D.R. Horton – The Daily Tearsheet

Morning Report: Goldman sees a break in the clouds

Vital Statistics:

	Last	Change
S&P futures	3109	5.25
Oil (WTI)	58.39	0.24
10 year government bond yield		1.76%
30 year fixed rate mortgage		3.93%

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Existing home sales rose 1.9% in October, better than expected. Lawrence Yun, NAR’s chief economist, said this sales increase is encouraging and he expects added growth in the coming months. “Historically-low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” said Yun. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.” The recent increase in building permits is seen as a positive sign for the sector. Inventory remains tight, however at only a 3.9 month supply. Note that D.R. Horton just reported a 9% increase in units sold, so we are seeing more supply come on to the market.

The index of leading economic indictators fell 0.1% in October, driven by weakness in manufacturing. This points to slowing growth ahead.

Despite the LEI numbers, Goldman is predicting a “break in the clouds” for the economy going forward. They anticipate a 30 basis point pickup in global growth next year to 3.4%, and for the US economy to grow at a 2.3% pace. “We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade escalation,” the forecast said. “Although much could still go wrong, the news on trade policy – both US-China and issues related to Brexit – has gotten better in recent weeks.” They anticipate the 10 year bond yield will rebound to 2.25%.

Morning Report: Is tapering behind the sell-off?

Vital Statistics:

	Last	Change
S&P futures	2651	-12
Eurostoxx index	356.08	-1.82
Oil (WTI)	52.76	-0.93
10 year government bond yield		2.76%
30 year fixed rate mortgage		4.62%

Stocks are lower this morning on no real news. Bonds and MBS are down.

We have a temporary reprieve of the government shutdown, with agencies to -re-open until Feb 15. This will allow Congress more time to work on some sort of deal on border security. Trump is willing to shut down the government again, or use emergency powers to secure funding. Note that Trump said over the weekend he is skeptical that Congress will come up with anything he would be willing to sign.

With the government shutdown over, we should start getting economic data again. We will have a big week for data, with GDP on Wednesday and the jobs report on Friday. Not sure what is going to happen with the missed data from the shutdown.

The FOMC meets Tuesday and Wednesday, however no change in the Fed Funds rate is expected. Jerome Powell will hold a press conference after the meeting, which is unusual for January meeting. The Fed Funds futures are pricing in only a 1% chance of a hike, so the press conference will be about something else – probably balance sheet runoff and the idea that the Fed’s balance sheet will probably end up closer to current levels than it will be to pre-crisis levels.

Note there has been some criticism that the Fed’s balance sheet reduction is behind the sell-off in the market. They believe that the Fed’s reduction in Treasury purchases, combined with higher borrowing amounts is causing rates to rise and that is spooking investors. The idea is that government borrowing is crowding out other investments by soaking up all of that excess liquidity in the market. The Fed isn’t buying that argument: “It’s hard to fathom the [Fed] balance sheet is having some dramatic effect,” Minneapolis Fed President Neel Kashkari said in a Jan. 17 interview. FWIW, if Fed buying was the catalyst for the sell-off, we should be seeing a steepening of the yield curve (in other words higher long term rates). In fact, we are seeing the opposite. IMO, the biggest reason for the sell off has been the re-introduction of money market instruments to the investment menu. For the past 10 years, they have paid nothing and therefore money market investors have been forced to invest in stocks and longer term bonds. Now that short term rates are rising again that money is returning to its natural home, which means some selling in the stock and bond markets as the trade is unwound.

D.R. Horton reported fourth quarter net income increased 52% YOY, although that was partially driven by a tax charge in Q4 last year. Orders were up 3% in units and flat on a dollar basis. Donald Horton, Chairman of the Board said: “Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across our markets, and economic fundamentals and financing availability remain solid. We are pleased with our product offerings and positioning for the upcoming spring selling season, and we will adjust to future changes in market conditions as necessary.”

Morning Report: An anticlimactic Fed decision

Vital Statistics:

	Last	Change
S&P futures	2794	-14.75
Eurostoxx index	364.5	-2.58
Oil (WTI)	59.81	-0.86
10 year government bond yield		3.21%
30 year fixed rate mortgage		4.98%

Stocks are lower this morning on no real news. Bonds and MBS are up.

As expected, the Fed made no changes to monetary policy yesterday. The language in the statement was almost identical to the September release, with some small changes regarding the deceleration in business fixed investment. Bonds didn’t have much a of reaction to the decision. The December Fed Funds futures contracts are handicapping a 76% chance of another 25 basis points next month.

Initial Jobless Claims ticked up slightly to 214k last week. The labor economy continues to plug along.

A lack of housing inventory translates into a “new normal” for home sales, which is about 1 million units less per year than the pre-bubble days – in other words, the early 2000s, before the big jump in sales driven by the bubble years. The problem is that household formation has outstripped homebuilding for over a decade, and if you correct for population growth, we are still way below what is needed.

D.R. Horton reported earnings yesterday that missed street estimates and the stock was rocked to the tune of 9%. Earnings were up 41%, but on the call, DHI CEO David Auld said the market was “choppy” and noted some “momentum slipping from the market.” D.R. Horton focuses on starter homes, so this is worrisome given that luxury is already struggling a bit. The whole sector is struggling this year, with the homebuilder ETF down 25% from its high set earlier this year.