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Trade Update: Covering GLD

 

Keith covered our short position in the gold etf GLD this morning at $149.02 for 4.9% gain.  

 

He remarked on the trade, "Booking another gain in gold.  Across 26 long/short positions taken since 2008, we have been right 89% of the time in GLD."

 

GLD is immediate-term TRADE OVERSOLD with support at $148.98; TRADE-range resistance is up at $154.92 (4.2% upside from the current price).  Given, risk heavily outweighs reward in being short GLD at the current price on the immediate-term TRADE duration.

 

On our intermediate-term (3 months or more) TREND duration, GLD is bearish with resistance at $165.91.  We will continue to trade gold with a bearish bias as long as it remains broken on our risk management durations, and the current inverse correlations with the USD persist.  Gold currently has a -0.91 correlation to the US Dollar Index - the highest that correlation has been among all durations up to three years.

 

Trade Update: Covering GLD - gold km

 

Kevin Kaiser

Analyst


RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS

Initial Claims Rise ... Expect More of the Same

The headline initial claims number rose 17k WoW to 381k (up 15k after a 2k upward revision to last week’s data).  Rolling claims fell 5.75k to 375k. On a non-seasonally-adjusted basis, reported claims rose 69k WoW to 490k.  

 

We've pointed out for the last several weeks that in the last two years claims have shown a tailwind from week 36 through year-end, and then tend to reverse that trend in the opening 1-2 months of the new year. This morning's print is consistent with that trend. That said, the larger, secular trend in place at the moment is ongoing improvement in claims. This is obviously a tailwind for lenders from a delinquency standpoint. That said, it will be dwarfed by the elimination of reserve release that will rear its head in 4Q earnings when companies start reporting in two weeks. We often look at Discover as a leading indicator on this front as they're an off-cycle reporter (November fiscal year-end). Discover's quarter told the tale quite clearly. Although they beat estimates and generally reported solid metrics, the optical sequential slowdown driven by the absence of reserve release led the stock to get sold. Don't be surprised when the impact is far greater at the big banks. 

    

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - Rolling

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - raw2

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - NSA chart

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - S P claims

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - fed and claims

 

2-10 Spread

The 2-10 spread tightened 2 bps versus last week to 165 bps as of yesterday.  The ten-year bond yield fell less than 1 bp to 192 bps.

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - 2 10

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

RISING CLAIMS SHOULD BECOME A TREND FOR THE NEXT FEW MONTHS - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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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 80.33%
  • SHORT SIGNALS 78.49%

Simple Explanations

If you can’t explain it simply, you don’t understand it well enough”

– Albert Einstein

 

For some reason, finance and science maintain a rather unique fascination with generating overly complicated and confounding verbiage to describe fairly straightforward and pedestrian concepts.  In my 30 years, I have had the lamentable pleasure of being a professional in both vocations. 

 

Before joining HEDGEYE, I was a molecular biophysicist.  I’m still not sure I can tell you exactly what that is, but it sure sounds impressive.  I’ve also been a dishwasher, business owner, carpenter, physiologist, bartender, Ph.D researcher, industrial sheet metalist, and successful self-taught trader.  Wandering philanderer? I like to think of it as Generation Y’s version of a renaissance man. 

 

Across disciplines, many times a process that, superficially, appears complex is really only the summation of a series of simple questions asked and answered.  The trick, of course, is in asking the right questions and then having the ability to successfully source the correct data as inputs for the model.

 

In finance and science, it just so happens that the canonical blueprint for increasing scarcity values calls for the addition of unnecessary technical jargon and intentional obfuscation of the details around the process in a way that makes the output appear overtly complex and thus, through the trappings of behavioral psychology, more desirable.

 

So, as the edifice of Wall street 1.0 has continued to implode under the weight of institutionalized, levered conventions of its own creation, on the healthcare research side, we’ve been working to develop an investment research process that successfully functions outside of the legacy construct of management one-on-one’s, recycled expert opinion, and valuation-in-isolation and intuition driven decision making. 

 

At the heart of the HEALTHCARE MACRO modeling effort has been the analysis and integration of government data sets which have proven effective in helping us create a quantitative, independent, and thus far, successful process for tracking real-time consumption across the health economy broadly and major sub-industries specifically.  Longer-term, healthcare consumption growth continues to be defined by domestic demographic trends. 

 

From a macro level, understanding how this approach functions from a practical investment research perspective can be explained fairly simply.  Broadly speaking, the consumption curve for healthcare services across the age continuum is fairly static with elastic demand occurring largely at the margin.  Given fixed census trends, if one is able to determine per capita consumption by age for a particular procedure or service type, a reasonable estimate for the underlying growth trend can be derived.

 

Having a quantifiably justified estimate for underlying organic growth, finding higher frequency data sets that accurately reflect real-time demand and solving for the shorter-term impacts of larger, more acute factors such as employment/insurance status makes it possible to both identify and forecast cyclical growth inflections as well.  Conviction is found where the demographic, per capita consumption by age, and the higher frequency macro data function to drive company model inputs that back test with strong correlations across durations. 

 

Taking a TAIL perspective on the healthcare sector, as an example, let’s take a short walk down demography lane and examine the consequences of the existent, secular domestic demographic shift and some of the resulting longer-term investing implications. 

 

Given that the consumption curve for healthcare services across age buckets remains relatively fixed, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly.  Therefore, it is important to understand that the period of greatest acceleration in per capita healthcare consumption comes as people age into their 50’s. Equally important is the fact that this 50-64 year old subset is covered, in large part, by high margin, commercial insurance.

 

The largest acceleration in medical consumption in combination with high margin insurance, places the 50-64 year old demographic as the heart, and profit center, of the health economy. This demographic is now in a secular decline (although the continued acceleration in employment for this age bucket remains a near-term positive for healthcare consumption). In fact, extending current census trends and per capita healthcare consumption by age out over the coming decades reveals a secular bear market for healthcare that won’t see its trough until 2024! 

 

This trend has definite and specific consequences for the hospital industry as well.  With roughly 30 cents of every healthcare dollar flowing through the hospitals, the industry sits at the heart of the healthcare economy and is inextricably beholden to meaningful shifts in utilization and service consumption growth.

 

At present, the current demographic setup is one which will see the 45-64 year old age group graduate into Medicare at a faster rate than those underneath can fill the void.  In other words, the spread between those aged 45-65 and those aged 65-85 will reach its narrowest point in 2011 before embarking on a protracted expansion where hospital margins will face a secular decline as negative margin Medicare volumes grow faster than commercial admissions.

 

In this scenario, we continue to believe high-tech, med-tech remains the relative loser as hospitals focus cost initiatives across controllable supply expenses.    ZMH remains our favorite long-term short in the space.

 

The outlook isn’t completely dismal, however.   The 30-40 year old demographic will continue to accelerate for the better part of the next decade.   Here, women’s health and companies levered to birth volumes remain favorably positioned to benefit from this secular trend.  Moreover, women’s health, along with dental and domestic U.S. physician office exposure, continues to sit positively across a number of our strategic TRADE & TREND themes as well.

 

(Please email  for more on our ZMH specific fundamental and demographic work, additional detail on where we’re targeting long exposure, or further detail on how we marry the HEALTHCARE MACRO process with our fundamental, company research.)

 

As the transparency curtain gets pulled further back on the collective global balance sheet, staring into the mirror of a leveraged overconsumption past will continue to reveal some painful realities.  Growth will remain impaired as developed economies deal with structural debt/deficit issues.  Beta will continue to auger to the latest centrally planned headline, and government intervention will continue to sponsor market volatility.

 

And while Euro & Bureau – Crats continue to hold summits and engineer soundbytes in a flagging attempt to placate markets looking for tactical solutions to structural problems, we’ll continue to evolve our own process. 

 

It’s not perfect, but it has worked a lot more than it hasn’t – and it’s repeatable. 

 

Buy Low. Sell High. Repeat.  Pretty Simple. 

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Italy’s MIB Index, and the SP500 are now $1, $106.01-107.93, $1.28-1.30, 14,466-15,094, and 1, respectively.

 

Christian B. Drake

Analyst

Hedgeye Healthcare

 

Simple Explanations - Demographic Trends 122911

 

Simple Explanations - hvp


CLIENT APPRECIATION PARTY 01/12/2012

Please join Anna, Felix, and me and the rest of the Hedgeye team for a New Year celebration party in New York City.

 

 

 

 CLIENT APPRECIATION PARTY 01/12/2012 - a


SHLD: Not a One Off

 

The preannouncement out of SHLD has set the stage for what we expect to be several negative preannouncements over the coming weeks. Sales are coming in lighter than expected at both Sears and Kmart, but we think that while SHLD has its own challenges (and they are many), it’s not the only retailer recording lighter than expected sales this holiday season. In addition, it adds to our view that price competition in the mid-tier channel is becoming increasingly more aggressive heading in the 1H of F12.


The struggles at SHLD are hardly an overnight development. At the annual shareholders meeting in May, Eddie Lampert (CEO) addressed the need to optimize the company’s real estate/footprint by increasing its allocation to apparel as well
as exploring lease options (e.g. sub-divisions) among other alternatives.

It should come as no surprise then that apparel was a relative outperformer in the company’s QTD results, which were hit particularly hard by weakness in consumer electronics and home appliances – categories in which SHLD has struggled to maintain share. In addition, the company announced it will also be closing stores.


All in, these measures are not the kind of seismic strategic shifts that one would expect in order to turn a retailer with over $40Bn in annual sales and 4,000+ stores from its current downward trajectory of contracting profits. In fact, we think its
just the beginning of more significant actions to come in 2012.


In the meantime, here are a few thoughts on some the broader implications of the SHLD announcement:

  • Kmart comps are running down -4.4% QTD reflecting among other things (i.e. weaker consumer electronics and home appliance demand) lower layaway sales. With WMT now offering layaway on toys and electronics for the first time this year, it appears that heightened competition is taking its toll. For perspective, if we assume that half of Kmart’s comp decline was due to a lost layaway sales equating to ~$300mm and we assume a complete shift of these sales over to WMT, it would add roughly 50bps to WMT’s domestic comps in Q4. A notable contribution in light of +2% comp guidance.
  • Closing 100-120 Kmart and full-line Sears Stores is a rounding error when considering the company’s 4,000 store base. With the average box size of a Kmart store at 93,000 sq. ft. and Sears  at 133,000 sq. ft., competitors of similar size (i.e. JCP at 101,000 and TGT at 134,000 sq. ft.) will likely see additional pressure as it relates to real estate optionality. Less of an issue for TGT, but a key consideration for JCP with Johnson reviewing any and all options in an effort to transform the retailer. 
  • In addition, with apparel one of the few bright(er) categories for SHLD, we expect the retailer to get more aggressive in attracting branded content as it looks to boost its portfolio. JCP is in the midst of a similar initiative. As such, we expect heightened competition for brands to result in higher acquisition costs. This is not really new news, but incrementally worse on the margin given SHLD’s reliance on apparel performance.
  • Reducing inventory by $500-$580mm from peak 2011 levels = more price competition at the mid-tier. Between
    Sears and Kmart, SHLD accounts for ~5-8% of the ~$180Bn domestic apparel industry and roughly 15% of the mid-tier segment. While $500mm accounts for less than 1% of the mid-tier, it’s yet another factor that will weigh on prices and margins in the 1H of F12. The reality is that SHLD is not going to get there without promotionally induced sales
    activity.

With retailers set to report on Holiday sales next week coupled with ICR the following week, we suspect SHLD won’t be the only company in retail preannouncing between now and then.

 

SHLD: Not a One Off - SHLD Sent

 

SHLD: Not a One Off - SHLD SIGMA

 

SHLD: Not a One Off - SHLD RNOA

 

Casey Flavin

Director



 


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