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Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC

Takeaway: Canada won’t be upset if TGT leaves. Nike clearing FuelBands - to its detriment? We don’t think Drexler is TGT-bound. PVH licensing spree.

EVENTS TO WATCH

 

THURSDAY

  • BEBE - Earnings Call: Thursday 5/8, 4:30pm
  • TUMI - Earnings Call: Thursday 5/8, 4:30pm

 

FRIDAY

  • RL - Earnings Call: Friday 5/9, 9:00am

 

COMPANY NEWS

 

TGT - Vote: Will you miss Target if it leaves Canada?

(http://www.theglobeandmail.com/incoming/vote-will-you-miss-target-if-it-leaves-canada/article18478552/#)

 

Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC  - chart2 5 7

 

Takeaway: This is snap of a poll we found on Canada's Globe and Mail site. Whether or not you believe in the validity of these straw polls, its hard to ignore the opinion of 10,000+ people. A quick note on the sample, we stress-tested the system to see if we could vote multiple times (which would therefore inflate the negative sentiment) - but, no dice. These results seem like they're for real.

 

It's particularly interesting that those who say they will miss Target in Canada totals 11%. Given that 11% of Canadian citizens had shopped at a Target in the US in the 12mnths prior to Canada's opening it leads us to believe that a good chunk of the 11% who say they will miss TGT Canada were already established US shoppers. To us this means that 1) Target Canada has yet to establish meaningful brand equity outside of its carry over customers from the US, and 2) customers missing Target in Canada is mostly a function of convenience. 

 

NKE - Gen 1 FuelBand on The Clymb

 

Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC  - chart1 5 7

 

Takeaway: Now this one is strange. This is the first time that FuelBands are showing up on The Clymb, a well-respected site for outdoor enthusiasts. But they're not the latest generation FuelBands -- these are the White Ice and Black Ice models -- which were sold a year ago. Looks to us like Apple is mandating that Nike clears all its old inventory of FuelBands before those two launch their new partnership (Nike on software, Apple on hardware). What we find most perplexing is that FuelBands, or any other Wearable Technology device that tracks fitness levels, are not like shoes or Hoodies where you can own a dozen items. This is a category where you own just one -- and you need to use it consistently in order to get the full benefits. You can't switch off to other devices like you switch sneakers. What will these people think in another few months when there's a new piece of Apple hardware co-branded by Nike? Will Nike have cannibalized its own sales by clearing old FuelBands?

 

PVH - PVH Corp. Announces License Agreement with Leisure Brands (Pty) Ltd. for IZOD Brand

(https://www.pvh.com/investor_relations_press_release_article.aspx?reqid=1927536)

 

  • "PVH Corp. announced that it had entered into a license agreement with Leisure Brands Ltd. under which Leisure Brands will distribute, sell and promote men’s sportswear, golf apparel and related accessories under the IZOD and IZOD Golfbrands throughout South Africa. The partnership will leverage Leisure Brands’ established positioning within the South African golf apparel market, as well as its operational expertise in the region. The initial term of the license agreement runs through December 2016."
  • "Under the agreement, Leisure Brands has the rights to sell, distribute and promote IZOD products including men’s denim pants and shorts in 5-pocket construction, men’s headwear, men’s belts, men’s socks and umbrellas, as well as the rights to manufacture, sell, distribute and promote men’s sportswear, golf apparel and specified golf accessories. The license permits Leisure Brands to sell such products in specialty stores, department stores and company-operated IZOD freestanding stores."

 

Takeaway: This is yet another seemingly insignificant licensing move by PVH. In isolation, perhaps it is. But the reality is that we're all going to wake up one day in the not-too-distant future and PVH will be generating growth of a few percent just from the latent growth associated with these licensing deals. Is it a reason for us to get excited about the stock? No…not unless people are underestimating growth for the company in aggregate. We don't think that's yet the case.

 

Jcrew - Mickey Drexler Discusses J. Crew Mercantile

(http://www.wwd.com/retail-news/specialty-stores/drexler-discusses-j-crew-mercantile-7671118)

 

  • "...Drexler on Tuesday discussed for the first time where the company is at with the J. Crew Mercantile name, telling WWD, 'Mercantile is a name we own. There’s not much beyond that. It’s a name that was available and we liked. The way we run the company, we are always thinking creatively, innovating, and managing our assets. We have secured names and trademarks with either loose ideas or intentions, or with our imaginations. Sometimes things come of it, or they don’t.'"
  • "Drexler, however, stressed that nothing has been decided and that there is the possibility that J. Crew Group never uses the Mercantile name."

 

Takeaway: We were asked twice yesterday if Drexler would go to Target's C-Suite. We'd be floored to see him make the move. The reality is that his sweet spot is innovating and brand building for small-mid sized companies. He did it at Gap. Doing it at J Crew.

 

BLKIA - Belk teams up with the Dallas Cowboys Cheerleaders

(http://www.retailingtoday.com/article/belk-teams-dallas-cowboys-cheerleaders)

 

  • "Belk has entered into a three-year partnership agreement with the Dallas Cowboys Cheerleaders (DCC). The agreement includes endorsements, appearances and numerous co-branded marketing initiatives."
  • "Belk will provide the official wardrobe for the director of the Dallas Cowboys Cheerleaders…"
  • "'The synergy DCC and Belk share was apparent from the beginning. The company's commitment to the communities in which it operates, fashion, style, and Southern values mirrors what the Dallas Cowboys Cheerleaders represent,' said Finglass."

 

Takeaway: With football players, Brands compete for the right to sell replica product to the masses. But somehow we don't think that quite applies to Dallas Cowboys Cheerleaders gear.

 

OTHER NEWS

 

VFC - Thinking Young, Wrangler Sees Red

(http://www.wwd.com/markets-news/denim/thinking-young-wrangler-sees-red-7669922)

 

  • "VF Corp...on Thursday will introduce Wrangler Jeans Co. Red, a new assortment of jeans and sport shirts targeted at the younger man...Wrangler Red will retail for $21.97."
  • "Wrangler Red will be tested in mass-market retailers such as Wal-Mart Stores Inc. and Target Corp. beginning this fall with a plan to roll out nationally in 2015."

 

WMT - Wal-Mart Boosts Tech

(http://www.wwd.com/retail-news/mass-off-price/walmart-boosts-tech-twitters-shares-fall-7671238)

 

  • "Wal-Mart said that the technology and innovation arm of its global e-commerce team, @WalmartLabs, is bolstering its team of technologists. This week, the Silicon Valley-based lab welcomed 60 technologists from Adchemy to its existing team of 2,100 to specialize in areas like marketing, data analytics and semantic search."
  • "Ten-year-old Adchemy, which specializes in product search and e-commerce technology, will help Wal-Mart develop e-commerce functionalities in-house…"
  • "The retailer founded the technology portion of its team, @WalmartLabs, three years ago. This marks the 12th acquisition since the lab’s inception. Web search categorization company Kosmix; mobile receipts technology Grabble; Facebook social reminders app Social Calendar; predictive data analytics company Inkiru, and recipe discovery and meal planning service Yumprint are among the companies that now sit under the @WalmartLabs umbrella."
  • "The lab is in growth mode. Hires from acquisitions aside, 1,000 people have joined the @WalmartLabs team in the past year."
  • Takeaway: We were asked twice yesterday if Drexler would go to Target's C-Suite. We'd be floored to see him make the move. The reality is that his sweet spot is innovating and brand building for small-mid sized companies. He did it at Gap. Doing it at J Crew. The decisions that need to be made at Target don't need to be made by a merchant. They reality is that Target needs someone from a mega-cap company that can radically shake up and re-architect an org chart.

 

SKX - Skechers, Marcolin Extend Deal

(http://www.wwd.com/accessories-news/eyewear/skechers-marcolin-extend-deal-7670816)

 

  • "...Marcolin Group has extended its licensing agreement for the design, manufacture and international distribution of Skechers USA Inc. eyewear for five years, until June 30 2019, with an option for further extension through 2024. Skechers...had originally inked a license in 2010 with Viva International, which Marcolin Group acquired last December."
  • "Skechers Eyewear includes men’s, women’s, boys’ and girls’ frames, which are available through e-commerce retailers such as framesdirect.com and glasses.com, as well as at opticians’ offices, department stores, select independent retailers and Skechers stores worldwide."

 

BBG - Billabong Appoints Global General Manager, RVCA 

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=1&id=51024)

 

  • "Billabong announced the appointment of Bill Bettencourt to the role of global general manager, RVCA. Reporting to Neil CEO Neil Fiske, Bill Bettencourt is returning to the Action Sports industry after a four year stint with Sperry Top Sider…"
  • "Previous to Sperry Top-Sider, Bill spent five years at Vans last holding the position of Vice President, Product and Marketing. In this capacity he had global responsibility for design, development, product merchandising and marketing for Vans footwear/apparel, Vans Snowboard Boots and ProTec equipment. Bill’s experience also includes eight years at Reebok International, where he led global marketing."
  • "With the appointment of Bill Bettencourt, the Executive Leadership Team reporting to CEO, Neil Fiske is now complete."

 

SHLD - Edward Lampert Says Sears Must Trim Apparel

(http://www.wwd.com/retail-news/department-stores/sears-seeks-to-accelerate-apparel-cuts-7671106)

 

  • "Speaking at a press conference following the retailer’s annual meeting at its headquarters here Tuesday, the chairman, chief executive officer and largest shareholder of the company said, 'There is too much space at Sears dedicated to apparel. We need to be more effective with all our constituents or more effective with one or two. We are evaluating who our core customers are going to be. We can’t be all things to all people, but we want to serve the entire family.'”
  • Instead of bulk orders to cover an entire year’s worth of selling, the retailer is looking toward more frequent, smaller fashion buys. 'It’s cheaper to make a decision 50 weeks out,' he said. 'But that’s offset by the inability to learn — you make a mistake and it costs you a year.…We’ve been deliberate, and aggressive, in bringing talent comfortable in that faster environment,' said Lampert."
  • “'We probably have more space than we need. In some cases we lease part of the space; in some cases we sell. We have great real estate.…Will we be operating more or less stores five years from now? It’s hard to say. If it’s more stores, it will be different types of stores with hybrids of our brands and others,' Lampert said."

MPEL 1Q EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

1Q14 CONSENSUS

  • EBITDA:  $363 million
  • Revenues: $1.37 billion
  • EPS: $0.41

QUESTIONS FOR MANAGEMENT

  • May Golden Week trends
  • Chinese macro concerns
  • Rolling Chip volume down significantly the past few months - what is going on with your junkets?
  • Commentary on why your mass market share has trended to its lowest level since Jan 2013
  • Are the new developments (e.g.new slot high limit, entertainment upgrade) paying dividends?
  • Japan update
  • Is there a threshold for how high premium mass hold can reach?
  • Any labor (dealer) issues expected at MSC?
  • Thoughts on capital return to shareholders

 

RECENT MANAGEMENT COMMENTARY

Premium Mass:

  • Performance continues to be driven by the strength in mass-market table games operations at City of Dreams, which once again outperformed the market both in total mass table GGR growth and importantly on a GGR per mass table basis.

Luck-adjusted margins:

  • Company-wide commitment resulted in expanding luck-adjusted margins for the 10th quarter in a row.

Altira

  • Continue to look at the EBITDA generation per table
  • The VIP segment in Altira continues to go up and flow up and is in the right direction.

CoD Manila

  • Middle 2014 opening date

Studio City

  • On track to open in mid-2015

  • Targeting a topping out of the entire property and the hotel tower around late-summer, early September.

  • On budget

5th CoD Hotel Tower

  •  The project is expected to open in early 2017. With 40 floors and a gross floor area of 150,000 square meters, the tower houses approximately 780 guestrooms, suites and villas exceeding 5 star standards. The hotel also includes a variety of meeting and event facilities and distinctive features, including a 30m high lobby atrium, selection of restaurants, spa, ultra lounge and sky pool.

Dividend policy

  • Distribute 30% of net income 

Philippines tax situation

  • Working very closely with PAGCOR

High premium mass hold rate at CoD

  • It's very, very sustainable, especially in a sense that we see a lot of demand from this premium segment.

New developments  

  • New high-limit slot area near Crown Tower on ground casino floor
  • Developing a more like entertainment combined with the F&B concept area on second floor

CoD opex

  • Nothing unusual to speak of, in operating expense at City of Dreams. Revenue growth obviously outpaced cost growth; been very pleased with how things are trending and how CoD is able to maintain costs.

1Q Non-operating guidance

  • D&A:  $95-100m

  • Corp expense: $24-26m

  • Consolidated net interest expense: $31-33m (includes finance lease interest of $11m (CoD Manila and $17m interest expense associated with Studio City).

  • Cap interest:  $18m


LEISURE LETTER (05/07/2014)

Tickers: BYI, MGM, PENN, GLPI, HT

EVENTS TO WATCH: 

Wednesday, May 7

• STAY Q1  – 830am

• STN Q1 – 4pm

• CZR Q1 – 5pm , Passcode: 20337702

 

Thursday, May 8

• PCLN Q1 – 730am

• MPEL Q1 – 830am , Passcode: MPEL

• CAR Q1 – 830am , Passcode Avis Budget

• BEE Q1 – 10am , Passcode: 10895989

• HOT – 10:10am presenting at Baird's 2014 Growth Stock Conference

• SGMS Q1 – 430pm , Password: SGMS

 

Friday, May 9

• HLT Q1 earnings – 10 am , Passcode: 25981567

• AHT Q1 earnings – 11 am

 

Monday, May 12

• DRH Q1 earnings – 10am , Passcode: 66393516

• HMIN Q1 earnings – 9pm

 

Tuesday, May 13

• HTHT Q1 earnings – 9pm , Passcode 28722442

 

Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 11:40 am PNK

• 12:20 pm IGT

• 12:20 pm CHDN

• 1 pm BYD

• 1 pm MGAM

• 1:40 pm PENN

• 2:25 pm BYI

• 5:05 pm SGMS

• 5:05 pm Seminole Gaming

• 5:50 pm GLPI

• 5:50 pm Golden Nugget

1:1 meetings only – MPEL, Station Casino, Motor City Casino & Hotel, and Jacob’s Entertainment.


COMPANY NEWS

BYI – announced an agreement with Golden Nugget, to connect BYI’s systems and slot products across all five Golden Nugget casinos (including upcoming Golden Nugget Lake Charles) encompassing nearly 6,400 slots and table games in four states, including Nevada, New Jersey, Mississippi and Louisiana.  BYI will replace a competitor’s systems at Golden Nugget properties in Vegas and Laughlin.

Takeaway:  Good deal for BYI.  We think it replaced Aristocrat's systems in Vegas and Laughlin. 


MGM – James Murren sold 26,778 shares of the company’s stock on the open market in a transaction that occurred on Thursday, May 1st. The stock was sold at an average price of $25.22, for a total value of $675,341. Following the sale, the chief executive officer now directly owns 22,286 shares in the company.

Takeaway: Not a ton of stock (may have been sold to offset taxes) but then again, he doesn't own a lot of stock - direct ownership is 22,286 shares while 175,329 shares are owned by a limited access spousal trust.
 

PENN / GLPI – Penn National announced Desiree Burke has resigned her position as vice president and chief accounting officer in order to accept a position at GLPI. 

Takeaway:  Move across the hall...

 

HT – announced that the Company has entered into a definitive agreement to purchase the 148-room Parrot Key Hotel & Resort in Key West, FL for $100 million. The hotel operated at an average daily rate (“ADR”) of $230.52 and occupancy of 92.3% in 2013. According to Hersha, the purchase price for Parrot Key reflects a trailing and forward 12-month economic capitalization rate, as of April 2014, of approximately 7.2% and 7.5%, respectively, and a 9.0% capitalization rate on stabilized earnings. For the trailing twelve months as of March 31, 2014, the hotel generated $7.5 million in EBITDA or approximately $50,000 per room.

Takeaway: This would appear to be a full price for a great quality asset in a consistently strong, transient destination market. 

INDUSTRY NEWS

GAMING               

Lawmaker urges government to close mainlanders´loophole to visit Macau Macau News

Lawmaker Antonio Ng Kuok Cheong urged the government Tuesday to close the loophole which is being used by mainlanders to stay in the city for up to nine days as "transit passengers".  According to current immigration rules, mainland Chinese passport holders are allowed to stay in Macau for seven days the first time they use Macau as a "transit point" before supposedly heading for a third destination. The second time within 30 days they enter they are given a two-day visa, while the third time they are routinely refused entry. However, if the mainland Chinese passport holder can prove that he or she went to a third destination from Macau, a seven-day visa will be granted again, with no limit on the number of times.  After 30 days the process re-sets itself.

Takeaway:  This issue continues to get more political spotlight.

 

Sands China boss says gaming demand sufficient Macau Business

Sands China CEO Edward Tracy expects Macau to have enough demand to keep all the forthcoming gaming industry capacity busy.  Tracy said, “We’re pretty confident that there’s plenty of market left to absorb the capacity that’s coming in 2017 and 2018.”

Takeaway:   We agree although the dealer labor situation needs to be addressed.

 

Missouri Gaming – Missouri lawmakers have passed a bill that will permit casinos in that state to offer lines of credit to high rollers. The measure now sits on the desk of Gov. Jay Nixon.

Takeaway:  Interesting advancement in gaming policy that would seemly make Missouri more competitive in regional gaming.

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 


real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Growth Slowing, Fast

Client Talking Points

JAPAN

Get the US Dollar right (i.e. get the Yen/USD right) and you’re getting the Nikkei right – with the USD smoked to a fresh year-to-date low yesterday, it was no surprise to see Japanese stocks rocked for a -2.9% Nikkei loss overnight = down -13.2% YTD.

10YR (UST)

The yield bounced (2 beeps) then failed to 2.58%, so the TAIL risk (to the downside for both yields and consensus growth expectations) remains on. Yesterday’s Core Logic (US Housing) price decline (2nd derive) was flat out nasty – both US #ConsumerSlowing and #HousingSlowdown are currently in our Top 3 Macro Themes.

RUSSELL2000

This isn’t the SP500. This is growth expectations slowing, faster – RUT is down -8.3% from its all-time-bubble-high and the high multiple stocks are down a lot more than that. Our risk management playbook says when A) inflation accelerates and B) growth slows, you get equity multiple compression (bond multiple expansion).

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 24%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

2 most bearish TREND risk S&P Sectors in our model = Consumer $XLY and Financials $XLF @KeithMcCullough

QUOTE OF THE DAY

"Today I will do what others won't, so tomorrow I can accomplish what others can't." - Jerry Rice

STAT OF THE DAY

Most of the people choosing health plans under the Affordable Care Act — about 80% — are paying their initial premiums as required for coverage to take effect. But the health insurance industry said the total of eight million people who signed up included “many duplicate enrollments” for consumers who tried to enroll more than once because of problems on the website. (New York Times)



Pasta or Burgers?

“Do you want a hamburger or pasta for dinner?”

- To my toddlers, 5/6/14

 

Parenting is a delicate art of subtle, positive perturbation.    

 

Many times, it’s what you don’t say that matters.   And much like investment and macro narratives, it’s very much about the #Frame-up.

 

For the non-parents, the key to coaxing positive behaviors often lies in framing up the optionality.   As it relates to the quote above, note that I didn’t say, “do you want dinner?” or “are you hungry?”.  

 

Pasta or Burgers? - spaghettibaby

 

The simple goal of exhausting, thrice daily adventures in toddler nutrition is usually to just get them to eat…something.  

 

By offering two options in the manner above you maintain the illusion of choice but, in reality, it’s the same choice.  To a fledgling mind, if not eating is not presented as a choice, it doesn’t exist as an option.

 

That little psycho-persuasive device isn’t full-proof, but it should be a staple in any multi-factor, volatility sensitive parenting model. 

 

Back to the Global Macro Grind

 

If there’s a quasi-relevant take-away from that intro perhaps it’s that the act of getting older doesn’t immunize one from the trappings of effective framing.  Indeed, lawyering and political strategy are critically dependent on that reality.

 

Q:  Would you rather invest in stocks or housing here?  

 

If you answered #Neither to that ‘framed-up’ question,  you get it.

 

Let’s stick with housing and extend this Socratic dialogue we’ve got going….

 

Q:  The Case-Shiller HPI data came out last week, the Corelogic HPI data came out yesterday, and the NAHB HMI data comes out on the 15th.  What period do those respective data releases cover?     

 

A:  NAHB data = May, Corelogic = April, Case-Shiller = February

 

Q: Which one should you care about?

 

Everyone cares about Case-Shiller right?  After all, Professor Shiller is a Nobel prize winner, the media makes a big deal about the indicator every month and analysts and pundits use it as the primary gauge of the state of housing.

 

In fact, the Case-Shiller HPI is one of the most lagging housing indicators there is.  The Index measures the change in market value of residential real estate across 20 defined MSA’s and is calculated as a three month moving average. 

 

So, last week’s release represented average home price gains over the Dec/Jan/Feb period.  In other words, while we are getting the (real-time) Corelogic Home price data for April,  Case-Shiller enlightened us as to housing’s temperature back in January.

 

The simple reality is that unless it’s central to your core coverage or positioning, and even if it is, keeping tabs on the breadth of housing metrics (we have 22 in our core model), the prevailing trends, and notable shifts on a monthly basis can be time intensive and onerous.  

 

We think we’ve solved for that onerosity with the forthcoming launch of comprehensive, but hyper-consumable, housing coverage led by Josh Steiner, our head of financials research, and myself.   More on that to come. 

 

If you’ve followed us with any consistency you’re aware that after getting explicitly bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly bearish at the start of this year and elevated #HousingSlowdown to a top macro theme for 2Q14. 

 

Indeed, the reported housing data since our themes call has reflected continued deterioration and the demand data released over the last few days has offered further positive confirmation to our expectation for an intermediate term slowdown.   

 

Corelogic HPI:  Corelogic home price data released yesterday showed home prices decelerating -70bps in March to +11.1% YoY.  More notably, the preliminary April estimate reflects another, significant sequential deceleration of  -190 bps to +9.2%.  If the preliminary estimate holds it will be the slowest rate of growth since December of 2012 and the largest sequential deceleration in growth since January 2007.

 

Mortgage Purchase Applications:  After last week’s decline of -5.9%, this morning’s data showed the composite MBA Mortgage Application Index bouncing +5.3% WoW.  The Refinance Index made another new low in YoY growth, declining -1.4% sequentially to -75.2% YoY!  The Purchase Applications Index was up +8.9% WoW, but note that the bounced came off its worst growth number of the year last week and purchase demand remains down -16% YoY.

 

It’s worth repeating that the demand deceleration has been geographically pervasive and has persisted in the face of both the positive inflection in the weather and declining interest rates.

 

Pasta or Burgers? - Corelogic

 

So, the housing slowdown has already commenced – what do you do with that?

 

At the individual security level, one way we’ve played housing from the short side has been via the mortgage services.   

 

The Hedgeye Financials team added NSM to our Best Ideas list on the short side on 1/8/2014 (after being positive and long the name from 2/27/13 to 9/27/13).  It’s down -14.5% since Jan 8th.  We think there is further downside.

 

Below is a bit of an analytical teaser but it captures a few of the central tenets of our short case on the company.  If you’d like to discuss the idea further please contact   

  

NSM: BEST IDEA SHORT -  The core of our argument is that when you figure out what servicing a single loan is worth and you multiply that by the number of loans NSM services you arrive nowhere near a valuation consistent with where NSM shares are currently trading

 

Originations = Great Expectations. We're truly confounded by guidance vs reality in the company's originations business. The company earned 14 cents in 3Q13 originating mortgages. In the fourth quarter it lost 80 cents originating mortgages, and that's on a core basis. The company lost $131-136 million on a pre-tax basis, which we'll split the difference on and call a $133.5 million PT loss. After tax, this works out to $82.8 million. NSM identified $10 million in one-time expenses after-tax. If we add that back and divide by 90.4 million shares, we get to a loss of 80 cents (core) in the quarter from originations. Moreover, the company indicates that it has identified the opportunity  to reduce expenses in the originations business by $15 million per quarter. This works out to 10 cents per quarter. My question is a simple one. How does a business that made 14 cents in 3Q13 and lost 80 cents in 4Q13 produce $1.35 - $1.80 in FY14 earnings (that's guidance) by identifying 10 cents in quarterly expense savings?

 

#CREDIBILITY: Fool Me Once .... So, to recap, the company started 2013 (post-BofA) with a guidance midpoint of $4.02, raised that to $4.40, lowered it to $2.88 and ultimately did $2.13 (or less).

 

Now, to expeditiously bring this food and kid themed missive full-circle…..

 

Q: What do you call spaghetti in disguise?  

A:  An Impasta!

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.56-2.68%

SPX 1

RUT 1101-1143

VIX 12.91-14.72
EUR/USD 1.37-1.39

Gold 1 

 

Happy Humpday Hunting!

 

Christian B. Drake

Associate


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 78.62%
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