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Why a Perfect Storm Is Brewing in Healthcare

Why a Perfect Storm Is Brewing in Healthcare - z storm

 

In recent weeks politicians and the media have been preoccupied with ISIS, Donald Trump and “Star Wars: The Force Awakens,” marking a major shift in attention away from Obamacare. After dominating the media cycle with its rocky start, including crashing enrollment websites, Republican votes to repeal the legislation (61 votes so far), and damning forecasts of spiraling costs, millions of previously chronically uninsured people now have access to medical care. It is not an understatement to make the claim that lives were likely saved as a result of Obamacare, but alas our collective attention is on to different things these days.

 

Why a Perfect Storm Is Brewing in Healthcare - tobin aca

 

The benefits to these newly insured are clearly significant. Studies have shown 30 – 50% reductions in mortality from having health insurance, not to mention reduced fear and anxiety, and the potentially ruinous financial burden that comes from going without insurance. But the benefits don’t just stop with the individuals the legislation helped. The Affordable Care Act created legions of newly minted medical consumers which benefited the bottom line of the companies that cared for them, their executives, and investors who enjoyed incredible stock returns.

 

For investors who bet on healthcare stocks during the roll out of the ACA, the portfolio returns have been stellar...

 

* * *

 

Click here to continue reading Tobin's Healthcare piece on Investopedia. 


Spain’s Political Risk Rises!

Results from yesterday’s Spanish election showed that no party secured the 176 seats required out of the 350-seat parliament to govern with an absolute majority.  

 

Now it appears that the only possible outcomes are the formation of a weak coalition or a call for new elections that could come as soon as January 13th.  This all clearly spells political risk rising! [The Spanish IBEX fell -3.6% in trading today, and is down -8.9% YTD]

 

The Results:

  • Spanish PM Rajoy’s center-right Popular Party (PP) finished first in yesterday’s general election, securing 123 seats, or 28.72% of the vote, but failed to win a majority
  • Trailing the PP were the Socialists (PSOE) 22.01%, Podemos 20.66% and Ciudadanos 13.93%
  • Results show that anti-austerity Podemos party and liberal Ciudadanos made big gains as the conservative PP lost support
  • There are no obvious coalition partners:  PP with Ciudadanos, 13 seats short of the 176 seat majority or the Socialists with Podemos, still 17 seats short

Below we repurpose an article written by special contributor Daniel Lacalle titled Spain. Can Politics Kill The Austerity Star? from 10/19/15.  He accurately predicted that any combination of parties would not have a strong majority, and the risks he raised about the instability of the government and sovereign’s financial health are as true now as they were then. 

 

Daniel Lacalle is an economist, CIO of Tressis Gestion and author of Life In The Financial Markets and The Energy World Is Flat. He presented Sell Spain conference call for Hedgeye customers on 10/21/15 (AUDIO REPLAY: CLICK HERE ; MATERIALS: CLICK HERE).  

 

Spain’s Political Risk Rises! - x. Spain

 

Spain. Can Politics Kill The Austerity Star?

It was difficult to think that Spain would make a comeback in 2011 when the Conservative Party (PP) won the elections. The challenges were too large. The previous administration, PSOE, Socialist, had left a deficit of 9% of GDP after promising a maximum 7%.

 

When the crisis started, the socialist government consciously decided to substitute the bursting real estate bubble with a massive civil works stimulus. It spent 3.2% of GDP, debt ballooned by 350 billion euro and destroyed more than 3 million jobs. On top of it, in the period from 2007 to 2009 the average annual trade deficit was around 6% of GDP and at one point in 2008 reached 9% of GDP. 

 

Spain was a Keynesian dream becoming a nightmare. 

 

When the socialist government left office, Spain had more than 40 billion euro in unpaid invoices from the public administrations to the private sector, the public savings banks presented a capital requirement of 100 billion euro and the regions and municipalities faced a bailout of 125 billion euro.

 

It was an unsurmountable situation.

 

However, after a large austerity plan that was split 50% in tax increases and 50% in spending cuts, and a very substantial set of reforms, including the financial sector, labor market, entrepreneurship programs and early payment schemes, Spain recovered.

 

Between 2014 and 2015 Spain started to grow well above the EU average. It led job creation in the Eurozone, with more than one million jobs, and brought unemployment rates back to September 2010 levels. It went from a massive trade deficit to a balance by 2015.

 

In summary, Spain undertook the largest adjustment seen in an OECD economy, 15 points of GDP, and managed to do so growing and creating jobs.

 

Despite critics´ calls of a recovery fueled by the ECB QE and low oil prices, these claims are easily refuted as Spain is growing more than countries with a similar sensitivity to interest rates and oil prices, like Italy or Portugal, and has recovered with no increase in total (public and private) debt.

 

However, all was not well and many challenges remain.

 

-          A high unemployment rate, despite the reduction and the evidence that many jobs are hidden in the underground economy and counted as unemployed.

-          A large fiscal deficit. Despite the massive adjustment, Spain´s deficit is well above the EU stability pact target.

-          External debt remains at 100% of GDP and public debt at 97%.

 

The austerity plan helped bring Spain out of the living dead, but did not create social stability. Despite the conservatives´ efforts to maintain social spending, the population perceived that the cuts were unacceptable. Public debt increased to 97% of GDP partially due to the bailout of the regions and savings banks as well as taking care of unpaid bills, but increasing pensions and keeping unemployment benefits didn´t please the public, as real wages fell.  As in Greece, fringe parties started to appear fueled by “magic solution” promises of default, massive increases in public spend and interventionist “miracles”.

 

Now Spain faces a historic election process. The Conservatives (PP) face the backlash of unpopular austerity measures and corruption accusations, and might win by a very small majority. The Socialists (PSOE) also faces a major loss of votes due to corruption and the past performance in government. However, the Socialists and the Communist-anti-establishment parties (Podemos, Ahora en Comun) could become part of a coalition for the next government with the promise of stopping the recent reforms, especially the labor market law. The moderate center party, Ciudadanos, which has steadily risen in polls, could be the deciding factor.

 

In any combination, the new government will not have a strong majority, and most of the likely agreements may only come with parties who promise more spending.

 

The risk of Spain falling under the QE trap, putting all the bets on the European Central Bank, as it did in 2008, and go back to the same mistakes of deficit spending and public sector white elephants to “boost growth” is not small. Halting reforms and going back to past failed measures will likely give the same results. Less growth, less jobs, more debt.

 

Spanish political parties tend to mention the Nordic nations and Obama as examples, yet they support the rigidity and intervention of France and Greece, not the economic freedom and flexibility of the leading economies. And when you copy France and Greece you get the growth of France and the unemployment of Greece.

 

Let us hope the decision on the 20th of December is not to bet on repeating 2008.


Twitter Flies South (Down 43% Since Our Short Call)

Takeaway: Our Internet & Media analyst made the short call on TWTR.

 Twitter Flies South (Down 43% Since Our Short Call) - twitter cartoon 04.29.2015

 

Notice Twitter's 3.5% drop today?

 

Hedgeye Internet & Media analyst Hesham Shaaban has been among the few bears on Twitter (TWTR). He recommended investors short the social-media company back in April 2014 when the stock was trading over $40 per share. Here's an interesting excerpt from a note sent to institutional subscribers back then:

 

"... TWTR is in a precarious setup. Every time TWTR beats estimates, consensus estimates move higher. However, street expectations differ from consensus: TWTR is expected to continue to beat those increasing estimates, and guide higher. 

 

We continue to expect a dramatic slowdown in revenue growth into 2H14, and particularly 2015 (see notes below for supporting detail).  Our bearish fundamental view vs. rising consensus & street expectations suggest the setup will only get worse from here.  

 

In short, the hurdle keeps moving higher while its growth prospects get progressively worse." - Hesham Shaaban, "TWTR: Re-Shorting." 4/30/2014

 

Nice call, huh?

 

Twitter Flies South (Down 43% Since Our Short Call) - twtr chart

 

Shaaban pretty much nailed it. As you can see from the chart above, TWTR shares are down more than 43% since he recommended shorting the company in April 2014. Shaaban's short thesis has been the tail wagging the dog (a.k.a. TWTR's stock price) ever lower. The company's revenue forecast has been consistently ratcheted down over time.

 

Twitter Flies South (Down 43% Since Our Short Call) - twitter info stock

 

Curious about our original short thesis on Twitter?

 

Below are two videos of Shaaban laying out his thesis. Give them a watch. Even with the drastic draw-down in the shares, we think his original call-outs have room to run. (If you'd like to read Shaaban's more granular research notes on Twitter or anyof the other companies he covers please email sales@hedgeye.com.)

 

 

Twitter Flies South (Down 43% Since Our Short Call) - Twitter cartoon 5.7.2014


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Why I Am Staying Short Junk Bonds | $JNK

Takeaway: With our dour economic outlook, junk gets junkier and even some investment grade credits are at risk.

On The Macro Show last week, a subscriber asked me about the breakdown in the high-yield debt market and how far up the ladder this could spread. The viewer’s question continued, “Are investment grade corporates at risk as well?”

 

My quick response: Of course they are.

 

Not to give too much away, but we’re working on our Q1 Macro Themes presentation right now. And we plan to show our subscribers precisely what credit looks like in a recession. Spoiler alert: It looks a lot worse than it does right now.

 

Why I Am Staying Short Junk Bonds | $JNK - stoplight

 

Growth is slowing. It’s the most glaringly obvious thing we’ve seen since the last cycle. The real problem is when investment grade bonds start to turn into high yield.

 

Take a look at Kinder Morgan (our Energy analyst Kevin Kaiser made an epic short call in this name to the chagrin of pumpers like Jim Cramer). The reason Kinder Morgan (KMI) is worth a look in answering this thoughtful question is that KMI has the highest leverage (as measured by debt-to-EBITDA) of any company with debt rated “investment grade” in the S&P 500.This is a key part of the short case laid out by Kaiser. It’s not getting better from here either. In fact, a lot of fund managers who own Kinder Morgan investment grade debt will be forced dump it, the junkier it gets.

 

That’s what happens to investment grade credits in a recession. Investment grade bonds get junkier. Our subscribers know that we handicapped this right. We added Junk Bonds (JNK) to the short side of Investing Ideas on October 9th. Since then, JNK is down over 7%. Moreover, we originally went bearish on JNK in Real-Time Alerts back in Q4 of 2014.

 

Why I Am Staying Short Junk Bonds | $JNK - jnk rta

 

Where are we now?

 

In baseball-speak, we’re in the top of the third inning of this credit market move. In six months, we might be in the seventh inning stretch. The real problem that is accelerating this slow moving nosedive is that everyone in the business of being long junk is stuck right now. They can’t get out. Just take a look at Third Avenue.

 

And that’s why I’m not covering this short junk bond position. No way.


MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE

Takeaway: While the energy and junk bond/leveraged loan complexes remain under attack, the TED Spread becomes the latest addition to the watch list.

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM11

 

Key Takeaway:

The three things to keep an eye on include:

1. The TED Spread backed up notably on the week, rising +12 bps to 41 bps.

2. Both High Yield and Leveraged Loans took another leg down last week. High yield (YTM) rose another +15 bps to 8.72% while leveraged loans dropped 11 more points to 1796.

3. The bloodbath that is commodities continued to flow. CRB shed another 3% W/W and is down 6.3% M/M.

Current Ideas:

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 7 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM15

 

1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions with little movement around the Federal Reserve's rate increase. The median change was only -1 bps. The one callout was MGIC (MTG), where swaps rose +12 bps to 249 bps.

Tightened the most WoW: ACE, AIG, MMC
Widened the most WoW: MTG, COF, AON
Tightened the most WoW: ACE, MMC, LNC
Widened the most MoM: COF, CB, WFC

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM1

 

2. European Financial CDS – Swaps were little changed, on the margin, last week across Europe's bank complex. The median change was zero. 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM2

 

3. Asian Financial CDS – Bank swaps in Asia were mixed last week and unchanged at the median. One standout was India's ICICI Bank, where swaps widened by +14 bps to 178.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM17

 

4. Sovereign CDS – Sovereign Swaps were mixed last week with a median change of 0 bps. Portuguese swaps showed the most movement, tightening by -5 bps to 168.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM18

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM3

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Indonesian swaps tightened the most, by -22 bps to 267 and by -22 bps to 241, respectively.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM16

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 8.72% versus 8.57% the prior week.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 11 points last week, to end at 1796.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM6

8. TED Spread Monitor  – The TED spread rose 12 basis points last week, ending the week at 41 bps this week versus last week’s print of 29 bps.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM7

9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 172 versus 178 the prior week. As compared with the prior month, commodity prices have decreased -6.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 3 basis points last week, ending the week at 1.82% versus last week’s print of 1.79%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM10

12. Chinese Steel – Steel prices in China rose 0.5% last week, or 10 yuan/ton, to 1927 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 125 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM13

 



Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS

Takeaway: Hedgeye Retail Idea List - COH, COST, LULU, PIR. NKE meaningful tweak to endorsement strategy. BOPIS kinks not ironed out.

Hedgeye Retail Idea List

 

This Week's Changes

Coach (COH): Added to our Long Bench for Vetting. Near $30, we simply need to give this perennial dog a look on the long side. The decision tree is one where all the business needs to do is stabilize, and the stock works. The business improves -- even if by accident -- and the stock goes up a lot. This would be a tactical TRADE/TREND call, and nothing more.

 

Costco (COST): Added to Short Bench for initial Vetting. Half of our team thinks this name is starting to screen like a good short. Half of our team thinks the other half is nuts. Still, a process is a process. We're vetting it.

 

Lululemon (LULU): This has been sitting on our Short Bench waiting for a better price. But we think that the CEO is fired within six months in conjunction with another miss. This company can either invest in people who can develop a real strategy, or sales can drift lower while management chases the elusive mid-50's GM%.

 

Pier 1 (PIR): Booted to the long bench. The call here is simple. It’s not easy, but it is simple. If you DON’T think we’re headed into a recession, or are not concerned about growth slowing incrementally from here…then you’re looking at a 20% FCF yield and 6% dividend yield as PIR recovers from a 3-year investment to build its online business from 1-20%. In a normal economy next year, this stock could be a 4-bagger.  But if you’re in the other camp, then the equity value could go away entirely. We still think that the upside to a $20-something stock is there. But unfortunately, has the potential downside to zero, which we don't like so late in an economic cycle.

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - 12 21 2015 idea list

 

NKE - Meaningful Tweak To Endorsement Strategy

http://www.wsj.com/articles/nike-still-has-room-to-run-1450639115

The crux of this article is that Nike has been conservative with athlete endorsements in recent years. Despite the headlines, that's actually true -- on a relative/competitive basis, at least.  The reality is that Nike has $6.2bn in minimum endorsement obligations, which is 16x what Under Armour has committed. UA is at 6.5% of Nike's endorsement levels today, vs 4.5% just two years ago, and 2.0% in 2010. That's on the heels of Nike uncategorically losing the spotlight to UA on its home turf during 2015 thanks to the likes of Steph Curry, Misty Copeland, Jordan Spieth, and Tom Brady. 

 

We can't say that UA's reign will end. But we're near certain that a major theme in 2016 for Nike will be spending more money on athletes. While first blush is that this would be ROIC dilutive...consider that Nike could add the equivalent of UA's entire 10-year endorsement budget to its current capital base with no cash payback, and it would erode Nike's 21% ROIC by only 60bps.

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - endoresement minimum UA NKE

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - endoresement analysis

 

WMT, TGT, KSS, Department Stores - BOPIS Kinks not ironed out. More investment needed.

(http://www.post-gazette.com/news/nation/2015/12/21/Buy-online-pick-up-in-store-Simple-right-Not-this-Christmas/stories/201512210086)

 

For retailers today, the standard ante chip for an 'omnichannel' operation involves a few key functionalities: website, mobile app, ship from store, and buy-online pickup in store (BOPIS). Scan any brick and mortar analyst day or earnings call transcript and you will see the mention of either the development or implementation of this group of strategies. But, it appears that the group still has a long way to go on the infrastructure side in order to service the ship from store/BOPIS functionality. This holiday season, 60% of BOPIS orders ran into a problem - that's notable as it's supposed be a) a margin saver as e-commerce sales are typically bps GM dilutive, and b) a traffic driver to stores. These services become most important during the peak shopping periods (especially when handlers are struggling to keep up with the volume), and its clear that the kinks are not ironed out. Meaning more investment needed in the IT/infrastructure side, and more employees to service the program.

 

BABA - Alibaba Group Appoints Matthew Bassiur as Head of Global Intellectual Property Enforcement

(http://www.businesswire.com/news/home/20151221005376/en/Alibaba-Group-Appoints-Matthew-Bassiur-Head-Global)

 

JCP - JCP names new CIO with Target background

(http://www.retailingtoday.com/article/jcp-names-new-cio-target-background)

 

FDX, UPS - Jet.com warns shoppers that packages will not arrive in time for Christmas

(http://blogs.wsj.com/digits/2015/12/18/holiday-shipping-delays-claim-retailer-jet-com/)

 

60% of shoppers wait for last minute Holiday deals, up from 50% last year.

(http://www.wsj.com/articles/holiday-shoppers-wait-until-the-last-minute-for-deals-1450521042)

  

ADS - Milan Shoppers On The Hunt For Black Adidas Yeezy 750s

(http://footwearnews.com/2015/focus/athletic-outdoor/adidas-yeezy-boost-750-black-kanye-west-release-milan-178465/)

 

KSS, M, WMT, SHLD - For last-minute shoppers, big retailers offer deals, extended hours

(http://www.fredericknewspost.com/news/economy_and_business/retail/for-last-minute-shoppers-big-retailers-offer-deals-extended-hours/article_b403adc9-1f99-5617-802f-4ff2820215f8.html)

 

NKE, GPS, HM-B - Cambodia workers protest after $20 monthly wage hike not implemented

(http://www.channelnewsasia.com/news/asiapacific/cambodian-police-use/2366600.html)

 
Returns Scams to Cost Retailers Billions

Holiday return fraud is expected to cost retailers $2.2 billion this year, up 15% over 2014 levels, according to a National Retail Federation survey released on Thursday.

(http://fortune.com/2015/12/17/holiday-returns-scams/


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