The Next 1,000 Points on the DOW

Richard E. Haskell, Sr.

March 22, 2010 Edition, Volume IV

Inside Signature Update

• The Market – The Next 1,000 Points on the DOW
• The Economy –  Extremely Costly Lessons
• The Takeaway – Consumer Demand and Stronger Dollar Affects

THE MARKET – The Next 1,000 Points on the DOW

The DOW closed higher for the 8^th day in a row Thursday, extending the index’s 52 week high to 10,821 points; though still far from the October 2007 high of 14,400, the rebound over the last twelve months represents a 66% gain over the DOW’s March 2009 low of 6,500.  Friday’s close at 10,737, down 39 points on the day, presented an expected breather for the markets after such an extended run to the positive.  And then came Sunday’s passage in the US House of Representatives of the Senate’s Healthcare bill and Monday’s double digit stock market gains.   

With a major piece of uncertainty now out of the way, the next 1,000 points for the DOW could come quickly.  You’ll recall that the markets disdain uncertainty above almost all else, and the recent political maneuvering towards a House of Representatives vote on the healthcare legislation presented just that.  As late as Friday of last week, House Speaker Nancy Pelosi maintained that a passing vote would occur on Sunday; but with only 200 votes secured of the 216 votes needed, her assertion was viewed as more than optimistic by many.  At the same time, President Obama suggested a passing vote may not take place until later the following week, and InTrade, an online market predictor, put the likelihood of passing healthcare legislation by June, 30, 2010 of approximately 80%.  That’s all history now, and even though there’s still much work to be done to bring the House and Senate bills into law, there appears to be little in the way of halting the legislation’s progress.

The biggest winners in this effort have been the Obama administration and the Democratic Party; to whom congratulations are due, regardless of how you feel about the legislation.  They’ve pulled off an effort at which others have tried and failed; one that I honestly didn’t think would succeed until after I spoke with a trusted business associate a little over a week ago.  This conservatively minded, small-business owner friend explained that the only way he saw himself being able to provide reasonably priced health insurance for his family was through the passage of the President’s health care bill.  Though he may not have fully appreciated the pending legislation’s nuances, it was clear that he had tied his family’s well being to the bill, and I immediately realized that if he had reached this conclusion, millions of others just like him had likely gotten to the same point.  At that moment, my expectation of the bill’s passage became certain; the only question was when it might take place.

Other winners include hospitals, which now see a clear path to a funding source for the cost of care for previously uninsured patients; pharmaceutical manufacturers, that just had almost 30% of the market open up to them (the previously uninsured), and insurers which are likely to see the largest proportional shift in the size of their risk pool and customer base since the 1940’s. 

The certain losers are those highest income earners, who will see their federal income tax obligations increase.

The US equities market may become a near-term winner as well.  With the legislation’s passage and with no discernable, immediately-negative impact, the market is poised to extend its gains even further.  In the longer run we’ll sort out the affect the increased tax on high-income earners will have had on capital investment, which is almost certainly negative, but even some highly respected economists disagree on this point.

An unfortunate aspect of the legislation’s passage is that it will likely move more important issues even further to the sidelines.  The current legislation is more of a health insurance reform bill than healthcare reform.  Its single largest benefit is to improve the risk pool for insurance companies by mandating the inclusion of healthier citizens who may not feel the need for coverage under the current system; and receiving premiums from them, of course. Demographers suggest that this portion of the newly covered won’t exceed those less-healthy individuals without coverage, but argue that the less-healthy, previously uninsured have been receiving de facto coverage through emergency rooms and free clinics funded by tax payer dollars and higher prices charged to those with insurance coverage.

This may fall under the heading of “good is the enemy of great”.  While there are certainly good provisions in the bill, it falls well short of great, but may be enough to keep the focus off of enacting a solution to the nation’s larger problem of healthcare reform.  In the August 11th (Just What Are We Reforming – part one) and September 3rd (Just What Are We Reforming – part two), 2009 issues of Signature Update we discussed some root causes of our nation’s healthcare problems.  Sadly, the bill just passed doesn’t address them; consumers will continue to expect more from the healthcare system than can reasonably be expected; insurance fraud and abuse will continue; and medical malpractice and tort reform are as far away as ever.

Regardless, what has taken place is historic and may open the way for the next 1,000 points of gains on the DOW.  That could also make winners out of anyone holding stocks, mutual funds, or other market based investment and insurance products.

THE ECONOMY - Extremely Costly Lessons

In the last few months I’ve had numerous thoughtful and intelligent people ask if the widely heralded economic recovery is real.  With unemployment rates close to 10%, market values well below their highs, many businesses still reporting revenues well below those seen in the mid-2000’s, uncomfortable real estate values and relatively low consumer confidence levels, could we honestly be seeing a broad-based recovery?  The answer is yes, but we need to differentiate between an economic recovery and a return to economic prosperity.

Economic recovery doesn’t mean that all is well and that good times have returned for every sector of the economy.  It simply means that the economy is improving rather than declining.  It suggests that today’s economic results are better than yesterday’s, with the recognition that yesterday’s were worse than those of the day before.

Unlike a return to economic prosperity, an economic recovery is simply the beginning, and in this case the road to prosperity is likely to be measured in years rather than months, as is a return to full employment.  Though our economy will almost certainly see a return to prosperous levels of output and employment, we still need to deal with the affect of the recession and the remedies employed to bring us out of it.  Unacceptably high levels of federal debt will need to be overcome, precautionary regulations will be enacted, and trust will have to be restored to the capital market system before we can declare prosperity across the board.  In the mean time, appreciate that the economy is improving; enjoy any benefits this may bring to your business or household; and learn from what have been extremely costly lessons.

THE TAKEAWAY – Consumer Demand and Stronger Dollar Effects

• The US Department of Transportation reported a decrease in miles driven of 1.6% (3.7 billion miles) in January 2010 over January 2009, reflective of consumer sensitivity to increased oil prices (The Rising Price of Oil May Quickly Become Self Correcting - Signature Update 3/16/2010).  The result is likely to be a moderation in oil prices due to decreasing consumer demand sufficient to offset the increased demands from global manufacturing and dollar fluctuations.

• The passage of healthcare legislation gave a small boost to the US dollar and put pressure on the gold and oil markets.  Unlike the current relative stability in the price for oil, a byproduct of higher demand offsetting declines due to a stronger dollar, gold’s value looks to continue its erosion. 

• Pharmaceutical and hospital stocks are likely to do well in the face of increasing insurance roles.  Look for those with below average P/E ratios (the relationship between the per-share stock price and the company’s earnings per share) and those that may be in a position to increase dividends.

Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management  and CEO of Signature Management, LLC

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