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2 Key Charts Underpinning Our Recession Call

Editor's Note: Want a better understanding of why our macro team thinks the likelihood of a U.S. #Recession in Q2 or Q3 of 2016 is significant? Wall Street is completely missing this. It has to do with the relationship between labor income and corporate profitability.

 

See below a brief excerpt from a research note written by our U.S. Macro analyst Christian Drake explaining this relationship. To learn more about how you can subscribe to our institutional research email sales@hedgeye.com.

 

... And click here to join us on The Macro Show today with Hedgeye CEO Keith McCullough. It's free

 

2 Key Charts Underpinning Our Recession Call  - recession cartoon 12.22.2015

 

According to Drake:

Labor Income ↑ = Profitability ↓

With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see the recent wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.  

 

Take a closer look at the charts below.

 

2 Key Charts Underpinning Our Recession Call  - labor income

 

2 Key Charts Underpinning Our Recession Call  - profit


[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.

 

Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.16 2.03 2.10
SPX
S&P 500
1,865 1,950 1,921
RUT
Russell 2000
991 1,059 1,025
COMPQ
NASDAQ Composite
4,440 4,614 4,615
NIKK
Nikkei 225 Index
16,804 17,905 17,240
DAX
German DAX Composite
9,507 10,022 9,794
VIX
Volatility Index
22.17 28.98 23.95
DXY
U.S. Dollar Index
98.66 100.12 99.14
EURUSD
Euro
1.07 1.10 1.08
USDJPY
Japanese Yen
116.41 118.99 118.06
WTIC
Light Crude Oil Spot Price
28.41 32.99 31.21
NATGAS
Natural Gas Spot Price
2.02 2.31 2.14
GOLD
Gold Spot Price
1,068 1,098 1,078
COPPER
Copper Spot Price
1.91 2.02 1.98
AAPL
Apple Inc.
93 101 99
AMZN
Amazon.com Inc.
564 616 593
GOOGL
Alphabet Inc.
704 748 731
MCD
McDonald's Inc.
113 119 116
FB
Facebook Inc.
92 100 98
INTC
Intel Corp.
30.06 33.07 32.74


Recessionary Data Pending...

Client Talking Points

VOLATILITY

The biggest tell yesterday was volatility – i.e. no change – it remains in what we call a Bullish Formation with an immediate-term risk range of 22.17-28.98. #Deflation’s Dominoes end with massive volatility and a breakout in credit spreads.

CHINA

China was hammered another -3.6% overnight in Shanghai after Trump reminded the world he wants to eviscerate Chinese trade – that would have to be super bullish for macro markets, no? #GOPDebate .

OIL

After every high profile pundit tries to call the bottom, Oil takes another leg down – this is #Deflation and it is not “transitory.”  Oil is crashing again this morning down -5.2%, this ensures Producer Prices in America are in a #Recession.

 

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

Asset Allocation

CASH 65% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.

 

McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.

GIS

General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.

 

In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).

 

GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.

TLT

After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.

 

TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.   

Three for the Road

TWEET OF THE DAY

VIDEO | Here's what we really think about the #Fed and QE

https://app.hedgeye.com/insights/47754-what-qe-actually-did-was-pay-the-few-and-crush-the-many?type=video… cc @KeithMcCullough @HedgeyeDDale

@Hedgeye

QUOTE OF THE DAY

Impatience never commanded success.

Edwin H. Chapin

STAT OF THE DAY

According to an analysis by Bloomberg Intelligence, Apple Inc. could owe more than $8 billion in back taxes as a result of a European Commission investigation into its tax policies.


Attention Students...

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CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to join Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale on today's The Macro Show. It's FREE!

 

"... Within the housing related equity complex, REITs provide the best relative returns during recession and rate risk environments.  As can be seen in the Chart of the Day below, REIT’s are essentially the Utilities of the Housing industry. While the r-square isn’t exceedingly high, the relative return distribution plots as you would expect and want in a growth slowing environment."  

 

CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment - CoD 2

 


Bro-Science

“A calorie is a calorie is a calorie”

 

My grad school Bionutrition professors peddled that perceived wisdom about caloric intake and its flow through to body composition every semester.

 

I think they truly believed it.

 

The math behind the conventional thinking ran like this:  1 lb of fat = 395g (~87% lipids) … 395g X 9 calories per gram  = ~3500 calories. 

 

So, create a caloric deficit of 3500 and the muffin-top melts to memory. 

 

Intuitively compelling, expositionally convenient …. and (mostly) empirically false. 

 

You don’t need an advanced degree to poke common sense holes in that orthodoxy. 

 

At the time, my simple pushback was something like this:  “If I eat 2K calories of butter, 2K calories of chicken, or 2K calories of lettuce everyday, do you think I’ll look and perform the same after 3-months?”

 

Empirically, physiology and physique transformation are nonlinear processes and simple calorie reduction works … until it doesn’t.   

 

The further someone progresses beyond the “honeymoon” dieting period, the more progress gets choppy and less predictable. 

 

Most people have experienced a form of diet nonlinearity.  Diet, Diet, Diet and nothing happens for days/weeks then wake up one morning and you lost 5 lbs overnight and look noticeably different. 

 

Having trained hundreds of high-level, competitive athletes and bodybuilders, you learn what works with live ammo.  It’s called Bro-Science. 

 

Bro-Science has had a sneaking tendency to become ivory tower doctrine … on a lag. 

 

Relatedly, this week I put on a pair of spandex and looked in the mirror.  It’s called #TruthSerum.  

 

Bro-Science - CoD 1

Click here to join Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale on today's The Macro Show.

 

Back to the Global Macro Grind ….

 

On Wednesday, we strapped the research spandex on Housing and delivered our outlook for 2016.  The conclusion, in rate-of-change bro-science empiricist terms is:  Less Good is Bad (ping if you’re interested in reviewing the 150-pg deck detailing our view) 

 

Without giving away the full institutional research alpha thunder, here’s a select summary of some of the issues facing the industry: 

 

  • WALL OF WORRY OR SLOPE OF HOPE?  The long-term bull case for Housing is still alive, but the short and intermediate term outlooks are dominated by negatives.  At the macro level, the manufacturing-industrial data is conspicuously contractionary, income and consumption growth are both past peak, birth trends are rolling over and recession risk is rising.  Housing related equities (Builders, Building Products, Home Improvement, Title Insurers, etc) underperform in both recessionary and rising rate periods.   Rather than climbing the wall of worry, we think the first 6-9 months of 2016 will be spent riding the slope of hope lower.
  • FUNDAMENTAL DECELERATION | VOLUME & PRICE:   Rate of change in both volume and price are set to decelerate in 2016. The short-term will be pressured by a late-4Q15 pull forward of demand ahead of the Fed’s rate hike. Beyond this, however, tough comps through 3Q16 will push Y/Y growth down sharply and home price trends will begin to play catch up (i.e. decelerate) to 2015’s back half volume slowdown.  Decelerating fundamentals are rarely a catalyst. 
  • HOUSTON, WE HAVE A PROBLEM:   While Houston is small relative to the country as a whole, it’s not small for builders.  The Houston Metro population is the fifth largest in the US with ~6.5 million residents and was the fastest growing metro from 2010-2014.  Builders ramped exposure to Houston and benefited over the last half-decade+ as demand and construction accelerated but conditions have reversed and activity is now spiraling south.  Job growth in the region slowed from +4.4% last year to just +0.8% in November, existing home inventory is up +28% YoY, demand is down -11% YoY, new orders at LEN were down -20.4% in 4Q and home prices and permitting activity have just begun to roll over.  Further, oil hedges for major E&P employers in the region will decline by -23% in 1H16 and further headcount “adjustments” will follow.  In short, don’t try to catch the falling knife in Houston – it’s going to get worse.
  • LABOR SUPPLY:  Builders have complained about the dearth in specialty trade contractors in recent quarters as the peri-crisis retreat in immigration, a lack of hiring of younger workers, and residual post-crisis industry level labor issues have reduced the supply of skilled workers to the industry.  A tight resi labor market is indicative of rising demand (i.e. a high quality problem from a longer-term perspective) but the associated cost and margin pressure will not resolve in 1H16 as the pace of new construction activity continues to outpace the growth in industry employment. 
  • HIGH END:  Growth in New Home Purchases at the high end (>$500K) has slowed to -10% YoY in 4Q and demand is unlikely to materially re-accelerate over the shorter-term.  As can be seen in the Chart above, High ticket discretionary consumption is (unsurprisingly) sensitive to asset market volatility and with the VIX in Bullish Formation and global equities in hard-hat mode, the high end probably won’t carry the consumption curve higher here in early 2016. 
  • PLAYING DEFENSE:  Within the housing related equity complex, REITs provide the best relative returns during recession and rate risk environments.  As can be seen in the Chart of the Day below, REIT’s are essentially the Utilities of the Housing industry. While the r-square isn’t exceedingly high, the relative return distribution plots as you would expect and want in a growth slowing environment. 

 

With the future’s red this morning, today’s domestic macro data is unlikely to fuel an appetite for holding risk over the long weekend. 

 

The PPI data will remain deflationary, Industrial Production growth should remain negative for 2nd month (and – outside of a prospective cold weather bounce in utilities production in January – it’s unlikely to reverse in the coming months with both backlogs and new orders holding <50 across the ISM/PMI surveys) and with savings rates elevated and durable goods orders and consumer credit growth flagging in recent months, Retail Sales are unlikely to surprise to the upside.  

 

God was in a good mood the day he created the intelligent bro-scientist gene. 

 

At some point we’ll be very publically wrong, but in the meantime …

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.03-2.16%

SPX 1
RUT

VIX 22.17-28.98
USD 98.66-100.12

 

To the bro’s continuing to front-run the (macro) flows,

 

Christian B. Drake

U.S. Macro Analyst 

 

Bro-Science - CoD 2


Stock Report: Allscripts Healthcare Solutions (MDRX)

Takeaway: We added MDRX to Investing Ideas on the short side on 1/12.

Stock Report: Allscripts Healthcare Solutions (MDRX) - HE MDRX table 1 14 16

THE HEDGEYE EDGE

Allscripts Healthcare is a legacy provider of Electronic Medical Record and Practice Management software and solutions to physician offices (ambulatory) and hospitals (inpatient). The market for ambulatory EHRs (50% of MDRX Sales) is highly fragmented, with over 400 different vendors claiming some stake to the market. The large number of vendors is the result of government subsidies issued to purchase software under the HITECH Act (2009), which mandated their purchase or face penalties longer term.

 

However, the stimulus spending has now ended and going forward, we believe market share will naturally accrue to the top vendors in the market. Our view is that Allscripts is NOT a top vendor.

 

Allscripts has a difficult past and questionable future. The company made a series of acquisitions in the 2005-2010 period and failed to integrate them properly. As HITECH requirements began, also called "Meaningful Use" attestation, in 2011 Allscripts was unable to keep up.

 

What resulted was a 30% drop in bookings in 2012, 50% drop in stock price, a board shakeup and ultimately a new CEO and management team. The new CEO, Paul Black, has made great strides to turn Allscripts around. Unfortunately, we believe the damage is already done and the most optimistic version of the turn-around story is reflected in the current stock price.

 

We have done a lot of work in the Health IT space as a derivative of our Best Idea Long call on athenahealth (ATHN), building proprietary tracking tools and analyzing large datasets to track share gain/loss over time. We also conduct a great deal of primary research, mainly in the form of speaking with those in charge of making purchasing decisions at large Health Systems and system users. The results of this research suggest that Allscripts will continue to be a share donor for the foreseeable future.

 

Stock Report: Allscripts Healthcare Solutions (MDRX) - 20150106 MDRX EHR GainLoss large

 

 

INTERMEDIATE TERM (TREND)

 

Based on our assessment of the market, we believe bookings growth will slow over the course of 2016, and expect the multiple to compress as a result. Historically, there has been a 0.85 correlation between bookings growth YoY and the change in forward multiple. This results in a stock price closer to $10 on a trend duration.

 

We expect our thesis to play out on both a trend and tail duration. Our key thesis points are as follows:

  • MARKET SHARE DONOR
    Data continues to show ambulatory and inpatient share losses. We expect this trend to continue as large health systems consolidate and value-based reimbursement drives the need for a single inpatient EHR. On the ambulatory side (~50% sales), Allscripts will continue to lose business (prospective and current) to peers athenahealth and eClinicalWorks, both of whom surpass Allscripts in interoperability and outsourcing capabilities. We will be receiving quarterly market share updates to monitor our thesis, and will continue to update our proprietary trackers.
  • LIMITED ADDRESSABLE MARKET
    While Allscripts reputation has markedly improved since the dark days of 2012-2013, the reality is that the damage is already done. Many Hospital Executives refuse to include Allscripts in RFPs and estimates of mind share vs. market share do not bode well for bookings growth. Based on industry ratings and anecdotes, the probability of Allscripts unseating the current acute care EMR vendor at any large IDN is low. We will continue to collect anecdotes from industry participants, including current Allscripts customers. 
  • ESTIMATES TOO HIGH
    Current valuation appears to be supported by accelerating sales growth in 2018-2019 from low single digits to mid-teens. In order for this to occur, bookings would need to sustain +25% growth and backlog conversion would need to accelerate. With system sales in secular decline, new contract lengths ranging from 5-10 years and for the reasons outlined above, we find this unlikely.

Stock Report: Allscripts Healthcare Solutions (MDRX) - 2015 01 06 EHR SHare Losers Gainers large

 

LONG TERM (TAIL)

 

Allscripts has amassed a large install base, and currently ranks 3rd in Ambulatory EHR market share. Share losses at Allscripts will come at both ends:

  1. Competitive displacement from the likes of athenahealth and eClinicalWorks and
  2. Health system consolidation resulting in the rip and replace of the legacy system.

On the last point, the shift to value-based reimbursement will likely accelerate health system consolidation in the coming years. The vendors that survive will be the ones who invest in the usability and interoperability of their products, and whose incentives are aligned with that of the physician. Allscripts does not rank favorable in either of these categories.

 

While there will certainly be volatility along the way, on a tail duration we believe the stock can reach the $5-7 level. 

 

Click here to watch a video of Healthcare analysts Tom Tobin and Andrew Freedman laying out their MDRX short thesis.

ONE-YEAR TRAILING CHART

Stock Report: Allscripts Healthcare Solutions (MDRX) - HE MDRX chart 1 14 16

 


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