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CHART OF THE DAY | Oil: Where To From Here?

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.

 

"... Where to from here?

 

  1. USD - continues to signal bullish TREND inasmuch the Euro and Pound are signaling bearish TREND vs. USD
  2. SUPPLY – tell me a story that isn’t, in rate of change terms, showing a rising probability of rising supply in Q3/Q4
  3. DEMAND – did it ever matter? If it does, US Consumption is currently lapping its peak comp (on a 2yr basis) in Q3

 

I know. I’m not an Oil man. But those are the Top 3 reasons why I’m not long Oil right now. Most “asset classes” that sustain volatility levels > 30 aren’t my cup of tea (I drink coffee). Oil Volatility (OVX) is breaking out > 45 this morning. That’s scary."

 

CHART OF THE DAY | Oil: Where To From Here? - 08.02.16 el chart


Low Energy

“We had low commodity prices for almost 20 years. I think we’re going to have high commodity prices for almost 20 years.”

-Ian Telfer

 

Gotta guy? You know, a guy? Because, for whatever reason, every good rumor I’ve ever heard on the Old Wall has come from “a guy.” No, no, no. Never a girl. Always a guy. “My guy is saying that he and another guy were standing above a hole and …”

 

Yep. They say they found Gold.

 

Telfer is a British born Canadian mining exec (currently Chairman of Goldcorp) who has a lot of guys. Oh yeah, mining guys have a lot of stories. For Canada’s sake, I’m just glad he’s not on the record with the aforementioned quote about oil.

 

Back to the Global Macro Grind

 

Obviously there has been an epic level of fictional storytelling about the Oil price in the last 5-10 years. The most comical ones come from the guys who have never been to Texas or Alberta. They just do “charts.”

 

God forbid you went beyond the last decade of US monetary asset inflation policy (Down Dollar), you’d find that the average price of oil was < $20/barrel during both Reagan and Clinton’s > 4% real GDP economic expansions (1 and 1).

 

But… if all you care about is monthly performance charts… Oil just crashed, again.

 

Low Energy - Oil cartoon 01.09.2015

 

Yep. After a -23% crash since June, the bull case for Energy assets that imply a recovery towards $60-70 crude looks like it has pretty low energy to me. I beat myself up about missing that v-bottom off the Q1 low, but I’m equally thankful I didn’t chase that Q2 high!

 

Where to from here?

 

  1. USD - continues to signal bullish TREND inasmuch the Euro and Pound are signaling bearish TREND vs. USD
  2. SUPPLY – tell me a story that isn’t, in rate of change terms, showing a rising probability of rising supply in Q3/Q4
  3. DEMAND – did it ever matter? If it does, US Consumption is currently lapping its peak comp (on a 2yr basis) in Q3

 

I know. I’m not an Oil man. But those are the Top 3 reasons why I’m not long Oil right now. Most “asset classes” that sustain volatility levels > 30 aren’t my cup of tea (I drink coffee). Oil Volatility (OVX) is breaking out > 45 this morning. That’s scary.

 

What else is scary? From a @Hedgeye TREND signaling perspective, all 3 of these continue to signal bearish TREND:

 

  1. XLE bearish TREND = $67.17
  2. XOP bearish TREND = $34.95
  3. OIH bearish TREND = $29.45

 

In other words, after a nasty 3 year bear market that culminated in Oil capitulating < $30 in Q1 of 2016, both the commodity and the sub-sector indexes took a good look at going from bearish TREND to bullish, and crashed.

 

My guy says that’s not a good channel check for Global PMIs.

 

What would have been even better than good (i.e. great, in rate of change terms) is WTI breaking out above both its intermediate-term TREND signal level of $47.52 and its long-term TAIL risk level of $52.11.

 

But it didn’t.

 

And I, for one, am staring at this damn oil price this morning … asking you to help me help myself. Tell me the next leg to the bullish story for being long Oil and related levered assets. I have lots and lots of cash. I’m looking to buy something…

 

But I don’t want some poppycock in your story about “global demand has bottomed” and/or “everyone is too bearish on Chin-er, bro.” I want something I can believe – something I can measure and map without depending on a 50-day moving monkey.

 

Gotta guy? Don’t send him to me. Guys and/or gals with time-series data we can measure in rate of change terms will suffice. Thanks in advance. There’s always something crashing somewhere to consider.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.45-1.55%

SPX 2161-2177
USD 95.25-97.50
EUR/USD 1.09-1.12
Oil (WTI) 39.06-42.73

Nat Gas 2.56-2.91

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Low Energy - 08.02.16 el chart


Before it was a Reform Effort, the ACA was a Jobs Program

Takeaway: The ACA has a two phased implementation; increased coverage and utilization which is behind us and payment reform which looms large ahead

The Affordable Care Act was not so much a health care law as it was an insurance law. Its primary purpose was to provide access to adequate and affordable health insurance coverage. The law left intact initially the highly inefficient fee-for-services system that dominates the Medicare, employer sponsored and commercial insurance markets. That approach was not without debate within the Obama administration so plans were made to introduce needed reforms when the time was right.

 

Inefficient is probably too kind a word to describe the American health care system. At the time the ACA was under consideration and ultimately enacted, data from the Organisation for Economic Co-operation and Development (OECD) and published in the Journal of Economic Perspectives by Alan Garber and Jonathan Skinner demonstrated that the United States health system was not cost-effective. Table 1 illustrates some of the utilization and health metrics they examined in their 2008 paper, Is American Health Care Uniquely Inefficient?

 

Table 1: Utilization and Health Differences across OECD Countries

Before it was a Reform Effort, the ACA was a Jobs Program   - OECD Data

 

Health care experts the Obama administration has assembled to develop the Affordable Care Act, understandably argued for significant changes to the care delivery system that would limit the growth and gross inefficiencies of the sector. Their arguments were for a better policy but the fact is one person’s inefficiency is another’s job. Virtually every Congressional district has at least one hospital which is often its largest employer. In a majority of congressional districts, health care and social assistance, according to BLS data, provide most jobs.

 

With unemployment in the U.S. flirting with 10 percent for 2009, the president’s advisers knew that if they did not get the employment situation under control there would not be a second term. As Politico reported couple weeks ago, “Health care experts like [Bob] Kocher and colleague Zeke Emanuel wanted reforms that would increase efficiency and tamp down the sector's growth. But ‘people on the jobs team were saying we need more middle-class jobs and the best place to create them was in health care,’ Kocher says. ‘And after we lost 7 million jobs [in the recession], that argument was winning.’

In the darkest days of the Great Recession, the health care sector was producing year-over-year job growth around 2 percent while the overall economy dipped into negative territory. Table 2 illustrates the year-over-year job growth for health care and all nonfarm payrolls.

 

Table 2: Annual Employment Growth - All Nonfarm versus Health Care 2007-2016

Before it was a Reform Effort, the ACA was a Jobs Program   - Jobs growth

 

Instead of imposing delivery reforms on the commercial insurers or significantly altering the Medicare fee for service system, the ACA created a laboratory for innovation called the Center for Medicare and Medicaid Innovation and funded experiments like Accountable Care Organizations and the Patient Centered Outcomes Research Institute. Most important, the ACA quietly enabled the imposition of those reforms deemed successful on the entire Medicare system – a tool that would not be used for five years.

 

In the four years between passage of the ACA and the end of 2014, per capita spending on health care rose to a little over $9,500 in the United States. Health care expenditures in the U.S. accounted for 17.5 percent of gross domestic product in 2014 up from 17.3 percent in 2010. In other words, the effect of the ACA on spending growth turned out much as those who crafted the bill anticipated. It increased utilization without any offsetting cost controls.

 

By the end of 2014, 10.5 percent or about 14.6 million employed were in the health care sector. Employment in health care exceeded that of the manufacturing sector and was only about 700,000 workers behind retail. By 2016, the health care sector would reduce that distance to 400,000 workers. As a jobs program, the ACA was a soaring success. As a health care reform effort, there was still much work to be done and the tools were there to finish the job. By early 2015, unemployment in the U.S. was finally approaching 5 percent. It was at that point the Obama administration unpacked the CMMI tool and took up the work for which Kocher, Emanuel and others advocated in 2009 and early 2010.

 

In early 2015, HHS Secretary Sylvia Burwell announced several goals. By the end of 2016, Medicare would make 30 percent of payments through alternative payment models. By 2018 the percentage would rise to 50 percent. Also, HHS pledged to tie 85 percent of Medicare payments to value-based purchasing programs by the end of 2016. By the end of 2018, HHS pledged that figure would be 90 percent. Efforts to extend these goals to commercial and employer-based insurers included the Health Care Payments Learning and Action Network.

 

Later that year, in the summer of 2015, CMS announced its first mandatory demonstration for bundled payments of hip and knee replacements, finally executing changes to payment and delivery of health care services envisioned by authors of the ACA. A couple of weeks ago, HHS extended the mandatory bundles to include cardiac care - not coincidentally after a June 23 letter from the Center for American Progress asking CMS to speed up the pace of reform.

 

As Medicare has placed itself decisively on the forefront of change in payment and delivery, it has turned the spotlight on the lack of innovation and slow pace of change in the commercial insurance space. The recent decision by the Department of Justice to intervene in the mergers of AET/HUM and ANTM/CI was based in part on the impact the combinations would have on changes to payment and delivery systems. What was once quiet grumbling about commercial insurers has morphed into a full throated call for change. Peter Orszag, one of the signatories to the CAP letter in June, writes in JAMA:

 

“In employer-sponsored insurance, the evidence shows substantial variation in prices, and to date, transparency tools have proven relatively ineffective at reducing this variation. Employers have to push for better pricing, and as the president notes in his Special Communication {in the same issue of JAMA], the so-called Cadillac tax on high-cost employer plans should be reformed, not ended.”

 

As things stand today, the pace of reform has quickened in response to economic and political circumstances that were not present when the bill was enacted back in 2010. This drive toward greater efficiency - which we see as only in its infancy -comes at the same time that the increased utilization brought on by the ACA begins to wane, putting pressure on incumbents. As the Hedgeye Health Care team has discussed (see "Short AHS, Contemplating a Buzzsaw" Aug. 1, 2016) the data is pointing toward a slowdown in health care employment even before payment reform kicks in. As payment and delivery reform ramp up in Medicare and spillover into commercial and employer-based insurance, the door swings wide open for disruptive forces.

 

And that was the plan all along.

 

Call with questions.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

DNKN: We Are Removing Dunkin' Brands From Investing Ideas

Takeaway: Please note we are removing DNKN from Investing Ideas (short side) today.

"After multiple corrections and under-performance vs. the broad market, I'm taking my ball and going home on this one," writes Hedgeye CEO Keith McCullough. "Looking to refresh our list with some new shorts."

 

DNKN: We Are Removing Dunkin' Brands From Investing Ideas - z d 1


[From The Vault] Cartoon of the Day: Currency Wars

[From The Vault] Cartoon of the Day: Currency Wars - currency wars

 

Our inimitable, in-house cartoonist Bob Rich is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. The top 50 central banks have cut interest rates 672 times since September 2008, triggering a global race to the bottom in currency devaluation terms. In light of all the monetary policy shenanigans, we bring you another audience favorite.

 

Click here to receive our daily cartoon for free.


The Most Significant U.S. Political Development In Over 30 Years

Takeaway: The rise of Trump and Sanders is the most significant development in American politics going back to the early 1980s.

Editor's Note: Below is a brief excerpt from an institutional research note written by Hedgeye Demography Sector head Neil Howe. This is the first of several pieces he is writing about the election. To access our institutional research email sales@hedgeye.com.

 

The Most Significant U.S. Political Development In Over 30 Years - trump bernie

 

Let me say at the outset that I get a lot of questions from readers about how Clinton v Trump fits into the predictive schema laid out in a couple of books I co-authored in the 1990s (Generations in 1991 and The Fourth Turning in 1997). I will respond to these questions in my upcoming notes.

 

Let me just say here, as a preview, that I regard the rise of Donald Trump and Bernie Sanders to be the most significant development in American politics going back to the early 1980s—not because of who Trump or Sanders are personally, but because of what their popularity says about a decisive mood shift in the electorate. (And not just here in America, but around much of the world.) In our earlier books, we foresaw this shift as driven by generational aging and occurring on a “seasonal” timetable that has demonstrated remarkable regularity through history.

 

In brief, since the middle of 2000-2010 decade, America has been moving into a “fourth turning era,” a winter season of history in which there arises a surging popular demand for community, public authority, national priorities, cultural tradition, and bottom-line results. There is an equivalent ebbing of popular interest in goals that had earlier been esteemed—such as individualism, personal rights, globalization, cultural transgression, and fair process.

 

Already, the Trump and Sanders movements have radically realigned the American political firmament. Trump, in one blow, has obliterated the party of culture-war social values, imperial globalism, and unregulated free agency. The new GOP stands for pragmatic social solutions, America-first isolationism, and solidarity with the working class.

 

Sanders, meanwhile, has pulled the Democratic Party far to the economic left and endowed its platform with vast new public agendas (including single-payer health, a universal right to college, and soak-the-rich tax rates) that few Democratic leaders previously contemplated, even as recently as 2012. And what Sanders started in the Democratic makeover, the sheer threat of Donald Trump has completed. Can anyone in living memory recall a Democratic convention with so many American flags and “USA” chants, so much talk about “American greatness,” so many appeals to “faith,” “family values” (thanks, Michelle), and law and order. At the same time the party is moving leftward economically, it is moving rightward socially.


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