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CHART OF THE DAY: Dispelling The Myth That Everyone Is Bearish

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.


"... 'Bearish positioning' means the 1-year z-score is A) negative and/or B) really negative (i.e. when it’s more negative than a -2.0x). US Dollar and British Pound have 1-year z-scores of -0.8x and -2.5x, respectively, as of last week.


So what the heck does it all mean? At 11 VIX can stocks never go down as long as GDP isn’t greater than 2%, but not less than 1%? How about long-term bonds and their “safe-yield” proxies – is it over for them, but never for high-beta-low-quality?"


CHART OF THE DAY: Dispelling The Myth That Everyone Is Bearish - 08.22.16 chart

Beast Hole

“The most physically and emotionally demanding part of your four years…”

-West Point


So I’m sitting there in bed this morning, wide-eyed at 3-something AM … It’s Day 1 for me coming back from vaca and I just couldn’t sleep. That’s just the way the grind goes. I love it.


The aforementioned quote comes from the handbook for new cadets at West Point. In her recent book, Grit, Angela Duckworth published what a typical day at Beast Barracks looks like.


Commonly referred to as “Beast”, it’s “designed to help you make the transition from new cadet to soldier.” The opposite of Beast would be something like the Fed’s “Economic Symposium” in Jackson Hole, Wyoming. That’s where you sleep in.


Beast Hole - Fed bunny cartoon 08.19.2016


Back to the Global Macro Grind…


Sure. I get it. If you don’t drink at the whisper-sessions (on Wyoming time), you’re probably up doing some fly-fishing or something. You have to get up early for that. But make no mistake, this is where central planners get paid to lounge.


BREAKING: Fed’s Fischer Signals Close To Targets (ex-GDP)


Yeah. Definitely. As a central-smoother of the US economy, you definitely have to back out 1% GDP if you’re going to proclaim to have nailed it. Reminder: if they actually use their “target” (+2% as the Deflator) real GDP will fall closer to 0% than rise to +2-3%.


But have no fear, the latest Fed forecast is here! Fischer “expects GDP to accelerate in the next few quarters”… which is almost mathematically impossible if inflation continues to rise (in rate of change terms) and real consumption slows from its cycle peak.


All of this will be reported, twisted, and tied together on Friday when Janet Yellen proclaims her mystery of ‘I gotta raise or retire’ faith. Ironically enough, Q2 USA GDP will be reported with a 1% handle in front of it on Friday as well.


So… is it Dollar Up or Dollar Down on that? How about rates?


Last week was a little squirrely on the hawkish-dovish-hawkish-dovish-hawkish (they’ve pivoted 5 times in the last 7 months) Fed watching front. With the US Dollar (Index) down -1.3% on the week:


  1. Rates (UST 2yr and 10yr) rose +4 and +6 basis points, respectively, to 0.75% and 1.58%
  2. But Commodities (Oil in particular) ramped +3.3% (CRB Index) and +9.1% (WTI) on the week, respectively
  3. And Safe-Yield Stocks like REITS and UTES dropped -1.9% and -1.2% on the week, respectively


In other words…


An inflation hawk might have read last week as “inflation is going to hit the Fed’s target and they’ll raise rates in SEP or DEC”, so we better keep chasing Energy Beta, cover shorts, and sell the Long Bond proxies we were never long to begin with.


At least that’s what the Sector and US Equity Style Factors looked like:


  1. Energy Stocks (XLE) were +2.5% on the week vs. the SP500 dead flat (0.0%) on dead volume
  2. High Beta Stocks were up another +2.0% on the week, taking their 3 month ramp to +9.6%
  3. High Short Interest Stocks were +1.2% on the week = +10.3% in the last 3 months

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 companies)


Uh, cover high after shorting low in FEB and JUN? Duh. If you look at sentiment (i.e. how PMs are positioned vs. what they say about sentiment in some Old Wall survey), here’s the latest:


  1. US STOCKS: SP500 and Russell 2000 net LONG positioning scored +2.0x and +2.8x on 1-yr z-scores
  2. TREASURIES: 10YR net LONG positioned pulled all the way back to +22,286 contracts (0.4 on a 1-yr z-score)
  3. US DOLLAR: registered the 2nd most bearish positioning to the British Pound in all of Big Macro futures/options


“Bearish positioning” means the 1-year z-score is A) negative and/or B) really negative (i.e. when it’s more negative than a -2.0x). US Dollar and British Pound have 1-year z-scores of -0.8x and -2.5x, respectively, as of last week.


So what the heck does it all mean? At 11 VIX can stocks never go down as long as GDP isn’t greater than 2%, but not less than 1%? How about long-term bonds and their “safe-yield” proxies – is it over for them, but never for high-beta-low-quality?


Do you think I really know? Do you think someone else does? Now you know why, instead of cajoling with central planning types in Jackson, I’m perfectly happy crawling out of my Beast Hole every morning and trying to think it through for myself.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.48-1.61%

SPX 2167-2192

VIX 11.03-14.44
USD 93.99-96.50
Oil (WTI) 40.37-49.31


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Beast Hole - 08.22.16 chart

AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC)

Takeaway: It is hard to imagine a more tone deaf approach to insurers' struggles w/ACA Exchanges that AET's - suggesting the future is not theirs


In the latest in a series of episodes in which corporate America exhibits tone deafness, AET announced that it was exiting many of the Affordable Care Act exchanges. Complicating public perception of AET’s decision is the fact that the Department of Justice had highlighted the decreased competition on the ACA exchanges were the AET/HUM merger to proceed. Since, AET had, as recently as May, expressed confidence in its exchange business, their announcement on withdrawal looks more like a game of hardball to effect merger approval. Unfortunately for AET, the other team appears completely uninterested in the game.


AET’s announcement, of course, played into the confirmation bias of many in America that believe a.) The ACA is just fancy websites that sell insurance; b.) No insurer wants to sell their insurance there; and c.) Ergo, the ACA is doomed. The government’s reaction to the AET announcement was a big “meh” – not what you would expect if you subscribe to theories a.) thru c.) above. The government reaction suggests a number of things worth keeping in mind as we enter the second phase of the ACA’s impact which the Hedgeye Health Care team has so astutely titled #ACAtaper:

  1. No longer fixated on economy wide employment growth, the Obama administration has turned its considerable administrative influence to encourage health care innovation and those that pursue it.
  2. A large part of the focus is on encouraging payers to shift from fee-for-service to alternative payment and delivery systems.
  3. A paradigm shift for commercial insurers who influence the health care spending of the 160 million Americans enrolled in employer-based insurance will inevitably lead to slower growth in the medical economy.

From the government’s perspective, it would seem that AET’s departure represents more of an opportunity for reform than a death spiral of the individual insurance markets. AET’s experience with the exchanges would seem to suggest that maybe, they just don’t get it.


ACA Exchange History. AET entered the exchange market in 2014 with participation in 17 states. In that year, AET appears not to have managed its risk pool well, based on scheduled risk corridor payment calculations. The risk corridor program was designed so that an insurer that spent 97 percent or less of premiums collected for exchange plans would pay a portion to the government. Those insurers that spent 103 percent or more of premiums would get an offsetting payment from the U.S. Treasury. Chart 1 provides a graphic illustration of this arrangement.


Chart 1: Risk Corridor Payment Calculation


AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC) - Risk corridor

It was early in the game and the ACA had suffered a semi-tragic roll-out with a botched launch of the healthcare.gov website but the 2014 scheduled risk corridor payments provide a proxy of sorts for claims and premium experience (2015 data are not available). Risk corridor payment or receipts at or near zero would indicate good management of care costs and utilization versus premiums.


It appears the AET branded insurers balanced things pretty well out of the gate. The Coventry unit was another matter. Three AET branded insurers – in Pennsylvania, Washington, D.C. and Virginia – paid the government $1.1 million. The small group AET branded insurer in Washington D.C. paid out $600,000 because premiums exceeded claims by more than 3 percent. Six AET branded individual insurers – Arizona, Illinois, Pennsylvania, Oklahoma, Texas and Utah were scheduled to receive just over $4.0 million from the government. Not too bad considering, in terms of risk assessment, AET was driving blind.


However, in terms of balancing claims and premiums, the Coventry unit of AET faired more poorly. One Coventry insurer – in Delaware – paid the government just under $100,000. The rest of the Coventry insurers in Oklahoma, Iowa, Illinois, South Carolina, Kansas, North Carolina, Missouri and Florida were scheduled to receive payments from the government totaling $115.5 million. Most of the Coventry insurers experienced claims that exceeded premiums by at least 3 percent.


For 2014, AET reported that they had approximately 560,000 members enrolled on the public exchanges. Total medical membership in all AET health insurance programs was about 22 million. Table 1 illustrates the payments and scheduled receipts from the risk corridor program for AET and Coventry.


Table 1: 2014 Benefit Year AET Risk Corridor Payments and Scheduled Receipts

AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC) - AET Risk Corridor Payment

AET’s merger target, HUM had a similar experience with the exchanges as the AET Coventry unit in 2014. At the end of 2014, HUM had 1.1 million medical members in the individual market both on and off the exchanges. Total medical membership in 2014 was 13.8 million.


HUM’s insurance company in Mississippi was the only one whose premiums exceeded claims and enough so that they were required to make a risk corridor payment. Table 2 lists Humana’s scheduled risk corridor payments for the 2014 benefit year.


Table 2: 2014 Benefit Year HUM Risk Corridor Payments and Scheduled Receipts

AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC) - HUM risk corridor payments

By comparison, Blue Cross and Blue Shield of Florida which has 700,000 members in Florida (2016 data) alone had a different experience. Again using the risk corridor scheduled payments as a proxy for claims and premium experience, it would appear Florida Blue had a better handle on things in that first year of the ACA exchanges. Table 3 presents the same data for Florida Blue.


Table 3: 2014 Benefit Year Florida Blue Risk Corridor Payments and Scheduled Receipts

AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC) - Florida Blue Risk Corridor Payments

Kaiser Permanente which covers 860,000 individuals most of whom purchased their plans on the exchange also had a different experience than HUM and AET. Table 4 illustrates Kaiser’s experience in the 2014 benefit year.


Table 4: 2014 Benefit Year Kaiser Permanente Risk Corridor Payments and Scheduled Receipts

AET Takes Its Ball and Goes Home; Government Says See Ya! (AET, HUM, ANTM, CI, UNH, MOH, CNC) - Kaiser Risk Corridor Payments

As it happened, the risk corridor payments were pro-rated due to poor estimates by CMS for receipts and disbursements. The political environment for ACA programs caused CMS to treat the program as budget neutral – meaning it could not go to the Treasury to make up the shortfall. In the end, payments for the 2014 benefit year were reduced to 12.6 percent of the scheduled amount. Risk corridor payments for benefit years 2015 and 2016 are subject to budget neutrality restrictions imposed by Congress. Ultimately what gets paid will be determined at the Court of Federal Claims.


There are a number of reasons, AET and HUM can cite for their relatively poor performance on the health insurance exchange. The major talking points are that the risk pool is unstable, the eligibility system too lax and the risk adjustment program too ineffective to allow for a sustainable program.


Additionally, the Obama administration, under pressure to honor its pledge that Americans could “keep their plan,” delayed enforcement of certain ACA requirements on existing plans until 2017. This decision, to the extent state insurance commissioners went along, meant that a number of already insured individuals delayed entering the risk pool.


Finally, whether it was because of the rocky roll-out of www.healthcare.gov or the economic recovery, employers, especially small employers, did not end their Employer Sponsored Insurance programs in favor of sending people to the exchanges as was anticipated by many policymakers and insurers. People insured through their employer tend to be healthier as indicated by their ability to work. In short, enrollees on the ACA exchanges were much sicker, required more services and provided less premium payment support than originally estimated.


The problem with all these excuses has two parts. First, insurers have had three years to modify their strategy to account for these obstacles. Yet, based on disclosures and public comments, the more claims paying experience they get, the worse their performance. To stem the tide, insurers have resorted to their go-to solution when claims exceeded premium revenue – rate increases.


Second, the excuses offered by AET and others ignore the fact that these challenges are nationwide. Yet regional participants like Florida Blue, Kaiser and other insurers have managed to overcome these obstacles and reiterate their continued involvement in the exchanges.


Government Reaction. Facing a less than innovative response and with ample evidence that a number of insurers are finding success, the Obama administration has shrugged off the AET announcement suggesting, in so many words, that perhaps AET and some others just aren’t up to the task. Specifically, many insurers are not sufficiently engaged, as Medicare has been for the last 18 months, in changing how they pay for care.


In an interview with Dan Diamond at Politico last week (32 minutes of your time you will not regret), Kevin Counihan, the www.Healthcare.gov CEO brushed off the loss of AET as part of the dynamism of the industry and says:


“Some of the big insurance companies…you do not necessarily find that their individual strategic strengths were in the individual health insurance line. Often you found that it was an area of the market that they felt was either harder to understand, had competition they did not necessarily want to match, had administrative expenses that were individually based that were just a little clunky for them and felt they were happier working with the big self-insured market.”


Translated out of the polite government-ese, Counihan is implying AET and perhaps UNH in this context just don’t know what they are doing when it comes to the individual insurance markets.


Now, this a pretty important characterization considering that also in the interview, Counihan identifies as a primary goal of the ACA to convert health insurance from a business-to-business model to a business-to-consumer model. Insurers with little experience with the individual market and no interest in gaining it seem poorly positioned for the future in Counihan's view.


So, too did Counihan seem unconcerned about the rate increases that have been making headlines and serve to buttress the popular wisdom that the ACA is in a death spiral. Of course, the implications of these rate increases are muted by the subsidies and cost-sharing provided to enrollees under 400 percent of the federal poverty threshold. Nonetheless, to Counihan the future does not include insurers that respond to increasing medical expenditures simply with rate increases. He tells Diamond:


“Now, there are a couple ways people are looking at [claims expense and premium rates]. One is that are saying ‘I am looking at my claims, I am just going to add my administrative expenses, add [medical cost] trend and that is my new price.’ Others are saying ‘Wait a minute. Let me look deep into those claims. What type of initiatives could I have taken to actually manage those claims differently, actually do unit cost and what’s the impact that has on price?...I would argue the latter is probably more sustainable.”


In other words, Counihan is sounding the death knell for an industry that has done little to reduce unnecessary utilization and medical cost inflation. In fact, as we alluded to in the context of the DOJ’s intervention in the AET/HUM and ANTM/CI mergers, multiline insurer have relied on dog-eared solutions like narrow provider networks and reduced reimbursement to keep premium increases in check. In the case of their Administrative Service Contracts for self-insured employers, they often haven’t even done that much. Most of the large insurers have eschewed innovative approaches like alternative payment models and use of less costly sites of services in favor of the status quo.


Counihan explicitly makes the point:


“[A} key element of the Affordable Care Act is to encourage innovation and to use the exchange population as a means for issuers to innovate and experiment, see what works and to see if that can be applied to their commercial population.”


Now, if that comment reminds you of things we have said about the CMMI and the spillover of Medicare payment and delivery reforms to the commercial payers and health care providers, you are thinking the right way about where HHS is going with the exchanges and the ACA in general.


Counihan goes on to cite Horizon Blue Cross in New Jersey which requires enrollees to activate their insurance card much like they would a credit card. While they have the enrollee on the phone, Horizon employees conduct a health status interview. He also brings up Blue Cross of Michigan which has managed to perform well despite the use of a wide network. Both insurers, incidentally, had a very positive claims and premium experience in the first year of the ACA according to risk corridor payment data.


(None of this is to say that the ACA individual market standards and operations are without fault. The law needs a tweak and with the public and the GOP ready to give up on repeal of the law, that just might be what happens. Topping our list is a reduction of the long, nonsensical and nonclinical list of required Essential Health Benefits that even the reform minded Institute of Medicine could not abide. Beyond that, we would like to see a little more fexibility in the various medal level plans to enhance affordability.)


Nothing Counihan says in his interview is new. Neither is what Patrick Geraghty, CEO of Blue Cross and Blue Shield of Florida and Bernard Tyson, CEO of Kaiser Permanente said in theirs last week. Yet, AET, which certainly has the resources to withstand the losses they reported from their individual market exchange business while they retool for the paradigm shift mandated by the ACA, decided to stick a finger in the Obama administration’s eye Their actions suggested both retaliation for the DOJ’s intervention in their merger with HUM and lack of comprehension about federal health policy and its direction.


Investors take note: AET is playing checkers when the situation calls for chess.

investing ideas

Risk Managed Long Term Investing for Pros

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Investing Ideas - Levels

Takeaway: Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

Investing Ideas - Levels - levels 8 19


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Last month's attempted military coup in Turkey continues to reverberate globally. The coup itself was, of course, a failure; but the response by Turkish president Erdogan has set the Turkish Republic on an extremely worrisome course, both domestically and diplomatically. 

  • Domestically, Erdogan's harsh and extensive purge of those he believes responsible -- not just the military but teachers, judges, public servants and the media - - has reinforced long-standing fears of the president's move to full-up authoritarian rule.  As a result, relations with the U.S. and Europe are at 40 years lows. 
  • Compounding the domestic crackdown is Erdogan's new bromance with Vladimir Putin. The Russian president was first to call Erdogan as the coup was unfolding to offer his support, beating other western leaders, including President Obama. (Some have speculated, not unreasonably, that Russian intelligence had advanced warning of the coup; by sending this information to Erdogan, it gave the embattled Turkish president precious minutes to escape the approaching Turkish special ops forces intending to capture him.) 
    • Particularly in the wake of the Erdogan apology to Putin in June for the shoot-down last year of a Russian fighter-bomber, Putin, as always, saw a geo-political opportunity. He knew any chance of Turkey's admission to the EU was zero; he also anticipated an unraveling of the migrant deal hammered out by Turkey with the EU in March. What better time to step in?

Economically, Erdogan is going all-out to shore up a faltering economy. Besides the boost Putin offers by restoring tourist travel and continuing planning on the proposed "Turkish Stream" natural gas pipeline, Erdogan knows he needs western investment. In light of his sweeping political purge, this will not be an easy sell.

  • Turkey's economy is not only slowing (current growth projections now have Turkey growing barely more than 3% for the rest of this year, slightly less for 2017), but Turkey is also running significant current account deficits; foreign investment is thus badly needed to keep the Turkish lira from falling further and accelerating an already worrisome inflation rate.
  • As a result, Erdogan personally met with foreign business leaders in Turkey following the coup attempt, assuring them that, despite dust-ups with Turkey in their capitals, "business is business;" he intends to repeat this theme with U.S. business leaders in September when he travels to New York for the UN General Assembly meeting.

Events since late June affecting Russia, Europe and Turkey have intriguing historical roots. From the time of Catherine the Great, Russia has had clear strategic ambitions, not just for access to the Black Sea, but for influence over transit through the Dardanelles; and since 1949, when NATO was formed, Joseph Stalin and his successors have coveted a disruption of the Atlantic Alliance and Europe's efforts to integrate. With the Brexit vote in June and now the Erdogan-Putin bromance, Russia has taken a few steps closer to achieving historic strategic goals. 

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Why Target Shares Have 20% Downside From Here (8/20/2016)



In this excerpt from The Macro Show on Friday, Hedgeye Retail analyst Alec Richards explains why Target shares have significant downside from today’s levels.


2. Can The ‘Let Trump, Be Trump’ Strategy Beat Clinton In Election 2016? (8/19/2016)



In this Capital Brief video Q&A, Hedgeye Potomac Chief Political Strategist JT Taylor the recent shakeup in Donald Trump’s campaign team and a shift in strategy for Hillary Clinton.


3. Is The Healthcare Bubble About To Burst? (8/18/2016)



In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Demography Sector Head Neil Howe respond to a subscriber’s question about whether the healthcare sector is a bubble that’s about to pop.


4. About Everything | Augmented Reality: Better Than Virtual? (8/17/2016)



In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the media hype surrounding virtual reality versus "the next big thing [that] may already be sitting in your pocket: augmented reality." Howe breaks down the key takeaways and explains the broader implications for investors.


Click here to access the associated About Everything slides.

Click here to read Howe’s associated About Everything piece.


5. McCullough: Don’t Hyperventilate, Buy Protection (8/16/16) 



In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains how to trade an environment in which volatility continues “shocking people to the upside.”


6. Intel: This Is As Good As It Gets In The Hardware Space (8/16/2016)



Introducing Hedgeye Technology Sector head Ami Joseph. In this excerpt from a recent HedgeyeTV video presentation, Joseph lays out why Intel (INTC) is his first Hedgeye Best Idea on the long side.


7. Australia’s Housing Bubble Is A Massive Powder Keg (8/15/2016)



In this brief excerpt from The Macro Show, Hedgeye Financials analyst Josh Steiner discusses some disconcerting new developments related to Australia’s housing bubble. 


Click here to subscribe for free to our YouTube channel.

Early Look

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