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WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT

Takeaway: Today we offer our thoughts on existing home sales and Mel Watt's announcement yesterday about expanding mortgage credit availability.

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. 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - compendium

 

A Brief Comment on the FHFA Annoucement Yesterday:

ITB, the home construction ETF, has rallied ~6% over the last two trading days (Friday and Monday) in response to news that FHFA is going to expand mortgage credit availability. On Friday, stories ran in both the Wall Street Journal and Bloomberg previewing a coming announcement from FHFA Director, Mel Watt, about boosting mortgage credit availability. Yesterday, we got the announcement. Director Watt spoke at the MBA conference and laid out two changes that would be implemented. First, Fannie Mae and Freddie Mac would lower the down payment needed to 3% from 5%, effectively raising the minimum LTV (with mortgage insurance) from 95% to 97%. Second, Fannie and Freddie would rein in some of the mortgage putback provisions that have scared lenders into excessive underwriting conservatism from an originations perspective. 

 

Regarding the first point, raising allowable LTVs two points, to 97% from 95%, will have little impact on the market. This is because the FHA already enables buyers to purchase homes with just 3.5% down payments. Much of the market that this would intend to address is already squarely served by the FHA. The GSEs are not relaxing FICO or DTI requirements, just lowering down payment standards to a level already available in the market through FHA.

 

On the second point, mortgage putback issues have been a major problem for banks for several years now. Post the housing crisis, banks have been extremely cautious in who they extend credit to largely out of fear that the loan will be put back to them for even a minor defect. Both JPMorgan and Wells Fargo, the two largest originators in the country, have spoken publicly about these issues many times. To that end, we think some further clarity around putbacks will help, on the margin, but is unlikely to cause banks to significantly expand the underwriting box. Remember that banks still have to comply with QM, which is where much of the pressure comes from.

 

Taken together, these two initiatives are positives, but we would argue small positives. We don't think this changes the landscape of mortgage finance in a material way over the intermediate term. We would also flag the timing of the announcement as interesting with midterm elections now less than 3 weeks away. Nothing sways voters like a last minute hat-tip to inflate the value of their primary asset.

 

 

Today's Focus: September Existing Home Sales 

As we've highlighted, there's limited usefulness in the EHS report on the sales side since the data is well-telegraphed by the Pending Home Sales report a month earlier. We show this in the 1st chart below, where we've offset the EHS data by one month to show its correlation to PHS on a 1-month lag.  

 

Despite the limited real-time utility in terms of demand trends, there is value in the data on inventory and the composition of sales (first-time buyers, cash buyers, investor share). This month we flag the still-anemic level of first time homebuyers (29% vs 2001-2008 average of ~40%).

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs vs phs

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs vs phs long term line

 

TOTAL EXISTING HOME SALES:  Total EHS resumed its uptrend in September after stumbling in August. Sales rose 2.4% MoM to 5.17mn SAAR. Meanwhile, the year-over-year rate of change slowed to a decline of 1.7%, an improvement vs the 5.3% decline in August. From a growth perspective, the YoY comps get progressively easier through the balance of the year as we lap the rising rate environment of 2H13. 

 

For comparison, Pending home sales have advanced +11.6% since the trough in March vs +12.6% for EHS and, given the recent pattern highlighted above, its likely we see a modestly worse sequential EHS print in October.  

 

REGIONAL:  The South and West regions registered strong sequential gains in sales while the Northeast saw a modest gain and the Midwest declined a full 5.6% MoM.  Sales across all regions but the South remain negative on a YoY basis. The South is now up +1.4% vs the same period last year. 

 

INVENTORY:  On a unit basis, existing home inventory declined -0.4% MoM, marking the 2nd month of sequential decline in supply since December of last year.  On a months supply basis, inventory was slightly lower sequentially at 5.34 months in September and up +7.8% YoY

 

OTHER:  The share of first time homebuyers remains anemic, coming in at 29% in September. First time homebuyers have been sub-30% now for 17 of the last 18 months. The share of first time homebuyers was generally above 40% from 2001-2008 and briefly hit 50% in 2010 in response to the government's homebuyer tax credit programs. Meanwhile, cash sales remain at 24% of transactions in September, down from 33% in September last year. 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - EHS long term

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs by region long term 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - EHS BY REGION 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs inventory long term 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs months supply short term line 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs months supply long term column 

 

 

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




LEISURE LETTER (10/21/2014)

Tickers: LVS, BEL, RCL, SKIS

EVENTS

  • Oct 23:
    • RCL Q3 earnings 10 am
    • PENN Q3 earnings 10 am
    • LHO Q3 earnings 10 am "LaSalle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am
  • Oct 28:
    • GLPI Q3 earnings 10 am
    • HOT Q3 earnings 11:30 am , code "10325720"
    • MAR Q3 earnings 5 pm , ID "59390131"
  • Oct 29: H Q3 earnings 11:30 am code "95150754"
  • Oct 30:
    • HST Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw "6307991"
    • BYD Q3 earnings 5 pm , pw "8021592"

COMPANY NEWS

ALL:AU (GGRAsia) Gaming supplier Aristocrat Leisure Ltd announced it completed the acquisition of U.S.-based gaming machine manufacturer Video Gaming Technologies Inc (VGT), in a deal worth US$1.28 billion. The Australian firm also said it would consider other “accretive opportunities”.

Takeaway: Could Aristocrat be on the hunt for additional add-ons?

 

AYA:TSX – announced it launched a strategic review of alternatives for Cadillac Jack Inc., its video slot machine subsidiary. The company said it wants to consider plans aimed at helping Cadillac Jack grow and maximizing value for Amaya's shareholders. Cadillac Jack designs, manufactures and sells a range of server-based and stand-alone video reel slots and other gaming machines.

Amaya has hired Macquarie Capital and Deutsche Bank Securities Inc. as co-financial advisers to assist in the review.

Takeaway: Sounds to us like a spin-off/sale is imminent.

 

LVS & 1928:HK (Macau Business) Macau casino operator Sands China Ltd’s labor costs will grow to over US$1 billion (about MOP8 billion) this year, their highest ever, according to Sheldon Adelson, the boss of parent company Las Vegas Sands Corp. Mr Adelson attributes the increase to the need to pay workers more to attract and keep them in a competitive labour market.

Takeaway:  We think it may be $1.1 bn and much higher in 2015.

 

BEL – Belmond, the luxury hotel company and rail-excursion operator formerly known as Orient-Express, will add two excursions for its Eastern & Oriental Express rail line next year. The five-night “Fables of the Peninsula” tour from Singapore to Bangkok will debut in late March and includes an overnight stay at Raffles Singapore and a one-day excursion to Kuala Lumpur. Rates for the excursion, which is limited to 60 passengers at a time, start at about $7,700 per person. The two-night “The Ancient Temples of Lanna” excursion will start operations in late October. The route starts in Bangkok and ends in Chiang Mai. That northern Thailand city is known for its horse-drawn carriages and artifacts.

Takeaway: New vacation offerings by a premiere operator to Old World destinations for the super wealthy.

 

SKIS – Peak Resorts files for $100 million IPO through FBR, Stifel and Baird. Back in April 2011, the very same company attempted a $40.3 million IPO through Rodman & Renshaw but the IPO was pulled "due to market conditions".  The company currently operates 13 ski resorts, 12 of which are owned in Missouri, Indiana, Ohio, Pennsylvania, New Hampshire and Vermont. The S-1 can be found here. Use of proceeds is to paydown 10%+ debt (EPR is the counterparty).

Takeaway: If a company's cost of debt is >10% (page 29 of the S1), what is the appropriate cost of equity - significantly higher in our opinion.  The last time we saw a transaction like this (equity issued to pay down high cost debt) was the Muruelo Maddux in January 2007 - quickly went gonzo.  On this filing alone, we'd prefer to buy EPR.

INDUSTRY NEWS

Macau Ferry Terminal Renovation Delay – (Macau Daily Times) Director of the Marine and Water Bureau (DSAMA), Wong Soi Man, has revealed that renovations to the Macau Ferry Terminal (also known as the Outer Harbor Ferry Terminal) will not be finished until the end of this year. She explained that the delay was inevitable because the renovation is being carried out while the terminal is still in operation.

Takeaway: A slight delay, but not likely to impede inbound visitation.

 

Clark County Nevada Taxi Rate Increase (LVRJ) The Nevada Taxicab Authority on Monday approved a rate increase of just more than 8%, boosting Clark County to the second highest rate in the nation among cities with a tourism-based economy.  The board unanimously authorized rates to climb from $3.30 for the initial drop to $3.45, 20 cents per one-thirteenth of a mile ($2.60 a mile) to 22 cents per one-thirteenth of a mile ($2.86 a mile) and wait-time charges of $30 an hour to $32.40 an hour. The $2 McCarran International Airport pickup fee will remain unchanged. The per-mile rates include a 20-cent-per-mile fuel surcharge.

 

It was the first taxi rate increase since November 2008. It’s unclear when the new rates will take effect because the Taxicab Authority must get permission to use budget reserve funds to pay overtime to the vehicle inspectors and investigators to change the meters on the 3,000 cabs in the Las Vegas fleet. A meter changeover generally takes about five to six days, but it could take weeks to get the approvals necessary to budget funds for the associated costs.

Takeaway: Higher costs to visit Las Vegas.

 

New Jersey Sports Betting Lawsuit (Bloomberg) The National Collegiate Athletic Association,  the National Basketball Association, the National Football League, the National Hockey League and Major League Baseball sued to block New Jersey Governor Chris Christie's renewed attempt to allow sports betting at Atlantic City’s struggling casinos. The complaint filed yesterday in federal court in Trenton came three days after Christie signed a revised bill to allow betting on sports at the state’s racetracks and casinos. The leagues contend the new bill is an attempt to end run a 2013 court order that had struck down a previous state law legalizing sports betting in Atlantic City casinos and at the tracks.

Takeaway: The judicial process to overturn begins.

MACRO

China Macro 

  • Q3 2014 GDP +7.3% yr/yr vs. consensus +7.2%

Also for China during September:

  • Industrial production +8.0% yr/yr vs consensus +7.5% and +6.9% in Aug
  • Retail sales +11.6% yr/yr vs consensus +11.8% and +11.9% in Aug
  • Jan-Sep FAI +16.1% yr/yr vs consensus +16.2% and +16.5% in Jan-Aug

 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 

 

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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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MACAU: NO PICKUP HERE

Takeaway: Yes stocks are down but with no catalysts in sight and Street estimates still too high, nothing to see here.

Another soft week in Macau

 

 

Please see our note: http://docs.hedgeye.com/HE_Macau_10.21.14.pdf


Keith's Macro Notebook 10/21: Russell 2000 | UST 10YR | Oil



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