The following commentary is from the latest issue of the Short Seller’s Journal. SSJ analyzes economic developments and presents fundamentally-driven short-sell ideas on a weekly basis. You can learn about this newsletter here: Short Seller’s Journal information.
A massive disconnect between consumer sentiment and the retail stock allocation has developed. The graphic below (allstarcharts.com) shows the U of Michigan Consumer Sentiment index (blue line, left y-axis) and the AAII (American Association of Individual Investors) equity exposure (orange line, right y-axis) going back to 1990. The two metrics have been highly correlated up until the stock market took off after March 2020.
Despite the onset of a bear market, the allocation of investment portfolios for retail investors and mainstream, dumb-money institutional money managers remains historically high. Consumer sentiment reflects the growing contraction in economic activity (as discussed below), while the historically high stock holdings (65%) reflects the persistence in perma-bullish sentiment. A similar set of data shows that household average allocation to equities on a percentage basis is back to early 2000 levels (right before the tech bubble popped). The bear market in stocks will not be complete until stock allocations are down to the levels seen in March 2003 (32.8%) and November 2008 (22.2%).
The rally in the SPX, which is up 13.7% from the bottom of the sell-off that started at the beginning of August, began on October 12, 2022. That was when the idea of a “Fed pivot” began to intoxicate the perma-bulls. While the Naz trended laterally from 10/12/22 until the end of December, it’s up 13.8% since the 12/28/22. The Naz has jumped 7% in just the last six trading days.
According to Morgan Stanley’s Quantitative and Derivative Strategies team, other than normal short-covering most of the buying is coming from “systematic” and retail buyers (“systematic” would be the hedge fund and CTA money flow dictated by algorithm programs). The group said that there was $20 billion of systematic demand this week on top of roughly $11 billion of net retail buying over the last nine days.
But the usual indicators that have marked the previous bear rallies over the last year once again reflect the frantic FOMO YOLO urgency of stock chasers on amphetamines. The melt-up over the last couple of days this past seek was fueled by a huge buying in Friday-expiry “gamma squeeze” call options. On Friday Goldman’s most-shorted stock index soared 7%. And Goldman’s index of unprofitable tech stocks shot-up 13% off of Wednesday’s lows. This index is up 30% YTD. Additionally, the market decided to completely ignore bearish earnings reports and guidance from 3M, Microsoft and Intel this past week.
It’s anyone’s guess how much longer this insanity can persist. But I would suggest that it’s closer to the end than the beginning. It took a couple of days into the month, but January is usually a strong month seasonally for the market, as pension and 401k funds have to put new cash to work and there’s a general “New Year’s” optimism. Fundamentally the stock market is expensive. The SPX is trading at 18x 2023 guesstimated earnings. After each of the bear rallies in 2022, the market sold off when the SPX traded back up to an 18 forward P/E. I am confident, moreover, that earnings estimates will be lowered several times by the Street this year, which means the market needs to go lower just to maintain an 18 forward P/E.
All three broad stock indices are above their key moving averages (21, 50, 100, 200). The Nasdaq closed over its 200 dma for the first time since knifing below it in January 2022:
While the Naz managed to close over its 200 dma, it double-topped in the last hour of trading and sold off 70 index points (0.6%) in the last 25 minutes. The SPX and Dow also sold off 0.6% in the last 50 minutes of the day.
In reference to 3M, MSFT and INTC mentioned above, it’s becoming more clear that the bottom is falling away from the economy, particularly household disposable spending. The chip sector is a leading indicator for economic activity as chips are used in a wide swathe of end-user products as well as manufacturing/industrial applications at every level of the economic system. At some point I believe that the market will shift its focus from pivot hopes to the deteriorating corporate earnings.
Last summer I pounded the table on BBBY as short, making the argument that it was headed for bankruptcy (actually first recommended $BBBY as a short in July 2021 when it traded briefly over $30). I made the assertion that BBBY may end up eventually liquidating and that it did not need to exist. The bonds are now trading at 11 cents, which suggests the strong possibility that BBBY will be liquidated. Whether or not this is the case, the shares will be canceled in Chapter 11 or 7.
The following brief analysis on Wayfair is from my latest issue of the Short Seller’s Journal (information link). I’ve been all over W as a short since it was trading over $300 more than 18 months ago. At the current cash burn rate, W could be out of cash by year-end. Note: this analysis was written last Friday. I have added to my Wayfair puts this week as it squeezes higher.
Wayfair (W – $46.79) – Wayfair, which I recommended at much higher stock prices intermittently throughout 2020-2022, announced that it was cutting 10% of its workforce. A big workforce reduction is the unmistakable sign that upper management and the Board of Directors are bracing for a contraction in a company’s business prospects. Yet, the stock market right now prefers to continue chasing “unicorn” sightings.
In this case, W jumped 20.3% Friday on that announcement on the notion that the cost reduction from the job cuts would boost earnings. In addition, the Company announced that initiatives were underway that are expected to cut $1.4 billion in costs by late 2023 (the unicorn). Of course, the Company did not identify specifics. It also said that it is expected to be “adjusted EBITDA breakeven” earlier in 2023 than was projected in August 2022.
The Company did not say anything about revenues for Q4 other than that it was encouraged by the “recent topline (sic) performance” and “the momentum in orders,” whatever “momentum” is supposed to mean. We know retail sales declined in November and December. If W generated revenue growth from November to December, it was at the cost of steep discounts, which means lower gross/operating margins.
W generated a $282 million operating loss in Q3. Through nine months its operating loss was $977 million vs a $77 million operating profit through nine months in 2021. Between year-end 2021 and the end of Q3, W’s cash + cash equivalents were nearly cut in half, from $$2.39 billion to $1.28 billion, a $1.1 billion cash burn.
Now, Wayfair will be incurring up-front cash costs connected to the job cuts, but its alleged cost cuts will not fully kick-in until late 2023. By then I am betting its revenue base will have declined a material amount on a year-over-year basis. If not, it means W continued to slash prices in order to move inventory and generate revenues, which in turn take a blow-torch to margins. W’s revenues dropped 12.5% from Q2 2022 to Q3 2023. October may or may not have improved, we know November likely did not and December remains to be seen. We’ll find out in late February when it reports its Q4/full year for 2022.
With a 34% short interest on a 72.8 million share float, I believe 80-90% of the upside action in W’s price Friday was from short-squeeze covering. The CEO’s hot air about expense cuts and “adjusted” EBITDA that accompanied the job cuts announcement got the momentum going. The last time when W ran up starting in late November from $28.75 to $42.20 in three trading days, I contemplated buying puts but did not. I regretted it when W fell back to $31 about 10 days later.
I’m not even sure Wayfair needs to exist in a nasty recession scenario, which is what I believe will unfold this year in conjunction with a consumer that has little liquidity remaining after paying for necessities and servicing credit card debt,. I’m not making that bet yet – crash puts – but I might after I see Q4 numbers.
The following commentary is from the latest issue of the Short Seller’s Journal. You can learn more about this newsletter for stock bears here: Short Seller’s Journal info.
New data two weeks ago by the Census Bureau shows that more than 35% of all households used credit cards or personal loans to make ends meet in December (for non-discretionary expenses). That’s up from 32% in November and 21% in December 2021. Along those lines, Bank of America’s debit and credit card data shows that spending per household on holiday items during the holiday shopping season (last eight weeks of the year) was down 3.4% YoY. This is a nominal number, which means real spending on holiday items was down at least 10.5% using just the CPI YoY “inflation” rate. Based on the big increase in consumer debt in recent months, I suspect debt-strapped household spending will decline more quickly this year.
The dying consumer is accompanied by numerous indicators of economic contraction. Amazon announced that it is taking its job cuts up to more than 18,000 from the 10,000 originally announced late last year. It also appears to be in cash conservation mode, as it will eliminate or curtail experimental and unprofitable businesses. It’s also trying to sell excess capacity on its cargo planes. Good luck with that, as logistics companies are starting to drown in excess freight hauling capacity.
One of the CNBC reporters was excited to announce that online holiday sales “jumped” 3.5% YoY. Of course I had to point out to her via a tweet that adjusting the nominal sales data by just CPI inflation implies a 4% decline YoY in real (“unit”) online retail sales. The attribution for the 3.5% nominal increase was record high discounting. That’s even worse news for e-commerce companies like AMZN because the discounting will hammer profit margins. Recall that in Q3 AMZN’s e-commerce business generated an operating loss and generated a $2.6 billion YTD operating loss.
While the easiest money shorting AMZN has already been made, I think AMZN could get cut in half, at least, over the next twelve months. This view, of course, depends on the perform-ance of the entire stock market. Despite falling 55% from the all-time high the stock hit in July 2021, AMZN still trades with a 78x trailing P/E and a 52x forward P/E (next twelve months earnings estimates, which will prove to be too high). This compares with Walmart, which trades with a P/E of 44, Target with a 20 P/E and Best Buy with a 12 P/E. Roughly 15% of AMZN’s revenues comes from its cloud services business, for which the rate of growth is rapidly decelerating. Microsoft, which is one its biggest cloud competitors, trades at a 25 P/E.
These comparative numbers suggest to me a real possibility that AMZN’s earnings multiple has room to fall at least 50%. A worse than expected Q4 will be a catalyst that would set the earnings multiple contraction in motion. The reason I say AMZN may be in cash conservation mode is the dramatic fall in its cash during 2022. Through the end of Q3, AMZN’s cash (plus marketable securities) was $58.6 billion, down from $96 billion at the end of 2021. Against this cash AMZN has $69 billion in debt, or nearly $11 billion of debt net of cash. At the end of 2021 AMZN’s cash exceeded its debt outstanding by $29 billion. A bad Q4 earnings report should crush the stock. I’ve started accumulating June 2023 near-money puts.
This article explores whether investing in gold can still be profitable, looking into the history of the metal through the lens of it as an investment vehicle as well as a currency. I wrote this article for Kinesis Money.
Gold has been a valuable asset for thousands of years. Not only is it used as money, but it also helps preserve wealth and protect against the decline in the value of paper currencies. Until 1971, governments and central banks used gold to back their paper currencies.
Before 1971, people could exchange dollars for gold at a fixed rate of $35 per ounce. However, when the United States stopped allowing people to convert dollars into gold, the price of gold was determined by the market. As a result, the price of gold quickly rose.
Gold is a valuable asset for wealth preservation and protection against inflation. In 1971, the price of gold measured in U.S. dollars was $35, and it has since risen to the mid-$1600s. This means that the purchasing power of gold has increased considerably. For example, in 1971 the average price of a home was $25,000, which required 714 ounces of gold to purchase. Now, the average price of a home is $391,000, but it only takes 236 ounces of gold to buy one.
In this example, gold not only appreciated in value compared to the dollar, but it also increased in purchasing power. To determine whether or not gold is a good investment, it is useful to compare its purchasing power to the rate of inflation or the rate of devaluation of fiat currencies.
Between 1971 and now, gold has performed well in both regards. In relation to the M2 measure of the U.S. money supply, gold is currently undervalued. This analysis applies to all major fiat currencies, including the euro, pound, yen, and yuan.
The chart above shows the relationship between the M2 US$ money supply and the price of gold from 1990 to present. At the start of the current bull market in precious metals (2001), the ratio was at its highest point in the last 30 years, indicating that gold was undervalued relative to the money supply.
Since bottoming in 2011, the ratio has been steadily increasing, indicating that the money supply (and therefore inflation) is growing faster than the price of gold. It is my opinion that the current scenario presents a prime time to convert fiat currency into gold and silver for both wealth preservation and as an investment.
The easiest way to invest in gold is through the purchase of shares of gold ETFs, such as the SPDR Gold Shares ETF (GLD). However, while GLD enables you to index the price of gold, it is emphatically not recommended for use as a wealth preservation vehicle. It is also possible to invest in gold is through purchasing sovereign mint bullion products like U.S. gold eagles or silver eagles.
Another good way to invest in physical gold is through precious metals service like Kinesis Money. The advantage is that you can buy at the spot price of gold instead of paying the premium to spot charged by coin dealers. Reputable digital gold services allow you to redeem your investment in the form of the physical gold units fully backing the digital gold held in your account.
The stock market, residential real estate market and bond markets have been inflated into bubbles of historic proportions. The Fed and other central banks created a financial market Frankenstein that is now causing historically high price inflation. It is worth considering alternative investments during times of market bubbles and high price inflation. Some people may look to gold and silver just as an asset for preserving wealth. But currently the precious metals sector is undervalued to such and extreme that gold and silver are also highly prospective as total rate of return investments.
The following analysis was presented earlier this month in the Short Seller’s Journal.
I agree with the title quote but it’s not mine. The CEO of luxury furniture retailer, Restoration Hardware ($RH), commented on the Company’s Q3 earnings call: “For the housing point of view, there is no soft landing…It’s looking more like a crash landing in the housing market. It’s looking like 2008, 2009…The housing industry is in a free fall.” Furniture sales are highly correlated with the home sales. I was pleasantly surprised thus to hear the CEO of a company tied at the hip with the housing market speak candidly. This is in contrast to the CEO of every homebuilding company who put a positive spin on the prospects for their respective companies’ home sales in the outlook for 2023 in their companies’ latest quarterly earnings report.
In a sign that investors are fleeing from real estate investments, the largest real estate fund operator, Blackstone, restricted investor redemptions from its flagship private REIT. Shortly after this, Starwood limited withdrawals from its private REIT, which is the second largest non-traded REIT. Private REITs are funds for wealthy individuals and money managers (pensions, insurance companies, hedge funds etc). This is a sign of the degree to which the real estate – both commercial and residential – has become illiquid.
This means these residential REITs have run out of cash and are stuck with homes that would be difficult to sell quickly enough to meet redemption requests. This is very bad news for the inventors in these REITS, many of them pension and retirement funds. In all likelihood the next directional move in real estate will be a big, step-function move lower. (Note: between private equity and real estate, pension funds will eventually be forced to take rather large market-to-market valuation write-downs).
According to Redfin, 60,000 purchase contracts were canceled in October. That’s the highest monthly number since Redfin began tracking the data in 2013. The number of price cuts in October also hit a record high in October. Not all of the 60,000 cancellations were on new homes, but canceled purchase agreements on new homes become spec home inventory for the homebuilder.
Even worse, the cancellation rates for homebuilders seem to have accelerated during the fourth quarter compared to the third quarters, as I discuss below with TOL and HOV quarterly numbers for their FY quarter ended 10/31. As an example, TOL’s cancellation rate jumped to over 20% from 13% in the previous quarter.
With cancellation rates rising quickly and large pools of capital dedicated to buying and owning rental portfolios out of cash, prices are going to have to fall by what will eventually be a shocking percentage in order to balance out supply and demand. And this is before the next shoe drops, which will entail a surge in forced selling by individual investors (e.g. ABNB rental investors). This growing amount of unsold inventory on homebuilder balance sheets will soon become a nightmare for these companies and their shareholders.
In fact, for Lennar (LEN) it already is a nightmare. LEN announced that it is offering to sell around 5,000 homes in inventory in “block trades” to rental landlords, with an opportunity to acquire entire subdivisions. Most of these homes are available because of contract cancellations. However, it also suggests that LEN has some subdivisions in which most to all of the homes have not been sold. This will be interesting to watch as it would appear that many of the residential REITs with big rental portfolios and who might otherwise bid on these home packages have run out of cash.
Lennar announced its Q4 (FY Q4 ended 10/31) results on December 14th (Wednesday) after the close. I’m just going to review the key metrics from Q4 that will affect LEN’s financial performance going forward. New orders were down 15% YoY, while new order values were down 24.1% YoY. The decline in the value is attributable to LEN slashing the average selling price (ASP).
The YoY ASP decline at 10% was much steeper than other homebuilders’ FY Q3. Prices were slashed in an effort to move inventory ahead of the bulk sales announcement. I’m not sure they’ll move much unless it’s at fire sale prices. How would you like to be someone who who took delivery of a new home from LEN in Q4 before LEN announced its bulk-sales?
The Q4 new order ASP (contracts signed) was down 10% YoY and was it down 13.8% from the ASP of the homes delivered (as opposed to the ASP of a new order contract) in Q2 and Q3. If you bought a LEN home that was delivered in Q3, you are down 13.3% vs what you paid, on average. The cancellation rate in Q4 jumped to 26% from 21% in Q3 and from 12% in Q4 2021. As with every homebuilder, the cancellation rate at LEN is climbing up to where it was during the worst of the 2008 housing bust. It will be worse this time.
Looking at the p/e ratios of homebuilders is not relevant right now because most of them will likely have earnings that swing to negative in 2023 and/or 2024. At some point the market will price this in regardless of where mortgage rates are at the time. I still expect LEN and the rest of the homebuilders to start selling off sometime this month or in early 2023. Q1 2023 could be bleak given the declining pool of potential home buyers who can afford a home.
TOL and HOV also reported their FY quarterly numbers through October 31st earlier this month. Both had worse new order numbers than LEN. TOL’s new unit orders for Q4 plunged 60% YoY and 50% from FY Q3 2022. This decline from Q3 to Q4 is not necessarily “seasonally” derived, because TOL’s unit orders in Q4 2021 increased 6% from Q3 2021. Similarly, HOV’s FY Q4 new orders during the quarter plunged 49.4%, the unit backlog fell 31.1% and the dollar value of the backlog dropped 20%. But here’s the money-shot: HOV’s cancellation rate was 41% vs 15% YoY.
The contraction in the housing market is just starting to build momentum. Witness the big decline in existing home sales in November – 7.7% from October on a SAAR basis (seasonally adjusted annualize rate) and the 35.4% plunge YoY. This is the 10th consecutive month of declining home sales and the biggest YoY decline autumn 2008. Not including the pandemic lockdown period, the November SAAR for existing home sales is the lowest since 2010. Of particular interest, the $1mm+ segment of the market had the biggest decline in sales (closings), down 41.25% YoY.
It’s not going to get better for the housing market. Despite an 80 basis point decline in 30-yr fixed rate conforming mortgages (20% down, minimum 740 FICO), the mortgage purchase apps index declined 0.1% this past week from the previous week. The not seasonally adjusted index fell 0.3%. Since mortgage rates peaked on October 21st and began to decline, the mortgage purchase app index is down 17.3% and down 36% YoY. The conclusion for me is that the housing market is in free fall.
I wrote the following commentary for Kinesis Money. A portion of it was derived from analysis I presented to subscribers of the Mining Stock Journal a couple weeks ago. You can learn more about this newsletter here: MSJ information
It’s likely that the next cyclical, sustainable move higher in the precious metals sector has begun. The silver chart to illustrate why I think this may be the case with gold and silver:
The chart above shows a 5-yr weekly of SLV (representing the silver price). The same charts for GLD and GDX look quite similar to the SLV chart.
After peaking in August 2020 following the post-lockdown bull party in all financial assets triggered by a massive dose of money printing by the Fed and other Central Banks, the precious metals sector has been in a two-plus year consolidation/pullback. That pullback was completed at the end of September and has been followed by sharp rally in gold, silver and the mining stocks.
From a technical standpoint, the precious metals sector looks ready to move considerably higher – note the set-up in the MACD in the above chart. I use the MACDf as a technical tool for multiple-year, weekly charts asit is slower-moving than the RSI and, to some degree of validity, reflects the longer-term potential for a move in the markets.
In the one-year daily chart, silver popped over its 200 dma (red line) on November 10th, which was the last key moving average hurdle on the chart (21, 50, 100, 200 dma’s).
After a brief trip back below the 200 dma, it shot back over the key moving average on Wednesday (November 30th), thereby successfully fending off an attempt to drive the price lower.
From a technical analysis standpoint, an investor who likes to use charts as part of the tool-kit for investing and trading would be hard-pressed to find a more bullish chart set-up than the charts for gold, silver and the mining stocks.
Certainly the technical picture for the precious metals sector is more than supported by several fundamental factors. It’s been well-documented that the banks have been reducing their net short-exposure to gold and silver futures contracts on the COMEX. This move has been mirrored by the BIS, the Central Bank of Central Banks, which has nearly eliminated its gold swap transactions (BIS gold swaps) after the swaps outstanding reached an all-time high in February.
The BIS gold swaps are a gimmick used by the BIS to make available BIS gold bars that can used to “allocate” bars to large buyers who choose to leave their bars in the custodial safe-keeping of London bullion banks.
The problem for the BIS is if the legitimate owners of those bars decide to take possession of the bars and remove them from London bank custodial services. The only reason I can think of that that the BIS would largely eliminate its exposure to upside price risk in gold and silver is concern about the probability of a big move higher in the sector that might trigger a run on bars on London bullion vaults, including the “swapped” BIS bars.
This action by the BIS thus removes the risk of its exposure to unallocated gold bars in London bullion bank custodial vaults, which implies that it be may worried about either a big move higher in gold or a run on the physical bars in the custody of London bullion banks – or both.
In addition, there’s been a low-grade gold and silver “rush” as evidenced by the large-scale removal of physical silver from LBMA custodial vaults in London and the removal of physical gold and silver bars from COMEX custodial vaults in New York. This reflects both a growing imbalance in the “demand” side of the supply/demand equations for gold and silver.
Furthermore, I would make the case that, particularly after the nickel short-squeeze earlier this year, there’s growing distrust by investors of leaving their physical gold and silver bars in custodial vaults. I firmly believe that, when it comes to physical silver, possession is ten-tenths of the law.
Finally, in response to the ongoing global bear market in equities and a growing fear of another credit market crisis, I expect to see movement of investment capital out of financial assets and into the precious metals sector that would entail a move into physical gold and silver followed by a speculative frenzy in mining stocks. Institutional investment portfolios in totality have a tiny percentage of assets allocated to gold and silver (less than 1%). If these funds allocated just 2-3% of their assets to the precious metals sector, it will be accompanied by soaring prices for gold, silver and mining stocks.
I wrote the following commentary/analysis for Kinesis Money’s Blog:
With inflation raging and the price of gold seemingly not keeping pace with rising rates, articles suggesting that gold is no longer a valid hedge against inflation or preservation of wealth assets have proliferated in the mainstream financial media.
However, as I’ll show, nothing could be further from the truth. While the price of gold is subject to short-term volatility, an examination of the data over a long period suggests that gold is a perfect ‘hedge’ against inflation.
Inflation and gold
The term “inflation” is commonly used in reference to rising prices as measured by the Consumer Price Index (CPI). However, this is not technically correct. The economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in economic wealth output.
As Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” This aptly describes Central Bank monetary policy in relation to wealth output since Quantitative Easing – aka “money printing” – commenced in late 2008.
Price inflation is thus caused by inflation of the money supply. The concept is pretty simple: when the money supply increases at a rate in excess of wealth output, there are more currency units relative to the supply of “wealth units,” where wealth units represent the number of goods and services supplied by an economic system – leading to more money “chasing” a relatively lesser amount of goods and services. When this subsequently occurs, the law of supply and demand dictates that price of the wealth units will rise.
Let’s take a look at the data. The chart below shows the price of gold vs. the CPI and the M2 money supply going back to 1990):
Read the rest of this article here: Kinesis Money
If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal
Based on the rate of depletion of gold and silver bars from bank custodial vaults in London and NYC, it’s fair to say a “low-grade” physical metals rush is in process – much of it flowing to large eastern hemisphere buyers. This disintermediation of physical metal has been widely documented. At some point Gresham’s Law will engulf a wider investor audience and morph into a full-blown run on physical gold and silver.
Based on the chart patterns, supported by strong fundamentals, it looks like the precious metals sector may be starting to diverge positively from the stock market, similar to the late fall of 2008. Andy Maguire and I discuss this topic as wells as several other’s in Kinesis Money’s Live From The Vault:
If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal
Courtesy of @FedProm
One of the primary purposes of FTX was to function as a giant “laundry mat” for the Biden Government to launder tax money sent to Ukraine, washed through FTX and back into the coffers of the Democratic Party – after, of course, Zelensky & Co. took their skim. The operation has Hillary Clinton’s finger prints all over it.
The following analysis is from my latest issue of the Short Seller’s Journal. You can learn more about this newsletter here: Short Seller’s Journal information
The November homebuilder sentiment index dropped to 33 from 38 in October. It was the 11th straight month of declining builder sentiment. Including the pandemic period, the future sales sub-index dropped to the lowest index reading since 2012. The traffic of prospective buyers fell off a cliff to 20.
Homebuilder sentiment transmitted to reality in the October housing starts/permits data released this past week. Housing starts declined 4.2% in October from September. Wall Street thought starts might drop 2.7%. The September starts number was revised lower to -1.3% from August. Single-family starts plunged 6.1% to the lowest level since May 2020. In addition, housing permits fell 2.4% from September to the lowest level since August 2020.
This chart shows why I continue to pound the table on homebuilder shorts and why I believe that homebuilder valuations still have a long way to fall:
The chart above shows the homebuilders’ sentiment futures expectations index (red line) vs October housing starts (green line). Both metrics ultimately reflect actual home sales activity, thereby signaling a continued decline in home sales – new and existing. This data likely will continue to head south, as the U of Michigan’s consumer sentiment survey for November showed that consumers regard current home buying conditions as the worst in the history of the data series, which goes back to 1978.
October existing home sales released Friday were crushed, down 5.9% and from September and 28.4% YoY on a SAAR basis. Existing home sales have declined nine months in a row to the lowest SAAR rate since December 2011. On a not seasonally adjusted basis, sales were down 13.3% from September (some seasonality in that number) and 29.5% YoY (no seasonality in that number).
I would argue that the YoY not adjusted number statistically reflects more accurately the degree to which the housing market is contracting. Single family home sales (not including condos/co-ops) fell 6.4% MoM on a SAAR basis and 29.1% on a YoY not adjusted basis. Using the NAR data for median sales price, YoY for October the median price is still 6.2% higher. But the price is down 8.5% since its peak in June 2022.
The last time the existing home sales SAAR was at its current level, the Dow Jones Home Construction Index was trading in the low 500’s (currently its at 1,232). New home sales for October will be released Wednesday. But the October SAAR was 603k. The last time the new home sales SAAR was that low was October 2016. Back then the DJUSHB was trading in the 500’s:
This is why I continue to be baffled by the valuation levels of the homebuilders. The only rationale I can conjure up is that a large segment of perma-bull investors is convinced that not only will the Fed pivot soon but that a pivot with more QE will revive the housing market. But in 2008 it took nearly three years after QE began before the DJUSHB began to begin a bull market run.
The housing market crash is thus starting to accelerate. If I’m wrong, how come insiders have not been buying shares of their companies in the open market after the 30-40% decline from the late 2021 highs? I went through the SEC form 4 filings for DHI, PHM, LGIH, TOL, LEN, KBH and BZW. Not one open market purchase in the last 12 months. The “buys” are zero-cost options exercised and the shares are immediately sold. The amount of insider selling in the sector is breathtaking, if not embarrassing.