Cartoon of the Day: Dead On Arrival

Cartoon of the Day: Dead On Arrival - earnings season cartoon 05.10.2016


A brief update on earnings season:

  1. 441 of 500 S&P 500 companies have reported their Q1 2016 numbers
  2. Aggregate SALES growth is DOWN -2.4% year-over-year
  3. Aggregate EARNINGS growth is DOWN -8.9% year-over-year
  4. Ex-Energy (EPS -109% y/y), Financials have EARNINGS DOWN -14.3% year-over-year
  5. Ex-Energy, Technology has EARNINGS DOWN -8.4% year-over-year 

Trump & Bernie's War On Math

Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email


Trump & Bernie's War On Math - trump 55


Donald Trump is under fire for waffling on the pillars of his economic plans. We think he has a bigger numbers problem - and his difficult task of winning over key demographics (particularly Hispanics) may have just gotten harder. Yes, his unfavorables are at a historic high for a major party nominee; and yes, his misguided attempts to win over those groups (think: TacoGate 2016) have not done him any favors.


But that may be nothing compared to the impending "Hispanic backlash."  Trump is backed up against a big border wall for a number of reasons: he has a net favorability among Latinos of negative 78% (while Hillary Clinton is at +29%). Since 1980, no Republican has won the White House without locking down at least 30% of the Hispanic vote, and Hispanic registration is up in a number of key states - CA, CO, NV and FL - to name a few. 


Trump & Bernie's War On Math - bernie sanders another


The Democratic underdog is fighting over big numbers again, and this time they're coming at him from the left. The left-leaning Urban Institute did the math on Sanders' "Medicare for all" program estimating it would increase federal spending by $32 trillion over 10 years - yes, that's trillion with a T


Sanders had previously estimated the cost to be closer to a measly $13.8 trillion. But West Virginians don't seem too concerned. Despite Sanders' long list of policy proposals with no clear way to pay for them, he is likely to pick off another win in WVA today and the Democratic contest will just keep dragging on. 


Tax Notes recently suggested the Obama Administration could use the regulatory process to close the so-called "carried interest loophole." Treasury officials responded in an eerily similar tone it used during the run-up to recently-released inversion guidance, saying closing the loophole was a top priority and that Treasury is "continuing to explore its existing authority...but the department cannot eliminate the carried interest tax benefit by itself." 


Given the heat they are taking on their unilateral action on inversions, we would be surprised to see Treasury take on another battle.  But given Clinton, Sanders and Trump have all criticized the carried interest provision, the rhetoric on this issue will likely heat up just in time for the summer.

Connecting the Dots: Proposed Enrollment Change Should Magnify #ACATaper

Takeaway: A change to enrollment policy on the federal exchange and the state based exchanges is good news for insurers. For providers?

Yesterday, we published a note regarding a change in enrollment policy for the federal health insurance exchange,, and the state based exchanges. Specifically, HHS is drastically limiting Special Enrollment for a "permanent move." In that note we focused largely on the implications for insurers like UNH, AET and MOH. However, in light of Tom Tobin's note this morning on AHS and his ongoing examination of the #ACATaper, we thought it would offer a few points on the flip-side - the implications of the policy change to providers.


Recall that about 60 percent of people enrolled in federal and state exchanges were previously uninsured with the largest portion coming from people with incomes at or below 250 percent of the federal poverty level. This result is much different from what most people (policy makers, insurers, economists and the Congressional Budget Office) thought would happen. They expected a larger shift of people from employer-based coverage to the exchanges.

  • The elimination of the Special Enrollment Period for a "permanent move" is most likely to shift people back to uninsured status not to insured status (after waiting for the next open enrollment period.)
  • Providers, especially hospitals, are very adept at running patients through all eligibility screens when they present at the hospital. These patients will still present at a hospital or clinic but the case workers will have one less option when screening for coverage. The other SEPs are pretty restrictive (release from incarceration, addition of a newborn, etc.) so assuming the patient needs treatment, they will be admitted as a "patient pay" case while the hospital sorts out what if anything the patient can pay. More likely than not, especially if the hospital is non-profit under recent IRS regulations, the patient will be treated on an uncompensated basis.
  • A certain portion of patients that sought non-emergent care and received coverage from the permanent move SEP long enough to have the necessary elective procedure (like a hip or knee replacement) will simply forego treatment.
  • Bottom line is that enrollment should drop, provider admissions will go down, and uncompensated care will go up as a result of this rule change thus magnifying the trends already identified in the #ACATaper thesis Tom Tobin has been discussing.
  • If you toss a recession into the mix, the admissions drop may be muted as a portion of this SEP population shifts to Medicaid due to income changes.
  • We do not yet know how many enrollees in 2014 and 2015 gained coverage through a SEP but the insurance industry said that 13 payers received $25 billion in claims from Jan., 1, 2014 to June 30, 2015 for SEP enrollees, according to a recently released report by Oliver Wyman.
  • Rule becomes effective in July so impact should occur in back half of 2016.

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A Nasty Day For Debt Collector PRA Group (Another Solid Short Call By Josh Steiner) $PRAA

Takeaway: PRA's weak quarter is only the beginning of it's downturn, says Financials analyst Josh Steiner. We still see "significant downside."

A Nasty Day For Debt Collector PRA Group (Another Solid Short Call By Josh Steiner) $PRAA - praa


Today hasn’t exactly been a happy day for investors long debt collector PRA Group (PRAA). After the company missed first quarter earnings estimates by a wide margin, shares plummeted over -18%. Ugly? Of course. But this barely scratches the surface of PRAA’s underlying issues.


To be clear, our Financials analyst Josh Steiner has been advising our customers to short PRAA. Since adding it to his team's Best Ideas Short list in November, shares are down almost 30%.


Here’s an excerpt from an update on PRAA via an institutional research note written by Steiner:


“PRA Group (PRAA) reported 1Q 2016 earnings after the close last night. The company missed revenue expectations by -6%, reporting $225 million versus expectations for $240 million, and adjusted EPS of $0.85 fell -11% short of expectations for $0.96. GAAP EPS, meanwhile, was $0.69, 28% below expectations.”


It’s also important to note, as Steiner continues, “Operating margin has fallen by a massive -770 bps from 39.2% in 1Q15 to 31.5% in 1Q16.”


Another highlight that caught our Financials team’s attention, since the broader issue is on the SEC’s radar, was the widening disparity between PRAA’s GAAP and non-GAAP earnings:


The last 9 months have seen GAAP earnings of $1.91, while non-GAAP earnings have been $2.87 (50% higher!). We think the buyside and sell-side may be slowly waking up to the fact that GAAP numbers are the better gauge of how PRA is performing. It's also remarkable how in the last 9 quarters, not once have Non-GAAP earnings been lower than GAAP earnings.”


Other important issues to watch include further deterioration in major company metrics, regulatory scrutiny, allowance charges and IRS-related tax troubles. In other words…


Not good.


Bottom Line: “Given the numerous aforementioned headwinds, we believe this quarter’s broad deterioration in PRAA’s metrics is only the beginning of the company’s downturn. We continue to see significant downside to PRAA’s stock price.”


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Editor’s Note: To access our institutional research email

Reality Bites Retail: Most Bankruptcies Since 2009

Takeaway: The Aeropostale bankruptcy marks the sixth of the year -- putting the YTD count ahead of the full-year tally for each of the past 6 years.

Editor's Note: Below is a brief excerpt from an institutional research note written recently by Hedgeye Retail analyst Brian McGough. To access our institutional research email


Reality Bites Retail: Most Bankruptcies Since 2009 - chapter 11 bankruptcy



In case you were hiding under a rock, Aeropostale finally did a favor for both the teen shopping crowd and the investment community alike when it filed Chapter 11 this week. There are two major takeaways from where we sit…

Click charts to enlarge


Reality Bites Retail: Most Bankruptcies Since 2009 - retail bankruptcy 1

  1. First off, let this serve as a reminder as to how long these apparel retailers can sustain a state of sub-mediocrity without going under. While not super high margin businesses, the only real capital needs are in inventory -- as capex is generally low, and property values are almost all off-balance sheet. In other words, by the time a company looks like it is headed to file, it might actually have another full economic cycle left in it. That's Aeropostale.
  2. Secondly, this event marks the sixth major retail bankruptcy of the year -- putting the year-to-date count ahead of the full-year Ch 11 tally for each of the past six years. If we annualize the current run-rate, we'll be on track to see more bankruptcy events than any year in two generations -- including the Great Recession. In fairness, as someone astutely pointed out to us last month, Chapter 11 filings are historically weighted toward the start of the fiscal year. That, in fact, is true. But we're still likely to see a few more by the end of the year. Regardless of any nuances, the most notable point to us is that we're seeing such a significant uptick in business failures when we're so late in this economic cycle.  


Reality Bites Retail: Most Bankruptcies Since 2009 - retail bankruptcy 2

As Neil Howe Predicted In March … ‘Trump Will Run To Left Of Clinton’


Renowned Demographer and Hedgeye Sector Head Neil Howe is always one step ahead of the crowd. Case in point: A popular Washington Post article today lays out how presidential hopeful Donald Trump is “running to the left of Hillary Clinton.” In a then controversial video on HedgeyeTV, Howe predicted this would happen … back in March. Watch as Howe and Hedgeye CEO Keith McCullough review and update his prescient call in this brief excerpt of The Macro Show.