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Mortgage Apps - August Anemia Complete

Takeaway: Purchase demand is tracking down 6% Q/Q with August data now all in.

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

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point

 

Mortgage Apps - August Anemia Complete - Compendium

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 29th.

 

The Composite index managed a +0.2% gain as the YTD low in rates continues to support marginal refi-activity.  Purchase demand declined -1.5% sequentilly with the index holding below the 170-level for an eighth straight week as the multi-decade dearth in demand persists to close out August. 

 

  • Demand Anemia, Week 8:  The purchase Index fell for the 4th time in 5 weeks, declining -1.5% WoW to 165.8 on the Index. This marks the eighth consecutive week at the 160-level and the softest demand streak since April of 1995.  Purchase demand remains down -12% YoY and is currently tracking -6% QoQ. 
  • Refi & Rates:   Refinance activity increased for a 3rd straight week, rising +1.4% sequentially alongside an incremental -3bps decline in the 30Y FRM contract to 4.25%.  Rates have declined -10bps over the last month and currently sit at their lowest level YTD. Refi activity remains down -26% YoY but continues to improve as we move through the easiest 2013 comps. 

 

We’ve discussed the regulation-catalyzed shift towards Nonbank origination and the potential challenge to intertemporal reliability and reported demand as measured by the MBA survey.  The WSJ and Inside Mortgage Finance (Here) reported that nonbank market share of mortgage originations have increased 6% to 23% in 1H14 vs. 17% in 1H13. While the MBA survey states that it covers 75% of all US retail residential mortgage applications, it does not count applications submitted through the broker/correspondent/wholesale channels.   

 

Under an assumption that the full 6% shift went uncaptured by the MBA survey and allowing for a lower pull-through rate (i.e originations to applications ratio) on non-QM loans, the demand decline moderates but the broader reality of ongoing softness in the housing market remains largely unchanged.  From here, demand comps across the MBA Purchase Application and Existing & Pending Home Sales series continue to ease.

 

Mortgage Apps - August Anemia Complete - Purchase   Refi YoY

 

Mortgage Apps - August Anemia Complete - Purchase Qtrly Ave

 

Mortgage Apps - August Anemia Complete - Purchase LT w Summary Stats

 

Mortgage Apps - August Anemia Complete - Purchase Apps 8Wk Rolling Ave

 

Mortgage Apps - August Anemia Complete - Composite Qtrly   YoY  

 

Mortgage Apps - August Anemia Complete - Composite LT w Summary Stats

 

Mortgage Apps - August Anemia Complete - 30Y FRM

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


LEISURE LETTER (09/03/2014)

Tickers: IGT, LVS, BEE, DRH, HLT, HOT, RCL

EVENTS

  • Sept 3:
    • MGM China (2282:HK) at Nomura China Investor Forum
    • Sands China Ltd (1928:HK) at Nomura China Investor Forum
    • MTN - expected ruling from Judge Harris in PCMR vs. Talisker
  • Sept 4:  MGM at Mizuho Investment Conference
  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8: MAR Analyst Meeting
  • Sept 9: 
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference

COMPANY NEWS

BEL:PM (GGRAsia) reports indicated CLSA Ltd is pre-marketing the PHP8.7 billion (US$200 million) follow-on share sale to expand its investor base with the official book opening on September 22 and a listing date of October 2. Reportedly, CLSA Ltd is the sole global co-ordinator of the operation, while Credit Suisse and Macquarie are joint bookrunners

Takeaway: Widely anticipated since BEL's filing on July 22.

 

IGT (Macau Business) Gaming equipment suppliers LT Game Ltd and International Game Technology will together unveil a concept called the "Total Casino Solution" at this year’s Macao Gaming Show, which will take place from November 18 to 20 at the Venetian Macao casino-resort.

Takeaway: Could this be the next iteration of the systems business?

 

LVS (Korea Herald) recently proposed to the Seoul government the construction of “a truly iconic building” in Jamsil, the site of the 1988 Olympic Games main stadium located in the affluent southern Seoul area. It is close to the Hangang River that runs through the capital city with a population of over 10 million, and Lotte World Tower, a 123-story building currently under construction.  LVS proposed to moving the baseball stadium to another location in order to optimize the redevelopment potential of the Jamsil site as a leading international meetings, incentives, conferences and exhibitions destination. 

Takeaway:  Another MICE opportunity or something larger?

 

BEE – announced that it has closed a ten-year, $115.0 million limited recourse loan secured by the InterContinental Miami hotel.  The Company had recently repaid the $85.0 million financing previously encumbering the property. Under the terms of the agreement, the loan bears interest at a fixed rate of 3.99% and has a ten-year term.  Deutsche Bank Securities Inc. originated the financing.

Takeaway: This financing replaced the existing $85mm loan that encumbered the property.

 

DRH – announced two acquisitions for a total of $174.2 million. First, the newly constructed 282-room Hilton Garden Inn/Times Square Central located on 42nd Street between Avenue of the Americas and Broadway in New York for a purchase price of $127.2 million ($451,000/key). Second, the 106-room boutique hotel, The Inn at Key West in Key West, Florida, for a purchase price of $47.5 million ($448,000/key). As of June 30, 2014, DRH has $253.0 million of unrestricted cash on its balance sheet and no outstanding balance on its $200 million senior unsecured credit facility. 

Takeaway: DRH's most recent equity offering was for 20 million shares at $10.03 on July 10, 2012.  Given the recent stock price and now low levels of cash, we would not be surprised to see an equity offering - especially as we approach year end 2014.

 

HLT – announced "China Golden Week" promotion for mainland China and Hong Kong. The promotion will reward customers who book directly through Hilton Worldwide's portfolio of hotels in mainland China and Hong Kong with exclusive discounts as well as, offering HHonors membership points to our valuable members. China Golden Week promotion from September 1 to October 10, 2014, all fully prepaid direct bookings up to two days prior to arrival will enjoy up to 34% off at any participating hotels and resorts under Hilton Worldwide across mainland China and Hong Kong

Takeaway: Hilton attempting to capitalize on its vastly larger China lodging footprint during the all important Golden Week.

 

HOT – announced an agreement with Hainan Jianfeng Tourism Development Co., Ltd. to debut China’s first W Retreat and the second St. Regis resort on Hainan Island. Scheduled to open in 2019 and 2020, respectively

Takeaway: Hainan, once thought to be the next gaming mecca, is quickly becoming a new city for high-end executive offices and technology firms.

 

RCL – announced that it has entered into an agreement to sell its 1,814-passenger cruise ship Celebrity Century to Exquisite Marine Ltd., a holding company led by Ctrip.com. Royal Caribbean Cruises will continue to operate Celebrity Century until April 2015. 

Takeaway: A smart move by RCL on 2 fronts - allows them to get rid of an old under performing asset while establishing a JV to manage the ship's operations while also broaden its relationship with Ctrip, who's a powerhouse OTA in China. 

INDUSTRY NEWS

Tourism chief forecasts single-digit visitor growth (Macau News)

Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes said she believes that in the next few years, growth in the number of visitor arrivals will remain in single digits.  She also said her bureau would be more focused on convincing visitors to extend their stay. Currently, visitors’ average stay amounts to just one day.

Takeaway:  Through July, Macau visitation has grown 8% ytd in 2014.  Changing the day trip perception of Macau will be difficult.

 

Macau International Airport – handled 520,000 passengers in August, 6.5% more than a year earlier and the most in any month yet. Macau International Airport Co Ltd says the airport handled 3,400 landings and takeoffs, 1.4% more.

Takeaway: The visitors are coming to Macau, but just not gambling as much.

 

Trump Plaza Atlantic City – New Jersey Division of Gaming Enforcement approved the closing to Trump Plaza and said the property can cease gaming operations at 6 a.m. Sept. 16, and that casino-cage operations should continue until 8 a.m.

Takeaway: The closing of the third casino in a mere two weeks.

MACRO

China Economic Data - The non-manufacturing purchasing managers’ index (PMI) rose to 54.4 in August from 54.2 in July.  Additionally, the HSBC Holdings Flash PMI survey was 54.1 versus 50.0 in July.

 

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.


What’s The Bull Case?

Client Talking Points

RUSSIA

Putin continues to try to puppeteer markets, bouncing the Russian Trading System (and Ruble) from the lows. The RTSI is up +4% this morning and all of Europe is chasing that (on bad German/French/Italian economic data - ISM Services for Italy breaches 50 in AUG to 49.8 vs 52.8 JUL).

OIL

At least Vladimir Putin didn’t leak the ceasefire to his boys yesterday; I guess Putin the peacemaker is the new bull case for those who love U.S. consumer stocks – makes sense, until the companies have to report. After getting smoked yesterday, Brent Oil holds $100.74 TRADE support, but remains bearish TREND.

UST 10YR

UST 10Yr Yield is up +11 basis points in less than 2-days, so this will be our worst start to a month since bonds got blasted in 1st week of July (to higher-lows); they chased the Russell to 1208 on July 7th on that too – painful position for us in the moment then, and it is now – staying with long TLT, short RUT.

Asset Allocation

CASH 52% US EQUITIES 0%
INTL EQUITIES 18% COMMODITIES 2%
FIXED INCOME 24% INTL CURRENCIES 4%

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.

BOBE

The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.

TLT

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 two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  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.

Three for the Road

TWEET OF THE DAY

Another rock solid econ print on the consumption side of the UK economy, AUG Services PMI 60.5 vs 59.1 last

@KeithMcCullough

QUOTE OF THE DAY

You get self-satisfaction from pushing yourself to the limit, knowing that all the effort is going to pay off.

-Mary Lou Retton

STAT OF THE DAY

Our two favorite stock markets; China is up another +1% to 11.5% year-to-date and India is up another +0.7% to +30.1% year-to-date.


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Follow the Leaders

This note was originally published at 8am on August 20, 2014 for Hedgeye subscribers.

“Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them.  They have either lost confidence you can help or concluded you do not care.  Either case is a failure of leadership.”

-Colin Powell

 

Compared to many of our Wall Street counterparts, Hedgeye is a relatively young and smallish firm.  We’ve been around just over six years, have right around 60 employees, and still have our growing pains at times.   If we’ve learned anything over those six plus years, it's this: leadership matters.

 

Leadership, of course, comes in many different stripes.  It can be the proverbial “foot soldier” owning his actions and going above and beyond the call of duty.  Or it can be top down leadership in which the “generals” enable the “soldiers” to do their job more effectively, through encouragement, teaching, and also making sure they are transparently held accountable to their goals and objectives.

 

Last week, we wrote about Kinder Morgan and even though we tend to disagree with the long term prospects for the company, we readily admitted that CEO Rich Kinder continues to show preeminent leadership in the realm of financial structuring. 

 

As stock market operators frequently evaluating companies, a key question we ask ourselves is: what makes a good leader?  In January 2004, internationally known psychologist  Daniel Goleman did a groundbreaking study of some 188 companies that quantified leadership success and concluded the following:

 

“When I analyzed all this data, I found dramatic results. To be sure, intellect was a driver of outstanding performance. Cognitive skills such as big-picture thinking and long-term vision were particularly important. But when I calculated the ratio of technical skills, IQ, and emotional intelligence as ingredients of excellent performance, emotional intelligence proved to be twice as important as the others for jobs at all levels.”

 

More than ten years later, Goleman’s findings apply now more than ever.

 

Follow the Leaders - DJ2

 

Back to the Global Macro Grind...

 

Across the global macro landscape this morning, we are witnessing all sorts of leadership.  Both perceived and actual.  

 

In the "actual leadership" category, European equities are leading and so are the central bankers in England.  The BOE released minutes from their most recent meeting and for the first time in more than three years, there were votes to increase interest rates.  Specifically, two policymakers voted to raise interest rates by 25 basis points.  Strong pound equals strong England.

 

In the "perceived leadership" category, we will have Fed minutes out today as well as a briefing from Jackson Hole. We’ve been decidedly contrarian in our view of bonds and rates this year. And we continue to believe that anything that comes out of Jackson will be incrementally dovish.   In our quantitative model, the ten year yield has immediate term downside risk to 2.34% in advance of Yellen "pushing out the dots" this week.

 

Finally, in the category of "lack of leadership," the Argentine Economic Minister Alex Kicillof will hold a press conference today after announcing a sovereign debt restructuring plan.  In conjunction with that, he will immediately submit a bill that will pay foreign currency bonds locally, lets overseas debt holders swap into new bonds, and create a separate account for holdouts.   So much for being pulled to par!

 

In terms of asset price leadership this year, one of the more outstanding performers has been coffee. It's up over 64% year-to-date.  Tomorrow, August 21st at 11am, our commodities macro analyst Ben Ryan will host a conference call on the outlook for coffee, which postulates, “Coffee Prices May Move Much Higher From Here.”

 

Joining Ben on the call will be Judith Ganes-Chase who has been following the coffee markets for more than twenty years.  They will be looking at such topics as tree scarcity, weather conditions, and scarcity of grades of coffee.  The call is also obviously relevant for a host of different equities, including CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI.  Hopefully you will grab a cup of Joe and join us for this call with this commodities leader.

 

In terms of leadership on Hedgeye's Best Ideas list, our savvy retail vet and Sector Head Brian McGough has had a good run with his long pick on Restoration Hardware (RH).  Given its lofty valuation, RH has become a true battle ground stock.  Since being added to the Best Ideas list just under a year ago, RH is up approximately 36%.  Over the last six months, the stock has mercy crushed the S&P 500 in terms of performance.

 

As always, though, the key is question is whether RH can continue to lead, or will the short sellers (almost 17% of the float is currently short) prevail.  If we are correct, the short sellers may be grossly underestimating the real estate opportunity.  As McGough wrote last week:

 

“We’ve spent a lot of time on the road discussing RH over the past three weeks, and most specifically, our recent 45-page deep dive on RH’s real estate. The punchline of our analysis is that a) RH stores could (and probably should) get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.”

 

As always, contact sales@hedgeye.com to learn how to get access to McGough’s deep dive.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.42%

SPX 1952-1987

RUT 1117-1167

DAX 8991-9360 

USD 81.33-81.97 

WTI Oil 94.56-96.91

Gold 1290-1321 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Follow the Leaders - COD 08.20.14


CHART OF THE DAY: Do You Cover the Russell 2000 $IWM Short? No.

CHART OF THE DAY: Do You Cover the Russell 2000 $IWM Short? No. - Chart of the Day

 

Excerpt from today's Morning Newsletter:

 

Q: Do you cover the Russell 2000 short?

 

A: No. Much like when bond yields had a head fake (to the upside) in early July and the Russell rallied, IWM has been doing the same for the last few weeks on even less volume. To put yesterday’s move to 1179 in context, Total US Equity Market Volume was -32% vs. its YTD avg, and the Russell would still need to rally +3% (from here) to get back to the July 7th breakeven.



Bear Truce?

“Reconciliation, n. A suspension of hostilities. An armed truce for the purpose of digging up the dead.”

-Ambrose Bierce

 

In what will undoubtedly be my worst two macro market days to start a month since the first week of July, I am the man in the arena this morning whose face is marred with blood and mud.

 

Bear Truce? - g5

 

Back to the Global Macro Grind

 

I can’t for the life of me find the sell-side note that explained 6-9 months ago that the bull case for both European and US growth equities was that Draghi was going to save Europe from slowing and that Putin was going to declare a truce. #ThesisDrift

 

But macro markets drift, and whether you like its message or not, the score is the score – and I’ll be held accountable to it. Responsibility in recommendation starts with answering questions in the moment. What do we do next?

 

I’ll summarize the questions I’ve been getting from Institutional Investors and give you where I stand this morning:

 

Q: Do you think the UST 10yr Yield has bottomed?

 

A: No. While yesterday’s ISM print was impressive, it’s not the consumption economy – I think it partly reflects the late-cycle pricing and hope you’ll see at the end of most economic expansions. Risk to Q3 GDP consensus estimates remains to the downside. 10yr yield has immediate-term downside to 2.33% and this makes Friday’s jobs report all the more important now.

 

Q: Do you cover the Russell 2000 short?

 

A: No. Much like when bond yields had a head fake (to the upside) in early July and the Russell rallied, IWM has been doing the same for the last few weeks on even less volume. To put yesterday’s move to 1179 in context, Total US Equity Market Volume was -32% vs. its YTD avg, and the Russell would still need to rally +3% (from here) to get back to the July 7th breakeven.

 

Q: Doesn’t the price of Oil falling get you more bullish on the US Consumer?

 

A: No. I never was bullish on the median consumer or US housing to begin with! If Brent breaks $95, it might get me less bearish, but not flat out bullish. While the rate of change always matters (WTI crude was -3.2% yesterday as Putin leaked the truce to his boys), the overall consumption tax on US consumers is broad based (Rents at all-time highs, Food prices +16% YTD, Real Wages flat to negative, etc.).

 

Q: Don’t you think the US stock market looks good on up days?

 

A: Kidding. No one actually asked it that way. But if you are me and see the reams of questions I get in the heat of the moment (how “bearish” the market looked at the early AUG lows when the Russell 2000 was at 1114 and SPX = 1925), and how this market looks like its “gonna rip”, “never really go down”, etc. after 5 straight up weeks… you’d at least chuckle.

 

Q: Doesn’t Draghi have credibility with markets?

 

A: Yes. We don’t doubt this guy means what he says and we don’t disrespect his impact on the currency market either (that’s why I covered the US Dollar short idea on the only pullback we’ve had since he decided to devalue again at Jackson Hole). But don’t confuse market credibility with economic stability. QE is simply a centrally planned policy to inflate asset prices.

 

Q: Do you buy European Equities on the Draghi put?

 

A: Not sure. I still need to see how markets respond to what he has to say on Thursday (ECB meeting). Buying European Equities today is a very different thesis than our bullish on European #GrowthAccelerating call was from 2013 until Q2 of 2014. Effectively, you’d be buying into a slowing economy with a broken idea that a renewed Policy To Inflate will “stimulate” real economic growth.

 

Q: Do you stay with long China and India?

 

A: Yes. Both the absolute and relative returns of these two stock markets (China +11.5% and India +30.1% YTD) are pulverizing something like the Russell 2000. More importantly, we think that’s happening for the right rate-of-change economic reasoning. In stark contrast to US and European GDP growth (which is slowing both sequentially and y/y), India is flat out accelerating, and China is finally stabilizing.

 

Q: What’s your sense on sentiment?

 

A: In the US stock market, I can assure you that many funds have been forced to chase this 4-5 week move off the August lows. In the US bond market, people are still fighting the down rates move too. Looking at the II Bull/Bear US Equity Sentiment Survey this morning, Bears have been blasted to fresh YTD lows of 13.3%, and the Bullish Spread is testing its early July highs of +4,280 (basis pts) wide to the bullish camp.

 

In other words, there will be no bear truce issued from Stamford, CT today. If you’d like to answer all of these questions differently, I’d be happy to post them to our entire subscriber base. It’s what makes a market.

 

When my face is bloodied, I love to get right back up, take a stance, and fight.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.33-2.46%

SPX 1

RUT 1151-1184

EUR/USD 1.31-1.33

Brent Oil 100.74-103.71

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Truce? - Chart of the Day


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%
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