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HOUSING HEADWINDS: HOME SALES FALL 10% AS MEDIAN PRICE HITS NEW LOW

The report below was originally published at 10:30AM EST by Josh Steiner and Allison Kaptur of our Financials Team, which does the bulk of our firm's work on housing. Below, they provide a detailed update to our 1Q11 Macro Theme of Housing Headwinds Part II. While consensus scrambles to figure out inflation's impact, we think it's worth highlighting a form of deflation that will limit the consumer's ability to absorb price increases in 2011. If you are a qualified institutional investor and would like to hear more about their work on the fins, rates, credit, housing and financial regulation, please email .


 

Existing Home Sales Fall; Median Price Hits Lowest Level Since 2002

The National Association of Realtors reports that February Existing Home Sales fell -9.6% MoM (-2.8% YoY) to 4.88M.  Inventory rose 3.3% MoM to 3.49M, equating to a months supply of 8.6 months.  Last month, we highlighted Corelogic's concern with the accuracy of the NAR report.  Corelogic believes that NAR sales volume data is overstated by 15-20%.  A detailed explanation of this argument is provided below.

 

Meanwhile, the NAR reported that February saw the lowest monthly median price for Existing Home Sales since 2002 at $156,100, which is down 32.2% from the highest median price ever recorded of $230,300 in July 2006.  February's median price fell -5.2% YoY.  This number is not seasonally adjusted, and the seasonal pattern shows median prices typically increasing from now until June, which is the typical seasonal peak.  

 

HOUSING HEADWINDS: HOME SALES FALL 10% AS MEDIAN PRICE HITS NEW LOW - 1

 

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Corelogic Casts Doubt on NAR Data

We have been noting for some time the increasing divergence between Existing Home Sales and MBA Purchase Applications.  For example, Purchase Application volume was 24% lower in 2010 vs 2009, but Existing Home Sales volume was only 4.6% lower.  Purchase Application volume was 24% lower in 2009 than 2008 as well, but Existing Home Sales were actually 5% higher.  We had been attributing this discrepancy to changes in the cash segment of the market, but it appears that the NAR's data may be faulty.  According to Corelogic, the NAR data has diverged versus Corelogic, MBA, HMDA, and Census data since 2006, and the gap is widening.

 

HOUSING HEADWINDS: HOME SALES FALL 10% AS MEDIAN PRICE HITS NEW LOW - 6

 

Says Corelogic, "There are several reasons for the divergence, including benchmarking drift, more sales going through MLS systems due to consolidation and a lower share of for sale by owners (FSBO) home sales. Net, NAR’s existing home sales data are overstated by about 15% to 20%." (emphasis added)

 

The NAR is currently reviewing its analysis, and is expected to restate the last several years of data.  The restatement may occur sometime this summer.  

 

What are the implications of a 15% to 20% overstatement of Existing Home Sales?  Fortunately, our home price model relies on MBA Purchase Application data as a measure of demand, not NAR Existing Home Sales data, so we conclude that our model is intact. For reference, our demand-based model now suggests 20% downside in home prices from current levels, with a predicted range of 10-30% downside. Any model that relies on NAR volume data may lead to incorrect conclusions.  

 

Joshua Steiner, CFA

 

Allison Kaptur


MACAU PROVES LAST WEEK WAS A BLIP

Huge week boosts our March revenue estimate to HK$18-19 billion.

 

 

 

Macau surged again this past week generating HK$623MM in table revenue per day versus HK$524MM the previous week.  For the month to date, table revenue per day averaged HK$581MM for a total of HK$11.6 billion.  Due to the strength, we are upping our March forecast to HK$18.0-19.0 billion, representing 37-40% growth over last year.  We are hearing the Mass floors at most casinos have been very busy which should be good for margins.

 

In terms of market share, the local guys are stealing the show.  SJM and Galaxy’s market share has been surging, both well above the 3 month average.  The three US operators have all fallen below trend.  MPEL is holding its gains achieved over the past three months.

 

MACAU PROVES LAST WEEK WAS A BLIP - macau1

 

MACAU PROVES LAST WEEK WAS A BLIP - macau2


R3: HD, SHLD, CROX, PVH

 

R3: REQUIRED RETAIL READING

March 21, 2011

 

 

 

 

RESEARCH ANECDOTES

  • In one of the first earnings revisions attributed to the tragedy in Japan, Billabong has lowered its June fiscal year-end outlook. After originally guiding towards flat sales, the company is now expecting top-line deterioration to the magnitude of 2%-6%. Interestingly, Japan only accounted for only 4% of global sales and 3% of EBITDA as of FY10. While roughly two-thirds of Japanese profits  are typically booked between March-June, it appears that Japan is perhaps one of only a few regions coming in below expectations.
  • After a successful test last year, Home Depot is bringing back its ‘Spring Black Friday’ event with the first of four weekends in select markets this past weekend. With door buster discounts as high as 50%-75% off select items, the company will post offers on Facebook every Friday now through the end of May in an effort to rebound from the lowest level of Lawn and Garden sales in over a decade last year.
  • Following weeks of speculation regarding Apple’s interest in retail space within Grand Central, the latest news suggests that the retailer has pulled out of negotiations. With this deal now at, or near an end, the question remains where Apple will look to anchor its latest flagship in the Big Apple.    

OUR TAKE ON OVERNIGHT NEWS

 

Sears’ Turf Wars Campaign - In a retail world which is polarising between “value” and “specialty”, many department stores have reacted by dumbing down their offer and embarking on broad-based discounting programs. The upshot, in Australia at least, is that the line between “department store” and “discount department store” has become increasingly blurred. So it’s refreshing to see a venerable US department store bucking the trend with a sharp, category-specific, competitively-focused campaign. Sears, that bastion of US retail, has just launched a new promotional initiative for the Northern Hemisphere Spring called “Turf Wars”. As indicated by the theme, it’s a tough-talking campaign that “names names” (in a tongue-in-cheek way), urging consumers to shop for their lawn and garden products at Sears, rather than The Home Depot or Lowes (the big-box home improvement competitors in this category). <InsideRetailing>

Hedgeye Retail’s Take: What’s interesting here is that we’re starting to see more retailers and brands call out their competition in ways that etiquette of the past would disallow. (Note the New Balance running campaign vs. Nike).

 

Van Heusen to Diversify into Non-Apparel - Van Heusen, a part of Madura Fashion & Lifestyle, the branded apparel business of the Aditya Birla Group, is targeting the non-apparel space as a future growth engine.  Van Heusen is a leading premium lifestyle brand straddling the premium apparel range with a turnover of Rs.650 crore and it is now planning to increase its presence in the premium non-apparel space currently dominated by multinational brands. From a small presence in men's ties and belts, the company's non-apparel business plan includes an entry into men's footwear, eyewear, watches and luggage. It will also enter the women's shoes and bags segment. Speaking to this correspondent, Ajay Ramachandran, Brand Head, Van Heusen, said, “we see a good demand for these products and over the next five years, expect the non-apparel business to contribute around 10 per cent of our targeted Rs.2,000-crore turnover.” <TheHindu>

Hedgeye Retail’s Take: Little impact on P&L. But we continue to be won over on the margin with how Manny is running this ship. All these little initiatives are going to add up to something meaningful one day soon.

 

Crocs Develops Lightweight Sneaker for Men - Crocs Inc. stepped out of its element when it launched a brand of high heels and other women's shoes that looked nothing like its iconic bright, lightweight clogs. Now it's doing it again, with a line of seven-ounce sneakers for men. The Niwot, Colo.-based company has no intention of abandoning its signature clogs, beloved by some and loathed by others. But it's pushing to become a shoe brand for all seasons and buyers, chief marketing officer Andrew Davison said. This summer Crocs plans to extend the sneakers to women and offer women's shoes made with more translucent materials, while maintaining its ideals of lightweight, odor-resistant, fun, casual footwear, Davison said. "The next couple of seasons, you'll see us push the boundaries of what a casual shoe is," he said. <Forbes>

Hedgeye Retail’s Take:  There’s a big difference between pouring a few tons of plastic pellets into a vat and popping out those Crocs we’ve grown to know and love to hate. Getting into more of a lifestyle business means one thing – complexity. The process from design, procurement, marketing, manufacturing, and logistics means that Crocs will see a meaningful change in its cash conversion cycle. We think that this is going to be one of the keys to whether they can make this work.

 

A Struggling Wal-Mart Turns to Its Core  - After attempting to appeal to a wider variety of shoppers backfired, discount giant Wal-Mart Stores Inc. now is mired in its worst U.S. sales slump ever. I think we tried to stretch the brand a little too far,' says William Simon, Wal-Mart's chief for the U.S.  But William Simon, the former Navy officer put in charge of the flagging U.S. division last June, says he is confident that the lumbering giant can reverse its fortunes after seven consecutive quarters of domestic sales declines at stores open at least a year. Part of his strategy includes returning to the "Every Day Low Prices" formula Wal-Mart popularized, after the company in recent years veered away from offering low prices across the board and instead discounted some items while raising prices on others.  Mr. Simon says he hopes this will win back some of Wal-Mart's core customers—households earning $30,000 to $70,000 a year—which the company has been losing to upstart dollar-store chains. <WallstreetJournal>

Hedgeye Retail’s Take: The only thing notable in this article is that it is in the WSJ. We still think that with inflation on the rise in 2010, and consumer spending remaining challenging at best, Wal-Mart has its job cut out for it.

  

Marimekko to Expand in U.S. Online - Marimekko, the Finnish design house, is moving ahead with its U.S. expansion plans, opening a flagship here, launching an e-commerce site, and extending its collaboration with Crate & Barrel.  In addition, the company seeks to enter new retail partnerships for clothing and accessories and increase its presence in home furnishings stores.  The flagship will open this fall in Manhattan’s Flatiron District in the “Toy Building,” at 200 Fifth Avenue. With nearly 4,000 square feet of selling space, the store will mirror the recently opened flagship in Helsinki. Both stores are designed by IMA, the Japanese architectural firm, in cooperation with Marimekko’s own store design team. The world of Marimekko products will be displayed, with new merchandise showcased each season.  <WWD>

Hedgeye Retail’s Take: No threat

  

European M&A Activity Heats UpEurope appears to have caught the M&A fever again.  The last six months has been a lively period for European mergers and acquisitions activity, culminating in the blockbuster $6 billion-plus transaction by LVMH Moët Hennessy Louis Vuitton for Bulgari earlier this month that followed a rash of private equity deals. Overall, and boosted by the LVMH deal, M&A activity in Europe in the fashion and luxury space over the last six months has approached $10 billion — and all signs are the momentum will continue throughout the rest of the year.  “There’s been a pickup in activity over the last several months. It’s been very substantial. Right now luxury is back [and] banks are starting to lend again,” said Richard Kestenbaum, partner at Triangle Capital LLC. “There are signs that firms who have capital are waiting in the wings wanting to do something.”  In the Bulgari deal, LVMH was able to double its watch and jewelry division through a single acquisition.  <WWD>

Hedgeye Retail’s Take: Is it us, or does this snippet scream 2003-2007? We’re not suggesting that all deals will be bad. But when executives tout that they “doubled a business” with a given acquisition, it is usually a bad sign.

 

The Aftershock for Retail Companies in Japan - As fears mount about Japan’s economy slipping into a recession, footwear firms are struggling to keep stores operating normally in the region. While every company said last week they are most concerned about the safety of their employees amid growing threats of a nuclear crisis, execs noted that business has been disrupted to varying degrees. Kobe, Japan-based Asics Corp., which derives about a third of its revenue from its domestic business, experienced light damage in certain facilities and distribution centers, including cracked walls and broken windows in its business office in Tokyo. And not all 57 stores in the country are fully operational, said Gary Slayton, Asics’ VP of marketing. “Our infrastructure and supply chain haven’t been disrupted. <WWD>

Hedgeye Retail’s Take:  The ONLY consolation from a business perspective is that there are very few businesses outside of the lux market that have had any success in Japan in a pretty long time. This is actually a pretty good time for better-managed companies to invest capital.

 

 

 


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European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit

Positions in Europe: Short Italy (EWI); Short Spain (EWP)

 

Below we include our weekly Risk Monitor for European bank CDS. Banks swaps in Europe were mostly tighter week-over-week, tightening for 32 of the 39 reference entities and widening for 7.

 

European capital markets continue to be volatile given existing global concerns (in particular the results of the earthquake and tsunami in Japan and unrest in MENA) and domestic issues (existing sovereign debt imbalances across states; indecision from the BoE and ECB on adjusting monetary policy to reflect inflation pressures; the second round of Bank Stress Tests; and the likely consummation of dovish agreements at the comprehensive EU Summit this week (March 24-25) – in short, a larger and more generous social net to bailout/protect ailing member states).

 

To the last point, European equity markets could likely trade with a positive bias anticipating that the EU Summit will calm near-term bailout/default fears. In particular we’ve highlighted Portugal as one country on watch as it goes up against a hefty schedule of bonds coming due over the next 4 months (see our portal: Portugal Shakes on Debt Dues on 3/16).

 

In the Hedgeye Virtual Portfolio we’re short Italy via the etf EWI and Spain via EWP. Our position remains that despite initial attempts at austerity, these two countries should break longer term under their bloated sovereign debt and deficit imbalances. In both cases, we tactically shorted the etfs on a bounce last week. We view the EUR-USD currently overbought, with immediate term TRADE levels of $1.39 - $1.41.

 

Matthew Hedrick

Analyst

 

European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit - cds


GREECE: DRAFT GAMING BILL SUBMITTED TO PARLIAMENT

Update on the Greek VLT Bill.

 

 

The Greece finance ministry unveiled the draft gaming law late last Friday.  The draft details an international tender where each market participant will be able to acquire one license.  An exception may be held for OPAP due to its monopoly agreement it has with the Greek government.  Any unsold licenses will be evenly distributed to those that would already have received a license.  There will be a 30% gross profit tax paid to the government on a quarterly basis.  In addition, a 10% tax on players’ gains will be imposed both in VLTs and Internet betting.  The minimum payout will be 80%.  The gaming regulator that will be established will set up a live monitoring system to which every VLT and internet site will be permanently connected.

 

The ministry reiterated that the bill will earn 500MM euros (US$698 MM) from license fees and 200MM euros (US$280MM) annually from tax collections.  Currently there are over 250 betting websites, ~20,000 slot machines and ~150,000 computers operating gaming programmes illegally in Greece, said the ministry.

 

What are the next steps (with tentative dates):

  1. Passage of bill in Parliament (Late 2011)
  2. Bill sent to President Papoulias for promulgation and publication in the Government Gazette (Late 2011/early 2012)
  3. Setup of new gaming supervising committee (early 2012)
  4. Tender process (2012-2013)

THE M3: CPI, GALAXY EARNINGS DATE

The Macau Metro Monitor, March 21, 2011

 

 

CONSUMER PRICE INDEX FOR FEBRUARY 2011 DSEC

Feb CPI rose 4.7% YoY and 0.90% MoM.

 

DATE OF BOARD MEETING Galaxy Entertainment

The board of directors of Galaxy Entertainment Group will discuss FY 2011 results on March 30.

 

 

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