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Trouble Ahead In Europe? Keep An Eye On Credit Default Swaps

Takeaway: Europe financials' CDS have been widening all of 2016 despite the episodic hope that ECB stimulus (see March declines) will prove a panacea.

Trouble Ahead In Europe? Keep An Eye On Credit Default Swaps - european cds

 

Even as financial markets swoon over Italian bank bailout hopes, a number of European financials' credit default swaps remain elevated versus where they were at start of this year. Make no mistake, the chart above is yet another example of the central planning #BeliefSystem breaking down.

 

Can the ECB save Europe's troubled banks?

 

Probably not.


CALL INVITE | Healthcare Themes (7/14/16 at 11:00AM ET)

Takeaway: We will provide a comprehensive overview of our #ACATaper and Healthcare Deflation themes with new datasets and analysis.

CALL INVITE | Healthcare Themes (7/14/16 at 11:00AM ET) - chart1

3Q16 healthcare themes conference call

We hope you can join us for our 3Q16 Healthcare Themes Call on Thursday, July 14th at 11 AM ET.  We will provide a comprehensive update of our #ACATaper and Healthcare #Deflation themes with new datasets and analysis.  The U.S. Medical Economy remains extended after the largest expansion in insured medical consumers in a generation.  Slowing growth in medical consumers, continued deterioration in affordability, aggressive payor reforms, company leverage at 15-year highs, and multiples at 10-year highs is a recipe for downside.  We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable, but rather a temporary boost in consumption driven by massive government stimulus.

click here to watch video preview

CALL INVITE | Healthcare Themes (7/14/16 at 11:00AM ET) - HE cover

 

We are also extremely pleased to announce that Emily Evans, Director of Health Policy at Hedgeye, will be joining the presentation and sharing her views on major policy initiatives including Alternative Payment Models, MACRA, and post-acute reform, among other topics that significantly impact our fundamental views.

 

Please contact  for further information.  An invite with dial-in instructions will be sent to subscribers ahead of the conference call.

key topics WILL include

#ACATaper Update and Review

  • JOLTS and Medicaid Pent-Up Demand
  • Exchange Enrollment
  • Premium/Deductible Affordability
  • Impact of Aging Population
  • Per Capita Spend by Age Cohort
  • Utilization History
  • Employment vs. Privately Insured
  • Hospital Bad Debt Expense
  • Real Private Fixed Investment
  • Biotech Fundraising Cycle
  • Alternative payment models – not just a CMS thing:
  • Health Care Payment Learning Action Network, Catalyst for Payment Reform, Vanderbilt Center for Health Care Market Innovation. Some are working, some are not – we expect bundled payments will see significant take-up
    • MACRA – has even greater potential to change how medicine is practiced than anything even the ACA Post-acute reform
    • Post-acute reform
    • Style Factor and Surprise Analysis
    • Estimate Revisions
    • Relative and Absolute Valuation

Demographic Trends

#Recession Risk

#AGGRESSIVE Policy

consensus expectations

 

Please call or e-mail with any questions.


LMT, RTN, Defense Primes To Gain From $109B Agreed Increases to NATO Spending

Takeaway: Even if NATO achieves only a fraction of promised $109B increase in annual defense spending by 2020, US defense companies will see windfall

Motivated by a sense of the unravelling of the European Union in the face of the clear and present danger of Russia, NATO leaders at last week's NATO summit in Warsaw affirmed for the second time their committment to spending 2% of their GDP on defense by 2020. Other manifestations of a renewed NATO included the approval of permanent NATO troops in the Baltics and Poland and the symbolic gesture of the admission of the last Balkan country, Montenegro, to the Allliance.

 

According to NATO figures, the 28 countries of NATO collectively spend $US 900B annually on defense with US spending of $650B comprising 72% of that amount. 

LMT, RTN, Defense Primes To Gain From $109B Agreed Increases to NATO Spending - Screen Shot 2016 06 05 at 1.44.30 PM

 

In 2015, only the US (3.6%), UK, Greece, Poland and Estonia met the unanimously agreed NATO guideline that individual nations will spend at least 2% of their GDP on defense.  Only six nations met the further standard that at least 20% of defense spending must go towards equipment: US (26%), Poland, UK, France, Turkey, Norway and Luxembourg.   

LMT, RTN, Defense Primes To Gain From $109B Agreed Increases to NATO Spending - Screen Shot 2016 06 05 at 1.58.00 PM

Translating GDP% to the dollars required to meet the goal shows the potential impact of additional spending on the defense industry.  In dollar terms the individual nations are underspending from the NATO guideline by a total of $109B annually.  Given the 20% equipment spending minimum, there is potential for at least $21B more spending annually on hardware when and if NATO countries meet their goal. 

LMT, RTN, Defense Primes To Gain From $109B Agreed Increases to NATO Spending - Screen Shot 2016 06 05 at 2.13.04 PM

 

In the face of Brexit, flat economies, the worst migration crisis since WWII and serious internal terrorist threats, meeting this financial goal will be a challenge.  However, we think that European defense spending will increase because it has to.  First, the Russian threat is real.   Second, this is going to be a central element of policy of whoever wins the next US election.  One of the few things that Hillary Clinton and Donald Trump actually agree on is that Europe must do more for itself.  Domestically this will become a mainstay of future US policy and thus NATO policy regardless of the election winner in November.  

 

NATO nations will naturally try to focus any increased spending on indigenous industry.  In general, the strategy of keeping increased defense Euros and pounds at home will work with respect to shipbuilding and vehicles but not when looking at fighters and missile defense. 

 

Fighters. The star of the Farnborough airshow is the F-35.  LMT and its partners, UTX, NOC, BA, not only have the only Western fifth generation export aircraft, they also have well developed local production partnership programs with all of the key NATO buyers (UK, Norway, Turkey, Italy, Netherlands, Belgium and Denmark) that allows partners to keep some of the increased spending at home.  UK industries, for example, reap ~15% of each F-35 sale.   While Canada currently appears to be backsliding on its committment to buy 65 F-35s, it is now facing the loss of $930M in F35 contracts as a consequence.  No matter what happens, the Canadians will be buying American, as their alternative is BA's FA-18E/F.    

 

Missile Defense is a critical and controversial need for each of the NATO countries allies close to Russia and a likely focus of increased NATO spending. LMT is a critical partner with German MBDA on MEADS (Medium Extended Air Defense System) which is the prime European competitor to RTN's venerable Patriot radar system (uses LMT's PAC-3 missile) in this critical area.  Moreover, the thirteen nations globally that already use the Patriot system are likely customers for needed upgrades to the radar, where RTN would appear to have the inside track.


Cartoon of the Day: Central Banking 101

 

Cartoon of the Day: Central Banking 101 - negative interest rates cartoon 07.12.2016

 

According to the Fiscal Times:

 

"Japan's household sentiment soured and inflation expectations hit the lowest since the Bank of Japan adopted its massive stimulus program in 2013, a quarterly central bank survey showed... The ratio of households who said they trusted the Bank of Japan's policy management also hit a seven-year low, with more than half of the respondents doubting whether it was independent from government interference, the survey showed."


Is Income Inequality Depressing Demand?

In this excerpt from The Macro Show this morning, Hedgeye Demography Sector Head  Neil Howe answers a subscriber’s question on how whether income inequality in the U.S. is depressing aggregate demand.


Capital Brief: Coup D'eTrump ... Congress' Fiscal Funding Fiasco

Takeaway: Convention Coup; Speaker Engagement; Fiscal Year Funding Fiasco

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: Coup D'eTrump ... Congress' Fiscal Funding Fiasco - JT   Potomac under 1 mb

 

"Tell the truth, work hard, and come to dinner on time."

-Gerald R. Ford

CONVENTION COUP?

With less than a week to go until the convention, anti-Trump forces are scrambling faster than ever to dethrone the presumptive nominee. Removing Donald Trump may be their main objective, but another option is being weighed – attempting to select his veep akin to an arranged marriage. The nominee's running mate is still technically decided by an independent delegate vote and delegates have no obligation to support the nominee's choice.

 

The Rules Committee is set to meet later this week to decide convention rules and the party platform, and we doubt any coup will succeed, but this could get interesting depending on Trump’s highly anticipated pick reportedly coming at the end of this week.

SPEAKER ENGAGEMENT

Speaker Paul Ryan has finally agreed to speak at the convention, becoming the most notable stumper on a somewhat atypical lineup. Ryan’s speech is expected to be penned by Ryan himself and will focus on the House Republican agenda and the sharp contrast between Republican ideals and another term of progressive Democratic policies. Expect Ryan’s speech to be more of a pitch for the party than a pitch for the nominee.

FISCAL YEAR FUNDING FIASCO

If you believed there was any chance of Congress agreeing on its annual spending bills this year, forget it – it’s time to focus on avoiding a government shutdown. As we mentioned numerous times throughout the past few months, the process of moving individual appropriations bills was limping along with some progress in each chamber, but with Congress about to call it quits for the summer, almost all hope has been lost. Republicans have now shifted their attention to a timeline for a stopgap spending bill they would need to move before the end of the fiscal year on September 30.


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