Weighing the Week Ahead: Pending Healthcare Legislation and Market Reaction

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Includes: DIA, IYH, KIE, QQQ, SPY
by: Jeff Miller

Health care legislation has been a focal point for national debate for more than a year. One way or another, the fate of legislation supported by President Obama will soon be decided -- probably this week. The final maneuvering will be the most important story of the week.

Sure, the Fed will meet. We will also have some economic reports, but the health care story is one that is both less frequent and more important.

I have some comments below about the investment implications. First, I want to answer a question from reader BK, who seeks advice on sources for health care reading. BK is willing to do some work, but is frustrated by the black-and-white portrayals from most sources of information.

Health Care Reading List

I avoid positions on elections and partisan issues. I have my own viewpoints of course, including health care, but this is not my forum for opinion. I am active in local citizen groups, and I never miss an election. I urge everyone to think about issues and to get involved. Meanwhile, the best investors are political agnostics. It is possible to find a good investment thesis no matter who is in power.

Here are some sources where you can get information that is factual and unbiased. You can augment this with strident arguments from partisans if you wish.

  • The Rand Corporation (at Rand Compare) provides both facts and comparisons, as well as news updates.
  • The Kaiser Family Foundation provides a side-by-side comparison of proposals.
  • FactCheck pulls no punches and finds fault with partisans from both sides. I found their discussion of the President's Health Care Summit to be much more helpful than any other news coverage.
  • CBS News had a nice piece, a few months old but still relevant, on 10 health care reform myths. I am avoiding most regular media sources, since nearly everyone imputes bias to them all, but I thought this was a helpful piece. Decide for yourself.
  • Consumer Reports, viewed as an authoritative voice on many topics, has a lot of material devoted to health care. Since they evaluate health insurance companies, they have an interesting perspective.

Thanks to BK for the suggestion. I certainly would not have done this without the question. I will try to address a reader question each week.

Last Week's Action

Here is my take on the key data from last week. I am not trying to be comprehensive, nor am I taking a viewpoint. I will highlight what I found significant, trying to be objective.

The Good

There were a few pieces of good news.

  • Jobs are important. The IT market (nice jobs) is heating up. Most ignored this, but it fits my thesis for 2010, where tech stocks take the lead as businesses catch up.
  • The latest JOLTS report from the BLS shows the highest ratio of job openings since February of 2009. I might have been the first of the economic bloggers to highlight this relatively new release. The permabear types pounced on it to show the terrible ratio of openings to job seekers. That ratio is improving. Many observers focus on the level (still bad) rather than the direction (improving). I see it as good news.
  • Consumer spending -- despite the skepticism of the bearish crowd (consumers spent-up, not pent up est. 2002) total consumer spending is solid. The analysis--from Gene Epstein in Barron's? Total payrolls are only off about -0.8% from a year ago.
  • Stocks. Still strong, somewhat to the surprise of everyone.

The Bad

There was much to dislike last week.

  • Concurrent indicators that I like -- initial jobless claims and Michigan sentiment -- both showed a downtick. I still do not see net job creation, and certainly nothing like what is needed for a solid recovery in employment.
  • A new "leading index", highlighted by Econbrowser and created by a group featuring excellent members, suggests that the recovery is lagging.
  • The ECRI leading index ticks lower. This one is humorous. You can read the story at Reuters, "Weekly Leading Index Rises" or Barron's "Weekly Leading Indicators Weaker." Same data, two headlines. The ECRI index is still in solid growth levels, but less solid than before. Astute readers can compare to the JOLTS report above. Please submit info from any pundit who uses level for one indicator and change for the other.
  • States and local governments are in trouble -- big trouble. Everyone knew this, but the timing of state budget processes is moving this into the news. State and local governments are generally required to maintain balanced budgets. Even though they cheat (a lot) they are still pro-cyclical in their behavior. There are serious questions about whether federal policy was large and long-lasting enough to offset state issues.

The Week Ahead

Everyone will fixate on the Fed for the early part of the week. Why bother? It is easy for people to criticize and get great exposure. Those who hate the Fed as an institution or who get page views from pounding on Bernanke have another week to enjoy. These are all cheap shots with little help for your investments.

I expect little in the way of fresh news from the Fed. Everyone is trying to parse nuances in statements about exit strategies. and new appointments. It is wasted effort. The Fed is going to move slowly as long as there is significant risk to the economic recovery.

In the economic releases, I always watch building permits as a clue to housing. I do not think that CPI or the various regional indexes will be market movers.

Politics and legislation will be important. With respect to the health legislation, I expect the bill to pass. I think that the Democrats will do enough horse trading to garner a majority in the House. The House hates the Senate bill, but the approach will be done in a way (reconciliation) that guarantees some amendments and only requires a simple majority in the Senate.

Regular readers may recall that I have been predicting this outcome for quite some time. The result is now upon us.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are now neutral, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

  • 27% (up from 18% two weeks ago) of our ETF's have positive ratings. This is weak, but improving.
  • The median strength is -15 (up slightly from -20), very negative, but improving.
  • 89% (down slightly from 93%) of the sectors are in the "penalty box," showing an extremely high level of risk.
  • Our Index Package has a slightly negative rating.

Investment Implications

My expectation is that the health legislation will pass. The market reports see the outcome as in doubt, so it will be something of a surprise. The market reaction will be negative. Even though the CBO projects a ten-year cost savings from the bill, it is pretty obvious that most market participants disagree.

I continue to look for opportunities to buy more health stocks, including insurance companies (the current bad guys in Obama speeches) and health information technology. This week may be the last good chance for those interested in buying these names.