Single vs Multifamily Housing Starts ('000s, SAAR) few years) in July; indeed, Single Family. South Northeast

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1 Housing Breakout We ve been big housing bulls for a long time (our earliest true bullishness on the sector dates to early in 214, when we wrote a Long Term Housing Outlook). Seventeen months later, the demographic, economic, and other long-term drivers we expressed enthusiasm for are still in place, and are starting to be borne out in economic data and the market. We continue to like housing, and one of our recent picks in the Bespoke 5 (AMWD) continues to surge after we mentioned it in Barron s (note: paywalled link). Today, we ll conduct a comprehensive review of today s housing starts and permits data before presenting some technicals on homebuilder ETFs and a stock screen of possible housing plays. Tuesday s starts data Single vs Multifamily Housing Starts ('s, SAAR) showed robust residential 2 investment (relative to 18 Multifamily the tepid pace of the last 16 few years) in July; indeed, Single Family single family starts hit their highest level since 1 27 as total starts printed 1.26 million (at a sea sonally adjusted annual 4 rate) for the month. Multi family starts pulled back from previous highs but remained strong at a 413K annual pace. Please note Housing Starts By Region (SA, 's): Last 1 Years that 2-4 unit starts are not 25 shown at left. Expectations were for a 1.18 million SAAR print versus day s release). As we mentioned in our recap South Northeast (revised upward by 3, Midwest West million last month to 1.24 million on to- on the blog, single family 5 starts are now up an incredible 19% year-overyear in the United States We ll get into some of the weaker aspects of the data on the next page, but above we update our chart of the geographic distribution of starts. As shown, the West and the South Census regions continue to dominate starts data, driven by cheaper land, higher population growth, and less restrictive building policy in aggregate. Copyright 215, Bespoke Investment Group, LLC. Bespoke Investment Page 1 of 7 Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

2 The disappointing aspect of the report was permits, where a massive surge in Northeast permit issuance over the last few months to take advantage of New York State tax breaks expiring in June reverted. Economist expectations were primed for a permit rate of million SAAR, but the actual figure was only million. The 16.3% MoM drop in permits was driven by a 6% decline in the Northeast despite an increase versus June for single family. This was the impact of the tax incentives, as we show in the chart at above right. Ex- Northeast, permits continued to grow over 9% per year. The level of activity (chart at middle right) is also robust, and similar to national single family starts sits at levels that haven t been reliably reached since 27. While the collapse in Northeast permitting suggests that permits activity for multi-family units in the region will continue to be a weight on permit growth over the coming months, we would note starts should be less impacted. The MoM decline in Northeast multifamily units (-171, SAAR) belies the fact that over the last three months there were drastically lower conversion ratios for permits in the region. If we see a catch up over the coming months for starts, the 167, (SAAR) boost to starts from Permits (SA, QoQ Annualized) Northeast Ex-Northeast Permits Northeast Permit Conversion Rate (Month - Month) units permitted but not started in April, May and June. We may not get that feed through next month, and in fact would very much doubt it, but when half of multifamily structures in a region that have been permitted aren t started, one can expect ground to be broken at elevated levels in short order. All YoY % Change (Left Axis) Level (Right Axis) Implies +167, SAAR unit tailwind for Northeast (last 3mos) vs 171, permit decline Page 2 of 9

3 The feed-through from Northeast permits may take some time though; for instance, looking at starts on a QoQ annualized basis, there was a sharp deterioration in the Northeast. Nationally, stripping away the effects of seasonal adjustment, total starts are up 11.2% YoY; again, that was driven by new highs for single family, as we showed on page one Housing Starts (SA, QoQ % Change) Our final chart for the monthly housing Mar Apr May Jun Jul supply breakdown is below, showing the conversion-implied starts (permits Housing Starts (NSA, YoY % Change) one month previously) to actual starts. 5 We use five-year averages for the chart below, but the data is similar over a longer time-frame. As shown by the chart, permits are implying a significant drop in starts next month, and while we would expect a month-over-month decline next month, latent permitted -7 starts from the Northeast should keep the temporary crash implied below from being fully realized. A final point on all off this housing data: +19% YoY housing starts is simply not consistent with anything short of 3% RGDP growth for the quarter. We expect that the current consensus around low growth in Q3 is just wrong, and that Q2 could see notable upward revisions All Midwest West South Northeast Housing Starts (SA, 's) R-Squared Since 1964:.9722 R-Squared Since 5/21:.9597 Implied Starts Actual Starts August Page 3 of 9

4 As far as market implications go, both the XHB and ITB ETFs (which track homebuilding-related names and home builders more specifically, respectively) are in the process of significant breakouts to new highs, as shown in the stock charts below. From a technical perspective, a move to new highs like this is constructive. While we might consider waiting for a consolidation period to add, both housingrelated ETFs look like they re on solid footing for further gains here. 4 SPDR S&P Homebuilders ETF (XHB): Last Year /14 9/14 1/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 32 ishares U.S. Home Construction ETF (ITB): Last Year /14 9/14 1/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 Page 4 of 9

5 Finally, below we present a screen of stocks that we think are likely to benefit from further acceleration in housing. We took stocks from 12 industry sub-groups geared to US home and apartment construction, including names from the Materials, Industrials, Consumer Discretionary, and Financials sectors. We then screened for names that had positive EBITDA margins and a Bespoke Stock Score in the top quartile of the 8 names we pulled based on the industry sub-group screen we did. The results are below, along with some basic stats about each name and a fairly comprehensive list of attributes that we think may be helpful in identifying quality names. We would also note that while XHB (+5.6%) and ITB (+8.2%) are surging, average returns over the past five days are lower for this group (+2.6%), meaning they might have better, less overbought entry points than the ETFs themselves. We would note that this screen is definitely meant as a starting point for further research, not a comprehensive buy list. Housing Plays Screen: Description and Market Data Avg Daily 1 Week Ticker Name Size Sector Sub-Industry Price Volume (mm) Return (%) EME Emcor Small Cap Industrials Construction/Engineering JLL Jones Lang Lasalle Mid Cap Financials Real Estate Services DHI DR Horton Large Cap Consumer Discret. Homebuilding GFF Griffon Small Cap Industrials Building Products AOS Smith (A.O.) Mid Cap Industrials Building Products HELE Helen of Troy Small Cap Consumer Discret. Household Appliances WD Walker & Dunlop Small Cap Financials Thrifts & Mortgage Finance HW Headwaters Small Cap Materials Construction Materials ETH Ethan Allen Small Cap Consumer Discret. Home Furnishings UFPI Universal Forest Prod. Small Cap Industrials Building Products PGTI PGT Small Cap Industrials Building Products MAS Masco Large Cap Industrials Building Products LEN Lennar Large Cap Consumer Discret. Homebuilding PHM PulteGroup Large Cap Consumer Discret. Homebuilding RYL Ryland Small Cap Consumer Discret. Homebuilding MDC MDC Mid Cap Consumer Discret. Homebuilding ROCK Gibraltar Small Cap Industrials Building Products CBG CBRE Group Large Cap Financials Real Estate Services WHR Whirlpool Large Cap Consumer Discret. Household Appliances TPH Tri Pointe Mid Cap Consumer Discret. Homebuilding Housing Plays Screen: Stock Scores and Fundamentals Bespoke Stock Scores 216 T12M T12M EBITDA T12M Sales Ticker Fundamental Technical Sentiment Total EV/EBITDA PE Margin Growth EME JLL DHI GFF AOS HELE WD HW ETH UFPI PGTI MAS LEN PHM RYL MDC ROCK CBG WHR TPH Page 5 of 9

6 As far as market reaction today goes, the S&P 5 briefly flashed positive around 11: AM following the strong housing data, but sold off to afternoon lows, closing down 26 bps. Bonds sold off throughout the day despite a brief rally on the back of the housing data, with the ten year closing up 2.5 bps to yield 2.193%. The curve steepened as front end bonds sold off but moved less than the long end. Ahead of CPI tomorrow, breakevens were mostly unchanged, off slightly at the ten year point. In commodities, oil rallied throughout the day to close up 1.27%, while other industrial commodities had a less impressive session as copper closed down 1.64%. Gold was flat while silver got absolutely smoked, down 3%. That was the single largest move in the gold/silver ratio since July 7th when gold gained 3.7% versus its tarnishable cousin. US credit was mostly wider on the day as CDX HY widened by 4.8 bps and high yield cash moved wider by 5 bps on weak breadth for bonds that traded. As far as US equites go, the breadth was a fair bit weaker than the move with 62% of the S&P 5 lower on the day and only one sector higher (Consumer Discretionary, fueled by homebuilders). The Russell sold off much harder, off 83 bps as it rejected overhead resistance right from the open in the form of its 2-DMA. Since large-caps bottomed versus small caps on June 25th, the big boys have outperformed more speculative small caps by about 5.4%. On a year-to-date basis, large caps are only up 1% versus small caps. Overnight, focus will be on Japanese data, with Eurozone balance of payments and construction spending releases also providing some interest. Tomorrow, US CPI data will loom large. We would note that the month-over-month change in core CPI last year that is dropping off was +.1% (+.979% unrounded) so a relatively modest move higher (+.18%) MoM will take core CPI to +1.9% YoY. To get to +2.% YoY for core, we would need to see a +.28% MoM move; that would be the highest since January of 213 and looks unlikely, although hypothetically possible. Economic Data: Int'l Overnight, US Today Time Release Period Estimate Reading Last n/a NZ Dairy Auction Avg Winning Price/ton ($) 18-Aug n/a NZ Dairy Auction Whole Milk Powder/ton ($) 18-Aug :3 Housing Starts ('s SAAR) Jul :3 Building Permits ('s SAAR) Jul :3 API Crude Oil Inventories (mm bbls) Jul :5 Japan Trade Balance (bn JPY) Jul :3 Australia Westpac Leading Index MoM Jul % :3 Japan All Industry Activity Index Jun +.4% % 2: Machine Tool Orders YoY (Final) Jul % 4: ECB Current Account SA (bn EUR) Jun : Construction Output MoM Jun % 7: MBA Mortgage Applications 14-Aug % 8:3 CPI YoY Jul +.2% % 8:3 Core CPI YoY Jul +1.8% % 8:3 Real Avg Weekly Earnings Jul % 1:3 DoE US Crude Oil Inventories (bbls, 's) 14-Aug : Minutes for July FOMC Meeting Page 6 of 9

7 Closing Charts & Tweets Popular Tweets on Twitter Strong showing from single family housing starts in July; up 12.8% m/ m and 19.% y/y. $ITB $XHB - 8:48 Another 2 crosses of the 5-DMA for the S&P 5 this week, crossed above yesterday, back below today. Go figure. $SPY - 14:54 S&P 15 Homebuilder group now up 1% since last Monday. $ITB $XHB $AMWD - 15:7 Target ($TGT) reports tomorrow morning. Stock has traded higher on its last 6 earnings reaction days - 15:36 Staples ($SPLS) also reports tomorrow AM. Has only risen on 3 of its last 15 quarterly earnings reaction days - 15:41 $SHAK has been up 5%+ in AM each of the last 3 trading days, only to fade hard each afternoon. - 16:36 2,14 2,13 2,12 2,11 2,1 2,99 2,98 2,97 2,96 2,95 2, Oil Future: Last 15 Trading Days US Dollar Index: Last 15 Trading Days The Tale of The Tape: S&P 5 vs ishares US Home Construction ETF (ITB) S&P 5 Intraday: Last 15 Trading Days S&P 5 24 ishares US Home Construction ETF (ITB) Gold Front Month Future: Last 15 Trading Days Long Bond Future Intraday: Last 15 Trading Days Nasdaq Composite: Last 15 Trading Days 49 S&P 15 Biggest Movers Price (%) Volume vs Historical Avg (%) Most Up Most Down Most Up Most Down NPBC CC NPBC CABO PVA 7.81 CENX OCR THOR TJX 7.22 FRAN HAIN BGFV FN 7.15 IDTI -8.1 FN NTCT WCG 6.99 HAIN MHO WST LL 5.95 ANF TJX NFBK SLH 5.9 SWKS URBN DEPO SZMK 5.58 REX FRAN IRDM ITG 5.48 CECO -5.3 DKS PVA DNR 5.45 CLD -5.3 PDCO TW GIFI 5.24 PSEM TECD GFF CCRN 4.44 HHS EL PLCM CBR 4.19 BNED DGII 24.3 TRAK MGLN 4.12 TECD WMT ITT LDR 3.97 ZUMZ -5.6 ANF DST Key ETFs (1 Day % Change) Ticker Name Change Last 6 Mos SPY S&P IJH S&P IJR S&P DIA Dow QQQ Nasdaq -.51 IWB Russell IWM Russell XLF Financials -.8 XLB Materials -.65 XLE Energy -.37 XLI Industrials -.18 XLY Cons. Cyclical.9 XLP Cons. Staples -.5 XLV Health Care -.14 IYZ Telecom -.63 XLK Technology -.52 XLU Utilities -.24 GDX Gold Miners -1.8 XME Metals & Mining -2.8 XRT Retail -.32 XHB Homebuilders 1.24 IYR US Real Estate.8 KRE Regional Banks.2 IWD Russell 1 Value -.28 IWF Russell 1 Growth -.22 VXX VIX 1.1 AGG Total Bond Mkt -.18 TLT 2+ Yr Treasuries -.79 MUB Muni. Bonds -.14 LQD Invest. Gr. Bonds -.38 JNK High Yield Bonds -.3 BKLN Senior Loan.4 GLD Gold -.2 SLV Silver -2.8 USO Oil 1.15 UNG Natural Gas -.76 VT Total World -.51 CWI World Ex-US -.75 VEA Developed Mkts -.78 EEM Emerging Mkts -1.8 EZU Eurozone -.84 DXJ Japan JPY Hdg'd -.54 EWZ Brazil.76 FXI China -2.9 EWT Taiwan EWH Hong Kong EWW Mexico -.29 Page 7 of 9

8 Bespoke Market Timing Model: 8/18/15 Bearish Neutral Bullish Current Level Average S&P 5 Performance (%) Sentiment Indicator Direction vs Historical One Week Two Weeks One Month CBOE Call Volume 1.3 ## NYSE Up vs Total Volume (%) 5.7 ## Nasdaq Up vs Total Volume (%) 48.5 ## Index vs Equity PC Ratio. ## VIX 5-Day ROC (%) -9.8 ## VIX 1-Day ROC (%) 6.1 ## Investors Intelligence Bullish (%) 4.2 ## Investors Intelligence Bearish (%) 18.6 ## Inv Intell. Bull Bear Spread 21.6 ## AAII Bullish (%) 3.5 ## AAII Bearish (%) 36.2 ## AAII Bull Bear Spread -5.7 ## Overall Sentiment ## Technical S&P 5 1-Day Avg. Spread (%).3 ## S&P 5 5-Day Avg. Spread (%).1 ## S&P 5 2-Day Avg. Spread (%).9 ## S&P 5 Monthly ROC (%) -.8 ## S&P 5 Weekly ROC (%).6 ## S&P 5 Quarterly ROC 1 (%) -1.4 ## Group 1-Day A/D Line 6. ## Group 5-Day A/D Line 62. ## S&P 5 1-Day A/D Line 463. ## S&P 5 5-Day A/D Line 835. ## NYSE TRIN Index 1. ## Overall Technical ## Fundamental/Monetary Corporate Spreads (1-Day ROC) 6. ## Corporate Spreads (5-Day ROC) 26. ## High Yield Spreads (1-Day ROC) 17. ## High Yield Spreads (5-Day ROC) 97. ## S&P 5 P/S Ratio 1.8 ## S&P 5 P/E Ratio 18.6 ## S&P 5 P/B Ratio 3.1 ## Yield Curve (5-Day ROC) -5.6 ## Yield Curve (1-Day ROC) -1.9 ## Overall Fundamental ## Bottom Line ## Average S&P 5 Performance (All Days) Page 8 of 9

9 Current Level Average S&P 5 Performance (%) Sentiment Indicator Direction vs Historical One Week Two Weeks One Month CBOE Call Volume Overall Sentiment Bottom Line Average S&P 5 Performance (All Days) The Bespoke Market Timing Model is a compilation of some widely (and not so widely) followed market indicators. While most investors have one or two indicators they rely on, we all recognize that no indicator by itself is correct all of the time. With this in mind, we set out to create a series of indicators from multiple disciplines in order to see what the 'crowd' of indicators are telling us. Just as no individual is bigger than the market, we contend that no single indicator is more accurate at forecasting the market than the sum of them all. What follows below is an explanation of the various fields in our report. Indicator: Current level of the given indicator. In this example, CBOE call volume is 1.7 times CBOE put volume. Direction: Change in the indicator (positive or negative) over the last week. In this example, calls relative to puts have increased during the last week. vs Historical: This field measures the distance in standard deviations that the indicator is currently at versus its average over the last five years. In the above example, the volume of calls relative to puts is.6 standard deviations above its historical average. Indicator: Current level of the given indicator. In this example, CBOE call volume is 1.7 times CBOE put volume. Average S&P 5 Performance: This field displays the average performance of the S&P 5 following previously occasions when the indicator was at similar levels to the present. Values highlighted in green indicate the two indicators for that group which are predicting the biggest gains, while indicators highlighted in red highlight the indicators which are signaling the most negative returns going forward. Overall Scores: Averages all the indicators for a given category. In the example above, overall sentiment is.3 standard deviations from its long-term average. At similar levels in the past, the S&P 5 has gone up an average of.14% over the next week,.16% over the next two weeks, and.28% over the next month. Bottom Line: This line shows the average of all the indicators in the study. In the example above, the aggregate level of all the indicators is currently.3 standard deviations above the historical average, and based on prior experiences, the S&P 5 has gone up an average of.12% in the next week,.21% in the next two weeks, and.27% in the next month. Values highlighted in red indicate returns that underperform the S&P 5 over the entire period covered (regardless of the indicator level), while green highlights indicate that they outperformed the overall average S&P 5 performance. Average S&P 5 Performance (All Days): This line measures the average historical performance of the S&P 5 over all periods for one week, two week, and one month time frames. These levels are then compared to the average level the indicators are predicting.in the next two weeks, and.27% in the next month. Values highlighted in red indicate returns that underperform the S&P 5 over the entire period covered (regardless of the indicator level), while green highlights indicate that they outperformed the overall average S&P 5 performance. Average S&P 5 Performance (All Days): This line measures the average historical performance of the S&P 5 over all periods for one week, two week, and one month time frames. These levels are then compared to the average level the indicators are predicting. Page 9 of 9