Hedging Against ObamaCare: Potential Hedges Against Health Insurance Reform

 |  Includes: BLV, JNJ, TBT, VHT
by: Donald Johnson

Worried about how President Obama’s proposed health insurance reform legislation will send interest rates soaring?

Many believe his health care reform, or ObamaCare, will be very inflationary along with the already enacted stimulus bill. The inflationary concerns related to proposed universal health legislation came up during an interesting and pretty balanced discussion today on Politico.com about the obstacles facing Obama’s health care legislation. The thread is pretty representative of the health care policy debates that have been going on over the last 35 years.

Among the big obstacles facing Obama’s health insurance legislation are predictions it will cost between $1 trillion and $2 trillion over the next 10 years. Opponents worry that the cost of providing insurance that will cover only a third of the uninsured, or about 16 million folks, will be inflationary. But 16 million would be double the actual number of uninsured American citizens, which is between 6 million and 8 million.

Whatever the cost, it’s expected to contribute to the inflationary spiral many are predicting Obama’s stimulus bill and other programs will cause over the next two to 10 years.

Scott Gottlieb, M.D., a resident fellow at the American Enterprise Institute, writes that investors worried about ObamaCare should “short health care” and buy the ProShares Ultrashort Lehman exchange traded fund TBT (NYSEARCA:TBT), which tracks the 20-year bond. Or, if you don’t like the risk of trading an ultrashort exchange traded fund, you could short the Vanguard long-term bond fund (NYSEARCA:BLV). As interest rates rise in anticipation of inflation, bond prices shrink.

You can short health care by shorting the Vanguard Health Care Viper (NYSEARCA:VHT) exchange traded fund. But it trades less than 100,000 shares a day, which means it’s not very liquid.

Another way to short health care is to short Johnson & Johnson (NYSE:JNJ), a major health care conglomerate that owns more than 100 medical device, medical supply and drug companies. I prefer to trade stocks instead of exchange traded funds, which charge small management fees of 0.10% and higher, but it’s easier to short heavily traded ETFs, I think.

Charts for TBT, BLV, VHT and JNJ are here. Click on a chart to see a gallery of charts for a stock or ETF.

There’s one small problem with shorting BLV, VHT and JNJ. They’re all in relatively good uptrends.

The gallery of charts for the ultrashort TBT is here. When the 20-year bonds drop in price, the price of TBT goes up with interest rates.

TBT’s daily chart is turning bearish even though it’s trading well above its 50- and 200-day moving averages. The PPO oscillator has fallen below zero, which is a sell signal. The CMF chart, which tracks cash money flow into and out of a security, also is pointing south.

TBT’s weekly chart, however, still is mostly bullish despite TBT’s current correction. Although TBT is still above its 50 DMA line, the line is declining.

TBT closed yesterday at $53.59. On its point and figure chart, TBT has a bullish price objective of $71 a share. But it’s threatening to make a bearish breakout if it falls to $52 a share.

Traders will play the charts. Longer-term fundamentalists will play the inflationary fears surrounding the health care legislation that is making its way through Congress.

Disclosure: I don’t have positions in any of the securities discussed above.