Amazon Strikes Again: CVS To Buy Aetna For $69BN In Year"s Largest Deal, "Reshaping Health Care"

A deal that was months in the making is finally official, with Aetna"s board of directors approving on Sunday the health insurer’s sale to drugstore chain operator CVS Health Corp for approximately $207 per share in cash and stock, in a deal worth $67 billion, multiple news sources reported on Sunday afternoon. The purchase price represents a premium of 29% to where Aetna shares were trading before the WSJ first reported that the two companies were in talks in October.

The deal will be this year’s largest corporate acquisition, and in combining one of the nation’s largest pharmacy benefits managers (PBMs) and pharmacy operators with one of its oldest health insurers, will "reshape health care" by bringing a large insurer and a big provider of pharmacy services under one roof.

According to the agreed terms of the deal, which will be announced later on Sunday, Aetna shareholders will receive $145 per share in cash and 0.8378 CVS Health shares for each Aetna share. According to Reuters, "Aetna shareholders will own about 22% of the combined company, while CVS shareholders will own the remainder." As part of the acquisition, three Aetna directors, including Aetna’s Chairman and CEO Mark Bertolini, will join CVS’s board of directors. After the deal closes, Aetna will operate as a separate unit run by members of the current management.

The acquisition will be financed with a mix of cash and debt. Barclays, Goldman Sachs and Bank of America have committed to provide $49 billion of financing, Bloomberg reported.

With Aetna currently employing 49,500 while CVS has 204,000 full and part-time employees, the combined company will boast a quarter million workers, if only for the time being. The deal, which is expected to close in the second half of 2018, will create cost savings of about $750 million, which means tens of thousands of layoffs.

Some more on the companies" background: CVS, with annual revenue of $178 billion, is a major pharmacy-benefits manager in addition to its vast collection of drugstores, some of which already have retail clinics. Aetna, with revenue of around $63 billion, is the third-largest U.S. health insurer, providing coverage to around 22.2 million members enrolled in employer, Medicare, Medicaid and other plans.

The deal comes as healthcare payers and pharmacies are responding to rapidly changing factors, including Obamacare, rising drug prices "and the threat of competition from online retailers such as Amazon.com", Reuters noted. In fact, as Morgan Stanley pointed out two weeks ago, Amazon"s imminent entry into the healthcare sector has been cited as one of the primary catalysts behind the AET/CVS deal:

As a reminder, this is how Morgan Stanley summarized the rationale behind the just announced merger:

Drug retailers have the most opportunities to adjust their business models and lower cost structures to defend against Amazon. Within the drug supply chain, the threat of Amazon’s entry into drug retail is accelerating vertical integration, and is cited as a driver behind the rumored CVS/Aetna merger. In our view, the combination would diversify profits away from the supply chain, help create a narrow preferred network, and act as a first step in repurposing the retail footprint to create a new healthcare-retail delivery model. If drug retailers don"t change  this model, we estimate ~10% risk to profits. CVS has also announced free same-day delivery in New York City, proactively preparing for a potential Prime Now entry, in our view.

As a result, the deal “feels more defense than offense,” Ana Gupte, an analyst with Leerink Partners LLC, said recently. In Aetna’s case, “I don’t see a path to growth” in its current configuration, she said.

“One of the problems with the health-care system is it’s so fragmented and there’s so little coordination,” Bessemer Ventures" Steve Kraus told Bloomberg. “A better vertically integrated less-siloed system is a good thing in my mind.”

In this context, Reuters points out that CVS plans to use its low-cost clinics to eventually save more than $1 billion per year on health care costs for Aetna’s roughly 23 million medical members. It adds that a combined insurer and PBM will also likely be better placed to negotiate lower drug prices, and the arrangement could boost sales for CVS’s front-of-store retail business.

It"s not just imminent layoffs however, as the combined company expects to invest billions in the coming years to add clinics and services, largely financed by diverting funds away from other planned investments.

That could eventually cut costs substantially, with the clinics serving as an alternative to more expensive hospital emergency room visits.

 

Meanwhile, deeper collaboration between Aetna’s insurance business and CVS’s PBM division could drive down drug costs by adding clients and boosting the PBM’s leverage with drugmakers.

In recent years, independent PBMs have been criticized for keeping drug prices high amid potential conflicts of interest with insurance company clients, because they could potentially keep cost savings from drug negotiations rather than passing them on to patients.

Alternatively, PBM margins have been pressured and health insurers have sought to cut costs amid steep prescription drug price rises and requirements to care for even the sickest patients under the Affordable Care Act.

* * *

Analysts cited by Reuters said the CVS-Aetna deal could prompt other healthcare sector mega-mergers, as rivals scramble to emulate the strategy.

It could spur a merger between Walgreens Boots Alliance Inc and Humana Inc, or between Humana and Wal-Mart Stores Inc, Ana Gupte, analyst at Leerink Partners, said recently.

On Nov. 30, Express Scripts Holding Co.’s top executive said the company would be open to a deal at the right price, though wasn’t actively looking for one. “We don’t need to sell to be very successful in the future, but we are always open to others who may all of sudden conclude they want what we have,” Express Scripts CEO Tim Wentworth said in an interview. He also mentioned the possibility of partnering with Amazon on a drug distribution arrangement.

The deal, and any subsequent follow through, is not without risk of regulatory intervention: last year Aetna tried to buy rival Humana Inc to gain leverage to control costs, but antitrust regulators killed the deal as well as a proposed merger between Anthem and Cigna. Furthermore it is unclear if the DOJ, which recently sued to block the Time Warner-AT&T deal, won"t issue another antitrust veto. That could happen if the DOJ shifts its attention to vertical mergers:

Although CVS and Aetna’s planned merger does not directly consolidate the health insurance or pharmaceutical industries, the U.S. Department of Justice has been taking a closer look at so-called vertical mergers, where the companies are not direct competitors.

 

Last month, the Justice Department sued to block AT&T Inc’s planned $85.4 billion merger with Time Warner Inc, saying the integration of a content producer with a distributor could reduce consumer choice.

Reuters concedes that "the CVS-Aetna deal could attract similar scrutiny if regulators feared it could block Aetna customers from frequenting other pharmacies or contracting with other PBMs" even as four antitrust experts said there is little doubt the deal will be approved, although it might need to meet conditions to convince antitrust enforcers to sign off.

It is unclear whether it would be evaluated by the U.S. Federal Trade Commission or the Justice Department but that decision might be made based on which agency is less busy, said Matthew Cantor of law firm Constantine Cannon.

 

“(The companies) want the FTC to get it. The reason that the FTC is better at this point is that the Justice Department has just broken with decades of precedent of how to deal with vertical mergers,” said Cantor, referring to the decision to refuse conduct remedies and file a lawsuit to stop AT&T from buying Time Warner.

According to Bloomberg Intelligence"s Jennifer Rie, the CVS-Aetna deal antitrust prospects may depend on which U.S. regulator is tasked with reviewing it.

The Federal Trade Commission has been less critical of consolidation among companies in adjacent businesses, known as vertical consolidation. The Justice Department, on the other hand, last month sued to block the merger of AT&T Inc. and Time Warner Inc., a vertical deal.

 

Michael Newshel, an analyst at Evercore ISI, said the DOJ effort to block the AT&T-Time Warner deal does raises concerns but a CVS-Aetna deal does have a path forward. Aetna would likely need to divest some or all of its Medicare drug plan business, he said.

In addition to regulatory risk, the combination faces substantial challenges, "including the huge operational task of knitting together the companies’ diverse operations so that customer experiences are smooth and seamless. The deal isn’t likely to deliver as many cost-cutting benefits as combinations with more direct overlap, such as Aetna’s scuttled acquisition of Humana, analysts said. CVS will need to keep much of Aetna’s infrastructure since it doesn’t currently provide health insurance."

As noted by the WSJ, as part of the deal CVS plans to repurpose portions of its pharmacies so they become community health centers where customers can go to get answers to more questions about their health and coverage and how to manage the cost of it. The pharmacies will have space dedicated to wellness, and provide services for things like vision, hearing and nutrition.

Is Tax Reform A Done Deal? This Is What Wall Street Thinks

Following the backing of Sen. John McCain on the GOP tax reform bill, markets have surged to new all time highs as tax-sensitive banks lead the way, with Bloomberg reporting that odds for the tax bill"s passage may increase to "near-certainty" if the Senate can finish its version in the days ahead, citing Evercore ISI.  And speaking of banks, the KBW bank index is up over 1.3% to the highest since Oct. 2007, outpacing the S&P 500’s 0.7 percent gain. This is just more of the same: since Trump"s election, banks have outperformed dramatically with the BKX up 40% vs S&P 500 +24%; top performers include SIVB (+86%), BAC (+68%); Citigroup (+52%); JPMorgan (+51%).

So at least according to bank stocks - and the market - tax reform appears to be a done deal. This is confirmed by online betting market PredictIt, where odds for a tax deal by the end of 2017 have jumped to 76%, up from 40% three days ago.

 

But do Wall Street analysts agree? As the following summary from Bloomberg shows, opinions range from Evercore"s 75% odds of a deal getting done by Q1 at the latest, with some such as Horizon Investments suggesting corporate tax rate may have to settle at 22% (especially if Trump "blows a gasket"), to pessimists such as Bloomberg Andrew Silverman stating that "the Senate will have tough time passing first stab at ax-overhaul, contrary to equity markets’ expectations for successful reform, as many have doubts about the bill and margin for failure is 2 votes."

Here is a full run down of some analyst views on the state of tax reform, courtesy of Bloomberg.

EVERCORE ISI (Terry Haines)

• Taxes on track for Senate approval in next few days; keeps 75% odds tax legislation happens by early 1Q at the latest; odds may increase to near-certainty if the Senate can finish its version of the bill by the end of this week or early next week


• Sees govt shutdown as very unlikely, with odds at most 10%


• Says don’t be distracted by posturing this week on both sides of the aisle; no one in Washington wants a shutdown, full-year spending deal that keeps govt spending stable, but with small increases for defense and domestic spending has been in negotiations for weeks

HORIZON INVESTMENTS (Greg Valliere)

• The one wild card that could disrupt tax reform process is "the increasingly erratic" President Trump, whose tweets this week (Access Hollywood, Obama’s birthplace, fight with U.K. PM May) have alarmed even his supporters; raises issue as Trump "could blow a gasket" if tax bill fails to give him what he wants for business, corporate rate may have to settle at about 22%


• Calls Corker trigger "a terrible idea"; asks whether tax hikes would be welcome if there’s a recession in next few years, or geopolitical issue; notes corporations may find it difficult to make long-term plans if their lower taxes are threatened by Corker amendment

COMPASS POINT (Isaac Boltansky)

• Still believes Senate will clear its tax package this week


• Then, House could consider the measure, pass it in early December, or there may be conference cmte that may bleed into 2018


• Sees conference as likelier path; keeps 75% odds of package being enacted regardless of procedural road ahead

COWEN (Chris Krueger)

• Congressional GOP has seemingly made calculation that "passing nothing on taxes is worse than passing something" 


• Notes "dueling" bills are receiving waves of negative news coverage across Trump and Clinton state papers


• Two questions remain: Tax trigger mechanism, how to pay for "new policy candy" to secure 50 votes

BLOOMBERG INTELLIGENCE (Andrew Silverman)

• Senate will have tough time passing first stab at ax-overhaul, contrary to equity markets’ expectations for successful reform, as many have doubts about the bill and margin for failure is 2 votes


• Too many uncertainties remain to predict a quick passage, and senators won’t know what they’re voting on until after "vote-a-rama," when the bill is rapidly amended on the floor


• Sees debate stretching into 2018

Source: Bloomberg

Fed Reports Unexpected Collapse In Credit Card, Auto Loan Demand

Two weeks after we reported that the consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013...

... we were looking forward to the latest Fed Senior Loan officer survey for more details about changing loan dynamics within US society.

What the report revealed was troubling: while on the surface, the Loan Officer Survey characterized loans to businesses as "basically unchanged" from the previous survey, it did remark that standards for commercial real estate (CRE) loans had tightened.

According to the report, "banks reported tightening most credit policies on Commercial Real Estate loans over the past year.... On balance, banks reported weaker demand for CRE loans in the first quarter."

More concering was the continued drop in demand for C&I loans among small, medium and large corporations, with "inquiries for C&I lines of credit remained basically unchanged" staying at a modestly depressed rate.

This helps explain, once and for all, the recent collapse in Y/Y commercial bank loan creation, both total and C&I, and indicated that contrary to Goldman"s take, the steep drop has nothing to do with calendarization or a base effect, and everything to do with declining demand for the product among America"s businesses, a concerning deterioration in an economy that is reportedly improving, and where companies would be willing to take out new credit to fund expansion.

Digging deeper revealed an even more distressing picture as a result of a sharp consumer revulsion toward credit, with reduced level of consumer card and auto loan demand in the quarter. The decline took place despite "visibly softer" underwriting standards for cards which surprised some analysts as not creating incremental demand;

Worse, demand for credit cards is now running at the lowest level in the 5 years the survey has provided credit- card-only data for consumer demand.

The report included special questions regarding commercial real estate lending conditions. Tighter credit policies for most CRE loans were the result of "a less favorable or more uncertain outlook for CRE property prices, vacancy rates or other fundamentals on CRE properties, and capitalization rates, as well as reduced tolerance for risk. Significant net shares of banks also reported less aggressive competition from other banks or nonbank financial institutions and increased concerns about the effects of regulatory changes or supervisory actions as important reasons for tightening CRE credit policies." (Emphasis added.)

Additionally, lending for residential real estate reflected little change in standards or demand by consumers. There was also little change to standards or demand for home equity lines of credit. Auto lending standards tightened. It is likely that concerns about the quality of auto loans may be driving some of the more restrictive conditions for lending. For credit card loans, there was some easing of standards and terms were "basically unchanged".

According to Stone McCarthy the contraction in the retail sector has had some impact here as several chains have significantly reduced or eliminated their brick-and-motor presence.

Not surprisingly, as demand for credit bumbled, banks" willingness to lend improved to 10.8 in April after slipping to 3.1 in January.

Finally here are excerpts from several sellside reports, all of which we unpleasantly surprised by the report, courtesy of Bloomberg.

WELLS FARGO (Matthew Burnell) 

• Primary takeaway remains reduced level of consumer card, auto demand vs 3Q after visible drop in 1Q (published in Jan., responses provided in Dec.)


• Notes "visibly softer" underwriting standards for cards aren’t creating demand; demand now running at lowest level in the 5 years the survey has provided credit- card-only data for consumer demand


• Standards across most other loan products were largely stable, though demand for commercial loan and commercial real estate dropped slightly from prior survey and mortgage demand ticked slightly higher (thanks to lower mortgage rates)

JPMORGAN (Daniel Silver)

• Survey was "a mixed bag," with weakening demand for many key series but also easing in lending standards for some major lending categories


• Easing C&I lending standards may be most important takeaway, even as demand declined

BARCLAYS (Jason Goldberg)

• Loan demand across all lending segments generally softened during 1Q, with C&I demand modestly weaker (though inquiries for C&I lines of credit was unchanged); CRE (broad-based), credit card, auto also weaker


• Key reasons included decreases in customers’ investment in plant or equipment and decreases in M&A financing needs


• Tighter lending standards could foreshadow CRE (particularly C&D and multifamily), auto credit quality deterioration; regulators still focused on CRE


• Lists banks most exposed to auto loans: ALLY followed by COF, HBAN, CFG, FITB, while COF, C, JPM, BAC have largest credit card concentration (all >10% of loans); JPM, MTB, COF, KEY have largest multi- family exposure (though all

EVERCORE ISI (John Pancari)

• Survey shows "tempered tone" around growth, largely reinforcing themes observed in recent results, including sluggish demand and credit tightening


• Notes little change in level of inquiries for C&I lines contrasts with 1Q bank mgmt comments mentioning pickup in borrower optimism, new line openings

SUSQUEHANNA (Jack Micenko)

• Trends support Susquehanna’s neutral view of regional banks (BBT, CMA, FITB, HBAN, KEY, PNC, RF, STI, USB, WFC, ZION) as optimism has yet to translate into notable improvement in loan demand

Cardinal Health, Peers Tumble As Lower Generic Drug Prices Hurt Industry Outlook

Cardinal Health tumbled the most in almost six months after the healthcare product distributor warned its outlook would be toward the lower end of its forecast range for this year and gave initial fiscal 2018 guidance that missed analyst estimates.

The company is grappling with lower prices for generic medicines, a trend that several sellside analysts warned is likely to also hit competitors McKesson and AmerisourceBergen. After the poor guidance, CAH fell as much as 12%, most since Oct. 28; Comps ABC and MCK were down as much as 6.2% and 5.7%, respectively. Prior to today, CAH was up 14% YTD vs S&P 500 Health Care Index up 7.6%; ABC had gained 11%, MCK was up 2.7%.

Additional CAH announced today it would acquire the patient care, deep vein thrombosis and nutritional insufficiency businesses of Medtronic for $6.1 billion in cash. The deal would give Cardinal Health access to 23 product categories that “are used in nearly every U.S. hospital,” the company said. The divisions have more than 10,000 employees and generated $2.3 billion in revenue in the 12 months ended in October, with more than 70 percent of sales in the United States.

Here is a brief summary of Wall Street"s responses courtesy of Bloomberg:

Mizuho (Ann Hynes)

• Weaker forecast raises concerns for drug distributors; expects generic deflation also will be headwind for MCK and ABC heading into their earnings


• CAH sees FY18 EPS growth flat to down mid-single digits, implies range of $5.03-$5.35; at the midpoint, that’s 12% below average analyst ests. and includes 21c of gains from purchase of MDT businesses


• Says CAH-MDT deal was largely expected


• Rates CAH neutral, PT $79

Baird (Eric Coldwell)

• CAH trimmed FY17 forecast for third consecutive quarter as generic deflation now seen down low-double digits vs previously down high-single digits


• Initial FY18 outlook is ~18% below Street on apples-to- apples basis excluding gains from purchase of Medtronic businesses


• Neutral, PT $80

Evercore ISI (Ross Muken)

• Initial FY18 outlook is major surprise, says shame that solid MDT deal is being completely overshadowed by guidance


• Modestly more confident about CAH conf. call; appears that majority of revisions in generic deflation expectations is due to handful of highly profitable products


• While slope of decline doesn’t seem to have gotten worse, recovery will probably take much longer than projected when CAH was upgraded to outperform on April 6


• Outperform, cuts PT to $77.50 from $91.50

Cowen (Charles Rhyee)

• Near-term challenges to pharma segment remain as fewer branded drugs go generic


• CAH’s outlook for FY18 generic deflation to improve y/y suggests macro environment is starting to stabilize but will take longer than expected


• Market perform, PT $89

Leerink (David Larsen)

• CAH cited generic pricing and sell-side pressure for EPS views missing expectations for FY18 and FY19


• CAH facing other challenges including loss of Prime Therapeutics as a client; Leerink believes this deal was won by ABC, says shares could rally if co. meets earnings ests. this quarter


• Incrementally more cautious on MCK


• Rates CAH market perform, ABC outperform, MCK market perform

Source: Bloomberg

Evercore ISI: "Trump Budget Not Happening"

In a note by Evercore ISI"s Terry Haines and Ernie Tedeschi, the analyst duo pours cold water on Trumps" budget proposal before it has been even formalized and confidently predicts that "Trump budget not happening" adding that the most likely outcome is that "Congress will modestly hike defense and non-defense spending."

Below is a summary of their thinking:

President Trump"s budget will not be submitted to Congress for a couple of weeks but already the speculation about it has begun with press stories about deep cuts to domestic spending used to fund increases in defense spending. Investors should understand that any president"s budget submission is inherently a political document; that Congress is not bound to follow it; and that this Congress will not follow it. We continue to see the likely result of the federal budget process as a continuation of the modest increases in both defense and nondefense discretionary spending agreed to on a bipartisan basis over the past four years. Any increase in defense spending is likely to be small and matched by similar small increases in nondefense spending.

Presidents are bound by law to submit an annual budget request. This is supposed to come in early February but new presidents always are given leeway. The Trump budget will come in a couple of weeks: the current and usual step in the process is to provide draft budget numbers to federal departments and agencies for views and pushback. When the budget is submitted, Congress holds hearings, develops its own budget numbers, and ultimately agrees on a budget by approving a budget resolution. This budget resolution guides Congress in its appropriations process and in the reconciling of changes in law to the budget (in the FY 2018 case, tax reform). Importantly, the president does not sign the budget resolution as it is not a law.

Moreover, what we know about the president"s proposal is merely a 30,000 foot target: an increase in defense funding of $54 billion this year (about 10 per cent), entirely offset by an equivalent cut to nondefense discretionary (that is, non-entitlement) funding. From a macro perspective, that means there will be no net stimulus from this defense hike. There is little to no detail about how either the defense hike or the nondefense cuts would be distributed across departments and programs because very likely those decisions have not been finalized yet. Over the next couple weeks, the details will be fleshed out internally at the White House before the budget"s release. Administration officials have pointed to foreign aid and the EPA as the targets of cuts, but neither spends enough money to shoulder the entire burden of the proposal.

And some follow up thoughts on the substance, what little there is, of the proposal:

• The president"s budget is a couple of weeks away from being finalized and submitted; during that time, department heads will have an opportunity to respond internally to the budget ideas and develop specific ideas for meeting the targets.


• The proposed $54 billion increase in defense spending in FY2018 is equivalent to a 10 per cent hike in the cap on defense spending that current applies. This would be only slightly higher on a per-year basis than the defense hikes that resulted from the last two-year budget deals in 2013 and 2015 (the Ryan - Murray-style deals) but not dramatically. Some congressional Republicans such as Sen. McCain (R-AZ) are pushing for even larger increases in defense spending.


• Since the $54 billion is a topline goal, there is no detail yet about how within the DoD the president is proposing distributing the funding (e.g., between procurement, operations & maintenance, etc.)


• The $54 billion surge in FY2018 defense spending is to "budget authority" (funding). This translates to "outlays" (money spent out) on a lag; generally, only about half of an increase in defense funding is actually spent out the first year.


• Because of this lag in actual spending, and because it is offset by countervailing cuts, this proposal would likely have negligible macroeconomic impact.


• The White House has promised not to touch entitlements such as Social Security and Medicare, so the defense hike is being paid for entirely by cuts to nondefense discretionary spending. The $54 billion is equivalent to a 10.5 per cent across-the-board reduction in nondefense discretionary spending, though it is not likely being applied evenly across the board.


• The White House has mentioned two specific targets of cuts: foreign assistance and the EPA. Note that all foreign aid spending, including military aid and including to allies like Israel, only comes to $42.4 billion. EPA"s funding in FY2017 is expected to be about $8.3 billion.

Dow Dragged Lower By UnitedHealth After Government Sues Largest US Health Insurer

The Dow Jones "Industrial" Average is suffering one of its worst intraday declines in weeks as a result of a 3.6% drop in UnitedHealth shares, which are sinking on news that the DOJ joined a whistleblower lawsuit against the insurer filed by a former executive claiming the country"s largest health insurer overcharged Medicare hundreds of millions of dollars.

The company denied the allegations, with UnitedHealth spokesman Matthew Burns saying in a statement that "we reject these more than five-year-old claims and will contest them vigorously." 

Alleging insurance fraud, the lawsuit which was filed in 2011 and unsealed on Thursday, claims UnitedHealth Group overcharged Medicare by claiming the federal health insurance program"s members nationwide were sicker than they were, according to the law firm Constantine Cannon LLP. Overnight, the DOJ also joined in allegations against WellMed Medical Management Inc, a Texas-based healthcare company UnitedHealth bought in 2011.

The lawsuit by whistleblower Benjamin Poehling, a former UnitedHealth executive, has been kept under seal in federal court in Los Angeles while the Justice Department investigated the claims for the past five years. Constantine Cannon posted the lawsuit online when it was unsealed on Thursday.  No total damages were specified in the lawsuit.

UNH"s drop is the biggest contributor to the DJIA"s intraday slide, accounting for nearly 80% of the total point loss in the index.

Despite the lawsuit, Wall Street"s sellside analysts - most of whom are bullish on the company - have quickly come to its defense, via Bloomberg

Oppenheimer (Michael Wiederhorn)

• DOJ claims center on UNH’s efforts to improve coding, date back to 2011


• While headlines aren’t positive, these processes take a long time and “typically result in manageable settlements”


• Expects UNH will get past this overhang, sees weakness as buying opportunity


• Rates UNH outperform, PT $186

Leerink (Ana Gupte)

• Risk is overblown; recommends buying UNH, Humana, WellCare and other Medicare Advantage (MA) stocks on weakness today


• Expects Trump administration will favor private MA plans with deregulation and more industry-friendly policies


• Rates UNH outperform, PT $195

Credit Suisse (Scott Fidel)

• DOJ joining whistleblower case is negative headline, especially since market has been bullish for prospects for MA under Republican leadership


• Even so, regulatory scrutiny isn’t new issue and Centers for Medicare & Medicaid Services has said MA revenue should benefit from more accurate risk coding


• Rates UNH outperform, PT $180

Evercore ISI (Michael Newshel)

• While DOJ joining case adds to risk, complaint doesn’t have “any particularly damning new evidence”


• Believes many of coding optimization practices described are common to industry


• Rates UNH buy, PT $185

The unsealed lawsuit is below:

Wall Street Responds To Today's Jobs Report

Following today"s jobs report, the market"s reaction to the unexpectedly strong January payrolls visualized in the charts below, is straightforward: the disappointing wage growth is an indication that the Fed may not hike rates for quite a bit longer than expected, and will likely will be forced to reduce its rate hike expectations from 3 to 2 (in line with the market) or fewer if wage growth continue to stagnate.

Sure enough, Wall Street"s strategists agree. As the following compilation of reactions shows, the prevailing reaction to today"s report is that while January job gains beat expectations, slower wage growth and disappointing underemployment figures help temper expectations for a near-term Fed hike.

Some examples, courtesy of Bloomberg:

TD (Mark McCormick)

• Jobs number is sweet spot for risk markets; growth is holding up with little impetus to nudge the Fed into action next month


• A softer read on wages and uncertainty over the economic agenda probably keeps USD sidelined for a bit longer


• This scenario favors continued momentum in some of the growth-sensitive currencies; could see the rallies in AUD, NZD and even NOK persist near-term

BofA (Michelle Meyer)

• Investors were setting up for a higher number given upside surprise in ADP on Wednesday; however, this was offset by increase in unemployment and softness in wages


• Report suggests labor market might not be as tight as previously believed


• Likelihood of the Fed hiking in March is fairly low and jobs report consistent with that


• BofA expects one Fed rate increase this year, in September, with risk of two rate hikes

Bank of Tokyo-Mitsubishi (Chris Rupkey)

• January employment report “strikes a blow” in hopes for a faster pace of rate hikes from “slow and steady” Fed


• “‘Big jobs today, but what about tomorrow’ will be the concern from Fed officials”


• Fed will be unlikely to act before there’s more certainty in Trump policies that could boost growth, make easier monetary conditions from Fed less necessary

Societe Generale (Stephen Gallagher and Omair Sharif)

• Jobs report shows “no additional pressure on the Fed to move beyond its indications of gradual rate hikes”


• “Evidence on labor market tightness abated in January”

Goldman Sachs (led by Jan Hatzius)

• Report “appears consistent with healthy economic growth, but only moderate pressure on labor resources”


• Reduces odds of a rate hike in March to 15% from 35%


• Maintains call for 3 rate increases this year, in June, September and December

CIBC (Avery Shenfeld, note)

• Only sore spot in jobs report was avg hourly earnings


• “Although the annual rate of wage inflation was likely to decelerate a couple of ticks, the fall from the revised 2.8% to 2.5% will be seen as a counterbalance to the stronger headline payroll number”

Janus Capital (Bill Gross)

• “Schizophrenic report” doesn’t alleviate skepticism about 3-4 percent growth promised by Trump administration


• “I think we’re stuck in a 2% real GDP world”


• While slow wage growth may be good for corporate profits, for consumers, “if their money is only growing at 2.5%, that’s a slow-growth economy”

Market Securities (Christophe Barraud)

• January payrolls report “looks somehow disappointing,” will create uncertainty among policy makers that wage pressures are materializing and full employment is close


• Could damp expectations for tighter policy


• Slowing wage growth suggests both personal income and spending were weak in January
  Underemployment results disappointed, while number of people working part-time increased by 242k; numbers don’t confirm that labor slack diminished

Marketfield Asset Management (Michael Shaoul)

• January jobs report “noisy” yet kept prior trends intact


• Weaker avg hourly earnings “greeted with some relief since it reduces the pressure on the FOMC to act in early part of 2017”


• Avg hourly earnings “is a lousy data series, but we accept it is one that the FOMC will follow when setting policy”

BNY Mellon (Marvin Loh)

• Tempered Fed expectations are biggest market takeaway from report, as it signals existence of more slack in labor market than headline unemployment rate would suggest


• “Any trough and subsequent increase in the participation rate would indicate continued jobs growth with limited wage pressure, a possible holy grail for corporate America”


• After report, anyone who thought Fed might raise rates in March will likely move their forecast to June

ING (James Knightley)

• Wages were a ‘big miss’’ but this likely is a “temporary slowdown with strong employment numbers ensuring that the trend is for faster wage growth in the months ahead”


• ING reiterates forecast for March Fed rate hike; expects that to be followed by another increase in 3Q


• “GDP growth on an upward trend”


• “Inflation figures looking consistent with the Fed’s medium term aspirations” so case for March hike “remains strong”

SouthBay (Andrew Zatlin)

• January data did not capture minimum wage hikes, which will show up in February, and that helped suppress wage inflation; expect a bigger jump next month


• If assumption is correct, the current environment of a patient Fed with slower and more gradual rate hikes could flip after next month’s jobs data

Evercore (Krishna Guha)

• January NFP report creates “little need for the Fed to pull forward the next rate hike to March”


• A move by May “is slightly more likely than not,” given strength in hiring


• Combination of strong employment growth with more supply to keep Fed “at bay” for now, “is perfect for U.S. equities”

Prestige Economics (Jason Schenker)

• Continued job creation backs hawkish Fed


• “A March Fed rate hike is a lock” after supportive jobs report and slightly stronger language regarding inflation in the Fed statement this week


• “We have been expecting a March rate hike, and only a shocking turn of policy or major upheaval in financial markets would derail that expectation”


• Sees upside risks for USD before Fed’s March meeting

Source: Bloomberg

Robots Over Roughnecks: Next Drilling Boom Might Not Add Many Jobs

Submitted by Tsvetana Parasova via OilPrice.com,

The inevitable advance of technology and automation has upended industries such as car manufacturing and food processing. Now robotics is making its way into the oil fields by helping drilling activities and putting together heavy pipes.

For companies, more automation would mean higher efficiency, safer operations, and ultimately, lower drilling and production costs. For oil rig workers, it would mean that part of the jobs lost during the oil price downturn would never return. Also, part of the new job openings would require a different type of skill set: for example, information technology and advanced computer skills.

But even if automation is expected to increase, and some day take over drilling sites and drillships, it is not the norm in the oil and gas industry today. While there have been early adopters, the oil and gas drilling business is still years away from becoming an automated activity.

Companies that had been lavishly spending on drilling at oil prices at $100 per barrel were too busy pumping oil and gas to think of efficiency and production costs. But the oil price bust has squeezed their budgets, and the firms are now seeking to cut costs while increasing efficiency.

Apart from reducing the human factor in drilling such as shifts or fatigue, or work-related accidents and incidents, automation can reduce headcount costs.

Automated drilling rigs may be able in the future to reduce the number of persons in a drilling crew by almost 40 percent, from 25 workers to 15 workers, Houston Chronicle’s Jordan Blum writes, quoting industry analysts.

Drilling company Nabors Industries expects that it may be able to reduce the size of the crew at each well site to around 5 people from 20 workers now if more automated drilling rigs are used, Bloomberg’s David Wethe says.

However, a sensitive issue such as workforce in an industry that had slashed a couple of hundred thousand jobs during the downturn has just become even more sensitive with the new U.S. administration.

“The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans,” President Trump’s America First Energy Plan states.

So companies are likely to keep a low profile on how much staff costs they would be saving.

“They’ll more likely brag about the automation rather than these head counts,” James West, an analyst with investment bank Evercore ISI, told Bloomberg.

Automation is also likely to drive small-sized subcontractors doing jobs for larger companies out of business.

Although it is expected in the not-so-distant future, automated rigs will not be replacing en masse human workforce this year or next. Right now, there are many conventional under-utilized rigs, especially in offshore drilling, where companies had slashed exploration and drilling expenditure.

In land drilling, activity in the U.S. oil patch is picking up, and employment has recently shown the first signs of gains after more than two years of declines.

Total job growth in Texas is expected to rise from 1.6 percent in 2016 to around 2 percent in 2017, Dallas Fed assistant vice president and senior economist Keith Phillips said earlier this month.

“Job growth picked up in the second half of 2016 due to a stabilization of the energy sector,” Phillips noted.

Part of the jobs lost over the past two and a half years may never return due to increased automation, but the recovery of U.S. drilling may send companies hunting again for staff this year.