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AETNA: The Government Healthcare Play

Takeaway: Healthcare providers are gearing up to take advantage of the influx of Medicare/Medicaid customers.

Consolidation in the healthcare sector is on everyone’s mind today with Aetna (AET) buying Coventry Healthcare (CVH) for $42.08 a share – a 20.4% premium. Our Healthcare Sector Head Tom Tobin is not surprised as he sees further consolidation in the industry as a dominant trend going forward. This morning, Tobin noted:

 

• Consolidation and government revenue are the last reliable sources of growth, but ultimately lower quality given the volatile political landscape.

• AET’s presentation promotes increased government sourced revenue from Medicare and Medicaid.

• Forecast accretion is meaningful, as are costs, and extends for several years to 2015.

• Only a few consolidation candidates remain: HNT, HUM, CI

 

 

AETNA: The Government Healthcare Play - AET healthcare

 

The real takeaway here is that Aetna is looking to make a Medicaid/Medicare play. Big government is big business. The company thinks that the Affordable Care Act (aka Obamacare) is going to stick around. This reform will cover millions more people under the government Medicaid umbrella, which bodes well for Aetna and others who are deriving revenues from Washington.

 


HUGE WEEK IN MACAU

Takeaway: August GGR trending +4-10%

Average daily table revenue jumped to HK$996 million from HK$757 million last week and up 47% YoY.  By monthly sequential comparison, ADTR was HK$735 million in July.  As a result of the strong week, we are raising our full month August GGR projection to $HK25.0-HK26.5 which would represent YoY growth of 4-10%.  We continue to believe that July was the near-term low in terms of YoY growth and growth will accelerate sequentially in August and September.

 

HUGE WEEK IN MACAU - MACAU1

 

It’s unclear whether hold played a major role in the week’s strength.  We have heard anecdotally that the Mass floors have been very busy.  Additionally, the junkets appear to be pretty optimistic about the recent activity.

 

In terms of market share, MGM and MPEL experienced the biggest jump in market share over the past week.  However, both companies are close to recent trend.  LVS’s share dipped from last week but is still above its recent trend as is WYNN.

 

HUGE WEEK IN MACAU - MACAU2


Faceplant

FACEPLANT

 

 

CLIENT TALKING POINTS

 

PLAYING GAMES IN EUROPE

Last week, European credit default swaps are tightening because Germany’s Angela Merkel came out and spun some positive commentary about the situation in the Eurozone. In these dog days of summer when everyone is on vacation (including volume and volatility), a little bit of discourse is all it takes to get the market excited. Despite European bank swaps widening across the board (Spain, Greece, Italy, etc.), participants are generally breathing a sigh of relief as Europe all of a sudden becomes “better.” The EUR/USD remains at $1.23. Any higher, and it’ll be a bull case. Break $1.23 and in particular, $1.225, and you have a bear case.

 

 

THE NEW ISSUE: BONDS

Bond issuance in 2012 is through the roof – it’s like banks and corporations are reproducing like bunny rabbits and the offspring is multi-year paper. Everyone’s doing it, too and with good reason. Refinance with the Fed’s “extended” low rate environment, crank out muni bonds for projects which in turn create jobs. When money is cheap, might as well use it. Looking at the investor  side of things, people are desperately chasing yield. They’ll buy anything offering more than 100 basis points it seems like. When your savings account has been collecting cobwebs for the past 5 years and CDs are as pointless as the media format with the same acronym, you need to get creative. For an idea of just how crazy the bond market has become, check out these facts from our research team:

 

Firstly, in the municipal bond market in the United States, as of May, issuance is up 70% compared to the same period in 2011.  Secondly, in the U.S. corporate bond market issuance is up 5% year-over-year, but has seen a serious acceleration in the last few months with investment grade issuance up 54% and high yield up 30% in July 2012.”

 

 

FACEPLANT

We won’t gloat long here, especially after booking 7 consecutive winning trades last week in the Virtual Portfolio. Facebook (FB) stock tanked last week. On Thursday, Keith went on CNBC’s Fast Money Halftime Report and basically slammed Facebook, saying it could go lower. “Don’t try to catch a falling knife,” he said. Some guests disagreed and said they’d be buying more at “these levels,” which are the time was around $20-$20.50. Friday the stock fell even further and closed at $19.05 a share. Keith thinks it’s going lower and guess what? It probably will.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:   UP

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Must. Invent. Products. For. Quantitative. Arbitrage. NASDAQ to create 150,000 Indexes this fall: tinyurl.com/9umevyu $$ #valueadded” -@SalArnuk

 

 

QUOTE OF THE DAY

“Money talks, so listen to it.” – 10cc, Art For Art’s Sake (1975)

                   

 

STAT OF THE DAY

$5.7 billion. The amount Aetna (AET) is offering to buy Coventry Health (CVH) for in cash and stock. The move will boost Aetna’s foray into Medicaid and other government-backed programs.


Early Look

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Bonds. James Bonds.

“This is a serious problem, although it is not as dramatic as sort of an epidemic.”

                -James Bond

 

Author Ian Fleming created James Bond, code named 007, in 1953 and subsequently featured him in twelve novels and two short story collections.  Bond was an intelligence officer in the Secret Intelligence Service and a Royal Naval Reserve Commander.   Fleming based this fictional character on many of the intelligence officers and commandos he met during World War II.  Interestingly, the name James Bond came from American ornithologist James Bond, a Caribbean bird expert and author of the definitive field guide Birds of the West Indies. (Don’t worry, I haven’t read it either.)

 

Over the course of the Fleming’s twelve novels and the twenty-two James Bond movies (the highest grossing series ever at $4.9 billion), Bond utilizes his astute intelligence gathering capabilities, combined with various gadgets, including an exploding attaché case, to save the world from a myriad of threats.  If Bond were a research analyst studying today’s markets, the U.S. bond markets may be considered an emerging epidemic in his analytical purview. 

 

Even if not an epidemic, bond issuance levels this year have been staggering.   Firstly, in the municipal bond market in the United States, as of May, issuance is up 70% compared to the same period in 2011.  Secondly, in the U.S. corporate bond market issuance is up 5% year-over-year, but has seen a serious acceleration in the last few months with investment grade issuance up 54% and high yield up 30% in July 2012.  Finally, according to Lipper Research, bond ETFs have seen the eighteenth consecutive month of net inflows.

 

So, is there is a bond epidemic / bubble?  Given the stance of the global central banks to keep interest rates at artificially low levels, it is likely not an epidemic that is going to end in the short term.  In fact, we are actually aggressively allocated to U.S. government bonds as we think equities are at an extreme and growth is continuing to slow.  Certainly though, James Bond, the research analyst, would be gathering his intelligence and watching and waiting for an opportunity to sell the high yield bond market.

 

As we show in the Chart of the Day below, which we have aptly named, From the Central Banks with Love, the high yield market is at a generational low in yield.  Obviously when studying a corporate bond, there are a number of factors to analyze in determining whether it is overvalued or undervalued.  Certainly, the overall interest rate environment is critical, but ultimately the prospects of the company are the drivers of a junk bond’s value, especially given the bond’s inferior position in the capital structure.  Therefore, given that yields in the junk bond market are literally at generational lows, it implies that default risk is also close to an all-time low.  Personally, I’d need a few James Bond-esque martinis before I’d believe that last point to be an accurate assessment of default risk.

 

Speaking of bonds, Der Spiegel reported this weekend that the ECB may set a specific threshold to cap periphery bond yields at its meeting in September.  The immediate reaction in the European sovereign debt markets is, not surprisingly, positive as credit default swaps are trading tighter across the board.  As well, the Spanish 10-year is back down to 6.19%.  Even if positive in the short term, broad intervention in a large market speaks to another epidemic, the epidemic of government intervention in the free markets.  Random intervention by governments does not build confidence in the markets.  And confidence is what is sorely missing in the European debt markets.

 

In the latest sign that global growth is slowing, the Shanghai Composite hit a fresh three and a half year low this morning.   The Chinese equity markets may not always garner headlines in the U.S. financial media, but nonetheless China remains the engine for global growth and as China goes so goes marginal global growth.  Thursday will give us some important insights on Chinese and global growth as flash PMIs are reported for China, Europe and the United States.

 

Keith is back in Thunder Bay this week taking some time off with his family ahead of what is going to be a busy next few months at Hedgeye, so we will be highlighting some of the key calls from our broader research team this week.  This will be kicked off this morning with our Financials Sector Head Josh Steiner and our Retail Sector Brian McGough leading our morning client call at 830 a.m.  Email if you like to ask them any questions, or get access to the call.

 

Although we are currently not short it in the Virtual Portfolio, one of McGough’s favorite short ideas has been J.C. Penney.   We’ve been consistently short JCP for the past fifteen months and will likely look to re-short when we see our level.  McGough had the following to say after JCP’s recent earnings announcement:

 

“We won't bother with the full financial review. Comps down -22%, dot.com down 33% and a ($0.67) loss pretty much sums that up.

 

But that's the past. We invest for the future. One thing that matters in investing for the future is believing in who is running the ship. We initially figured that Johnson's Apple halo would have lasted 18-24 months. But about 5-minutes into his commentary today, his credibility stood up, ran out the door, and got hit by a bus.

 

Last quarter, his level of arrogance around communicating the message was bothersome. He spoke to the Street like we were toddlers, or at least retail novices. He glossed over the bad, and played up whatever positive statistic he could find. A JV mistake for a new CEO.”

 

As it relates to CEO Ron Johnson at J.C. Penney, or really any CEO of a large public company, perhaps Ian Fleming said it best when he wrote:

 

“Once is happenstance. Twice is coincidence.  Three times is enemy action.”

 

Indeed.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $110.89-115.21, $82.20-82.89, $1.22-1.24, 1.72-1.87%, and 1, respectively.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Bonds.  James Bonds. - Chart of the Day

 

 

Bonds.  James Bonds. - Virtual Portfolio

 


Brave Bears

This note was originally published at 8am on August 06, 2012 for Hedgeye subscribers.

“Your father doesn’t believe in magic.”

-Elinor

 

This weekend I took my son Jack to Pixar’s latest animation, “Brave.” The original story, set in the 10th century Scottish highlands, was called “The Bear and The Bow.” Since the McCullough Clan genuinely loves bears, we thoroughly enjoyed the movie.

 

Brave’s King Fergus doesn’t like bears anymore than modern day Eurocrats do. In fact, the King’s entire life is centered around fighting one demon bear in particular by the name of “Mor’du.”  

 

I won’t ruin this European short squeeze (or the rest of the movie for you), but having gone to French Canadian school until the 5th grade, I must give you a hint – “mordu”, en Francais, is the past participle of “death.”

 

Back to the Global Macro Grind

 

No worries, no short sellers from New Haven, CT actually died in Friday’s latest no-volume squeeze (we cut the SHORTS in the Hedgeye Portfolio to only 5 by Friday morning). Evidently, neither did as many people perish in the government’s now infamous “birth/death adjustment” for US payrolls.

 

In today’s Chart of the Day, Darius Dale contextualizes the July 2012 Jobs Report with a picture that nets out the effects of the NSA’s “birth/death adjustment” from the NSA Non-Farm Payroll month-over-month figure.

 

In addition to that picture telling you 1,000 words, here are some other quick hits on the jobs report:

  1. For June (last month’s report), the government revised non-farm payrolls down to 64,000 vs 80,000 prior
  2. For July, the “birth/death adjustment” of +52,000 jobs was the highest “adjustment” on record (since July 2000)
  3. For July, the actual unemployment rate ticked up +10bps (month-over-month) vs June to a very elevated 8.3%

But, but… provided that you believe in magic during an Election Year, America’s jobs crisis is over and it’s time to buy stocks with both hands at VIX 15, again. *Note, every time you’ve bought US Equities at VIX 14-15, in the last 5 years, you’ve been killed.

 

Killing the shorts is cool, until it isn’t. Don’t forget that short covering is one of the only ways left for these markets to go up. Inflows into US Equities remain dead. So is trust.

 

While it was funny to see the perma-bulls of the manic media blame Europe for the April-June US stock market declines, I don’t see too many of these cats championing Europe as the reason for a US stock market rally. #weird

 

Looking at the short squeezes we’ve seen off the June 2012 lows, here are some noteworthy ones:

  1. Oil (Brent) = +23%
  2. EuroStoxx50 Index = +15%
  3. SP500 = +8.7%

Centrally planned black magic or not, Americans of the 30th Olympiad better be thanking Europe for hosting one mother of a short squeeze in commodity and stock prices, even if the volume of fans is low.

 

The commodity side of this Reflation Rally to lower-highs is worth wasting a few more bullets on:

  1. CFTC (US Commodities Futures Trading Commission) contracts ripped another +5% wk-over-wk to 1.22 million contracts
  2. Agricultural bets (net long contracts) were up another +3% wk-over-wk at a new high of 884,477 contracts
  3. Gold bets put on their biggest wk-over-wk move (+36%) since November of 2008 (96,200 contracts)

Got Inflation Expectations? Brooksley Born, do you hear her now?

 

How about causality (central planning policies) and correlation (US Dollar Correlation Risk to stock and commodity prices)? Yep, Obama and Axelrod understand this full well. So did Bush and Bernanke. If you want commodity and stock market inflations to re-flate those political chances, you just need to spend like mad and debauch that US Dollar.

 

With the US Dollar down another -0.4% last week (down for 2 consecutive weeks), this keeps Oil (and Energy stocks) leading the latest charge. Oh, wait. The US stock market is down 8 of the last 11 days,  and the Russell2000 was down another 1% last week…  

 

So you better be either a Brave Bear when covering those shorts on Thursdays, or just get right loaded to the gills in commodity leverage and, at the same time, say there’s no inflation at the pump. Jack’s Dad tells him magical fairy tales at bedtime too.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1591-1624, $106.05-110.84, $82.06-82.95, $1.20-1.23, 779-791, and 1368-1406, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Brave Bears - Chart of the Day

 

Brave Bears - Virtual Portfolio


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 78.51%
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