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BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER

Takeaway: Existing home sales move up modestly, but the real surprise is the crush of inventory hitting the market.

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. 

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Compendium 052214 2

 

Today's Focus: Existing Home Sales

The National Association of Realtors (NAR) released its monthly Existing Home Sales report for April earlier this morning. Most of the data is largely useless because it's telling you what you already knew, but on a lag. This is because it mirrors the Pending Home Sales index, which comes out a month ahead.

 

Remember, the Pending Home Sales index reflects contract signings while the Existing Home Sales report reflects contract closings. There's typically a 1-2 month lag between signings and closings. That being said, there is one extremely valuable piece of data in the Existing Home Sales report that most market participants tend not to focus on, and that's the inventory number. It's the only measure of total housing stock for sale published by any source and it's not a stale number. It's reflecting the number of properties (existing) for sale at the end of the period.

 

Context

Taking a step back, our main call here is that we're bearish on the outlook for the rate of change in home prices in 2H14 and 1H15.

 

Why?

 

Principally, it's because demand has been in decline since mid-2013 and price changes tend to follow demand on a 12-18 month lag. The mitigating force, however, is that supply of homes for sale has remained quite low by historical standards. This morning's data is interesting principally in that there was a very large move up in inventory.

 

To be fair, unlike existing home sales, which are seasonally adjusted, inventory numbers are not. So one would expect to see a big month-over-month upturn in inventory in April, but the size of this year's increase is significantly larger than what we've seen in Aprils past. This increase lessens the mitigating effect of the tight inventory on prices, adding incrementally to our conviction in our call for the rate of home price appreciation to slow markedly.

 

Here's a summary look at the numbers:

 

Demand:  Better month over month but still weak, soft across all geographies and not reflecting any significant deferred demand from 1Q weather distortion.

  • Total sales increased 1.3% MoM….but remain down -6.8% YoY (vs. -7.5% YoY in March)
  • YoY Sales growth remained negative across all geographies with the decline accelerating in the Northeast (-6.3% YoY vs. -4.8% in March) and South (-3.5% YoY vs. -3.0% in March)

 

Supply:  Large jump in Supply.  Biggest MoM increase in inventory on a units basis ever (back to 1999) at +16.8% MoM

  • Inventory (MM Units) = 2.3…up from 2.0 in March = +16.84% MoM & +6.5% YoY
  • Inventory (Months Supply) = 5.91…up from 5.12 in March = +15.3% MoM and +14.3% YoY

 

Other:  All cash sales remain elevated and 1st time home buyers continue to run less than 30% as QM impacts, lower affordability, low inventory (among others) all continue to drag on young buyer demand  – If you view housing as a ladder then inability for 1st time buyers to purchase = lower turnover & lower total transaction activity (although rising supply may help low end volumes)

  • Distressed = 15% of April Sales down from 18% last April
  • 1st time buyers = 29% of buyers in April – down from 30% in March and flat with 29% from April last year
  • All-cash sales = 32% of transactions vs. 33% in March and 32% april last year

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Existing Home Sales total LT

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Existing Sales by Region March April Ave

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Existing Inventory Units

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Units MoM Chg

 

BIGGEST M/M GROWTH IN INVENTORY FOR SALE .... EVER - Existing Inventory Months Supply

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake

 


INITIAL CLAIMS: TAPER ON, TAPER ON

Takeaway: Initial claims have been a reliable and early indicator on the labor market and their message now is that tapering will continue.

Not Too Hot, Not Too Cold ... Just Right for More Tapering

This morning's claims data isn't as bad as it looks, but it's not great either. The previous week was anomalous in its strength, whereas this week is more or less in line with the steady trendline rate of improvement we've been seeing for a while now. 

 

The important takeaway is this. The labor market remains strong enough for the Fed to push forward with its taper. The taper is pushing long-term rates lower (counterintuitive, we realize .... for more on why, see our note from May 6 entitled "Tapering = Rates Falling"). This means more tough sledding for Financials positively correlated to long-term rates such as banks (R = +0.62), Life Insurers (R = +0.75) and Online Brokers (R = 0.67). Conversely, negatively correlated Financials include the agency mortgage REITs like NLY, MFA (R = -0.90) and select bond fund managers (i.e. AB, where R = -0.45). Squaring these values will tell you the magnitude of the headwind you're fighting being long. Yield plays also do well amid falling rates so our recent Best Idea addition, OZM, should fare well alongside our traditional fixed income asset manager idea LM. 

 

The Data

Prior to revision, initial jobless claims rose 29k to 326k from 297k WoW, as the prior week's number was revised up by 1k to 298k.

 

The headline (unrevised) number shows claims were higher by 28k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.1%

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 1

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 2

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 3

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 4

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 5

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 6

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 7

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 5 22 2014 9 54 06 AM

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 9

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 10

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 11

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 12

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 19

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 220 bps. 2Q14TD, the 2-10 spread is averaging 225 bps, which is lower by -14 bps relative to 1Q14.

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 15

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


LEISURE LETTER (05/22/2014)

Tickers: ALL.AX, LVS, PENN, SGMS, WYNN, CCL

EVENTS TO WATCH

Thursday May 22

  • G2E Asia - The Venetian Macao

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

 

Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call

COMPANY NEWS

ALL.AX – Some electronic gaming machines (EGM) from Aristocrat Leisure Ltd are down in Macau casinos following a player dispute. The shutdown affects some of Aristocrat’s EGMs, including Yellow Dragon links carrying 5 Dragons and Fa Fa Fa games. The decision to switch off Aristocrat’s EGMs follows new regulation introduced in 2012. Administrative Regulation 26/2012 states that concessionaires should refuse to pay prizes or any accumulated credits if it suspects a malfunction or software glitch in a particular EGM.

Takeaway:  A slip in what will be a great fiscal half for Aristocrat when they report on the 27th.  Maybe a small positive for IGT.

 

LVS – confirmed Michael Leven, President & COO, will retire at the end of 2014, when his contract expires.  CEO Adelson has no plans to slow down, step back, or relinquish his CEO title and role. 

Takeaway: Mr. Adelson remains fully in-charge.  As we mentioned yesterday, Leven's replacement is a very key hire.

 

PENN – is now required to buy the 98 acres of land Lakes Entertainment owns adjacent to the Jamul Indian reservation in San Diego County, CA. PENN will pay $5.5 million for the land no later than 10 days after the Jamul opens and PENN will manage.  Recall in 2012, Lakes entered into ten-year option agreement with Penn that granted Penn the right to purchase the 98 acres of land, owned by Lakes adjacent to Jamul’s reservation land for a purchase price of $7 million which increased annually by 1%.

Takeaway: Land crucial to development potential to further the duration of casino management contract.

 

SGMS priced its $350 million in 6.625% private placement senior subordinated notes due 2021 at 99.321 percent with QIBs.  The proceeds will repay $350 million in 9.25 percent senior subordinated notes due 2019. The tender offer for those notes expires June 17.

Takeaway: That's nearly $0.11/share (pre-tax) of interest expense savings and earnings accretion - should the entire nearly $9.2 million interest expense savings drop to pre-tax net income.

 

WYNN (GGRAsia) Gamal Aziz, president of Wynn Macau Ltd, told GGRAsia on the sidelines of the opening session of Global Gaming Expo (G2E) Asia 2014 that premium mass players – that theoretically offer superior margins to the house compared to credit-based high rollers – were now being courted more assiduously by his company, via perks traditionally reserved for VIPs including complimentary rooms.

Takeaway: Wynn getting more aggressive in Mass is a positive for market share, revs, and profits.  There remains the potential for Wynn to provide more credit to its junkets to boost VIP in the same way.  These levers provide on leg of our positive thesis on WYNN. 

 

WYNN – in the competition for the Greater Boston casino license, WYNN's competitor Mohegan Sun announced it reached a surrounding community agreement for the proposed $1.3 billion Mohegan Sun resort casino for Revere.

Takeaway: We have a two horse race and handicapping the exacta bet is too close to call.

 

RLJ – announced a 7.5 million share offering use the net proceeds from the offering to fund potential acquisitions and for general corporate purposes, and may use net proceeds to repay amounts outstanding from time to time under its unsecured revolving credit facility. 

Takeaway: The share prices of most lodging REITs are +10% to +15% on a YTD basis, the underperforming lodging REITs are flat to +4%, we are not surprised to see equity issuance. 

 

CCL - will spend up to $400m on installing scrubbers to more than 70 vessels across its brands, up from 32 announced last year. 

Takeaway: An expected announcement to comply with regulations.  Carnival has said prices will be unaffected.

 

MSC Cruises- (Seatrade Insider) MSC Cruises orders 2 'futuristic' newbuilds 

MSC Cruises signed a contract with Fincantieri for two ships, with an option for one more.  The ships will accommodate up to 5,300 passengers each and are to be delivered in November 2017 and May 2018. They are priced at €700m each, financed by the support of SACE.

Takeaway:  These are big ships.  The 2016-2018 capacity growth is starting to worry us.


MTN – the Third Judicial District Court of Summit County, Utah ruled favor of Talisker (and Vail Resorts) on all matters relating to the expiration of the Park City Mountain Resort lease.

Takeaway: While a positive ruling, PCMR continues to own the base operations and Vail must reach an agreement (very soon) to lease or purchase such operations from PCMR.  Futhermore as we wrote in our April 10, 2014 Leisure Letter, PCMR indicated that if unsuccessful with its lawsuit, PCMR indicated it would dismantle and remove most of the area's chair lifts except for Jupiter, Thaynes, and Motherlode.

 

INSIDER TRANSACTION

MAR - Simon Cooper, President/Managing Director Asia Pacific, sold 10,000 shares of stock on Monday, May 19 at an average price of $58.50/share.  Following the transaction, Mr. Cooper now directly owns 46,315 shares in the company.

Takeaway: More selling by an lodging insider at the same time the managements are telling investors that business trends are accelerating. 

INDUSTRY NEWS

GAMING

Macau bound ferry accident – More than 30 people were injured late Wednesday night when a Macau-bound high-speed ferry collided with a cargo ship in the waters west of downtown Hong Kong around 11 p.m. local time.  The ferry involved in the accident is operated by Shun Tak-China Travel Ship Management Ltd.

Takeaway: Given the frequency of high-speed ferries between Macau/Cotai and Hong Kong, we are surprised more accidents don't occur.

 

Macau smoking ban – according to the Macau Health Bureau, premium mass areas located on the mass market floor will have to comply with the the full smoking ban.  Grant Bowie, CEO MGM China, recently commented that in order to have smoking in VIP rooms, the VIP rooms will need to be physically separated from mass market gaming areas.

Takeaway: Bowie says VIP could be somewhat impacted by smoking ban.  We certainly haven't heard that from anyone else.

 

Macau non-gaming spend - non-gaming spending by visitors in Macau increased 10% to US $1.99 billion in 1Q 2014 while overnight visitors during Q1 spent more on non-gaming items with spending up 8% to $1.653 billion while day trip visitors spending increased 19% to $350.641 million.

Takeaway: Strong growth in non-gaming spend.

 

Upstate New York Gaming in an unexpected turn of events to applicants, New York Governor Andrew Cuomo spoke up in support of casinos located in Sullivan and Ulters counties versus proposed casinos in Orange County.  The Governor indicated he favors the more economically hard-hit regions of the Catskills/Hudson Valley getting a first crack at jobs-building casinos and will press hard to get the first licenses issued in those areas - which was the intent of Proposal 1.

Takeaway: It seems to us, this was the Governor's intent in floating and supporting Proposal 1.  Additionally, we remind investors gaming will likely come to the downstate zone, which includes the City of New York, Nassau, Suffolk, Westchester, Rockland and Putnam counties seven years after the commencement of gaming activities in the upstate region.

 

LODGING

Macau Hotel ADR – The average price of hotel rooms increased by around 10.3% in April YoY.  The biggest increase was by 4-star hotels, where rates increased an average of 1,026 patacas per night from 890 patacas an increase of around 15.3% YoY.  5-star hotels increased by 9.5% YoY to 1,547 patacas from 1,403 patacas a night.

Takeaway: Strong growth in ADR prior to the new properties opening in 2015 and 2016. 

 

NYC Lodging –  New York Attorney General and Airbnb have reached agreement on information disclosures about short-term New York City apartment rentals in a state investigation of illegal hotels.  The NYAG is seeking information about Airbnb's hosts going back three years, noting many listings appeared to offer unoccupied apartments for very short periods, violating rules against unregulated hotels. The state law prohibits owners or renters of apartments in multi-unit buildings from renting them for less than 30 days unless they remain present. The law permits having boarders or renting rooms.

Takeaway:  Sounds to us like a crackdown on short-term rentals in NYC will happen, which in turn will reduce the number of Airbnb bookings/transaction fees.

MACRO

China HSBC Flash PMI - May flash PMI picked up from 48.1 in April to 49.7, ending the consecutive decline in the past 6 months. 

Takeaway:  Still falling demand but above expectations

 

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.


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Hedgeye Risk Management Hires New Technology Sector Head

Takeaway: Craig Berger will lead Hedgeye's Technology sector build out and research production efforts as it continues to scale its research platform.

FOR IMMEDIATE RELEASE

 

STAMFORD, Conn., May 22, 2014 -- Hedgeye Risk Management, a leading independent investment research and media firm, announced today that industry veteran Craig Berger has joined the firm as Managing Director of technology research with an immediate focus on the semiconductor industry. In addition, Craig will also lead the firm’s Technology sector build out and research production efforts as it continues to scale its research platform.

 

"We are incredibly excited to welcome Craig onto our team during this important phase of our growth," said Keith McCullough, CEO of Hedgeye. "As both Hedgeye and the tech sector continue to grow and evolve in coming years, Craig’s proven track record of experience and expertise will be instrumental to our continued success."

 

Mr. Berger comes to Hedgeye with over 15 years of industry experience. He was most recently Managing Director of Equity Research at FBR Capital Markets where he provided primary coverage of semiconductor stocks. Before that, he served as Senior Vice President of Semiconductor Equity Research for Wedbush Morgan Securities. He was also a semiconductor analyst at Smith Barney Citigroup after spending several years at Intel Corporation as a senior financial analyst.

 

A Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA), Mr. Berger received a B.B.A. from the McCombs School of Business at The University of Texas at Austin where he also completed his Master in Professional Accounting degree. He is a fixture in financial media with over 80 live television interviews and is regularly quoted in publications including the Wall Street Journal, Barron’s, Forbes and Bloomberg.

 

ABOUT HEDGEYE RISK MANAGEMENT


Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Technology, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media. The firm is united around a vision of uncompromised real-time investment research as a service.

 

Visit www.hedgeye.com for more information.

 

CONTACT: Dan Holland

dholland@hedgeye.com

203.562.6500


Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX

Takeaway: WSM more strength in DTC. Adi-soccer balls and t's to fuel WC growth. SKX ends Hall of Fame endorse run.

EVENTS TO WATCH

 

THURSDAY (5/22)

  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm

 

FRIDAY (5/23)

  • FL - Earnings Call, 9:00am

 

COMPANY NEWS

 

WSM - 1Q14 Earnings

 

Takeaway: Hard to ignore a 10% comp. The key takeaway from the print, in our opinion, is the strength of WSM's DTC channel. For the first time in the company's history, DTC accounted for over 50% of net revenues and more importantly 80% of EBIT.

 

We go back and forth on how to handle WSM. We continue to believe that RH will continue to consolidate market share as it reinvents its real estate portfolio and introduces new product offerings to both its category lineup and bigger boxes. The truth is that neither name commands a significant share in the highly fragmented home furnishings market. Still a lot of white space for both to expand before we get concerned about competition.

 

Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart1 5 22

 

ADDYY - Adidas sees boost to sales from World Cup

(http://www.reuters.com//article/2014/05/22/adidas-soccer-idUSL6N0O82QM20140522)

 

  • "German sportswear company Adidas has given a more precise sales growth target for 2014, amounting to a rise of up to 8 percent, as it gets a lift from the soccer World Cup that starts in Brazil next month."
  • "'This year we will add 1-1.2 billion euros ($1.4-1.6 billion) to operational revenue, with the World Cup playing an important role,' Chief Executive Herbert Hainer told journalists at a briefing in Munich in remarks released for publication on Thursday."
  • "That increase represents a rise of 7-8 percent from the 14.492 billion euros of sales Adidas recorded in 2013. Previously, Adidas had guided for a 'high single-digit' increase in currency-neutral sales in 2014."
  • "'Football is the DNA of our company. We want to clearly show that we are number one in football,' Hainer said, adding Adidas expected to sell significantly more balls than at the last World Cup in South Africa four years ago and about as many shirts."
  • "Hainer acknowledged, however, that Adidas faced a 'head-to-head' race with Nike in the business for football boots, including in Germany, predicting Adidas would sell 2 million pairs of special boots designed for the World Cup."
  • "Adidas is investing a 'double-digit million sum' in advertising associated with the World Cup with a particular focus on social media, he said, with plans for a media room in Brazil to deliver and filter content from its sponsored teams and players."

 

Takeaway: Pretty damning admission by Hainer. Adi is 'head-to-head' with NKE in the football boots arms race? We would have guessed as much, but NKE is just starting to gain traction in the soccer market. Add UA to the mix and it’s a pretty bleak outlook for Adi. When soccer balls and t-shirts are the key pillar of growth for a footwear company - we get concerned.

 

SKX - Skechers’ Home Run

(http://www.wwd.com/footwear-news/markets/media-bank-allen-edmonds-winning-design-skechers-signs-pete-rose-7689559)

 

  • "Skechers’ Relaxed Fit men’s line is adding former baseball player Pete Rose to its family. Rose will appear in ads this fall for the footwear line. He joins other sports figures including Joe Montana, Mark Cuban and Joe Namath, who have all appeared in the Relaxed Fit marketing."

 

Takeaway: This officially ends SKX's string of Hall of Fame ex. Athlete endorses.

 

OTHER NEWS

 

WMT - Report: Wal-Mart to expand Sunnyvale e-commerce operation

(http://www.chainstoreage.com/article/report-wal-mart-expand-sunnyvale-e-commerce-operation)

 

  • "Wal-Mart is reportedly planning to substantially expand its e-commerce operation based in Sunnyvale, California. According to the Oakland Tribune, Wal-Mart intends to add hundreds of staffers to its global e-commerce unit there, bringing the total number of e-commerce employees to about 1,000."
  • "In addition, Wal-Mart will lease a 107,000-sq.-ft. space in Sunnyvale to help house its e-commerce operations. Currently, the retailer employs about 550 e-commerce employees in Sunnyvale at an existing facility it will maintain."

 

JCP - J. C. Penney Company, Inc. Grants Previously Disclosed Equity Inducement Award to Edward Record

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1933365&highlight=)

 

  • "...J. C. Penney Company, Inc. announced that on May 20, 2014, an equity inducement award of 223,964 restricted stock units (RSUs) was granted to Edward Record, the Company's Executive Vice President and Chief Financial Officer, in connection with the commencement of his employment."
  • "The RSUs will vest in thirds on the first, second and third anniversaries, respectively, of the grant date, provided Mr. Record remains continuously employed with the Company through those dates.  The award fully vests if Mr. Record is terminated for any reason other than cause, and if his employment terminates in certain cases within two years following a change of control at the Company."

 

BrandZ's Most Valuable Global Brands Unveiled

(http://www.wwd.com/menswear-news/clothing-furnishings/brandzs-most-valuable-global-brands-unveiled-7689661)

 

  • "...global research agency Millward Brown...unveiled its 2014 BrandZ Top 100 Most Valuable Global Brands Wednesday."
  • "The ninth release of the study measures consumer brand perception along with financial data to calculate brand value."
  • "Among this year’s top 10 apparel brands, Nike was named the most valuable, stealing the top spot from Zara by increasing 55 percent to a brand value of $24.6 billion. The strongest rise, however, came from Uniqlo, which rose by 58 percent to $7.3 billion, moving up two notches to take the number-four spot. The only decliner in the top 10 was U.S. yoga brand Lululemon, down 13 percent to ninth place and a valuation of $3.3 billion."

 

Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart2 5 22

 

Alec Richards

Analyst



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