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INITIAL CLAIMS: STRONG ENOUGH

Takeaway: Initial Claims suggest the tapering will continue. The bond and currency markets, meanwhile, are still signaling slower growth.

Headline claims rose +28K WoW to +326K while the rate of improvement in non-seasonally adjusted initial claims, our preferred read on the underlying trend in the labor market, decelerated to -5.5% YoY vs. -15.8% last week.  The 4-wk rolling average in YoY NSA claims decelerated -80bps sequentially to -5.3% YoY.  

 

In short, another week of decent (not outstanding) improvement as we continue to steadily track towards the frictional lower bound at ~300K in seasonally adjusted initial claims.

 

Josh Steiner, our head of financials research, characterized this morning’s claims data like this:

 

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.

 

Source: Hedgeye Financials 

INITIAL CLAIMS: STRONG ENOUGH - 1

 

INITIAL CLAIMS: STRONG ENOUGH - 2

 

The “strong enough” initial claims characterization sits as a sufficient microcosm for the broader domestic macro data as well. 

 

Sequentially, the data is generally better but the reported March-May data certainly doesn’t reflect significant deferred 1Q (weather) demand or signal a return to the slope of growth observed over 1Q-3Q13 period last year. 

 

Still, sequential improvement supports the wait-&-see/steady-as-she-goes policy approach promulgated by the fed again yesterday– at least over the nearer term.   

 

With the 10Y and $USD both in bearish formation, the bond and currency markets continue to price in slowing growth.  On the fundamental side, housing continues (& will continue) to slow (see today’s note: Biggest MoM Growth in Inventory...Ever) and the conflation of decelerating wage growth, a troughed savings rate and rising inflation continue to constrain any upside for  “non-core” consumption growth.  And from a comp perspective, growth comparisons get harder while inflation comps ease through the third quarter of this year. 

 

INITIAL CLAIMS: STRONG ENOUGH - Eco Summary 052214 

 

 

More broadly, looking at growth and inflation expectations across our Global Macro dashboard (click on it for an expanded view) developed market growth estimates continue to rise while EM growth revisions remain negative.  Interesting, funds continue to flow in the opposite direction of revision trends (ie. into EM markets & away from domestic/DM markets) – a phenomenon largely linked to persistent weakness in the dollar, in our view. 

 

On the inflation side, expectations for ongoing disinflation remain the prevailing trend.  Notably, the U.S. sits as one of the only developed market economies (alongside Canada) where inflation expectations have been rising. 

 

Absent technical factors driving a material supply/demand imbalance for credit, rising inflation expectations + falling (nominal) bond yields = lower real growth expectations.  We think that remains the right call for the immediate/intermediate term.  

 

INITIAL CLAIMS: STRONG ENOUGH - GM P L 052214

 

Christian B. Drake

@HedgeyeUSA


10 More Signs of #InflationAccelerating

Takeaway: It’s going to be an entirely different thing when the 80% of people in this country getting jammed by the Fed’s Policy To Inflate revolt.

US rents (34% of Americans have to rent, and like it) and the cost of living hit all-time highs this week, so alongside #RentRipping, here’s more year-to-date #InflationAcclerating data:

CRB Foodstuffs Index +21.9% YTD

10 More Signs of #InflationAccelerating - 1

CRB Commodities Index +10% YTD

10 More Signs of #InflationAccelerating - 9

Coffee +57.6% YTD

10 More Signs of #InflationAccelerating - coffee

Nickel +42.1% YTD

10 More Signs of #InflationAccelerating - nickel3

Lean Hogs +28.3% YTD

10 More Signs of #InflationAccelerating - pork chops

Soybeans +19.2% YTD

10 More Signs of #InflationAccelerating - Soybeans Beige 5 08

Cattle +15.4% YTD

10 More Signs of #InflationAccelerating - 700cow

Palladium +15.4% YTD

10 More Signs of #InflationAccelerating - palladium 3428

Orange Juice +10.9% YTD

10 More Signs of #InflationAccelerating - orangejuice

Oil +7.9% YTD 

10 More Signs of #InflationAccelerating - petroleum

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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

 


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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

 

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

 

INITIAL CLAIMS: TAPER ON, TAPER ON - 9

 

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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.


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


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