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VRX | HARD TO SEE A WAY OUT FROM HERE

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX CDS

OVERVIEW

The title of our short presentation on VRX back in July 2014 was "Something New Under The Sun?".  It seems like a good title in retrospect. 

Click Here for the original deck

 

its hard to see a way out from here...

  • Claim edits likely go to "deny all" for anything come out of a pharmacy named in the media or associate with VRX
  • Extreme RX price inflation practices put a fast halt to prescription growth
  • Regulatory scrutiny does not end quickly
  • Yields are blowing out, debt and equity capital raises look out of reach, limiting buy-back potential and end to a debt-fueled acquisition binge and the "new pharmaceutical" model.
  • How quickly does anyone really think VRX can restart the R&D engines?

 

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX LEV LOAN

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX 7

VRX | HARD TO SEE A WAY OUT FROM HERE - VRX 558

 

Please call or e-mail with any questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC  

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 



ECB Kicks QE Decision to December!

ECB head Mario Draghi, in what has become an all too familiar song and dance, reiterated his extend & pretend mantra in today’s ECB presser, namely stating that country level structural reforms combined with accommodative ECB policy (low interest rates and continuous QE program) is the recipe to achieve Eurozone growth and an inflation rate near its target of 2.0%.

 

We’ll take the other side of the “hope” embedded in that positing!  And it’s one we’ve long espoused and expressed as our 3Q15 Macro theme of #EuropeSlowing (published on July 7, 2015).

 

What was new in today’s presser?  Very little:  Draghi kept main interest rates on hold (as expected) but did clearly signal that the ECB is in fact in wait and “monitor” mode until its December 3rd meeting when the ECB’s staff releases a new growth and inflation outlook for the region.  Expect forecast revisions to go one way – down!

 

The EUR/USD is down -1.4% since Draghi’s remarks this morning, indicating that investors are already baking in the cake an extension to the QE program come December.

 

We continue to suggest that you trade the risk range in the EUR/USD based on our quantitative multi-factor risk signals, and risk weight what our good friend Jim Rickards has penned the Currency Wars.

 

This morning the EUR/USD broke its immediate term TRADE/TREND level of $1.12, a bearish signal for further downside support if it can hold for at least 3 trading days.

 

Stay tuned!

 

ECB Kicks QE Decision to December! - aaa. euro 22


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CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE

Takeaway: The argument that the cycle won't roll over until the Fed raises rates seems to miss an important point: the Fed began raising 22mos ago.

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - rate hike cartoon 10.15.2015

 

The Fed Has Been Tightening For 22 Months, Which is Why the Next Cycle Downturn Is Now Just Around the Corner

This week we thought we'd do something a little different and look at the relationship between claims and Fed funds. The chart below looks at Fed Funds (inverted) on the left hand side and initial claims on the secondary y-axis. What's interesting is how different this cycle appears to be versus prior cycles. First, let's establish a reference point for measuring where we are in the cycle based on the number of months elapsed at a sub-330k level of initial claims. As the chart below shows, by this point in previous cycles (we're now 20 months into sub-330k) the Fed was already well underway raising rates.  

 

While everyone knows that rates have been low for a long time, it's not obvious just how long until you look at the chart and compare it with the last four cycles. 

 

A bull might look at this chart and argue that it was the increase in rates that was the proximate cause of the downturns in the last four cycles and without that spark this cycle could live on for a while yet, especially with no emergent signs of inflation. 

 

A bear could argue that the cycle is already long in the tooth and the fact that the Fed hasn't yet raised rates is indicative of just how weak the underlying fundamentals of the current cycle are. 

 

A further argument (and the one we think is the most apt description of what's really going on) would be something along the lines of this: The Fed has already hiked simply by removing QE. As a reminder, the Fed began slowing its $85bn/month asset purchases by $10bn/month back in December 2013 and ceased those purchases altogether by October, 2014. In other words, the Fed began tightening policy ~22 months ago, which is about in-line with the start of previous cycle rate hikes when benchmarked against the 330k claims index level. Translation: this cycle actually looks very similar to recent cycles when viewed through this lens - it just appears different because most investors don't treat the slowing and cessation of QE as the equivalent to rising Fed Funds.

 

Our framework for thinking about the Fed is this latter scenario, and this is why we keep emphasizing the relevance of the the last three cycles duration within the context of initial claims. The last 3 cycles saw claims stay below 330k for 24, 45 and 31 months before the economy entered recession. The average duration of those three cycles was 33 months (max: 45, min: 24). With claims having just started their 20th month of strong, sub-330k claims, we are now 4 months from the min, 13 months from the average and 25 months from the max. 

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims1

 

By the Way, Dont' Forget about Energy

Separately, claims in energy states rose faster than claims in the U.S. as a whole during the week ending October 10. The spread between the two series in the chart below widened week over week from 19 to 20. What's interesting here is that energy companies are largely hedged through ~YE15. As such, we expect to see energy claims rise steadily over the next 6 months as those hedged roll off and energy employers begin to find other ways to right size the P&L. The chart below suggests that this theme is beginning to play out.

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims18

 

The Data

Prior to revision, initial jobless claims rose 4k to 259k from 255k WoW, as the prior week's number was revised up by 1k to 256k.

 

The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 263.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.1%

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims2

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims3

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims4

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims5

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims6

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims7

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims8

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims9

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims10

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims11

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims19

 

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 140 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims15

 

CLAIMS | WHY THIS CYCLE IS MORE LIKE PRIOR CYCLES THAN MOST REALIZE - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 


Euro, Spain, Russell

Client Talking Points

Euro

$1.13 vs. USD into the @ECB event and the question remains whether Draghi can be incrementally more dovish than the Fed is implied being with UST 3-month yields moving back to NEGATIVE -0.01% this morning – if he doesn’t bring the cowbell, EUR/USD should hold $1.12 and Oil/Gold/Copper etc. should bounce post WTI’s -2.3% #deflation yesterday

Spain

We hosted a risk mgt call w/ Daniel Lacalle yesterday (ping me if you want the replay) and in the absence of Draghi trying to reflate European stocks, remember that Spain is as #LateCycle as the USA is at this point – the early DEC election (going left) = major catalyst as well

Russell

Less hedge funds are short it (vs. SPY) so it continues to go down faster (and more often) than SPY, closing -1.5% yesterday taking its draw-down from the YTD high to -11.7% and signaling bearish on both my TRADE and TREND durations = pure play short on US #GrowthSlowing 

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 29% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s reports 3Q15 earnings Thursday, October 22nd before the market opens, with a conference call at 11:00am ET. We are expecting strong sequential improvement in performance globally. We look forward to giving you an update on the company’s performance next week, but this week we wanted to focus on the ‘Looming Crash in Beef.'

 

On Thursday, October 15th, we held a thought-leader call regarding the declining price of beef and how long it will continue. Prices have sky rocketed in recent years and are now standing at more than two standard deviations above the 30 year average. We believe a 50% decline down to historical averages is well within the realm of possibilities. Declining beef prices will be a major tailwind for McDonald’s as they navigate their turnaround.

RH

Restoration Hardware opened its new Full Line Design Gallery at the Cherry Creek Shopping Center in Denver this week.  This is another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek.

 

RH is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.

TLT

The #SlowerForLonger theme from Hedgeye Macro has been consistent and straightforward. Our pivot in advance of the most recent jobs report to get long of gold and stay out of the way short-side on commodities turned out to be a good position.

 

Growth expectations have been correctly revised, but there’s still a good amount of room between Hedgeye estimates and consensus. We are expecting GDP in a range of 0.1%-1.5% for Q3 and another 1-handle in Q4. If that proves accurate, flatter goes the Treasury curve (TLT, EDV), wider goes high yield spreads (bad for JNK), and down goes the USD (GLD).

Three for the Road

TWEET OF THE DAY

Congrats to everyone who took up their #GrowthSlowing exposure yesterday buying $TLT $ZROZ $MUB, etc.

@KeithMcCullough

QUOTE OF THE DAY

"What is the point of calling yourself the best if you truly don't believe that in your mind?"

-Bret "The Hitman" Hart

STAT OF THE DAY

Daniel Muphy of the NY Mets has homered in 6 straight post season games, he had 14 homeruns through 130 games during the regular season.


BREAKING: Earnings Season Still A Hot Mess

Are we entering an earnings recession?

 

It's a question we've been posing for a while now. Here's a quick look at where we stand right now. 

 

BREAKING: Earnings Season Still A Hot Mess - 10 22 2015 earnings

 

As we outlined in our Q4 macro deck, earnings recessions have preceded economic recessions in the last 3 cycles. 

 

BREAKING: Earnings Season Still A Hot Mess - 10 22 2015 EARNINGS REC

 

Investors beware. 


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