“Progress isn't made by early risers. It's made by lazy men trying to find easier ways to do something.”
-Robert A. Heinlein
When it comes to stocks, progress is having the right answer to a simple question most of the time; is the price heading higher or lower. A simple question, with only 2 options, yet with an infinite number of ways to get there.
Investors are Heinlein's kind of lazy, they look for short cuts to the answer about the next price. In defense of the investor, getting the answer right is anything but a lazy man's game. Sifting through data, other people's opinions, quant, inside information, chart formations, the confidence in a CEO’s voice, you name it, and it takes long hours.
Heinlein would agree with The Principal of Least Effort, as do some corners of Evolutionary Biology. We may just be hard wired like our Paleolithic ancestors to find food in the most efficient way while not being eaten each day. In searching for information, the Principal of Least Effort means you stop looking as soon as you find "minimally acceptable result", or for a stock, the answer to the up or down question.
The paradox is that people will go to extraordinary lengths to make the least effort. It starts innocently enough by saying "wouldn't it be great if....". Guttenberg might have said something like "wouldn't it be great if I didn't have to copy this Bible by hand!" The founders of Twitter perhaps said "wouldn't it be great to send short 140 character messages to my friends!", although I can't imagine why. But after they did, they got to work.
Back to the Global Macro Grind…
The BIG MAC is one of Hedgeye Healthcare's "wouldn't it be great if" ideas. "Wouldn't it be great if I knew how all of this macro data connected to the stocks I care about." So we built a database of thousands of macro and company data, tools to update them, tools to sort them, in order to discover how they relate to each other. In theory, one can react with reasoned calm to new economic data that may be pushing stocks around on a given day, or forecast important company drivers, or recognize a new and unexpected relationship that leads to a great stock idea.
We're constantly evolving the process, adding new data, refining the analysis, looking for easier ways to do things. Below are some examples of what we've found interesting lately.
Consumer Confidence is rising, that's good for Healthcare stocks, right? No, changes in medical consumption are highly inversely correlated to Consumer Confidence. Falling confidence sends people to the doctor. When consumers feel good, they go to the mall. Consumer Confidence is currently slowing year over year.
Is there a healthcare stock that I can use to get levered to Hedgeye's#Eurobulls theme? Yes. Long XRAY, their European growth is tightly correlated with changes in German Unemployment. Germany happens to be XRAY's biggest EU market. In the US, the dental market tracks Dentist Office Employment which continues to rise.
Hospitals are up on a rope, should I stick with it? Yes, highly profitable surgical cases which represent 30% of hospital revenue started growing again and it looks sustainable. We track a single medical Producer Price Index series (of the hundreds reported each month) to forecast the ICD businesses at BSX, MDT and STJ, while growth for US Orthopedic sales closely follow a monthly employment number representing 16% of the workforce and just started to turn. Hospital admissions are weak in Q413 because flu and maternity are weak, and don't pay well, while the surgical indicators are both rising after a multi-year declines.
UNH was down a little on their earnings yesterday, is it a good time to buy it? No. Deflating their medical cost trend with a key macro series suggests utilization is beginning to accelerate after years of soft or declining trends. At the same time, realized pricing is steadily making new lows, in line with the Employment Cost Index Health Insurance and the Producer Price Index for Managed Care. Additionally, managed care premium rates are growing slower than the rates they pay to hospitals, their largest expense. A de-levering of the pricing spread is a massive headwind that Obamacare, private exchanges, dual eligibles, or Optum can offset.
Deciding how to weight BIG MAC signals can be challenging sometimes. While a BIG MAC query is a key part of our process, we still do all of the other things too. We sift through data, read other people's opinions, listen for the confidence in a CEO’s voice, look at charts, talk to experts; everything except the inside information thing. Remember, it's a simple question with no easy answer. You better have a process.
Our immediate-term Global Macro Risk Ranges are now (TREND in brackets):
SPX 1 (bullish)
DAX 9 (bullish)
VIX 11.84-13.55 (bearish)
USD 81.54-81.32 (neutral)
Gold 1 (bearish)
Always be #evolving!
Thomas W. Tobin
Healthcare Sector Head
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TODAY’S S&P 500 SET-UP – January 17, 2014
As we look at today's setup for the S&P 500, the range is 18 points or 0.48% downside to 1837 and 0.49% upside to 1855.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JANUARY 17, 2014
GAMING TABLES/SLOTS DICJ
At the end of 4Q, Macau gaming tables was 2 tables higher QoQ to 5,750. Slot count declined by 1,669 machines QoQ to 13,106.
I'M NO 'TOUGH COP' SAYS BEIJING'S NEW MAN IN MACAU Macau Business Daily
Li Gang, the new Macau rep from China, took the opportunity to reassure listeners that he was not a ‘tough cop’ focused on some clampdown on the local casino industry, and also that there would be no ‘blind expansion’ of tourism to Macau.
“My role as a [discipline] commission member is to participate in the anti-corruption works in mainland China, and that does not have to do with the local gaming industry,” he added.
Li also said Beijing has no plans currently to expand the existing individual visit scheme allowing mainland residents from select cities to travel independently to Macau. “Last year, there were 28 million mainland visitors coming here under the individual visit scheme,” Mr Li said on the sidelines of a cocktail reception for Chinese New Year. He added: “This number could exceed 30 million this year.”
MACAU LEGEND FALLS ON $174 MILLION STOCK SALE Bloomberg
Macau Legend Development said it raised about HK$1.35 billion (US$174 million) selling new shares, less than previously planned of US$300 million. The company sold shares equal to about 2.9% of its enlarged share capital at HK$7.25 each to fund its proposed redevelopment of Fisherman’s Wharf casino complex in Macau. Fisherman’s Wharf will focus more on mass-market gamblers instead of high-stakes bettors.
TRADING OF BLOOMBERRY STOCK HALTED AFTER GGAM EXIT Macau Business
Bloomberry Resorts Corp, who operates Manila’s Solaire Resort and Casino, was suspended at the Philippine Stock Exchange after Global Gaming Asset Management LLC sold its 8.7% stake in the company. Bloomberry told the exchange it had asked for trading to be suspended until next Thursday. Bloomberry said it needed to confirm that the buyers of the shares would be unaffected by arbitration proceedings meant to settle its dispute with GGAM.
Bloomberry ended its management agreement with GGAM in September, saying GGAM had failed to manage the Solaire casino-resort. GGAM objected and asked arbitrators in Singapore to settle the argument.
GOVT SAYS LRT TAIPA SECTION SLATED TO BE READY IN 2016 Macau News
Transportation Infrastructure Office (GIT) Director Lei Chan Tong said that the government was doing its best to ensure that the Taipa section of the Light Rail Transit (LRT) is in operation in 2016. Lei said the Taipa section should be completed by late 2015 or early 2016, after which the trains would make trial runs until the system’s official opening.
Takeaway: JCP Board: your CEO is failing you, and the investors you represent. His time is over. Replace him – now – and earn our support and respect.
This note was originally published January 16, 2014 at 21:02 in Retail
SERIOUSLY, LET’S THANK HIM AND SEND HIM ON HIS WAY
The fundamentals have not changed nearly as much as JCP’s equity would suggest, but the reality is that the company is giving us very little reason to continue to support the name as the stock slides (note: recent announcements that; a) results are ‘in-line’ (but without any quantification whatsoever), and b) the company will be closing 33 stores and laying off 2,000 employees). The company might be one of the only retailers that is comping positive in this environment at a higher margin y/y, but that’s in stark contrast to its recent behavior. Recent announcements hardly match up with a company that has confidence in its future.
We’re still of the view that there is $1.50 in earnings power tucked away inside JCP, and for people that want to look out several years, we really don’t think that there’s any fundamental change to this story. That makes the company’s recent actions all the more ridiculous. The research has not changed, though the timing is questionable. We don’t like questionable timing. We’ll stomach it for a great company, or even a good one, but have less of an appetite when it comes to a company like JCP.
The reality is that we won’t continue to stick our neck out when Ullman seems to be doing his best to break it. There are too many great businesses that have gotten hit recently that are far more worthy of defending than JCP (such as RH, ZQK, WWW, and FNP). JCP was our only loser in 2013, and we won’t make the same mistake twice.
Management is failing – big. The answer here is for Ullman to jump ship (or get pushed off). The Board has to take action. The company needs a permanent leader. Ullman already made good progress to stabilize the company. We’ll give him that. Seriously. Golf clap for Mike. But it’s time for the next phase of JCP, and he’s not the guy to lead. Not by a long shot. We’d like to think that accepting the role of Chair of the Federal Reserve of Dallas, and then being elected to the Board of the National Retail Federation is his way of moving off to the next stage in his career. The reality is that being CEO of JCP is easily two-full time jobs, and one of the most challenging roles in Corporate America. JCP’s board had to approve these outside assignments, and we can’t imagine that they’d do so if they thought he was going to be a long-timer.
That thought process certainly lends itself to the prospect of a CEO change over the near-term, but we have no edge on that timing. If you want to speculate on that one, it might be a good trade if it proves to be correct. But it’s not a trade we’re going to make.
Punchline: The Board needs to fire Ullman and hire a powerful and appropriate leader to unlock the value we know exists at JCP. When that happens, and we gain confidence that the new CEO sees the same earnings power we do, then we’ll support this name until the cows come home, because all of our research tells us that the value is there. That’s true even if it means getting involved at $9 or $10, presuming we’ll see a pop on the CEO announcement. The reality is that when someone is running the company that has a definitive long-term plan, and the earnings power we’re modeling becomes a reality (or at least earns a spot in the debate), this can be a big stock even a few bucks higher.
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