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1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE

Takeaway: C&I loan demand picks up sharply in 1Q13 while prime resi loan standards ease. Auto loan demand rises while card demand falls.

Loan Underwriting Standards Continue to Ease. Demand is Heating Up.

The Fed released its 1Q13 Senior Loan Officer Survey yesterday afternoon. The survey, which contains data on lending standards and loan demand across asset classes, was conducted between December 27th, 2012 and January 15th, 2013. Overall, the results were positive again this quarter with a few categories showed significant sequential improvement. We look at the results for each loan category below.

 

C&I Loans - Posting a Strong Sequential Improvement

Demand for C&I loans surged in the latest Senior Loan Officer Survey. Banks reporting an increase in C&I loan demand from large and mid-size firms rose to +19.1% from -6.2% in 4Q12. C&I loan demand among small firms was reported to have risen to +15.4% from +4.5% last quarter. Underwriting standards for C&I loans continued to ease at a rate comparable with what we saw in 4Q12. The same can be said for banks spreads: spreads are flat to down at a net 54.4% of banks on large firm C&I loans and 50.8% for small borrowers.

 

C&I lending remains the strongest area of growth for banks since the recovery began. In fact, C&I loans outstanding recently eclipsed their pre-crisis high. As such, this sharp increase in demand in the first quarter is a positive sign. 


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Commercial Real Estate - Demand Remains Strong As Standards Are Relaxed Further

Commercial real estate loan demand continues to heat up as debt maturities remain very high again this year, following a record year last year. Interestingly, you would think that all that demand would lead banks to be more choosey, but in fact the opposite has happened. CRE lending standards have eased each quarter since 2Q11 and this quarter was no exception.

 

Commercial real estate loans outstanding have finally begun to increase after posting years of decline following the bust of the real estate market. This is a significant inflection point, and should become a material driver of bank loan growth going forward. 

 

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Residential Mortgage Loans - Prime Standards Easing

Banks reported a modest further net easing of standards on prime mortgage loans. On balance, 4.6% of banks reported flat to lower standards on prime resi loans. That is up from 1.6% last quarter. While not a huge change sequentially, the emerging trend of banks easing prime resi standards is a very important development that will continue to reinforce the recovery in residential real estate as additional cohorts of buyers find their way into the market.

 

It's also notable that Nontraditional resi loans saw standards tighten modestly (+2.9%), and that subprime loan standards were reported again. Bear in mind that the Fed hasn't reported a response on subprime resi loans since Q1 of 2009, so the fact that banks are even commenting on it is an indication that subprime loans are starting to re-emerge. That said, on the margin, 20% of banks reported tightening standards on subprime loans, likely in response to the recently issued new QM rules.

 

On the demand front, however, borrowers continue to show greater interest. 1Q13 marked the sixth consecutive quarter of banks reporting QoQ growth in prime residential mortgage demand. Naturally, much of this is refinancing demand.

 

Two other noteworthy callouts are that demand for credit card loans took abrupt downturn in 1Q13 falling to -4% from +8.5% in the prior quarter. This is notable in that the prior six quarters were all positive. On the auto finance front, standards continue to ease while demand accelerated.

 

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Joshua Steiner, CFA

 


MPEL YOUTUBE

In preparation for MPEL's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

MCE FINANCE LIMITED ANNOUNCES PRICING OF SENIOR NOTES OFFERING Jan 29

  • US$1,000 million aggregate principal amount of 5.00% senior notes due 2021 priced at 100.00% of par
  • Use of proceeds (i) to repurchase in full MCE Finance's US$600 million 10.25% senior notes due 2018 issued on May 17, 2010 and fund the related redemption costs, and (ii) the entire remainder of the net proceeds thereafter for the partial repayment of RMB2.3 billion (equivalent to US$364.9 million) 3.75% bonds due 2013 issued by Melco Crown Entertainment on May 9, 2011.

 

YOUTUBE FROM Q3 CONFERENCE CALL

  • "City of Dreams continues to maintain its market-leading mass market yields when compared to all other major mass-focused properties in Macau, while at the same time, it has delivered strong improvements in rolling chip table yields over the prior period."
  • "Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter, which we are confident can be further built from here."
  • "Studio City is moving ahead on its expected timetable, with the majority of the piling and foundation work now complete. We have also recently engaged on a fixed price lump sum contract basis, our main contractor, providing us greater clarity and certainty around Studio City's design and construction costs. We remain on track to open this property around mid-2015."
  • [Manila] "With our current expected investment upon opening of both Phase 1 and 2 of the project expected to be around US$600 million, we believe this venture offers the company an opportunity to deliver strong returns on invested capital while also providing us with a platform for future expansion throughout Asia. We currently expect those Phases to open together by the first half of 2014."
  • "Total depreciation and amortization expense is expected to be approximately $90 million to $95 million. Corporate expense is expected to come in at $18 million to $20 million, and net interest expense on MCE's existing debt is expected to be approximately $23 million to $25 million."
  • "So heading into next year and hoping that some of the global headwinds like the European – people get used to the European debt crisis and there's less headwinds, and eventually, I think the Chinese leadership, they've had a very tight grip on the various sectors such as the real estate sector which has impacted asset prices. But once those things are behind and with the new leadership in place, I'm quite optimistic about next year."
  • "We feel no pressure in terms of the credit as well as the liquidity."
  • "We do need more rooms at City of Dreams, and Macau in general. We continue to believe it's a supply-driven market."
  • "City of Dreams, Phase 3, the additional tower – we're going through the formal government approvals because we have upgraded the building and included more amenities. So assuming it gets approved, we are hoping that we could get started on that project, probably the middle or the later half of next year."
  • "In terms of the yield on the VIP side... we are a little bit discount to the leading property at the moment. So I guess we have put plans in the optimizing process during the last three quarters in both Altira and CoD. This is a ongoing process, and we hope that we could be able to stabilize Altira at the moment, but we are still continuing to put the effort in CoD. So you will see some improvement in the next few quarters."
  • "We would love a dividend, but at the same time, I think the Board concluded that recently that we do want a very exciting development pipeline with Manila, Studio City, City of Dreams, Phase 3, to be on its way first....But I think for the next year, it's really about getting built-up on Studio City and Manila as quickly as possible and also getting City of Dreams Phase 3 started."
  • "In terms of the mass and VIP mix, I think it's a ongoing process and you'll see some margin-based improvement if we are doing this new performance in the next few quarters."
  • "In addition to the Studio City numbers that we've already discussed, we anticipate spending approximately $600 million in Manila upon opening. And as we said, we anticipate having $325 million of that funded through a local loan. So, you can back into our equity component there. And you're correct on Phase 3 of City of Dreams, that will be funded by cash and internally generated cash flow."

Troubled Times

Client Talking Points

Flash In The Pan

One day, things are groovy, the next, they aren’t. Case in point: the stock market. Yesterday’s sell off was a reminder that markets just don’t go up and to the right in a continual, straight line. People sell ‘em on some days and yesterday was one of those days. But seeing as how we are in a bull market, the sell off was short-lived. Today, the futures are back up and ready to rocket higher. Fund flows are still headed to US equities and bonds continue to get crushed.

Problematic Politicians

Europe is back in focus with the Spanish 10-year bond offering up a yield of 5.44%, up from 4.95% on January 14. European debt markets are getting shaky again as more problems arise in the Eurozone. Between allegations that the Prime Minister of Spain has been taking kickbacks for ten years and French President Francois Hollande saying that the markets shouldn’t dictate the price of  the Euro, there is much to be worried about. Throw in Japan and Taro Aso’s mission to destroy the Yen and you’ll realize that the currency wars are in full effect.

Asset Allocation

CASH 42% US EQUITIES 18%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“The concept of #timestamps means you don't have to lie about your positions - everyone knows them” -@KeithMcCullough

QUOTE OF THE DAY

“Society, my dear, is like salt water, good to swim in but hard to swallow.” -Arthur Stringer

STAT OF THE DAY

Redbook Retail Sales w/e Feb 3rd: 1.5% y/y prior; Jan MTD: -0.6% m/m prior, Jan MTD: 1.8% y/y prior


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Market Relationships

“Zeus ordained that only in sorrow and in suffering do we find wisdom’s way . . . by suffering we shall gain understanding.”

-AESCHYLUS, Agamemnon

 

A week ago I had memorable birthday and while I’m not quite forty, I’m getting pretty darn close.  As usual, my friends and family delivered in helping me celebrate.  Keith and his wife Laura invited me out to their house for a fine birthday dinner.  I also received a few books, including one called, “How to Be an Adult in Relationships: The Five Key Lessons to Mindful Loving.”

 

I think the person that sent me this book meant it as a gag gift, although I’m sure, as with most jest, there was some truth imbedded in the gift. Setting aside an analysis of my relationship history, I think we can all agree on the fact that relationships, and fruitful ones, are really the key to success and happiness in life.  As stock market operators, we all have a relationship with a gentleman called Mr. Market.

 

The quote at the start of this note is actually very applicable to the stock market.  The best lessons learned from investing typically come from the mistakes.  Further, as my colleague and Hedgeye restaurant Sector Head tweeted last night:

 

“$YUM is the annual reminder of how humbling this job actually is . . .”

 

In this instance, Howard Penney was referring to the results from Yum Brands, a company he had been favorably disposed to going into the quarter, which provided disappointing guidance based on worse than expected results in China.  Howard gets many more calls right than he gets wrong (see our 300%+ gain in Starbucks as evidence), but his point on $YUM is a good one – just when we are least expecting it the market humbles us. 

 

Speaking of humbling markets, the European sovereign debt market is once again becoming relevant.  In the Chart of the Day today, we look at the Spanish 10-year over the last three weeks.  On January 14th, the Spanish 10-year was yielding 4.95% and today is yielding 5.44%.  In the last three weeks, Spanish yields have spiked 10%. 

 

If I were an investor in Spanish and European sovereign debt generally, I’d probably be demanding a higher yield for the inherent acceleration in risk over the last few weeks.  First, Spanish Prime Minister Mariano Rajoy has been under attack for purportedly taking secret payments over a more than ten year period, with the evidence seemingly well documented.  Secondly, ahead of the EU Summit this week, French President Francois Hollande stated:

 

“A monetary zone must have an exchange rate policy or else it ends up subjected to an exchange rate that does not match the true state of its economy.”

 

The translation from French is simply this: Hollande does not believe the market should determine the price of the Euro.

 

The economic data out of Europe this morning will likely only serve to bolster Hollande’s arguments.  The Eurozone PMI Services numbers were reported this number and on aggregate January came in at 48.6 versus 47.8.  There were a number of positive surprises with the U.K. coming in at 51.5 and Germany at 55.7.  Unfortunately, for Hollande and his government’s policies France was a disaster at 43.6.  The other disaster in European economic data was December retail sales down -3.4% year-over-year. 

 

On one hand, Hollande is correct that with both Japan and the United States actively devaluing their currencies, Europe will be at a disadvantage in terms of exports if they don’t follow suit.  Unfortunately, like most wars, this ongoing currency is destined to end poorly.  The reality remains that no country in the history of the world has devalued its way to prosperity, though the Japanese have certainly tried.

 

On that last point, this morning the Japanese are once again upping the devaluation ante.  Bank of Japan Governor Shirakawa announced late yesterday that he would be leaving office on March 19th, a full three weeks earlier than planned.  At the same, two deputy governors will be leaving office.  It seems Prime Minister Abe realizes that political life in Japan is short, and that he needs new leadership at the Bank of Japan to aid in implementing his inflationary policies as soon as possible.  And so, the currency wars continue.

 

The question related to Japan is just how aggressive will the government get in terms of devaluing.  As my colleague Darius Dale wrote yesterday:

 

“The Japanese yen, which is down roughly -16% since we initially outlined our bearish bias back on 9/27, continues to get Taro Aso’d.

 

The latest developmental jawboning on this front has come in the form of Finance Minster Aso’s recent remarks that the Japanese government is taking a page out of its own historical playbook by pursuing strong anti-deflation policies:

 

“There is no one in the government, the bureaucracy or the BOJ who has experience in anti-deflation policy. We can only learn from history.”

 

-Taro Aso, 2/3/13

 

The history lesson Mr. Aso is referring to is Depression-era Japanese Finance Minster Korekiyo Takahashi’s mandating of the BOJ to directly monetize Japanese sovereign debt (as opposed to open-market operations), which began in 1932 and continued for the next 14 years.

 

During this era, the ratio of JGB issuance financed directly by the BOJ peaked at 89.6% in 1933 and remained elevated throughout the program. This monetization strategy assisted in doubling JGB issuance and boosting Japanese public expenditures by a whopping +34% in 1932 alone.”

 

The short answer is that Japan can get a lot more aggressive and this won’t be positive for the Yen, despite the recent sharp correction.  If you’d like to set up a time for us to do a briefing with you or your firm on the risks associated with Japan, please email .  Japan is a risk that you should keep front and center because in this day and age, all global markets are related.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $114.55-116.88, $79.02-79.83, $1.34-1.36, 90.77-93.22, 1.91-2.10%, and 1, respectively.

 

Best of luck out there today,

 

Daryl G. Jones

Director of Research

 

Market Relationships - Chart of the Day

 

Market Relationships - Virtual Portfolio


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