Dear Restaurant Subscribers,
We’re hosting a series of calls next week, including an expert call focused on the organic space and a new Best Idea short call (with Black Book) on a well-liked organic name.
If you have any interest in attending one, or both, of these events please let us know.
The new Qualified Mortgage (QM) regulations that went into effect on January 10th tightened mortgage underwriting standards and were broadly expected to compress credit availability – particularly at the lower end and across non-conforming loan categories.
While the prevailing expectation was for some measure of credit tightening, there’s been a general dearth of hard data on the impact.
We received some harder quant today with the release of the Fed’s 3Q Senior Loan Officer Survey (Here) which included a set of special questions on the effects on the approval rates for home-purchase loans of the Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act
Bottom Line: ~30% of banks indicated that ATR/QM rules have reduced approval rates for borrowers across the FICO score spectrum while ~50% reported reduced approval rates across Jumbo and Nontraditional mortgage loans.
In short, the new regulatory provisions are, indeed, dragging on loan approval rates and residential real estate transaction volumes by extension. We expect that drag to continue to impact the reported housing data at least until we annualize the implementation in early 2015.
Joshua Steiner, CFA
Christian B. Drake
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We are adding SHORT Hain Celestial Group (HAIN) to our Hedgeye Best Ideas list.
We will also be hosting two conference calls focused on the organic space of the food industry next week.
The first conference call will be an expert call on Tuesday, August 12th, 2014 at 1pm EST and will feature guest speaker Bob Burke, Principal at Natural Products Consulting Group.
Since 1998, Bob Burke has provided assistance in bringing natural, organic and specialty products to market across most classes of trade. This includes work in strategic planning, writing sales, marketing and business plans, building distribution, broker selection and management, organizational development and compensation, strategic options, financing, branding, trade spending and assistance around M&A, due diligence and venture strategy groups. He is also the co-author of the Natural Products Field Manual, 6th Edition and The Sales Manager’s Handbook. Prior to consulting, Bob was with Stonyfield Farm Yogurt for 11 years as Vice President, Sales & Corporate Development.
During the call, Mr. Burke will focus on:
The second conference call will be a Best Idea call on Thursday, August 14th, 2014 at 1pm EST.
The organic food industry is the only place in the consumer staples sector that investors can find real growth. That being said, the last five years have been great for organic stocks – especially HAIN. The past 12-months, however, have been more challenging with evidence mounting that industry headwinds will keep some stocks within the organic segment under intense pressure. With HAIN being the 700 pound gorilla in the room, it has the potential to feel the most pain.
We’ve recently seen early signs of maturation in the organic segment of the food space. This is despite several companies seeing above-average organic volume growth.
Our call on HAIN will focus on the following issues:
Takeaway: We are removing TIP from our Investing Ideas list, and we are adding TLT to it.
On June 2 we added the iShares TIPS Bond Fund (TIP) to our Investing Ideas list. Since then this ETF has outpaced the -1.3% decline for the S&P 500 ETF Trust (SPY) and the -4.4% decline for the iShares Russell 2000 ETF (IWM).
In conjunction with our #InflationAccelerating and #StructuralInflation themes, we’ve seen measures of domestic consumer price inflation creep up over the past several months. Indeed, CPI has nearly doubled from its February 2014 YTD trough of +1.1% YoY to +2.1% in the month of June. We’ve seen a similar trend of accelerating inflation in the GDP deflator as well, with the figure accelerating to +2% QoQ SAAR in 2Q14 from +1.3% QoQ SAAR in 1Q14.
Is the trend of accelerating inflation in the rearview mirror? With the recent downdraft in commodity prices, we are increasingly inclined to think so. Both Crude Oil and the benchmark CRB Commodity Index are now breaking down quantitatively on our intermediate-term TREND duration, which is typically a leading indicator for a phase transition in both market prices and reported fundamental data.
To the extent the US Dollar Index confirms its commensurate quantitative breakout, we could be looking at a situation where the rate of change in reported inflation and inflation expectations levels off. To that tune, it’s worth noting that the 5Y Breakevens have receded -13bps from their late-JUN YTD highs in the 2.11% range.
On the margin, this developing fundamental setup is negative for TIP, so we are looking to book the gain here.
As they have been throughout the YTD, fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side.
In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next 2-3M:
This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Be it Bloomberg consensus estimates that call for a 3.11% US Treasury 10Y Yield at EOY ’14 amid perpetual ~3% real GDP growth forecasts or speculative net length in the futures and options markets for 10Y Treasury Notes at -19.2k contracts on a rolling 4-week basis, consensus is far from being in the area code of bullish on bonds.
Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
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