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Remember Our Healthcare Team's #ACATaper Call? It's Happening.

Takeaway: Healthcare job openings posted the slowest growth rate in 7 quarters and provided confirmation of our Healthcare team's #ACATaper theme.

Editor's Note: Below is an excerpt from an institutional research note written by Healthcare analysts Tom Tobin and Andrew Freedman on healthcare employment. Why is this important? As our analyst Tom Tobin wrote in an article that appeared on Investopedia earlier this year:


"The Affordable Care Act created legions of newly-minted medical consumers which benefited the bottom line of the companies that cared for them... [in other words] ACA has created a year-over-year comparison so enormous that healthcare stocks will probably unwind rather violently."

Our healthcare team calls the coming "unwind" the #ACATaperHealthcare job openings are essentially a proxy for this massive pull forward of demand. That's why today's slowing JOLTS data (Job Openings and Labor Turnover Survey) was so critical.


Remember Our Healthcare Team's #ACATaper Call? It's Happening. - healthcare pills


Of the thousands of macro and fundamental data series we track on a daily basis, Healthcare Job Openings (JOLTS), proves to have the most consistent and reliable relationship to utilization trends in the industry.


Despite a slight sequential uptick in the absolute number of Healthcare Job Openings (1,015 April / 957 March), on a trending basis, growth was the slowest in 7 quarters with the 3-month YoY growth rate at +12.2%.  


Remember Our Healthcare Team's #ACATaper Call? It's Happening. - HC Jolts 6 8


Why does that matter?


JOLTS as a percentage of Healthcare Employment remains extended at +2.1 standard deviations, suggesting there is a lot more downside to go as the #ACATaper takes hold and the U.S. Medical Economy mean reverts.


The latest JOLTS and Employment report is consistent with an organic growth slowdown at AHS and implies a sequential decline in adjusted same-store admissions volume at HCA, and is a sign of potential weakness for HOLX’s diagnostic business.


Remember Our Healthcare Team's #ACATaper Call? It's Happening. - HC Jolts HCA 6 8


To access our institutional research email sales@hedgeye.com.

LULU | Short It

Takeaway: We wouldn’t touch this stock for all the Goji Berries in the world.

We wouldn’t touch this stock for all the Goji Berries in the world. Yes, the comp was great at +8%, but the company still managed to leverage a great top-line algorithm -- 8% comp and 17% sales growth – into a -12% EPS decline. How we look at it, comparisons on the top line begin to get tougher immediately, LULU just showed us that the cost of its growth is getting much more challenging, and it all but assured the investment community that gross margins will start to inflect – even though it lacks the operational excellence to make such a statement.  Again, not for all the Goji Berries in the world. All in, at 30x earnings and 15x EBITDA, LULU is in the top 1% of retail as it relates to being expensive. We’d flat out short this name.  While our estimates are not wildly outside of the Street, they carry – by a country mile – the greatest likelihood of any of any retailer/brand to completely blow a quarter, year and reshape investors’ view materially to the downside.

LULU | Short It - 6 8 2016 LULU financial table


Comps – The 8% constant currency comp puts LULU in the 97th percentile during the 1Q16 earnings season. That’s nothing to scoff at – especially in this environment. Though, if we peel back the onion a few layers on the LULU comp trends – especially at the store level – the underlying trends paint a much less bullish picture. Specifically, the 3yr trend which eliminates all of the quarterly noise, hit an all-time low at 0% in the quarter (see exhibit below). That type of trend doesn’t add up to a growth stock.


Now comps get more difficult, going from a -1% compare this quarter to +5-6% comps, as the company laps Chip’s “our customers are fat” tailwind which benefited LULU in final 3 quarters of FY15.

LULU | Short It - LULU comps


Gross Margin – Definitely the highlight for LULU in the quarter, beating expectations by 130bps. Add on the better inventory balance, and LULU appears to be on track to reach its gross margin goals for the year. Guidance of 120bps of leverage in 2Q16 reflects that. Yet, despite the positive tailwinds from the sourcing side, product margins still were pressured by markdowns and discounts. LULU may very well get the gross margin lift this year (it’ll more or less give it back in SG&A), but that requires a level of operational excellence that this company has never proven it can deliver sustainably – if not momentarily. And…at this price the market absolutely demands it.


Up at 30,000 ft., the 35bps of deleverage in the quarter caps off a 5 year stretch in which margins have declined by a cumulative 10.5 percentage points. 2Q16, according to the company, will be the inflection point in the GM slide. That may be true, but we still think a mid-50’s gross margin is a pipe dream. Keep in mind that the bulk of this deleverage came at the same time LULU should have experienced its most profitable growth period – as it built out its store network in the US. Now growth becomes more expensive (Intl, ivivva, men’s) at the same time the DD comps dry up.


Also keep in mind that while inventory levels improved on the margin, we’re still looking at five quarters in a row – including this one – where inventory grew faster than sales. The only time we’ll give credence to a management team’s assertion that gross margins will turn around imminently is when it makes that statement with only a few weeks left in the quarter, or if inventory is exceptionally clean (i.e. there is a significant sales/inventory spread). We’re looking at neither here.

LULU | Short It - 6 8 2016 LULU SIGMA


SG&A – Let’s ignore for a second the 100bps of SG&A deleverage caused by a strengthening of the CAD in the quarter. SG&A still delevered by 300bps in the quarter, or 75bps higher than street models called for. Yes, the cost of growth is growing.


Now on to currency, the headwind experienced in the quarter is part of doing business when the corporate headquarters are stationed in Vancouver. Over the past 3 years – LULU has recognized a $12.7 million benefit from currency revaluations. Now that’s going the other way, as are the cost savings associated with paying employees in Toonies, but there is an equal benefit to the top line.

We know that there’s supply chain investments underneath the SG&A hood, but let’s not forget where LULU’s growth is coming from. In this year alone, the combination of ivivva and Int’l accounts for more new doors (23) than North American LULU (17). That’s a meaningful margin headwind in light of the profitability characteristics of the two vs. the core business. The punchline = growth is more expensive.

LULU | Short It - LULU segments


International – the store growth plans for the Int’l markets remain on track (the reduction in store additions for the year came in the US market) at 11 new openings in FY16. That will put LULU at 22 locations in Europe and Asia by the end of the year, meaning a minimum of 18 openings in FY17 to hit guidance for 20 doors in Europe and Asia by the end of that year. Commentary was again mixed on the success of the International operation. With the positive being the store in Hong Kong putting up monster productivity of $5700/sq.ft. on a 1,300 sq. ft. box for a grand total of $7.4m. About 7% higher than an average 2.5k-3k sq. ft. US door at the peak. The rest of the doors in that region are tracking at or above $1,500-$1,600/sq. ft. Not shabby, but far below where LULU needs to be if it wants to hit its $1bn Intl sales goal (more below).


Europe appears to be a different story all together, with the case study being the London Market. The company has 5 doors in the country now and the hit rate is sitting at 60% in terms of winners – with 3 doors tracking at plan, and 2 doors lacking the community ‘vibrancy’ to be effective.  To be clear, 60% winners equals 40% losers. Shouldn’t it have more success in a nascent market like the UK? Heck, maybe that’ll change with some nice therapeutic Brexit. No, not really.


We give LULU credit however, for looking at additional alternatives like shop-in-shops to broaden the International reach, but for International to work according to plan and meet the $1bn sales target which we will assume will get it to its ROI targets, it needs to average productivity of $4,500/sq.ft. The initial reads are not even close, and as LULU steps on the accelerator outside of NA, the company will move into lower tier markets. Zurich ≠ London or Hong Kong.

LULU | Short It - LULU intl


The Loonie Bump

LULU was explicit in calling out the SG&A impact caused by a 6% appreciation in the Canadian Dollar vs the US Dollar in the quarter (about 2x what the company expected).  However, management failed to highlight the top line benefit created by the same currency move. Assuming 20% of sales are in Canada, the change in currency value caused a $6mm bump in revenue or 140 bps of growth in the quarter.  On a full year basis, the currency change implied in guidance gives LULU about a $12mm (+0.5%) benefit from the Loonie appreciation. Meaning nearly all of the full year upward revenue revision can be explained by changes in the FX rate and not in a material improvement in the underlying health of the brand.


Takeaway: Join us tomorrow, Thursday, June 9, 2016, at 1 PM ET for a run-through of our latest analysis on ECPG and PRAA.

Over the last 18 months, we have released a number of detailed research notes on two of our best short ideas: Encore Capital Group (ECPG) and PRA Group (PRAA). We will be hosting a conference call this Thursday, June 9, 2016 at 1 PM ET to explain our latest in-depth analysis on both companies. 

CLICK HERE to watch this presentation live.




Encore Capital Group

  • Recent & Significant Deterioration: The amount of collections relative to purchase price on recent vintages has fallen to all-time lows. 
  • Deteriorating Vintage-Level Operating Income: We use company data to approximate operating income at the vintage level. The results of which show the earnings power of the company is in real trouble.
  • Would the Real Earnings Power Please Stand Up: The company’s results are not nearly as good as the company is suggesting. 
  • Into the Abyss: Our analysis finds persistently declining revenue and earnings going forward, while the Street has revenue and earnings per share growing every year through 2018.

PRA Group

  • Deteriorating Recoveries: Similar to Encore, PRA's newer vintages’ cumulative collections as percentages of purchase prices are falling fast relative to older vintages.
  • Negative Top-Line Growth: PRA is already exhibiting declining top line and earnings due to deteriorating collections performance. 
  • Allowance Albatross: Contrary to managment's assertion that Allowance charges are incidental, we've found that they're material and a hallmark of the late stage collapse in earnings power for this company. 



Toll Free Number:

Conference Code: 13638888#

Watch Live: CLICK HERE

Materials: CLICK HERE (Materials will be available approximately one hour prior to the start of the call)


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

Benn Steil: Donald Trump Is a Clear and Present Market Danger


Would a Trump presidency be bad news for the global economy and markets? Benn Steil, director of international economics at the Council on Foreign Relations and author of "The Battle of Bretton Woods" thinks so. He discusses the disconcerting and adverse consequences a Trump presidency may have with Hedgeye CEO Keith McCullough.

Nothing To See Here, Move Along: World Bank Slashes Growth Outlook

Takeaway: The World Bank cut its 2016 global growth forecast amidst a rally in 10yr Treasury and Russian equities.

Nothing To See Here, Move Along: World Bank Slashes Growth Outlook - Slow growth cartoon 09.11.2015 copy


In global #GrowthSlowing news, the World Bank just released its most recent 2016 year-end growth forecasts. It should come as no surprise to our subscribers, but the results aren't good.


The World Bank cut its 2016 global growth forecast to 2.4% from 2.9% projected in January. A slew of other country specific outlooks were cut as well, including China, Brazil, Russia, South Africa, Japan, and U.S. (See the chart at the end of this post for more on the estimates.) 


What happens when growth slows?


With Swiss and German bond yields setting new lows, it's no surprise the 10yr Treasury yield is tumbling too. Here's some analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:


"If reflation was real growth, the 10yr wouldn’t be setting itself up for all-time lows – but you already know that. Risk Range on UST 10yr is now 1.64-1.79% after barely trying to bounce yesterday from its jobs day bomb."



Meanwhile, in international markets...


All is not well.


Consider the World Bank's assessment in its "risks to the outlook" section:


"In a weak growth environment, the global economy is facing increasingly pronounced downside risks. These are associated with deteriorating conditions among key commodity exporters, disappointing activity in advanced economies, rising private sector debt in large emerging markets, and heightened policy and geopolitical uncertainties. Other major downside risks over the medium term include increased protectionism and slower catch-up of large emerging markets toward advanced economy income levels. The possibility of delayed benefits from lower energy prices remains an upside risk."


Which gets us to the massive rally in Russian equities...


Additional analysis from McCullough:


"Forget Chinese demand continuing to slow (see this morning’s Export numbers for details), the real alpha out there next to being long real world #GrowthSlowing and Bond Proxies is in anything that looks like a commodity, including countries – that’s not a new story; that’s simply reflating the deflation (RTSI up another +0.8% this morning and +5% m/m)."



Below is the breakdown of the World Bank's forecasts and the GDP revisions for your own perusal. It confirms what we've long known:


Global #GrowthSlowing


Click to enlarge 

Nothing To See Here, Move Along: World Bank Slashes Growth Outlook - real gdp


About Everything: The Bullish Case for Life Insurance

The industry has been down, but its prospects are brightening.


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why life insurance company shares have been beaten down since the Great Recession, but makes the case for their comeback. "Looking forward, there are a lot of positive trends at play. Gen Xers are waking up late to save for retirement, while risk-averse Millennials are trying to prepare early, promising to drive demand steadily upward for decades to come," Howe writes.


About Everything: The Bullish Case for Life Insurance - metlife 6 7


The life insurance industry has problems.


Or at least, what’s left of it has problems. In 1988, there were 2,343 U.S. life insurers, but by 2014 that number had plunged to a mere 830.


Sure, giants like MetLife, Prudential, Manulife, and AIG still have hundreds of billions in total assets. But investors have soured on these companies since the Great Recession. Manulife’s stock prices have dropped by two-thirds since the end of 2007. Industry heavyweight MetLife still sits well below its pre-recession peak. Lincoln Financial has lost a quarter of its value in the past year alone. As for the remains of AIG, they are in danger of being dismembered and devoured. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 2


Earnings season sure didn’t help these companies’ stock prices. Prudential saw its total revenue slide more than 4 percent year over year. AIG badly missed Wall Street’s estimates, tallying just $0.65 in operating income per share (compared to a consensus $1.00). MetLife’s YOY earnings, meanwhile, plunged a full 9 percent.


So yes, this industry has its issues, but they’re well-known—and are already priced into the market.


“Minimum return guarantees.” Today’s life insurers are hamstrung by yesteryear’s optimism. Moody’s estimates that guaranteed products—whether life insurance policies or annuities—make up as much as 80 percent of insurers’ balance sheets. Most of these products carry a minimum payout of 3 percent or more.  


What’s wrong with that? Nothing, if it’s the 1980s and the rate on 10-year treasuries is bobbing around near double digits. But today, with long-term rates sinking toward zero, these guaranteed payouts are a bleeding wound.


The “interest-rate risk” triggered by imbedded guarantees is greatest for fixed annuities, which are often locked into a single rate of return over the life of the product—as well as for “universal life” policies that accrue cash value at a fixed rate.


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 3


Demutualization. In the old days, the big mutually owned (or privately held) life insurance companies could keep their eye fixed on long-term returns. These firms could match long-term obligations with long-term assets without listening to what bean-counters might say about the changing net worth of their companies quarter to quarter.


But all that changed during the bubbly exuberance in the late ‘90s, when insurers from MetLife to Prudential thought they would be worth a lot more if they went public. And now these companies are saddled with the result: investors who constantly want to know what their stock is worth now, now, now.


In search of a higher immediate return that they could advertise to their shareholders, these newly public insurers have turned to riskier asset classes. In 2004, corporate and government bonds made up 74 percent of life insurance portfolios—a share that slid to 58 percent by 2014. Now more than ever, their assets rise and fall with each market swing—and there’s clearly been much more falling than rising going on lately. 


“Too-big-to-fail” regulations. In 2014, under Dodd-Frank rules, three of the biggest life insurers by assets (MetLife, AIG, and Prudential) were classified as “systemically important financial institutions” (SIFIs)—meaning they had to meet liquidity requirements and hold more capital on hand than your average life insurer. MetLife has since wiggled out from under its SIFI categorization, perhaps opening up the door for the others to follow suit.


Competition from other savings vehicles. According to consultancy LIMRA, sales of life insurance policies have declined 45 percent since the mid-‘80s. Today, roughly 30 percent of American households today have no life insurance at all (not even a term policy)—up from 19 percent three decades ago. Most of this decline has been in “whole life” policies with a strong savings component.


Why? Competition. A century ago, life insurance was the only way a typical American family could save anything for the future. Then we added Social Security. Later we added defined-benefit pensions. And still later we added a whole array of voluntary options, from 401(k)s to IRAs. These retirement savings vehicles aren’t just plentiful: They’re efficient, easy to use, low-cost, and (often) tax sheltered.


Sure, in the near future, life insurance will continue to suffer from its legacy problems—guarantees that are “in the money” plus competition from other forms of tax-free savings. But firms that can manage these challenges have a lot to look forward to.


The retirement savings crisis. By any measure, working-age Americans are saving far too little to retire when they plan to or with as much as they need—and they’re just beginning to wake up to that fact.


The National Retirement Risk Index shows that more than half of Americans aren’t putting away enough to retire without a steep drop in living standards. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 4


Of these non-savers, a huge share belong to Generation X. The 35- to 54-year-old demographic now populated by Xers has seen its median household financial assets slide since 1989. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 5


And what’s worse is what’s left after all the new debt they’ve accumulated. Median household net worth has downright plummeted. Back in 1989, the typical 35- to 44-year-old household had a net worth about $100,000 (in today’s dollars). Now it’s below $50,000. Net worth among 45- to 54-year-olds have dropped by nearly half as well. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 6


How is this generation ever going to retire? Keep in mind that public retirement benefits are going to become stingier, not more generous, in the years to come—as today’s breaking age wave puts ever more pressure on Social Security, Medicare, Medicaid, and related programs.


My conclusion: Gen-Xers will have no choice but to ramp up their savings steeply in the years ahead. And much of these new savings will flow into products offered by the life insurance industry. Indeed, over the last three years the personal savings rate has already been rising. This rise will continue—putting some deflationary drag on the economy as a whole, perhaps, but enabling millions of 40- and 50-something households to repair their balance sheets.


Low rates of return. Life insurance execs complain a lot about low long-term rates—not just because of the hit they take in guaranteed payouts, but also because they think it makes their products look unattractive. These worries are unfounded. Quite simply, everything looks unattractive nowadays. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 7


In fact, low rates could easily cause people to save more. In the short run, sure, low interest rates suppress savings. But in the long run—once everyone expects low rates to continue indefinitely—the correlation reverses. (The world’s ZIRP-  and NIRP-fixated central bankers have yet to figure this out.) Households and pension funds eventually realize they must put away ­more money each year to hit their retirement targets. Plus, workers in a low-interest-rate environment can’t count on their own income to grow as fast in the future—which further boosts the need for extra savings.


Favorable demographics. From the ‘90s onward, Boomers moving into midlife have helped push much of the life insurance industry away from its traditional whole-life product line and toward various kinds of annuities. Now, as Boomers move past age 65, that strong demand for annuities is fading.


Meanwhile, the demographic tide is about to turn. Census population projections show that, over the next fifteen years, Millennials will swell the ranks of 30- to 39-year-olds and then the ranks of 40- to 49-year-olds. This will provide a much-needed boost in demand for traditional life insurance. 


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 8


Generational change. More than just their sheer number, Millennials’ cautious worldview will fuel even greater demand for life insurance.


For starters, they’re already saving as much as possible to avoid falling into the quicksand of retirement catch-up that they’ve seen happen to so many of their parents. In this effort, life insurance is one more way to save.


But life insurance isn’t just another savings vehicle for Millennials. This generation also wants to be protected from risk—which is the name of the game for life insurers. For Millennials, there’s no such thing as “playing it too safe.” Many are already buying whole-life insurance well before the age at which they’re likely to use it. In the workplace, they’re fueling new demand for voluntary life insurance policies that will keep their loved ones solvent no matter what happens. Among workplace benefits, according to a 2015 survey by the Employee Benefit Research Institute, Millennials are the only generation that regards life insurance as important as retirement savings.


It’s not just married Millennials, either. Some single twentysomethings are taking out policies as well, just in case—presumably to reimburse Mom and Dad for all those years of rent-free living.


In fact, insurers could even leverage this need for protection into a service that walks Millennials through everything they need to know about finance—in which life insurance is just one piece of the puzzle. Look no further than Massachusetts Mutual’s “Society of Grownups,” a program chalk-full of whole-life advice for prudent young consumers. (The tagline: “Helping you find your inner adult.”)


About Everything: The Bullish Case for Life Insurance - life insurance 6 7 9


  • Up until recently, life insurers have been plagued by difficult challenges. Their guaranteed products have left them vulnerable to “in the money” payouts. They’ve also been pressured to prove profitability to their shareholders amid a long-term slide in the demand for their flagship products.
  • But looking forward, there are a lot of positive trends at play. Gen Xers are waking up late to save for retirement, while risk-averse Millennials are trying to prepare early, promising to drive demand steadily upward for decades to come.

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