“Global asset markets continue to be in deep REM sleep,” Daryl Jones, Hedgeye Director of Research wrote in today’s Morning Newsletter. “U.S. equity volatility is literally at an all-time low and well below the 20-year mean of 20.05.”.
As we recently highlighted in our Q3 Macro Themes presentation, volatility has been at generational lows across asset allocations and continues to tick lower. U.S. equity volatility is literally at an all-time low and well below the 20-year mean of 20.05. Fixed income volatility is also literally at an all-time low and the current reading is 54.03, which is in the 1.5% percentile versus the long run mean of 99. And JPM Global foreign exchange volatility index is at 5.45 versus the long run mean of 10.6. We see the risk increasing the more you push the ball under water.
In today’s poll we asked: Is volatility ($VIX) going to wake up or stay asleep through Labor Day?
At the time of this post, 59% voted that the VIX will stay asleep through Labor Day, 41% believe it will wake up.
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Takeaway: Mortgage demand plunges while Builders get some of their swagger back. The conflicting datapoints continue to grow.
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.
Today's Focus: July NAHB HMI (Builder Confidence Survey) & MBA Mortgage Applications
July NAHB HMI
This month (July), the NAHB’s HMI, which measures builder confidence, rose to 53, a gain of four points from June's print of 49 (which was not subject to any revision) and the highest reading in six months. For reference, the last two months have seen a total improvement of 8 points.
- Sub-Indices: All 3 sub-indices increased MoM although expectations registered a disproportionate increase, gaining +7pts sequentially and sending the “optimism spread” back to its highest levels since 3Q12.
- Regional: All regions showed sequential improvement for a 2nd straight month.
NAHB vs. Pending Home Sales: On a LT basis, the correlation between NAHB and Pending Home Sales is strongest on a coincident basis. However, since 2010 (when Pending bottomed) the strongest relationship is with Pending leading changes in Builder Optimism by ~2 Months (which makes temporal sense as the NAHB HMI is released ~2 months ahead of Pending, with Pending offering a cue/anchor for builder expectations).
Given the autocorrelation and colinearity in housing metrics, resolving the growing divergence between Pending & Purchase Apps and discerning the true trajectory in purchase demand will become increasingly important.
Turning to the commentary, note the stark and somewhat whimsical reversal of spin with respect to the numbers the last couple months:
NAHB Chairman Kevin Kelly had this to say on the July reading:
“This is the first time that builder confidence has been above 50 since January and an important sign that it is strengthening as pent-up demand brings more buyers into the marketplace
For reference, here's what Kevin Kelly said a month ago:
“After several months of little fluctuation, a four-point uptick in builder sentiment is a welcome sign and shows some renewed confidence in the industry. However, builders are facing strong headwinds, including the limited availability of labor.”
While NAHB's Chief Economist, David Crowe, added this:
“An improving job market goes hand-in-hand with a rise in builder confidence. As employment increases and those with jobs feel more secure about their own economic situation, they are more likely to feel comfortable about buying a home.”
And here's what David Crowe said a month earlier:
“Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase. Builders are reacting accordingly, and are moving cautiously in adding inventory.”
MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended July 11.
In short, it’s getting increasingly interesting to start 3Q. While HPI remains in conspicuous deceleration, the divergence between various measures of housing activity are growing more stark – is demand really in discrete retreat, is the latest high frequency data reflective of peri-holiday related volatility, is the shift in non-bank origination really that remarkable?
Mortgage demand softened significantly in the latest week with the composite index declining -3.6% in the post-holiday week with the purchase index declining -7.6% WoW .
- Purchase Apps: Purchase Demand declined -7.6% WoW, posting its largest sequential drop since February 2013. The index dropped to its lowest level since February, completely bypassing the 170-level to close at 167.8 (181.7 prior). The YoY rate of change deteriorated to -17.2% from -9.9% prior with the early 3Q data tracking at -2.4% QoQ. Historically, outside of 2009 and amidst the throes of the recession, purchase demand hasn’t shown any notable volatility in the week following the july 4th holiday, suggesting the decline in purchase activity is authentic.
- Refi: Refi activity was largely unremarkable WoW, declining -11 bps alongside little change in 30Y rates.
- 30Y FRM: 30 year interest rates on conventional fixed rate contracts were largely unchanged WoW, increasing to 4.33% from 4.32% according to MBA data. Rates remain near the lowest levels since May of last year.
Here are a few other recent anecdotals:
- Lumbar Liquidators: In a nutshell, the stock is down ~25% in the last week as 2Q14 Comps came in ~14% below analyst estimates and the company aggressively guided lower. Here's what management had to say:
- "Customer traffic to our stores was significantly weaker than we expected, particularly in geographic areas severely impacted by the unusually harsh weather in the first quarter. The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013. We now believe the prolonged purchase cycle associated with our customers' discretionary, large-ticket home improvement projects is likely to be delayed for some customers into the fall flooring season, and for others, into spring of 2015."
- Inside Mortgage Finance: Paul Muolo, publisher of Inside Mortgage Finance, had this to say recently (7/11):
- This week, when Inside Mortgage Finance published its preliminary origination forecast for the second quarter, we caused a bit of whiplash among certain analysts, who believe there’s no way the number can be right. But we’re sticking by the preliminary $310 billion figure, which represents a 32 percent sequential gain. From what we’ve been hearing, the purchase-money business is picking up and more depositories are funding jumbos, keeping the loans in portfolio. We should point out that Friday morning Wells Fargo reported that its production volume jumped 31 percent in 2Q. Wells, by the way, has been doing a little worse than the overall market the past several quarters…
- Phoenix Housing Market: We recently read an interesting summary of the Greater Phoenix Housing situation - the report can be found here (h/t ZH). To summarize, sales are way down and largely because the investor base has flown the coop. Historically, prices follow demand by a 12-18 month lag as it takes time for reality to set in with sellers. We regard Phoenix as proxy for all markets that were similarly inflated by institutional demand.
- Sales of single family homes were down 19% in May 2014 from May 2013 while sales of townhouse/condos were down 20%.
- Single family home sales decreased year over year across every sector:
o Normal re-sales (down 2%)
o New homes (down 4%)
o Investor flips (down 53%)
o Short sales and pre-foreclosures (down 73%)
o Bank owned homes (down 20%)
o GSE (Fannie Mae, Freddie Mac, etc.) owned homes (down 44%)
o HUD sales (down 76%)
o Third party purchases at trustee sale (down 59%)
- However the new home sector did grow 22% year over year in Pinal County
About the NAHB HMI:
The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.
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.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Tickers: IGT, RLJ, NCLH
- July 16: LVS 2Q call (430pm)
- July 23: TRIP 2Q call (430pm)
- July 24:
- WYN 2Q call (830am)
- PNK 2Q call (9am)
- LHO 2Q call (930am)
- PENN 2Q call (10am)
- HOT 2Q call (1030am)
- July 25:
- PEB 2Q call (9am)
IGT – announced a definitive merger agreement with GTECH S.p.A. for the acquisition of IGT by GTECH for $6.4 billion, comprised of $4.7 billion in cash and stock and the assumption of $1.7 billion in net debt -- for approximately $18.25/share in cash and stock. IGT and GTECH will combine under a newly formed holding company organized in the United Kingdom (NewCo). IGT shareholders will receive an aggregate value of $18.25 per IGT share in a combination of $13.69 in cash plus 0.1819 ordinary shares of NewCo for each share of IGT common stock. GTECH shareholders will exchange each of their existing GTECH shares for one (1) newly issued NewCo share. The transaction may close in Q1 2015 or Q2 2015.
Takeaway: Despite a less than stellar history and career at IGT, CEO Patti Hart catches a golden parachute...the $18.25/share is slightly higher than the $18.13/share closing price on December 31, 2013 versus Hedgeye's $18-22/share fair value on a takeout basis.
102:HK & 200.HK – (GGR Asia) Investors in a casino project in Vladivostok, Primorye in the Russian Far East will invest an additional US$137.7 million to the development. The Russian casino resort complex, located near the port city of Vladivostok, is expected to have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables, 15 mass market baccarat tables and 25 mass market tables providing other table games. The casino is targeted to open in the last quarter of this year. Summit Ascent Russia Ltd, a British Virgin Islands firm wholly owned by Mr Ho’s firm Summit Ascent Holdings Ltd, will invest an additional US$82.6 million. Firich Investment Ltd, a Mauritius-incorporated firm, will pay a further US$27.5 million, while Elegant City Group Ltd, a BVI entity, will pay US$20.7 million, and New Crescent Investments Ltd, a BVI firm that is a wholly-owned subsidiary of Melco International Development Ltd, a Hong Kong-listed firm chaired by Mr Ho and a partner in his Macau casino investments, will pay US$6.9 million
Takeaway: More competition coming in Q4 2014.
RLJ – acquired the 194-room Hyatt Atlanta Midtown located in Atlanta, GA for a purchase price of $49.5M or approximately $255,000/key and the purchase price represents a forward capitalization rate of abuot 8.0% on the Hotel’s projected 2015 net operating income.
NCLH – (Cruise Critic) Norwegian Cruise Line to announce smoking ban on ship balconies, effective November.
Macau table/slot count in 2Q 2014 – (DICJ) Tables increased to 5,710 in Q2 2014 from 5,700 in Q1 2014. Slot count fell from 13,232 to 12,895 in Q2.
Takeaway: Lowest slot count since Q1 2009
Macau Slot Machine Issues – (SCMP) Casinos have reportedly refused 133 gamblers their winnings, claiming that their wins are the result of "mechanical errors" - a practice critics say will deal a blow to Macau's tourism image. The Macau government has brushed off calls for tighter casino controls, amid accusations that operators in the world's gaming capital are unfairly withholding prize money from winners. Legislator Au Kam-san argued that gamblers could not know if a machine was technically reliable before playing it. Au called for a rewriting of laws governing the circumstances in which casinos could refuse payment.
Takeaway: Based on our read, this story seems overblown, table play is what matters in Macau and total slot count in Macau is now below 13,000 units.
Macau Grand Prix – Macau junket operator SunCity Group is the official sponsor of this year’s Macau Grand Prix. The junket operator is also the title sponsor for the Formula 3 Macau Grand Prix, the Macau Motorcycle Grand Prix and the FIA World Touring Car Championship 2014 season finale. Suncity Group is committing MOP16.6 million (US$2.08 million) for the 61st Macau Grand Prix which runs runs between November 13 and 16.
Takeaway: Suncity Group shining brightly in all aspects and leading the way at the Grand Prix.
Jeju Casino Dispute (follow-up from July 2) – Casino operators on the South Korean island of Jeju are concerned that their image may be tarnished by a case in which the management of one casino appears to have falsely accused four Chinese customers of cheating in order to refuse a payout of 1.1 billion won (US$1.1 million) in May. On May 15, a Chinese national surnamed Lu and his three friends went to the local police, where they reported that the Seogwipo casino on May 11 had refused to cash out chips worth 1.1 billion won and had also threatened them. The four subsequently brought a civil suit against the casino, which filed a countersuit claiming the group had cheated at gambling with the help of one of its staff. The casino employee concerned, however, later admitted giving false testimony at his manager's instruction and the casino was unable to produce evidence to substantiate its case.
Takeaway: A negative headline as the country begins to consider a locals gaming expansion.
Saipan Casino License Award – Best Sunshine International was awarded an exclusive 40-year casino license for Saipan and the Company is planning a $2 billion casino with the required 2,000 hotel rooms. Best Sunshine is a subsidiary of Imperial Pacific, a Hang Sang listed firm.
Takeaway: We remain very skeptical...With current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), that's only a small percentage of the total 730,000 room nights at a 2,000 room hotel. We remain skeptical of the casino's profitability and viability given the isolated location. Additional airlift is required to ensure casino visitation.
Australia Hotel Boom – More than 40 developers are competing to turn two 100-year-old government office buildings into hotel rooms as demand soars. Additionally, developers including China’s Greenland Holding Group Co. and Singapore-based M&L Hospitality Trust plan to add more than 5,300 rooms over the next five years. If they are completed, the city’s supply of rooms will rise by about 20% by the end of the decade, the most since Australia’s largest city hosted the Olympics in 2000, according to broker CBRE Group Inc.’s hotels division. Foreign visitors to Australia are growing at the fastest pace since the Sydney Olympics, sending occupancies in Sydney to a record and the highest in Asia after Hong Kong and Tokyo. Sydney’s average hotel occupancy is set to reach 88.8% by the end of 2016, the highest since at least 2000, according to economics advisory firm Deloitte Access Economics Pty.
Takeaway: Strong Aussie tourism could benefit Aussie casinos.
China GDP – Q2 GDP +7.5% year/year vs consensus +7.4% and +7.4% in Q1
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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