• run with the bulls

    get your first month

    of hedgeye free


Simple Explanations

This note was originally published at 8am on December 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

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 sales@hedgeye.com  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 $1537-1568, $106.01-107.93, $1.28-1.30, 14,466-15,094, and 1240-1260, respectively.


Christian B. Drake


Hedgeye Healthcare


Simple Explanations - Demographic Trends 122911


Simple Explanations - hvp

Believe The Evidence

“A wise man proportions his beliefs to the evidence.”

-David Hume


If there’s one thing that Hume, Hayek, and Hedgeye may have had in common, it’s that free-market pricing bears evidence of the truth. That’s my 2012 Global Macro Strategy - Believe The Evidence.


For Global Macro investors managing risk across asset classes in 2011, evidently US Treasuries outperformed mostly everything else. With Global Growth Slowing and the 10-year UST Yield dropping -43% on the year (from 3.31% to 1.88%), America’s long-bond zoomed higher as the MSCI All-World Stock Index and the 19 component CRB Commodities Index dropped -7.2% and -8.1% respectively.


In the USA, primarily due to a +9.9% rally in the US Dollar Index (from testing a 30 year low post QE2), the last 8 months of 2011 were very different from the first 4 months of 2011. While US Dollar strength may have been what Keynesians fear-mongered as a “deflationary force” on certain stock and commodity market prices, it provided the tail-wind needed for the largest part of the US Economy – Consumption.


Believe The Evidence: C + I + G (EX – IM) = GDP. And 71% of the US GDP number comes from the C, Consumption.


From a Q1 of 2011 low of 0.36% US GDP growth (and an unemployment high of 9.2%), US GDP growth recovered to 2.0% by Q3 of 2011 (and unemployment fell to 8.6%). *Note to Bernanke: stay out of the way, it’s working.


Therefore, the most contrarian bullish call we can make on US GDP Growth in 2012 is that the US Dollar continues to strengthen. Not to be confused with what the US stock market or commodity markets do, employment and economic growth is what really matters. Any sniff of a QE3 implementation will drive inflation higher and stymie whatever real (adjusted for inflation) growth Americans can look forward to.


Back to the Global Macro Grind


With 13 consecutive booked gains in the Hedgeye Portfolio into the final day of the 2011, I’m feeling as good as I can feel about our risk management process. The goal in December was neither being bearish or bullish – it was simply to keep moving as prices did and to be right.


Rather than give you a reckless wire-to-wire “2012 Outlook” call this morning, I’ll give you our positioning (Hedgeye Asset Allocation Model):

  1. Cash = 61% (down from 70% before last week’s Global Equity and Commodity selloff)
  2. Fixed Income = 18% (Long-term Treasuries and a Treasury Flattener – TLT and FLAT)
  3. Int’l Currency = 12% (US Dollar – UUP)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. Int’l Equities = 3% (China – CAF)
  6. Commodities = 0%

FYI: I haven’t worked alongside or know one top performing Portfolio Manager from the 2008-2011 period that deals with his or her Portfolio Strategy on a trivial duration of exactly 12 months starting January 1st.


Leading Portfolio Managers of the Wall Street 2.0 era have learned to be:

  1. Multi-duration
  2. Multi-factor

As the evidence changes, they do.


Absorbing all that’s new in my trusty notebook this morning, here’s how I think about the evidence in market pricing related to our aforementioned positioning:


1.   TLT and FLAT: Whether I look at the Bloomberg Consensus US GDP estimates or the 10-year trading at 1.94% this morning, it’s all signaling the same thing to me again this morning. Consensus has finally appropriately priced in the 2011 Growth Slowdown and now we can deal with Growth’s Pricing Signals day-to-day. A breakout > 2.03% on 10-year yields would have me sell TLT and FLAT.


2.   UUP: Strong Dollar = Strong Consumption = Stronger Employment. Rinse and Repeat. Whoever (Obama or his Republican challenger) figures this basic economic relationship out in 2012 is going to have a good shot at becoming the next President of the United States. US Dollar Index is in a Bullish Formation with its first line of immediate-term support = $79.37.


3.   XLY: There should be no confusion as to why I had a 0% asset allocation to US Equities in either July of 2008 or July of 2011. I fundamentally Believe The Evidence that debauching the dollar kills US Consumption (and confidence). Strengthen and stabilize the currency of a country and the volatility of its economic cycle (and how markets price it) will break down; equities then break-out.


4.   CAF: Pardon? Yep. TimeStamp us as being long Chinese Equities as of 3:19PM on December 29th, 2011. Call us the scions of “valuation” intellect buying a legitimately “cheap” Global Equity market or just call us names, we’ll either not sell this position for a few years or we’ll sell it tomorrow and smile either way. Strong Dollar = Deflating The Inflation (bullish for Chinese Consumption).


5.   COMMODITIES: Zero means zero. With the Gold price up for 11 consecutive years and Oil prices up for the last 3 in a row, I have zero problem calling a 0% asset allocation to this asset class as contrarian right here and now.


While Cyprus, Greece, and Egypt seeing their stock markets evaporate on the order of -72%, -52%, and -49%, respectively in 2011 has our eyes open to “value” opportunities outside of Chinese Equities, this morning there’s reason to believe that cheap can get cheaper. Poor Cyprus is down -4% to start 2012, and I’m going to Believe The Evidence rather than believing I’m smarter than Mr. Macro Market.


My immediate-term support and resistance ranges for Gold (covered our short position last week), Oil (Brent), and the SP500 are now $1, $107.86-110.26, and 1, respectively.


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


Believe The Evidence - Chart of the Day


Believe The Evidence - Virtual Portfolio

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


TODAY’S S&P 500 SET-UP – January 3, 2012


SQUEEZE – in both Asian and European Equity squeezage (yesterday + today) there actually was some economic data supporting it; China (which I bought on last day of 2011) printed a 50.3 on its PMI for DEC and Germany’s unemployment rate dropped in DEC to 6.8% vs 6.9% last month, with both economies proving you don’t need Keynesian fear-mongering to generate a solid employment base - KM


As we look at today’s set up for the S&P 500, the range is 21 points or -0.68% downside to 1249 and 0.99% upside to 1270.  






THE HEDGEYE DAILY OUTLOOK - daily sector veiw


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  -154 (-1893) 
  • VOLUME: NYSE 588.05 (10%)
  • VIX:  22.40 +3.31% YTD PERFORMANCE: N/M
  • SPX PUT/CALL RATIO: 1.49 from 2.80 (-46.77%)



  • TED SPREAD: 57.80
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.03 from 1.97   
  • YIELD CURVE: 1.89 from 1.91


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 10:00am, Construction Spending, Nov., est. 0.5% (prior 0.8%)
  • 10:00am, ISM Manufacturing, Dec., est. 53.2 (prior 52.7)
  • 11:30am: U.S. selling $29b 3-month bills, $27b 6-month bills
  • 2:00pm, FOMC Minutes
  • UK Dec Manufacturing PMI 49.6 vs consensus 47.4 and prior revised to 47.7 from 47.6
  • Germany Dec Unemployment Rate sa +6.8% vs consensus +6.9% prior +6.9%
  • Germany Dec Unemployment Change sa (22K) vs consensus (10k) prior (20k)
  • China December PMI 50.3 vs 49.0 seq. 


  • Mitt Romney vying with Rick Santorum, Ron Paul for top spot in Iowa caucuses; other rivals may see campaigns end
  • French President Nicolas Sarkozy to meet with German Chancellor Angela Merkel in Berlin Jan. 9
  • EU says no decision has been made yet on financial assistance to Hungary -- wires




COMMODITIES – as important to watch as European equities as they test their TAIL lines of resistance in early 2012 will be Copper and Oil testing their TAIL lines of resistance of $111.61 (brent) and $3.99/lb, respectively. 

  • Global Growth Slows to 3.9% as O’Neill Sees Aging Labor in BRICs
  • BP Seeks Recovery of All Gulf Spill Costs From Halliburton
  • Hedge Funds Raise Bullish Bets by Most in 16 Months: Commodities
  • Biggest Hedge Fund in Ships Sees Frozen Gas Beating Oil: Freight
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Gas Bears Trim Short Bets as Prices Dip Below $3: Energy Markets
  • Gold Advances as Iranian Nuclear Concern Increases Haven Demand
  • Chile’s Codelco Exercises Buy Option on Anglo Copper Unit
  • Copper Paces Advance in Metals as China’s Output Boosts Outlook
  • Iron Ore Prices May Average 11% Lower in 2012, IG Markets Says
  • Australian Manufacturing Shows First Expansion in Six Months
  • Caterpillar, Rio Lock Out Canada Workers as Contract Talks Fail
  • Mewah Invests in Indonesia Refinery to Diversify, CFO Says
  • Polyus Leads Gain as Oil Rises for Third Year: Russia Overnight
  • Sugar Mills in India Seek Time to Export as Surplus Cools Demand
  • Copper Rises as Manufacturing Gauges May Signal Stronger Demand
  • Lee Says ‘New Era’ Possible After N. Korea Calls Him Traitor
  • S. Korean Agency to Boost Metals Buying 47% to $461 Million
  • CDS Dealers to Judge If Sino-Forest in ‘Credit Event,’ ISDA Says

THE HEDGEYE DAILY OUTLOOK - daily commodity view





EUR/USD – get the US Dollar’s daily direction right and you’ll get most things beta right; that’s not a perpetual correlation, but it certainly still matters this morning. Euro’s new TRADE range = 1.28-1.31, so we’re dead cat bouncing this thing right back up to the top end of the range and Gold (which has a stunning -0.91% inverse cor to USD right now) pops for a +1.5% gain (covered our GLD short at $1538/oz)


THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance




  • Global Growth Slows to 3.9% as O’Neill Sees Aging Labor in BRICs
  • Biggest Hedge Fund in Ships Sees Frozen Gas Beating Oil: Freight
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Aldar Soars on $4.6 Billion Abu Dhabi Bailout: Islamic Finance
  • Iran Warns U.S. Against Sending Aircraft Carrier Back to Gulf
  • Gold Advances as Iranian Nuclear Concern Increases Haven Demand
  • Egypt Holds Final Round of Vote as Mubarak Faces Prosecutors
  • Dana Gas Bond Yield Jumps Most in Two Weeks Ahead of Meeting
  • Blackwater Is Back as U.S. Spending to Hit $8 Billion in Iraq
  • Gold Climbs to One-Week High as Iran Makes Nuclear Rod
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Banque Saudi Fransi Seeks to Raise Capital 25% Via Bonus Shares
  • U.A.E. Interbank Rate Reaches 5-Month High as Loans Top Deposits
  • Dubai Plan to Halve 2012 Deficit Urges Bond Upturn: Arab Credit
  • Dana Board to Discuss Egypt, U.A.E. Project Financing on Jan. 4
  • Iran Military Warns US Aircraft Carrier to Stay Away From Persian Gulf
  • Iran military warns US aircraft carrier away from Gulf
  • Greece Looking For Alternatives to Iranian Oil, Kathimerini Says




The Hedgeye Macro Team

Howard Penney

Managing Director


And January should accelerate from December’s growth rate.



Final December GGR grew 25% YoY, close to the midpoint of our most recent projected range of HK$22.5-23.5 billion.  However, at HK$22.9 billion, GGR was higher than our initial projected range of HK$21.5-22.5 billion.  We don’t yet have the market shares and property details but investors should be satisfied with the solid finish to the year.


Looking ahead, January figures to be a very strong month.  Most of the Chinese New Year celebration will occur in January of 2012 versus February of 2011.  Moreover, January of 2012 contains an extra weekend day relative to last year.  We estimate YoY growth of 32-40% (+7% MoM) for the first month of the year.

The Week Ahead

The Economic Data calendar for the week of the 2nd of January through the 6th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - call 1

The Week Ahead - call 2

The Week Ahead - call 3

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.