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Cartoon of the Day: The Elephant In The Room

Cartoon of the Day: The Elephant In The Room - GDP cartoon 04.26.2016

 

We think U.S. GDP will come in significantly worse than even downwardly-revised macro consensus or the Fed is currently forecasting.


Washington On Wall Street: Handicapping the ‘Acela Primary’

 

Potomac Research Group Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones to discuss today’s so-called "Acela primary" bringing voters to the polls in Pennsylvania, Connecticut, Rhode Island, Maryland and Delaware.


Can Fed Stop Recessionary Selloff?

 

In this animated excerpt from The Macro Show, Hedgeye’s Keith McCullough, Darius Dale and Neil Howe respond to a subscriber’s question about whether the Fed can continue propping up the stock market as economic conditions deteriorate and a recession knocks on the door.


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Penney: The Better Burger Won't Save Chipotle's Investors

Takeaway: The bad news for Chipotle investors isn't going away anytime soon writes veteran analyst Howard Penney on Fortune.

Editor's Note: Beleaguered Chipotle reports earnings tonight after the market close. Bulls (and bears) will undoubtedly be focused on the pace of Chipotle's losses following last year's E. coli outbreak. But, as veteran Hedgeye Restaurants analyst Howard Penney writes in Fortune, Chipotle has committed a "fatal mistake" and "massive shareholder value will be destroyed over the next few years."

 

Penney: The Better Burger Won't Save Chipotle's Investors - fortune chipotle

 

On Tuesday, the Mexican fast-food chain is expected to report earnings for the first quarter of 2016.

 

Fast-food chain Chipotle Mexican Grill on Tuesday is expected to report its first quarterly loss as a public company following last year’s E. coli outbreaks that exposed the chain’s health safety issues. Wall Street analysts are estimating a GAAP earnings loss of $1.04 versus $3.88 last year. I suspect the media will focus on Chipotle’s loss and its decline in same-store sales of roughly 30% during the first three months this year. Meanwhile, anyone who is still bullish on Chipotle’s stock will likely focus on the pace of its recovery in same-store sales and the improving profitability over the next two years.

 

I’m bearish and think massive shareholder value will be destroyed over the next few years. Up until the E. coli outbreak, Chipotle’s management team has never managed a company crisis. They continue to believe consumer attitudes toward the brand have not changed and that customer traffic will return to pre-crisis levels within the next 12 to 24 months.

 

That outlook is flawed. The fatal mistake the company is making is all about capital deployment. Chipotle ended 2014 with 1,783 stores and $445 million in net income. By the end of 2018, the company’s estimates suggests that they will spend $1.3 billion to add 1,117 new stores, a 62% increase in its store base. The problem is that during the same period between 2014 to 2018, even the most bullish investors of Chipotle estimate that the chain could earn net income of $506 million or incremental net income of $61 million. So if Chipotle invests $1.3 billion in new stores and generate $61 million in incremental new income, that’s a 4.7% return on investment. That is what I call the definition of destruction of shareholder value.

 

CLICK HERE TO CONTINUE READING ON FORTUNE.


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.

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