Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.
Claims Strong = Rates Down
Yesterday the 10-Year Treasury yield dropped 8 basis points to close at 2.44%, down from 2.52% on Tuesday. In early May, we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ basis points declines in long-term rates.
With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The year-over-year change in NSA initial claims came in at -15% and the four-week rolling average is now lower by 10.4% year-over-year versus the prior week being lower by 5.3%. It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.
Prior to revision, initial jobless claims fell 26k to 300k from 326k week-over-week, as the prior week's number was revised up by 1k to 327k.
The headline (unrevised) number shows claims were lower by 27k week-over-week. Meanwhile, the four-week rolling average of seasonally-adjusted claims fell -11k week-over-week to 311.5k.
The four-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -5.3%
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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 29, 2014 at 9:35 a.m. EST by Hedgeye’s Financials team. Follow Jonathan Casteleyn and Josh Steiner on Twitter @HedgeyeJC and @HedgeyeFIG.
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Takeaway: April pending home sales rose 40 bps m/m, but are down 9% year-over-year - consistent with the trend over the last four months.
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.
Today's Focus: April Pending Home Sales Index
The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of April. Pending Home Sales rose by 0.4% month-over-month to an index level of 97.8 (vs 97.4 in March). For reference, an index value of 100 corresponds to the average level of contract activity in the year 2001. While the report was positive month-over-month, contract activity remains down year-over-year by 9%. This is a stark contrast vs where we were one year ago, when contract activity was running +10% year-over-year. Weakness on a year-over-year basis was pervasive geographically. The best performing region is the South, where contract activity is down 6.4% y/y while the West is the worst at -15.0%.
Pending Home Sales activity tends to lead price by ~18 months, as we show in the second chart below. This is why we are bearish on the outlook for HPI in 2H14 and 1H15. We expect the y/y weakness we're seeing in demand since the middle of 2013 will manifest in weaker rates of home price appreciation as we progress into 2014 and 2015. Inflections in the rate of HPI have historically been powerful macro tailwind/headwind drivers.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
Joshua Steiner, CFA
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Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.
Claims Strong = Rates Down
Yesterday the 10-Year Treasury yield dropped 8 bps to close at 2.44%, down from 2.52% on Tuesday. In early May we put out a note entitled "Tapering = Rates Falling", in which we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ bps declines in long-term rates. See our note for more detail.
With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The y/y change in NSA initial claims came in at -15% and the 4-week rolling average is now lower by 10.4% y/y vs the prior week being lower by 5.3%. It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.
To reiterate our conclusion from our early May note, falling rates 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 table below is from our May 6 note and shows the correlations of various Financial stocks to the 10-Year Treasury yield over the past year.
Prior to revision, initial jobless claims fell 26k to 300k from 326k WoW, as the prior week's number was revised up by 1k to 327k.
The headline (unrevised) number shows claims were lower by 27k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -11k WoW to 311.5k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.3%
The 2-10 spread fell -10 basis points WoW to 208 bps. 2Q14TD, the 2-10 spread is averaging 224 bps, which is lower by -15 bps relative to 1Q14.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Client Talking Points
The yield crashes to 2.42% after snapping our 2.61% TAIL risk signal line a month ago – consensus (long rates) has had plenty of time to prepare for the waterfall of risk, but instead continues to send out emails saying why this “shouldn’t be happening” and why “it’s different this time.” US #ConsumerSlowing, reiterated.
Not interested in selling off versus USD after testing Hedgeye TREND support. This is an important signal as both the MOTHERS Index and Nikkei are signaling immediate-term TRADE overbought as well (highly correlated to the YEN/USD).
Food/energy now taking turns plundering the people as cost of living (US Rents) hits all-time highs. Brent sold off small yesterday but held all lines (TRADE, TREND, TAIL) of support. Buy #Inflation + Energy stocks (XLE, XOP) and stay short growth (Russell2000).
|FIXED INCOME||24%||INTL CURRENCIES||23%|
Top Long Ideas
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.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
RUSSIA: leads gainers this morning +1.1% as Putin's Petro Dollars rip humanity a new one #InflationAccelerating @KeithMcCullough
QUOTE OF THE DAY
"Stop worrying about the potholes in the road and enjoy the journey." - Babs Hoffman
STAT OF THE DAY
Apple is officially buying Beats for $3 billion. The company will pay $2.6 billion up front, plus another $400 million over time. (CNN)
Tickers: LVS, HOT, CCL
EVENTS TO WATCH
- Monday, June 2 - Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference
- Monday, June 2 - Tuesday, June 3 - Midwest Gaming Summit, Rosemount, IL
- Tuesday June 3 - Thursday, June 5 - REITWeek, New York, NY
LVS – (Macau Business) Sheldon Adelson hopes a visit to Marina Bay Sands by Japanese Prime Minister Shinzo Abe will speed up the legalization of casinos in Japan. The news agency quotes Mr Adelson as saying the prime minister will tour the Marina Bay Sands casino-resort in Singapore on May 30 and get a “scripted plea” to push for legalization. Prime Minister, Shinzo Abe, is visiting Singapore where he is giving a key note address at the IISS Asia Security Summit Shangri-La Dialogue.
Takeaway: When will the Gaijin learn, the Japanese people and systems move at their own speed and pace?
HOT – signed a new 430,000-square-foot, 20-year lease for a planned $30 million expanded global headquarters at One StarPoint in Harbor Point, Stamford CT - made possible by a state loan of up to $5 million and $20 million in state tax credits. The two-tower One StarPoint is a 430,000-square-foot Class A office property that was originally built in 1989 and renovated in 2011. Starwood currently occupies 300,000 square feet, and under the new lease will be able to expand into additional space as it becomes available.
Takeaway: Confirmation that this company is not relocating to a foreign domicile anytime soon.
CCL - Ibero Cruises to be absorbed into Costa Cruises (Cruise Currents)
Earlier this month, Costa Cruise’s CEO, Michael Thamm, announced the line would absorb the smaller Ibero Cruises into the Costa brand by the end of the year. The decision to absorb Ibero into the Costa brand will allow Costa to significantly expand in the Spanish cruise market, a market Costa has been eyeing for some time. Prior to the final transition into the Costa fleet, one of Ibero’s two ships, Grand Celebration, will be renovated and redesigned to coordinate with the remainder of the Costa fleet. The ship will be renamed Costa Celebration and has reportedly received a new hull design, reflective of the white hulls of the current Costa fleet. The Grand Holiday is expected to be either transferred from the Ibero fleet or sold before the transition is finalized.
Following the transition, Thamm states Costa will increase their calls in Spanish ports by 6% in comparison with 2013.
Takeaway: The Spanish market has rebounded somewhat in 2014. We're seeing it in our pricing survey.
BX – (Las Vegas Sun) Executives responsible for Blackstone's investment in Cosmopolitan of Las Vegas indicated they "believe that gaming revenues can increase there very quickly by 50 percent." They also indicated this is not their (Blackstone's) first foray into Las Vegas. In addition to a previously unknown equity position in the Cromwell and Drai’s Beach Club and Nightclub, they also have made a substantial billion-dollar-plus investment separately in Caesars Entertainment.
Takeaway: Tough to bet against Jonathan Gray's track record, but this will be a challenge.
Japan Lower House Staff: Casino Bill Won't be Discussed this month (WSJ)
As a result, lobbyists and lawmakers said they believe it will be nearly impossible for the bill to get passed during the current parliament session, which ends June 22. A committee on Japan's lower house won't have time to address the casino bill in its next session on Friday because it has to handle another item regarding the country's Atomic Energy Commission, a representative from the cabinet committee in charge of bill discussion told WSJ. Toru Mihara, an adviser to the 200-member bipartisan group pushing the bill, said Wednesday that he remained optimistic the bill would still be passed, just "not in the near future." Some casino advocates such as Mike Tanji, executive adviser at Gaming Capital Management Inc., said they are now setting their sights on the next parliament session this fall.
Takeaway: WSJ confirmed the rumors of last week.
UnionPay – (Macau Daily Times) despite the crackdown on non-Macau registered UnionPay POS (point-of-sale) machines in local casinos, people are still using the loophole posed by the machines to illegally withdraw money. Allegedly, a reporter from the Hong Kong newspaper Apple Daily found a man from the mainland who solicits people to make illegal UnionPay withdrawals in a Cotai casino. The currency transaction would be conducted in a hotel room via a Mainland UnionPay machine.
Takeaway: No surprise that illegal transfers are continuing.
UnionPay – announced it will spend 200 million yuan ($32.02 million) to promote its payment functions and services to cardholders. The promotion is to change cardholder habits from swiping cards to paying with phones.
Takeaway: Recall in our May 13 Leisure Letter we noted Apple is likely to incorporate a near field communication payment function in the net generation iPhone and Apple reached an agreement with China UnionPay on a mobile payment service whereby users would download the UnionPay bank card app to Passbook in their iPhones and make mobile payments on over three million China UnionPay ‘QuickPass’ POS machines in China.
US Online Poker Legislation – new online gambling bill that includes a carve out for online poker is floating around Washington DC. The bill draft is titled the “Internet Gambling Prohibition and Control Act of 2014”as is viewed as a potential path to compromise between Mr. Adelson and his adversaries.
Takeaway: Poker is likely the only form of internet gambling to be legalized federally. This has been our contention all along.
Iowa Gaming – Warner Gaming LLC's Hard Rock Sioux Falls announced August 1 will be the opening date for the new casino.
Takeaway: The stage is set for a showdown between Argosy Sioux City's desire to remain open (subject to their bankruptcy proceedings) and the Hard Rock's desire to open without competition from another local casino.
Downtown Las Vegas – a Las Vegas committee will consider a new liquor law allowing people to drink only from plastic cups in a 32-block area around Fremont Street downtown. The proposed amendment to city ordinances is meant to help police enforce regulations prohibiting the outdoor consumption of alcohol purchased from liquor stores within 1,000 feet of those stores. The 1,000-foot law has been in effect for several years but never strictly enforced. The law would apply within an area bounded by Stewart Avenue to the north, Bridger Avenue to the south, 8th Street to the east and the Union Pacific Railroad right of way to the west, which is essentially Main Street.
Takeaway: The City of Las Vegas is trying to clean up the image of downtown Las Vegas and this is but one of many small actions in that process.
Las Vegas Home Prices - the S&P Case-Shiller Home Price Index increased 21.2% YoY in March. While the area has experienced a strong rebound in home prices over the past 18 months, values remain below peak levels of 2007.
Takeaway: Positive data point for the locals casino business but climbing housing prices have yet to boost gaming revenues.
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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