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Dear Fed, It's Better To Remain Silent and Be Thought a Fool...

Takeaway: America's unelected central planners look more and more manic with each passing day.

Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - Yellen data dependent cartoon 11.18.2015


"The 2nd worst thing to happen to capitalism (behind ZIRP and QE) is the Fed's decision to constantly think out loud," Hedgeye Senior Macro analyst Darius Dale wrote earlier today.


It's been shocking to watch the market confusion as the Fed pivots between hawkish and dovish (sometimes in just a matter of days).


The latest from the Fed, between the meeting minutes yesterday and the parade of regional Fed heads today, is that a June hike is a "live possibility." Meanwhile, the market doesn't know what to make of the Fed's "thinking out loud." Below is the market-implied rate hike probability yesterday at 1:44pm ET, right before the Fed minutes were released.


Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike 5 18 1.44


Now look at the probability today...


Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike prob 5 19


In other words, the probability of a June rate hike doubled in less than 24 hours. Despite all the hawkish tough talk, the market is reluctant to accept the flippant Fed's words as gospel. The current probability of a rate hike is just 28%. 


Just to underscore how truly manic these market reactions have been to each and every word out of the Fed, here's the implied rate hike probability at the start of the year, on January 1. Notice the near certitude of rate hikes throughout 2016.


Clearly, the Fed has a credibility problem.


Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike 1 1


If all of this leaves you a bit befuddled, here's what you need to know via Hedgeye CEO Keith McCullough in today's Early Look:


"If the Fed hikes in June into the face of this economic slowdown it will perpetuate deflation (down yields)."


That's why we're reiterating our big macro call...

Long the Long Bond (TLT).

WMT vs. TGT | More Than Meets The Tape

Takeaway: This whole WMT/TGT debate goes far beyond a simple EPS print. The bifurcation in investment spend suggests we’ll see this again and again.

Though we’re seeing fireworks in the daily trading ranges for both WMT and TGT this week – justifiably so, we might add – we think that the ever-widening gap in investment spending between the two is ultimately very bearish for TGT. We outline some compelling analysis below.  We said TGT was THE name to short this earnings cycle, and after the sell-off, we’re by no means tempted to cover. Investment cycles last much longer than a quarter.


WMT No Expectations VS. TGT High Expectations

The most glaring juxtaposition between the two prints this week from WMT and TGT, is the difference in investment each company is making, or in the case of TGT not making, in order to sustain/improve traffic over the long term. A quick summation of the two strategies…

  • WMT investing heavily in employees, e-commerce, stores, vendors, and now price. CEO McMillon took on the chin in the Fall of 2015 when he said that the company wouldn’t hit 2015 earnings levels again until 2019.
  • TGT cutting costs across the organization to free up $2bn in order to invest in people (they’ve added a lot of new faces in the C-Suite alone), e-commerce, stores, grocery, and of course…buying back stock. 

WMT isn’t just talking shop – it’s putting the dollars behind that plan. When we stack up the growth in SG&A/sq.ft. for the two retailers in the US over a 3yr time series, we can see that WMT started to step up the spend during the same quarter that Cornell started his tenure in Minneapolis. Since then we’ve seen a big bifurcation in spending levels, with the most recent data point showing a 900bps spread between the two when we normalize the TGT SG&A growth rate for the Pharma sale. Think WMT’s actions won’t affect TGT? Think again. To have it’s biggest competitor spending up big at the same time we’ve seen the biggest delta in NTM earnings expectations (chart 2 below) between the two makes the competitive pressure incrementally heavy for Cornell and his team to run the business with the long-term strat planning goggles (which he’s not doing), rather than managing expenses to hit a quarter.

WMT vs. TGT | More Than Meets The Tape - SGA FT


The Key Focus In This Chart = TGT EPS expectation ramp is trending above WMT’s to the greatest extent in over 20 years.

WMT vs. TGT | More Than Meets The Tape - NTM EPS WMT TGT


WMT Out-Trafficing TGT

Now in year two of investment mode, we’ve seen the fruits of WMT’s investment translate to better traffic. Now that the benefit has passed for TGT from the data breach at the tail end of 2013, we’ve seen WalMart traffic growth best TGT for the past 3 quarters. That’s during the same time period that TGT raised it’s long-term comp guidance to 3%+ (we still don’t understand that bizarre guidance decision). The guidance scoredcard for the upcoming quarter reads like this – WMT +1%, a 20bps acceleration on a 2yr basis. TGT -1%, a 110bps deceleration a 2yr basis. And weather, the Achilles Heel TGT attributed with the slowdown in comps in April and May was actually called out as a positive by WMT. Granted it was on the cost side, but the absence of any mention of weather as a headwind is notable.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart3


A Tale of Two Quadrants

The WMT SIGMA chart, which triangulates the P&L and balance sheet, showed the best sequential improvement of any company we’ve seen this earnings season. For WMT, that means a clean balance sheet and bright gross margin prospects with sales growth well ahead of inventory. The opposite is true for TGT – hence the negative guidance on gross margin ex. the pharma benefit.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart4


Put A Win On The Board For Target

It comes from the e-commerce operation. Though TGT is well off the 40% growth rate it promised 15 months ago and subsequently backed off from, it’s winning the e-comm battle relative to WMT. Each is in the basement of the competitive set with e-comm as a percent of sales in the 2-3% range, i.e. both companies have a lot of work to do. But, WMT simply can’t figure it out. Consider for a minute the fact that WMT sells 10mm SKUs online, Wayfair (0.4% the size of WMT) offers 7mm, and AMZN according to a few reports is close to half a billion. Where WMT wins in stores through its selection and price, it loses badly on the interwebs.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart5

McCullough: History Is An Important Guide To Mr. Market


In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough responds to a “fantastic question” about the correlation between the U.S. dollar and Treasuries now that the dollar is getting stronger. 


Subscribe to The Macro Show today for access to this and all other episodes. 


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CY 2017 End Stage Renal Disease Annual Reimbursement Update Sent to White House for Approval

Takeaway: Assuming a 2.1 percent ESRD Market Basket increase, base payments should increase from $230.39 in CY 2016 to an estimated $231.37 in CY 2017

Relevant Tickers: DVA and FMS


Approximately 60 percent of ESRD treatments in the United States are performed by Davita Healthcare Partners, Inc. (DVA) and Fresenius Medical Care AG (FMS) The other 40 percent are performed by a large number of regional and local for-profit and non-profit providers. Medicare covers ESRD treatments regardless of the age of the patient. Dialysis providers are paid per treatment using a formula that adjusts the base rate for patient characteristics. This payment includes the dialysis procedure as well as supplies and drugs. The base rate does not include certain “oral only drugs.”


ESRD Reimbursement for CY 2017 and 2018 in under the control of the Protecting Access to Medicare Act (PAMA), a provision of which over-rode a poorly considered and un-vetted rebasing of the ESRD per-treatment payment amount that was included in the American Taxpayer Relief Act of 2012 (ATRA). Under PAMA, the annual ESRD Market Basket adjustment is reduced by 1.25 percent in CY 2017 and 1.00 percent in CY 2018. ESRD payments will return to the more normal formula of ESRD Market Basket less Multi-factor Productivity Adjustment in CY 2019.


The CY 2016 ESRD base, per treatment rate is $230.39 which is a result of a 1.8 percent ESRD Market Basket increase, less the PAMA imposed reduction of 1.25 percent, a multi-factor productivity reduction of 0.4 percent and a refinement budget neutrality reduction of 4.03 percent plus a wage index budget neutrality factor increase of 0.0495 percent.


The latest ESRD Market Basket adjustment will be released as part of the payment update. Unlike Market Basket indices for hospitals and other providers, the ESRD index is not as dependent on labor costs. Forecasts for the more labor dependent Market Basket indices have been jumping around a good bit lately due to historical labor costs, particularly in the last half of 2015. The last publicly available forecast indicates an ESRD Market Basket forecast of 2.1 percent. The forecast released with the rule should be pretty close to that figure.


Given an ESRD Market Basket increase of 2.1 percent and a wage index budget neutrality factor similar to last year’s, we anticipate that CMS will propose a 0.40 percent increase in the base rate for ESRD treatments. This rate reflects an ESRD Market Basket increase of 2.1 percent, less a multi-factor productivity reduction of 0.5 percent, less the PAMA-mandated reduction of 1.25 percent plus a wage index budget neutrality factor increase of 0.5 percent.


It was the ATRA that also required the CY 2016 refinement budget neutrality adjustment of 4.0 percent. This adjustment was meant to address changes in resource use that occur over time. The language of the law suggests this is a change mandated for CY 2016 and will not be repeated in CY 2017.


If all goes according to plan the CY 2017 ESRD base rate should be about $231.27 – not great but at least it represents an increase after last year’s payment cut.


Table 1: Estimated CY 2017 ESRD Base Rate


CY 2017 End Stage Renal Disease Annual Reimbursement Update Sent to White House for Approval - ESRD


The proposed CY 2017 reimbursement update should be released in the next three to four weeks and will be finalized late Q3 or early Q4 2016. The proposal will include estimated impacts to providers and policy goals and changes, if any, under consideration. We will do a deeper dive on the proposal is released.

About Everything | Millennials: Are We There Yet?

Why Our Economy Is Still Waiting for the Young to Show Up


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why the Millennial Generation is coming into adulthood, but delaying traditionally big steps like homeownership and family life. Howe explains why and explores the broader investing implications.


About Everything | Millennials: Are We There Yet? - z mill



Many forecasters are pegging 2016 as a momentous year for young adults.


The multitudinous 1990 and 1991 birth cohorts (at 4.8 million, the two largest birth years of the Millennial Generation) start turning 26 this year—precisely the age at which young adults have traditionally taken the big steps in homeownership and family life.


But if we are on the brink of Millennials making their move, the numbers aren’t yet showing it.


Despite record-low interest rates and a six-year-old economic recovery, single Millennials are avoiding setting out on their own. Between 2007 and 2014, the share of 25- to 29-year-olds living alone fell slightly, from 11 to 10%—while the share living with family or friends jumped from 39 to 48%, a massive 9 percentage-point surge. The vast majority of this increase came not from more cohabitating couples, but from a surge of singles living either with Mom and Dad or with each other.


About Everything | Millennials: Are We There Yet? - neil howe chart3


About Everything | Millennials: Are We There Yet? - neil howe chart4


Later this year, Census will release 2015 household data, but we doubt the new year will show anything different.


In decades past, analysts have ordinarily assumed that young adults generate all the new households. Well, that’s no longer happening. Researchers are now finding that, despite the massive wave of Millennials moving into adulthood, all age groups under 55 (including young adults) actually generated negative net household formation between 2014 and 2015.


About Everything | Millennials: Are We There Yet? - neil howe chart5


Who is creating all the household growth today? Boomers, another large generation, as their tail end moves past age 55. Boomers can actually afford to “go solo” if they so choose.


OK, so what about starting a family? Well, Millennials aren’t doing that, either. Marriage rates among 20- to- 24-year-olds are only half of what they were in 2001. And this downward trend shows no sign of stopping. Even though the peak 1990 birth cohort reached age 25 last year, total marriages in the 25-to-29 year-old age bracket actually fell from 2014 to 2015. 


About Everything | Millennials: Are We There Yet? - neil howe chart6


Census defines a “family” as a married couple living together or as any person, married or not, living with his or her child. In 2014, by this definition, 59% of adults in their late twenties had not yet started their own families. This is surely a first in American history. Until the Great Recession, this figure was never above 50%. (Back in the Silent Generation’s American-High era, it was never above 30%.)


According to the latest CDC data, the mean age of a mother at first birth was 26.3 years old in 2014, with birthrates declining to a record low for women in their early 20s. If it weren’t for a large rise in the rate at which Gen-X moms are giving birth in their late 30s and 40s, the U.S. fertility decline would be catastrophic.  


About Everything | Millennials: Are We There Yet? - neil howe chart7


About Everything | Millennials: Are We There Yet? - neil howe chart8



The lingering effects of the Great Recession. Though the economy has improved significantly since 2009, Millennials’ income levels and overall job prospects have continued to disappoint—making it tough, if not impossible, for many of them to truly start their adult lives.


In 2014, the real median income of 15- to 24-year-olds and 25- to 34-year-olds was still 10% and 7% (respectively) below their levels in 2006. In other words, it’s not only Generation Xers who have struggled since the recession. 


About Everything | Millennials: Are We There Yet? - neil howe chart9


Yes, the employment/population ratio for young adults has improved since the depths of the Great Recession. But progress has been maddeningly slow. The optimism that many forecasters felt earlier this spring was dashed by the most recent BLS Employment report, which showed that the employment/population ratio for 25- to 34-year-olds dropped from 77.3 to 76.9 last month—back to where it was a year ago. (And 76.9 is only about halfway back from the ratio’s recession nadir of 74.0 and its pre-recession peak of 78.0.)


Even when Millennials do get jobs, they’re often lower quality than the careers that earlier generations of young adults once entered. A rising share of Millennials with college degrees, for example, work in jobs that don’t require a degree. This so-called “underemployment rate” rose to 46% in mid-2014—a level not seen since the early 1990s.


Meanwhile, the share of employed young adults working in well-paid and stable blue-collar trades has continued to fall, while the share working in the service sector still surges. Many of today’s “full-time” Millennial workers are part of the gig economy—including permalancers and Uber drivers who depend on a string of temporary projects to make a living.


Increased educational attainment. Over the last twenty-five years, young Americans have been driving up college enrollment and graduation rates. Paradoxically, this rise has retarded their progress toward adulthood.


Between 1992 and 2001, enrollment in degree-granting institutions increased 15 percent. And from 2002 to 2012, as Millennials became the new college frosh, enrollment accelerated another 24%. In 2015, the share of 25- to 34-year-olds who have completed four or more years of college climbed to an unprecedented 36%.


But as Millennials spend more time in the classroom, they effectively “bid up” the minimum credential they need for a relatively fixed number of desirable careers. Not to mention the mountain of student loan debt that now weighs them down: According to the New York Federal Reserve, the change in real per capita debt for student loans rose by 174% for 30-year-olds from 2003 to 2015.


Shifting generational attitudes. Risk-averse Millennials saw what happened when their parents plunked down big money on homes prior to the downturn. And despite ever-higher tuitions, Millennials still see college as a necessary (though obviously not sufficient) condition for career success.


Result: soaring college debt, but sizable reductions in every other form of debt. For Millennials, college loans are not only crowding out home mortgages—they are crowding out credit card borrowing and car loans as well.


About Everything | Millennials: Are We There Yet? - neil howe chart10


From 2003 to 2015, total debt for post-college young adults (age 23-35) was virtually unchanged, despite the sizeable demographic growth in this age bracket. Compare this to the change in total debt for 60+ Americans: Debt mushroomed by between 65% and 120% for every cohort. The increase was driven both by the growth in Boomer numbers and by growth in Boomer borrowing per capita.


About Everything | Millennials: Are We There Yet? - neil howe chart11


Though most Millennials eventually want to end up married, they’ve come to see marriage more as a capstone than a cornerstone. Millennials want their mortgages and careers in place before they think about walking down the aisle. Some even have their own Boomer parents reminding them that all divorces start with marriage.


About Everything | Millennials: Are We There Yet? - neil howe callout 5 19


As for childrearing, when Millennials do have kids, they’re more open to having them outside of marriage. According to a recent Pew report, Millennials still believe that a two-parent household is the best way to raise a child—whether the parents are married or not.


In fact, Census data show that “shotgun cohabitations” (that is, moving in together after a pregnancy) surpassed “shotgun marriages” for the first time during the last decade. In decades past, it was the father of the bride who was holding the shotgun. Today, it’s social stigma that motivates young fathers who may not want to support their children.



Millennials are unlikely to produce another baby boom—even as the massive 1990 birth cohort reaches the age at which biological fertility peaks and society traditionally expects family formation. When fertility rates fall during a brief and severe shock (like a recession or war), fertility does often play catchup—what demographers call a “tempo” effect. By now, however, too much time has passed and too many new habits have formed to expect a sizable rebound. Demographers have another maxim: Fertility delayed is fertility denied. When young men and young women delay having kids, they often think they will be able to make up lost time later. But life goes on, events change, and the original lifetime fertility goal (which demographers do track in surveys) is forgotten.


Pew Research noted in a study released late last year that the share of young women ages 18 to 34 living with parents reached 36.4% in 2014. That is up from only 20.0 in 1960. It is also the highest share ever recorded going all the way back to 1940 (when it was 36.2%).


In 1940, of course, the Great Depression still lingered. And this brings to mind the cohort of women born in 1910, who came of age at a memorably adverse moment: Imagine reaching age 23 just as unemployment is hitting one-quarter of the labor force and the President is closing down all the banks. This cohort ended up with a very low lifetime fertility rate and one of the highest childless rates (22%) ever recorded, even to this day.


My take? Don’t expect a big fertility rebound to just sneak up on us. It’s not like a dumb coiled spring, waiting for any chance to bounce back. Fertility is smarter than that. It’s looking for a clear change in the direction of the nation, the economy, and the social mood. Over the last century, America has only experienced two large fertility rebounds. One of them (lasting from about 1946 to 1962 and creating most Boomers) was triggered by the end of a total war in which America overhauled its political institutions, conquered half the world, and created a global Pax Americana. The other, more modest rebound (lasting from about 1979 to 1990 and creating first-wave Millennials) was triggered by a moral panic over children. We became, suddenly, are more child-friendly and family-oriented society. Look for something on the same order of these events to trigger the next baby boom.


As they do assume adult roles, don’t expect Millennials to follow the same path as older generations. Buy a home? No thank you, we prefer to rent a home. With real estate prices pushing into the stratosphere in so many desirable urban areas, we will wait until the expected capital gains are likely to be positive. Live alone? Sure, great idea if our goal is to burn money. Instead, we like to live in peer groups (see WeLive)—or, if we must live alone, let it be in a closet or micro-apartment for sleeping only. Live with ‘rents? Why not? We save a bundle and my god their credit rating is so much better than our boyfriend’s (girlfriend’s)!


Millennials won’t be snatching up the McMansions their parents adored. Too remote, too libertarian, too vast. On the other hand, they won’t want to stay in the live-work-play CBDs (central business districts) once they start families, either. Instead, as I’ve said before, Millennials will opt for homes in the inner suburbs that give them more square footage than an urban apartment without losing the distinct flair of city life.


In the coming years, the pressure will be on these suburban areas. With core urban Millennial hotspots like New York City and Silicon Valley running out of space (at least, affordable space), suburbs with plenty of community amenities and reliable transportation to urban areas stand to gain the most.


  • Rates of homeownership, marriage, and childbearing have all declined drastically among today’s young adults. Plenty of Millennials are “waiting it out” until their career prospects and balance sheets improve.
  • Millennials don’t mind taking a nontraditional road to adulthood. For young Silent and even for some Boomers, it was easy to follow the childhood song “first comes love, then comes marriage, then comes the baby in the baby carriage.” For Millennials, that pathway isn’t necessarily a straight line.

Another Great Opportunity To Get Long #GrowthSlowing

Takeaway: Mr. Market is giving investors another shot to get long Utilities and the Long bonds.

Another Great Opportunity To Get Long #GrowthSlowing - growth escalator cartoon 04.29.2016


I said it back in December, and I’ll remind you again today – if the Fed hikes into a slowdown, they’ll implode (#Deflate) markets.


What should you do with that?


Again, it’s where mean reversions come from that lead false narratives – the 10yr Yield was oversold at 1.70% and bounced… but A) post a GDP print of 0.5%, B) a NFP print of 163k and C) a headline CPI of 1.1% y/y… GROWTH has trumped (pardon the pun) inflation the entire way and I think it will again – this chart is beautifully bearish TREND on growth.



I don’t want to say layup (because I’m a 5'9" hockey player who is bad at hoops), but if you have our GDP, employment, and consumption slow-down view in Q2/Q3, it’s the best spot you’ve had since DEC to buy Utilities (XLU) and short the Financials (XLF and KRE).


Here's the sector breakdown of what's working in 2016... Got Utes yet?


Another Great Opportunity To Get Long #GrowthSlowing - sector 5 19


In other words, we can finally get long #GrowthSlowing in a bigger way now.

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 78.35%