great Financial Crisis (GFC) and intersects the hangover years early in the post-GFC recovery. As we've heard ad nauseam per the lobbying machine otherwise known as the National Association of Realtors, October's 3.4 months' supply remains anemic, albeit well off the January 2022 cycle low of 1.9.

Of all data outlets, Redfin's supply commands the status of industry standard. At 3.7 months, its gauge is within spitting distance of the four-to-five months considered balanced. The trend has legs given Redfin's new listings in the four weeks ended November 19 rose 5.2% year-over-year (YoY), the biggest in more than two years amplified by falling listings a year ago. Adding to concerns about supply swelling into 2024, Google searches for "home for sale" were -11% from a month earlier and -7% YoY. No coincidence, this matched the YoY drop in Redfin's Homebuyer Demand Index.

Zelman & Associates proprietary tracking of second home transactions suggests scant marginal support. As relayed by real estate brokers, mortgage originators and homebuilders, second-home demand remained deeply depressed in October (bottom right chart). Separately, while demand ranked the strongest on a relative basis in the Midwest, a rude awakening in the making given the region is the most vulnerable to a weakening job market after posting below-average unemployment expectations in November.

Melody Wright, QI amiga, 25-year mortgage veteran and CEO & founder of Huringa has been on the hunt for a true read on housing supply. The moving pieces are almost impossible to track given the million multifamily units still in the construction pipeline, the nebulosity of pent-up 'Airbnb jock' supply, an unsettling number of vacant homes and homebuilders flattering their own data:



"Absent RFID-chipping every structure, it's impossible to get a reasonable count of what the true housing inventory is given there are 3,000 counties all using different reporting methodologies. What we do know is all this housing is not going to be filled absent emergency affordable housing measures taken during an election year to allow builders to mitigate their losses with tax write-downs."

As for how the supply/demand imbalances affect prices in the coming year, social media was abuzz yesterday as news hit that Median sales prices posted a record YoY compression of -17.6% last month, taking out the Great Recession lows (teal line). Granted, new home prices carry a much higher beta vis-à-vis the smoother S&P/CoreLogic/Case-Shiller series (lilac line). Turbulence alone, however, can't prevent 2024 from its fate as a year of shelter disinflation.

The median new home price (representing about 20% of housing market) in October dropped by nearly -18%. That is the single largest decline in history:

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Doomberg on "The Hydrogen Bomb".

Investors take on more risk:

From Wally:

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

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From JPMorgan:

US: Futs are slightly weaker with mixed bond yields and flat USD. Cmdtys higher, led by Ags and Energy (ex-natgas); Energy reacting to headlines that Saudi Arabia will ask for add'l supply cuts at this week's OPEC+ mtg. Gasoline prices had fallen 60 consecutive days. With month-end, we could see Equities underperform Bonds by as much as 50bps - 75bps given performance differentials. Today's macro data focus is on housing price indices, consumer confidence, activity updates from Dallas/Richmond Feds, 2x Fedspeakers, and the 7Y auction.

and...

EQUITY AND MACRO NARRATIVE: Kicking off the week, there were two significant-sized bond auctions for 2s and 5s, both over $50bn notionally. The 2Y auction required a concession, the 5Y auction did not. In any case, bonds rallied with the curve flattening. Despite increasing bets on early Fed cuts, as well as increased media attention, the front-end of the yield curve remains elevated despite a consensus view that the Fed has completed its hiking cycle. Perhaps that changes after the December Fed meeting and an updated view on the dots? Bond markets are pricing in the first full cut occurring by the June 12 meeting. Despite the moves in the bond market, Equities did not take advantage. The SPX closed down almost flat with narrow leadership.

A reminder from yesterday:

Programming Note

I will be leaving at around 3:45 pm today as I have a visit to my dentist (for the placement of a new crown).

Tomorrow morning I have Board meetings outside of my office at 9 am and 10 am -- so my posts will be sparse Tuesday morning.

Be a responsible contrarian, not someone oppositionally defiant:

* At around 5 a.m....

Added to SPY and QQQ shorts at $454.50 and $388.99.