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Yale Hockey and the Frozen Four

Today we'd like to bring your attention to a Bloomberg article written about the Yale Hockey Team. Hedgeye CEO Keith McCullough was captain of the team in the late 1990s and many other Hedgeye employees were on the team at one point in time. 

 

With Yale advancing to the "Frozen Four" and a shot at winning the championship after being seen as the underdogs who didn't have a shot this year, it makes sense that everyone following the team is filled with excitement. Keith was quoted in the Bloomberg article, discussing the challenges the team faced on the road to the championship.

 

"It’s like watching David versus Goliath,” McCullough said in a telephone interview with Bloomberg. “It’s pretty amazing to see Yale beating teams like Minnesota, which has 15 players drafted by NHL teams, while Yale doesn’t even give athletic scholarships.”

 

Both hockey and Yale are core components of our company's esprit de corps. Both Director of Research Daryl Jones and Managing Director Bob Brooke also played hockey at Yale with Brooke going on to play in the NHL for the New Jersey Devils and the New York Rangers.

 

“I am encouraged by the Yale Hockey Team once again proving to the larger Yale community, and all of the Ivy League and more, that being academically qualified and athletically gifted are not mutually exclusive," said Brooke.

 

"Life comes down to a few special moments and this will be one of those for the 20 guys on the ice tonight," said Jones as he geared up for the big game.

 

You can read the full article on Bloomberg by clicking on the following link: http://mobile.bloomberg.com/news/2013-04-11/yale-s-betts-joins-hockey-alumni-on-bulldogs-frozen-four-road.html


Measuring Birth Trends

Baby Steps to Giant Steps

Health Care sector head Tom Tobin walked our institutional clients through his detailed analysis of birth trends today in a presentation titled “US Births: Is the Worst Decline in 40 Years About to Turn?”  Tobin’s work indicates the US is on the verge of an upturn in the birth rate.  While it’s too early to gauge the scope and intensity of the increase, even a small uptrend has implications for health care stocks, and for the broader economy.  

 

We haven’t seen anyone else doing this kind of demographic analysis.  By the time everyone else on Wall Street is reporting on increases in the birth rate, it will be old news.  Today, thanks to Hedgeye and Tom Tobin, it’s fresh.  Read on. 

 

Measuring Birth Trends

Tobin and his team base their work on a proprietary survey of OB/GYN practitioners across the country.  The core survey focuses on four metropolitan areas representing diverse housing and employment trends: Houston, Denver, Tampa, and Cleveland.  

 

Houston, the most robust of the four, weathered the recent Great Recession best, suffering the least decline in employment and housing.  Cleveland, at the other end of the spectrum, continues to show lackluster employment growth and weak housing demand – and correspondingly weak birth rates.

 

The team surveyed established OB/GYN practices who see an average of 104 pregnancies a month.  Perhaps unsurprisingly, the relative strength or weakness of the local economy largely corresponds to maternity trends.

 

Economic cycles have had a demonstrable impact on birth trends.  Tobin points to economic downturns in the 1980’s and early 2000’s that triggered declines in the birth rate.  At the same time, Tobin says positive economic factors presage increased birth rates.  Increased employment drives birth rates because people feel more confident about starting a family when they are earning a living; but Tobin also notes the important correlation between birth trends and private employer-provided health insurance.

 

As the economy grows weaker or stronger, the mix between Medicaid and private insurance fluctuates, with obvious broad implications for health care.  The established OB/GYN practices in the survey had a private insurance / Medicaid mix of about 80% / 20%, meaning that employment is a critical component for most couples planning to have a baby.  An improving employment picture has meaningful implications for a broad range of companies providing everything from pre-pregnancy care, to in-hospital delivery and neonatal care.

 

Economic Impact

Private insurers have seen revenues suffer due to weak employment in recent years.  This means private insurance has not recovered, and Medicaid dominates many areas of health care.  Hospitals, OB/GYN practices, and all birth-related providers would benefit from even a modest rise in the birth rate.  Certain companies stand to reap outsized profits if the birth cycle turns positive, because of increased revenues available under the Affordable Care Act (aka  Obamacare).

 

Tobin notes that when couples plan to have babies, other businesses benefit.  As part of his base demographic research, Tobin and his team also follow housing, furniture purchases, sales trends at maternity clothing stores, as well as sales figures in such categories as pet ownership and women’s vitamins.  These areas not only support Tobin’s overall work on birth trends, but week-to-week shifts in buying patterns can confirm employment and family income trends, which has implications for private payer insurance.

 

Tobin lists 6 companies that stand to benefit from a rise in the birth rate:

  • Mednax (MD) – neonatal and maternal fetal care
  • United HealthCare (UNH) – private payer inpatient admissions
  • Hospital Corporation of America (HCA) – inpatient admissions
  • PerkinElmer (PKI) – pre-natal and newborn screening
  • Hologic (HOLX) – OB/GYN practice volume
  • Cross Country Health Care (CCRN) – labor and delivery nursing care

 

It’s About Women

The key demographic group is the 20-34 year old age group.  They are the sweet spot in employment – the age range during which people build professional careers – and in household formation.  It is also, obviously, the demographic group that has the most babies.

 

Tobin says the gap between the growth in the population of women of child-bearing age, and the decline in the birth rate in the period 2008-2012, is the worst it has been in 40 years.  That’s a decline on a scale not seen for two generations – since the economic turmoil of the early 1970’s.  Since the 20-34 year olds were not around in the 1970’s, they have no memory of the economic upturn of the 1980’s.  Many members of this group came of age in the midst of the Great Recession and are not equipped to be optimistic.  In a phenomenon known as the “Zeitgeist” – a German term meaning “the governing mind-set of the age” – when a group turns optimistic, they tend to do it in a sudden surge.  Tobin’s work indicates we may be seeing that right now, with more young adults leaving their parents’ homes to strike out on their own – household formation has been improving since 2010 – improving measures of consumer comfort since the dismal lows of early 2012, and more babies being born.

 

Perhaps the most striking correlation is between women’s employment and births.  Tobin says that, with more women employed today, the combination of employer-paid health coverage and maternity leave is a major contributor to the upturn in birth rates.  Women’s employment growth has returned to pre-Great Recession levels, and a distinct pattern is emerging of women who give birth within 9-12 months after starting a new job.

 

Where Can This Lead?

It is too early to project the magnitude of the births recovery, as we appear to be right at the inflection point.  With couples of family-formation age who have put off having a baby, due to the economic situation, Tobin says there is a “pool of deferred births” that could be between 700,000 and 1.4 million over the coming three to five years.  Think of it as a concrete example of what economists call “pent-up demand.”  

 

The US sees about 3.8 million births a year on average, with first-time mothers accounting for 40% of births.  Between new families and growing ones, Tobin believes it is reasonable to predict 3%-5% growth in the average number of births.  

We also note that immigration reform looks to be almost certain in the next election cycle, as the major political parties are stumbling over one another to attract the Hispanic vote.  A large percentage of illegal immigrants are already employed in one job or another, and legitimizing their presence on US soil should provide a further boost to household formation and basic consumption – not to mention tax revenues.  This provides a population growth wild card that could lead to a mini baby boom in the coming years.

 

Conclusion

Even a small increase in birth rates can have a meaningful impact on a broad cross-section of health care providers, as it will be a significant bounce off of a broad decline in birth rates that has prevailed for four decades.  Obstetrics practices represent 25% of the metric known as “physician utilization “ – meaning that’s what people go to the doctor for perhaps more than any other type of treatment.  On top of that, if 11 million US residents and their children become legitimized, we should expect a corresponding lift in consumption across a broad range of goods and services.

So babies are good for business?  Says Tobin, “You bet!”  

 

 

 

 


INITIAL CLAIMS: WHAT A DIFFERENCE ONE WEEK MAKES

Takeaway: In contrast to last week's soft payroll report, on both an SA and NSA basis, labor conditions improved sharply in the latest week.

Easter Bunny Distortions

The time shifting of Easter has historically been a notable challenge for the seasonality department at the Dept. of Labor. Looking at the latest two weeks of data, we saw claims spike by 28k two weeks ago and then drop by 39k last week (these are both comparisons vs. the unrevised prior number). On the margin, claims were better by 11k over two weeks.

 

Market cheering aside, the trend in SA rolling claims is fulfilling its destiny. A look at the first chart below shows this plainly. SA claims are beginning their steadily rising path that they'll follow through August of this year. In the last three years this has been a major factor contributing to the sector's turn in the Feb-April timeframe. 

 

On an NSA basis the data improved. Last week we lamented that the rate of YoY improvement slowed to almost zero. This week, it jumped to -9.3%, one of the strongest prints we've seen in the last six months. Ostensibly, the two should be averaged, producing a blended YoY improvement of around 4-5%, which happens to be precisely what the rolling NSA YoY trend did (-4.5%).

 

Overall, labor market conditions are holding up well, despite last week's scary headlines. We continue to expec the SA data to deteriorate on the margin over the coming months, but the true, underlying trend is strong.

 

The Numbers

Prior to revision, initial jobless claims fell 39k to 346k from 385k WoW, as the prior week's number was revised up by 3k to 388k. The headline (unrevised) number shows claims were lower by 42k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 358k. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.5%

 

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Yield Spreads

The 2-10 spread fell -2.0 basis points WoW to 158 bps. 2Q13TD, the 2-10 spread is averaging 156 bps, which is lower by -12 bps relative to 1Q13.

 

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Joshua Steiner, CFA


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Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

Carnival cruise offers cruise to Caribbean for $38 a night (via ABC15)

 

Brian McGough (Retail):

 

Chinese Sportswear Company Sues MJ (via SGI News)

 

Kevin Kaiser (Energy):

 

Oxy Plus Proxy Would Shake Big Oil (via WSJ)

 

Jay Van Sciver (Industrials):

 

Shanghai in China Confirms Start of Carbon Emissions Trading in June (List of Initial Companies Named) (via IBT)

 


Treasuries And Jobless Claims

If we take a look at the yield of the 10-year Treasury and put it up against non-seasonally adjust (NSA) jobless claims, you can see that there's a correlation. Yields on Treasuries tend to increase after a decrease in jobless claims and vice versa. When things are bad and jobless claims rise, so does the yield on the 10-year. Does this mean that investors are looking for allocate capital to a safe haven like Treasuries when things begin to go to hell in a handbasket? Could be.

 

Treasuries And Jobless Claims - image001


The Consumption Game

Client Talking Points

Strong Dollar

Our non-consensus bull case for US growth is something we've been talking about for awhile now and we think that it sells itself. It all revolves around consumption growth which in turn boosts US consumption stocks. The three pillars of our case are:

 

1.       #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)

2.       #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)

3.       US Consumption Growth occurs when the real purchasing power of the US currency rises

 

 

 

Changing Our Mind

What would get us to move away from our consumption plan outlined above? Easy: a change in monetary policy. If Bernanke starts printing money again, then we're in for a rough ride. Commodity prices would like jump as the US dollar was debauched. As US food and gas prices increase, consumption in the US decreases. It's as simple as that. We'll have to wait and see what the Fed is up to. Who knows if QE will ever truly end at this rate?

Asset Allocation

CASH 28% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Failed HLF distributor files first lawsuit post-Ackman @nypost Salesman’s suit says $HLF a ‘scheme’, nyp.st/14dXaMC" -@hedgeygrl

QUOTE OF THE DAY

"Laughing at our mistakes can lengthen our own life. Laughing at someone else's can shorten it." -Cullen Hightower

STAT OF THE DAY

U.S. weekly jobless claims drop 42,000 to 346,000


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