House prices rise, home builders fall
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Welcome back. It’s better to be careful today.England has Beat Germany In an important football match. Anything can happen now. Unhedged stays safe by sticking to familiar areas: housing, inflation, and memetic stocks. Email me: [email protected]
House prices no longer help home builders
This headline News Tuesday was mainly the April reading of the Case-Schiller National House Price Index, which showed that the annual growth rate of US house prices was 14.6%, the fastest growth rate in 30 years. This is not surprising.The April and May figures from the National Association of Realtors, I have written yesterday, Also very sporty. But when housing prices appeared in 2006, no one liked it:
In the context of this chart, it is interesting that the stocks of American homebuilders peaked almost a month ago:
The products of homebuilders are more valuable than ever. Input costs such as wood are picking up. As I wrote before, due to ten years of insufficient construction, the housing shortage in the United States may reach 2 million or 3 million units. Companies such as Toll Brothers, Pulte and Lennar have slightly higher valuations, but they are still within the historical range of 1-2 times their book value. Why did the group fall from the high position?
As Truman Patterson of Wolfe Research pointed out to me, the main reason is memories of 2018. That year, the 30-year mortgage interest rate rose by about 100 basis points, and within a short period of time, the annual growth in unit sales of new homes fell from 9% in July to minus 14% in November. That year, the value of stocks of homebuilders shrank by a third. This is what we call interest-rate sensitive industries (data from the Federal Reserve):
Mortgage interest rates have only risen by about 35 basis points from lows this year, but this is enough to scare people. At the same time, as we discussed yesterday, some indicators of housing demand are fading. Finally, the KBW team pointed out that there are still 2.1 million mortgages that will face the possibility of foreclosure this fall, and the rent eviction suspension will end, which means that new inventory may enter the market.
In short, the short-term settings of homebuilders are very bad, especially if you think interest rates will start to rise from here.
But the long-term demand prospects are good. Something must be done for the housing shortage. If you think that as more and more people work from home, the pandemic will urbanize the country, and you think that inflation concerns are exaggerated, don’t you want to buy into this decline at some point?
Painful inflation is not necessarily the inflation of the 1970s
Recent discussions on inflation have some comforting souls, pointing out that the possibility of 1970s-style hyperinflation recurring today is very small. Here For example, a week or two ago, the British “Financial Times” boss Bob Prince:
“If you go back to the 1970s… you didn’t print money back then, but you have credit growth. You have very strong collective bargaining, unions,” he added. “You relaxed the control of the commodity market… So commodity prices soared, oil prices soared. You have a lot of things that don’t exist today.”
It’s all true. But it is important to remember that inflation does not necessarily make investors’ lives very difficult.
There have been many articles in recent months on how the usual negative correlation between stock and bond prices has become a positive correlation as inflation (or inflation concerns) rises. When no one is worried about inflation, when bond prices fall and bond yields rise, this is seen as an indicator of future economic growth. Stocks tend to rise. When people are worried about inflation, falling bonds/rising yields indicate the risk of inflation and the possibility of the central bank tightening policy. The stock fell. The portfolio of stocks and bonds is no longer automatically hedged, and investors are sad.
But how much must inflation rise to make the correlation positive? Evan Brown, head of multi-asset strategy at UBS Asset Management, said that as long as the inflation rate is maintained at 2.5%, the problem can be solved. I spoke with him on Monday. He points to this chart his team produced earlier this year that compares 36 months of rolling core inflation with 36 months of stock/bond correlation:
The following is a table of UBS’s long-term performance of U.S. Treasuries during the worst stock decline in the past 60 years:
In the past 20 years, due to the very low inflation rate, bonds played a huge role when the stock market fell.
In the 40 years before that, as the inflation rate rose, when the stock market fell, bonds played little or no role at all.
It seems that only 2.5% sustained inflation may be enough to reverse the negative stock-bond correlation.
Inflation doesn’t have to be the entire 1970s to mess up your life.
It’s cheap to short emoji stocks now
Garrett DeSimone was most recently the head of quantitative research at OptionMetrics, an option market analysis company. Point out The cost of borrowing “memetic” stock (for short selling) has recently fallen. For example, here are the implied costs of borrowing AMC stock during the 30-day and 90-day periods, derived from the cost of market makers to hedge short positions in the options market:
The cost of borrowing AMC stock dropped from a high of more than 20% to about 5% (meaning that the annual interest rate is 5% of the stock price). According to DeSimone, this means that “short positions will no longer be a factor in the rise of meme stock in June.”
In turn, this may mean that the volatility of meme stock will decrease. Short squeeze (and option hedging) provided the most significant price surge. But it is the volatility of meme stocks that makes them interesting to trade. If the volatility drops, the game will be no fun, will everyone go home?
A good book
My summer reading: Georges Simenon (Georges Simenon) great little Maigret Inspector Novel. You can read every weekend. There are many. Any good second-hand bookstore will sell you a copy for five dollars. They remind you of Paris. They have nothing to do with the market.