Friday, March 30, 2012

Striking Down the Health-Care Mandate: Liberty or Violation of a Societal Contract?

With regard to the "mandate" included in the Affordable Care Act ("ACA"), I find it interesting that some of the questioning by some Justices (e.g., what does broccoli have to do with anything?) failed to grasp what I believe to be the most important dimension of the mandate provision.  Specifically, because of the social contract we have embraced from our founding as a nation to support the general welfare of our country's population, we now fail in our societal contract with each other if we allow a minority of our citizens (i.e., those choosing to forego maintaining health insurance for themselves and their families) to impose their economic burden upon all other U.S. citizens when they need health care and can't afford it.

And yes, in the process, this same minority affects interstate commerce --- for which the U.S Congress has ample powers to regulate such commerce through legislation such as the ACA, such powers being granted to it under the Constitution and confirmed to it by prior Supreme Court decisions.

Truth be told, from the very outset of the ACA being drafted, I was slightly bothered with the concept of the mandate and the imposition of a contractual obligation being imposed upon U.S. citizens.  But my thinking has evolved to the point where I can now accept that concept as the greater good for the general welfare of the U.S. population.  I hope the Justices come to see it that way too, but I'm concerned political partisanship has infected the Court of Chief Justice Roberts --- or has it just metastasized so we find ourselves where we are today?

Reprinted below is an excellent article on the health-care arguments before the U.S. Supreme Court.  I've highlighted in yellow a quote by Switzerland’s former secretary of health, Dr. Thomas Zeltner.  Perhaps this should be a starting point as we think about the mandate contained in the ACA.

March 30, 2012, 6:00 am
1. Whether Congress has the constitutional authority to mandate every legal resident in the United States to have insurance coverage for a specified package of health benefits (hereafter the “mandate”) or whether that is an issue for the states to decide.

2. Whether Congress has the constitutional authority to expand eligibility for Medicaid benefits from the highly varied income thresholds that currently define eligibility to anyone under 133 percent of the federal poverty level (hereafter the “Medicaid expansion”).
Severability: If the court ruled that either the Medicaid expansion or the mandate, or both, were unconstitutional, it would then have to decide, for each provision, whether striking it down invalidated the entire Affordable Care Act or whether only the stricken provision was invalidated.

The legal jargon for this issue is “severability.” To avoid having entire laws invalidated over one provision that may be found unconstitutional by the court, legislation typically includes an explicit severability clause. For either strategic reasons or inadvertently, such a clause was not included in the Affordable Care Act.

The Supreme Court devoted a session of argument on Wednesday to this issue, and the questioning by the justices suggested a range of opinions on the issue, so what the future of the entire law may be is uncertain.

The Anti-Injunction Act: To rule on the mandate, the court will first decide whether the Anti-Injunction Act of 1867 applies to the mandate. The crucial issue here is whether the penalty exacted from individuals who choose not to obey the mandate to be insured is to be construed as a mere penalty or a genuine tax.

If the latter, under the Anti-Injunction Act the court should hear the case and rule on it only after someone has actually been forced to pay the penalty for violating the mandate, which could occur only in 2015 or thereafter.

The consensus among legal experts appears to be that the court will not feel bound by the Anti-Injunction Act and will rule on the mandate this year, most likely by the end of June.

The Mandate: I have discussed the mandate in several earlier posts, including this one. As explained there, a mandate on individuals to be insured is an actuarially necessary complement to two strictures on private insurers that seem to be popular with the public:
1. “Community-rated” premiums, that is, premiums divorced from the health status of any particular applicant for insurance and charged to all applicants for an insurer’s coverage

2. “Guaranteed issue,” that is, the requirement that an insurer must sell an insurance policy to any applicant willing to pay that insurer’s community-rated premium for that policy.
For decades, Americans have lamented in vignettes published by various news organizations the families, stricken with serious illness, who find themselves unable to procure health insurance at premiums they can afford or are refused coverage altogether.

The Affordable Care Act was written to solve this problem by subjecting private health insurers to community rating and guaranteed issue.

But if Americans want the benefits of these two strictures, they must also be willing to countenance the mandate to be insured. It is not legislative hegemony. It is an actuarial necessity

As I had noted in a post, that insight was shared during the 1990s by many Republican policy analysts and policy makers, including Senator Orrin Hatch of Utah, who now views the mandate as a violation of individuals’ freedom. Republican legislators then openly countenanced the mandate and embodied it in federal legislation they proposed.

One can also view being insured for at least catastrophic health care a civic responsibility, as is the case in most other industrialized nations, including freedom-loving Switzerland. For example, asked in an interview in Health Affairs in August 2010 how he could defend the mandate to be insured to Swiss citizens, Switzerland’s former secretary of health, Dr. Thomas Zeltner, responded:
That’s easy. We will not let people suffer and die when they need health care. The Swiss believe that in return, individuals owe it to society to make provision ahead of time for their health care when they fall seriously ill. At that point, they may not have enough money to pay for it. So we consider the health-insurance mandate to be a form of socially responsible civic conduct. In Switzerland, “individual freedom” does not mean that you should be free to live irresponsibly and freeload from others, as you would put it.
Part of American exceptionalism, which we feel sets us apart from other nations, seems to be that Americans believe they have a moral right to critically needed health care, whether or not they can pay for it, but also believe that they should be free not to make financial provision for that event beforehand.

If the Supreme Court strikes down the mandate as unconstitutional — as it very well might, judging from the sharp and skeptical questions asked by the justices in arguments on Tuesday — it could lead to one of two distinct pathways.

First, as the Obama administration asserts, community rating and guaranteed issue would then have to be stricken from the Affordable Care Act. We would be back to the vignettes of Americans complaining about private insurers doing their actuarially sound and defensible thing, which can, however, be so devastating on American families.

An alternative would be to let these two provisions stand and force the insurance industry to live with them. As I explained in an earlier post, it would lead to what actuaries call the “death spiral” of individually purchased insurance, with shrinking risk pools of ever-sicker individuals and, naturally, ever-mounting premiums.

One could lambast the insurance companies for these ever-rising premiums, of course, but informed observers know better: the culprit would be the absence of a mandate to be insured. New York and New Jersey, which imposed community rating and guaranteed issue without a mandate to be insured, are living proof of that assertion. Risk pools there have shrunk and community-rated premiums have skyrocketed.

The Medicaid Expansion: As is shown in the chart above, the Anti-Injunction Act does not affect the court’s jurisdiction over the Medicaid expansion. If I had to bet, the court will rule this provision constitutional. After all, a state does not have to take part in Medicaid, which is heavily subsidized with federal money. The program is voluntary.

For the expansion, the federal government would pick up 100 percent of the cost in the first three years, which descends over time to 90 percent thereafter. For the existing enrollment, the federal government traditionally has picked up 50 to 80 percent of the program’s cost.
The opponents of the expansion appear to hold that for the federal government to make all of its generous Medicaid subsidies to a state conditional on that state’s agreement to expand Medicaid eligibility to 133 percent of the federal poverty level is so powerful a fiscal incentive as to be coercive and hence unconstitutional, even though participation in Medicaid is voluntary. It strikes me as a stretch.

Tuesday, March 27, 2012

Not Very Satisfying Data Today

The consumer confidence numbers were disappointing (to me) this morning even though they were in the realm of those expected by the "consenus."  Also disappointing were the manufacturing activity data out of the Chicago, Dallas and Richmond Fed districts over the past couple of days and the retail sales numbers reported this morning.  The only data that seemed reasonably favorable was the institutional investors' confidence number reported by State Street.  (However, see the concerns I raised in a prior post to this blog regarding hedge fund equity buying activity over the past few months).  In spite of today's "lethargic" data, the markets have remained flat to only slightly down for most of the day.

Tomorrow we'll see durables goods orders followed by jobless claims and GDP data on Thursday and personal income/outlays and Chicago PMI numbers on Friday.  If these data points leave us unsatisfied, I expect the markets to move toward the 3-5% correction we've been waiting for.

Is Our Governmental "Leadership" Choosing Societal Success or Failure ?

In “Collapse: How Societies Choose to Fail or Succeed”, Jared Diamond warns that throughout history surviving cultures are always the ones that focus on long-term planning, far in advance of crises.  Failed societies are the ones whose leaders “focus only on issues likely to blow up in a crisis within the next 90 days.”

Monday, March 26, 2012

Raising Stop-Loss Floor to 1400 on the S&P 500

After the run-up in today's equity markets, helped in large measure by Fed Chairman Bernanke's morning comments, I'm raising my conditional trade stop-loss floor to 1400 on the S&P 500. Last week I had a 1380-1385 target floor in mind (see blog of March 22nd).  However, today's market exuberance together with my expectation that favorable US economic data will be forthcoming over the next several days suggests to me that we could see a higher market before the week is out --- perhaps 1425 on the S&P 500.  Moreover, I think institutional "window dressing" for the end of the quarter will support market prices for the remainder of this week --- although it's possible some of that "window dressing" added to today's market results.

If the market falls below 1400 in the next couple of weeks, I think it probably will be because the economic data disappointed, the market re-thinks its enthusiasm over Bernanke's comments, and/or we're heading for that proverbial 3-5% correction --- and setting conditional stop-loss triggers at the 1400 level will protect much of the as-of-yet unrealized gains in our managed portfolios.

Time To Make Certain Your Stop Losses Are In Place

Here are the headline and lede of a Bloomberg article which cause me to think (from a somewhat contrarian viewpoint) that it's certainly time to have appropriate stop losses in place in the event hedge fund managers have it wrong (once again).  The hedge fund buying activity over the past several months has set the stage for the much anticipated 3-5% near-term correction.  (See my prior posts regarding the potential of a market correction.)  As Bruce McCain, chief investment strategist at the $20 billion private-banking unit of KeyCorp in Cleveland, said in a March 22nd Bloomberg interview, “There should be a pullback, there’s been just too much enthusiasm.  One of the last parts of the rally is when people throw in the towel and buy into it, and there is that risk for the hedge funds right now.” 

Bloomberg article, March 26, 2012 ---
Hedge Funds Capitulating, Buy Most Stocks Since 2010
Hedge funds trailing the Standard & Poor’s 500 (SPX) Index for the last five months are giving up on bearish bets and buying stocks at the fastest rate in two years.

See the whole article by Nikolaj Gammeltoft and Whitney Kisling here ---

Sunday, March 25, 2012

Another Problem With Gold

I haven't been much of a believer in gold as an investment vehicle. And now, as Felix Salmon reports, there's more for gold bugs to worry about:

"You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

"...there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger."

See the whole post here ---

Bull or Bear -- Pick Your Poison

Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co., and David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., talk about the outlook for U.S. stocks and their investment strategies. Lee is thinking about raising his S&P 500 year-end target above 1430 and Rosenberg is thinking a target toward 1200 is more likely.

One thought re: Rosenberg's argument that current GDP numbers don't support a higher market level --- check out this article about the relationship (or, really, lack of significant correlation) between current GDP growth and future equity market returns (

Thursday, March 22, 2012

Start of the Market Correction or Buying Opportunity?

Softness in economic data from China and Eurozone this week offset continuing favorable recovery data from the US --- S&P 500 down to 1390 this morning from 1410 a few days ago.  The data from China and Eurozone were pretty much expected --- so is this a buying opportunity or the beginning of an anticipated 3-5% market correction?

Also, lots of US economic data coming next week (e.g., consumer and investor confidence data, manufacturing and durable goods orders,  retail sales, personal income and outlays, etc.).  If favorable, this data could bode well for a move upward in the equity markets to a level above 1410 on the S&P.  On the other hand ...

I'm inclined to add to investment positions as S&P 500 hovers around 1390 or dips slightly below that level --- but liquidate some holdings if the index falls much below the 1380-1385 level.

Tuesday, March 20, 2012

Biggs Boosts Bullish Bets on Stocks to 90% Net Long

I have high regard for Barton Biggs --- and find it interesting how quickly he has moved in and out of long equity positions as his assesssment of relevant economic and political factors has changed from week to week.

Bloomberg News Article
By Inyoung Hwang and Tom Keene - Mar 20, 2012

Barton Biggs, the hedge-fund manager who increased bets on equities before the Standard & Poor’s 500 Index rallied this year, is getting more bullish.

“I’ve been gradually increasing and I’m up to 90 percent now,” said Biggs, referring to the proportion of his fund that benefits from higher share prices. He spoke in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “There is an awful lot of money that is out of stocks and in very low-yielding fixed-income instruments. I think the odds are that money is going to migrate back.”

Biggs, the founder of the Traxis Partners LP, said last month that his net-long position, a gauge of bullish versus bearish investments, in stocks is about 75 percent, up from 65 percent in January. His optimism fluctuated along with the market, with at least eight changes in the past six months, according to interviews with Bloomberg.

The S&P 500 (SPX) has rallied 11 percent this year and is on pace for the best first quarter since 1998 amid better-than-estimated economic reports and confidence that Europe’s debt crisis won’t derail the global recovery. The index was 9.9 percent below its October 2007 record of 1,565.15 yesterday. It trades at about 14.5 times reported earnings, the highest valuation level since July, while still below the average since 1954 of 16.4.

The benchmark gauge for U.S. equities fell 0.5 percent to 1,402.44 at 10:10 a.m. New York time today.

Net-Long Positions

Biggs reduced the net-long position in the Traxis Global Equity Macro Fund to about 40 percent at the end of September before increasing it to 65 percent on Oct. 17 and 80 percent on Oct. 31, according to interviews with Bloomberg. On Nov. 21, he said he cut the level to less than 40 percent. On Dec. 2, he said he boosted it to about 60 percent.

Biggs said on Dec. 12 that he was investing in U.S. and Asian stocks. He said at the time that equities might rise or fall 20 percent because of concern about budget negotiations and Europe. The S&P 500 rose 14 percent from that day through yesterday, while the MSCI All-Country Asia Pacific Index advanced 11 percent.

He sees risk to the markets from tensions in the Middle East. If Israel were to “take a shot” at Iran, it “would be very, very serious for the world economy and would cause a double dip,” Biggs said today.

“The ‘gloom crew’ is looking over their shoulders at what’s happened, and it certainly isn’t a perfect world,” he said.

Biggs said today that while the problems in Europe haven’t been solved, he is encouraged by the quality of the leadership at the European Central Bank and the International Monetary Fund, and in Italy.

Sunday, March 18, 2012

Where is the 3-5% Market Correction?

In my blog of February 27th I expressed the thought that a 3-5% market correction may be happening in the March/April timeframe before the equity markets resume upward movement in the latter part of Q2 and in Q3 to reach a level of 1450-1500 on the S&P 500 this year. Since then the S&P 500 has gone from 1367 to 1404, up almost 3%. What gives?

The temporary resolution of the Greek debt drama has, of course, had a beneficial effect in adding some calm to the equity and debt markets.

But most importantly, the US economic recovery has continued to move slowly along a recovery path. Of more than 40 national and regional economic data points1 that have been reported from March 1st to March 16th, only 9 have been adverse to a continuing recovery and some 25 have been favorable. The remaining data points were inconclusive or neutral. This bodes well for a continuing rise in the equity markets --- but the market can be fickle as well as infatuated --- and a couple of downward disappointments could very well send us into correction mode.

While I continue to be fully invested at this time (between 90-95% net long equity positions), I've put tiered trailing stop loss orders in place on about 65% of my equity holdings --- particularly those most susceptible to a market correction. This should allow me to protect most of the not-yet-realized portfolio gains this year (YTD performance is above 25% vs. 11.6% for the S&P 500 index). The other 35% of the portfolio holdings could be liquidated on a case-by-case basis if any of the tiered stop-loss orders trigger.
1   These economic data points include, among others, construction spending, jobless claims, non-farm payrolls, motor vehicle sales, personal income and outlays, factory orders, capacity utilization, retail sales, consumer credit, job-cut reports, employment indices, business inventories, wholesale trade, international trade, export and import prices, general business conditions indices, consumer and producer prices and consumer sentiment.

Thursday, March 15, 2012

And Now For a Reality Check?

I'm not a Paul Farrell fan --- at best he's an Eeyore and at worst a "the glass is always empty" kind of guy.  But a recent article about Wall Street's personality traits rings more true than usual.  Here are some excerpts --- and, if you really need a dose of depression, you can find the entire article here --

"10 reasons Wall Street will hit bottom, crash -- Commentary: Gambling-addicted banks need a Betty Ford Center"

By Paul B. Farrell, MarketWatch March 13, 2012, 12:01 a.m. EDT

Wall Street’s 10 personality traits today:
1. Amnesia: Since the 2008 meltdown, Wall Street’s memory erased
2. Overoptimistic: Wall Street casino’s blowing another megabubble
3. Immature: totally narcissistic, the ‘King Baby’ syndrome
4. Greedy: Yes, “greed is still good” … for Wall Street’s gamblers
5. Compulsive liars: Never trust Wall Street to tell the truth
6. Insatiable: Wall Street’s hooked on ‘more is never enough’
7. Macho-macho: Regardless of the facts, they can’t admit failure
8. Unpredictable: Wall Street gamblers haven’t a clue about the future
9. Irrational: Wall Street gets rich off investor irrationality
10. Myopic: Failure to think long-term guarantees another crash

Saturday, March 10, 2012

A Word of Caution ...

Here's an excerpt from an article in The Economist discussing the continuing recovery in the US and yesterday's solid jobs report,

"And while momentum seems to be building, there is no shortage of threats around the world. Europe ever looms, and rising oil prices have households nervous. The biggest danger may be policymaker complacency, however. The Federal Reserve took steady strides toward more economic support in the last few months of 2011 but seems now to be backing away from hints of further accommodation. That would be premature. It was only last spring that the economy last enjoyed a three-month run of 200,000+ employment growth—a streak that quickly fizzled as dear oil, European crisis, Japanese catastrophe, Congressional bickering, and an idle Fed nearly tipped the economy back into recession.

"Confidence in the American economy looks as good as it has in years, and is especially striking by comparison with the outlook across most of the world. If the recovery has taught us anything, however, it is to take nothing for granted."

Saturday, March 3, 2012

Just a Little Diversion ---

The Self-Made Myth

It's perhaps time to give thought to the concept of the self-made "job creator."

As Elizabeth Warren recently said, "There is nobody in this country who got rich on his own. You built a factory? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

This same idea is advanced in a new book—The Self-Made Myth by Brian Miller and Mike Lapham.  A central thesis of the book is that the greater an individual’s success, the greater his or her dependence on public infrastructure, public investment in research and innovation, and regulations and fair rules—all of which business leaders in the book cite as essential to their own accomplishments.

Many politicians are relentlessly pushing the notion that lower taxes, less regulation and small government (except for defense) will magically end the recession and create a better country, and “job creators” will lift all boats.  Perhaps, as we move toward November, we should reconsider the social contract that "self-made job creators" have implicitly entered into with their 311,591,917+ American brethren.

Friday, March 2, 2012

We Have Met the Enemy and He is Us

The Two Issues that Can Bring Down the Economy
 "The term “crisis” is frequently overused in Washington, never more so than in budget debates. The problem is that a real crisis requires a hard deadline by which time something must happen or something terrible will happen.

"There are two hard deadlines approaching, the need to raise the debt limit and expiration of all expiring tax cuts at the end of the year. These two action-forcing events, when combined with more than the usual political uncertainty over control of Congress and the White House next year, mean that the long-awaited fiscal crisis is now here."

See the whole article here ---