CHART OF THE DAY: Remember What Happened When The Fed Hiked In December? We Do.

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... If the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway.


That last part is the part Consensus Macro got smoked by when they bought the Financials (XLF) and shorted “expensive” Utilities (XLU) in December 2015 on the DEC Rate Hike. The Fed drives the Dollar; the Dollar doesn’t drive the Fed."


CHART OF THE DAY: Remember What Happened When The Fed Hiked In December? We Do. - 05.19.16 EL Chart

Long Bond Bookie

“I’d rather be a bookie than a goddamn poet.”

-Sherman Kent


Barring some alliteration here and there, I’m not a goddamn poet either. I’m a Risk Manager. And when I think about risk, I think in probability and rate of change, not the consensus corner of the hedge fund community’s panic attacks.


When you wake up in the morning do you want someone to hold your hand and tell you what to do? Or do you have your own process and group of market practitioners like me to help augment it?


From his perch at the CIA during WWII and the Cold War, Sherman Kent, helped US Presidents make decisions using probability language. “If the National Intelligence agency said something is “probable”, it would mean 63-87% chance it would happen. Kent’s scheme was simple – and it greatly reduced the room for confusion.” (Superforecasting, pg 56)


Back to the Global Macro Grind


If you want to be 100% certain, there’s a bookie in the clink I can put you in touch with. His name is Madoff. If you want credibility in making Macro Calls on Wall Street, you better be right at least 63% of the time.


If you simply think something is “possible” (not probable)… like say a Fed “rate hike” into a slow-down… Kent “suggested the word “possible” be reserved for important matters where analysts have to make a judgment but can’t assign probability.” (pg 56)


“So.. you’re saying there’s a chance.”

-Dumb & Dumber

 Long Bond Bookie - dumb and dumber


That’s about as useful as some of these regional Fed Heads (like John Williams at the San Francisco) have been in outlining their “chance for 3-5 rate hikes” in 2016. There’s no process in that. There’s only confusion. And market confusion breeds contempt.


I don’t make a call on something unless I think there’s at least a 67% chance that I’m going to be right. “Where could you be wrong Keith?” Well, folks, I could be wrong on all of it. How about you? What are you going to do if I’m right on rates again?


Being The Bull on the Long Bond since this time last year has not been easy. I’m almost starting to feel like the Long Bond Bookie of Twitter. But, if you think I fold with Q2 consumption and employment #GrowthSlowing here, you’ll be 100% wrong on that.


So, let’s go right to the wood and let me reiterate what I did in Real-Time Alerts yesterday:


  1. COVER signal = US Retailers (XRT) which were getting pounded to new lows (still bearish TREND)
  2. BUY signal = McDonald’s (MCD) which is still my favorite Big Cap US Equity (bullish TREND)
  3. BUY signal = Utilities (XLU) which is still our favorite US Equity Sector Style (bullish TREND)
  4. SHORT signal = JP Morgan (JPM) which signaled immediate-term TRADE overbought (bearish TREND)
  5. COVER signal = Kinder Morgan (KMI) which signaled immediate-term TRADE oversold (bearish TREND)
  6. COVER signal = Encore Capital (ECPG) which signaled immediate-term TRADE oversold (bearish TREND)
  7. BUY signal = Occidental Petroleum (OXY) which signaled immediate-term TRADE oversold (bullish TREND)
  8. BUY signal = Long Bond (TLT) which remains my favorite way to play US #GrowthSlowing (bullish TREND)
  9. COVER signal = PRA Group (PRAA) which signaled immediate-term TRADE oversold (bearish TREND)
  10. SHORT signal = Regional Banks (KRE) which signaled immediate-term TRADE overbought (bearish TREND)


Q: “Are we clear?” –Colonel Jessup

A: “Crystal” –Kaffee


I didn’t build this place to play possum. I built it with no conflicts of interest – no bankers, no brokers, no bookies – so that we could bring transparency and accountability back to a profession in dire need of it.


I don’t make calls assuming I’m going to be right. We all get things wrong on Wall Street. But over my dead body are my subscribers going to be getting “possible” when I make a call. They are going to get probable and why.


Why do I think the aforementioned 10 moves were the highest probability decisions I could make yesterday?


  1. US GROWTH continues to slow
  2. US Consumption and Employment GROWTH slowing are more important to the Fed than CPI
  3. US INFLATION is reflating from deflationary lows – that’s not to be confused with a breakout of hyperinflation
  4. US 10yr Yields (intermediate-term, not 2-day moves) map the rate of change in GROWTH more so than INFLATION
  5. If the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway


That last part (5) is the part Consensus Macro got smoked by when they bought the Financials (XLF) and shorted “expensive” Utilities (XLU) in December 2015 on the DEC Rate Hike. The Fed drives the Dollar; the Dollar doesn’t drive the Fed.


While her rookie Dollar Debaucherers in Regional Federal Reserve offices are more “preferred outcome” dependent, what we have learned in 2016 is that Janet Yellen has been data dependent, but on a lag.


As #LateCycle growth slowed, she cut out 3 of the 5 hikes. If she hikes for the sake of hiking, she’ll prove that she’s not politically tied to the Democrat party. She’ll probably blow up the commodity, stock, and bond markets all at once right before the election.


And at that point, we all might be aspiring poets anyway.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.88%

SPX 2035-2061


VIX 14.71-17.40
USD 93.62-95.48

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Long Bond Bookie - 05.19.16 EL Chart

The Macro Show with Keith McCullough Replay | May 19, 2016

CLICK HERE to access the associated slides.



 An audio-only replay of today's show is available here.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.36%

Higher Gasoline Demand Drives EPA Increase in Proposed 2017 Ethanol Mandate

Takeaway: The ethanol industry should be pleased with EPA's proposed RFS for 2017 of 14.8 billion gallons but the rule will raise costs on refiners.



The Environmental Protection Agency (EPA) today released its proposed 2016 Renewable Fuel Standard (RFS) for 2017 using record gasoline demand as the driver to compel higher ethanol and other renewable fuel mandates next year. The law requires a public comment period on the proposed rule for the next several months with EPA finalizing the rule by November 30, 2016.


EPA is proposing to require refiners to blend 14.8 billion gallons of conventional ethanol in 2017 – an increase of 300 million gallons from 2016 and 750 million gallons more than 2015.  The proposed ethanol RFS is just 200 million gallons shy of the statutory requirement of 15 billion gallons.



Summary of EPA’s Renewable Fuel Standards 2014-2017

Higher Gasoline Demand Drives EPA Increase in Proposed 2017 Ethanol Mandate - Joe EPA Chart


While EPA is still below the statutory volume, ethanol producers should be pleased by the proposal today. The Obama administration has now reversed itself on the RFS having increased the volumes every year since 2014 when it proposed the now withdrawn 13.01 billion gallons ethanol mandate. With this new proposed RFS, EPA has now increased the required volumes by 1.8 billion gallons.


Refiners and the petroleum industry will be strongly opposed to the proposed RFS as it will increase costs and require volumes above the so-called 10 percent blend wall. 


The ethanol producers and refiners were both unhappy with the 2014-2016 RFS finalized late last year and have file lawsuits challenging the rule. Likewise, we would expect both groups to file law suits after the 2017 rule is finalized later this year.


EPA has rationalized the higher RFS based on record gasoline consumption in the US this year. The agency likely contends that its 2017 proposed RFS is still within the 10 percent blend wall since more gasoline consumption means more room for ethanol blending volumes.


However, estimating gasoline demand and consumption is a dark art. Already we have seen the Energy Information Administration (EIA), International Energy Agency and OPEC re-adjust their oil and gasoline demand figures several times this year.


Regardless of the degree of difficulty, EPA has developed its own robust demand estimates and seemingly ignored the EIA estimates. Certainly, we can all agree that demand appears to be at record levels but EPA envisions an even rosier outlook than EIA.


According to the EIA May 10 Short Term Energy Outlook (STEO), gasoline consumption for 2016 will be 142.5 billion gallons. The STEO continues “in 2017, forecast gasoline consumption is close to its 2016 level” or 142.5 gallons.


Based on the EIA forecasts, ethanol volumes for 2016 and 2017 should be closer to 14.25 billion gallons if EPA wanted to adhere to the 10 percent blend wall. Instead, the agency has busted through the blend wall in 2016 with 14.50 billion gallons and in 2017 with this proposed 14.80 billion gallons.  


The oil industry generally pushes for a 9.7 percent cap for ethanol blending of gasoline consumption to provide a cushion to the forecast data. Using the 9.7 percent formula, the 2017 proposed RFS would instead be 13.82 billion gallons – a billion gallon difference from the EPA proposal.


Biodiesel got another bump up in volume requirements to 2.0 billion gallons in 2017 and 2.1 billion gallons in 2018.


CY2017 Home Health Annual Payment Update & Changes to Medicare CoP Sent to White House

Takeaway: HHA reaching end of recent reimbursement upheaval in time to take break before PAC reform in 2019-20. Efforts to improve quality continue.

Relevant Tickers: AMED, LHCG, AFAM, KND, HLS


CY 2017 Reimbursement. Last week, the Centers for Medicare and Medicaid sent to the White House for approval the proposed CY 2017 annual reimbursement update for home health agencies. With much of the Affordable Care Act mandates for rebasing and Value-based purchasing implemented, this year’s reimbursement release should be a snoozer.


The CY 2016 national, standardized 60-day episode home health care payment of $2,965.12, often referred to as the base rate, is adjusted each year for two budget neutrality factors; one for changes to the wage index and the other for annual changes to the case-mix weights. For CY 2016 , 2017 and 2018, the base rate is adjusted downward by 0.97 percent to address nominal case-mix growth not otherwise accounted for by changes to patient characteristics. CY 2017 marks the last year of a four year rebasing that requires a reduction of $80.05 in the base rate. Finally, the base rate is inflated for the Home Health Market Basket adjustment less the ACA-mandated multi-factor productivity adjustment.


CMS has not yet released the Home Health Agency Market Basket adjustment but if it follows the trend established by other releases this spring, it should be about 2.6 percent. This market basket adjustment will be reduced by the multi-factor productivity adjustment which is currently forecast at -0.5 percent. Using budget neutrality and case-mix growth adjustments similar to last year’s, we estimate the proposed CY 2017 National Standardized 60-Day Episode Payment will be about $2,975.00, a small increase over the CY 2016 rate of $2,965.12.


Table 1: Estimated CY 2017 National, Standardized 60-day Episode Rate for Home Health

CY2017 Home Health Annual Payment Update & Changes to Medicare CoP Sent to White House - CY 2017 HHA Estimate Base Rate


Rural home health agencies, like those owned by LHC Group (LHCG), get the benefit of the 3 percent add-on payment in 2017. This add-on will increase the national, standardized 60-day episode rate to an estimated $3,064.00 in CY 2017. It is worth noting that unless Congress extends the rural add-on between now and the end of 2017, it will expire on January 1, 2018.


In the aggregate, Medicare spending on home health services will likely decline again next year due to the combined effects of near zero year-over-year growth in the base rate and a 2.82 percent reduction in reimbursement for Non-routine Medical Supplies that are not included in the base rate. With the elimination of the ACA-mandated rebasing phase-in, CY 2017 should be the final year of negative aggregate reimbursement.


Release of the Proposed Rule for CY 2017 Home Health reimbursement should take place within the next three to four weeks.


Home Health Conditions of Participation. Separately, CMS also sent to the White House a final proposal for changes to the Home Health Agencies’ Medicare Conditions of Participation This proposal has languished at CMS since Q1 2015 and is being dusted off and finalized - no doubt to check it off the “get ‘er done” list of the outgoing Obama Administration.


The proposed CoPs circulated in late 2014 represent the first change in over a decade to the standards to which home health agencies must adhere to qualify for Medicare reimbursement. Not only that, this proposal represents a significant change from a process-oriented “check the box” approach to one focused more intensely on quality of care.


We will wait to see the final proposal for a deep dive on the specifics but the key point from the 2014 proposal is the addition of four new CoPs necessary to qualify for Medicare reimbursement. There are:

  • Patient Rights – Emphasizes the HHA’s responsibility to respect and promote the rights of each home health patient.
  • Care planning, coordination of services and quality of care - Incorporates the interdisciplinary team approach to provide home health services.
  • Quality Assessment and Performance Improvement – Charges each HHA with responsibility for carrying out an ongoing quality assessment, incorporating data-driven goals, and an evidence-based performance improvement program of its own design to effect continuing improvement in the quality of care furnished patients.  QAPI programs are currently in place in ESRD suppliers, hospitals, hospice, transplant centers and organ procurement organizations.  
  • Infection Prevention and Control – Requires HHA to follow accepted standards of practice to prevent and control the transmission of infectious diseases and to educate staff, patients and family members or other caregivers on these accepted standards.  

The meat of these changes is the implementation of QAPI and new care planning, coordination and quality of care requirements. CMS believes, and we concur, that the proposed changes to the CoP represents a fundamental shift in their regulatory scheme. Instead of a prescriptive approach in which the federal government issues a list of dos and don’ts and the state surveyors make sure the HHA complies, under the proposed CoPs the state surveyors will look at outcomes of care. The addition of a QAPI would, according to CMS, stimulate the HHA to continuously monitor its performance and find opportunities for improvement. State surveyors would be enabled to assess how effectively the provider was pursuing a continuous quality improvement agenda.


While we acknowledge that state surveyors do not inspect HHAs with the regularity that perhaps CMS expects or is counting on, the changes spelled out in the proposed rule are not good news for the many small, less capitalized and less sophisticated operators that populate the space. These operators generally lack the resources to invest in the IT systems, data analytics and clinical talent necessary to run a good quality program.


For well capitalized, sophisticated operators  like AMED and LHCG that have made quality care a hallmark of their operations, the transition to new CoPs should be relatively easy. Moreover, we anticipate that their acquisition targets, already robust as CMS has increased pressure on providers to produce better outcomes, will increase. Unlike many other CMS-driven quality programs, failure to comply with CoPs means exclusion from the Medicare program and in effect, termination of operations.


When both rules are released, we will do a more thorough review since CMS always uses rulemaking as a way to signal ongoing concerns and changes under consideration. However, we anticipate that until post-acute reform ramps up in 2019-20, the regulatory and policy environment remains stable to improving.


Cartoon of the Day: Crash Tech Dummies?

Cartoon of the Day: Crash Tech Dummies? - NASDAQ cartoon 05.18.2016


"The Nasdaq moved back into full-blown correction mode yesterday (-10% from its all-time bubble high in 2015)," Hedgeye CEO Keith McCullough wrote earlier this morning. It's now down -9.5% from that high today.




"Inclusive of the Buffett-bounce in AAPL," McCullough continues, "the Nasdaq is down -4.8% in the last month alone. Lots of chart chasers are not liking their Tech charts anymore (reminder: at #TheCycle peaks of 2000 and 2008 the Nasdaq put in its YTD highs in MAR-MAY too)."

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