VIDEO | Keith's Macro Notebook 5/9: EURO INDIA UST10YR

QM Pressuring Housing Finance: Early Circumstantial Evidence

Takeaway: Fed Senior Loan Officer Survey supportive of our #HousingSlowdown call as residential mortgage demand & availability continued to decline.


QM Pressuring Housing Finance: Early Circumstantial Evidence  - QM Summary Table


The call-out here isn’t huge but it is worth a highlight as it relates to housing finance and the credit availability impacts from QM’s higher regulatory burden.


The 2Q14 Fed Senior Loan Officer Survey released earlier this week showed residential mortgage activity getting squeezed from both sides. 


While demand across all loan types remained under pressure in the latest survey, the tightening of credit standards across non-traditional and subprime loan categories sat as the largest and most remarkable change. 


The net percentage of banks tightening standards for Non-traditional and Subprime residential real estate loans increased to 24.3% and 42.9%, respectively, over the three month period ending in April.      


Whether the Jan 10th implementation of the new Qualified Mortgage standards is singularly responsible for the discrete tightening of credit standards in the latest survey is open to some speculation. 


However, given that the credit tightening was isolated to the loan types most likely to be affected by the regulations (note that the net percentage of banks tightening standards for prime borrowers showed no increase sequentially) and that it occurred exactly concomitant to QMs implementation is highly suggestive. 


While lender caution may be more pronounced in the early going as institutions ‘get a feel’ for the new regulation and its level of policing, we continue to think the more stringent lending guidelines will serve as an ongoing drag to housing demand over the intermediate term.



QM Pressuring Housing Finance: Early Circumstantial Evidence  - Resi Loans Tightening Standards


QM Pressuring Housing Finance: Early Circumstantial Evidence  - Resi Loans Demand



*Reference:  Below is the categorization of loan types used by the Fed for the Loan Officer Survey


  • The prime category of residential mortgages includes loans made to borrowers that typically had relatively strong, well-documented credit histories, relatively high credit scores, and relatively low debt-to-income ratios at the time of origination. This would include fully amortizing loans that have a fixed rate, a standard adjustable rate, or a common hybrid adjustable rate—those for which the interest rate is initially fixed for a multi-year period and subsequently adjusts more frequently. 
  • The nontraditional category of residential mortgages includes, but is not limited to, adjustable-rate mortgages with multiple payment options, interest-only mortgages, and ``Alt-A'' products such as mortgages with limited income verification and mortgages secured by non-owner-occupied properties.   
  • The subprime category of residential mortgages typically includes loans made to borrowers that displayed one or more of the following characteristics at the time of origination: weakened credit histories that include payment delinquencies, chargeoffs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories


Christian B. Drake


LEISURE LETTER (05/09/2014)

Tickers:  PENN, OEH, RCL


Friday, May 9

• HLT Q1 earnings – 10am , Passcode: 25981567

• AHT Q1 earnings – 11am


Monday, May 12

• DRH Q1 earnings – 10am , Passcode: 66393516

• HMIN Q1 earnings – 9pm

• SJM Holdings Q1 earnings 


Tuesday, May 13

Nomura Global Gaming & Lodging Conference in New York

• 8am WYN

• 3pm RHP

• 4:30 pm HOT


• HTHT Q1 earnings – 9pm , Passcode 28722442


Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 11:40am PNK

• 12:20pm IGT

• 12:20pm CHDN

• 1 pmBYD

• 1 pmMGAM

• 1:40pm PENN

• 2:25pm BYI

• 5:05pm SGMS

• 5:05pm Seminole Gaming

• 5:50pm GLPI

• 5:50pm Golden Nugget

1:1 meetings only – MPEL, Station Casino, Motor City Casino & Hotel, and Jacob’s Entertainment.


Wednesday, May 14:

• Altantic City April Revenues

• Japan Gaming Conference thru Friday, May 16


Thursday, May 15

• Atlantic City April Revenues

• Japan Gaming Conference thru Friday, May 16


PENN – CEO Timothy Wilmott has purchased 50,000 shares at an average price of $10.74 each giving him 188,623 shares.  CFO Saul Reibstein has purchased 500 shares at an average price of $10.53 each, giving him 7,950 shares.

Takeaway:  Nice stock purchase right in the face of an analyst downgrade.  Good confidence for a stock in need of some.


OEH - The 5-Star Hotel Ritz in Madrid, one of Spain's most prestigious properties, is listed for sale. The property is 50% owned by the private Omega Capital led by billionaire Alicia Koplowitz, and 50% by New York-based Orient Express Hotels. The two bought the property for €125m in 2003 from the Le Meridien hotel group.

Takeaway:  Won't know if this is a positive until we know the price but seems like a good time to sell luxury hotel assets.


RCL - orders 4th Oasis-Class Vessel

Oasis III will be 20% more energy efficient than Oasis of the Seas and Allure of the Seas.  The 4th Oasis-class ship will be even more efficient.  Capex guidance for 2014, 2015, 2016, 2017 and 2018 are $1.4b, $1.4b, $2.2b, $0.3b and $1.5b.

Takeaway:  Expected order given the high yielding performance of the Oasis-class ships. As long as the gap between new and old ships continues to widen, expect continued supply increases.


Cyprus Gaming Expansion – Commerce Minister George Lakkotrypis on Thursday told reporters a bill to regulate casinos will be submitted to parliament later this month and, once approved, the fast-track licence process will take eight months via an open tender process. Mr. Lakkotrypis estimated the first licence will be issued around March/April of 2015.  

Takeaway:  A much closer location for VIP gamblers from Europe, Mediterranean, Western Russia and the Middle East.  Could be up to 4,000 slots as well.


Las Vegas – The median sales prices of homes in Las Vegas rose 15% YoY but -1.5% YoY in April to $192,000

Takeaway:  Housing related wealth effect will soon outweigh demographic headwinds in LV Locals. We expect BYD and Stations to benefit from exposure to what we believe will be the best performing regional gaming market in the country over the next few years.


Hotel M&A - Marcus & Millichap sold a four-property portfolio of La Quinta Inns for $11.8m.  Average price per key of $23,413 for midscale properties.

  • 136 room in St. Louis, MO
  • 104 room in St. Louis, MO
  • 134 mixed corridor hotel in Tallahassee, FL
  • 130 mixed corridor hotel in Knoxville, TN


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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No Man's Land

Client Talking Points


One-day down versus the US Dollar does not a Hedgeye TREND make. If the EUR/USD were to snap $1.37 I’d take ECB President Mario Draghi’s comments more seriously. I think he’s just jawboning for the French and Italian bureaucrats, for now.


There was a big standout to the bullish side overnight with the BSE Sensex closing up another +2.5% to +8.4% year-to-date. Under a Down Dollar macro scenario, you want to be buying our favorite Emerging Markets.


I guess consensus bond bears tried to rally the 10-year yield every day this week, and failed. We’re in no man’s land (for US growth equities) if this thing closes and remains under our TAIL risk line of 2.60%. Watch that closely.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


RUSSIA: now that its not -20% YTD, great spot to re-short $RSX @KeithMcCullough


“It’s easier to go down a hill than up, but the view is from the top.” – Arnold Bennett


The class of 2014 expects to make bigger bucks than those who graduated the year before, but they're already behind in the first step: getting a job. Only 11% secured a job two months before graduation. Nearly 80% of those surveyed are facing at least $10,000 in loans. (CNN)

CHART OF THE DAY: Explain This Chart Without Saying "Valuation"


CHART OF THE DAY: Explain This Chart Without Saying "Valuation" - Chart of the Day

Muscle Hamsters

“Your job is to coach the team I give you.”

-Sonny Weaver Jr.


That’s a Kevin Costner quote from the new NFL movie my wife and I went to see on date night a few weeks back called Draft Day. The movie is somewhat contrived but, at the same time, somewhat real. Sort of like a nickname.


Imagine your nickname was the Muscle Hamster? As I was watching the actual NFL Draft last night with some of Hedgeye’s former college football boys (Casey Flavin, Darius Dale, and Ryan Fodor), they were trying to explain to me why they call him the hamster.


Like most things in life, I don’t totally get it until I see it. One pic of #22 RB for the Tampa Bay Bucs, Doug Martin, says 1,000 words. The dude is 5’9 and weighs 215lbs. He might not like the nickname, but he definitely looks like it.


Muscle Hamsters - 55


Back to the Global Macro Grind


If you’re a levered long high-multiple-growth-momentum-chaser, you may not like the complexion of the US stock market this year, but that doesn’t change what it’s become – a slow-growth-yield-chaser.


If we’ve shown you this pic 100 times in 2014, it probably feels like 1,000:


  1. Utilities (XLU) are +13% YTD
  2. Consumer Discretionary (XLY) stocks are -5% YTD


If you don’t like the Sector Variance that’s developing out there, here’s another pic:


  1. Russell2000 is -9.1% from its all-time-bubble-peak in March…
  2. Whereas the SP500 is only -0.8% from her all-time-twitter-muscles-but-but-the-market-isn’t-down-yet peak


Or you can #SnapChat some of the dirtier growth pics:


  1. Twitter (TWTR) -49%
  2. FireEye (FEYE) -37%
  3. Amazon (AMZN) -28%
  4. Yelp (YELP) -23%
  5. Zulily (ZU) -20%


No one likes to be called dirty. I know. I am sorry. But the truth is that some of these charts are filthy.


In reviewing all the tapes, the Draft Day Hedgeye Playbook remains the same:


  1. A Down Dollar Policy To Inflate ultimately drives #InflationAccelerating
  2. As real-world inflation accelerates, real (inflation adjusted) consumption growth slows
  3. And, as 71% of GDP (consumption) slows, US growth slows


“So”, if you want to win this year, you’re chasing the muscle-hamster-wheel that the Fed has trained you on and praying that no one knocks the entire cage of interconnected risk over. That would suck; especially since we’re all in this #YieldChasing thing together.


Yep, we’re all out in the open doing things we naturally wouldn’t do (hamsters are crepuscular, which means that if they weren’t centrally planned to run around in a cage, they’d stay underground in order to avoid being eaten).


And since doing what you shouldn’t naturally do only works if you genuinely believe that this time is different (try buying the company with no earnings at 15x sales again), you just have to get on that damn performance chasing wheel and run!


Run, muscle hamsters, run!


Because, as long as you can outrun the 80% of funds that can’t beat a bloated SP500 beta anymore, you will live to pay peak cost of living in America for another day!


Our immediate-term Global Macro Risk Ranges are now (today, in brackets I have our intermediate-term TREND signal as well):


UST 10yr Yield 2.56-2.64% (bearish)

SPX 1 (bullish)

RUT 1087-1118 (bearish)

Nikkei 14004-14348 (bearish)


VIX 12.96-14.52 (neutral)

USD 79.01-79.74 (bearish)

EUR/USD 1.37-1.39 (bullish)

Pound 1.68-1.70 (bullish)


WTIC oil 98.99-102.27 (bullish)

NatGas 4.52-4.81 (bullish)

Gold 1 (bullish)

Corn 5.05-5.25 (bullish)


Best of luck out there today,



Muscle Hamsters - Chart of the Day

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