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Takeaway: We hosted our 3Q16 Healthcare Themes Call earlier today with a comprehensive update of our #ACATaper and Healthcare #Deflation themes
3Q16 healthcare themes conference call
We hosted our 3Q16 Healthcare Themes Call earlier today with 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.
Emily Evans, Director of Health Policy at Hedgeye, also joined the presentation and shared her views on major policy initiatives including Alternative Payment Models, MACRA, and post-acute reform, among other topics that significantly impact our fundamental views.
Takeaway: Here's our take on some of today's top financial stories.
The mainstream media continues to cite "back room" musings of conflicting Japanese officials and their views on helicopter money.
According to Reuters: "There is no chance Japan will resort to 'helicopter money' any time soon, government and central bank officials directly involved in policymaking told Reuters on the condition of anonymity."
Those unidentified Japanese goverment officials eagerly dismissed the notion of helicopter money. Below are a selection of their comments:
Meanwhile, Bloomberg reports...
"Ben S. Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers.
Etsuro Honda, who has emerged as a matchmaker for Abe in corralling foreign economic experts to offer policy guidance, said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money -- in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them -- could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.
Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he wanted to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser."
OUR TAKE: As Japan's moribund economy continues to flounder, what makes central planners so certain helicopter money will finally pull it out of stagnation? The BOJ is already firing up the monetary printing presses to the tune of ¥80 to ¥90 trillion a year. In other words, the best efforts of Japanese central planners continue to fail. None of this bodes well for Japan.
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Takeaway: Claims have been sub-330k for 29 months, now just 16 months shy of the all-time duration record: 45 months set in the 1990s.
Editor's Note: Below is a complimentary excerpt from an institutional research note written by Hedgeye Financials analysts Josh Steiner and Jonathan Casteleyn. If you would like more info on how you can access our research please email firstname.lastname@example.org.
While claims moved momentarily higher in early May, they have resumed a breakneck pace lower for now with the most recent week coming in at an impressively low 254k. However, the keyword here is "breakneck." While the labor market remains strong for now, the current level of claims seems unsustainable in the context of history.
The chart below shows that in the last three cycles claims have dropped below and remained below 330k for 24, 45, and 31 months (average: 33 months) before the economy entered recession in the last three cycles. With the current cycle in its 29th month below that level, we are 5 months past the minimum, 4 months shy of the 33-month average, and 16 months from the max.
With the market at all-time highs and the labor market classically late stage, we remain bearish.
Takeaway: "The probability of a Valeant bankruptcy is high, and the probability that we see a sub-$20 stock over the next 12-months is even higher."
In November, our Healthcare analysts Tom Tobin and Andrew Freedman wrote the research note: "VRX | Bear Case $20." The stock has plummeted since then -- down -75%.
Here's an exclusive update from Andrew Freedman:
"Our $20 “Bear Case” valuation was based on acquisition price of the assets less accumulated debt and assuming the assets perform on par with historical trends. Clearly the latter part of that assumption is no longer valid given the deterioration in the core business that is likely permanently impaired. With $18.6 billion of Goodwill on the balance sheet and the stock down 91.8% from its peak, the market is already telling us that Valeant overpaid for these assets. We are surprised that Valeant has yet to take a write-down to reflect this reality.
The probability of a Valeant bankruptcy is high, and the probability that we see a sub-$20 stock over the next 12-months is even higher. At this stage, it makes more sense to sell the company off in pieces, repay debt holders, give what is left over (if anything) to stockholders and call it quits."
Chart below is from March, 17 2016.
Tobin and Freedman have been laying out the short case for some time. Here's a video from earlier this year which largely predicted what's happened at Valeant, including the precipitous drop in VRX shares and "we would be surprised if Mike Pearson survives as CEO."
Click below to watch. It's instructive to understand what's to come.
Additional updates worth reading from our Healthcare team:
In this brief excerpt from The Macro Show this week, Hedgeye Healthcare Sector Head Tom Tobin answers a “heartbreaking” question from a subscriber on the collapse of ACA exchanges and the impact it’s having on American families.
Subscribe to The Macro Show today for access to this and all other episodes.
Subscribe to Hedgeye on YouTube for all of our free video content.
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