"Everybody talks about the weather, but nobody does anything about it."

-Mark Twain


I have been chirping about the #ACATaper for several months now with a small but growing audience of subscribers who are starting to ask more questions about our research as the evidence mounts and stock prices in the healthcare space get hammered. 


I say chirping because a chirp is hard to hear, and to a lesser extent, the person chirping is usually beating you. If you have played sports, you know what I mean. If you have an older brother who beat you at whiffle ball absolutely every single time you played and called it “The Streak,” I understand your pain completely.


It is no fun to be chirped, and it’s not my style. Good research is usually quiet, and “getting loud” is anathema to a process, at least a good one, that generates more questions than answers. So far we’ve shared our research most comprehensively in our recent Healthcare Themes Presentation (ping for more info) if you care to take a look.




Back to the Macro Grind


The #ACATaper theme suggests that after the U.S. Medical Economy experienced the largest inflow of new medical consumers (35 million) in the last 30 years, and who carried with them above normal per capita spending resulting in more than $120B of new money being pumped into the system in a mere 18 months, the what-comes-after will likely be equally epic on the downside.


To put the ACA enrollment expansion into context, the next best year for increases in the number of insured medical consumers occurred in 1996 when the United States added 3.2M people to the insured population.  The United States just added 10 times that number in just 18 months!  Nothing in recent history even comes close.


What will happen next, in our view, is the enrollment gains of 2014-2015 are now convincingly behind us, and heading for declines in 2016. Those 35 million new medical consumers, who had been chronically uninsured prior to the ACA and had a lot of things to take care of medically, will be spending much less per person in 2016 and beyond. What the ACA has created is a comparison so big that it will likely be violent as it unwinds and might make “taper” look like too gentle a term in retrospect. The #ACATaper may mutate into #REFORMAGGEDON.




If we’re right, we’re not just leaving it up to management teams for the heads up when they speak at a conference or report earnings, like HCA did when they preannounced negative for 3Q15 (down -31%) , or like UNH did yesterday when they also pre-announced negative(down -12%). In HCA’s case, they overstaffed their hospitals for volume that didn’t show up. That agrees with the #ACATaper, which anticipates pent-up demand to roll off in the coming quarters and the ACA consumption contribution to turn negative.


UNH said the same thing but on a lag and in reverse. They announced that their ACA Exchange enrollment was going to cost +$425M more than expected for their 540,000 exchange enrollees. That is $773 per enrollee more than expected, with the true expense likely higher since presumably these losses came after the ameliorating forces of risk adjustment, reinsurance, and risk corridors which the ACA put into place to smooth this new market’s emergence. These two stalwarts of the S&P 500 did not see this coming. 


The #ACATaper appears to be happening fast as well. Just compare what UNH said on their 3Q15 earnings call on October 15, 2015 to what they said yesterday on November 18, 2015 when they pre-announced and guided down.


“We will expand to 11 new markets in 2016 and we continue to expect exchanges to develop and mature over time into a strong, viable growth market for us. -David Scott Wichmann President & Chief Financial Officer, UNH 3Q15 Earnings Call


Compare that rosy picture to what UNH communicated in their press release yesterday…


“UnitedHealthcare has pulled back on its marketing efforts for individual exchange products in 2016. The Company is evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017” (UNH 2015 earnings update)


We have our high frequency data sets that will keep us alert to the #ACATaper trend. We prefer predictive, high frequency data check-ups with a few anecdotes mixed in, as oppose to waiting for management to tell us what happened.


The Great Healthcare Deflation


After the #ACATaper, the prospects for the US Medical Economy do not appear any brighter in 2017 or 2018, at least not for the vast majority of publicly traded market capitalization available to investors today. Consider the following demographic trends:


  1. The U.S. workforce and their commercial insurance, the most profitable part of the US Medical Economy, will enter a long period of population growth stagnation, remaining at 190M for the next decade.
  2. The workforce will get younger too on average, and consume less per capita, as the bolus of Millennials displace the Gen-X generation.
  3. Meanwhile, the Baby Boomers will graduate into Medicare at a faster rate than Medicare spending is forecast to grow, and push growth of real spending per Medicare beneficiary negative.


REFORMAGEDDON COMETH! - EL Real Medicare Spending


These demographic trends will occur with affordability nearing its natural limits. Premiums are nearing the peak for individual out of pocket expense, employer premium contribution, and state and federal budgets for Medicaid and Medicare.


But people will get sick in the future and the population will consume more medical care; they will show up to the doctor office, pharmacy, and hospital regardless of the fiscal backdrop. However, when they do make that appointment, the price paid and profit available for those units of care will almost certainly be lower than today, resulting in a secular decline. 


The great hope I have for the U.S. Medical Economy is that I will see a massive turnover in the healthcare market capitalization now included in the S&P 500 Index, and witness the emergence of new delivery models, new products, new technology, that makes the system more price transparent and more efficient. The problem for now is much of this innovation is sequestered out of sight in the world of private investment and venture capital, or yet to be developed at all.


We’ve had 50 years of excess inflation in healthcare, a trend so long in the making that it seems like it can never end, but it will end because there simply isn’t another alternative. There was a time when a knee implant with $70 of material costs could be sold for $7000, but those days are over. 


Of course, the transition will be painful, and has only just begun, but it does hold the promise of renewal. My hope is if the policy and capital stewards of the U.S. Medical Economy can manage it, we will have deflating prices, less waste, better care, and the perpetual Healthcare Crisis we’ve come to expect will turn into the Healthcare Opportunity.


If it happens, it will be a great source of strength for individuals and their medical security, their employers who will have more to reinvest, and for our country if we can stick the landing. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.17-2.29%

SPX 2038-2104
RUT 1135--1195

VIX 14.72-20.51
USD 98.49-100.18

Copper 2.05-2.20


If you have any questions please call or send us e-mail.


Thomas Tobin
Managing Director 




Draghi, Oil and Retailers

Client Talking Points


Mario Draghi is saying the ECB “cannot be relaxed” about fighting #Deflation – so, he’s devaluing the Euro again this morning. The Euro is down -0.5% to $1.06 vs. USD, reversing what was a Dollar Down day yesterday (in other words, he’s perpetuating commodity #deflation).


WTI Oil is looking to snap $40 again as the Dollar ramps on “whatever it takes” to try to bend/smooth economic gravity - you can expect that most OCT “reflation” data is going to mean revert to bearish TREND here in NOV as commodities crash.


But, you “buy Retailers on low gas prices”, right? Gap (GPS) and William Sonoma (WSM) were the latest “misses” last night – and as long as you aren’t long anything other than AMZN, all good – U.S. Retail (XRT) is down -10.3% for 2015 year-to-date.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.


Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.


When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.


It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.


With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

**Please note we removed EDV from Investing Ideas yesterday. With the Fed hell bent on raising into a slow-down, we have to risk manage the risks associated with that. They have no idea on the economy (forecasts on growth have been wrong 70% of the time since Bernanke's un-elected reign). So the risk, is their forecast.


Three for the Road


Buy  $ZOES - very strong quarter



By associating with wise people you will become wise yourself.



Last month was the hottest October in 136 years of data, according to U.S. figures released Wednesday, making it the 8th record-breaking month so far in this year.

Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!


Please RSVP to Kerrie at  if you can join.


We look forward to seeing you!


-Your Hedgeye Macro Team


Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015

investing ideas

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The Macro Show Replay | November 20, 2015



Zoes Kitchen (ZOES) is on our Hedgeye Restaurants Best Ideas list as a LONG.


ZOES was never a one or two quarter call for us. Given the high multiple (EV / NTM EBITDA of ~27x) nature of the stock it is ultra-sensitive to the volatile market. Since going LONG the name on 4/08/15 (link to Black Book HERE) at a price of $31.21, we saw a peak in the stock price on 7/23/15 at $45.60 per share and now we are back down to the ~$30 range. This stock does not contain style factors that the market likes right now (high-beta, low-cap), so we expected a turbulent ride, but you must stay strong and buy on the dips. This quarter for instance is a perfect example, there was nothing wrong with it, besides the comp number missing slightly, and the stock was down 9% immediately in after-hours trading, it has since recovered slightly. People that sell on these headlines create great buying opportunities, and we are buyers of ZOES on any big down day like this.


ZOES reported revenue of $56.4 million, representing 29.4% YoY growth and beat consensus expectations of $55.7 million. Comparable restaurant sales increased 4.5%, versus consensus expectations of 5.4%. The comp was built up by +4.6% mix, +0.3% price and a -0.4% traffic. Management’s explanation for why traffic declined was because they have been pushing catering and family offerings, which reduce the actual number of transactions. By diving deeper into this phenomenon, management seemed to have created more questions for themselves than answered. Nonetheless, this was a solid comp performance given they took virtually no pricing. In select markets management is now testing price increases to assess elasticity.



Restaurant level operating margin for ZOES improved to 21.58% an increase of 174bps YoY and beat consensus expectations of 20.79% by 79bps. This improvement was led by a reduction in cost of sales by 223bps down to 31.47% from 33.70% last year. Slightly offset by an increase in labor costs, which were 28.16% in the quarter, up 83bps YoY and 29bps higher than consensus expectations. ZOES prides themselves on hiring great talent and paying higher than the minimum wage, to that end, labor will continue to be a headwind into 2016. Commodity basket deflation will be a minor tailwind for them, as they have been experiencing lower poultry costs



ZOES adjusted net income for 3Q15 was $0.09 million, or $0.05 per diluted share, beating consensus estimates of $0.03 and increasing $0.01 YoY.


Opened 10 restaurants during the quarter, for a total of 158 company-owned restaurants. Since the end of Q3, ZOES has already opened four more restaurants, bringing the 2015 count to 33 new company-owned restaurants (high end of the guidance). Looking into 2016 ZOES plans to open four stores in Colorado and three more in Kansas City, which already has one store.


For the full year 2015 the company updated guidance slightly. Restaurant sales will be between $222 million and $224 million versus previous guidance of 220 million and $224 million. Comparable restaurant sales growth of 5.5% to 6.0% versus previous guidance of 5.0% to 6.0%. Restaurant contribution margin of 20.3% to 20.6% versus previous guidance of 20.0 to 20.5%.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




November 20, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.29 2.17 2.24
S&P 500
2,038 2,104 2,081
Russell 2000
1,135 1,195 1,166
NASDAQ Composite
4,917 5,144 5,073
Nikkei 225 Index
19,015 19,966 19,859
German DAX Composite
10,688 11,105 11,085
Volatility Index
14.72 20.51 16.99
U.S. Dollar Index
98.49 100.18 99.06
1.05 1.07 1.06
Japanese Yen
121.81 123.91 122.89
Light Crude Oil Spot Price
39.15 42.34 41.85
Natural Gas Spot Price
2.20 2.38 2.26
Gold Spot Price
1,068 1,097 1,081
Copper Spot Price
2.05 2.20 2.08
Apple Inc.
111 119 118
1,215 1,339 1,284
Valeant Pharmaceuticals International, Inc.
67.01 88.26 84.00
Facebook, Inc.
103 110 106
Williams Sonoma, Inc.
62.09 68.19 66.21
Nike, Inc.
120 132 125



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