• run with the bulls

    get your first month

    of hedgeye free


CHART OF THE DAY: Fed-Induced Hawkish Hyperventilation

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.


"... The Fed has “clearly seen improvements for the last 2 months?” Or were those the politically prepared remarks pre the SP500 (you-ge indicator!) going down for 5 of the last 6 trading days and US Equity Volatility (VIX) ramping +20.4% in a week?"


CHART OF THE DAY: Fed-Induced Hawkish Hyperventilation - 08.29.16 chart

Hawkish Hyperventilation

“If you hyperventilate, you can hold your breath underwater longer.”



I guess, provided that you’re always fading the Fed’s forecasts, you can make money as a Long Bond Bull for longer too.


If you’re still keeping score, it’s hawkish (DEC), dovish (MAR), hawkish (MAY), dovish (JUN), hawkish (AUG). That’s right. You go girl! Janet has had 5 policy pivots in 7 months – and she’s one bad jobs report away from her 6th in 8.


Totally cool. Totally manageable. As long as GDP stays around 1%, 90% of Housing doesn’t slow more than -1.2% year-over-year, and Consumer Confidence doesn’t fall much from 4 month lows, right? Or do we need the data to worsen, from here, to really get paid?


Hawkish Hyperventilation - Rate hike cartoon 11.30.2015


Back to the Global Macro Grind


Yep. Memories are short on what happened last time the Federal Reserve tightened into a slow-down (DEC). That said, I’m thinking the government should just make up a nasty jobs report on Friday just to get the SEP bull market narrative (stocks and bonds) back on track.


The government, unlike the Fed, is actually elected. And since it’s an election year, why not work the numbers a little more aggressively like they did the GDP Deflator, understating inflation (and overstating US growth at 1%) in Q1? Ex-profits, no recession as a result. Phew!


As long as “stocks” are going up, this is totally manageable. The narrative, that is. If Obama needs some advisory services on things like month-end and stuff, maybe he should give my boy Bill Ackman a buzz. Did you see what he tried with Herbalife (HLF) on Friday? lol


In all seriousness. This is getting serious.


Fed Funds futures on a SEP and DEC hike probabilities just popped back up to 42% and 65%, respectively. Before the double-hawkish pivot from Fischer that was confused by Yellen, those probabilities were 32% and 57%, respectively, early last week.


I actually agree with 32% being around the right number as there’s a better than 2/3rds chance that US GDP growth continues to slow in Q3 and that the rate of change in non-farm payroll growth continues to slow in the coming months as well.


What you do with that from a macro markets perspective is pretty much the same thing we’ve been telling you to do since the US economic cycle peaked in Q2 of 2015. Buy long-term bonds, Gold, and stocks that look like bonds as you fade Fed forecasts.


That is not what macro markets did last week:


  1. US DOLLAR was UP +1.1% to -3.1% YTD
  2. COMMODITIES (CRB Index) were DOWN -1.4% to +5.7% YTD
  3. OIL was DOWN -3.0% to +11.1% YTD
  4. GOLD was DOWN -1.5% to +24.5% YTD
  5. COPPER was DOWN -4.3% to -3.3% YTD
  6. US STOCKS (SP500) were DOWN -0.7% to +6.1% YTD
  7. UTILITIES (XLU) were DOWN -2.2% to +13.6% YTD
  8. FINANCIALS (XLF) were UP +0.4% to +1.2% YTD
  9. 2YR TREASURY Yield was UP +10bps to -20bps YTD
  10. 10YR TREASURY Yield was UP +5bps to -64bps YTD


That’s right, hawkish hyperventilation fully loaded, the US 10yr Treasury Yield only moved 5 basis points (week-over-week) because it had been moving passive aggressively higher since the last “everything is awesome” US jobs report at the beginning of the month.


Up 5 or down 64. What has the real growth of the US economy looked like (in rate of change terms) in 2016? Relative to Fed expectations of “5 or 6 hikes”, I’d say the current 1.1% US GDP print looks like down 98. That was (in basis points) the YTD low for the 10yr yield.


Oh, you want to go Ex-GDP and go for another hike because “inflation is reaching the target” do you? Cool. In addition to commodity-linked inflation proxies getting deflated last week, the 5yr US Treasury Break-Even rate dropped 2 basis points on the week to 1.34%.


In other words, with:


A) GDP tracking towards 1.1% in Q3 (we’ll get that print right before the election)

B) Housing and Consumer Confidence rolling off their #LateCycle peaks

C) Inflation pressures deflating from their Down Dollar YTD highs

D) Yield Spread (UST 10yr minus 2yr) at its YTD low (down 5bps last week)

E) SP500 dead flat now vs. 1 month ago today


The Fed has “clearly seen improvements for the last 2 months?” Or were those the politically prepared remarks pre the SP500 (you-ge indicator!) going down for 5 of the last 6 trading days and US Equity Volatility (VIX) ramping +20.4% in a week?


The only thing that’s crystal clear to me at this point is that A) the US GDP growth cycle peaked in mid-2015, B) inflation has had what the Fed should call “transitory” reflation, and C) the labor cycle continues to slow from its 2015 rate of change cycle peak.


If that means that Janet Yellen wants to make you hyperventilate every other month as she pivots from hoping-to-be-hawkish back to dovish (when labor data slows), you can keep holding your breath because it’s mathematically impossible for labor to accelerate in Q3.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.50-1.63%

SPX 2162-2190

VIX 11.95-15.03
USD 93.99-96.25
Oil (WTI) 44.01-49.03

Gold 1311-1365


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Hawkish Hyperventilation - 08.29.16 chart

The Macro Show with Keith McCullough Replay | August, 29 2016

CLICK HERE to access the assosciated slides. 

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

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

EVENT | Macau Operators & LVS

Tuesday, August 30th at 11:00AM ET

Watch the replay below.

CLICK HERE to access the associated slides.

CLICK HERE to access an audio-only replay.


Court to CMS: Educate Providers/Contractors on Expanded HHA/SNF Benefit: Pos: AMED, ENSG, LHCG, KND,

Takeaway: CMS's less than enthusiastic education of providers and contractors on the abandonment of the improvement standard must be corrected

Five years have elapsed since the Medicare beneficiary group, Center for Medicare Advocacy, filed a lawsuit against CMS to end use of what was known as the “improvement standard” for approving occupational, speech and physical therapy claims. Despite a settlement three years ago, the issue remains unresolved. The Center has argued, with the help of organizations that advocate for Alzheimer’s, Multiple Sclerosis and Parkinson's patients that CMS’s settlement agreement remains on paper alone. Last week the U.S. District Court agreed and ordered CMS to develop a corrective action plan within 45 days that addresses their breach of the 2013 settlement agreement.


Full implementation of the desired alternative to the improvement standard – the maintenance standard –is a positive for post-acute providers like SNFs and HHAs and negative for Medicare Advantage Plans.


The crux of the CMA’s complaint is that CMS through its contractors, the Medicare Administrative Contractors (MACs) and Medicare Advantage Plans, have for years relied on the improvement standard for approving home health and SNF claims. Specifically, CMS policy dictated that the patient must benefit from the therapy such that their condition improves. That standard, of course, would rule out therapy for Medicare beneficiaries suffering from Alzheimer’s, Parkinson’s, Multiple Sclerosis and other chronic and debiliating diseases who, although they would benefit, are not likely to improve due to the nature of their illness.


In the settlement agreement, CMS agreed to apply a maintenance standard. A maintenance standard would permit a home health agency to provide complex physical, occupational and speech therapy to patients to maintain function or slow deterioration. To their credit, CMS does describe a maintenance standard in their provider education materials. As is so often the case, when complex government programs must be executed by people three or four steps removed from central decision making, execution has been flawed.


As required by the settlement agreement, a series of tests were run to analyze SNF and HHA claims for compliance with the maintenance standard. In the first report 95 percent of claims applied the standard appropriately. In the second report, 53 percent of claims sampled applied the standard incorrectly and had to be returned to the contractor. In a third report, the percentage of incorrect claims had dropped to 38 percent. We should note that the sample size of these claims numbered just 100.


Based on the affidavits that accompanied CMA’s complaint requesting enforcement of the settlement agreement, CMS appears to have three barriers to successful implementation of the maintenance standard:

  • Adherence by Medicare Advantage organizations
  • Training and education of MAC personnel
  • The less than vigorous efforts by CMS

Several of the affidavits were submitted by people whose Medicare coverage was through a MAO. Either the beneficiary named the MAO – Humana and Healthnet, for example - or referred to them as a Medicare Advantage Organization or Plan. We have heard fairly consistently from providers that Medicare Advantage organizations tend to be very difficult to work with from both the care delivery and reimbursement perspectives. Several providers we know refuse to join MA networks.


We have tended to attribute the MAO’s action to a general skepticism about home health care which has a reputation for fraud, waste and abuse. The CMA’s filing, however, suggests that MA plans are also not staying on top of changes to benefit policy. There is little incentive for them to do so as increased home health and SNF utilization is not in the interests of their plans. Of course, the cases represented in CMA’s filing may be isolated and not represent larger trends.


Complaints about Medicare Administrative Contractors transcend reimbursement divisions in Medicare reimbursement. From IRFs to Clinical Labs to HHAs, providers routinely express concerns that the MACs inconsistently apply Medicare benefit policy and are not sufficiently staffed. While some of that might just be the usual chafing under the yoke of government, we have found some of the MACs prepayment determinations to be a bit unbelievable - as in the case of 100 percent improper claims determinations for HLS’s IRFs a couple of years ago. More recently home health agencies have expressed concern that the MACs will be unable to handle the volume of claims subject to the new pre-claim review in certain fraud-prone states.


MACs, many of whom have held their contracts since the inception of Medicare in the 1960s, have a strong influence on HHAs who are disproportionately reliant on Medicare payments. One or two claims denials for violating the improvement standard would be enough for an HHA to refuse admission to an Alzheimer’s, or Parkinson’s patient even in the presence of a doctor’s order. Providers, under these circumstances, are best served to wait until the MAC is sufficiently aligned with CMS on Medicare Benefit Policy before admitting patients for whom payment may be denied.


For good reason, the maintenance standard has gotten hung up on contractor interpretation and understanding. The court found that CMS failed to fully explain to contractors what the maintenance standard was and how it should be applied. Contractors and especially MACs, have a difficulty relying on nuanced interpretation of policy often preferring the “check the box” approach to compliance. Absent an explicit directive, contractors will adhere to the status quo.


CMS has 45 days to submit a corrective action plan to the court. If their change in policy actually reaches implementation this time - and we think it will - it should be a positive for HHAs and SNFs due to increases utilization by heretofore ineligible beneficiaries. The change is likely a negative for Medicare Advantage organizations.


Call or email with questions.

JT TAYLOR: National Politics By Amy Walter

NATIONAL POLITICS By Amy Walter, August 24, 2016

Of Electoral Maps, Emails and Pivots


With just under three months to go in election 2016, some things, specifically the Electoral College math, look much clearer. Clinton not only has a decided lead, but she has a deeper, wider path to 270 than Trump does. Then there’s the stuff that makes the election look less stable - the constant campaign staff shuffling by Trump and the never-ending drip, drip, drip of Clinton’s emails. 

Let’s start with the more clear-cut stuff first. 

The decision this week for the Clinton campaign to announce an $80M ad buy in just seven states, eight if you include the decision to target Omaha’s 2nd CD - North Carolina, New Hampshire, Nevada, Florida, Ohio, Pennsylvania, Iowa - suggests that they see these states as the most competitive. Notably absent from this list are traditional battleground states like Virginia, Colorado, and Wisconsin. Recent polling has shown Clinton up by the high single or double digits in those three states. 

Notably the Trump campaign - despite its previous disdain and skepticism of TV advertising - has begun to run campaign ads in four of those same states - Florida, North Carolina, Ohio and Pennsylvania. 

In other words, both sides see the same states as the ones that will determine the election. So, let’s plug these assumptions into my favorite Electoral College app - 270towin.com. First, plug the seven states (and NE-02) as undecided. Then give Clinton the traditionally blue states - as well as Virginia and Colorado - and give Trump the traditionally Republican states. That scenario means Clinton starts at 249 and Trump begins at 190. 


JT TAYLOR: National Politics By Amy Walter - Map


According to the 270towin.com calculator, there are 13 different paths for Clinton to the magic 270 number. She can win or lose any of those seven toss up states and still hit the threshold. Trump, meanwhile, has only 4 paths to 270. And, all require winning BOTH Florida and Pennsylvania. The current Real Clear Politics Average of polls has Clinton up by nine points in Pennsylvania and 4.5 points in Florida. Unless and until Trump can turn those numbers around, there is no way he can win the election. 

Now the murky - which is actually less murky than you think. 

At this point in a “normal” campaign, there is talk about the dreaded “October Surprise” which is an event or series of events that can change the contours and direction of the campaign. Or maybe it’s a new piece of information about the candidate that alters the perception of that candidate or pulls them off their carefully crafted message. 

What’s unique about this campaign, however, is that the stuff (specifically bad stuff) that is most likely to come out between now and Election Day won’t be “surprising,” but will instead reaffirm existing perceptions about these candidates. More suspect emails from Clinton and more bad behavior from Trump won’t be a “surprise” to voters who already view both Clinton and Trump more negatively than positively. 

Moreover, the biggest problems for both candidates are the ones they have brought onto themselves. A surprise is something that is unexpected. Like the economy falling-out between now and November, or Obama’s approval rating suddenly dropping by 20 points. That’s not likely, but would be surprising. Instead, it’s Clinton’s sloppy handling of the email server and the porous firewalls between the State Department and the Clinton Foundation that are going to dog her through November. And, beyond. Those problems are totally self-inflicted. And, while there is no evidence of a quid pro quo or anything explicitly illegal, it not only smells bad - it looks woefully out of touch. At a time when voters are more frustrated and disillusioned than ever by “politics as usual” and the symbiosis between the powerful and the rich, the State Department/Clinton Foundation nexus looks at best outdated and at worst a proof point that she will continue to support the discredited and disliked status quo. The expectations of transparency and accountability have changed. She - and those around her - have not. 

Moreover, there is concern among some Democrats that a lack of enthusiasm among younger voters as well as African-American voters could blunt not only Clinton’s margin of victory, but also prevent a wave from washing out down-ballot GOPers. One smart Democratic strategist I spoke with recently was surprised at the cynicism and apathy he saw among African-American voters in recent focus groups. They don’t like Trump, but they also weren’t committed to showing up to vote. Among younger voters, Johnson and Stein are getting a significant percent of the vote that has traditionally gone to Democrats. 

Trump, of course, has problems of his own making. His inability to control himself, his message or his itchy Twitter finger are the biggest single impediments to his ability to win this contest. As I’ve written many times before, there is never going to be a Trump “pivot.” What you see is what you get. And, for a majority of Americans, they don’t like what they see. The latest pollster.com chart shows Trump’s favorable/unfavorable rating at 35%/ 63% or -28. Clinton is at 42%/56% or -14. 

Even if Trump were able to show a more restrained side, it’s not clear that voters would believe it. We are getting to point now where opinions of these candidates are getting baked in and are tougher to change. At a focus group of swing female voters I attended the other week there was a lot of frustration expressed about the not-ideal choices in front of them. Yet, while they didn’t trust Hillary Clinton, they were far more worried about Trump’s lack of self-control. As one woman in the Phoenix group remarked, “I don’t trust Hillary Clinton on fighting terrorism, but Trump would get us into World War III.” 

Preeminent pollster Peter Hart has followed one voter in particular for the last year and sees her as a solid gauge of this race. Jen Howard lives in suburban Colorado. She is a “conservative, middle-class Republican in her mid-forties who works in accounting. She has voted for the past four GOP presidential nominees.” In early 2016 she told Hart that “Bernie Sanders was her new favorite. Donald Trump, who had been in the race for about six months at that point, appealed to her because of his position on immigration. Throughout this election cycle, immigration has been her driving concern.” And yet, today she says won’t vote for Trump. She tells Hart that she thinks that Trump “is acting like an idiot; he is crazy.” Her advice: “Shut up; be quiet.” Moreover, while she agrees with Trump on immigration, she has “many reservations about his position and considers ‘the wall’ a ridiculous approach.” While she doesn’t like Clinton: “I don’t trust her; she is not approachable,” she sees Clinton “as competent and someone who will keep U.S. relationships with other countries stable.” It’s not just Jen who Trump lost, but he lost her husband too. While he was an early supporter of the businessman, he “does not plan to vote for the Republican nominee, whom he considers a bully.” 

If voters, especially those that are predisposed to like you, describe you as an “idiot” and a “bully” this close to the election, those views are not likely to change. Moreover, Trump’s decision to double, triple and quadruple down on a strategy of appealing almost exclusively to white voters, has already made his pathway to the presidency narrow. And, any softening of his deportation policies isn’t going to be enough to make up for his previous statements about Mexican “rapists” and his continued focus on building a wall. The wall itself, for many minority voters, is as problematic as a deportation policy. It says, pretty clearly, we don’t want you here. 

At the end of the day, we have two candidates with well-defined weaknesses who are going to be battling those weaknesses for the foreseeable future. Clinton has less control over how her bad stuff gets out. The State Department and Judicial Watch, not her campaign will be releasing the latest trove of previously unknown emails. But, she’s aided by the fact that Trump has proven unable - or unwilling - to stay focused on making her weaknesses the centerpiece of his strategy. Just when it seems he’s honed in on a message, he veers off into another tweet storm or speech that distracts from her and puts the spotlight back on him. Moreover, with a huge fundraising advantage, Clinton and her allies will be able to keep more of Trump’s bad stuff in front of voters - regardless of what is happening in the news cycle.


the macro show

what smart investors watch to win

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.