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Macro Notebook 11/19: Volume | Japan | Oil

Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.


Starts & Apps - More Positive Housing Data Turning the Table Greener

Takeaway: Single family starts rise to the highest level in a year while mortgage purchase apps bounce 12% w/w.

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.


Starts & Apps - More Positive Housing Data Turning the Table Greener - Compendium 111914



We'll reiterate today what we wrote yesterday when assessing the NAHB HMI data. Our bearish call on housing thus far in 2014 has been playing out as the XHB remains the worst performing sector YTD. That said, many of the negative dynamics that we flagged earlier this year have largely or completely played out and we're now seeing some signs of light at the end of the tunnel (see the volume of "green" in the compendium at the top of this note). We'll be hosting a call in early December to update our views on housing heading into 2015. 



Today's Focus: October Housing Starts & Permits & MBA Mortgage Apps


October Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for October this morning.


Total New Home Starts declined -29K (-2.8%) sequentially in October while Permits rose +49K (+4.8%) to 1.080M SAAR– the highest level since June of 2008.  In contrast to last month, the headline is less flattering than the core as single family starts showed a second month of (modest) positive mojo.


Single Family starts rose +28K (+4.2%) to +696K, the highest level in a year and the second month above the TTM Trend.  The September figures also saw a +22K positive revision up to +668K from +646K.  Permits, however, continue to meander with SF permits up just +9K to +640K in October, extending the flat YTD trend and diverging from starts the last two months.  The two, of course, are invariably tethered so we can expect some measure of re-coupling in the coming months. 


Two months do not (yet) a trend make and we’re interested to see in which direction the burgeoned divide between actual construction activity and builder confidence corrects in favor of against a 2015 backdrop of easier compares, looser regulation and ongoing improvement in the labor market (and the 20-34YOA demographic in particular). 


On the multi-family side, starts declined -57K MoM (-15.4%) to +313K while permits rose +40K (+10%) to +440K.   Given the volatility in the multi-family data on a month-to-month basis, we look more to the trend and with single-family starts up +4.5% YoY on average YTD vs. multi-family up 19%, the concentration in construction activity, and the predominate driver of the recovery in starts, remains well defined.


Starts & Apps - More Positive Housing Data Turning the Table Greener - SF Starts   permits TTM


Starts & Apps - More Positive Housing Data Turning the Table Greener - SF Starts   permits LT


Starts & Apps - More Positive Housing Data Turning the Table Greener - MF Starts   permits TTM


Starts & Apps - More Positive Housing Data Turning the Table Greener - MF Starts   permits LT


Starts & Apps - More Positive Housing Data Turning the Table Greener - Starts Lt 



MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended November 14th. 


  • The Composite Index rose +4.9% in the latest week alongside a modest gain in refi activity and a remarkable pop in Purchase demand
  • Purchase demand rose +11.7% WoW – the largest weekly increase in 20 months – taking the index up to 179.8, the highest level since June. Inclusive of this weeks gain, purchase activity is tracking -1.1% QoQ and -6.7% YoY (vs. -12% YoY last week).  We continue to expect some measure of ongoing improvement in rate of change measures  as compares ease into the last weeks of the year and take a second dive into the end of 1Q15 as the collective shock from weather, QM implementation and FHFA loan limit reductions peaked.
  • Refi Activity rose for the first week in a month, gaining +0.9% sequentially as rates on the 30 FRM contract dropped a tick to 4.18%.    


Starts & Apps - More Positive Housing Data Turning the Table Greener - Purchase Apps 2013 v 2014


Starts & Apps - More Positive Housing Data Turning the Table Greener - Purchase LT w Summary


Starts & Apps - More Positive Housing Data Turning the Table Greener - Purchase Qtrly Ave


Starts & Apps - More Positive Housing Data Turning the Table Greener - Purchase   Refi YoY   


Starts & Apps - More Positive Housing Data Turning the Table Greener - Composite LT w Summary


Starts & Apps - More Positive Housing Data Turning the Table Greener - 30Y FRM




About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 


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

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LEISURE LETTER (11/19/2014)



  • Nov 19: Sega Sammy Investor Meeting
  • Nov 23: Pacquiao-Algieri bout at Venetian Cotai Arena


BYD – The first renovation is now complete -- the Suncoast opened The Game, a sports bar and grill near the property’s race and sports book that replaced a TGI Friday's.  The Game is being positioned as a new concept with more than two dozen craft beers from local brewers and a menu that includes spicy barbecue chicken wings, build-your-own hamburgers, fish tacos and flatbread artisan pizzas.

Article HERE

Takeaway:  BYD following through on Q3 conference call assertions to revamp restaurant offerings. Probably an improvement but a sports bar at a casino is pretty much par for the course at locals casinos these days. 


Station Casinos – disclosed the pending sale of 101 acres of land in the southeast quadrant of the Mount Rose Highway-South Virginia Street junction in Reno Nevada to an undiscloser buyer for approximately $2.0 million and recognized an impairment loss of $11.7 million to write down the carrying amount of the land to its fair value less cost to sell. 

Article HERE


CZR – Philippine Amusement and Gaming Corp received a concept proposal for a casino resort from Caesars Entertainment Corp, but the country’s gaming regulator says it will wait for a “substantial completion” of Entertainment City before deciding on new licenses.

Article HERE

Takeaway:  According to sources, CZR says a Philippines project is still viable despite upcoming bankruptcy proceedings.


BEE – announced the Company signed an agreement to acquire the 210-room Four Seasons Resort Scottsdale at Troon North from an affiliate of Walton Street Capital, L.L.C. for $140.0million, which includes 13.8-acres of developable land zoned for an additional 88 hotels keys and potential incremental residential usage. Management has valued the land parcels at $6.0 million. The acquisition, which is expected to close during the fourth quarter of 2014, remains subject to customary due diligence, closing conditions and working capital adjustments. The Company forecasts the property will contribute approximately $10.0 million of EBITDA and $8.0 million of NOI in 2015. The purchase price, net of the allocated land value, represents a 13.4 times multiple on forecasted 2015 EBITDA and a 6% cap rate on forecasted 2015 NOI.

Takeaway: We would like to know what is the property's LTM EBITDA as compared to management's expectations for 2015 EBITDA -- regardless, it is a full price on "forward" EBITDA multiple. Interesting to us is the implied $628,570 price per key versus the $90,900 per key for the developable land.


CLDT – announced it completed the previously announced acquisition of a 52-hotel, 6,976-room portfolio from Inland American. The combined total purchase price was approximately $1.1 billion, before deal costs and funding of escrows.


HOT – announced the sale of the 229-room Sheraton Ambassador Monterrey hotel to FibraHotel. Specific transaction details were not disclosed. The hotel will be operated by Starwood through a long-term management agreement.

Takeaway: We don't expect any material net proceeds from this asset sale as the press release noted Fibra's total investment including capex would be $12.5 million over two years.


MTN – Specialty Sports Venture, the retail division of Vail Resorts Inc., is searching for sites in several suburbs with plans to open three or four more Hoigaard's stores.

Article HERE

Takeaway: Not large enough to move the revenue nor earnings lines at Vail Resorts.


MSC Cruises Agents are struggling to sell MSC Divina in the Caribbean despite incentives given by MSC. MSC’s decision last week to offer 18% commission on groups for the Divina’s 2015-16 season in the Caribbean. No other cruise line pays such a high commission.

Takeaway:  Higher commissions are not enough to sell a bad product.

Insider Transaction:

BEE – EVP, General Counsel & Corporate Secretary Paula Maggio sold 17,493 share of stock (non-options related) at $13.0245 on November 18 (immediately following the acquisition announcement) and now owns 219,087 shares.

Takeaway: As we noted late week, despite C-Level executives telling us BEE's stock was undervalued during meetings at NAREIT, insiders continue to sell, and sold prior to this acquisition announcement.


Macau Visitor Expenditure Survey for 3Q 2014  – total spending (excluding gaming expenses) of visitors in 3Q 2014 reached MOP15.5 billion, up by 5% YoY. Visitors from Mainland China spent an average of MOP2,220, or -4% YoY, and spending of those travelling under the Individual Visit Scheme (IVS) was MOP2,758.

Article HERE

Takeaway: The wealthy Chinese are not only gambling less, but their non-gaming spend is also lower.

Border crossing between Macau and Hengqin Island should start operating on a 24-hour basis and the move will be announced at the commemorations of the 15th anniversary of the Macau Special Administrative Region, according to Chinese media.  The Chinese-language newspaper “Ou Mun Iat Pou” (Macau Daily News) reported that the building works at that checkpoint are progressing apace “in order to be completed before that date.” 

Chinese media in Macau reports that China’s government is expected to announce the opening of the “Lotus Flower” border crossing in time for the celebrations of the 15th anniversary of the establishment of the MSAR, which is marked on 20 December.

Article HERE

Takeaway: Rumors of the 24-hr crossing opening has been well communicated. It looks like it will open on December 20 - also the day of the Chinese Premier visit


Border record – Macau border registers new record of 515,000 people in one day. The feat was achieved on November 15, 2014 (1st day of Grand Prix).

Article HERE

Takeaway: Visitation seems to be doing ok but how many of them are gambling significantly?


Macau's 2015 Municipal Budget & Gaming Taxes – Secretary for the Economy and Finance Francis Tam Pak Yuen expects revenue from direct taxes on gaming to be MOP115.5 billion (US$14.46 billion) next year, about the same as this year and enough to cover the government’s spending plans. Mr Tam told the Legislative Assembly that the absence of growth in revenue from direct taxes on gaming would reduce only the budget surplus, not government spending.

Article HERE


Macau Wages Rising – Small and medium enterprises intend to increase the pay of their employees by 5% to 6% next year, according to Macau Small and Medium Enterprises Association vice-president Daniel

Article HERE

Takeaway: SME's raising employee wages commensurate with inflation (the average annual rate of consumer price inflation in the 12 months ended September was 6.03%) but below the gaming sector wage increase.


Japan's Integrated Resort Legislation Delayed Again – The bill to legalize casinos in Japan will face new delays and might even be scrapped as PM Abe called a general election for mid-December, says Kazuaki Sasaki, assistant professor at the Nihon University College of Economics and director of IR (Integrated Resorts) Gaming Academy in Japan.


“This could be a setback for the casino legislation in Japan. While it definitely means new delays, it may even be that the IR bill could be scrapped. In the best case scenario, the Diet [Japanese parliament] may revisit this bill around this time [November] next year,” Sasaki added.  

Article HERE

Takeaway: Very little hope for Japan as recession and more pressing issues than gaming take precedence. 


Philadelphia Second Casino License Awarded – The Pennsylvania Gaming Control Board awarded a license to a joint venture of Cordish Companies and Greenwood Gaming and Entertainment. The casino will be the fourth in the Philadelphia area and the 13th in the state, and will be named "Live! Hotel & Casino Philadelphia".  The property will feature 2,000-slot and 125-table casino as well as a 250-room hotel. 

Takeaway: More competition for Atlantic City  


Golden Nugget Lake Charles to open – The Golden Nugget Lake Charles announced it is taking hotel reservations beginning on Monday December 8 with a promotional rate as low as $139/night.

Article HERE or HERE

Takeaway: While we are able to book a room via the web-site (found in the above link), the company's toll-free reservation number 844-777-GOLD was inoperable. Watch for the cannibalization impact to PNK's L'Auberge Lake Charles. 


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:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 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.

TGT – Quick Take – It’s All About 2015

Takeaway: The real issue seems to be whether or not TGT will need to guide down for 2015 in another 1-2 quarters. We think more likely than not.

The accountability pants are fitting pretty snug for us on TGT today. We’ve been on the wrong side of a 15% spike over the past month, which is a lot for a low beta name like Target. Any time an event goes against us like this, we always step back and re-evaluate our positioning. But the way we look at it, the thesis here still holds. Consider the following…


This is one of the most expensive names in retail relative to its underlying growth. We’re looking at 20x ’15 earnings and 9x EBITDA. If you assume that Canada losses go away entirely, and that TGT gets a billion in cash for the leases, it is still trading at 16.5x EPS and 8x EBITDA. While valuation is hardly a catalyst, barring an acceleration in the US Consumer or a rebound in the Canadian business, we can’t see TGT pushing all-time highs and peak valuations when we’re in year 6 of a retail margin expansion cycle.


Let’s consider the dramatic change in expectations. Back in August when TGT was trading at $60, the company lowered full year guidance by $0.50 to about $3.20 for the year (midpoint). Since then, the stock has gone up by $10 (outperforming the market by 14%), the company is de-leveraging lackluster sales growth into a year/year earnings decline. Could TGT come in a nickel ahead of sandbagged guidance in 4Q? Sure. But it will still be earning $0.40 (11%) less than when the stock was $10 lower.  


People like the big guide-down the company offered up three months ago as it serves as a cushion heading into the holiday for TGT to be more aggressive in discounting, offering free shipping, and ultimately taking share – even if it’s earnings dilutive. In fact, this quarter, sales were up +2.7% and yet EBIT was -3.4%, despite an improvement yy from Canada.


We think next year is key. The Street is at $3.80. TGT hasn’t given any guidance there yet. If we assume Canada gets 25% better next year (i.e. it gets back about $0.20 in earnings that it cost this year), then it suggests that the Street is looking at 12% earnings growth in the core business. With no square footage growth, a prescedent for buying comp, virtually no reason to think that gross margins will improve, and Brian Cornell likely to invest more SG&A to accelerate share gain in the outer years, we simply can’t get close to the Street’s numbers.  It seems to us that Canada has returned to being the key variable in the earnings


TGT – Quick Take – It’s All About 2015 - 3q 14 earnings

TGT – Quick Take – It’s All About 2015 - tgt sigma

A Growing Sell List

Client Talking Points


Price/volume/volatility – that’s our quantitative signal, and we’re sticking to it. Total U.S. Equity Market Volume was -5% and -26% vs. its 1 month and year-to-date averages yesterday – that provided the immediate-term TRADE Overbought signal for the SPY as trending volatility continues to signal bullish (not bearish like it was all of 2013).


Bank of Japan Governor Haruhiko Kuroda “reiterated his upbeat assessment of the economy” overnight – seriously… with household spending -6% year-over-year and the economy in recession. Apparently fin media can parrot central planners from Russia to Japan lying to the world on economic matters. The Yen is burnt right through $116.94 support vs. USD to $117.57.


Down Yen, Up Dollar, Down Oil – and a big % of the high yield energy market continues to see spread risk widen inasmuch as oily (and levered) illiquid upstream MLP stocks do; Oil testing a breakdown of $74 this morning – that’s big time #deflation, down -31% since June.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


TREASURIES: old faithful Long Bond continues to perform as Global Growth Slows, 10yr 2.32% $TLT @KeithMcCullough


We learn more by looking for the answer to a question and not finding it than we do from learning the answer itself.

-Lloyd Alexander


The National Weather Service said Tuesday afternoon that some parts of Western New York could get nearly 6 feet of snow by Thursday from a lake effect snow storm.

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