This note was originally published at 8am on March 26, 2015 for Hedgeye subscribers.
“No matter how much it cries or begs, NEVER feed it after midnight”
According to 1980’s legend, feeding a mogwai after midnight catalyzes the transformation from cutesy, wellmeant Gizmo to mischievous, malevolent Gremlin. Hijinks, hilarity, and the creation of the first PG-13 rating ensue.
The spat of soft early March housing demand data had many wondering whether we’d already reached midnight on the current housing inflection and if the fund flows and improving sentiment feeding the multi-month run of outperformance were set to spawn a reversal in the related equity complex.
We think the hour is nearer twilight than midnight… and Gizmo has more to give as it relates to housing.
Back to the Global Macro Grind….
We reviewed our bullish thesis on Housing in a late-February Early Look – see: Dr. House-ing. The subsequent ping-pong match in housing data over the last month has, at the least, been interesting.
In a recent note to institutional clients we compared and contextualized the competing realities promulgated by the March to-date data.
Consider the following juxtaposition:
So, certainly not the numbers accelerating recoveries and sustainable outperformance are made of.
We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.
As it relates to builder confidence, the Current Traffic component of the index led the weakness in the composite reading, which is consistent with a severe weather related drop in the flow of active buyers. The NAHB also cited supply chain concerns, particularly in terms of labor supply. Residential construction employment saw its largest monthly increase in employment in nearly 10 years in January and employment at the industry level continues to run in the high-single digits.
There is clearly strong demand for labor in the sector, however, wage growth has yet to really accelerate according to BLS data so it remains equivocal whether rising labor demand is, in fact, driving accelerating builder cost pressure and/or labor supply shortages at the aggregate level. Further, while labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market. All else equal, we’d view improving demand as a net positive.
On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. The 57% collapse in starts in the Northeast drove the bulk of the headline decline, again consistent with unusually cold/severe weather weighing on activity.
Sure, seasonality and weather are not new phenomenon but resolving the volatility and vagaries inherent in month-to-month changes in activity in seasonal industries remains challenging despite the best efforts of evolving seasonal adjustment methodologies.
Further, staring at industry numbers from the aseptic environment of a spreadsheet has the sneaking ability to, at times, drive a wedge between expectations conceived in an analytical echo chamber and the practical realities of the underlying business. Having been in the construction industry, digging a foundation or auguring down to below the frost line to pour piers in frozen terrain is a largely quixotic pursuit.
Anyhow, we expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.
What’s our suggested interpretation of this Tale of Two Housing Realities?
We’d argue that much of the weakness in the reported February data was weather related and, in effect, created a mini-ball underwater dynamic. Over the next 6-8 weeks, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity.
Indeed, behind the data volatility in March, the crux of our underlying thesis remains largely unchanged. Labor market strength + credit box expansion + (very) easy compares should continue to support improving rates of change in housing demand over the intermediate term.
We’ll be hosting our 2Q Housing Themes call next Thursday, April 2nd at 11am to update our outlook for the industry and the related equity complex. Please contact email@example.com if you are interested in attending.
No matter how much it [your position] cries or begs, NEVER capitulate at a manic, short-term bottom.
Our immediate-term Global Macro Risk Ranges are now
UST 10yr Yield 1.81-1.98%
Oil (WTI) 42.37-52.28
To hair bands, Hungry Hippos and Volker-style policy sobriety,
Christian B. Drake
U.S. Macro Analyst
TICKERS: HLT, MGM, ZNGA, FCH, WYNN, AYA
HLT - Blackstone has reportedly been approached by a Chinese consortium including Shanghai-based JinJiang International. Whispers have suggested Blackstone has been offered $45/share for its controlling stake but Blackstone wants more.
Takeaway: HLT has done well on solid lodging fundamentals. This rumor would further support its share price.
MGM - The Bellagio has just completed a resort-wide remodel of the guest rooms and 403 suites in its main tower. The Mandalay Bay Convention Center is on schedule to open the first phase of its expansion in August.
ZNGA - has announced the resignation of CEO Don Mattrick after just short of two years in the CEO hot seat. Former CEO and founder/chairman Mark Pincus will return to CEO, effective April 8. Pincus tells the WSJ that the company is preparing a new set of mobile games.
FCH - announced prelim Q1 REVPAR growth of +13.1% on same-store basis. “We are extremely pleased with our strong year-to-date results, which are significantly ahead of our expectations. Lodging fundamentals continue to be robust and our same-store RevPAR growth continues to outperform the industry," said Richard A. Smith, President and Chief Executive Officer of FelCor. “We are also making great progress on completing the sales of our remaining non-strategic hotels. We have sold three hotels during 2015, including one in March, and three of the five remaining hotels are under contract to be sold.”
Melco International - $700 million casino in the Russian gambling zone of Primorye at Vladivostok will open its first phase in July. This will include a casino and a 140-room hotel.
Takeaway: This project has been long delayed.
WYNN - “The corporate governance committee will name one or more diverse directors to the board by the end of 2015,” said WYNN in a filing. Wynn Resorts would “prioritise women and diverse candidates in its search,” the filing added.
Pollard Banknote - its $5 instant lottery game Frogger is already the Vermont Lottery’s highest-selling instant game despite being on the market less than three months. The game, licensed from Konami, is outperforming all other instant games introduced in Vermont since 2010.
Less Mainland visitors - Macau received fewer visitors from the mainland but more from both Hong Kong and Taiwan over the Easter and Ching Ming holidays between Good Friday and Monday, Macau Government Tourist Office (MGTO) Director Helena de Senna Fernandes said.
Senna Fernandes said that the city received 641,000 visitors during the four days, up 2.7% YoY. While the number of mainland visitors dropped 3.5%, the number of visitors from Hong Kong and Taiwan rose 20% and 42% respectively, the city’s tourism chief said.
Meanwhile, the Government Information Bureau (GCS) said in a statement on Wednesday that the number of “tourist arrivals” rose 1.67% to 775,086 between Good Friday and Tuesday.
Takeaway: Weak Mainland visitation could partly explain the lower revenues in the 1st week of April.
Singapore - Singapore is trying to use judicial means to compel dozens of Chinese gamblers to pay up. Last year its two casinos filed 49 lawsuits against individuals in Singapore’s High Court for gaming-related debts, up from just two a year earlier. The resorts brought 12 more cases in the first quarter of 2015.
Takeaway: Without junkets, Singapore casinos are more exposed to the VIP downturn and collecting debts.
South Korea - According to news agency Yonhap, national officials supported a measure that would ease some foreign investment conditions relating to Saemangeum, an area of reclaimed land (pictured) in North Jeolla, in the southwest of the country. The government-backed bill is said to simplify the registration process for foreigners-only casinos in that area. Under the current rules, only casinos that are attached to luxury hotels and have at least US$500 million of investment are qualified to register, reported Yonhap.
Romania - The Romanian government has triggered an investigation into the affairs of national lottery Loteria Romania, accusing the company of entering the gambling proper business without licence or authority by introducing 6,263 slot machines over the period 2006 to 2014 in collaboration with an Intralot subsidiary, Lotrom SA. Prosecutors claimed Wednesday that this illegal activity has impacted state budgets to the tune of over Euro 100 million (a preliminary estimate). The officials declined at this stage to provide further details, and Loteria Romania declined to comment on the issue in view of the ongoing investigation. Sources close to the investigation told Reuters that the enquiry was criminal in nature, and that bank accounts belonging to the two companies involved had been frozen.
Indiana GGR declined 7.3% YoY in March
Takeaway: A couple of % points below our expectations.
Thoroughbred races - Handle on thoroughbred races grew 9.46% YoY to $984.365 million in March. Race dates rose 1.81% to 394.
Takeaway: Horse racing betting did well in March.
Four-river cruise in China - Asia's first four-country river cruise from the Mekong to China has been introduced by locally based operator Pandaw. The new seven-night itinerary will sail from Chiang Saen, in Thailand, to Myanmar, then on to Laos before crossing the Chinese border for the first time to reach the city of Jinghong in Yunnan Province.
Chinese Ministry of Finance to ease restrictions on NPL write-offs
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.
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Takeaway: We now find it prudent for investors to broadly cover their shorts in/across the emerging market space.
We arrive at the aforementioned conclusion for the following three reasons:
CLICK HERE to download our 20-slide presentation which contains the supporting analysis behind these views.
Have a wonderful evening,
Takeaway: Oil prices are now down over ~50% from June of last year which has surprised…. Well, pretty much everyone.
"The main purpose of the market is to make fools of as many men as possible."
- Bernard Baruch
A quick trip down Memory Lane:
Back in October, people said there was a “price floor” because it was uneconomical for “high cost” U.S. Shale Producers to produce below $80/barrel...
In November, people said there was a price floor because OPEC was going to cut production...
Then in January, people said there was a price floor because oil rigs were being idled at a rapid pace...
The one thing clear now is that the world has learned a thing or two about oil production now that we are in the $50/barrel range:
3. OPEC’s main focus is to keep market share. Cutting production risks the possibility of end-user customers finding a new producer to source crude oil. Market share is key for keeping “swing producer” status. OPEC has already been consistently losing this share since its “oh-so-powerful” status during the 1970s embargo years when they had a 50%+ share in global markets.
4. Aggregate production levels can increase even with rigs coming offline at a rapid pace. Oil companies will sideline lower-producing rigs in more mature oil fields and produce more from their best rigs on the most lucrative acreage in tough times of low prices.
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