Hedging Against ObamaCare: Potential Hedges Against Health Insurance Reform

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 (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 (BLV). As interest rates rise in anticipation of inflation, bond prices shrink.

You can short health care by shorting the Vanguard Health Care Viper (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 (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.

Comments

[J. D. Swampfox:]

Better to short health insurance stocks - not all heath care in general...

Jun 17 10:42 AM

[klarsolo:]

People that react on some proposed legislative changes by shorting whole sectors or buying double inverse short ETF should be very careful. You should be VERY convinced that you see this through correctly if you follow that path. I'd rather buy some oldfashioned puts.

But I personally wouldn't even do that. This whole healthcare thing is in such a state of flux that I don't think I'm able to say at all what's going to happen to healthcare stocks at the end of it all. If you think you can, go for it.

Jun 17 11:54 AM

[ozzy:]

We have bought into the lie that we have a healthcare crisis in this country. We don't. We have a poverty crisis that will cause BHO to destroy the entire system at our expense to provide for those that choose not to provide for themselves. We have have the best health care system in the world in the U.S., however if we continue down the Obama path, we will all suffer.

Jun 17 03:32 PM

[robert.b.fe...:]

Main stream Pharma will probably do fine no matter what government action is taken. I'm currently avoiding health insurers but Swamp Fox's strategy will undoubtedly work just because of the uncertainty surrounding them. Exotic pipe line drugs which will start expensive may be some thing to avoid as well. OZZY is right on the button here with that annaysis as well. I may well sell off Hanna Biosciences (HANB) while it's still up.

Jun 17 04:01 PM

[Donald Johnson:]

I agree that it's almost impossible to predict what will happen to ObamaCare because nobody knows what it will be.

What is clear is that new predictions this week that Kennedy's bill would cost $1.6 trillion over 10 years and reduce the number of unemployed by less than 15 million has given opponents new ammunition. Advocates don't have an answer.

It's also clear that anything Congress passes will be inflationary. And there is no way any of the gimmicks promoted by Obama will cut costs or expenditures.

I've blogged many times over the last six years about ways health insurance markets could be reformed in ways that would reduce insurance premiums without costing taxpayers a dime. But Kennedy and Obama are bent on creating a single-payer system that will attract billions in campaign contributions to the politicians who control health care spending.

Single-payer solutions are supported by about 21% of Americans, but their guys are in power. So who knows how this will turn out. I'm not trading in anticipation of any particular outcome related to health care, but I am trading anticipating more inflation.

Jun 17 11:32 PM

[Donald Johnson:]

Ozzy,

I agree that we don't have a health care crisis. Obama has created a crisis in an effort to get his ObamaCare enacted. People are beginning to doubt his solutions more and more.

What we have is an education crisis. Uneducated people live unhealthy life styles, don't make enough money to buy health insurance and don't know how to deal with providers or insurers. They, do, however, seem to do pretty well when it comes to gaming Medicaid.

If more parents and families valued education and made sure their kids got good educations, more people would be economically literate, understand risks, know how to shop for insurance and providers and make more cost effective health care decisions.

Jun 17 11:39 PM

[daniel3582:]

I rarely watch the news; however, I did see a report on MSNBC or CNN while at the gym the other night. While I was dutifully running my five miles, I read the subtitles as Obama sold his snake oil. Here's (roughly) the quote:

"We won't rest until health care has been reformed. We won't rest until price is lower, quality is higher, and every American is insured."

Our President is no idiot. He's well aware of basic economic principles. You cannot take a finite resource and promise a demand increase of 16% without either:

(a) raising the price or

(b) driving down the quality.

This is Economics 101. Never mind the fact that the 47 million people who we are going to be "taking on" (medically speaking) are among the nation's worst offenders when it comes to poor choices regarding their health and diet.

If Mr. Obama is aware of the stupidity of his statement and the impossibility of his plan, why is he persisting? Power grab? Delivering favors to his political bedfellows? Maintaining / building a constituency? Or is he just a blind idealist? Whatever the case, this tripe is yet another clear proof that we cannot get a decent leader in this country.

Jun 18 01:45 AM

[klarsolo:]

Ozzy, both uneducated and educated live unhealthy lifestyles. This is not a factor of education. There are lots of very educated smokers, including doctors. Lots of very smart people are overweight.

Also, the two statements you described in your posts as "clear" are not clear at all. 10 year predictions are completely useless. They're usually built on a linear extrapolation of a very limited number of factors, not counting in a zillion of other future factors that can't even be known at this point, and which can be both good and bad. Just assuming that everything unknown will automatically be bad is just a personal opinion biased by your own worldview. This is no fact whatsoever.

Whatever Congress passes may be inflationary and it may be not. Unfortunately Congress is not solely responsible for inflation, so I have a problem accepting your forecast of higher inflation just because of this one factor / theme. Once again, there are one zillion other factors out there that influence inflation, not just what Congress does. Unless you get the great majority of them right, your forecast is once again just a personal opinion biased by your own worldview, which is "Everything Obama does is bad. God help us all".

On Jun 17 11:39 PM Donald Johnson wrote:

> Ozzy,
>
> I agree that we don't have a health care crisis. Obama has created
> a crisis in an effort to get his ObamaCare enacted. People are beginning
> to doubt his solutions more and more.
>
> What we have is an education crisis. Uneducated people live unhealthy
> life styles, don't make enough money to buy health insurance and
> don't know how to deal with providers or insurers. They, do, however,
> seem to do pretty well when it comes to gaming Medicaid.
>
> If more parents and families valued education and made sure their
> kids got good educations, more people would be economically literate,
> understand risks, know how to shop for insurance and providers and
> make more cost effective health care decisions.

Jun 18 04:32 PM

[ozzy:]

No my friend, my opinion i sbased on 30 years making my livivng in the health care field. I find your comments to be reather amusing and less than informed. As a point, should you see someone smoking a cigarette there is a 90% probability that they did not graduate from college. How much time have you spent in an ER watching what has been happening . I guess not much

Jun 22 12:58 AM