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CHART OF THE DAY: Yellen's Favorite Indicator Prints Worst Reading Since 2009

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more. 


"... Janet’s favored dashboard labor Indicator, The Labor Market Conditions Index (LMCI) dropped to an index reading of -4.8 in May, marking a 5th consecutive month of decline, a 7th straight months of deteriorating conditions and the worst reading since 2009."


CHART OF THE DAY: Yellen's Favorite Indicator Prints Worst Reading Since 2009 - 06.10.16 EL

Crazy Pills

Blue Steel? Ferrari? Le Tigra? They're the same face! Doesn't anybody notice this? I feel like I'm taking crazy pills!

-Mugatu, Zoolander (clip here: Crazy Pills)


QE? NIRP? rhetorical dovishness? $8T+ in negative yielding sovereign debt? serial negative estimate revisions? all-time lows in bond yields? decelerating domestic employment/income/consumption growth? sub-2% potential output? utilities/low growth/low beta outperformance?


They’re all outcroppings of the same slow-growth reality! Sure, there are recurrent bad = good, down-dollar counter-trend reflations but that’s why they’re called “counter-Trend” because they are not the overriding reality. Doesn’t anybody notice this? If feel like I’m taking… !


Crazy Pills - Crazy bull cartoon 08.19.2014


Back to the Global Macro Grind ….


If you are unaware, in addition to being a prolific “ambiturner” from a policy perspective (hawkish-dovish-hawkish-dovish pivots YTD), Janet is a noted labor economist. 


In other words, both her primary research and policy focus centers on labor market dynamics.  


It is also likely that she is aware that you are aware that the market is well aware of the current softness in the domestic labor market. 


For the unaware:


  1. NFP Growth: Employment growth decelerated markedly in the latest month on both an absolute and rate-of-change basis and has now been slowing for 15-months and ….  100% of the time, it converges to 0% growth everytime.
  2. LMCI: Janet’s favored dashboard labor Indicator, The Labor Market Conditions Index (LMCI) dropped to an index reading of -4.8 in May, marking a 5th consecutive month of decline, a 7th straight months of deteriorating conditions and the worst reading since 2009
  3. ISM Employment: While expansion in the 80%+ of the economy that is the Services Sector slowed to its weakest pace in 27-month in May, the employment component of the index fell into contraction in May, matching the lowest reading since 2011.
  4. JOLTS: The Job Opening and Labor Turnover Survey (JOLTS) provides the internals on the gross flow of both Hirings and Separations and is released on a month lag to the NFP report. The data for April, reported on Wednesday, showed Job Openings making a new all-time high (data goes back to 2001) while Hires fell to an 8-month low (& will again when the May data are reported) and the quits rate retreated -10bps to 2.0%. As we’ve highlighted previously, a hallmark of an efficient and well-functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. Or so conventional thinking goes. The issue has been the apparent, burgeoning skills gap reflected in the growing spread between Job Openings and Actual Hires and the continued rise of “Jobs Hard to Fill” component of the NFIB Small Business Survey. There are a number of compelling explanations for the skills gap which I’ll address in a future EL.     


So, from a labor-centric Fed, what can we expect from the FOMC meeting next week?


Our Hedgeye-Potomac colleague, former Fed Vice Chairman and Potomac Research Group Senior Economic Strategist Don Kohn, previewed next week’s meeting/decision on a call yesterday. Here is a selection of his salient takeaways (paraphrased):


  • No Change in June … or July: June is an obvious no go from a tightening perspective and July carries less than even odds. If employment growth, inflation and household spending all continue to improve then it becomes higher probability but everything needs to fall into place for July policy action to occur. From a messaging perspective, raising in July when there is no scheduled press conference, would be a strong indirect conveyance that we are transitioning to a more normalized environment where nominal policy changes needn’t be oversensationalized. 
  • Projections: 2.25% was the middle of the range on growth estimates in the last SEP. That will likely be revised lower given the reported growth thus far as it would imply overly optimistic assumptions around 2H growth. It would be unsurprising to see modest upward revisions to Inflation projections. [Note: the net of this is a stagflationary update with Growth ↓, Inflation ↑]
  • Distribution, Not Dots: The Median is a flawed indicator of where the committee sits collectively. For example, in the last SEP the median was for two rate increases in 2016 but there were more people above it than below it. One thing we might see next week is people fall back towards the median, shifting the distribution/skew but leaving the median reading itself unchanged. 
  • Modestly Accommodative: Janet’s recent (& altered) characterization of policy as “modestly accommodative” expresses lower confidence around the prospect for a rising equilibrium interest rate. In other words, we should expect to see the path/trajectory of policy revised to something flatter … if not for the balance of 2016, then for 2017 and beyond. 
  • Levels, not Changes (In response to a question asking if the Fed cares about 2nd derivative changes)It’s the level of the unemployment rate relative to its sustainable value that will ultimately determine inflation pressures. And Labor gains had, arguably, been running too hot and needed a slowing in so as not to overshoot the unemployment rate on the downside with negative flow through to prices. Janet indicated that, in taking a “balanced” approach to policy, they wouldn’t mind an overshoot as undershoot on the inflation target would be balance by an overshoot on the employment target. [Note: in this context, the FED is viewing negative 2nd derivative changes, not as an indicator of a late-cycle slowdown, but as a positive development supporting achievement of their mandate] 


In short, we’re likely to see a modest negative revision to growth projections, a flatter projected policy trajectory and a shift in focus from the prospects for reaching the inflation target to the prospects for further progress in the labor markets. 


Remember, however, that projecting an air of confidence and maintaining maximum policy optionality requires carefully treading the hawkishly dovish messaging line … or maybe it’s the dovishly hawkish line.


In either case, it’s clearly not nonsensical that we haven’t never seen a data dependent policymaker that did not mention neither labor growth nor price growth. Ignoring both certainly won’t get you nowhere!


That was the most confounding double negative filled sentence I could come up with at half past 5:15am in the morning after three days before Sunday morning. 


If that made sense to you then there is probably a “communication tool-ing” job waiting for you at the Marriner Eccles Building in D.C. 


If it was confusing & contradictory, no worries, you’re not alone. After all, domestic equities and global bonds are at all-time highs, at the same time.  


If everyone else is taking crazy pills, who’s really the crazy one?   


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.63-1.76%

SPX 2082-2119

VIX 13.02-16.73
USD 93.05-95.27
Oil (WTI) 47.77-51.47

Gold 1


Best of luck out there today,


Christian B. Drake

U.S. Macro Analyst


Crazy Pills - 06.10.16 EL

The Macro Show with Todd Jordan Replay | June 10, 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 80.51%
  • SHORT SIGNALS 78.32%

JT TAYLOR: Capital Brief

Takeaway: No Money, Mo' Problems, Clinton's Cash Cow; Peacemaker-in-Chief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


NO MONEY, MO’ PROBLEMS: Donald Trump’s finance team held its first official meeting amid concerns over the campaign’s lack of a finance team, infrastructure and coordination with the RNC with less than five months left to prepare for the general election. In most election cycles, fundraising for presidential campaigns starts 18 to 24 months out - and Trump will be at a disadvantage out of the gate given his continued controversies and general lack of enthusiasm among the Republican donor class leading many to question whether Trump can achieve his previously stated goal of raising $1 billion. Donors are disturbed with the threadbare nature of his campaign which continues to struggle in carrying out even the most basic of functions. He lacks pollsters, data and field expertise, a policy-writing shop, and a communications apparatus - and will soon find that the general election is a different animal than the primary.

CLINTON’S CASH COW: On the other hand, when it comes to fundraising, Hillary Clinton and the Democrats are running like a well-oiled machine. She’s spent well over $200 million, has a large campaign staff with seasoned veterans, and continues to pad her war chest every day. Additionally - with Clinton, well, being a Clinton - she enjoys a deep bench of supporters ready to fundraise, cut ads, hit the campaign trail, and utilize social media. When Bernie Sanders finally exits the race, she’ll look to tap into a deep reservoir of new (and smaller) donors padding her fundraising lead.

WARRENTED ENDORSEMENT: In what may be an audition for the prototypical running mate, Elizabeth Warren launched another blistering attack on Donald Trump, the Republican party, and calls for Wall Street reform. Warren has been suggested as  Clinton’s veep choice by none other than Minority Leader Harry Reid, despite his warning on choosing a senator from a state with a Republican governor. The case for Warren is clear - she’s an outspoken populist-progressive leader who would rally the supporters of Bernie Sanders to Clinton’s cause.


PEACEMAKER-IN-CHIEF: President Obama met privately with Sanders in the Oval Office to congratulate him for a well-run campaign and for the impact he and his message have had on the party and primary election. But, Obama did not tell Sanders to drop out and feels that Sanders has more than earned the right to make his own decision about his course of action recounting Clinton’s similar impasse in 2008.  Obama’s message was clear – it’s time for the Democrats to pull it together and unify around their nominee - and within hours threw his full support behind Clinton.

RYAN’S REVERSAL: Speaker Ryan announced that he will no longer be following his open amendment process and restricting contentious amendments on spending bills. The move comes after a poison pill amendment was attached to the energy and water bill, sinking the entire legislation. The “structured rule” process gives Democrats new ammunition as they continue their charge blaming Republicans for the lack of progress and inability to pass a budget while they control both the House and Senate.

BREXIT: SHOULD I STAY OR SHOULD I GO?: In case you missed it, here’s a recap of our call with Alexander Nicoll, a consulting member of the London-based think tank International Institute for Strategic Studies, who walked us through a seven point framework to contextualize the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU.

DON KOHN REPLAY: Please email us today if you’d like a replay of our call with former Fed Vice Chairman Don Kohn yesterday.


NOTE:  We’re traveling this weekend and Capital Brief will resume on Tuesday.


Cartoon of the Day: Drinking The Kool-Aid?

Cartoon of the Day: Drinking The Kool-Aid? - central bank kool aid 06.09.2016


Did you drink the central planning Kool-Aid?

CMS Home Health Prior Auth becomes pre-claim review in fraud-prone states -AMED, LHCG, KND, HLS

Takeaway: CMS backed down from a pre-authorization demo for home health in fraud-prone states and is requiring pre-claim review. Not great, not awful

In early February, CMS sent up a trial balloon in the form of a Paper Work Reduction Act notice in the Federal Register asking for comment on the collection of information for a pilot on pre-authorization of home health services in the fraud-prone states of Florida, Texas, Illinois, Michigan and Massachusetts. That trial balloon was barely aloft when the industry got out the BB guns and started shooting. A grass roots effort turned out the public comments and lobbyists helped circulate a letter opposing the yet-to-be-proposed prior-authorization demonstration that was eventually signed by 116 lawmakers. And you thought no one reads the Federal Register.


Prior authorization for home health services raises the ire of the industry because it can slow beneficiary access to services which can diminish outcomes for the patient. Prior authorization also raises the specter that Medicare fee-for-service home health agencies will be forced to operate in the way they do as members of Medicare Advantage plan networks. Many Medicare Advantage plans require prior authorization before the commencement of home health services and agencies do not recieve the upfront "anticipated payment" that amounts to about 2/3 of the episode reimbursement. On the other hand, CMS is under a lot of pressure to reduce improper payments. Please see our recent report on Recovery Audit Contractors for more on that. Home health is rife with improper payments - largely due to documentation errors. Complete capitulation by CMS was not politically possible, given the OIG's recent demand that CMS come up with a plan to reduce its improper payment rate below 10 percent.


Yesterday, CMS found a way to begin to address the extremely high improper payment rates in home health without going so far as requiring prior authorization. Instead of obtaining prior authorization to admit and treat a patient in home health care, CMS is asking agencies in Florida, Texas, Illinois, Michigan and Massachusetts to submit a "pre-claim" review of documentation that supports the admission of the patient and the level of home health services. They are to submit to pre-claim review after they have submitted their Request for Anticipated Payment. An HHA can submit to a pre-claim review as many times as necessary to get it right. If an HHA does not submit to a pre-claim review and the claim is submitted for payment, then the claim will be subject to prepayment review to determine medical necessity. If after three months of the demonstration being operational, the HHA does not submit documentation for pre-claim review and the claim is later deemed payable, it will be subject to a 25 percent reduction. This demonstration is scheduled to last three years and begin in Illinois no earlier than August 1, 2016.


The industry in the form of the Visiting Nurses Association fo America (VNAA) and the Alliance for Home Health Quality and Innovation (AHHQI) consider CMS's move to be pre-authorization by another name. The Partnership for Quality Home Healthcare (PQHH) which represents many of the publicly traded home health providers agreed. Both issued statements today opposing the effort, suggesting alternatives and pointing out that CMS failed to use the rulemaking procedure to implement the demonstration.


Pre-claim reviews will be handled by the Medicare Administrative Contractors who get mixed reviews from providers on their ability to adequately communicate and educate. HLS, for example, has been plagued by pre-payment reviews of IRF claims that return 100 percent denial rates. So the industry is understandably wary that the MACs will use what is meant as a way to improve on documentation problems to deny claims after services have commenced. Sophisticated, well capitlaized operators will probably have few problems overcoming documentation problems. It is the rest of the industry - the small local operator that make up so many of the HHAs in the US - that is most likely to be negatively impacted.


We tend to think that anything that helps improve the reputation of the industry and pushes it toward consolidation is probably, in the long run, a good thing. We do acknowledge that pre-claim review in a few states may be a big headache but probably not the end of the world for reputable operators like AMED, HLS, LHCG, KND and AFAM.







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