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Vomitous U.S. Economic Data

Takeaway: If you're buying stocks on the effervescent hope that U.S. economic data is improving ... think again.

Vomitous U.S. Economic Data - queasy

1. Durable goods down -2.5% y-o-y Today.

2. Consumer Confidence Still Off Feb. 2015 peak.

 

Nothing to see here. Go buy stocks...

 

Back to the data.

 

As Hedgeye Senior Macro analyst Darius Dale wrote today: "BREAKING: U.S. Durable and Capital Goods violently puke in March... What recovery?" Here's the Durable Goods table (notice all the nasty-looking red):

 

Click the image below to enlarge. 

Vomitous U.S. Economic Data - durable4 26 

 

A more simplistic (sic "obvious") #GrowthSlowing breakdown looks like this. 

 

 

Another bitter pill for bulls to swallow...

 

Consumer confidence continues to decline from its February 2015 peak, dropping to 94.2 in April versus 96.1 in March.

 

 

Basically, it boils down to this:

 

If you're buying stocks on the effervescent hope that U.S. economic data is improving, think again.


About Everything: The Surge in Mental Health Services

The Doctor is in: Treating America’s Mental Health Epidemic.

 

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why "mental health services spending is riding a long-term attitudinal shift that has brought mental health issues out into the open." Howe explains why it's happening and the broader implications.

 

About Everything: The Surge in Mental Health Services - brain

WHAT’S HAPPENING

 

Mental health care is booming. Since 2003, national spending on mental health services (MHS) has nearly doubled—and is expected to reach $229 billion in 2016. Its growth is far outpacing GDP. 

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 1

 

Sure, the industry isn’t growing quite as fast as health care at large. But the fact that they’re in the same ballpark is impressive, considering that behavioral treatment, unlike somatic medicine, is still what it’s always been—low-tech therapy plus (mostly) vintage pharmaceuticals. In other words, MHS growth is driven almost entirely by volume, not service intensity.

 

Profit margins on all this volume expansion remain high. Acadia Healthcare, which boasts the largest network of inpatient and outpatient treatment centers, was recently named one of Kiplinger’s hottest stocks to own in 2016. Share prices of Universal Health Services (which specializes in MHS) have nearly tripled over the past three years. Hospital giant HCA Holdings cites its behavioral health business as one of its fastest-growing service lines. American Addiction Centers has been on a buying spree since it debuted on Wall Street with a market cap of $314 million in late 2014. 

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 2

 

These companies are spending big on physical infrastructure. Community Healthcare System plunked down nearly $5 million to build onto its psychiatric unit. In Sonoma County, California, a sprawling $2.6 million, 14,066-square-foot mental health facility is in the works. The number of eating disorder facilities has more than tripled in the past decade.

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything callout

WHY IT’S HAPPENING: DRIVERS

 

New laws and mandates. In 2008, Congress passed the 2008 Mental Health Parity and Addiction Equity Act, which required all private health insurance plans offering MHS to do so on the same basis (cost sharing, etc.) as other health benefits. In 2014, the ACA required all private insurers to offer MHS benefits.

 

The ACA also sets a minimum MHS standard for all state Medicaid plans, which is triggering a swift climb in Medicaid spending on both outpatient and inpatient care. Even as Medicaid is spending more on mental health, an exploding number of Disability Insurance beneficiaries with emotional problems are “retiring early” on Medicare. UHS generates a whopping 40 percent of its revenue from Medicaid and Medicare reimbursements.

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 3

 

Growing incidence by cohort. Extensive research has shown that, throughout the postwar era, successive birth cohorts have exhibited depression symptoms at ever-earlier ages. Americans today moving past age 65 have more mental health problems than previous generations of elders did. 

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 4

 

Generational change: Unhealthy Boomers. Boomers’ notoriously unhealthy lifestyle choices have burdened them with chronic diseases and disabilities which are often comorbid with emotional disorders. For example, Boomers are bringing their high rates of substance abuse (most recently, opioid addiction) with them into their 60s.

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 5

 

Generational change: Care-Seeking Millennials. An average high school student today is twice as likely to see a professional for emotional problems as a student was in the early 1980s. College counselors are reporting rises in mental illness (from anxiety disorders to depression) among students.

 

Much of this increase comes from the fact that institution-trusting Millennials are simply much more inclined to seek care from a medical professional than rebellious Boomers or cynical Xers were in young adulthood.

BROADER IMPLICATIONS

 

New frontiers of behavioral health treatment could further accelerate industry growth. Although most policy makers agree that people suffering emotional disorders deserve care and supervision, much research shows that traditional treatment modalities may barely work better than a placebo. Now that may be changing. Thanks to advances in  neuroscience, caregivers may soon be using “biomarkers” found in blood tests, brain images, and saliva samples to identify and treat mentally ill patients—which could produce results in a matter of days.

 

Deinstitutionalization has created a ripe market for privatized mental health care. In the mid-1950s, more than 500,000 people with severe mental illness were institutionalized in state psychiatric wards. Despite six decades of population growth, that number is now under 100,000. The rest now in live in the community. General hospitals, inpatient facilities, and psychiatric clinics are left to pick up the slack. Firms like Acadia, HCA, and American Addiction Centers are jumping in to serve this need.

 

The demand for MHS is virtually unlimited. Or, to put it differently, the demand vastly exceeds the supply. Public policy deliberately constrains spending by making MHS unavailable to most Americans who cannot afford it through private insurance. Most U.S. counties don’t have a single psychologist, psychiatrist, or social worker. The controversial IMD exclusion further limits care by capping Medicaid funding for large state-funded mental health institutions (which have been gradually closing their doors).

 

Increasingly, Americans may feel that it’s cheaper to serve this demand than to ignore it. For every dollar spent on major depressive disorder in 2010, almost $7 was spent on the effects of untreated depression.

 

About Everything: The Surge in Mental Health Services - 4 26 About Everything 6

 

The rising social cost of addiction alone is a growing concern. And then there’s the emotional toll of tragedies like Sandy Hook and Aurora, perpetrated by the mentally ill. As the public becomes increasingly aware of the link between mental illness and mass murders, legislators may become more willing to spend on evaluation and treatment up front. This of course would be great news to the MHS industry.

TAKEAWAY

 

Accelerating MHS spending is riding a long-term attitudinal shift that has brought mental health issues out into the open:

  • Back in the early postwar era, the G.I. and Silent Generations who ran America carefully avoided any mention of emotional distress for fear of being locked away.
  • Boomers and Xers now go on Oprah to talk endlessly about their mental issues—and also about the social benefits of treating the untreated.
  • Millennials trust professionals to diagnose and treat the mental health problems that they suffer from.

Christman: The Real Reason Russian Fighter Jets Flew Dangerously Close To USS Donald Cook

Takeaway: Expect more Russian "Top Gun" behavior in the months ahead.

Editor's Note: Below is a complimentary research note written by Hedgeye colleague and Potomac Research Group National Security analyst LTG Dan Christman USA Ret. In the note, Christman analyzes "what was largely overlooked" in the media's coverage of Russian fighter jets' "Tom Cruise-like antics" while recently flying "dangerously close" to a U.S. destroyer in the Baltic Sea.

 

Click below to watch the footage.

 

Russian fighter-jet antics over the last 10 days -- buzzing dangerously close to an Aegis-class US destroyer and barrel-rolling over an American high-tech reconnaissance aircraft -- begs the question, "Why?"

 

Ian Bremmer of the Eurasia Group wrote shortly after the events that, discounting the muscle flexing, the intent was principally intelligence gathering: the U.S. destroyer Donald Cook had recently received an upgrade to add the highly sophisticated "Aegis" phased-array radar suite, which has anti-ballistic missile as well as anti-air and anti-cruise missile capability. The Russians were hoping the destroyer would turn on at least part of its defensive radar package, to allow Russian electronic intercepts. That probably occurred, at least with some of the Cook's radars, given the flight profile of the Russian jets.

 

What was largely overlooked in the media's emphasis on the Tom Cruise-like antics of the Russia fighter jets, however, was the slow-flying Russian helicopter which loitered near the ship, undoubtedly taking high-resolution pictures of the Aegis weapon system for later intelligence evaluation

 

None of this is particularly new in terms of muscle flexing and intelligence gathering, "Soviet-style;" actions like these were very common through the '80's, despite the signing in 1972 of the U.S.-USSR "Incidents at Sea" agreement.   

 

In this case, Vladimir Putin's finger prints are obvious; the Russia leader has yet to meet a security cooperation agreement with the West that he likes. With his economy continuing to contract in 2016 as Russian banks close by the dozens, Putin has every incentive to provoke an incident with the U.S. It's to the credit of the Donald Cook's crew that they didn't take the bait. 

 

But there is more than intelligence gathering at play. The eastern reaches of the Baltic Sea and the Baltic states themselves, for Soviet-era apologists like Putin, are Russia's back yard. They have never accepted Baltic state independence, and the incorporation of the three Baltic countries into NATO's Article V guarantees grates especially. In this light, the "muscle flexing" that really matters is geo-strategic. 

 

For well over a year, robust Russian ground exercises, submarine activity, and aerial overflights in the Baltic region have alarmed NATO's military; SACEUR General Breedlove has been especially vocal in calling for a U.S. and NATO response. The Donald Cook's steaming by Kaliningrad is part of a long-delayed US reaction to the Russian year-long push in the north; the Russians last week told us what they thought of that.  

 

But there is an additional twist: NATO must decide shortly, in advance of its July summit in Warsaw, whether to follow a U.S. and Breedlove lead to plus-up its ground forces with heavy armor and then continuously rotate these into northern Poland and the Baltics. It's no surprise that opinion is sharply split within NATO on the wisdom of doing this; it's also no surprise that the Russian information campaign is working overtime to deepen these divisions. 

 

The Tom Cruise-like antics last week should hence also be viewed as part of this larger strategic game: a none-too-subtle reminder by Moscow to NATO, and to NATO members opposing a ground force plus-up especially, what could happen if force enhancements proceed; all this in a part of Europe where Russia insists on exercising strategic influence.

 

Bottom line: expect more Russian "Top Gun" behavior in the months ahead. And hope that the U.S. exercises leadership to maintain the NATO alliance unity that Putin is determined to undermine.


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WAB | Release Not Very Useful, But One Thing Stands Out (First Look)

Wabtec’s earnings release is generally not helpful for understanding the quarter.  For example, the topline is not particularly helpful without the backlog numbers.  How gross margin increased on negative mix and a sales decline is also unclear – were accruals reversed, pre-production costs capitalized, unsustainable inventory builds that lowered unit costs, or the like at play?  Last quarter, traders were crushed by relying on the initial release, and this release similarly lacks critical data.

 

One item of note, however, is that with year-on-year declines in sales and net income, Wabtec is no longer a growth company and may fail to meet the criteria for some growth funds.  This is a key step in the growth to value transition we continue to anticipate for WAB shares. Growth investors are unlikely to rely on financial engineering like debt funded buybacks in establishing investment criteria.  If that take is right, we would look for growth holders to have shares on offer following today’s sales miss.

 

Unfortunately, we won’t be able to understand WAB’s results without the rapid-fire earnings call disclosures and the 10-Q.  


Earnings & Expectations - Key Call-Outs (Peak Forward Multiples)

The Materials sector, and the S&P 500 as a whole, is going on its third consecutive quarter of negative Y/Y earnings growth, and forward expectations have been taken down (obviously on a lag). With the sector now trading at peak forward multiples, below we ask the question, are forward-looking earnings expectations now too beaten-down, or is the current peak multiple a sign to be cautious of prospective returns? We would argue the latter.

 

*Note*: The S&P 500 GICS Materials Index only has 27 companies, so we’ll take a deeper look at expectations and different multiples for a larger sample next week in our monthly “Sector Sentiment Run” slide deck.

  • Earnings Growth: With Materials sector earnings down -18% this reporting season to date (after printing -18% in Q4 2015), Q1 2016 would mark the 3rd consecutive quarter of negative Y/Y earnings growth (see chart below).
  • Case for Peak Multiples: Without question earnings expectations have been revised materially for the obvious reasons, especially in resource-driven sectors. Every sub-sector beat bottom line expectations in Q4 despite the fact that earnings declined -18% (the same level we are currently tracking for Q1 2016). With the 2-month move in Materials stocks, does the market have it right? – The sector is trading at cycle peak forward multiples. 
  • Earnings & Expectations: Earnings growth beat estimates by 16.9% in Q4 2015 despite declining -17.9%. However, every sub-sector beat top-line estimates in Q4. This trend has continued for Q1 2016. So are earnings expectations too low, or is earnings manufacturing by corporations at unprecedented levels? Either way, the sector is trading at a peak multiple 7 years into a bull market, which in reality could be a much higher on a comparative basis, and we question the catalyst to take the market to much higher multiples without a correction. Again, we’ll look at this next week with a larger sample of companies.

 

Earnings & Expectations - Key Call-Outs (Peak Forward Multiples) - PE Chart

 

Earnings & Expectations - Key Call-Outs (Peak Forward Multiples) - Q1 COmps

 

Earnings & Expectations - Key Call-Outs (Peak Forward Multiples) - Q4 15 Comps

 

 


RTA Live: April 26, 2016

 


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