Tsetse Fly








Today was fun and eventful.

Early this morning there was the Turkish CPI & PPI YoY print.

Turkish producer prices rose significantly in September, the most since 2001, by 11% on the month and 46% YTD. Notably, Tayyip Erdogan’s AK party took control in 2002.



Higher rates equate to higher volatility, according to Bloomberg. 

As a reminder, I needed one, on Bull, Bear Steepeners & Flatteners. 

The demand for dollars is still in place with EUR, JPY & GBP 3-M cross-currency basis swaps at -39.37,-52.25 & -18.25, respectively. 

All-time highs make me think of inflection points and perhaps to a greater extent, reflexivity. Therefore, the next sector and style factor I am rotating towards are High Dividend Yield/ Minimum Volatility/Low Beta and Quality names on a style factor rotation and towards the Healthcare, Consumer Staples and REITs sectors.

In closing, I’ll leave you with my transcription of Hedgeye’s, Daryl Jones,  Forbes article regarding the Housing Sector and the distinction between the absolute interest rate and the probability of further rate hikes in the future. 

As Mr. Anothy Sanders points out, there is now a 71% Probability of a December rate hike now with the 10+bps move in the 10-year today. wirp100318

Financial media states a rising rate environment is bad for housing. There is merit to the idea that rates going up is negative for housing equities by using the US 10 Year Yield as a proxy to mortgage interest rates vs. builder relative performance. There is a tight inverse correlation between rates and homebuilders. But while rate increases matter, it is the pace of rate increases that are ultimately the primary driving factor. 

(Source: Hedgeye)

The second big negative cited for housing has been the rampant increase in input costs. This has been a relevant part of any bearish thesis on housing in 2018 as, “PPI: Inputs to Residential Construction” has been accelerating through the course of 2018 and was up 9.9% in the June/ July time frame. 

However, input cost growth has now peaked and is now increasing at a decelerating pace. In fact, lumber futures prices have seen double-digit monthly declines for the last three months. 

(Source: Hedgeye) 

In addition to the fact that input costs are now slowing, several other factors are strengthening the constructive view on housing. 

First, believing that the US economy has peaked and is heading into a slowdown. In this environment, growth and inflation decelerate and the Fed naturally reacts by getting incrementally more dovish. So, while rates may continue to go up, the pace of rate increases is likely to slow in this scenario. 

To wit: the pace of rate hikes impacts housing more so than the absolute interest rate. 

Second, the consumer’s ability to purchase housing is improving. For instance, wage growth is accelerating. In August, it rose 2.9% YoY to a 9-year high. In addition, the ability to get credit (and therefore a mortgage) is also improving. As the chart below highlights, credit standards have been decreasing (so credit is looser) consistently for the last three years and “looser” credit standards are now accelerating. 

(Source: Hedgeye) 

Finally- and perhaps the most important factors to a bullish housing view- is the fact that affordability remains lows on a nationwide basis. The median mortgage payment as a percentage of median income (a proxy for affordability) is still at the low end of the second quintile and far below the unaffordable levels we saw heading into the global financial crisis. In effect, homes are still cheap on both a relative and absolute basis. 

(Source: Hedgeye)

Bottom Line: 

  • affordability is low;
  • purchasing power is increasing; and
  • cost pressures are declining.

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-R.W.N II, yours in 322.