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The Week Ahead

The Economic Data calendar for the week of the 5th of September through the 9th of September is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 09.02.16 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: HCA, AHS, HOLX, HBI, LAZ, FL, TIF, WAB, LVS, EXPE, UUP, LMT, GLD, TLT, MUB

Investing Ideas Newsletter - Fed cartoon 09.01.2016

 

Below are our analysts’ new updates on our fifteen current high conviction long and short ideas. If nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. 

 

Please note that we added HCA Holdings (HCA) to the short side of Investing Ideas and Municipal Bonds (MUB) to the long side this week. Included below are Hedgeye CEO Keith McCullough's refreshed levels for each idea.

levels

Investing Ideas Newsletter - z levels 7

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

EXPE

We sent a new stock report on Expedia earlier this week. Click here to read it.

 

LVS

We also sent a report this week on Las Vegas SandsClick here to read it.

 

TLT | GLD | UUP

To view our analyst's original report on PowerShares DB US Dollar Index Bullish Fund click here and here for Gold.

 

For the high-frequency flopping fans... it looks like we’re going to get our sixth rhetorical Fed policy pivot of 2016 following a week of downbeat domestic macro data:

 

To review the "ping-pong" match in policy communication:  In the last seven months, the Federal Reserve has pivoted from Hawkish (DEC hike) to Dovish (on market down), to Hawkish (April), to Dovish (May Jobs Report bomb), back to Hawkish (July), and now probably back to Dovish again!

 

To review the week’s fundamental data:

 

Pending Home Sales & HPI

Pending Home sales rose just 1% year-over-year in July and have been negative in 2 of the last 3 months.  Sales in the existing market represent ~90% of total housing transaction volume and the trend remains one of deceleration.   Case-Shiller HPI data for June released this week showed price growth in the 20-City series slowed -10bps sequentially to +5.1% YoY, marking a 10-month rate-of-change low.  As it stands, all the primary price series (Case-Shiller, FHFA, CoreLogic) are telling a consistent story of modest HPI deceleration.  

 

ISM

The August ISM reading printed 49.4, down -3.2 pts sequentially and down for a 2nd month off the latest underwhelming  “top” as current production, new orders, employment and backlogs all slide into contraction. 

 

Auto Sales

Auto Sales fell -4.8% MoM in August to 16.91mm Units.  Auto sales represent ~20% of Headline Retail Sales so a -5% decline will sit as a -1% drag to reported growth in the Retal Sales data reported on 9/15

 

NFP

Employment growth slowed on both an absolute and rate-of-change basis in August.  Notably, the deceleration was complemented by a decline in average hours worked and a significant deceleration in hourly earnings growth.  Average hourly earnings in the private sector slowed from a cycle high of +2.7% YoY to +2.4% while earnings growth for Nonsupervisory workers (~80% of the labor force) decelerated +2.1% YoY vs +2.7% prior.   Expect to see a more significant deceleration in payroll growth in 4Q as we traverse meaningfully harder comps. 

 

Income & Consumption

Slowing employment growth + a decline hours worked + deceleration in earnings growth will = a deceleration in aggregate income growth when the official data are reported at the end of the month.  Absent a significant decline in the savings rate and/or significant re-acceleration in credit growth, consumption growth can be expected to track income growth lower. 

 

Industrial Activity 

The -14K decline in manufacturing employment in August accords with the retreat in the employment subcomponent in the ISM manufacturing report.  Lower manufacturing employment and a slowdown in manufacturing hours worked also points to a sequential decline in Industrial Production when that data is reported later in the month. 

 

In short (and in the short-term), bad economic data is good as falling rate hike expectations support asset price inflation. 

 

Over the intermediate-term, "slower-and-lower-for-longer" continues to characterize the growth, inflation and interest rate outlook and support #GrowthSlowing allocations in bonds, gold, and dollars.   While incremental dovishness from the Fed may serve as a short-term headwind to the dollar, the structural case for the $USD amidst ongoing policy divergence between the U.S. and the balance of global DM markets remains intact.   

 

Investing Ideas Newsletter - NFP

 

Investing Ideas Newsletter - ISM

HBI

To view our analyst's original report on Hanesbrands click here

 

Hanesbrands (HBI) has not yet announced participation in this year’s Goldman conference, which takes place next week. Though it’s possible that HBI attends without an announcement, it’s worth noting that in advance of last year’s conference the company positively preannounced earnings.

 

That does not appear to be the case – at least yet – for this year. HBI remains out top short in Retail. 

LAZ

To view our analyst's original report on Lazard click here

 

Lazard had a series of troubling ancillary news this week. First, the European Union (EU) served a tax bill in arrears to tech giant Apple claiming that the company had received an unlawful 13 billion euro subsidy when Ireland gave it preferential tax deals. The development while not directly related to Lazard, serves as a future impediment to international M&A transactions, as a common acquisition strategy is to acquire and redomicile into a lower tax jurisdiction. We hosted a call mid-year with an attorney close to the new U.S. Treasury rulesets on U.S. tax inversion deals and we estimate that 5% of global M&A is tax related which will now add the EU as a region frowning upon tax related benefits.

 

Secondly, Lazard caught some bad press for a debt calculation mistake during the end of the week on the pending Tesla/Solar City transaction. The firm was singled out as having double counted Solar City’s debt balance which would have raised the consideration value for Tesla’s acquisition. While two separate and unrelated issues for the firm and outside of our fundamental call on M&A having peaked last year, these items on the margin are far from bullish and continue to outline a short case on LAZ in our view.   

TIF

To view our analyst's original report on Tiffany click here

 

In its latest quarter, Tiffany (TIF) comps missed for the 4th straight print coming in about 100bps below the street. 

 

As expected, soft demand and macro headwinds continue to pressure the US as the Americas C$ comp slowed on a 2 year basis, now running at a negative MSD rate.  We expect comps to continue to be soft as the issues of lower tourist traffic and slowing luxury demand show no signs of abating. 

 

Our negative macro view was further strengthened by the August jobs miss on Friday.

 

Investing Ideas Newsletter - tif

LMT

To view our analyst's original report on Lockheed Martin click here.

 

Hedgeye Senior Defense Advisor LtGen Emerson "Emo" Gardner USMC Ret. has no new update on Lockheed Martin this week.

FL 

To view our analyst's original report on Foot Locker click here.

 

Foot Locker (FL) has among the lowest SG&A ratios in all of retail. Why? Because 3/4 of sales come from the mother of all brands (Nike) that serves as its own traffic driver.

 

FL is shifting incrementally to Adidas and UA, both of which are lower ticket and less profitable. And importantly, with such a huge Nike presence, FL needs to spend close to nothing on advertising relative to the financial impact of having such great product. That is changing. A 19% SG&A ratio is targeted to 18%, but it could (and should) just as easily go to 22-23%, which cuts margins by more than a third — not including the e-commerce investment. FL needs to hire a world-class e-commerce organization to prevent itself from being disintermediated. That is very very expensive. Same goes for fulfillment ops, and having the content to back up such an investment.

 

All in, the next leg of growth will be more expensive, and street earnings numbers do not have the proper margin assumptions baked in to maintain top line growth.

WAB

To view our analyst's original report on Wabtec click here.

 

Our Industrials analyst reiterates his short thesis on Wabtec (WAB).

HOLX

To view our analyst's original report on Hologic click here

 

Something bad is going to happen here. We see 30% downside for Hologic (HOLX) and credibility risk.

 

The Mammography Quality Standards Act and Program (MQSA) reported National Statistics for mammography facilities yesterday afternoon.  Beginning in June 2016, MQSA began reporting Digital Breast Tomosynthesis (3D) facility and unit counts. The sequential increase in facility and unit counts were 98 and 125 for the month and 244 and 341 for the trailing 1 month and 3 months, respectively.  

 

Interestingly, the 3D placements reported by Hologic as of June 2016 was 3,895, which is higher than MQSA's 3,469 for the comparable period. We're assuming Hologic's count includes placements outside of the US.  We believe there is greater than -30% downside for HOLX as the significant revenue and gross margin contribution from 3D turns negative. F4Q16 and F2017 guidance appear to be a strong near term catalyst.  Also at stake is management's credibility (and multiple) given the vigorous there-is-no-Tomo-cliff communication with the street.

 

Investing Ideas Newsletter - holx

AHS

Click here to read our stock report on AMN Healthcare Services (AHS).

 

We’re seeing our #ACATaper theme play out in our SHORT call on AHS this week with hospital employment continuing to slow.

 

The new healthcare employment data for August 2016 was 3.4% compared to a peak 3.9% in April 2016. Our next major catalyst for AHS is the JOLTS data being released next Wednesday which we will highlight in next weeks investing ideas. We continue to expect shares of AHS to trade back to the low-$20s as organic growth slows and then potentially goes negative over the next 6-9 months.

 

Investing Ideas Newsletter - ahs


Replay & Recap: Staying Ahead of the Curve in Diagnostic Policy - MYGN, AZN, ILMN, LH, DGX & others

Takeaway: The reimbursement and regulatory changes coming to lab testing - especially genomic tests - is unprecedented, dramatic and evolving

Yesterday morning we had the pleasure of speaking with Jud Schneider of NextGxDx about the implications of a radically changing regulatory and reimbursement landscape for clinical labs. Jud is the VP in charge of Bioinformatics. NextGxDx is a technology company that brings transparency to genetic testing  for providers, payers and laboratories. The event was sponsored by LifeScienceTN which provides education and advocacy for the the life science industry.

 

A replay is available here. Presentation begins at about 9:00 minute mark.

 

The conversation focused primarily on two issues; the FDA's proposed oversight of Laboratory Developed Tests and the Medicare reimbursement change brought on by the Protecting Access to Medicare Act of 2014.

 

LDTs:

 

  • The FDA's guidance currently under consideration is really 10 years old and a lot has changed since it was first written
    • Personalized medicine has emerged whose foundation is genetic testing and LDTs
    • Absent any regulation, laboratories have relied on the Clinical Laboratory Improvement Act (CLIA) as the regulatory pathway
    • There are tests that have gone through the FDA that still have a high false positive result suggesting concerns about unregulated tests may not be addressed by FDA's approach
  • The FDA is relying on their belief that LDTs are a device and because of that use the language and classification system of devices
    • Reliance on the definition of device instead of a medical service is highly disputed by some in the lab industry
    • There is a disconnect on whether or not tests as LDTs use the same assays as a test that has gone through a medical device approval pathway. MYGN as gone thru approval of tests as companion diagnostics in cooperation wtih AZN, to name one example, to ease the regulatory pathway for the associated therapy. In the case of MYGN's BRCA 1 & 2 tests - one is an LDT and one is a companion diagnostic. They do virtually the same thing - look for the same mutations in BRCA 1 & 2 and results of the assays are very similar. If the patient has the germline mutation, has developed breast cancer, the FDA says the patient must get the second, companion diagnostic test.
    • The regulatory pathway for a lab under an FDA regime will be a very different process than the CLIA pathway to which they are accoustomed. Many labs may not be prepared for the cost and the time required.
  • The volume of tests the FDA may be asked to review is large.
    • Lengthy process that ties up resources
    • FDA's proposed phased-in approach would mitigate
    • The universe of tests is large. There are about 100k LDTs; 65k genetic tests. About 1k tests are likely to be classified as Class III. The registration burden alone is significant.
    • About 40% of tests utilize NGS technology which is more compex and at a scale that may not yet well-considered by the FDA.
  • Industry would prefer a CMS/CLIA based regulatory regime.
    • This is a regulatory system with which labs are familiar.
    • Most errors are process errors which is clearly in CLIA's scope. Are we focusing on the right problem?
    • Because the FDA process is long and expensive there are some products that have persisted on the market even though the technology has evolved beyond them. The FDA does look at analytical validity, a key component of any assay but does the FDA imply a stamp of approval and therefore clinical utility for the test? The fact these tests tend to remain on the market even though there may be a more effective LDT would suggest yes.

Next Gen Sequencing

  • NGS Guidance does indicate the FDA knows these tests are impacting the market.
    • NGS will impact the paradigm shift to personalized medicine and other initiatives like 21st Century Cures.
    • Release of guidance suggests that NGS may not fit into the devices classes the FDA relies on for regulation.

Companion Diagnostics

  • There is broad agreement that there should be some regulation of companion diagnostics
    • Particularly important for cancer diagnosis where companion diagnostic will properly assign a patient to the right population associated with that particular cancer.
    • Companion diagnostics are critical for treatment with very expensive drugs like GLD Hep C treatment to which certain patients respond very well and where a cost can be avoided for those patients that do not.
    • A lot of room for compromise on this issue. Maybe a good starting point for FDA oversight.

PAMA reimbursement

  • PAMA represents biggest change to reimbursement in labs since 1980s
    • Medicare becomes rate follower not rate leader.
    • More market dynamics will come into play
    • Payment rates that will be reported and thus used to calculate Medicare rates are in effect right now.
    • The form of communication between a lab and the payer is the CPT code. A comparision of CPT codes and the products on the market are not aligned.
    • A carrier panel, for example will test for a number of recessive genes for rare diseases but there is no CPT code for tests for several diseases but there is a code for each disease. This problem creates a disconnect with payers.
    • Health insurers tend to be more reactive than proactive.
    • AMA looking into developing new CPT codes for genetic tests and is now going through quarterly updates instead of annual to accomodate swift pace of change.
    • Large dominant players will have a lot of influence in pricing of CDLTs and could lead to consolidation
    • There is a dearth of information on ADLTs for determining payment regardless of whether or not it is a MAC trying to gap-fill or a commercial payer trying to determine price.
  • Genetic testing market is way out ahead of pricing and payment systems and medical guidance/clinical support systems.
    • We don't know yet if payers are overpaying or underpaying for genetic tests. Probably overpaying for CDLTs.
  • Congress may intervene on LDT oversight if the FDA moves on it before the end of the term. The conflict between CMS and the FDA is a unique and hard to assess dynamic in the negoatiations.

Please call or email with questions.

 

 


MUB: Adding iShares National Muni Bond to Investing Ideas (LONG SIDE)

Takeaway: We are adding Municipal Bonds to Investing Ideas today.

Editor's Note: Please note that our macro team will send out a full report outlining our high-conviction long thesis.

 

MUB: Adding iShares National Muni Bond to Investing Ideas (LONG SIDE) - z muni


Cartoon of the Day: Earnings Dog

Cartoon of the Day: Earnings Dog - earnings cartoon 09.02.2016

 

Earnings continue to “beat” beaten down expectations.


Hedgeye Guest Contributor | Cliggott: What Coming Recession and Current Expansion Have In Common

Takeaway: My guess? Like the current credit and economic expansion (long and muted), the coming "recession" will be long and muted too.

Editor's Note: Below is a new Hedgeye Guest Contributor research note written by our friend Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. This piece does not necessarily reflect the opinion of Hedgeye.

 

Hedgeye Guest Contributor | Cliggott: What Coming Recession and Current Expansion Have In Common - recession cartoon 12.22.2015

For what it is worth

 

...not much has changed in "my read" of the U.S. cycle over the summer. The profit recession looks to be firmly in place. An "NBER business cycle recession" looks to be on the way. {see yesterday's ISM data}  

 

I'm looking forward to an update on the credit cycle when the Fed publishes the Z.1 data on September 16th.

 

My guess is just like the current credit and economic expansion that has been long and muted, the coming  "recession" will be long and muted too -- probably measured in years, not months.

 

I'm still holding on to my "Look Out For Inflation" idea {yesterday's productivity & unit labor cost data} and that headline inflation readings will surprise to the upside in the U.S. during the next 6-12 months.

 

Even as the economy stalls.

 


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