Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Tuesday - equity markets 5 24


Daily Market Data Dump: Tuesday - sector performance 5 24


Daily Market Data Dump: Tuesday - volume 5 24


Daily Market Data Dump: Tuesday - rates   spreads 5 24

China, Japan and USD

Client Talking Points


Literal collapse (limit down) in rebar, iron ore, etc. yesterday and the Chinese Stock Market (Shanghai) loses another -0.9%, taking its loss in the last month alone to -4.7%, and the year-over-year crash to -39% (vs. today last year) – bottoming?


The Nikkei was actually DOWN on Yen DOWN – that’s new, The Nikkei was -0.9% overnight taking it’s crash from the Global Equity #Bubble peak of 2015 to -21% (note: Japan’s economy has not “bottomed”); KOSPI continues to break-down alongside Copper.


Now here’s something that may have bottomed! As it always does when we re-enter #Quad4 Deflation – i.e. when you deflate the short-term reflation, the USD working on its 4th straight up week as U.S. Equities debate having more than 1 up week in the last 6.


*Tune into The Macro Show with Darius Dale live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

5/23/16 50% 6% 0% 8% 30% 6%
5/24/16 52% 6% 0% 8% 28% 6%

Asset Allocation as a % of Max Preferred Exposure

5/23/16 50% 18% 0% 24% 91% 18%
5/24/16 52% 18% 0% 24% 85% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.


McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.


Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.


In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.


If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road



What The Yield Spread Reveals About Growth… via @HedgeyeDDale @KeithMcCullough



It’s a helluva start, being able to recognize what makes you happy.

Lucille Ball


The temp sector has shed some 27,400 jobs since December.

CHART OF THE DAY: What Gives Us Confidence In Our Bearish Growth Forecast?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


CHART OF THE DAY: What Gives Us Confidence In Our Bearish Growth Forecast? - chart of the day image 5 24


CHART OF THE DAY: What Gives Us Confidence In Our Bearish Growth Forecast? - Chart of the Day 5 24

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

About Right

“… over the rest of the year, say, two or maybe three rate increases this year, maybe one or two more next year, so three or four next year, I think that’s still about right.”

-John C. Williams, President of the San Francisco Fed


Wait, what? The Fed is going to hike rates 4-7 times by the end of calendar 2017? Seems ambitious…


About Right - rate hike cartoon 10.15.2015


Back to the Global Macro Grind… 


I don’t know about you, but it’s becoming a real grind keeping up with the torrent of forward-looking commentary out of regional Fed heads.


If you include the aforementioned speech which Williams delivered over the weekend at an event hosted by the Council on Foreign Relations, as well as Boston Fed President Eric Rosengren’s comments to the FT on Sunday evening, yesterday saw three different Fed heads pipe up with [hawkish] commentary regarding the outlook for domestic monetary policy:


  • Rosengren (voter): “I want to be sensitive to how the data comes in, but I would say that most of the conditions [needed to justify a June rate hike] that were laid out in the minutes, as of right now, seem to be… on the verge of broadly being met.”
  • Philadelphia Fed President Patrick T. Harker (non-voter): “Although I cannot give you a definitive path for how policy will evolve, I can easily see the possibility of two or three rate hikes over the remainder of the year.”


Having to react to the increasingly well-publicized opinions of the various regional Fed heads has become a daily occurrence. In fact, having to incorporate 2-3 such views into one’s investment mosaic on any given day has effectively become par for the course.


Part of me thinks this current spate of hawkish commentary is all part of a sinister plan to float hawkish trial balloons into the market, just so that they can be counteracted via dovish rhetoric – likely from Federal Reserve chairwoman Janet Yellen herself. This would effectively amount to monetary easing, on the margin, as expectations for near-term tightening are diminished.


Another part of me thinks they honestly have no idea what they are doing. And I don’t mean that in a disrespectful manner; these are obviously all very brilliant economists who are all at/near the top of their profession. Rather, I honestly think there’s just a lot of uncertainty associated with forecasting economic activity and pinpointing where we are within #TheCycle itself.


Moreover, the confluence of said uncertainty and their insistence upon thinking out loud becomes quite the intoxicating concoction when spiked with a dose of “modeling to desired (as opposed to probable) outcomes”. While we were pleased to see one of our chief competitors follow in our Superforecasting footsteps yesterday, we can rest assured that the models employed by the Fed remain as linear as they come.


Do the economic outlooks expressed by each of the aforementioned Fed heads and their counterparts incorporate some degree of hopium? Of course they do – almost by default. While it’s sad that the world’s most important economic policymaking institution has a zero percent lifetime batting average in forecasting cyclical downturns, I’m definitely of the view that they really can’t afford to.


Imagine if the Janet Yellen dropped the “r-word” during a prepared speech at a $10,000 chicken dinner, specifically suggesting that her model(s) was forecasting one to commence within 3-6 months? The reflexive impact that would have on investor, consumer and business confidence would likely and perfectly perpetuate that outcome. As such, it makes sense why the Fed is serially overly optimistic in their forecasts for both growth and inflation – they don’t really have a choice.


But just because they don’t have a choice doesn’t mean their forecasts are going to be proven accurate on an intermediate-term basis. On growth specifically, each year of this expansion has seen the FOMC’s intra-year forecasts for annual real GDP growth surprised to the downside, with an average maximum intra-year tracking error of 92bps (on a number that has ranged from +1.5% to +2.5%, nonetheless).


Moreover, according to our model, 2016E is shaping up to be not much different. Their +2.2% forecast compares to our current estimate of +1.5%, effectively implying 70bps of downside surprise risk to their number if our estimate is proven accurate. For reference, Bloomberg consensus is splitting the distance at +1.8%, which itself is down from +2.5% at the start of the year.


What gives us such confidence in having a growth forecast that divergent from the perceived wisdoms of macroeconomics?


For starters, the data itself helps:


  • 16 of the 23 key categories of monthly high-frequency growth data that we incorporate into our predictive tracking algorithm are showing trending deceleration.
  • The deterioration in the respective growth rates of real PCE and real disposable personal income is most noteworthy at this stage of the economic cycle. What’s really significant about these dour trends is that we have yet to lap peak base effects, which, for consumption growth specifically, occurs over the next 2-3 quarters.
  • Of the seven indicators that are showing trending acceleration, four all slowed sequentially per the latest data and each remains in contraction territory on a YoY basis (i.e. durable goods orders, factory orders, housing starts and exports).
  • One of the remaining three indicators showing trending acceleration (i.e. the personal savings rate) is technically a negative signal for growth.
  • Of the two remaining indicators showing trending acceleration, one is wildly incongruent with both market prices and the preponderance of related company commentary (i.e. retail sales) and the other has historically peaked within 4-5 months of recession (i.e. nominal wage growth).


The market continues to back our bear case as well on a trending basis:


  • Within equities, the defensive style factors we like are up 5-11% YTD, while the broader market is effectively flat and the #LateCycle sectors we don’t like are down 3-6% YTD: low beta (USMV) +4.6%, safe yield (DVY) +7.6% and utilities (XLU) +10.6% vs. the SPY +0.7%, financials (XLF) -2.7%, healthcare (XLV) -3.6% and retailers (XRT) -5.5%.
  • Within fixed income, high-yield credit (JNK +3.2% YTD) continues to lag our most preferred factor exposure in all of global macro: the long bond (TLT +8.2% YTD, EDV +12.7% YTD and ZROZ +12.9% YTD). This performance divergence is not what you want to see if you’re bullish on growth – especially with the Treasury yield spread (10s-2s) continuing to narrow. The latter has compressed by another -14bps MoM, closing at a new cycle-low of 94bps yesterday.


All told, we think investors will continue to do well to fade what we view as inappropriately hawkish commentary out of various Federal Reserve officials. Fight the Fed by tactically taking advantage of intermittent back-ups in rates and sharp sell-offs in defensive style factors to increase your allocation to these [winning] factor exposures.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.87% (bearish)

SPX 2029-2058 (bearish)
RUT 1090-1120 (bearish)

NASDAQ 4 (bearish)

Nikkei 16311-16795 (bearish)

DAX 9 (bearish)

VIX 14.16-16.94 (bullish)
USD 94.04-95.98 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.01-110.55 (bullish)
Oil (WTI) 46.23-49.91 (bullish)

Gold 1 (bullish)
Copper 2.02-2.10 (bearish)


Keep your head on a swivel,




Darius Dale



About Right - Chart of the Day 5 24

UPDATE: CMS's Part B Drug Demo Sidelined 'til 2019

Takeaway: Obama Administration punts Part B Drug Demo to next administration who probably won't have any better luck.

Update: Late yesterday afternoon, one of the Capitol Hill newspapers, Inside Health Policy, reported basically what we did, reaching pretty much the same conclusion. In the report, CMS issued a statement: “We have not announced a change in timing and we continue to review comments." CMS claims that the date of March 2019 was simply the latest date they could finalized the proposed rule without starting over. According to IHP, "A CMS official told IHP that 'Final Action' on the White House Office of Management and Budget's website in this case reflects the statutory deadline for a final rule, not the expected time to issue a final rule. IHP goes on to point out: "However, the statutory deadline and the final action dates listed in the agenda for many rules are not the same." We would add that IHP reported on Friday a delay to rules related to the 340b drug program based on the new schedule listed in the recent Unified Agenda.


We share IHP's skepticism and think the proposal has problems - real problems not just political problems - with oncologists, rural providers, non-profit hospitals, patient advocates and others. Time will tell.



Drug prices have become a white hot political issue this year and for good reason. In October, 2015, a Kaiser Family Foundation tracking poll found that respondents felt affordability of prescription drugs was a top health care priority. In a March report from the Health and Human Services Office of the Assistant Secretary for Planning and Evaluation (ASPE), the research arm of the department, estimated that in 2015, Americans spent $328 billion on retail (drugs sold at outlets that serve patients like Walgreens and CVS) and $128 billion on non-retail (drugs dispensed through physicians offices). Drugs accounted for 16.7 percent of all health care spending in 2015.


The ASPE found that, after a period of slow growth from 2008 to 2013, retail and non-retail drug spending dramatically increased in 2014. Chart 1 illustrates recent drug spending and projections from the HHS Office of the Actuary.


Source: ASPE


A driver of the increased spending appears - though there is some conflicting data - to be increased costs associated with the use of specialty drugs. ASPE estimated that 30 percent of the increase in drug spending in recent years is attributable to escalating prices. Other factors include an increase in prescriptions per person, general population growth and economy-wide inflation.


These facts took human form in late 2015 when the tone deaf Martin Shkreli, former CEO of Turing Pharmaceuticals, created a stir by raising the price of Daraprim, a drug for which Turing had recently acquired the manufacturing license, and earned him the title of "most hated man in America." The drug industry's standing in the court of public opinion was further eroded by the bad behavior of Valeant Pharmaceuticals (VRX) and a spate of tax inversion deals. The combination of a real and dramatic increase in drug costs and the convenient arrival of a boogie man, forced the issue onto the 2016 Presidential campaign platforms. In October 2015, Senator Bernie Sanders released his plan for combating the increase in drug costs and was quickly followed by Secretary Hilary Clinton. Donald Trump appears to also be considering ways that drug prices can be controlled.


The confluence of events and the predictable political response had quite a few people wondering if the time was right for federal intervention to control drug prices. Some of those people were at the Center for Medicare and Medicaid Innovation and the White House. In early March, the Obama Administration, out of the blue, proposed the Part B Drug Demonstration. The proposal had not previously appeared on the Obama administration's regulatory agenda suggesting that they were exploiing a political opportunity so in the waning years of their administration they could claim some credit for reform of drug prices.


We were not among those who saw federal intervention in the drug price issue as viable. The reimbursement system for drugs is too complicated and too connected to the payment systems for physicians and hospitals to be easily altered. Furthermore, the drug industry lobby's power and effectiveness in Washington is legendary. Our money was on Pharma and on Friday the Obama administration offered pretty compelling evidence that the Part B Drug Demo was not moving forward anytime soon. The Spring 2016 Unifed Agenda - a "honey-do" list of regulatory activities in the coming months - includes the Part B Drug Demo but with a finalization date of March 2019. Since the Demo cannot move forward until the rule is finalized, it would appear, assuming there has not been a clerical error, the project will be backburnered until the next Administration. The next President can proceed or abandon the whole thing.


What Are Part B Drugs?

Medicare pays for prescription drugs obtained from retail pharmacies through the privately administered Part D plans. Drugs administered in physicians’ offices and Hospital Outpatient Departments (HOPDs) (e.g. chemotherapy infusions) are reimbursed through direct payment to doctors and hospitals via Medicare Part B. Many of these Part B drugs are what the ASPE referred to as "non-retail" drugs. The Medicare payments to doctors and hospitals are comprised of both reimbursement for the drug itself and payment for the administration of the drug either through the physician fee schedule or the Hospital Outpatient Prospective Payment System (OPPS). It should be noted that reimbursement for services on the HOPD schedule is considerably higher – 20 to 30 percent in some cases- than the physicians fee schedule.


Medicare reimburses for Part B drugs by inflating the Average Sales Price from manufacturers to wholesalers by 6 percent. This formula takes into account all rebates and discounts offered by the manufacturer but not “prompt pay” discounts that are not typically passed on to the provider. Part B drug reimbursement has been subject to sequestration for the last several years and that is scheduled to continue until 2024. The impact of sequestration on reimbursement is -1.6 percent so that the effective reimbursement is ASP plus 4.4 percent.


The Part B Drug Demonstration

The Part B Drug Demonstration would be a five-year, mandatory program with two phases that would significantly upend Medicare Part B payments. Phase one of this experiment, as it is often called due to the inclusion of a control group, would have begun in Fall 2016. The current reimbursement system of Average Sales Price (ASP) of the drug plus 6 percent would be replaced by ASP plus 2.5 percent (0.9 percent after sequestration) plus a $16.80 flat fee. All physicians and Hospital Outpatient Departments (HOPD) would be required to participate. However, roughly half would be part of a control group.


Phase two of the Part B Drug Payment Model would have begun in early 2017 and layered on top of the phase one payment method a veritable smorgasbord of Value-based Purchasing (VBP) payment tools. CMS has provided relatively few details on phase two. They do propose that the VBP could include:

  • Reference Pricing – Payment for a drug would be based on the price of all therapeutically-similar drugs. A reference pricing scheme could be based on the average price of all drugs in the group or on the lowest drugs in the group. Because of a prior and quite negative experience, CMS has stipulated that any reference pricing scheme would not include increased beneficiary liability.
  • Indications-based Pricing – Under this approach, Medicare payment for the drug would be based on safety and cost-effectiveness of different indications. In other words, Medicare would pay a higher reimbursement for a drug meant to treat conditions for which research shows greater effectiveness and less when the drug is used on conditions where the drug is less effective.
  • Outcomes-based Risk Sharing Arrangements – CMS would enter into agreements with manufacturers to provide price adjustments when products do not meet specific targeted outcomes. Commercial insurers have been experimenting with this approach in recent months and it has been heralded as a private sector approach with promise.
  • Discounting or eliminating patient cost-sharing – Medicare would provide incentives to patients that use “high value” drugs by limiting cost-sharing.
  • Clinical Decision Support – CMS would provide online tools to provide education and literature to physicians and a feedback mechanism for prescribers to provide data on claims and utilization.

The Part B Drug Demonstration model would consist of four populations:

  • A control group paid using the existing Medicare reimbursement formula of ASP plus 6 percent
  • An experimental group using the existing payment formula of ASP plus 6 percent and the VBP tools
  • An experiment group using the new payment formula of ASP plus 2.5 percent plus the flat fee of $16.80 flat fee
  • An experiment group using the new payment formula of ASP plus 2.5 percent plus the flat fee of $16.80 and the VBP tools.

If the details of phase one seem a bit arbitrary and those of phase two rather vague, you are not alone. Aside from a MedPAC study last year where the 2.5 percent add-on was presented as merely an illustrative example, and chosen because it was higher than the 1-2 percent reportedly given to wholesalers, there does not seem to be much research to support its use.


Phase one also fails to even address the problem identified by CMS. In the studies released in conjunction with the Part B proposal, CMS characterizes the problem as one where providers have little incentive to prescribe lower cost, but equally or more effective drugs when they are available. As noted above, a big part of spending increases are attributable to specialty drugs. There is not yet an agreed upon definition of a specialty drug but most people agree they usually are manufactured or produced by a single company implying there are no alternatives. Yet the phase one proposal makes no distinction between reimbursement for drugs with comparably effective alternatives and those without. Given the history of Medicare, where reimbursement cuts are inevitably met with margin protection through higher utilization, the phase one proposal could actually create incentives for increased prescriptions for drugs without alternatives.


Phase two of the proposal is significantly more nuanced but treading dangerously close to charging Medicare with a role in determining cost effectiveness of drugs – a dog whistle for patient advocates and often used as code for rationing of care. This phase does include opportunity to tailor incentives for providers. However for things like indications-based reimbursement, CMS would need to rely on some scientific knowledge-base that is undisputed. There is a significant lack of detail and specifics on how exactly, CMS would measure things like effectiveness and outcomes making phase two look unready for prime time.


In short, phase one appears to be more complete than phase two but arbitrary and an oversimplified response to an extraordinarily complex problem. Phase two is less defined but equally inadequate in addressing the multi-faceted and complex nature of Medicare Part B drug spending.


The Drugs.

The Part B Drug model is budget neutral – meaning CMS anticipates paying the same amount of money, in aggregate, to physicians and HOPDs as they would had the program not been implemented. As such, some practice areas will see an increase in payments for Part B drugs, while others will see a decline. Anesthesiologists, for example, will see an increase in Part B drug reimbursement while oncologists will see a decrease. This result is not a surprise since drugs administered by oncologists, ophthalmologists and rheumatologists usually make the list of Top 25 drugs for Medicare spend.


Topping the list of most Medicare dollars spent is Roche's Rituxan to treat certain cancers and Lucentis to treat Macular degeneration.




CMS claims - and we have no reason to dispute it - that there are many oncologists for whom half their income is derived from the drugs the prescribe. The finding appears to be their sole justification for structuring the program in such a way as to alter provider compensation.


The Implications. The near term implications for physicians and patients was significant and the source of much of the opposition to the program. While the Obama Administration was able to keep its party on the reservation for a hearing last week on the Demo, members of both parties raised objections. Opinions ranged from Republican calls for a complete withdrawal to requests from Democrats to downsize the project. In these days of a divided Washington, it is tough to find such consensus.


Driving the debate was the Pharma who understood this Demo for what it was: a political response to a very complicated and difficult problem. Political reactions call for more politics not less. Pharma put together a coalition of physicians, hospitals and patients to be the face of the opposition who effectively pointed out the many flaws of the program. After a week of floating trial balloons suggesting a much smaller Demo was in the offing, the Obama Administration released the Spring 2016 regulatory agenda. Finalization of the Part B Drug Demo is now scheduled for March of 2019.


The delay is good news for Pharma who apparently still has what it takes to protect their interests. Because of that, efforts by the next President to "do something about drug prices" will not be easy. Pharma's success in beating back this threat however, did rest solely on their lobbying prowess. The fact is that federal drug reimbursement policy has created a web of interests that are tough to unwind. Part B drug reimbursement is an element of physician compensation and not simply a cost recovery system. Non-profit hospitals that increasingly derive significant portions of their annual revenue from the 340b drug discount program want to avoid any disruption of the current system of reimbursement. Had Pharma failed at blocking the Part B Drug Demo, interests favoring drug price regulation would have had the toehold they needed for additional intervention. In political terms, the Pharma lobby would have suffered a loss that would have called into question their ability to defend the industry, a weakness that would have been exploited by supporters of price controls.


Any changes to how the federal government reimburses and controls drug prices will be a hard fought fight and it doesn't look like anyone is spoiling for that just yet.





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