US Housing Market is EXTREMELY Tight [DIRTY DOZEN]

They think that intelligence is about noticing things that are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns).. ~ Nassim Taleb via The Bed of Procrustes

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the incredible strength of the US housing market and explore some reasons why we should expect this strength to persist… We then dive into the short-term outlook for the SPX, add some data to our longer-term bull thesis for risk-assets, including a record level of people expecting a crash + very positive late election year stimulus seasonality. And finally, we end with a look at one of the worst performing markets year-to-date, energy assets, plus more…

Let’s dive in.

***click charts to enlarge***

  1. Back in July we put out a report laying out the long-term bull case for US housing. Well, the latest prints are definitely supportive of this take. Home sales saw a record jump last month to new 14-year highs.


  1. This incredibly strong backdrop of demand is mirrored by a record low in relative new home inventories…


  1. Interest rates are the fulcrum of the global economy. They underpin the valuation of all global assets. The housing market being no different. Falling interest rates lead to falling mortgage rates which bring down the monthly payments on mortgages, thus making housing more affordable.

The chart below tracks the 30-year fixed mortgage rate (blue line) and the 30-year Treasury Bond (orange line). The red line tracks the spread between the two.

When we see the spread elevated, like it is now, it typically precedes a large move lower in mortgage rates as they tend to follow treasury yields with a lag. So not only are mortgage rates at all-time record lows. If history is any guide, they’re about to move even lower.


  1. The US demographic trends are incredibly favorable to the housing market over the coming decade. BofA notes that the “population of 35-44 year-olds is expected to grow 14% over the next ten years.”


  1. Here’s the 3-month returns of top holdings from the US Home Construction etf (ITB) via Koyfin. This is a good starting point for finding some names. There’s plenty of good looking charts in this bunch.


  1. Hedge Fund manager John Huber tweeted the following last week regarding $TOL’s recent mid-quarter update. “Incredible numbers from housing lately. Existing home inventory falling to levels not seen in decades, at same time demand is flying. Sweet spot for builders, which are reporting numbers that are almost hard to believe. Here’s $TOL’s mid-quarter update (& 2019 wasn’t a bad yr)”


  1. SPX put in a double-bottom on the daily basis last week and it looks like we’ll get at least a small bounce this week. In addition, the SPX has seen four consecutive weekly bear bars which is unusual. Since 09’, the SPX has printed a positive week 7 out of 8 times following four consecutive weekly bear bars.


  1. The Yale “Crash Confidence” Index recently hit record levels. There’s a lot of people worried about a “market crash”. This fear gauge typically spikes directly following a crash. Which is funny because that’s exactly when a crash becomes least likely. This fits in with all the other indications of large cash piles and under-positioning that we’ve been talking about for over a month. At MO we’re worried about a crash too, but it’s a crash up… (chart via Bespoke Research)


  1. High expectations of market crashes, investors sitting on large cash piles, a real estate market (a significant driver of household wealth) that’s incredibly tight and turning hot, and election year stimulus (to be seen, but I think we get it). That’s quite a potent bullish cocktail.


  1. Speaking of the election… Biden’s lead continues to narrow.


  1. With the first presidential debate this Tuesday, we could see some market moves if there’s a blowout performance by either Trump or Biden. This chart from NDR shows the 120-year election year market returns following various outcomes.


  1. I’m still watching the big bust in oil and related names play out. There’ll be some incredible deals once the dust settles, but I’m in no rush to buy. These cycle turns take some time and while the pieces are coming together, there’s still a few missing ingredients needed to put in a cyclical bottom. NDR’s energy strategist Warren Pies tweeted the following chart last week along with:

“The Bull case =

(1) Decreased excess capacity:

-E&P bankruptcies spike to new ATH (chart),
-Refinery closures (watching Europe/Japan)

2) Demand normalization (watch air travel)

Unfortunately, these things take time…”


Stay safe out there and keep your head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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