Shorting the Obama Health Plan

Barack Obama is proving to be a masterful president just six months in office. I am not talking about policy or legislative initiatives - the first role of any president is to lead and he has led the nation from a sense of panic - perhaps panic itself - to calm - real calm. He has been wildly successful, regardless of what the "paid to scream" pundits in the conservative and financial media may say about him.

And now that calm is here, and his policies and proposals are more rather than less important than his ability to re-assure the American people about their own strengths, it may be time to, metaphorically and literally, short Obama. Specifically his health plan, whatever shape it may take. At least some of the profits can be used to pay the extra taxes we are going to pay for next 25-50 years. (For purposes of full disclosure, I voted for Obama.)

The problem for Obama, and why it is possible to develop a short view of his administration going forward, is his loss of control of Congress. Most Senators and handful of Congressmen know something of money, the budget, deficits and markets. But most members of the House do not - and they are showing way too much influence and power in the setting of policy. That means a make believe energy bill/cap and trade bill, because they don't want the cost of energy to go up; too much support for a housing market that would best be left to itself, to correct itself quickly; and a health care bill that has its heart in the right place and its head up, well, this is a family blog - a health care bill that sets the nation on an untenable course.
And that is where it is best to start looking for short and long opportunities - health care. Health care bill will probably pass; it will probably mandate everyone have or buy health care insurance; it will include thousands of pages of regulations that will not work as planned; it will be based on cooked data about cost reductions that will never happen; and when it all gets too expensive, 12-18 months after enactment, medical care for those dependent on the government will be further rationed and medical care paid for by the private sector will become increasingly expensive as private payors subsidy of government programs increases. And then 3-5 years after that, something will blow, led by the need for Medicare to dip into the general tax fund, roughly around 2016.

Short something that will blow up in 2016? No.

But look at short positions in companies that will be first in line to be seriously squeezed - some with merit, others not.

Who will be squeezed? And when?

The squeeze will begin about six nanoseconds after the health care bill is passed and the remaining responsible adults in Washington - there are a few - take a look around and go "omigod." They will be seeing an obese, aging population unwilling or unable to take care of itself hurtling towards government paid health care with frightening speed. And an industry still used to printing money at will with new products or fees and in control of their local Congressman or Senator. And they will go after the unusual suspects first -- and then some not so usual ones.

So, who gets squeezed?

Big Pharma: I follow the industry more closely than most, used to write a biotech letter, Big Pharma was my comic relief whenever I got too serious. This industry deserves to be squeezed if not on economic principles but everyday idiocy and a total inability to match real consumer needs with their business model and product development. For example, if you talk to doctors, the best proton pump inhibitor around is Aciphex (I take it, it changed my life, no kidding). It runs almost $300 a month without insurance while generic Prilosec costs less than it does to feed someone at Chipotle (well, maybe not my sons). If ihad the best product, I would hire the right people and go head to head with Prilosec. Nope - just jack prices and milk profits until the patent runs out. And this is the preferred mode of business in the entire, traditional Big Pharma industry. And Congress knows this as well - so you can expect a big squeeze on drugs that do not directly save lives. For short sellers, this intersects with the greatest, most cost saving patent expiration ever - Lipitor, November 2010 - so take a hard look at Pfizer. They are facing a revenue downturn of up to $9 billion in Lipitor sales within 12-18 months of patent expiration. That would require 9-10 blockbusters to emerge - and they have none in the pipeline worth mentioning. In my book Sell Short, which is about process, not specific recommendations, the Lipitor expiraton and Pfizer are central to explaining how one can find and use great short opportunities. (check out MichaelShulmanSellShort.com for more info.)

Other candidates? I have a personal bias against the frequently overprescribed Aranesp and Procrit (an anemia drug) from Amgen - way overprescribed compared to Europe, where people typically live longer. Mind you, Pfizer and Amgen print cash, they are simply overvalued and it will take a while for the market to catch up with them. Between the two of them, and hundreds of billions in R&D over the past twenty years, they have produced, I believe, one blockbuster in their labs.

Devices: Medical devices routinely get approved by the FDA - when effective - then a hyperactive sales force pushes them onto the market and patients pay for them. The 10% better widget results in a 100% increase in fees to the hospital or center - endorsed by Medicare, who sets the price for the new procedure that is copied and used as a floor by the private sector. Well, according to Bob Dylan, the "times they be a changin." It is easy to see Medicare and then insurance companies balking at new devices that sell well here, barely sell in Europe and do little to actually improve patient outcomes. This includes services for treatment and for diagnosis. Who look ripe for trouble? Medtronic. Unlike Pfizer and Amgen, this is a well managed company with a great product development organization - but they are in the wrong place at the wrong time and their size means they need a great deal of success with new products to move the needle on sales and continue as a growth company. Other losers are the big imaging players - GE, Toshiba and Siemens - but these huge multinationals are so diversified you cannot consider shorting them based on this thesis alone.

Payors: Stay away - long or short - who knows what is going to happen to them.

Providers: Ditto for providers - price pressures will be offset by increased business and reduced or eliminated bad debt - but a lot of their billing nonsense is going to get squeezed - a friend was just billed $26 for one spoon of Pepto Bismol - impossible to say where this will end up.

Biotechs: If you want to go long, look at the great biotech's will real live saving products and start with Gilead Sciences. Bets managed biopharma company on the planet - by a mile. They own the HIV marketplace and are pushing into pulmonary and also have a promising, high risk hypertension drug. They are also a great stock to hedge - very high premiums on their calls. If there is a buy and hold company left on the market, they are it.

Cognitive Dissonance on Wall Street

I have been writing about brown shoots for too long to recount - perhaps since the term green shoots was created by some bull with calls on the S+P - and I have been astounded by the number of analysts, pundits and whatever who bought the argument. Congress is expected to re-write the laws of math but no one else. So why were so many people surprised on Thursday with the unemployment data?

This Thursday's unemployment report should not have been a surprise. I will not waste your time recounting numbers you can see or have seen elsewhere. But the sharp selloff means a) a lot of traders got in on the wrong side of the trade and ran in a hurry and b) there is still a historically high amount of cognitive dissonance on Wall Street. Cognitive dissonance may, in fact, explain the entire rally and is, if you like behavioral psychology, is central to understanding the behavior of markets that fly in the face of economic reality.

To quote part of the Wikipedia definition (a good one, to be found at http://en.wikipedia.org/wiki/Cognitive_dissonance), "Cognitive dissonance is an uncomfortable feeling caused by holding two contradictory ideas simultaneously. The "ideas" or "cognitions" in question may include attitudes and beliefs, and also the awareness of one's behavior. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and behaviors, or by justifying or rationalizing their attitudes, beliefs, and behaviors."

Sounds like the Street to me.

Wall Street does one thing quite well - math, usually reserved for bonus calculations, commissions, fees but occasionally used for analyses - and it knows the consumer is dead and getting deader, suppressing business behavior and employment. But it wants to go long - it longs to go long - and this tension is cognitive dissonance. It removes the tension by reconciling these two ideas with what it really wants--for the market to go up. Otherwise intelligent people go on TV and tell people things are fine with green shoots everywhere - I am not talking about screaming anchors who have traded ideology for intelligence like Larry Kudlow, nor am I referring to corrupted reporters now always optimistic as if they had a patriotic duty to be so - perhaps it is ratings? I am talking about money managers who are mostly long and want to stay that way. They are now telling people to "invest in the second derivative" - a decline in the rate of decline - and their reasoning "green shoots." So if you are going to willfully deceive yourself and resolve cognitive dissonance, you might as well pull some sucker along for the ride.

This optimism extends to individual market segments and companies. In the good old days, pre Bear Stearns, when housing starts hit one million per year it was a "bottom" and time to buy the home builders. We are down to half of that rate with no rebound in sight but pundits are talking up the companies, most of them kept alive by billions in tax rebates that end this year. Not one investment bank, not to mention a major money center bank, has earnings power remotely approaching their capability five years ago but the stocks have risen sharply based on accounting metrics the Street knows are on paper, not the real world. Not to mention all of the money center banks cannot exist without Fed guarantees of their bonds. And within this group, look at Citigroup - worthless balance sheet, some great businesses, but having no real shareholder value and if and when forced to properly (I don't mean legally, what they do with their books is legal) account for assets, they are wroth nothing. And how about GM trading above a buck?

There is another variant to this optimism - honest optimism based on a mis-reading of data. My favorite TV analyst, Ron Insana, a brilliant and painfully honest man, not quite fully pulled back into all of CNBC's mantras about green shoots, thinks we have hit bottom in the market with the overwhelming reason being the amount of liquidity the Fed has injected into world markets. Yet, if you look at the circulation of "new money" - its velocity - how much it circulates - against what the Fed has metaphorically printed you can see the money supply may have actually declined in the past year. No kidding. And even if I am partially wrong, where is the liquidity? It is now showing up in margin accounts of hedge funds or trading desks - it is sitting in bank mattresses, ready to be used to balance out future losses.

So there is optimism from cognitive dissonance, know one thing, think another, reconcile this by sticking with a belief even if you know the belief is wrong. Or you are getting it wrong because you are using historical norms to analyze something far less than normal - today's economy and markets.

I am not complaining - well, I guess I am, sort of, since I live on fundamentals even though I only recommend options position in my service, ChangeWave Shorts - but a day of at least partial reckoning is coming. Either a blow up or a slide that defeats even the hardiest if bulls. And even if I am wrong, based on the history I am trying hard not to use, the economy will inhibit corporate profits and at best keep the market going sideways for several to many years. Even Congress cannot change how the market value corporate profits - and the market is way overpriced based on the next 2-12 quarters of economic and profit growth.

The bottom line? Whatever trades you make, they need to be in the face of an economy that is not bottoming and when it does, facing a recovery that could take as much as a decade. And, seriously, take a look at Citi as a short - if they are forced to move their off balance sheet assets on their books, well, lots and lots of these. Check out page 21 of the town hall presentation they half for employees last November. And if you are long Citi, have a drink before you get to that page, and that can be found at http://74.125.47.132/search?q=cache:xSvJ_3VrNX8J:www.citigroup.com/citi/fin/data/p081117a.pdf+citigroup+november+2008+town+hall+meeting+pdf&cd=1&hl=en&ct=clnk&gl=us&client=firefox-a

Brown Shoots Turn Black

I never believed in green shoots - they were always brown at best - and now they are turning black and will stay black through 2010. As I write this Larry Kudlow is screaming, telling viewers and suckers to essentially ignore very disappointing retail sales data and invest based on consumer confidence. Well, pal, consumer confidence is still negative - just not as negative as it was - we all know that - but it is headed south again. C'mon, Zucker, do you really want ratings that badly? Remember what you want badly, you get badly.

Where was I? Oh, black shoots. My newsletter, ChangeWave Shorts, is published by Investor Place Media and we have an in house brand - ChangeWave - and in house survey group that has been doing sentiment surveys on everything from consumer purchases to oil exploration budgets for eight years plus. And they survey the same people, enabling them to create and use great baseline data. And they are never wrong - truly - my interpretation of their results may be wrong, but the data is always spot on and typically weeks if not months ahead of other data gatherers.
The last consumer survey, finished up earlier this week, tells us the slight uptick in some categories of consumer spending and the rebound in confidence was a head fake. My interpretation - brown shoots turning black. Simply put, consumers continue to spend less and plan to spend less heading into the rest of the summer.

Let me quote the report. "The mixed picture we reported back in June has worsened in ChangeWave's July consumer spending survey. And for the first time in four months we're seeing an actual pullback in the 90-day spending outlook going forward. The ChangeWave survey of 2,681 U.S. consumers, completed July 6th, has also picked up a significant worsening in consumer sentiment and expectations. Spending on travel/vacation, durable goods for the home, and consumer electronics all edged downward in the current survey, even as automobile and restaurant spending stayed flat."

"After three consecutive months of improvements, our July survey has registered a setback in U.S. consumer spending. Better than two-in-five U.S. respondents (45%) now say they'll spend less over the next 90 days - 2-pts worse than the previous survey in June. Only 22% now say they'll spend more - 3-pts worse than previously. The spending outlook is down across all income categories, with lower income households (under $50,000 per year) particularly hard hit."

The travel/vacation category was the biggest loser - only 26% of respondents are spending more and 35% less on these products and services - a six point shift, more versus less, in the past month.

I got these results on Tuesday and look what we saw this morning - very weak retail sales data from everyone from Macys to Costco - data Kudlow continues to scream at me to ignore. I guess the desire for celebrity and rankings is stronger than his ability to do third grade math. And that math says the consumer is dead and getting deader. At a macro level, let me summarize what you hopefully already know.

Housing: Dead and believe it or not, getting deader. Forget historical norms - the 2.6 million peak was fueled by funky mortgages and investors, perhaps 60% or more of demand - and 500,000 starts is still too many with 11 months inventory and more than two million foreclosures on the horizon. Maybe more. Home prices will not stabilize, nationally, until 2012 at the earliest - when foreclosures peak - and consumer confidence cannot seriously until that happens.

Consumer Spending: Dead, deader, dying again - besides the loss of wealth - housing and stock market crashes - take away more than $4 trillion in credit and more to come. No wealth, no cash due to falling incomes and unemployment, no credit - ain't no meaningful consumer spending rebound for as far as the eye can see. Don't believe me? I vacation mid way between Myrtle Beach and Wilmington every year for a generation and take, excuse me, took the kids for a movie, an ice cream and some shopping at a large enclosed mall - several department stores, food court, the works - in North Myrtle Beach. Wanna buy it? It is empty and on the market for $3.3 million - not $33 million, $3.3 million.

Banks: On the mend in the headlines, the big ones - Citi, Wells, BOA - broke and getting broker as delinquencies and defaults climb faster than anticipated - well ahead of reserves - and toxic assets sit there like a vacant lot in New Jersey. Citi keeps comparing its performance and capital to its $2 trillion dollar balance sheet - what about the $1.2 trillion in off balance sheet assets (last November's count) that are off balance sheet for a reason? Wells says it is fine, yet it has almost $350 billion in commercial real estate loans not to mention more than $90 billion in option ARMS on its balance sheet. And BOA still has Ken Lewis, a blind, deaf and dumb board and unknown liabilities from its purchase of Merrill. For purposes of full disclosures, most of my assets are at Citigroup and I bank at BOA.

Credit Markets: What credit markets? They do not exist for all but a couple of investment banks and AAA rated companies. Otherwise, it is all government backed borrowing. Trillions backed by Uncle Sam - and a few billion in private transactions.
I know you know all this - but I put it together with new consumer spending data to prove a point - optimistic anchors and pundits can talk up the market or the economy and Congress can re-write laws but no one can change the laws of math. And those laws tell me, and should tell you, consumers are right to pull back and they will do so throughout 2010.

So what to do now? The crazy value investors are looking at hotels - hotels! - I just stayed at a great Hilton in New York for less than half what I paid 20 years ago. Look at shorting hotels - Starwood looks ripe to see continuing problems in bookings and revenue - and maybe the booking sites like Expedia - they are going to take another hit this quarter and be in the doldrums for at least another 4-6 quarters.