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[From The Vault] Cartoon of the Day: Blast Off!

[From The Vault] Cartoon of the Day: Blast Off! - Rate hike cartoon 11.30.2015

 

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. After Friday's Jobs Report "beat" analyst expectations, Hedgeye CEO Keith McCullough wrote, "After going from hawkish to dovish to hawkish to dovish to hawkish, this Jobs print keeps Federal Reserve hawkish." Here's another audience favorite ... Blast off!


MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas

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

Hedgeye CEO Keith McCullough is removing Allscripts Healthcare Solutions (MDRX) from Investing Ideas today. Below is an excerpt from an institutional research note written by Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman in which they lay out their outlook for the stock and weigh the current upside and downside.

 

MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas - allscripts

MDRX | SHORT MORE | 2016 BACK-END LOADED WITH STEEP BOOKINGS COMPS | DOWNSIDE $8 / UPSIDE $16

 

MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas - mdrx

DISAPPOINTING SALES GROWTH; 2016 BACK-END LOADED

Allscripts (MDRX) reported 2Q16 Sales of $397 million and Adjusted EBITDA of $69.5 million, with both missing consensus estimates of $403.5 million and $72.7 million, respectively. Driving the miss was a lower revenue contribution from Netsmart of $43 million versus $50 million consensus, and disappointing organic sales growth of +0.6% YoY despite strong bookings performance.  The Netsmart joint-venture and financial consolidation masked what would have been a larger miss, with 2Q16 core Allscripts revenue of $353.6 million missing pre-Netsmart consensus sales estimates of $363.0 million, and our estimate of $357.8 million.  Note that 1H16 organic revenue growth of +1.8% YoY is below management's guidance for core Allscripts growth of 3-5%, and with guidance left unchangedorganic growth will have to accelerate to +6% YoY in 2H16 to hit consensus numbers and management's guidanceThis compares to our estimate of +3.5% sales growth in 2H16 and expectations the company will continue to miss estimates like they have for the past 3 quarters.

 

Non-GAAP EPS of $0.14 was in-line with consensus and slightly above our estimate of $0.13.  However, we would highlight that a combination of a higher R&D capitalization rate for Netsmart and an increase in stock-based compensationresulted in Non-GAAP R&D expense that was down sequentially, which provided a 190bps sequential tailwind to operating margins in 2Q16.  

ANOMALOUS BOOKINGS STRENGTH; LOTS OF QUESTIONS...

Bookings were the big positive surprise in the quarter, but were somewhat anomalous even considering seasonality.  Total bookings excluding Netsmart were +22% YoY with mix favoring higher margin software delivery bookings that were up +44% YoY.   Meanwhile, Client Services bookings were down -6% YoY, -26% QoQand marks a deviation from a 3 quarter trend where the mix shift had favored client services due to cross-selling of hosting and other outsourcing services to existing clients.  We have argued that the rate of 2H15 client services bookings was not sustainable as they max out wallet share with their largest clients. Total backlog growth excluding Netsmart was +5% YoY, which is down from +5.6% YoY in 1Q16 and +6.4% in 4Q15, and in-line with our model implying higher churn given our lower bookings estimate.

 

We have a hard time understanding the drivers of the strength in software delivery given reported deal flow compared to previous periods and our assessment of a slowing market, which we believe to be valid. Despite the many questions on the conference call, management would not provide transparency into the number.  We question the impact a single deal may have had on the number, specifically the strategic agreement with OptumCare to rollout the Touchworks EHR and Practice Management system across their network of providers.  OptumCare was the "commercial partner" tied to the warrant issuance for 4.1 million shares, and while it appears we were wrong to be skeptical about its near-term impact on bookings, we were right in that it was an atypical structure and more strategic in nature.  


"It's a long term, it's a strategic deal so you can imagine it doesn't look like a typical agreement. It's not a typical agreement. This is the platform which we expect to, over time, translate to a significant sized relationship between the two entities." -2Q16 Earnings Call

 

Near-term revenue impact from the deal will likely be modest, and while we have more to learn about OptumCare, it seems there may be hurdles to getting physicians to adopt.  Additionally, we place less value on the deal as they had to tradeoff economics in the company to close it.  

 

"...we're going to be methodical and make sure we get it right, get it plugged into the rest of their standardized platform and that they have the time to educate their providers on the benefit of the standard platform too. So they're not — nobody is interested in jamming it down anybody's throat." -2Q16 Earnings Call

TOUCHWORKS; TOO LITTLE TOO LATE

Despite management's positive commentary around improvements in Touchworks and the OptumCare deal, we view it as too little too late, with recent market share losses irreversible, especially at the large IDNs. Additionally, while we appreciate that Black Book "deploys one of the most statistically significant survey techniques in the industry", the results run counter to market trends.  We would like to see the characteristics and details of the survey population ourselves.  

 

We spoke to a 30-year CIO at one of the largest IDN's in Michigan who is currently migrating away from a combination of Touchworks and Pro EHR to Paul Black's alma mater who had the following to say about Allscripts:

  • "No CIO worth their salt would go with Allscripts"
  • "I am not close enough to retirement to make a bad decision like that [Choosing Sunrise]"
  • "Everyone in the industry knows they lost so many people because of their instability"
  • "No one in their right mind would be their career on Allscripts"
  • "Even if Allscripts was 50% of the money of Cerner or Epic, I wouldn't go with them"
  • "I look at their support and it is really poor because of all the employee turnover"

SHORT MORE; DOWNSIDE $8 / UPSIDE $16

We like the risk/reward on the short side given back-end loaded sales guidance, at a time where we face the most difficult bookings comparisons of the year.  We don't view strength in software delivery bookings as sustainable, which we believe was confirmed by management's guidance related to bookings mix in future quarters and for a return to normalized software delivery gross margin. Meanwhile, Netsmart acquisition brings more accounting shenanigans and is a low quality, highly levered, short-term "fix" to management's growth problems.


#RoadWarriors: Important Considerations for Every Investor

Keith and I have spent much of the past four weeks on the road visiting with existing and prospective clients the world over (~35 meetings in total). As always, the buysider-to-[former]-buysider nature of such dialogues allows for a higher order of debate and critical thinking that both parties typically find invaluable.

 

Below is a summary of what I found to be the most important, thoughtful and/or consistent topics of discussion, organized by theme (all quotations paraphrased); hopefully you find it helpful as well. Any associated charts, research notes or presentations are hyperlinked below for ease of review.

 

SENTIMENT

 

  • “Financial repression the world over is the primary reason for the rally in high-yield and EM throughout much of the YTD. The near-desperate search for yield and abundance of liquid vehicles for investors to attain it has pushed many investors dangerously far out on the maturity and CAPM curves relative to their respective risk profiles.”
  • “Investors the world over are systematically reducing their exposure to actively managed investment vehicles where they have found themselves overpaying for beta – or worse.”Hedgeye: This latest fund flow data confirm the existing trend. Specifically, U.S. equity mutual funds have suffered their two largest weekly outflows of the YTD over the previous two weeks, at -$10.3B and -$8.2B, respectively. Meanwhile, equity ETFs took in $3.7B of inflows over that same time period. Elsewhere, the $72B New Jersey Investment Council effectively cut its target hedge fund commitment in half to 6% from 12.5%. Lastly, eVestment data showed that investors redeemed $28B from hedge funds in 1H16 – the largest sum since they began tracking the data in 2009 – with $20.7B of that outflow coming in the month of June alone. The inability of active managers to generate the degree of alpha needed to attract and/or retain capital amid central bank-induced market melt-ups likely explains much of the general angst and frustration shared by many investors across the globe.
  • “What’s really frustrating to bottom-up, process-oriented investors like us is that operating metrics and valuations hardly matter anymore. Domestic equity and credit markets are now entirely driven by factor-based investing.”Hedgeye: ETFs, at ~$3T AUM, are now larger than the AUM of the entire hedge fund industry. Moreover, fund flow trends imply the growing prevalence of factor-based investing is here to stay. This is why we have found ourselves doing more and more business with funds that have traditionally eschewed macro research in favor of deep-dive security analysis.
  • “The Vanguard-ization of markets is not going to last. Just wait until the market crashes; investors will be pouring back into active and alternative managers in no time.”
  •  “If I told you a year ago that corporate profits would enter a protracted recession, domestic and global growth would slow considerably, Brexit would occur and Donald Trump would become the GOP nominee and a viable candidate for president of the United States, would you have bet that U.S. equities would be higher or lower on that? In that regard, what’s the bear case from here?”Hedgeye: This line of pushback upon our bearish bias is well-received. That said, however, naval gazing at all-time highs in the SPY completely misses the point of what is perpetuating said highs – i.e. the outperformance of the sector and style factors we like on the long side because of the aforementioned bearish catalysts: Utes at +18.3% YoY, REITS at +14.4% YoY, Defensive Yield at +13.8% YoY and Low Beta at +10.9% YoY are all trouncing the S&P 500’s paltry YoY return of +3.4%. The soft bigotry of low expectations that is trumpeting [mediocre] market beta is not a doctrine we will ever subscribe to.
  •  “Most of my colleagues think I’m crazy for being long Utilities and REITS at these valuations, but I’ve consistently pushed back on their criticism because they are actually cheap – when compared to bonds that is.”
  •  “The TTM outperformance of U.S. equities relative to European and Japanese equities can be largely explained by the higher quality of American companies and the fact that American management teams are laser-focused on creating shareholder value – much more so than their DM counterparts.”Hedgeye: While that narrative is both interesting and compelling, it is inconsistent with Treasury International Capital (TIC) data, which shows that foreigners have been net sellers of U.S. equites on a trending basis for over a year now.
  • “The global weighted average discount rate is at all-time lows. That equals all-time highs in equities – plain and simple.”

 

POSITIONING

 

  • “We’re as bearish as we’ve ever been and are receptive to your bearish views, but why do you think the SPX has held up so well in the face of a global equity bear market and obvious global growth slowdown?”… Hedgeye: One answer is NIRP and a paradigm shift in future discount rate expectations. Moreover, the S&P 500 has ~320 companies whose dividend yields exceed the 10Y Treasury yield. We’re not at all believers in the “this time is different” mantra, but we’d be remiss to downplay passive, income-oriented flows into this asset class.
  • “We want to be net short, but we simply can’t in this [bull] market. There is a whole community of investors who’ll get fired if they don’t participate in the upside. Our investors don’t get nearly as upset when we lose money as they do when we aren’t making money while the market appreciates.”Hedgeye: This is definitely true and we are empathetic to the plight of reluctant bulls. That said, however, the current net lean in futures and options positioning implies that investors fully capitulated to the upside in late-July insomuch as they fully capitulated to the downside in early-February. Even the most ardent bears are leaning long at these highs. When investors are broadly whipped around like this, it creates air pockets above and below last price that have the potential to be easily and demonstrably exploited by economic and/or political surprise factors.
  • “We are getting squeezed by central banks. Helicopter money = we can’t be net short.”Hedgeye: It would help you to actively manage your net exposure in the context of our immediate-term risk ranges; you have to trade the chop if you want to survive in this market. Buy low; sell high. Rinse and repeat.
  • “Rather than have one core position on, I’ve resorted to spreading out such bets to multiple stocks that are similar in nature. Being smallish in three stocks means you can change your mind and get out in 10 mins rather than in two days… And you have to change your mind constantly in a market like this.”
  • Volatility skew is so incredibly compressed right now because so many investors are bidding up upside protection. The market is basically paying you to hedge for a draw-down so that’s precisely what I’m doing – especially given that my prime broker’s data is currently showing the average net exposure of hedge funds across the entire strategy spectrum is at 1-2Y highs, depending on strategy.”Hedgeye: As previously mentioned, investors have completely capitulated to the upside and the skew data you cite is indicative of an investment community that has thrown in the towel in order to play catch-up with beta. We can see this intensified performance chase in the reversal of style factor performance; high beta stocks are up +5.1% MoM, while low beta stocks are down -0.4% over that same duration. This compares to their YTD returns of +5.2% and +13.5%, respectively.

 

U.S. ECONOMY

 

 

GLOBAL ECONOMY

 

  • Hedgeye: As we anticipated as part of our “no blow-up risk” view, China was conspicuously absent in many of the discussions. See more HERE and HERE regarding our increasingly less non-consensus view on Chinese economic and financial market risks.
  • “The Eurozone and Japanese economies are much more at risk of experiencing slowdowns due to NIRP than the U.S. because they rely much more on traditional banking for credit intermediation. The U.S. – with a relatively greater reliance upon capital markets – can see its economic cycle extended via yield-seeking flows into high-yield credit and equity markets amid falling interest rates.”Hedgeye: This is a very astute and accurate observation indeed. As a ratio to nominal GDP, domestic credit to the private sector provided by banks in the Eurozone and Japan is 145% and 110%, respectively; this compares to a lowly 79% for the U.S. As a proxy for reliance upon capital markets, the market capitalization of publically listed companies as a ratio to nominal GDP is only 54% and 95% in the Eurozone and Japan, respectively; this compares to a relatively inflated 152% for the U.S.
  • “The EUR is a structural buy because the ECB can’t cut rates much further without Germany having to eventually backstop a broad-based recapitalization of the Eurozone’s beleaguered banking systems – which is a politically unpalatable option given that they are already subsidizing the persistent sovereign deficits of Southern European economies. As countries balk at what is likely to be ever-increasing hardball out of Berlin and Brussels by opting to leave the common currency one-by-one (then likely all at once), what’s left behind is the DEM, the ever-hawkish Bundesbank and Germany’s massive current account surplus.”Hedgeye: That all is true, but don’t forget the role of the ECB prior to said outcomes. Draghi has made it his sworn life’s mission to defend the common currency at all costs, so the associated economic and financial market turmoil that is likely to stem from all of the aforementioned political chaos is likely to perpetuate unprecedented monetary easing out of the ECB. Moreover, said easing could occur at a time where the U.S. is recovering from recession, which would massively inflate swap spreads in favor of the USD – which already has a distinct demographic advantage in favor of relative rates of GDP growth and inflation over the next 5+ years. While the DEM is certainly a structural buy (meaning the structural net short position in the EUR eventually needs to be covered), we’re not so sure that the EUR doesn’t mean revert to its prior closing lows of 0.8272 per USD prior to the DEM’s assumed return.

 

POLITICS

 

  • “Do you view a Hillary Clinton victory as negative or positive for the market?”Hedgeye: Stability is positive, but it’s very likely that her campaign promise to implement sharp increases in minimum wages across the country will be bad for [already flagging] corporate profit margins on a structural basis.
  • “Who do you view as more favorable for the market?”Hedgeye: Clinton – with her likely move towards centrist pragmatism and ability to compromise with Speaker Ryan – is the obvious choice for most investors, but perhaps not the correct one. Trump’s desire to simplify the tax code (e.g. implementing a flat tax) and lower corporate taxes, his pledge of $500B+ in infrastructure spending (nearly 2x Hillary’s $275B proposal) and his plan to counter Chinese mercantilism [potentially] via targeting a weaker dollar might prove to be quite the bullish concoction for U.S. equities.

 

EMERGING RISKS

 

  • VERY IMPORTANT DISCUSSION: “I haven’t seen anyone talk about the stealth tightening that is the ~15bps back-up in 3M LIBOR over the past month. Everyone talks about where the Fed Funds Rate is headed next, but the reality is that global debt is priced off of LIBOR. I wonder how much the pending rule changes in the money-market fund industry have been and will continue to be a contributing factor to the tightening we’ve seen across the short and long end of several noteworthy yield curves globally over the past few weeks.”Hedgeye: That’s a very astute observation and one we do not yet have a proven answer for. Here’s what we do know: The sharp backup in Japanese interest and inflation swap rates across the curve over the past few weeks (5Y and 10Y JGBs +19bps since 7/27; 20Y JGB +27bps and 30Y JGB +34bps since 7/6; and 5Y5Y Forward Inflation Swap Rate +20bps since 7/16) has caught our attention and is indicative of one of the following two outcomes. On one hand, the market may be responding positively to the government’s recently announced ¥28.1T ($277B) stimulus package and pricing enough of a recovery in Japanese economic growth to perpetuate an increase in risk-taking among Japanese investors. Conversely, the market could be front-running the beginning of a global, politically-driven shift away from the dominance of monetary easing – which lowers interest rates by creating excess demand for sovereign debt securities – to fiscal stimulus – which may perpetuate higher interest rates via excess supply of sovereign debt (in the absence of helicopter money). The fact that Japan’s benchmark Nikkei 225 Index is down -2.5% since 7/27 is supportive of the latter [more-bearish] theory. Regardless of the underlying driver(s) of the aforementioned backup in Japanese rates, a lasting “JGB Tantrum” is likely to prove quite negative for now-crowded yield trades globally – just as the “Bund Tantrum” was before it. The $1.9B outflow from high-yield bond funds in the week to 8/3 – the first of its kind since June and the largest outflow in seven weeks – is evidence of said unwind risk.
  • Hedgeye: Going back to aforementioned discussion of money-market fund rule changes, it’s important that investors understand the drag on economic activity that may result from the associated tightening of capital markets. Specifically, the move to require prime money market funds to hold more short-term debt and allow their NAV’s to fluctuate (versus remaining at $1) has perpetuated a $420B outflow from the industry over the past year, leaving the industry with assets below $1T for the first time since 1999. This would seem to suggest companies reliant upon prime funds for liquidity are likely to have to find other ways to borrow, at the margins – either via costlier bank loans or long-term bond issuance. It’s probably not a huge deal given that government money-market funds have more than absorbed the aforementioned outflow (AUM +$509B YoY to $1.5T), but it’s just one more headwind to a U.S. economy that is facing cycle-peak comparisons for its lone growth driver (i.e. consumer spending) as far as the eye can see.
  • “Central planners are destroying the financial services industry. It’s as if they do not want us to exist – and the reality is they probably don’t. Yellen is critical of income inequality, no?”

 

Hopefully you’ve found these discussions helpful. As always, please feel free to reply with any follow-up questions.

 

Best of luck out there incorporating the aforementioned factors into your existing and respective research and risk management frameworks.

 

Happy Summer Friday,

 

DD

 

Darius Dale

Director


investing ideas

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As you prepare for another bearish TREND (rate of change) NFP report…

Client Talking Points

UK

Carney did his best to devalue the purchasing power of The People yesterday (a little “market security” in exchange for what was great drive for the UK consumer economy in 2015, #StrongPound) and got GBP/USD down to $1.31 while blasting the 10yr Gilt Yield down to 0.63% where it’s holding this morning, down -14bps month-over-month.

Commodities

Quite the bear of deflation re-developing here; shall they call it Commodities “Ex-Energy”? I call this a bearish TREND @Hedgeye with an old wall of resistance up at CRB Index 185 with no legitimate support to 165.

UST 10YR

If you don’t have growth (we’re all in the 1% GDP now) and inflation is deflating, what do you have? A: Long Bond Bulls. A bad jobs report gets me 1.40% on the UST 10yr; a “good one” might get me 1.60%; all the while JGBs and Bunds not moving like they did earlier in the week; watching those closely.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/4/16 56% 5% 6% 7% 13% 13%
8/5/16 64% 4% 6% 6% 10% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/4/16 56% 15% 18% 21% 39% 39%
8/5/16 64% 12% 18% 18% 30% 30%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

To summarize our active ideas, long Gold (GLD) and long U.S. Dollar position (via PowerShares DB US Dollar Index Bullish Fund (UUP), netted out Friday, with gold catching a bid against a USD that got crushed on the report. (Part of the reason we added UUP to Investing Ideas was the expectation of a GDP print that may have sent a hawkish message to the market.) Think of Gold and the USD as a position against a basket of other currencies.

TLT

The good news for #GrowthSlowing bulls is that the Treasury rate curve will likely get pushed lower over the coming days as investors take stock of this week’s ugly data. That's good for Treasury Inflation-Protected Securities (TIP) and Long Bonds (TLT).

UUP

See update on GLD.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Pre-#JobsReport Insights via @HedgeyeUSA app.hedgeye.com/insights/52911… cc @KeithMcCullough #NFP

@Hedgeye

QUOTE OF THE DAY

"I've never lost a game, I just ran out of time"

-Michael Jordan

STAT OF THE DAY

Daniel Murphy is leading the MLB in BA currently, he is hitting .358


Daily Market Data Dump: Friday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Friday - equity markets 8 5

 

Daily Market Data Dump: Friday - sector performance 8 5

 

Daily Market Data Dump: Friday - volume 8 5

 

Daily Market Data Dump: Friday - rates and spreads 8 5

 

Daily Market Data Dump: Friday - currencies 8 5

 

Daily Market Data Dump: Friday - commodities 8 5


August 5, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.60 1.40 1.51
SPX
S&P 500
2,145 2,177 2,164
RUT
Russell 2000
1,195 1,225 1,213
COMPQ
NASDAQ Composite
5,047 5,199 5,166
NIKK
Nikkei 225 Index
16,084 16,533 16,254
DAX
German DAX Composite
9,988 10,385 10,227
VIX
Volatility Index
11.75 15.16 12.42
USD
U.S. Dollar Index
94.50 97.25 95.72
EURUSD
Euro
1.09 1.12 1.11
USDJPY
Japanese Yen
99.27 103.90 101.23
WTIC
Light Crude Oil Spot Price
39.08 43.62 41.93
NATGAS
Natural Gas Spot Price
2.60 2.93 2.83
GOLD
Gold Spot Price
1,335 1,390 1,367
COPPER
Copper Spot Price
2.15 2.23 2.17
AAPL
Apple Inc.
99.99 109.44 105.87
AMZN
Amazon.com Inc.
725 775 760
NFLX
Netflix Inc.
87.33 95.88 93.44
JPM
J.P. Morgan Chase & Co.
62.26 64.86 64.56
PCLN
Priceline Group
1330 1391 1359
TSLA
Tesla Motors
215 236 230
XOP
SPDR S&P Oil & Gas Explore
32.33 34.95 34.53


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