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June 25, 2015

June 25, 2015 - Slide1

China, Germany and Industrials

Client Talking Points


The Chinese made some comments about rate cut expectations and the Chinese stock market closed pretty close to its lows down -3.5% (in the last month Chinese stocks are now down -5.9%). Quantitatively, China has broken its immediate term trade line of support which was right around 4,750 but is still well above its intermediate trend line of support which is closer to 4,200. China is probably a more tradable two-way market now then it is when it was going straight up. 


Beware: Germany is not out of the rough waters yet. The German DAX is broken from a trend perspective; it would have to get back above 11,741 to reverse this. Currently the DAX has immediate downside risk to

10,770. Whether or not you believe the Greeks are going to get something done, it's important to remember that the entire free world of market participants are long the concept of the next central plan having upside as oppose to downside – but what happens if they don’t get it done?! From here the asymmetry is to the downside, you can buy Germany but you don’t have a lot of upside vs downside.


Industrials – just terrible! Oh and by the way, the entire global growth complex is slowing. Yesterday, Industrials were down almost a full percent and are now down 2.1% year-to-date. Industrials are a leading indicator to the downside that we are indeed late cycle and being long late cycle is not a good thing to do.


**The Macro Show - CLICK HERE to watch today's replay, with Macro Analyst Darius Dale, Gaming Lodging & Leisure Sector Todd Jordan and CEO Keith McCullough.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


FX: Euro holding yesterday's gains vs USD at $1.12 - TRADE risk range there remains $1.11-1.14



To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance in science.

Albert Einstein


An Australian warship patrolling the Indian Ocean seized nearly 600kg (1,300lb) of heroin with an estimated street value of more $500m. The Australian navy said it was the 2nd largest such haul by the Combined Maritime Forces (CMF), a naval partnership of 30 countries to tackle piracy in the Middle East and Indian Ocean.


LEISURE LETTER (06/25/2015)



  • June 25 - AC tax bill 


MGM - Celebrity cruises and MGM are in a partner deal. Starting on June 24, Celebrity’s Captain’s Club and MGM Resorts’ M life members can choose from offers throughout the year. These include complimentary cruises for qualified M life Platinum and NOIR members, and Captain’s Club members can enjoy benefits and special access at MGM Resorts’ destinations, including concerts, events, entertainment venues, restaurants and more.



Genting Singapore - Announced on Tuesday that they will be de-registering their wholly-owned subsidiary, North Spring Investments, LLC in Mongolia.  According to the press release, the de-registration is not expected to have any material impact on the consolidated net tangible assets or EPS of the company.  


AHT - Ashford announced yesterday they are planning to acquire the W Minneapolis and Le Meridien Minneapolis for $101 million. 

  • The 229-room W Minneapolis Hotel - The Foshay, and the 60-room Le Meridien Chambers Minneapolis hotel, put the transaction cost at $349,000 per key.
  • The purchase price represents a trailing 12-month cap rate of 6.0% on NOI and a trailing 14.4x EBITDA multiple
  • On a forward 12-month basis, the purchase price represents an estimated cap rate of 7.0% on NOI and an estimated 12.5x EBITDA multiple



MSC Cruises - MSC Cruises and Etihad Airways announced a new global partnership agreement that will benefit MSC Cruises’ guests traveling to Abu Dhabi and the UAE.

  • Up for offer are “Fly & Cruise” packages from destinations around the world - with Etihad Airways or partner airlines in its network.
  • Under the terms of the agreement, MSC Cruises’ guests will be able to fly to Abu Dhabi with Etihad Airways to cruise in the region in the Arabian winter. Guests will fly with the national airline of the UAE to their cruise during winter 2015-2016 on MSC Musica.



Silversea - Announced it is adding the following all-inclusive package amenities offered on all Silver Shadow Asia cruises in 2016:

  • Free shore excursions
  • Free Wi-Fi
  • Roundtrip economy air travel and transfers 
  • Two-night, pre-cruise hotel stay 

The all-inclusive packages are available for new bookings made on or after June 24, 2015 on 17 cruises, including, for example, a seven-day voyage to Indonesia, Thailand, and Malaysia. Sailing roundtrip from Singapore on February 6, the cruise starts at just $4,550 per person. 



Macau REVPAR - Maria Helena de Senna Fernandes, director of the Macau Government Tourist Office, said she expects the city’s hotel occupancy rate to improve in the coming months. Hotel occupancy rate stood at 83.9% in May, down 6.4 YoY. Ms Senna Fernandes said she expects room prices to fall with the opening of new hotels. In May, the average room rate in Macau was MOP1,485 (US$186), down by 7.5%.  


Takeaway: May REVPAR in Macau looks very weak and it could get worse in the coming months. Bad news for room rate operators like LVS.

Broken tooth - Famed gang leader known as Broken Tooth Koi has reportedly opened a VIP gaming room in Macau.


Macau-Guangdong Investment - Leong said on Thursday he hoped that through today’s meeting with Guangdong officials the two sides could reach an agreement on the framework for the local government’s plan to invest part of its huge reserves via the Guangdong government. 

  • Leong said the government planned to invest about 10 billion to 20 billion patacas of Macau’s financial reserve. 
  • He said the government was looking to invest in projects related to infrastructure or undertakings that will improve Macau people’s living conditions as that would be more acceptable to the local population.



Macau Housing - The slump in gaming in Macau is beginning to depress the city’s housing market.  The news agency quotes estate agent Jones Lang LaSalle Inc as forecasting that housing prices will drop by 15% this year, the first annual fall since 2008.



Korea Tourism - Air passenger arrivals to South Korea from neighboring China increased 28% YoY to 1.69 million in May, show official data from South Korea published on Wednesday. 

  • Additionally, a weakening in Japan’s currency the yen contributed to a 22% YoY in air passengers on South Korea-Japan routes.  There were 1 million such travelers in May, according to the data from the Ministry of Land, Infrastructure and Transport.
  • For June: The overall number of air travelers in the South Korea market plunged 19.5% YoY in the first three weeks of June, with the drop in international air passenger traffic hovering at about 20% since June 16, according to ministry data.


Takeaway: MERS certainly affected travel.


Europe -  European cruise destinations such as Santorini, Lisbon and Oslo suffered dwindling visitor numbers and spending last year for the first time in a decade as Americans cancelled trips to the Baltic and Mediterranean over geopolitical concerns.

  • Visits to European ports of call were down 7 percent after almost 9 percent growth a year earlier, a report issued by the Cruise Lines International Association (CLIA) on Thursday showed.
  • Passengers and crew spent 3.64 billion euros ($4.08 billion)at ports in Europe last year according to the report, 4.2 percent less than in 2013.
  • The number of Europeans booking cruises remained stable at 6.4 million in 2014 as declining bookings in Britain, Italy and Spain -- partly affected by weak economies -- were offset by a growing number of bookings in Germany.


Takeaway: We believe European struggles were extended into 2015 as confirmed by CCL and RCL.


New Bedford, MA - City residents overwhelmingly approved the proposed construction of the $650 million Foxwoods-managed resort casino for New Bedford's waterfront.  The referendum passed Tuesday with 73% voting in favor of it and 27% against, according to results posted on the city's website.



New Jersey - A new poll finds most people from New Jersey don't want casino gambling in other parts of the state beyond Atlantic City. The poll released Wednesday finds 56% opposed to casinos somewhere other than Atlantic City, and 37% in favor. 



Ohio - The Ohio Supreme Court must decide whether a group can file suit against the state for allowing video lottery terminals at horse racing tracks and other policy decisions related to voter-approved casinos. 

  • At issue is whether the conservative American Policy Roundtable and a dozen other plaintiffs have legal standing to challenge gambling-related legislation and executive actions.
  • The American Policy Roundtable and others say the video slots amount to casino-style gambling that has not been OK’d by voters, and the net proceeds from the devices are not being devoted to educational purposes, as stipulated under the state constitution.
  • The video lottery terminals “were neither contemplated nor included in the definition of ‘lottery’ used in ... the Ohio constitution,” the challengers say in court filings." The operation of such devices exceeds the constitutional authorization to conduct a lottery.



Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.

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This Country’s Real Estate Market Is An Epic Bubble About To Burst

Last week, we hosted a special institutional call, “Bubble, Bubble, Toil & Trouble” highlighting the epic bubble occurring in Canada’s real estate market right now and various ways investors can profitably play these developments.

*  *  *  *  *  *  *

This Country’s Real Estate Market Is An Epic Bubble About To Burst - 9p


In his 130-slide deck, Hedgeye’s Financials Sector Head Josh Steiner covered the Canadian property market, how to track it and some of the best ways to play the coming problems. We highlight a few of the salient takeaways below. Please ping sales@hedgeye.com if you would like to learn more about this presentation and ways to invest around it.


Our northern neighbors saw similarly rising home prices as the US through the early 2000s until the US bubble burst. However, after US prices dropped, Canadian prices kept growing, rising 146% since 2000 as seen in the figure below. That’s roughly double the increase that’s occurred in the US market over the same time period.


This Country’s Real Estate Market Is An Epic Bubble About To Burst - 444


Median Income vs. Home Prices

There is a growing problem across all major Canadian cities regarding the explosion of home prices relative to household incomes. While Toronto and Vancouver lead the way in market size, it is Winnipeg that leads the disparity between home prices and incomes. More importantly, all major Canadian cities are seeing eye-popping levels of disconnect between prices and incomes.


To put some of this in perspective, by the end of 2006, just as the US housing bubble was peaking, the difference between the growth in housing prices and incomes was 67%.  Fast forward to today where nine out of the eleven major cities across Canada are at or above US levels from 2006 with an 11-city average of 87%. In other words, the incredible pace of rising home prices has blown away median income growth on a scale well beyond that seen in the US ten years ago.


The rocket fuel for rising home prices in Canada, of course, has been easy credit and growing debt. As we learned in this country eight years ago, asset prices rise and fall, but the debt endures.


The ingredients for a correction within the Canadian real estate sector all seem to be coming together. It’s just a matter of time. 


CHART OF THE DAY: #Housing Starts

Editor's Note: In today's Chart of Day from Hedgeye's Morning Newsletter, we show the historical cycles in Housing Starts over the last half century.  


Click to enlarge

CHART OF THE DAY: #Housing Starts - z 1 Starts CoD2

First Time, Long Time

“I’m against picketing, but I don’t know how to show it”

-Mitch Hedberg


Suppose I told you that a certain macroeconomic phenomenon manifests as a discrete trigonometric function with a period of approximately 7 years. 


The phenomenon in question is highly autocorrelated (i.e. it goes in the same direction for extended periods), peaks and troughs at approximately the same levels in each cycle and is levered to glacial, analytically tractable drivers. 


Moreover, our mystery metric currently sits in the bottom quartile of historical observations with mean reversion upside of ~40% to its LT historical average and ~65% upside to average peak levels.  Now further suppose that in addition to this sanguine secular backdrop, in the nearer term it will probably (continue to) post the best rate-of-change numbers in all of global macro.


In abstract terms, what I’ve described  – which is probably not particularly mysterious given my ongoing Early Look chronicling of our evolving housing investment thesis - is the core argument behind the secular bull case in housing and residential construction activity. 


In today's Chart of Day we show the historical cycles in Housing Starts over the last half century.  Immediately below, we show the periodic nature of New Home Sales in the pre-bubble period.  


Click image to enlarge 

First Time, Long Time - z 2 NHS CoD1 


Back to the Housing Macro Grind...


“Yeah, but it’s a dry heat, so it’s not that bad”. 


With summer upon us and the temperature inflecting, your hopes for the future of human originality will again be tested as you’re invariably subjected to some version of that “insight”, probably repeatedly.   


You can tell when the comment is coming.  You can’t do anything to stop it.  And when the person actually says it, it feels just as trite you thought it would be.  Or maybe that’s just me…


To extend the superfluousness even further – another of my etymological pet peeves is when talk radio callers call-in and lead with “Hi..First time, long-time” (short for “first time caller, long-time listener”).


If nails and chalkboards managed copulation, those irksome platitudes would be their progeny.


Anyway, we did get a first-time, long-time moment in housing this week as 1st-time buyers, after a half-decade hibernation, showed signs of stirring.  


1st-Time Buyers | Call it a Comeback?   First-time buyers represented 32% of Existing Sales in May, up from 30% last month and 27% in May of last year.  It’s been our view that ongoing improvement in labor and income fundamentals along with maturation of the employment recovery beyond the 2-year mark for the key 20-34 YOA age demographic would support household formation growth with slow flow through to demand in the single-family market.  


It’s difficult to take a convicted view of a single month of data in isolation but with cash/investor/distressed sales declining, mortgaged purchases rising and young buyer demand percolating the slow march towards market normalization is progressing. 


Whether the mini-step function rise in 1st-time buyer demand in May represented a head-fake or an early inflection back towards the historical average of ~40% share of EHS remains to be seen but its evolution will represent a fulcrum factor for the direction of the existing market from here with transaction activity having retracted back to longer-term historical averages.


Indeed, the sequential +5.1% rise in May took aggregate existing sales up to 5.35MM units SAAR, marking the strongest level of housing demand since the artificially (tax-credit) amplified late 2009 period.


Further, the high-frequency weekly Purchase Application data from the MBA – which clocked purchase demand growth at +18% year-over-year in the latest week – suggests the strength observed across Pending and Existing Sales in March/April extended to May/June.


Trends in the New Home market have been similarly strong.


New Home Sales | 2nd Derivative Bonanza - New Home Sales in May (reported Tuesday) rose +2.2% month-over-month to +546K, the strongest level since February 2008 (88 months).  On a year-over-year basis, sales growth registered +19.5% with the positive revision to the prior month (+1.3% MoM) taking April sales growth up to a remarkable +30% year-over-year.  


Further,  given the favorable comp dynamics, it’s likely we see similar strength from a rate-of-change perspective in the coming months.  For context, if sales were to hold flat at current levels, year-over-year growth would come in at +34%, +35% and +20% over the next 3-months, respectively.    


But isn’t Housing Early-Mid Cycle?


That has been a recurrent inquiry given our late-cycle view of the broader economy. 


A somewhat obvious but seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years.  Given that housing was the final, pre-crisis beneficiary of an epic, multi-decade (policy) game of rotate-the-asset bubble, it’s not surprising that the subsequent recovery has been slow, choppy and broadly unimpressive. 


However, Housings unique role in precipitating and propagating the financial collapse also makes historical cycle precedents (in terms of housings position in the temporal pattern of the archetypical cycle) less informative as analogs.  In short, while we’re late or mid-late cycle more broadly, we’re somewhere closer to early-mid or mid cycle in housing itself.  The housing cycle and the economic cycle are, of course, not mutually exclusive but they can tread variant short-to-medium term paths.


Teasers & Siren Songs:  The secular upside opportunity for housing is both conspicuous and sirenic.  But between here and the omni-amorphous “long-term”, however, there are/will be discrete investible periods on both sides of the trade.   


We reversed to bullish on Housing in late 2014 and with positive 2Q results out of KBH and LEN over the past week, the top down inflection in housing fundamentals we’ve been calling for is now showing up in the reported numbers and being embedded in more sanguine forward guidance from management.


The fundamental data should remain good over the nearer term.  Will good be good enough to support ongoing outperformance in the housing related equity complex?  We’ll be updating our outlook on our 3Q15 Housing Themes call on Thursday, July 9th (ping for details)


Our immediate-term Global Macro Risk Ranges are now:


SPX 2094-2130 
Nikkei 204
VIX 12.13-15.61 
USD 93.81-95.96
Oil (WTI) 59.04-61.22 

Gold 1168-1188

To long-term opportunities, tactical risk management, and who-ever invented “the teaser”.


Christian B. Drake

U.S. Macro Analyst


First Time, Long Time - z 1 Starts CoD2


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