This note was originally published at 8am on January 17, 2014 for Hedgeye subscribers.
“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 1837-1855 (bullish)
DAX 9546-9761 (bullish)
VIX 11.84-13.55 (bearish)
USD 81.54-81.32 (neutral)
Gold 1221-1267 (bearish)
Always be #evolving!
Thomas W. Tobin
Healthcare Sector Head