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HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON

Takeaway: More evidence of home prices accelerating, while the government is poised to add further stimulus to an already strengthening recovery.

Home Price Data Reinforces Main Street Confidence

This morning's Case-Shiller HPI reading for October showed further acceleration. On a year-over-year basis, home prices rose by 4.3% in October, up from a 3.0% YoY increase in September. This should come as no surprise as Case-Shiller reflects Corelogic data on a lag, as it is a 3-month rolling average. Nevertheless, the market, media and Main Street continue to ascribe greater significance to this series, which makes it important.

 

Once of the central tenets of our bullish housing call is that good news in housing feeds on itself. As Main Street hears more and more good news about housing's recovery, that begets greater demand as demand is positively correlated with price. That rising demand, in turn, fuels ongoing price increases in a virtuous loop.

 

In our recent Black Book "Housing Heading Higher in 2013" we laid out the bull case for housing's recovery being stronger than expected in 2013. This morning's print is another data point in support of our thesis. 

 

Looking at the data on a city-by-city basis, Phoenix and Las Vegas showed the strongest month-over-month improvement, rising 1.4% and 2.8%, respectively. Meanwhile, Boston and Chicago were the laggards. On a year-over-year basis, Phoenix is blowing the rest of the country away, up +21.7% YoY, followed by Detroit +10.0% YoY. Clearly the distressed market has turned from headwind to tailwind. The weakest two markets nationally on a YoY basis are New York and Chicago, both down just over 1%.

 

It's also worth noting that New York has an enormous weighting in Case-Shiller. New York accounts for 19.4% of the index. Considering NYC is the worst performing market in the country, and accounts for one-fifth of the index, it's a testament to how strong the real estate market throughout the rest of the country is.

 

Further Government Involvement Is a Positive for Housing

Normally, weekly mortgage application volume data is released on Wednesday morning, but in light of the holiday it seems to be on a delay. We will provide an update once the data hits. That said, we wanted to flag an article in the Wall Street Journal as an interesting read.

 

The article describes new initiatives by the Obama administration to expand the refinancing programs backed by the government. The idea is to allow non-GSE loans that are underwater to be refinanced, though it's unclear how this would be achieved. One proposal has these loans being transferred to Fannie and Freddie, but there doesn't appear to be any consensus around whether this would also entail putback immunity for the banks underwriting the refi. This would be a major undertaking, however, as it would require a change to Fannie and Freddie's charters, which can only be done by Congress. Another proposal would allow non-GSE borrowers to refinance underwater loans through HAMP. This would be the path of least resistance as it would require no involvement by Congress. Currently, HAMP only allows underwater refis for borrowers at imminent risk of default. The proposal would modify those guidelines to include underwater borrowers not at risk of default.

 

While it remains to be seen what, if anything will come of this, it seems clear that the two scenarios here are either status quo or further stimulus for housing. As such, the expected outcome is another positive for housing. Our Black Book had flagged further government initiatives as an ongoing catalyst to the strengthening recovery in housing and this article appears to support that conclusion. Here is the link to the article WSJ.

 

HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON - SA YoY

 

HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON - NSA YoY

 

HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON - YoY

 

HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON - MoM

 

HOUSING: ACCELERATING PRICE GAINS AND MORE STIMULUS ON THE HORIZON - NSA MoM

 

Joshua Steiner, CFA

 

Robert Belsky


ANOTHER GOOD WEEK IN MACAU

Average daily table revenues were HK$775 million over the past 9 days, same as the prior week and up 14% the comparable period last year.  We believe the market is on pace for December YoY growth of 13-17% which would be above our original expectations of 12%.  High hold percentage may be the main driver of the better than expected results.

 

ANOTHER GOOD WEEK IN MACAU - 1

 

Wynn has been unable to recapture much share lost in the first 10 days of December and remains well below trend.  LVS and MGM continue to outperform their recent trend.  We think LVS will continue to gain share over the coming months while MGM appears to be more of an anomaly.  

 

ANOTHER GOOD WEEK IN MACAU - 2


Cliffhanger

Client Talking Points

Edge Of The Cliff

Now that the holidays have come to a close, it’s time to get back to business. Congress in particular really needs to reach into their mahogany desks and pull out their thinking caps. It’s going to be extremely difficult getting the political class to work together with President Obama to come to a solution on the fiscal cliff, but it must be done. We are fast approaching our debt limit of $16.39 trillion and guess what? Americans have little faith that Congress can get its act together to come to a compromise on spending cuts, taxes and the like. InTrade’s odds of the debt ceiling being raised by year-end are currently at 10% - so much for confidence.

Raise The Roof

Housing is one sector that’s on the fast track to a bright recovery. For the last six weeks or so, we’ve seen positive data from nearly every spectrum of the housing market. This morning October home prices are up 4.3% year-over-year according to S&P/Case-Shiller. Mortgage lending is up and the amount of inventory is decreasing. This is the kind of recovery investors have been wanting/needing for some time now.

Asset Allocation

CASH 55% US EQUITIES 21%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“When the #Fed & #ECB truly bring systemic risk in the banking system back to 2004 levels, they will lose complete control over yield curve” -@Convertbond

QUOTE OF THE DAY

“Nature is trying very hard to make us succeed, but nature does not depend on us. We are not the only experiment.” -R. Buckminister Fuller

STAT OF THE DAY

October S&P/Case-Shiller Home Prices rise 4.3% year-over-year.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

THE M3: SMOKING BAN; GUANGZHOU-BEIJING RAILWAY; CORRUPTION; UNEMPLOYMENT

The Macau Metro Monitor, December 26, 2012

 

 

NO GRACE PERIOD FOR SMOKING BAN: GOVT Macau Business 

According to Macau Health Bureau director Lei Chin Ion, the partial smoking ban on casino floors will take effect next week, even though some casinos will not be ready on time.  Lei says there would be “no room for exercising discretion or another grace period” for enforcing the partial smoking ban in casinos.  If a casino fails to get its project on smoking areas approved by the government by the deadline of January 1, it will be considered a full non-smoking area.

 

He pointed out that the bureau has already received requests for approval from all six gaming operators and is now conducting site inspections.  Lei added that he is confident that the bureau would conclude all the proceedings on time.

 

WORLD'S LONGEST HIGH-SPEED RAIL LINE OPENS IN CHINA AP

China has opened the world's longest high-speed rail line, which runs 2,298 kilometres (1,428 miles) from the country's capital in the north to Guangzhou.  Trains on this high-speed line will initially run at 300 kph (186 mph) with a total travel time of about eight hours.  Before, the fastest time between the two cities by train was more than 20 hours.  Railway is an essential part in China's transportation system, and its government plans to build a grid of high-speed railways with four east-west lines and four north-south lines by 2020.

 

MACAU CASINOS WEIGH THE ODDS OF IMPOSING SMOKING BAN London Times

85% of gamblers in Macau are reckoned to be smokers - representing the upper estimate by the casino operators.  The 50% floor space rule presents casinos with a clear choice: they will not ban smoking in any of the VIP rooms because they cannot afford to annoy the high-rolling smokers.  By taking that decision, and using their quota of smoking area on the VIPs, most casinos will end up having to have total bans on their mass gaming floors.  When American and Australian casinos enacted such bans, gaming revenue fell by an average of 12% in the first year, and that was in countries where only about a third of gamblers smoked.

 

CHINA AUSTERITY MAY CRIMP LUXURY DEMAND WSJ

China's new leaders have come out swinging against official excess and corruption. Expensive banqueting and lavish overseas trips are out. Clean living and austerity are in. Some senior officials are under investigation. The antigraft dragnet could catch more than just corrupt cadres.

 

Luxury retailers have benefited from the inflated incomes and gifting culture of China's officials.  It is difficult to say how much luxury spending is tied to corruption. But a recent Bain survey found about a quarter of all luxury goods are purchased for gifting.  Foreign auto makers that sell to the official fleet or cater to China's princeling set could also be affected. The likes of Audi and Ferrari now count China's wealthiest class as key customers, including bureaucrats, business owners and their offspring.  Macau's gambling sector could also suffer.

 

It is difficult to know how effective the new leadership will be with efforts to clean house.  Hu Jintao has railed against corruption for years to little apparent effect.  Rule changes that would force officials to disclose their assets and subjecting party members to the law would help.  But antigraft rhetoric without a change in the rules will likely have little permanent effect.  Still, corruption and excess have been important components of revenue growth for some sectors. If Beijing gets serious about stamping it out, the impact will be meaningful.

 

EMPLOYMENT SURVEY FOR SEPTEMBER - NOVEMBER 2012 DSEC

Macau unemployment rate (1.9%) and the underemployment rate (0.8%) for September-November 2012 held stable as the previous period (August-October).  Total labor force was 356,200 and the labor force participation rate stood at 72.5%.  Total employment reached 349,600, an increase of 2,900 over the previous period. 



The Marshmallow Experiment

“Strength does not come from physical capacity.  It comes from an indomitable will.”

-Mahatma Gandhi

 

It is a quiet week at Hedgeye and in the markets this week.  Keith is spending some time with his family, so I’ve been handed the pen on the Early Look.  My family decided to take a little vacation in the Canadian Rockies for the holidays.  As a result, this note is coming to you from Banff, Alberta in all of its -30 degrees Celsius glory.

 

Similar to most vacations, I’ve taken an opportunity in the downtime to do some reading.  The most interesting book I’ve picked up this holiday season is called, “Willpower”, and was written by Roy Baumeister and John Tierney.  This is not one of those books in which the title has a double meaning - the book is in fact about will power. 

 

As the authors write, when psychologists attempt to identify the key traits that lead to positive outcomes in life they consistently come up with two: intelligence and self control.  Interestingly, the first trait, intelligence, is considered to be somewhat innate and researchers have thus far been unable to permanently increase a person’s intelligence.  Self control, on the other hand, can be improved.  In fact, according to Baumeister and Tierney, improving self control, or willpower, is the surest path to a better life.

 

One of the most interesting studies that support the relationship of willpower to positive life outcomes is the Marshmallow Experiment.  This experiment was conducted by Stanford psychologist Walter Mischel in 1972 and its original objective was to study how children learn to delay gratification.  In the experiment, four year olds were put in a room alone and told that they could eat a marshmallow whenever they wanted, or if they waited until the experimenter returned they would get two marshmallows.

 

Interestingly, Mischel’s daughters attended the school where the Marshmallow Experiment occurred, so he kept hearing anecdotes about the marshmallow kids from his daughters after the experiment had ended.  Naturally, this led Mischel to do follow up research on the children that had participated in the experiment. 

 

The follow up research showed that those four years olds who were able to hold off for the second marshmallow had SAT scores that were on average 210 points higher, earned higher salaries, had lower body mass indexes, and lower rates of divorce.  The results of this experiment surprised many academics, since prior to this experiment it was thought that childhood characteristics were not accurate predictors of future success.

 

Since discipline is an attribute of most great investors, I’m sure many of those men and women that went on to have great careers as stock market operators would have waited for the second marshmallow.  As for politicians, I’m not so sure.  If the most recent policy stalemate implies anything, it is that elected officials don’t really want any marshmallows.  The caveat over the last 24 hours is that President Obama has made the decision to end his Christmas vacation early and will return to Washington, D.C. today, thus the futures are up this morning.  Santa Claus Rally anyone?

 

So, even as President Obama is coming back in hopes of getting his proverbial second marshmallow, it remains very unlikely that the fiscal cliff gets resolved in 2012.  Senator Mitch McConnell, who has been a catalyst for prior bargains, is having none of it this year as he looks toward a re-election campaign in 2014 and recently stated:

 

“We don’t know what Senator Reid will bring to the floor.  He is not negotiating and the president is out of town.  So I don’t know what they are going to do over there.”

 

The Republicans in the House, of course, have also not been able to accomplish much. Speaker Boehner’s attempt before the holidays to get his members to support a tax increase on incomes over $1 million was not successful. The likely reality is that we are looking at a short term solution that allows Congress more time to negotiate.  If this reminds you of the definition of insanity, doing the same thing over and over again and expecting different results, it should.

 

The other major concern related to the influence of politicians is the debt ceiling.  According to the most recent data from the Treasury Department, the total outstanding U.S. government debt was $16.30 trillion as of December 21th.  This is just shy of the statutory debt limit of $16.39 trillion, a number which is likely to be violated in early January 2013.

 

So, where is Washington on resolving the looming breach of the debt ceiling? Well, according to InTrade, the online prediction market, the odds of the debt ceiling being raised by year-end are currently at 10%.  Similar to the fiscal cliff, our elected officials have decided to wait until both of these issues are directly upon us and volumes are back in the New Year.  I suppose this is a version of waiting for two marshmallows, albeit not a positive version.

 

Clearly, if we get past the inability of the politicians in Washington to put their partisan bickering aside and reach a workable solution to both the fiscal cliff and debt ceiling, then 2013 may shape up to be a positive year for equities.  As Keith has been writing, global growth seems to be bottoming (one of the more recent supportive global data points this week is Taiwanese Industrial Production hitting a nine month high on Monday), commodity inputs look to be on a deflationary path, and housing in the U.S. is poised for a parabolic recovery in terms of home prices.

 

The last point is critical for growth surprising on the upside in the U.S. as the value of the consumer’s home has historically shown a high positive correlation to their discretionary spending intentions.  A sustained housing recovery is the proverbial marshmallow that many U.S. focused investors have been patiently waiting for over the last five years.  Based on our models, 2013 could well be the year where that happens.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.21-109.77, $3.49-3.58, $79.13-79.99, $1.30-1.33, 1.70-1.85%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Marshmallow Experiment - Chart of the Day

 

The Marshmallow Experiment - Virtual Portfolio


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