Earlier this morning, we posted up hedge fund Ellington Management's 2010 equity outlook. Now that you've had a chance to digest their overall stance on things, we wanted to shift focus to one of their specific theses. Brace yourself: Ellington Management is bullish on housing (gasp). Now, why should you care? Well, Ellington Management is the hedge fund founded by Michael Vranos that primarily focuses on mortgage backed securities (MBS). Not to mention, Vranos was previously head of MBS trading at Kidder Peabody. So, they're pretty experienced in the arenas of MBS & housing and we thought we'd use this post to outline their views with an attached slide-deck at the bottom.
Firstly, a broad overview. Focusing specifically on the US, Ellington believes that a 'new normal' or 'jobless recovery' are unlikely. They see excess growth for sectors with cyclical or secular tailwinds (housing, smartphones, infrastructure) and in-line growth from the consumer sector with high-end consumer names outperforming low-end consumer names. That helps frame their overall stance, but let's dig into the specifics.
Vranos' hedge fund argues that foreclosures are only ownership transitions and that they do not create new houses. As such, they believe that these foreclosures (and shadow inventories) are already baked into the various numbers you see floating around. Additionally, they argue that the supply/demand dynamic in housing is dependent on the number of houses versus the number of households (instead of who owns the houses). This is contrary to our assertion in December of '09 that housing inventories were still too high. Ellington then goes on to graph out the absorption of foreclosures and argues that demand for said foreclosures is likely to grow.
Their main argument here is that housing inventories are declining despite foreclosure activity. Overall, here's the summary of their stance in an embedded slideshow. RSS & Email readers will need to come to the site in order to view it:
