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3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN

Takeaway: The Fed's 3Q15 senior loan officer survey shows ongoing easing in business & consumer lending, both mortgage & non-mortgage.

C&I Seeing a Bump to More Easing and Mortgages Continue Significant Easing

 

The Fed released its 3Q15 Senior Loan Officer Survey yesterday afternoon. The survey was conducted between June 30 and July 14 and covers lending standards and loan demand across business and consumer loan categories.

 

The survey results were largely positive. In most categories, lenders continue to report net easing of underwriting standards, falling spreads and rising borrower demand.

 

The one slight negative for the quarter was that standards for construction and land development CRE loans crossed the zero line into net tightening in 3Q15, but only by 1.4%. 

 

Here are the two main takeaways this quarter:

 

1. The net % of banks easing C&I lending standards rose in 3Q15. 7% of banks eased C&I credit standards for large firms in 3Q15 versus 5% in 2Q15. Additionally, 6% of banks eased C&I credit standards for small firms versus 1% in 2Q15.

 

The chart below looks at the historical C&I lending standards (LHS) juxtaposed against the S&P 500 Financials Index (RHS). C&I lending standards have historically begun tightening ahead of peaks in equity prices. We've highlighted in green the periods during which Financials stocks are rising. In the 1990s it was clear that lending standards were tightening by early-1999, suggesting the roll was near. In the 2003-2007 period standards began to tighten steadily in 2007.

 

There are two important takeaways here. First, inflections in this series lead turning points in Financials equity prices. Second, underwriting standards tend to be autocorrelated, meaning they trend in the same direction for a long time before reversing. This means that once the turn begins you can ride the trend for a long time.

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 1 

 

2. Ongoing Resi Easing. Lending standards among underwriters of Fannie and Freddie guaranteed loans continued to ease in 3Q. FHA/VA standards also eased in the quarter. One of the central tenets to our longer-term bull case on Housing is that underwriting standards will continue to ease in the coming years as the credit pendulum works its way back to center.

 

 

 

Now, A Quick Review of the Senior Loan Officer Survey by Category:

 

C&I: Easing Resumed

Last quarter we called out C&I as a potential canary in the coal mine. That's because the net percentage of lenders tightening standards was almost back to the zero line. This matters because, historically, net tightening of credit conditions has preceded (and arguably, precipitated) all three recessions since the survey's introduction.

 

As such, we were very interested in whether the 3Q15 survey would show a continuation of that trend. It turns out that it didn't. C&I lending standards eased at a faster clip in 3Q than they did in 2Q. 

 

Moreover, demand from both large and small firms for C&I loans increased in the third quarter.

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 2

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 3

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 4

 

CRE: C&D Tightens (Slightly)

Back in 4Q13, the Fed split the CRE category into four new survey components: C&D Lending, Nonfarm nonresidential lending, and Multifamily lending. C&D lending actually saw a small net percentage of lenders tightening standards -- a first in the post-4Q13 era. We wouldn't get too excited about it as it was only 1.4%, net of lenders surveyed that were tightening, but the trend signal is what matters to us.

 

Meanwhile, the lending environment for nonfarm nonresidential and multifamily CRE loans improved in the third quarter as banks eased standards. 

 

Demand for all three categories of CRE loans increased in the third quarter.

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 5

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 6

 

Residential Mortgage: Easing

Starting in 1Q15, the Federal Reserve broke the survey's residential Prime and Nontraditional categories into six new categories and kept the Subprime category for a total of seven different categories. The six new categories include: (GSE-Eligible, Government, QM non-jumbo/non-GSE eligible, QM jumbo, Non-QM jumbo, and Non-QM/non-jumbo). The categories we're most interested in are the GSE-Eligible (Fannie/Freddie) and Government categories (FHA/VA) since these two categories account for ~90% of all origination volume. The GSE-Eligible category showed 11.3% of banks, net, eased standards Q/Q in 3Q15. Additionally, Government showed a 5.1% net easing. Four of the other five categories also eased.

 

We pay little attention to the demand component of the Fed's Survey because it reflects shifting refi demand and isn't a good barometer for purchase activity. Nevertheless, we include both charts below.

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 7 2

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 8

 

Consumer: Easing

Standards for credit cards, auto loans, and consumer loans ex-cards and autos all eased in the third quarter.

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 9 2

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 10 3

 

3Q15 SENIOR LOAN OFFICER SURVEY | MOSTLY GREEN - SLOOS 11 2

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


The Macro Show Replay | August 4, 2015

 


LEISURE LETTER (08/4/2015) - NCLH, CCL

TICKERS: NCLH, CCL

 

EVENTS   

 

August 4: 10:00am: NCLH 2Q CC Webcast Link Here

August 4: 10:00am: RHP 2Q CC

August 4: 11:00am: MGM 2Q CC ; PW: 0575269

August 4: 11:00am: H 2Q CC ; PW: 73409721

August 4: 5:00pm: AWAY 2Q CC

August 5: Studio City opening date unveiled during media tour

August 6: 6:00am: G13.SI 2Q CC

August 6: 8:30am: MPEL 2Q CC ; PW: MPEL

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)

August 7: 11:00am: Hedgeye Macau Call 

COMPANY NEWS      

Leisure and Resorts World Corp. - City of Dreams Manila casino resort in the Philippines, is independently to open this year between 10 and 15 retail gaming outlets for either bingo or online games in that country.  The company operated – as of the end of last year – a network of around 90 bingo sites and about 50 “e-games stations” licensed by the Philippine Amusement and Gaming Corp (Pagcor), according to a media report on Monday. 

ARTICLE HERE

Takeaway: We think this property will experience a nice ramp through 2016

 

NCLH - Norwegian Cruise Line's expansion into Asia is now on the schedule.  The 13-ship brand today announced it would offer sailings in the region starting in 2016 on the 2,348-passenger Norwegian Star.  Norwegian says the vessel will operate out of Singapore and Hong Kong as part of a seasonal deployment that also will include Australia and New Zealand sailings out of Sydney and Auckland, New Zealand. 

ARTICLE HERE

Takeaway: This confirms our comments from the July 15 Leisure Letter.  

 

CCL -  Seabourn has revealed the rendering of one of the most distinct onboard venues aboard its newest ultra-luxury vessel, Seabourn Encore.

  • The Grand Salon is set to debut in December 2016. According to company reports, the main show lounge will present a sophisticated setting for onboard performances, from new shows by seasoned entertainers to local, cultural productions from ashore and guest speakers from the line's popular enrichment series, such as legendary American journalist Dan Rather and Forbes Media Chairman and Editor-in-Chief Steve Forbes.  
  • Seabourn Encore will feature modern design elements and innovations consistent with the line's reputation for understated elegance. The 40,350-GRT ship will be configured with one additional deck and expanded public areas, and is expected to carry just 600 guests, based on double occupancy. In addition, every suite will feature a private veranda.

ARTICLE HERE

Takeaway: Seabourn continues to raise the bar for luxury cruises. 

INDUSTRY NEWS 

Macau Junkets - The slump in gaming has reduced the number of VIP gaming promoters serving Macau to 148, about 30% fewer than two years ago, Business Daily reports, citing an estimate by the Association of Gaming and Entertainment Promoters of Macau.  The newspaper quotes association president Kwok Chi Chung as saying: “This number is about 60 fewer than the peak time of about 213 VIP gaming operators in business in the city back in 2013, when Macau had robust gaming results.” 

ARTICLE HERE

 

Macau GGR Share - Sands China Ltd retained the biggest slice of Macau’s casino market last month, Business Daily reports.  The market leader had 23.8 per cent of gross gaming revenue.  Galaxy Entertainment Group Ltd had 22.6% of gaming revenue, SJM Holdings Ltd 20.3%, Melco Crown Entertainment Ltd 14.2%, MGM China Holdings Ltd 9.7% and Wynn Macau Ltd 9.4%. 

ARTICLE HERE

 

Macau Labor Dispute- A group of more than 30 local construction workers went to the Labour Affairs Bureau, complaining that they have been unfairly dismissed. The group of Macau residents said they were hired more than two months ago by contractor Shing Lung Construction and Engineering Company to work at SJM's Cotai property – Lisboa Palace.  They say they received a phone call on the 31st of July saying that they no longer needed to go to work.  Some workers say that non-resident employees are now working there, adding that the company is hiring some illegal workers as well.  Shing Lung Construction and Engineering Company told, Macau News outlet, TDM that the workers in question have been hired by a subcontractor and not by them directly.

ARTICLE HERE

 

River Cruises - Low water on the Danube is continuing to disrupt river cruise itineraries, forcing cruise lines to cancel cruises, change itineraries and bus passengers between ports and ships in order to complete itineraries.  

ARTICLE HERE

Takeaway: It has been a challenging summer for river cruise operators. 

MACRO 

Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.


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BETR | It’s Already Popped

Given the current “free money” environment we are not surprised that Amplify Snack Brands is going public.  The company fast tracked its IPO process and is the beneficiary of the JOBS act, taking advantage of the reduced reporting requirements afforded to small ‘emerging growth’ companies.  Aside from getting the POP in the initial trading upon a successful completion of the IPO there is no reason to own this name.

 

THE OFFERING

Amplify Snack Brands (BETR) is set to price their shares tonight.  Amplify Snack Brands has positioned itself as a “high growth, snack food company focused on developing and marketing products that appeal to consumers’ growing preference for Better-For-You, or BFY, snacks.”  The only brand of consequence is the SkinnyPop brand.  Going forward the company will try to become “an industry-leading BFY snacking company that capitalizes on the potential of great-tasting and high-quality BFY snack brands that we create and acquire.” Existing shareholders of BETR are offering 15,000,000 shares between $14.00 and $16.00 per share, the company will not receive any of the proceeds.

 

OWNERSHIP HISTORY

TA Associated acquired SkinnyPop in July 2014 for $320mm, after the company was most likely shopped around to potential strategic buyers unsuccessfully.  We were not surprised that the company did not find a home due to the limited transferability of the SkinnyPop brand to anything but healthy popcorn. “The parties agreed to consummate the Sponsor Acquisition…for an aggregate purchase consideration of $320mm, which included rollover stock from the Predecessor’s members representing 14% of the Company.” Following the offering, TA Associates will beneficially own approximately 58.3% of issued and outstanding common stock.

 

HEDGEYE OPINION – As with any small company the future depends on management and the board successfully executing the growth strategy.

 

BRANDS AND THE MARKET FOR POPCORN

SkinnyPop is their anchor brand, and Paqui a tortilla chip brand acquired in April 2015 for $12.2mm is a minor brand in the portfolio.  BETR sales are dominated by SkinnyPop, the original sku represents 87% of total sales for the entire company, with an insignificant amount coming from White Cheddar, Naturally Sweet, Black Pepper and Hatch Chili flavors. As stated in the S-1, the U.S. popcorn sub-segment is estimated at $1.9bn in 2014 and grew at 8.1% over the prior year. The RTE popcorn sub-segment is estimated to be $966mm growing at a 14.6% CAGR since 2010.

 

HEDGEYE OPINION - The market in which they play is littered with small players, like Angie’s, Popcorn Indiana, Lesser Evil, Good Health, Earth Balance (BDBD), Garden of Eatin’ (HAIN), Beanitos and dominated by the powerhouse brands from major CPG companies such as, PEP, GIS, CAG, LNCE, DMND etc. not to mention the emergence of private label.

    

COMPANY OPERATING PERFORMANCE

In 2014 SkinnyPop’s market share grew 6.5% to 12.1%. Net sales increased from $55.7mm in the year ended December 31, 2013, $132.4mm in the pro-forma year ended December 31, 2014, representing growth of 137.6%. Gross profit and adjusted EBITDA margins were 58.6% and 44.5%, respectively, for the year ended December 31, 2013, 56.1% and 44.2%, respectively, for the pro-forma year ended December 31, 2014.

 

HEDGEYE OPINION – The margins for BETR are some of the best in the industry - because it’s just popcorn.  As the company expands into other categories the consolidated margins will likely decline significantly. 

 

BALANCE SHEET

As of December 2014 BETR had a DEBT / EBITDA ratio of 4.09x, not what you want to see from a company that is set to IPO and not receive any or the proceeds. This lofty valuation (6.55x June 30, run-rate sales) for this company is predicated on the fact that they can roll up more BFY snack brands in the $25mm-$75mm revenue range, but the balance sheet can’t support that right now. A better use of proceeds would be to de-lever the balance sheet, allowing the company to be in a better position to make acquisitions.

 

VALUATION

At $16 or even $14, BETR is significantly overvalued for basically a one product company.  If the IPO is priced at $16, the high end of the range, the implied market value of BETR will be $1.2 billion.  The implied market cap of BETR is 64% and 124% of the addressable U.S. popcorn sub-segment and RTE popcorn sub-segment, respectively.   

 

HEDGEYE OPINIONAt this point BETR is a one product wonder and given that at $16 the company market cap is 24% bigger than the RTE popcorn sub-segment the stock is grossly overvalued.

      

We’re impressed by the current owner’s ability to rapidly build up a business in a fast growing and very profitable category.  That being said, BETR is a small player in a very big competitive category.  The RTE Popcorn segment is littered with regional premium brands as well as the national premiums such as Popcorn Indian and Angies. Not to mention the emergence of Private Label.

 

The recently acquired smaller chip business appears like a quick tuck-in acquisition just to make the company’s IPO appear more appealing.  At this stage, anyone who wants to get involved in the chip business on a small scale has got to be crazy.  The chip business has little product differentiation, and the product isn’t much better or worse than other competitive products and they have a limited distribution compared to the competition.

 

Customer concentration is a significant issue, with 55.6% of BETR’s revenue coming from the club channel (Costco and Sams Club).  Without hesitation, one of those companies could drop SkinnyPop in a second for a faster growing more appealing brand.  Also, sales are limited to one maybe two sku’s with 87% of sales coming from the Original flavor.  Needless to say, it’s a lot different than saying 30% of GIS sales come from Walmart, because that is across possibly 100 skus.  BETR is dependent on a single co-packer, no internal manufacturing, although creating an asset light model; it puts the company’s fait into someone else’s hands.

 

Lastly, ‘Skinny Pop’ is a tough brand to bring across categories, basically just labeled as healthy popcorn. Retailers shifting focus away from the center-of-store, shelf space will come at a premium, competing against PEP, LNCE, GIS, CAG, DMND.  This leaves future growth in new categories dependent on the company acquiring other brands which presents a whole new set of issues.  The first issue being the company’s balance sheet does not have much room to make any significant acquisitions.

 

In the end the success of this story depends on total points of distribution (TDP’s) growth, and we do not believe that they will consistently grow at near the rate they currently are. In BETR’s filing they have been growing TDP’s by 115% from 2012-2014, to consistently grow at that rate going forward, in the competitive center-of-store salty snacks market, will not be possible.

 

This company is grossly overvalued in our opinion, take a look at the below data table for a conservative look at the downside potential.

 

BETR | It’s Already Popped - CHART1

 


#LateCycle

Client Talking Points

UST 10YR

UST 10YR Yield of 2.16% reminds Bond Bears that they need more of a catalyst than a chart – with both growth and inflation slowing (at the same time) again, the fundamental catalyst for a big asset allocation to the Long Bond remains as intact as #LateCycle data is.

OIL

Capitulation yesterday on the down -4% daily drop for WTI, taking its 3 month #deflation/crash to -23.4% - then the bounce off the oversold line this morning +1.3% to $45.77 with a risk range of $45.32-47.90 – “cheap” getting cheaper.  

RUSSELL 2000

The Russell 2000 is down -4.9% from its all-time high and continues to be bearish on both our TRADE and TREND durations  as the Russell “Value” side of the equation is getting thumped (relative to Russell Growth) like it did when growth slowed in the summer of 2011.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale and Ben Ryan.

Asset Allocation

CASH 52% US EQUITIES 4%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed.  

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.   

 

Three for the Road

TWEET OF THE DAY

VIDEO: Got Gold History? #NewLows $GLD https://app.hedgeye.com/insights/45354-got-gold-history … via @Hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.

Sigmund Freud

STAT OF THE DAY

Spam accounted for 49.7% of email in June, which is actually the lowest it’s been since before 2003.


August 4, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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