CHART OF THE DAY: #ACATaper Likely = #NFPTaper

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye U.S. Macro Analyst Christian Drake. Click here to learn more.


ACA has proven effective as a jobs and consumption stimulus program.  It served to augment employment growth over the last two years and has helped support headline payroll gains in the face of ex-healthcare softening in 2016. 


However, as the #ACATaper theme plays out and the benefit decays, the support to NFP will similarly diminish. 


CHART OF THE DAY: #ACATaper Likely = #NFPTaper - cd 1


“We don’t know what we’ll be doing a year from now ... you can’t expect the Fed to spell out what it’s going to do... because it doesn’t know."

-Stanley Fischer, FOMC Vice Chairman


Has your investing enthusiasm stagnated, secularly?


Is your proclivity for abandoning rationality in favor of serial attempts to front-run changes in policy rhetoric now past peak?


Are you unsure whether bad (macro data) is still good (for asset prices)?


Has your early cycle euphoria gradually ceded share to existential late-cycle angst?


You are not alone.  And the chronic fatigue you are experiencing may not be your fault. 


Not too many people know this but some compelling, early-stage research suggests that that constellation of psycho-emotional symptoms singularly characterizes a new category of acute disorders broadly classified as Fed Associated Recurrent Torpidity Syndrome … or, #FARTS.


There’s good news and bad news.


The bad news is that there is no existing remedy for FARTS and it’s likely only to worsen nearer-term.


The good news is it’s Friday. 


Back to the Global Macro Grind …


#NFPTaper - cd2


When I was a teacher, a pedagogical point of emphasis was repetition and restricted focus. 


In other words, focus the lesson on a singular or limited set of topics and repeat/practice to the point of inanity.  Students may begin to get bored but they will remember the main takeaways of an exclusive topic.  An eclectic and ranging discussion may be more interesting in the moment but retention will be close to zero in t+x days. 


In that didactic spirit, I wanted to update an isolated theme we’ve given some focus to in institutional notes but not in Early Look-scape: 


It’s an offshoot of a great call our healthcare team has had with their #ACATaper theme (email if you are interested in the Healthcare team’s work).


Here’s the conceptual and quantitative underpinning.   


The implementation of the Affordable Care Act (ACA) resulted in a largely unprecedented influx of newly insured individuals.  Because many of those formerly chronically uninsured had deferred care and carried higher acuity, their utilization rates subsequent to gaining coverage were comparably higher.  The ramp in the insured base coupled with higher utilization and cost rates for the newly insured drove healthcare consumption higher and a discrete ramp in sales in earnings growth for the sector.  Growth rates in healthcare relative to the S&P500 broadly and its defensive brethren (staples and utilities) decoupled, leading to marked outperformance in the related equities.  The #ACATaper theme is centered on the reversal of this dynamic as the sector comps out of the benefit and growth shows a meaningful deceleration.


At the macro level, the implementation of ACA has provided a clear benefit to both employment and aggregate consumption growth.  


That benefit becomes evident in the data concurrent with the initial enrollment deadline for ACA at the start of 2014 and builds conspicuously through 2015. 

  • Employment Palooza: Healthcare's share of total employment began to ramp in mid-2014 with Healthcare payroll gains driving ~16% of total NFP growth from 2Q14-2Q16.  With healthcare industry employment just 10% of total, this represents a disproportionate share of growth.
  • Benefit = Past Peak!  Healthcare Job Openings (JOLTS) and net monthly payroll gains peaked in late 2015 alongside peak NFP gains and have begun a modest retreat in 2016.  After broadly accelerating for 2 years, Healthcare employment growth peaked in March 2016 and has now decelerated in each of the last 5 months.  Meanwhile, Job Openings in Healthcare – which show a strong relationship with overall medical consumption spending – dropped -6% sequentially in July and posted their first year-over-year decline in 26 months at -4.75% YoY.  The Chart of the Day below depicts the ACA associated ramp in Healthcare employment and the emergent deceleration. 
  • Amplification Goes Both Ways:  While trailing 6M/12M NFP gains have slowed in 2016, monthly Healthcare job gains have slowed only modestly until the most recent month.  Healthcare employment rose just +14K in August, down from the +40K TTM average and marking the smallest monthly gain in 3 years.  Should the fledgling deceleration in Healthcare employment progress, Healthcare would reverse from a relative support to a negative amplifier of the headline trend.
  • GDP Juicing:  As the chart above illustrates, over the last 8-quarters Healthcare’s contribution to GDP has seen a step function increase, contributing almost double its average contribution observed over the last 20 years.


Alas, the vision that we could one day all work in the healthcare economy and use our collective earnings to pay for each other’s collective healthcare under ACA in one utopian, incestuous circular economy was not to be.   


ACA has proven effective as a jobs and consumption stimulus program.  It served to augment employment growth over the last two years and has helped support headline payroll gains in the face of ex-healthcare softening in 2016. 


However, as the #ACATaper theme plays out and the benefit decays, the support to NFP will similarly diminish. 


The simple macro punchline is that #ACATaper is likely to = #NFPTaper.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:


UST 10yr Yield 1.51-1.63% (bearish)

SPX 2166-2190 (bullish)

VIX 11.59-14.48 (bullish) 

Oil (WTI) 42.86-48.61 (bearish)

Gold 1 (bullish)


Have a great weekend.


Christian B. Drake

U.S. Macro Analyst


#NFPTaper - cd 1

The Macro Show with Keith McCullough and Neil Howe Replay | September 9, 2016

CLICK HERE to access the associated slides.

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




Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“National honor is the national property of the highest value.”

-        James Monroe


FORUM FALLOUT: Donald Trump and Hillary Clinton were on the receiving end of the firestorm of feedback from the Commander-in-Chief Forum, and bombs continue to fly after each candidate struck out on almost every question posed. For a pre-debate event just two months out from Election Day, much was left unanswered. Neither candidate appeared ready for one of the biggest events thus far, as both flashed the very liabilities that make voters squirm. Trump’s muddy policy proposals and repeated claims he opposed the Iraq war makes our heads spin as we try nailing down who Trump is and what he actually stands for. And sure, Clinton is scheduled to meet with her military advisory council to outline a counter ISIS strategy and military agenda, but we’re baffled by her inability to cogently set the record straight on her biggest liability. But hey, at least they know what Aleppo is.


EMAIL OUTLOOK: Clinton’s email controversy is and will remain a hot button issue with only 60 days left in the election cycle. House Democrats, who thought they were helping Clinton, may have instead hurt her after releasing a slew of emails between Clinton and former Secretary of State Colin Powell discussing the use of her personal email and devices. In the thread, Powell warned Clinton of the danger and advised her that if used for business, it could become an official record to the law. As we know, Clinton did not rely on the advice, putting herself and her veracity in the line of fire. Face it, this issue is not going away, and Clinton remains uncomfortable addressing it - but for what it's worth, House Republicans, who have continued to go after Clinton for her misuse of her email, may end up helping her by overplaying their hand yet again, as oversight hearings will take up much of Congress’ limited remaining work days.


VOTE EARLY AND OFTEN: Most Americans will cast their votes on November 8th, but not all of them. Early voting begins in some important states (OH, FL, NC) at the end of this month and up to 20 million ballots could be out. Democrats ramped up their efforts with the Obama campaign in 2008, and have continued to keep up with data operations. Republicans and Mitt Romney did well in 2012, but could never fully reach their base. Clinton has long been known for her depth of resources, and - of course - has carried that over to her data analytics operation, which includes early voting. Like other pieces of his campaign, Trump's operation is not as set in place, and his mixed relationships with state and local Republicans will be a large disadvantage - as they’re the one’s who know who cast early votes.


SENATE PLANS AHEAD: Senate Majority Leader Mitch McConnell is preparing a measure to fund the government until December 9, 2016. Yes, it's good news that Congress is devising a plan, but the patch ultimately puts unwanted pressure on a divided House Republican conference that is still at odds over the length of the spending measure or CR. Some Republicans would like a CR that stretches into next year, while others fear that a funding debate following an election that is currently leaning Democrat could lead to a budget increase. The Republican Leadership in the House is holding meetings to address party discord, but in the meantime, the Senate’s measure could arrive as early as next week.


SUMMER SAVINGS: As expected, the Senate is coming off a hugely successful summer recess, raising $42 million in August, further showing that Republican donors are focusing their efforts - and bank rolls - on retaining the Senate. The breaking of the piggy bank helps underscore what we’ve been talking about for months - donors continue to be skeptical of Trump and are becoming increasingly concerned that he will fail on November 8th. Donors are turning away from the presidential election in an effort to focus their interests on the Capitol Hill. Along with the Senate’s big summer blowout, Speaker Paul Ryan hauled in $30 million for National Republican Congressional Committee. The efforts comes on the back of Ryan’s plan to stump for and support more House and Senate members in September and into October to guarantee maximum results for Republicans on Election Day.


FOR SALE BY OWNER: Members of the far right House Freedom Caucus are looking for their biggest power grab in years, and are weighing their options to take control of the Republican Study Committee - a leading House group for conservatives - in an effort to push the House Republican Caucus further to the right. The move would throw a wrench in Republican leadership’s agenda, as they continue to battle with not only their own party divisions, but House Democrats - who are expecting more seats to swing their way each day. Republicans may not lose the House outright this term, but could face bigger problems if the aforementioned plot follows through.


GUIDE TO HITCHHIKERS ON THE LAST TRAIN (AKA YEAR END SPENDING BILLS) OUT OF WASHINGTON: Our Healthcare Policy Analyst Emily Evans shared her insight on year end budget negotiations and last chance health legislation in Congress. You can read her piece here.


CALL INVITE: TOP THREE DEFENSE POLICY ISSUES FOR NEXT PRESIDENT: Our Senior Defense Policy Advisor LtGen Emo Gardner is holding a call with the Honorable Dr. James Miller, former Undersecretary of Defense for Policy and leading expert on defense policy. You can find details on the call here.



Takeaway: North Korea's nuclear test makes the commander in chief question in the campaign real.

If it had been an earthquake that measured 5.3 on the Richter scale, North Korea's fifth nuclear test would be considered "moderate", one of over a thousand such occurrences that happen each year.  The impact will be far greater than "moderate" on the campaign and on US defense policy and activity over the coming months.  


This was the most powerful North Korean test yet, estimated to be between 10 and 20 kilotons, approximately the size of the Hiroshima bomb, "Little Boy".  North Korea's second test this year comes just 16 days after North Korea's better than expected test of a submarine-launched ballistic missile (SLBM) that went over 300 miles before landing inside Japan's Air Defense Identification Zone (ADIZ).  North Korea has claimed that its nuclear test was of a missile-sized payload.


While we do not believe that North Korea has the capability to put the two capabilities together yet, it will - and well within the first term of the next President.   Pacific commanders have become increasingly concerned about the rate of North Korean progress.  Although the test was not unanticipated and fits into the well-known North Korean pattern of seeking concessions through aggressive behavior,  the actual event shows the apparent ineffectiveness of sanctions.  Those sanctions had just been increased to the "toughest yet" in March and President Obama has been in Asia for the last week calling for more.   


One of the two Presidential candidates who talked about everything but what is really important about being the next commander-in-chief during Matt Lauer's pathetic job interviews on Wednesday night will have to decide how the US is going to stop Kim Jong Un from getting these tools.  


A preemptive strike against North Korean capabilities has always been on the US menu of options.  While an effective strike against North Korean nuclear or missile launch facilities can be done, the concept is no slam dunk.  North Korea has been preparing to be attacked for decades. The 10 million people of Seoul are extremely vulnerable to well-concealed North Korean artillery and no amount of preemptive strikes will be totally effective against their use.  


Nevertheless, the probability of a US preemptive strike happening over the next twelve months has increased. Two reasons:  

        1) The North Koreans will do something provocative again soon.  President Obama is certain to tighten the screws further on North Korea and may even get Chinese support. North Korea almost always reacts to such pressure by ratcheting up the tension or doing something provocative.  

        2) Both candidates will try to out tough-talk each other on this issue as it moves to the top of the pile of steaming campaign fodder and one of them is going to be elected.








Guide to Hitchhikers on the Last Train (aka Year End Spending Bills) Out of Washington

Takeaway: Year end budget negotiations are last chance for this Congress to get health legislation passed. We have assembled a list of possibilities.

We have put together a comprehensive list of health legislation that might might move with year-end, must pass spending bills. You can download it here. Good news for behavorial health and SUD; mostly good news for Medicare Advantage and a mixed bag for hospitals and LTCHS.


The federal fiscal year ends in 22 days. Between now and then Congress must do one of three things:

1. Pass an omnibus spending bill

2. Pass a continuing resolution

3. Shut down the federal government


Both options 1 and 2 require Congress to pass something. We are not even going to entertain Option 3 at this point because we think most Members of Congress- especially House Republicans- would like to be re-elected this year. The public takes a dim view of delayed Social Security checks and the like. Given the short time until the end of the fiscal year, option 1 seems very unlikely. That leaves the old reliable Continuing Resolution or CR as the most likely course of action this month.


Then the question becomes whether Congress will pass a stopgap CR that expires in December or one that expires in March. House conservatives would like to see the government funded until March arguing that lame duck sessions produce some pretty bad bills. They are right to a certain extent but after Rep. Tim Huelskamp (R-KS) who helped unseat House Speaker John Boehner, went down in ignominious defeat (42-58%) to his primary opponent, we are not sure the Freedom Caucus has the stroke they once did. Left unsaid is the right wing of the right wing's belief that they will gain influence in the body if Republicans lose the anticipated 10-15 seats in November and thus have more sway in March than they will in December.


House moderates are arguing for a December resolution to avoid the confluence of a spending negotiation with an increase in the debt ceiling in early 2017. More on a practical level, the moderate wing of the House thinks approving a spending package to be necessary for the orderly conduct of federal business. They tend to get support for this view from House Democrats. Senate Majority leader Mitch McConnell would appear to concur as he is eyeing an early December vote for a spending bill.


Regardless of whether Congress elects to pass a simple CR until December  - the most likely outcome - or until March or it passes an omnibus in September - right after pigs fly - they have to do something or risk a government shutdown. Passing bills has become such a rarity these days that an omnibus or continuing resolution (or in 2014, the love child of both, the Cromnibus)  is one of the few vehicles available to get unrelated legislation to the president's desk. As such, there will be a good bit of horse-trading between now and the end of September or, more likely, the end of December, between leadership and various Congressional factions to see which bills will hitch a ride on the must pass Omnibus/CR/Cromnibus.  Historically - meaning the last 6-7 years - these year-end deals have included health care legislation, often of great significance.


To get ahead of what will become a very fast moving process at the end of September and December, we have gotten in the habit of making a list of the likely health care-related hitchhikers, starting with bills that have moved past introduction and gotten some traction in either House. To this list we generally add bills that may not have gotten as much speed legislatively but are topical or pressing for other reasons. We generally exclude bills that result in de minimus changes to law like new reporting requirements, bills that are largely designed to score political points like repeal of the ACA and bills that affect federal or state grant programs. to the extent possible, we have included relevant tickers.


In the list you can link to here, a few themes are easily noticeable. First, addressing mental and behavioral health and substance abuse is front of mind for many Members of Congress. We have argued for several years now that this subsector of health care is going against trend. While most health care spending has shifted out of capital intensive environments like hospitals and SNFs and into outpatient and home or community settings, the opposite is true of behavioral and SUD treatment. Congress's efforts reflect a continuation of that trend which is a positive for AAC, ACHC and UHS.


Another noticeable theme is continued support for Medicare Advantage. This program, which was once the go-to source for budgetary off-sets by Democrats, now enjoys broad bipartisan support. That support is not without some scrutiny which usually takes the form of refinements to risk adjustment and oversight of plans' coding.


Finally, the list does include a modest effort to continue the march toward site neutral payments especially for hospital inpatient and outpatient services. HR 5273 would create identical codes for the same services delivered on an outpatient and inpatient basis. Currently, the same services have a different HCPCS codes, making standardization of payment more difficult. The bill would also grandfather in Hospital Outpatient Departments that were under development when reimbursement for new projects was changed last year. This change has been sought by the hospital lobby for a year now.


Not readily apparent from our list of hitchhikers, but on our short list for inclusion in September CR or a year-end spending bill are tweaks to MACRA. CMS indicated today, that they would be allowing physicians to ease into MACRA so legislation may not be necessary. Also likely for inclusion is a halt to the Part B Drug Demo. Notwithstanding the way in which certain drug companies have done their best to attract unwanted attention, the Part B Drug Demo has met with significant bipartisan opposition. Another possibility is a tweak to the LTCHs 25 percent rule which has the support of Rep. Tom Price of Georgia who has championed the cause on behalf of the Shepherd Center in Atlanta. Given the proximity to the November election, we doubt the year-end will bring any relief to some of the issues that have plagued the ACA including the low level of insurer interest in some markets in the public exchanges.


With Congress back in session, this list could grow or shrink depending on what, if anything, gets accomplished legislatively between now and then end of the month. We will keep you informed.


Call with questions.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.