prev

Eye On US Healthcare: Mad Max?

Fire up the Thunder dome. The Democrats are in the house and the Max Baucus Plan is in motion – conference call just ended; here are our head of healthcare, Tom Tobin’s, immediate takeaways:

The scariest part of the plan is the Health Exchange, but that won’t happen for 3 years.

The idea is to push everyone into a market to purchase insurance. The question is the margin for those products. 50M additional lives is a significant boost even at 10% gross margins.

In the meantime, Medicare expands to cover younger Americans and SCHIP expands. Medicare Advantage cuts are a sure thing. This wont kill the companies and has been quantified.

No change to employer system until Exchange is created. So no near term risk of further disenrollment or margin pressure from employers anticipating a government plan. This is positive for UNH and AET.

Baucus expects to enact legislation 1H09, but I got the distinct impression he is acting on his own. This may be a problem that delays things.

CBO analysis is likely more favorable this time around as opposed to 1992.

“Devil is in the details” was the key quote.

Baucus expects the plan to lose money initially, but save later. This is the key to the CBO score and pay-go.
If there is any conclusion, device manufacturers are most at risk.

Baucus wants to create a comparative institute to score effectiveness of therapies and allow hospitals to partner with physicians to participate in cost savings initiatives. He also want to ban collaboration with docs and industry. This seems like a recipe for unit pricing declines.

This is perversely positive for R&D, the only engine to generate new products.

Thomas Tobin
Managing Director

Eye On Leadership: Jaime Dimon

This is definitely one of the quotes of the day that lines up most succinctly with what we have been saying this week - "we're not running the company as if we're in a Great Depression" (Jaime Dimon, CEO of JPM).

Nice call Mr. Dimon - we're on board with you there. People are freaking out about 2009, and you're providing some leadership to calm the fear that some investors should have had 12 months ago.

We are not going into a Great Depression. The only depression I see dominating New York's groupthink is in the bank accounts of the levered longs.

Keith McCullough

Shrink to Grow

As an industry analyst I have deployed the shrink to grow theory many times to identify ways to make money buying companies that are right sizing their business to enhance future profitability. With SBUX reporting earlier this week, I have the shrink to grow theme as top of mind. Unfortunately, this theme is everywhere I turn and is one reason to remain cautious on the consumer. From a Macro standpoint, the US economy will likely contract before it can grow again. The US and many global economies are headed down a slippery slope which can be toxic for investors, because of the unknown of how steep the slope will be. I guess this is why I’m still bearish about the consumer.

The market swoon in October provided another shock to the consumer, the impact of which we do not know and most likely has yet to be fully digested by the market. The monthly sales figures reported by companies that rely on discretionary purchase decisions, like restaurant and automobile manufactures, were disastrous in October, and November is not off to a good start. The consumers have not bottomed yet; as a result there continues to be significant excess capacity in many sectors. These sectors need to shrink capacity before they can grow again.

There continues to be significant excess capacity in the restaurant industry that needs to close before the industry can fix the traffic related issues we are seeing today, particularly in casual dining. This is not to say that QSR is immune, but it does not appear to be as bad. QSR has picked up some traffic from casual dining, but the incremental traffic is coming from discounting. Unfortunately, the more stores that close the more people there are out of jobs. Regardless, the restaurant industry still needs to shrink to grow!

Moving to… Discussing the fate of GM is a moot point – the collapse of the credit markets, especially speculative credit, means there is no life support in bankruptcy. So that leaves one of two outcomes for GM; it’s going to file for bankruptcy and liquidate or the government will bail them out. The reality is the government will provide life support, with the stipulation that the company needs real fundamental restructuring – it needs to shrink its excess capacity and thus cut its payrolls. When the US Government bailed out Chrysler it ended up laying off 1/3 of its work force. GM needs to shrink to grow!
The US Banking and financial services has been operating with excess capacity for years. No need to rehash that story, but capacity is finally declining there, too. Shrink to grow!

We are now just beginning to see the severity of the stress in other parts of retail. The retailer du jour is Best Buy – no surprise, but reality. Recently, Circuit City and Linens ‘N Things have either shrunk significantly or liquidated. The US economy is going through a cleansing process that is healthy but takes time to fix. Unfortunately, government intervention in the process is only prolonging the process. Today, companies that are on the brink of collapse don’t go bankrupt, but become socialized by the US government.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Why we didn't cover our Japan Short (EWJ) today...

This questioned is better answered with a chart. This is embarrassing. Amidst the rest of the world (Australia, Germany, USA, etc...) putting in sentiment bottoms, the Japanese ring the gong on a fresh 26 year low.

Japan is not a place to be invested. As Wall Street great, Marty Whitman, would say "a bargain, that remains a bargain... is no bargain!"
KM

Why Did We Cover our British (EWU) Short Position Today?

One, the EWU was down over -6%, and we cover on red meltdown days... Two, and more importantly, as bad as this morning's jobless claims # in the UK was (worst since 1992), the rate of change improved sequentially (i.e. less bad, see chart).

Everything that matters in our macro models occurs on the margin. Today's delta was an important one. Look for the British to cut interest rates again in the near future.
KM

Paulson: Get The Guy Out The Door Already!

Hank "The Market Tank" Paulson strikes again. Just when I thought we were done with his lack of clarity, they cart him back onto that ole Bushy administration podium to remind us of this countries reactive management ghosts past.

Getting Paulson off of TV and back into whatever job he wants to take other than his current one could very well be the most bullish pending catalyst that US market investors can look forward to.

The Goldman Sachs that he left is the company that is seeing there share price go down every day. America has voted. Let's get on with it, and clean this mess up.
KM

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next