Cartoon of the Day: Long China?

Cartoon of the Day: Long China? - China cartoon 07.28.2015


From Hedgeye research this morning:


Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.

HH Formation vs HPI = Momo vs. So-So

Takeaway: HVS Household formation trends mark their third consecutive quarter of bullish breakout. Case-Shiller HPI trends, meanwhile, remain subdued.

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.


HH Formation vs HPI = Momo vs. So-So - Compendium 072815


Today’s Focus:  2Q15 Homeownership and Vacancy Survey & May Case-Shiller HPI


Homeownership and Vacancy Survey: 2Q15

The Census Bureau released the Homeownership and Vacancy Survey (HVS) for 2Q15 this morning.


First, the caveats.  The HVS survey is timely and widely cited, but it’s volatile and doesn’t always comport cleanly with the more comprehensive annual Census/CPS housing surveys or a common sense reading of reality. 


We take the data with a grain of salt and, while we view the magnitude of change as a distorted reflection of the underlying reality, we view directional changes in the data as a largely accurate depiction of the underlying trend.  


Household Formation:  Household formation in 4Q of last year saw a big step function move higher with the yearly net change in households jumping to 1.6 MM – the largest increase in a decade. Those gains saw follow through strength in the 1st quarter of 2015 with household formation up approximately 1.5 MM year-over-year.   The update for 2Q shows net HH formation up +2.16 MM YoY  (+1.05 MM QoQ) – with the gains, again, singularly a result of rising rental demand as the rental vacancy rate declined to a new multi-decade low of 6.8%, pushing excess for-rent inventory further into deficit. 


Homeownership:  The National Homeownership rate dropped to 63.4% in 2Q from 63.7% prior, marking a new 48-year low.  Homeownership rates declined across age groups with the notable exception of 18-34 year-olds where the rate improved to 34.8% from 34.6% prior. 


In light of the marked improvement in household formation in recent quarters it's worth re-remembering the fundamental short-comings of the Homeownership Rate. 


Households can either be Renters or Owners and the Homeownership Rate represents Owners/(Owners + Renters).  Thus, if the number of households is increasing but the number or renters is rising faster than the number of owners (as is the case currently), then the Homeownership Rate will decline. 


It’s hard to characterize strong household formation growth – regardless of type - as a fundamentally negative development for the housing market, particularly with the propensity for strong rental market demand and rising rental prices to serve as a conduit to rising single-family purchase demand.


Bottom Line:  The magnitude of increase in HH formation reported by the Census Bureau is likely overstated but the trend towards improving formation rates is probably correct.   The maturation of the employment recovery broadly and accelerating employment growth across the 25-34 YOA group specifically (where positive employment growth is just now reaching the 2.5yr mark) supports the trend in the HH formation data and the reported rise in homeownership rates among young buyers.   We expect headship rates, which = households/population and represents a more comprehensive measure of participation, to improve alongside labor/income fundamentals.  We’ll get the official data for 2014 from the Census bureau in September.  



Case-Shiller HPI (May)

The Case-Shiller 20-City HPI for May released this morning – which represents average price data over the March-May period – showed home prices declining -0.2% MoM and decelerating to +4.9% year-over-year (vs +5.0% prior). 


On an NSA basis, all 20 cities reported sequential increases in May while on an SA basis, 10-cities reported declines.   Notably, Index heavyweights New York, Boston, Chicago, San Francisco and D.C, which collectively carry a 45% weight in the 20-city index, all showed sequential declines.  Moreover, Los Angeles, which alone carries a 15% weighting managed just a 0.1% gain on the month.   Performance by City is illustrated in the scatterplots below. 


In contrast to the 20-city series, the National HPI which covers all U.S. Census divisions showed a modest +10bps acceleration sequentially to +4.4% YoY.   


The deceleration in the 20-city series also stands in contrast to both the CoreLogic HPI and FHFA HPI series for May which showed a marked acceleration in price growth.   As it stands, we remain inclined to side with the CoreLogic data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.   


Price growth can’t sustainably accelerate at a premium to income growth in a flat rate environment and select markets like San Francisco are certainly over-stretched from an affordability perspective but, in the aggregate, affordability remains good, sitting perched right between the bottom and second-from-bottom quartile of the last ~30 years.  


On the HPI front, the more important release will be next week’s CoreLogic data for June along with the short-term projection for July. 


HH Formation vs HPI = Momo vs. So-So - CS National HPI vs 20 City HPI


HH Formation vs HPI = Momo vs. So-So - CS 20 City HPI NSA YOY  TTM


HH Formation vs HPI = Momo vs. So-So - CS SA MoM


HH Formation vs HPI = Momo vs. So-So - CS MoM   vs City Weight in Index


HH Formation vs HPI = Momo vs. So-So - CS MoM Vs YoY TTM Scatterplot


HH Formation vs HPI = Momo vs. So-So - HVS HH Formation by Type Cumulative chg


HH Formation vs HPI = Momo vs. So-So - HVS HH Formation 2Q15


HH Formation vs HPI = Momo vs. So-So - HVS Homeownership Rate


HH Formation vs HPI = Momo vs. So-So - HVS Homeownership Rate 18 34YOA


HH Formation vs HPI = Momo vs. So-So - HVS Rental Vacancy Rate 



About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.




Joshua Steiner, CFA


Christian B. Drake


Our Healthcare Analyst Thinks athenahealth Has Over 50% Upside From Here | $ATHN

This past Thursday our Healthcare Sector Head Tom Tobin held a conference call updating his team’s bullish thesis on athenahealth (ATHN) ahead of the print with institutional subscribers. ATHN continues to be one of his team’s Best Long Ideas.


Our Healthcare Analyst Thinks athenahealth Has Over 50% Upside From Here | $ATHN - z athn 1


The stock has risen over 15% since Tobin’s call.


According to Tobin, there was little for bears to hang onto coming out of the quarter in this battleground stock – lower revenue per physician due to higher enterprise client mix.


Among the many positives include record bookings, a second straight quarter with the financial component of the balanced scorecard above 100% at 115% (proxy for bookings), and Collector physician adds that beat estimates (2k vs. 1.6k), which is the product that matters.


In addition, while profitability is currently masked by high levels of investment to drive growth, ultimately, we think they will be a mid-70% gross margin (63% currently), high-20% operating margin business (10% currently).


At around +30% short interest, we think this recent move higher is just the beginning. We still think this is a $200+ stock, and have greater confidence in ATHN tracking to our long-term adoption forecast model toward 15% share of the ambulatory physician market.

*  *  *  *  *


(Send an email to if you would like access to our latest ATHN Black Book)

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Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs

Takeaway: Flat BTS forecasts, as chain store comps remain difficult. Kering luxury read-throughs to NA and Japan.

ICSC - Chain Store Sales


The ICSC trend line is a bit noisy but what is clear is, we've seen a deceleration in the 1yr number from the mid to high 3's to the low to mid 2's since we exited May. We don't see that reaccelerating anytime soon as comps remain elevated and BTS forecasts from 3 sources now (see below) are less than optimistic.

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart1

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart2



Deloitte & Brand Keys Back To School Forecasts - Looking For Flat Growth YY




Another bleak outlook for BTS this time from Deloitte and Brand Keys. While not as sour as the NRF forecast which called for a 5.8% decrease in spending per family, the flat number published by the two sources mentioned above are not overly optimistic. If we look at the ICSC numbers, comps remain difficult throughout BTS and that synchs with what we are seeing from these initial reads. We'll be interested to see what inventories look like headed out of 2Q in the face of this. Especially after inventories built across the industry headed out of the first quarter. That tells us that if the retailers put up a decent comp, it's likely going to come at the expense of gross margin. 

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart3



KER - Luxury Read Throughs


Comparable growth in NA Luxury retail segment was up 9% -- a 600bps acceleration from 1Q and ~700bps on the 2yr trend line. On the call management noted that tourist traffic remained pressured, but the underlying demand looked strong as evidenced by the acceleration in comparable growth. Japan put up a +27% against negative comps following the sales tax hike in 2Q14, that’s up from -4% in 1Q which is right in line with the number KATE printed in 1Q15. While not the exact same consumer segment as KATE, KORS, and COH -- the sales trends reported by KER's Luxury Segment look much healthier than the broader market sentiment would otherwise suggest.





UA - Stephen Curry’s New Under Armour Curry One Sneakers Drop Friday


Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart4


W - Wayfair Partners with Mattress Firm to Offer Online Shoppers Same-Day Delivery and World-Class Customer Service on Top Mattress Brands



Shipt is giving Instacart, Deliv a run for their grocery money



WMT - Walmart takes a White House pledge



SVU - SUPERVALU to Explore Separating Its Save-A-Lot Business



COLM - Columbia Sportswear angling for new shoppers



EBAY - eBay continues to clean house



Jailed Chinese Billionaire Huang Guangyu Boosts Stakes In Gome



Takeaway: Better WVO segment as higher VPGs offset lower tours but REVPAR guidance was soft and it wasn't all FX/Parc 55 sale related

  • Rental transaction volume is growing for the summer
  • Lodging  
    • Strong growth in Wingate brand (highest customer satisfaction)
    • Microtel brand - leadership in economy/budget segment
    • Migrating 4,500 franchisees to new revenue mgmt system.  Full implementation of new mgmt system in late 2016.
    • New revised loyalty programs:  7% increase in loyalty bookings. Reward redemptions are up 60% YoY
    • $4m benefit in increase in licensing fee rate paid to Wyndham 
    • Strong Pacific/Atlantic performance
    • Weak occupancy in oil-producing regions
    • SS managed NA REVPAR increased double digits YoY
    • Excluding China and FX, global REVPAR grew 4%
  • Rental
    • Launched niche brands in UK
    • 2Q: Included $3m loss due to sell of  Canvas Holidays in 2014 
    • Had some mix impact as a large portion of membership was from timeshare club which generates lower revenues
    • Denmark Days, UK Cottage, Wyndham Rentals in US were strong
  • Vacation Ownership
    • Favorable product mix which resulted in higher yields
    • Modified sales approach to owners with a hybrid model
    • 60% tours in specialist presenter/group format
    • Opened 6 new sales centers (e.g. NYC, St. Thomas Las Vegas)
    • Sees tremendous upside in timeshare business
  • FX reduced revs by $48m and $12m in EBITDA
  • FCF 2Q: $428m (flat YoY), expect 1st 9 months FCF to be lower YoY in 2015 due to inventory shifts and FX headwinds
  • FX headwinds: $25m for FY 2015 EBITDA  
  • Lower WAAM fee-for-service (1.0) - continued to shift to WAAM 2.0 (just-in-time model).  Expect this to continue
    • 25bps reduction in FY tax rate 36.5%
    • 2015 REVPAR: 2-4% (down from 4%-6%) - will be at lower end of range and FX issues and the sale of Parc 55 to Hilton. - But this sale closed in February 2015. Should've been known when they last gave guidance
    • WVO:  1-3% 
    • 3Q EPS: $1.65-1.68 
    • Rental: Canvass brand had $18m EBITDA contribution in 3Q 2014. Credit card transaction of $4m in 3Q 2014
    • 3Q Interest expense: $32m (early termination of interest rate swaps in 2Q)
    • May issue some more debt for the rest of the year
    • 3Q: $13m FX headwinds


Q & A

  • VPG - not a consistent metric, can be volatile. 
  • Hybrid - Specialist-presenter model - targeted towards in-house customers (who have already own a timeshare)
    • 60% of tours is the right balance
  • WVO:  Breakout: 2/3, 1/3 - new owner/existing owner
  • Citycenter hotel to Hilton: worth a little under 100bps in REVPAR
  • VPG:  will be positive going forward.  Constantly changing marketing programs
  • Vacation rental pricing seasonality:  summer is highest 
  • Rentals:  European booking shorter stays? Have not seen that.
  • Acquisition:  constantly looking for Rentals and Lodging opportunities
  • Pipeline a little stronger than in the past but expectations are pretty high
  • No reset button on brands. Franchisees are reinvesting in their properties.
  • Domestic REVPAR vs STR underperformance:  feel they performed in-line with economy segment
  • Exchange rev/member:  Change in composition of exchange membership:  going to clubs and transact less   
  • New yield mgmt system:  will take time to roll out since these owners are new to this technology.
  • Health of consumer:  saw an improvement in close rate in timeshare sales.  Don't know if consumer will feel stronger in 2H 2015.  Hotel/timeshare and European rental business seeing good reaction from consumer in July.
  • Summer European rental pricing has been healthy 
  • Sales team:  may be providing too many tours

Durable Goods, Reflation and China

Client Talking Points


The sequential gain in June was largely a function of wholesale negative revisions to the May data.  Headline New Orders were down -2.8% year-over-year, marking a 5th consecutive month of negative growth, and growth across the various sub-aggregates were not much better. Indeed, Durables Goods Orders Ex-Defense & Aircraft (i.e. the stuff the average Household buys) declined -2.0% year-over-year (vs. -0.7% prior) while core Capital Goods orders declined a notable -6.6% year-over-year.  In short, the 13% of Household Consumption and 9% of GDP that is Durable Goods remains in anti-escape velocity mode. 


The “reflation-trade”, “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms. The Energy (XLE), Materials (XLB), and Industrials (ITB) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers. If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.  


Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.


Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.


Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road


The @AtlantaFed model has 2Q growth coming in at +2.4% QoQ SAAR -- 10bps below our est. Will @Hedgeye be closest to the pin 2qtrs in a row?



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