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CHART OF THE DAY: Expensive, Like 1929

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Longer-term though, on something like P/E ratios, Shiller has been proven right. Today’s Chart of The Day is a picture Shiller emblazoned into my thick but impressionable skull in the 1990s. It reminded me that today’s US stock market “multiple” looks like it did in 1929 (you can find Shiller’s long-term mean reversion and behavioral research at www.econ.yale.edu/~shiller/)."

 

CHART OF THE DAY: Expensive, Like 1929 - 07.19.16 EL Chart


Expensive, like 1929

“When the market diverges from its historical trends, eventually it reverts back to the mean.”

-Richard Thaler

 

“Eventually” is a good word for an academic or legitimately “long-term investor” to use. That way they don’t have to get the timing and/or risks right. That said, being blind to #TheCycle for the last 20 years has been very painful for those chasing equity market tops.

 

Thaler’s quote comes from my old professor, Robert Shiller, in a great chapter in Misbehaving called “The Price Is Not Right” (pg 234). Where I grew up in this business (a hedge fund that had an intermediate-term TREND duration to ideas), last price was always right.

 

Longer-term though, on something like P/E ratios, Shiller has been proven right. Today’s Chart of The Day is a picture Shiller emblazoned into my thick but impressionable skull in the 1990s. It reminded me that today’s US stock market “multiple” looks like it did in 1929 (you can find Shiller’s long-term mean reversion and behavioral research at www.econ.yale.edu/~shiller/).

 

Back to the Global Macro Grind

 

At this price (i.e. the all-time closing high of 2166), even if you believe the “E” (Earnings) embedded in the SP500’s multiple, this is a Top 3 most expensive stock market in US history.

 

Expensive, like 1929 - earnings cartoon 07.18.2016

 

While valuation is typically not a catalyst, until central-market-planners take it away from me, it’s still something I have the personal freedom and liberty to not chase. If you’re paid to consider it with other people’s money, that’s a different compensation exercise.

 

If you’ve owned the SP500’s YTD return of 6%, that’s great. It’s nothing exciting (like Gold and Utilities +25.9% and +20.5% YTD, respectively), but it sure beats getting paid nothing at all. No matter how you were positioned, what matters is what you do from here.

 

Back to the “E”…

 

  1. So far 43 of 500 companies in the SP500 have reported GAAP and non-GAAP earnings
  2. In the aggregate (including the generally unaccepted storytelling #s) y/y EARNINGS are down -7.1% QTD
  3. Financials (-8.3%) and Tech (-15.4%) lead losers, underperforming the -7.1% aggregate

 

But no worries, most of the banks “beat.”

 

Yep. Fully loaded with non-GAAP trickery and deceit, they “beat” the soft bigotry of low expectations (apologies to George Bush for borrowing one of his best quotes to describe the RNC, DNC, and Old Wall).

 

But that doesn’t change the fact that the “E” I’m using for a stock market that’s as expensive as it was before the 1929 crash is the wrong “E.” Imagine we used the right number?

 

Pre-EPS season, the GAAP multiple for the SP500 was about 25x. And pre-EPS season, Consensus Macro was trying to make the call that “earnings have bottomed” based on some of the following factors:

 

  1. Over-indexing what they “ex-d out” (Energy) from last year’s earnings, “Oil is up” (but down 5% in the last month)
  2. “The US Dollar is down” (even though now it’s up year-over-year)
  3. “The Consumer is hanging in” (that part is actually true, if you don’t deflate what they’re buying to report real growth)

 

You see, that’s the magic in talking up how a “weak dollar” is giving us +2.3% year-over-year inflation (CPI) … you can’t subtract that inflation from American cost of living (from nominal growth) and print real, inflation adjusted growth. That way, ex-Main St., all good.

 

But what’s real anymore when it comes to storytelling about “the market” vs. the real economy anyway?

 

Another by-line about “the consumer” is that they’re still re-ramping their old levered spending binge on big stuff like autos and homes. If you ask the builders though (NAHB reported its JUL #s yesterday), this is what the numbers say:

 

  1. NAHB Builder Confidence of 59 in JUL (vs. #TheCycle’s rate of change peak in OCT 2015 of 65)
  2. NAHB Sales Activity of 63 in JUL (vs. #TheCycle’s rate of change peak in OCT of 2015 of 70)

 

There are 2-ways to read those numbers: A) like we do - going from great to good is bad (great time to book gains if you’ve killed it long #Housing for the last few years) OR B) like they do - good is good because everything is always good.

 

And that leads me to the full circle on the point of this morning’s note. Whether you missed it or nailed it, is buying the all-time high in anything good? Maybe if you’re a super duper short-term chart chaser… maybe it feels good…

 

But, for my money… from here… I’m not betting that “it’s different this time” and that we don’t have another one of what’s become quite common now for a year in US Equity Beta – i.e. a big mean reversion (lower) AFTER the VIX taps 12.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.31-1.63%

SPX 2110-2190

NASDAQ 4

VIX 12.01-17.14
USD 96.00-97.11

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Expensive, like 1929 - 07.19.16 EL Chart


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

 

“I have noticed that nothing I never said ever did me any harm.”

        -  Calvin Coolidge

 

UNCONVENTIONAL CONVENTION: The highly anticipated Republican convention kicked off last night with a solid celebrity B-list group of speakers and headlined by none other than Donald Trump’s wife, Melania - whose well-received maiden speech is now mired in controversy given stark similarities to Michelle Obama’s 2008 Democratic convention speech. But this convention was supposed to be different – we all expected that - and instead of the usual emphasis on celebrities, the focus would then be centered on politicians who typically serve to give testimonials to the nominee and represent a passing of the torch for the party, but that is in short supply in Cleveland.  Despite the, well, uneven start (more below), expect Donald Trump to grab the torch on his own and run with it.

 

RULES RUCKUS: The #NeverTrump crowd’s last-ditch effort to invite discord and derail Trump’s nomination was squashed after their attempt to force a roll call vote on the convention rules failed. The group submitted signatures from a majority of delegates in more than the required seven states to force a recorded vote from all 2,472 delegates. However, a number of delegates under pressure from the party reportedly removed their names, allowing the rules package to pass by a chaotic voice vote. #NeverTrump hoped to unbind pledged delegates from voting according to their state’s primary or caucus result and allow them to vote independently. Despite its failure, the spectacle of #NeverTrump’s last stand exposed the lack of unity in the Republican party, embarrassing Trump and diverting media attention away from his message and primetime speeches.

 

RALLYING REPUBLICANS?: The ten billion dollar question heading into this week’s events is: can the party survive the convention and emerge unified and enthusiastic while scores of Republicans refrain from endorsing (or even mentioning) the nominee? Speaking to the Wisconsin delegation, Speaker Paul Ryan intimated that the party still needed to come together without mentioning Trump’s name once and while TX Senator Ted Cruz is set to participate in the festivities, we understand he will not endorse. Top that off with OH Governor John Kasich’s very public dissing of Trump and the convention in his own backyard - which happens to be a battleground state. In fact, the only former Republican presidential nominee to attend is former Senator Bob Dole – the nominee from 1996. We haven’t mentioned the litany of excuses Members of Congress are using to stay away - from hiking the Grand Canyon to cutting the grass or even taking their kids to watch dumpster fires.

 

SPOTLIGHT ON OHIO: Hillary Clinton was in OH yesterday – not for the Republican convention – but to address the NAACP conference. Her speech comes after a spate of tragic events in the U.S. and around the world and is a quadrennial stop for most candidates running for higher office - but  this year only one presidential nominee will pay homage as Trump snubbed the group last week. Speaking to a constituency she relied upon heavily to defeat Bernie Sanders, Clinton’s focus was threefold: she spoke on the group’s concerns with their rights and beliefs, used the opportunity to speak on crime and guns, and did it all in a highly sought-after battleground state. Her campaign remains heavily invested in OH and continues to outgun Trump’s organizational efforts especially given his lack of support from the state's popular Governor.

 

CALL INVITE | BREXIT IMPLICATIONS – A 360° ANALYSIS: Please join us this Friday, July 22nd at 11:00 AM EST as we begin a series of calls on post-Brexit implications. Our first call, in conjunction with the international law firm of Squire Patton Boggs, will examine the legal and procedural implications. You can find call details here.

 

IT’S OVER: Our geopolitical analyst Dan Christman shared his insight on the Turkish coup’s failed attempt to oust President Erdogan. You can read his piece here.

 

FCC DROPS RETRANS CONSENT RULEMAKING: In case you missed it, our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the FCC closing its retrans rulemaking, how it’s a relief for broadcasters and more of a disappointment for subscription TV operators. You can read his piece here.


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

The Macro Show with Keith McCullough Replay | July 19, 2016

CLICK HERE to access the associated slides. 

 

 

An audio-only replay of today's show is available here.


Iran Nuclear Deal Emerging as a Potential Election Risk For Energy Markets

Takeaway: Trump pledges to undo the Iran nuclear deal. Reimposing US sanctions will put Iran's 750K b/d of new crude exports to world markets at risk.

As Republicans gather this week in Cleveland, there will be considerable talk about energy issues – support for hydraulic fracturing, coal, natural gas, LNG and overall US energy independence. While Donald Trump has not provided many specifics on his energy plans, there is a solid consensus that his administration would be favorable to fossil fuel energy sectors with very little downside risk for investors.

 

However, there is an emerging election risk to energy markets and that is Trump’s pledge to nullify the Iran nuclear deal.

 

It would be especially disruptive to oil markets as Iranian crude exports have regained significant market share in recent months. The International Energy Agency (IEA) said last week that Iran’s crude production rose to 3.66 million barrels a day in June and 750,000 barrels a day since January when international nuclear sanctions were lifted.

 

Re-imposing US sanctions could put much of this new Iranian crude exports on the market at risk.

 

This is not some crazy Trump idea either. In fairness, the Iran nuclear deal is one issue on which Trump is aligned with Republican orthodoxy as all of the Republican presidential candidates as well as nearly all Congressional Republicans opposed the deal.

 

But Trump has been the most aggressive in disparaging the deal on the campaign trail. In his famous foreign policy interview with the New York Times earlier this year, Trump called the Iran deal “a disaster” and said Obama should have made “a good deal.” So perhaps Trump is not necessarily opposed but thinks he could have gotten a better deal.

 

Hillary Clinton, on the other hand, has made supportive statements regarding the Iran deal, and we would expect a future Clinton administration to uphold it. There will be a great deal of pressure on her to preserve what is viewed by Democrats as a premier foreign policy achievement by President Obama. We suspect this is her personal view as well since the secret talks with Iran started while she was Secretary of State and involved one of her top aides. However, it also should be noted here that the Saudi leadership believes Hillary Clinton will be tougher on Iran than the Obama Administration.

 

In addition to Trump, there remains significant opposition in Congress to the nuclear deal.  On July 7, the House of Representatives passed the Financial Services appropriations bill that contained a provision blocking the $25 billion Boeing deal with Iran Air. The plane deal was a critical part of the Iran negotiations as Iran desperately wants to upgrade its commercial aviation industry after years of sanctions. While it’s unlikely to pass in the Senate and President Obama is certain to veto the legislation, the vote demonstrates Congress’ continued commitment to undo the deal.

 

Supporters of the nuclear deal believe that international pressure will preserve the deal no matter who wins the White House. They say the Europeans and Russians will not join a US effort under a Republican Administration to walk away from the deal so re-imposed US sanctions would be ineffective.

 

In our view, this is a pretty significant miscalculation. Many European companies are already cautious about doing business in Iran out of concern about violating other US sanctions still in effect. If US nuclear sanctions were reinstated, international companies would have to decide between doing business in Iran or the US. The financial penalties alone will be a huge disincentive on Iran business, as evidenced by the $8.9 billion fine the US Treasury Department charged France’s BNP Paribas bank last year for an Iran-related violation.

 

Some observers also believe that Democrats will win the majority in the Senate, and therefore can prevent Trump from sinking the Iran deal. However, the sanctions can be re-imposed via executive action – the same way President Obama lifted the sanctions. Moreover, there are many Democrats in Congress who oppose the deal but only voted for it with extensive caveats out of deference to President Obama.

 

Despite the campaign rhetoric, we do not believe it is a certainty that Trump will undo the Iran deal. After President Obama took office in 2009, he had to abandon several campaign pledges on removing US troops from Iraq and Afghanistan after meeting with intelligence and Pentagon officials. We suspect Donald Trump will be faced with the same realities. By January 2017 so much of the Iran deal will have been implemented that it will be tough to nullify. Iran has received unfrozen cash assets and new revenues from oil exports that have recovered to pre-sanctions levels. We think a Republican President may have no choice but to give it time.

 

However, much will depend on Iran’s compliance under the agreement as well as other non-nuclear related activities. It is not inconceivable that some future Iran misbehavior will cross a line and trigger a US response with snap-back sanctions. Indeed, a German intelligence agency disclosed in a report released in late June that Iran had pursued trying to acquire technology for nuclear weapons purposes even last year when the nuclear deal was signed.


UPDATE: CMS panel votes to reconsider definitive drug testing lab fees - Positive LH, DGX AAC SGRY

Takeaway: CMS mostly followed the advisory panel's recommendation and reimbursement is increasing about 30 percent.

Update: In July we told you that at a public meeting of the Advisory panel had recommended increases to the drugs of abuse reimbursement. The matter was before them because industry groups had requested CMS reconsider its 2016 pricing. The panel voted overwhelmingly in favor of the following reimbursements for the drug testing codes:

 

  • G0480 - $147.60 (CPT Code 82542 * 6)
  • G0481 - $196.80 (CPT Code 82542 * 8)
  • G0482 - $246.00 (CPT Code 82542 * 10)
  • G0483 - $295.20 (CPT Code 82542 * 12)

On Friday, CMS released the 2017 reimbursment rates and as we speculated in July, are a big improvement over the 2016 rates. The new rates are:

 

  • G0480 - $116.85 (CPT Code 82542 * 4.75)
  • G0481 - $159.90 (CPT Code 82542 * 6.5)
  • G0482 - $202.95 (CPT Code 82542 * 8.25)
  • G0483 - $252.15 (CPT Code 82542 * 10.25)

So, the Secretary who has final decision making authority, got most of the way to the panel's recommendation and noted that the reimbursement levels established in December were probably not sufficient. Helping the Secretary with her decision, no doubt, is the vigorous national debate on substance abuse currently underway. The Medicare rates for lab reimbursement are important because private payers often mimic them in their agreements with providers.

 

It is important to note that data collection for lab reimbursement under the new PAMA system is currently underway. To the extent a lab was being reimbursed by commercial payers between January 1, 2016 and June 30, 2016 at the December 2016 rates or close to them, it could apply downward pressure on the rates determined under PAMA for 2018. That said, the new rates are still good news for lab companies and for AAC for which a short thesis has developed around their lab revenues. SGRY also benefits from the increased reimbursement. These rates will be effective January 1, 2017.

 

Original Post:  We had the chance to attend a meeting yesterday of the citizen panel which advises CMS on Medicare reimbursement for clinical lab tests. The panel has reconsidered the payment rates finalized in December for definitive drug tests. The members voted overwhelmingly in support of payment rates that are 35-85 percent higher than what was finalized late last year. The decision to change reimbursement ultimately rests with the Secretary of HHS but yesterday's recommendation is a positive for LH and DGX both of which conduct a substantial number of drug tests. The recommendation is also good news for AAC which derives a portion of its revenue from drug testing of patients under treatment at its facilities.s

 

BACKGROUND. In September 2015, CMS released the Preliminary Determinations for the 2016 Clinical Lab Fee Schedule. In that release CMS proposed to replace the AMA CPT codes for drug testing with three "G" or temporary codes for presumptive testing and four "G" codes for definitive testing. The test codes for definitive testing were described as follows:

 

  • G0480 - Drug test(s), definitive, utilizing drug identification methods able to identify individual drugs and distinguish between structural isomers (but not necessarily stereoisomers), including, but not limited to GC/MS (any type, single or tandem) and LC/MS (any type, single or tandem and excluding immunoassays (eg, IA, EIA, ELISA, EMIT, FPIA) and enzymatic methods (eg, alcohol dehydrogenase)); qualitative or quantitative, all sources, includes specimen validity testing, per day, 1-7 drug class(es), including metabolite(s) if performed.)
  • G0481 - Drug test(s), definitive, utilizing drug identification methods able to identify individual drugs and distinguish between structural isomers (but not necessarily stereoisomers), including, but not limited to GC/MS (any type, single or tandem) and LC/MS (any type, single or tandem and excluding immunoassays (eg, IA, EIA, ELISA, EMIT, FPIA) and enzymatic methods (eg, alcohol dehydrogenase)); qualitative or quantitative, all sources, includes specimen validity testing, per day, 8-14 drug class(es), including metabolite(s) if performed.)
  • G0482 - Drug test(s), definitive, utilizing drug identification methods able to identify individual drugs and distinguish between structural isomers (but not necessarily stereoisomers), including, but not limited to GC/MS (any type, single or tandem) and LC/MS (any type, single or tandem and excluding immunoassays (eg, IA, EIA, ELISA, EMIT, FPIA) and enzymatic methods (eg, alcohol dehydrogenase)); qualitative or quantitative, all sources, includes specimen validity testing, per day, 15-21 drug class(es), including metabolite(s) if performed.)
  • G0483 - Drug test(s), definitive, utilizing drug identification methods able to identify individual drugs and distinguish between structural isomers (but not necessarily stereoisomers), including, but not limited to GC/MS (any type, single or tandem) and LC/MS (any type, single or tandem and excluding immunoassays (eg, IA, EIA, ELISA, EMIT, FPIA) and enzymatic methods (eg, alcohol dehydrogenase)); qualitative or quantitative, all sources, includes specimen validity testing, per day, 22 or more drug class(es), including metabolite(s) if performed.)

These test codes were finalized in December with the following reimbursement rates:

  • G0480 - $79.94
  • G0481 - $122.99
  • G0482 - $166.03
  • G0483 - $215.23

 

The idea behind creating tiers for the number of drugs tested was to encourage providers to test for only the number of drugs necessary and prevent CMS from over-compensating laboratory providers. In practice, however, CMS has found, in the first five months of 2016, that virtually all testing for drugs of abuse were submitted under G0483, thus permitting maximum reimbursement while falling short of CMS's goal to develop a more rational system.

 

Meanwhile, the lab testing industry has raised concerns about access for employers and treatment centers working to combat the current heroin and opioid addiction epidemic. The new codes represent reimbursement rates that some sources estimated as roughly half what CMS paid under the old CPT codes. Although the reimbursement rates for the G codes only apply to Medicare claims, they tend to act as a rate setting mechanism for commercial payers. Since commercial payer contracts are on varied schedules it is hard to know the extent to which the December rates have penetrated the commercial payer market.

 

RECONSIDERATION. In the spring of 2016, industry associations like the California Clinical Laboratory Association submitted a request for reconsideration of the definitive testing codes, G0480-83. Yesterday afternoon, the CMS Clinical Lab fee Schedule Advisory Panel heard public comment and discussed reconsideration of payment rates for these four codes. The 11 members voted overwhelmingly to accept the industry recomendation as follows:

 

  • G0480 - $147.60 (CPT Code 82542 * 6)
  • G0481 - $196.80 (CPT Code 82542 * 8)
  • G0482 - $246.00 (CPT Code 82542 * 10)
  • G0483 - $295.20 (CPT Code 82542 * 12)

These rates had been considered by the panel along with other, lower rates in the fall. However, the Secretary opted to use the lower rates and they were finalized in Decmeber. As was the case then, adopting the panel's recommendation from yesterday's meeting rests entirely with the Secretary of HHS. She could decline to accept this recommendation, modify it or reject it. We think, however, that she is likely to adopt something close to what garnered votes from the majority. While panel members noted the lack of cost data, the Chairman did present information from CMS suggesting that the new codes were not lowering costs as most claims were being submitted with the maximum reimbursement under G0483. Further, there was little dissent with just one or two panel members opting to vote for a rate that was different from the industry recommendation.

 

The current political environment also suggests the wiser course for CMS is to adopt the panel's recommendation. Addressing heroin and opioid addiction is one of the few areas of bi-partisan agreement, although not without some haggling over funding. Reducing reimbursement for a necessary part of drug treatment - the identification of drugs being abused - would seem to be well off message for the adminstration. This point was brought up several times during today's public hearing.

 

If the Secretary decides to concur with the panel's majority view, an increase in reimbursement is, of course, good news for LH and DGX. What is more interesting is the impact on AAC. Some months ago, a short thesis dependent on the impact of decreased lab reimbursement was circulating. To the extent that reasoning explains any of the short interest in AAC, yesterdays's vote may be an opportunity to rethink it. However, it is worth noting that, if the Secretary adopts the most recent recommendations, the new rates would be effective on January 1, 2017. Any claims billed during 2016 would be at the lower rates approved in December. Also, since the data collection period that will establish the new market oriented payment rates under PAMA runs from January 1, 2016 to June 30, 2016, it is possible that any commercial payer agreements that imposed the newer, lower G-code rates on providers could exert downward pressure on the new PAMA rates effective in 2018.

 

 

 

 


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