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ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET

Takeaway: April's headline starts/permits print looks great, until you look closely. Single family continues to trudge wearily, going nowhere fast.

Welcome to The Hedgeye Housing Research Vertical

Yesterday we introduced our Hedgeye Housing Vertical research product. The effort is being led by Josh Steiner and Christian Drake from the Financials and Macro teams. Subscribers to Financials and/or Macro verticals are currently set up to receive this product. If you'd prefer not to receive our housing-focused research going forward please let us know.

 

Our goal is to help investors understand the trends and spot inflection points in the US housing market by tracking 15-20 different housing data series and presenting them in a hyper-simple format. Whenever data hits we will publish a brief note summarizing its importance, or lack thereof. Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

We've broken the market into four main categories: Home Prices, the existing home market, the new home market, and other miscellaneous data. The focus is on simple supply and demand measurements and whether they're weakening or strengthening, on the margin. We're using red and green to make it easy for investors to gauge, at a glance, whether there's widespread improvement, deterioration or a mixed bag. 

 

As the housing research effort evolves we hope you'll engage us with questions and feedback.  

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Compendium Table

 

Today's Focus: April Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for April this morning. The big takeaway is this: don’t be fooled by the headline.

 

While total starts and permits bounced sharply in April vs March, the bounce was entirely attributable to multifamily. Single family starts and permits did not show any bounce from normalizing weather and continue to show slug-like progress in renormalizing back to pre-crisis levels. Multifamily starts and permits remain strong and are showing a nice, weather-related bounce, suggesting that rental demand continues to benefit from the conjunction of a strengthening labor market, ongoing household formation and QM’s negative effects on would-be first-time buyers.

 

Taking a look at the data, single family starts grew 5k month-over-month or 0.8% to 649k, while single family permits grew 2k, or 0.3% m/m to 602k. Multifamily starts, however, grew by an impressive 120k m/m (+39.6%) to 423k and permits were up 78k m/m, or +19.5% to 478k.  Said differently, multifamily accounted for 96% of the growth in Starts and 98% of the growth in Permits month-over-month.

 

One interesting observation is the apparent trendline divergence between LTM SF starts and permits. Take a look at the first chart below. SF starts are exhibiting a positive upward slope, but permits are showing the opposite. Permits, by definition, lead starts, so the lack of any upward trajectory in permits should tamp down expectations for a coming bounce in starts.

 

Yesterday’s soft NAHB HMI print of 45 taken with today’s soft single family data paints an ongoing picture of a housing market that continues to stumble through the first half of 2014. Interestingly, these most recent two data points reflect the new home market, which is actually faring better than the existing home market due to the slightly higher affluence of the average buyer.

 

We think three factors are principally responsible for this weak 1H14 performance. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Single Family   Starts   Permits ST

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Single Family   Starts   Permits LT

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Starts Single vs Multi MoM Chg Stacked Bar

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Permits Single vs Multi MoM Chg Stacked Bar

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Multi Family   Starts   Permits ST

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Multi Family   Starts   Permits LT

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Total Starts TTM

 

ANOTHER SIGN OF WEAKNESS FROM THE NEW HOME MARKET - Total Starts Long term

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


Video | Keith’s Rant of the Day: Buy Inflation, Short Growth

CEO Keith McCullough looks at key style factors within the market that’s signaling him what to do now.


VIDEO | Keith's Macro Notebook 5/16: UST 10YR XLF COMMODITIES


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 80.28%
  • SHORT SIGNALS 78.51%

LEISURE LETTER (05/16/2014)

Tickers: BYI, FLL, PENN, GLPI, MGM, WYNN, HOT, MAR

EVENTS TO WATCH

Friday, May 16

  • Japan Gaming Conference thru Friday, May 16

Tuesday, May 20- Wednesday 21

  • East Coast Gaming Congress 

Tuesday, May 20 -Thursday May 22

  • G2E Asia - The Venetian Macao

http://www.g2easia.com/Conference/#IGaming

COMPANY NEWs

BYI – CEO/President and board member Ramesh Srinivasan to step down; the Board of Directors appointed chairman Richard Haddrill CEO, effective May 23, 2014.  Previously, Handrill was the company’s Chief Executive Officer from 2004 to 2012. Handrill served as a member of the board since 2003 and Chairman of the board since 2012.  Additionally, David Robbins, who has been serving as the board’s Lead Independent Director, has been appointed Chairman of the board effective May 23, 2014. Robbins also served as Chairman from 1997 to 2010. Ramish Srinivasan is no longer an employee of Bally Technologies.

TAKEWAY:  The sell side explanations don't seem to hold much water. The company's hands are probably tied in terms of what they can say but we wonder if there was some kind of incident with Srinivasan. Conduct standards for executives are high these days especially for highly regulated companies in gaming.  That said, we don't have any inside information but we're not sure there is anything to worry about regarding BYI's operations.

         

BX – will acquire Cosmopolitan from Deutsche Bank for $1.73 billion in cash for ~16.7 times 2013 EBITDA of $103m.  In a related data point, Cosmo Q1 gaming revenues increased 20.2% while hotel revenues jumped 18.8% to  $75.7 million on stronger group traffic which in turn drove ADR $303

TAKEAWAY: Private equity now fully involved in the gaming industry, could more gaming acquisitions be in the offering?

 

FLL – cancelled its agreement, announced in March, to purchase 507-room Fitz Tunica Casino & Hotel from The Majestic Star Casino LLC for US$62 million. Full House revealed in its recent earnings report that “the company will not likely be successful in obtaining financing for the purchase. As a result, we have requested Majestic Star to consider termination of the agreement.”

TAKEWAY:  Oops

                

PENN – Greenlight Capital disclosed via 13F filing a 100% increase in shares owned in PENN at a current 2 million shares vs 1 million shares previously.

TAKEWAY: Betting on new casino growth and a regional reversal

 

PENN / GLPI – Penn National Gaming the parent company of Argosy Sioux City filed for Chapter 11 bankruptcy for the property.  As part of the reorganization, PENN is asking bankruptcy court to allow it to continue operating. PENN’s justification for filing for Chapter II is that it would lose its entire $110 million investment in the market if it loses its license. And that license is part of the bankruptcy estate, meaning bankruptcy court has authority over it, the company contends.  PENN is suing in court to retain its license, but that trial does not begin until autumn.

TAKEWAY: Given PENN's admission that the company recognized it failed to renew its gaming license, this seems like an extreme action.

 

MGM – “We’re absolutely considering an IPO in Japan, but not initially,” MGM Chief Executive Officer James Murren, 52, said in an interview in Tokyo yesterday. “The best model is to put together an ownership group, finance through equity partners, open the facility, generate a strong track record of performance. We did that in Macau.”

TAKEWAY:  MGM still a longer shot in our opinion.  

 

WYNN - is “actively looking” for equity partners for a planned integrated resort in Japan and would eventually list the venture, according to comments made by President Matt Maddox at the Japan Gaming Congress.  Additionally, Wynn Resorts intends to conduct an initial public offering if awarded a gaming license for a planned Japan resort with the offering intended to increase the company’s profile in Japan.

TAKEWAY: "We'll list too if it helps us get a license..."

 

WYNN MACAU, 1928.HK – denies it lets triad-linked junket operators promote VIP gaming .  Wynn Macau has denied accusations leveled by a union boss Jeff Fiedler in a letter to the Macau Gaming Inspection and Coordination Bureau (DICJ) director yesterday (15-May in Asia).  Wynn Macau called Mr. Fiedler's accusations "those of a bitter, unsuccessful union boss who lost representation of employees in Steve Wynn's prior company, Mirage Resorts (SCMP)

TAKEWAY:  Mr. Fielder was the founder of the CasinoLinks web-site that attacked casino companies doing business in Macau. Additionally, Mr. Fielder has strong ties to the Democratic Party and Democratic Leader Nancy Pelosi so there is a political angle here against Steve Wynn. These allegations have been made repeatedly against WYNN by Fielder and CasinoLinks over the years so nothing new.  

 

HOT – has listed for sale the five-star Sheraton on the Park Sydney, which would continue to be managed by Starwood.  Sheraton on the Park Sydney is situated opposite Hyde Park in the central business district, close to Sydney’s luxury retail precinct. The hotel comes with 557 guest rooms and suites, a restaurant, a tea lounge, a bar, extensive conference and function space, leased retail space and a range of recreational facilities.  JLL's Hotels & Hospitality Group has been appointed to market the freehold hotel. Expressions of interest are welcome until June 20.

TAKEWAY:  Finally, a company owned asset listed for sale.  Could an expanded repurchase program be forthcoming as a result of the asset sale(s)?

 

MAR - EVP Anthony Capuano sold 4,000 shares of MAR on Monday, May 12th at an average price of $59.45, for a total value of $237,800.00. Following the sale, the executive vice president now directly owns 62,463 shares of the company’s stock, valued at approximately $3,713,425.

TAKEWAY:  Insider selling becoming prevalent in hotel stocks. Will Blackstone in June contribute to the trend (HLT)?

 

TUI AG

 

LEISURE LETTER (05/16/2014) - TR

 

TAKEWAY: Small player (RCL JV) who reaffirmed its turnaround outlook on European cruise industry 

 

ClubMed - reported 1H results which were in line w ith expectations but offered commentary on current trends with included comments about cumulative summer 2014 bookings as of May 10 with bookings (3.0%) impacted by a strong downturn in the Europe-Africa region, in particular over the last eight weeks at (16.3%), and a slowdown in Asia.  In the Americas, bookings were up 11.5%, mainly driven by the sustained momentum of sales in 
North America.

TAKEAWAY: European slowdown seems to be more company specific (closure of 2 managed short-haul villages) and the Easter shift but the decline in reservations in Asia was due to China/Malaysia rifts.  US bookings were strong.

INDUSTRY NEWS

Macau Smoking Ban - full smoking ban on mass floors beginning Monday, October 6, 2014.

TAKEAWAY: Given the recent Labor Day protests in Macau and the smoking debate, this policy outcome seemed an inevitable conclusion.  We're hearing VIP rooms and Premium Mass will be excluded.

 

Macau Airlift - Starting 1 July 2014, AirAsia will increase the number of flights it operates between Macau and Manila, Philippines. from its existing 3 flights per week services between Manila and Macau, to 7 flights per week.

TAKEAWAY: Can't hurt.

MACRO 

China Lending - Nonperforming loans rose by 54 billion yuan ($8.7 billion) in the three months through March to 646.1 billion yuan, the highest level since September 2008, based on data released by the China Banking Regulatory.  Non-performing loans accounted for 1.04% of total lending, up from 1% three months earlier.  The 10th straight quarterly increase in defaults adds to concern banks’ profitability may slip as they build buffers to cover loan losses.

TAKEAWAY: Chinese banks had the biggest quarterly increase in bad loans since 2005 as a slowdown in the world’s second-largest economy causes defaults to rise. Not yet a worry for Macau but we're starting to get a little concerned.

 

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.


Stay With the Program

Client Talking Points

UST 10YR

The yield finally crashes after our TAIL riskline of 2.61% on the 10-year signaled the point of entropy was pending. I see nothing but backpedaling from people who are still positioned for what they should have been last year (#RatesRising). Consensus needs to come our way as inflation slows real growth.

FINANCIALS (XLF)

Back into the red for 2014 year-to-date, and they should be – Down Rates = Yield Spread Compression = Financials Down. It still looks very 2011 stagflation to me – as inflation slows growth, you get equity market multiple compression (and bond market multiple expansion).

COMMODITIES

The CRB Commodities Index is up +9.6% year-to-date versus Growth (Russell2000) down -5.9%. #timestamped. Meanwhile, if it ain’t broke, don’t change it – stay with the long inflation, short US growth program.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 8% COMMODITIES 22%
FIXED INCOME 22% INTL CURRENCIES 22%

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

Portugal -1.6% looking more and more like the roundtrip Greek stocks have been @KeithMcCullough

QUOTE OF THE DAY

"If opportunity doesn't knock, build a door." - Milton Berle

STAT OF THE DAY

Swiss voters go to the polls this weekend in a nationwide referendum on whether to introduce what would be the highest minimum wage anywhere in the world. If approved, employers would be obliged to pay workers a monthly minimum of 4,000 Swiss francs ($4,470) - which works out as just over $53,600 a year. (BBC)



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