Monday, March 22, 2010

Morning Note...


Futures -60bps on renewed tax concerns resulting from the passage of the healthcare bill and MOTS (“more of the same”) overseas, as markets continue to process the potential for a smooth Greek bailout and for stimulus tightening in both India and China.  For a “cheat sheet” on the healthcare bill (via GS research), please see the quote section below.  Financing costs are in bold, and note the fee increases on healthcare providers.  Further, it’s the tax increase on dividends and cap gains that are perhaps “re-pricing” equities this morning.  Add the scheduled expiry of the Bush tax cuts to the increased taxes embedded in this new legislation, and you have a double hit for high income (+$200k) earners.  Regarding Greece, Germany’s Angela Merkel said not to expect much in the way of resolution to the Greek issue from this week’s scheduled EU summit: 

German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan and helping send Greek bonds to their lowest in more than three weeks.  EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk radio yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its aid measures at the March 25-26 summit in Brussels.  (BBERG news)

Looking ahead, we’ll see US Durable Goods orders on Wednesday, and Friday brings the final Q4 GDP revision.  Note the House has scheduled a hearing on China’s yuan appreciation for Wednesday.  John Mauldin had some thoughts on that this weekend, as he took on a recent Paul Krugman NY Times editorial that argued for a 25% tariff on all Chinese goods:

I probably shouldn't take on a Nobel Laureate who got his prize for his work on trade, but this truly scares me. People pay attention to this nonsense, including the five Senators, led by Schumer of New York, who want to start the process of targeting China.

First, the Chinese have got to be wondering what they have to do to make these guys happy. In 2005 they were demanding a 30% revaluation of the Chinese yuan. And over the next three years the yuan actually rose by 22% at a gradual and sustained pace. Then the credit crisis hit, and China again pegged their currency. From their standpoint, what else were they to do? Force their country into a recession to appease our politicians?

They responded by a massive forcing of loans to their businesses and governments and huge infrastructure projects. Kind of like our stimulus, except they got a lot more infrastructure to show for their money. It remains to be seen how wise that policy was, and how large the bad (non-performing) loans will be that came from that push - just as there are those (your humble analyst included) who do not think the way we went about the stimulus plan in the US was the wisest allocation of capital.

But the reality is that the Chinese will do what is in their best interest. I wrote in 2005 that the yuan would rise slowly over time. The political posturing of Schumer, et al., was counterproductive then, and it still is now.

…Are we going to start targeting the currencies of every nation that runs a surplus with us? What about Europe? And Great Britain? Their currencies are dropping against the dollar, in the case of England rather precipitously. Are they pursuing mercantilist policies, Senator Schumer [in reference to his recent scandalous press conference]? What happens when the euro goes to parity against the dollar (and it will!) because the Europeans are having trouble getting their act together? Are we going to demand they force the euro to rise? Tell the ECB to raise rates and shove the whole euro area into an even worse recession?

…It is a dicey damn world we live in. We are coming to the end of the debt super cycle, as I have written elsewhere in this letter. It is a very perilous time. Things are going to be hard enough. We have a huge problem with deleveraging and controlling our fiscal deficits, not just in the US but in the entire developed world. Starting trade wars is the absolutely worst possible thing to do. For the US to even suggest that such a policy is reasonable is the worst possible kind of message. Where are the adults in the administration?

By the way, if you’re looking for something “under the radar” to keep an eye on this week, take a look at the following…I would expected state and municipal debt levels to begin to creep into the headlines:

California, the lowest-rated state, will lead about $3.1 billion in taxable debt sales in potentially the biggest week for such issues since December as investors gain confidence in Build America Bonds. The most-populous U.S. state will offer about $2 billion in taxable notes this week, including $1.3 billion in federally subsidized Build America securities, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Oregon’s Transportation Department will sell $556.4 million of the debt and the Arizona Board of Regents will market $164.9 million on behalf of Arizona State University.  As much as $3.16 billion in taxable bonds will hit the market this week, the most since Dec. 11, according to preliminary data compiled by Bloomberg. Tax-exempt issues will total about $8.2 billion. (BBERG News)

Rochdale ups C.  GOOG expected to close China search business as early as today.  CITI cuts AKAM.  GSCO cuts OMX.  Janney cuts STI.  JPHQ cuts GMR, JACK.  OPCO cuts VRSN, LMT.  UBSS cuts IACI.  OPCO ups BA.  GSCO ups GPC.  PLCM signs strategic partnership with HPQ.  Barron’s positive GME, FAST, PEP, HAS, WU; cautious PALM.  ALV raises guidance.  AIB, IRE lower on concerns gov’t will pay less to take bad loans off their books.  NOVL rejects Elliott Assoc’s bid for the company.  WEFA cuts SPF.  TIF misses by 4c.  BERN cuts VLO.  WSM beats by 12c. 

Asia mixed overnight.  Europe down over 1% thus far.  Gold -82bps.  USD +36bps.  Oil -240bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
TENET HEALTHCARE       6.19      +7.65% 514299
WATSON PHARM            43.39    +7.35% 1000
TIFFANY & CO               44.70    -5.4 %  115943
PINNACLE WEST            39.50    +4.58% 500
SLM CORP                     11.07    -4.57%  6076
FANNIE MAE                  1.10      -4.35%  93730
NOVELL INC                   5.88      +4.26% 1120561
LIZ CLAIBORNE               6.85      -3.93%  285
IAC/INTERACTIVEC        23.00    -3.73%  2200
AKAMAI TECH                30.40    -3.15%  13366
SUNTRUST BANKS          26.37    -2.98%  1376
MEMC ELEC MATER        13.78    -2.96%  2860
MBIA INC                       5.52      -2.82%  5217
NABORS INDS LTD          19.33    -2.77%  2195
WILLIAMS COS INC        21.91    -2.75%  1071
MARATHON OIL              31.10    -2.75%  1725
COMCAST CORP-A         17.07    -2.62%  500
WEATHERFORD INTL      15.65    -2.61%  12673
AMERICAN INTERNA       33.90    -2.59%  72000
VALERO ENERGY            19.80    -2.51%  4800

Today’s Trivia:  Let’s try a couple more company name translations or about Hitachi, Adobe, Subaru, Starbucks, and Reebok? 
Yesterday's Answer:   Raytheon literally translates to “light of the gods,” Hyundai means “modernity” in Korean, Akamai is from a Hawaiian word meaning “smart” or “clever,” and Volvo – my favorite – is from the latin, meaning “I roll.” 

Best Quotes:  Below are the main points of the House-passed health package. From here, one part of the package, the Senate-passed bill, goes to the White House for signature on Tuesday. The other part goes to the Senate, where it will be taken up under “reconciliation” rules starting Tuesday, with debate on the bill and amendments to it likely to last several days. Most of the provisions will become law when the president signs the first bill on Tuesday.  The summary below includes provisions from both bills. All fiscal effects listed are from CBO, over the 2010-2019 period.


Most major coverage provisions would take effect in 2014. This includes insurance subsidies, coverage mandates and some of the more important insurance reforms.  Personal (Medicare) tax increases will take effect in 2013, and most of the Medicare spending cuts will take effect in 2011.  Near term incremental reforms include high risk pools (90 days from enactment) and various changes to insurance rules.

New Health Program and Insurance Reform:

Health Exchange. The bill will create health exchanges in which insurance companies would offer benefit packages that met certain standards. Individuals without employer-sponsored coverage and small business employees would be eligible to join. CBO estimates that 24 million would enroll by 2019, 19 million of whom would be eligible for some level of subsidy.

Health Subsidies. Households with incomes between 133% and 400% of the federal poverty level (for family of 3, this works out to $24k to $73k) will be eligible for refundable/advanceable tax credits to purchase insurance from the health exchanges (see above). Subsidy rates depend on income, but in most cases enrollees will pay part of the premium. Cost:$350bn

Medicaid Expansion.  Individuals with incomes up to 133% of the federal poverty level ($24k for a family of three) will become eligible.  The cost of expansion will initially be covered 100% by the federal government, but states must cover 10% by 2019. Medicaid expansion accounts for 16 million of the 32 million CBO estimates would be covered by 2019.  Cost: $434bn.

Individual Mandate. The bill will impose a requirement that individuals enroll in coverage, either through their employers, existing federal programs, or plans in the new health exchange. The penalty, once fully phased in by 2016, will be the greater of $695 or 2.5% of income.  Revenue collected: $17bn.

Employer Mandate. The bill will require employers with 50 or more employees to provide health insurance or pay a penalty of $2000 per employee if any employee becomes eligible for subsidies.  Despite the mandate, CBO estimates employers will cover 3 million fewer employees by 2019 than under current law. Revenue collected: $52bn.

Small Business Tax Credit. Employers with less than 25 employees and average wages of less than $40k would be eligible for a tax credit for a percentage of the employer’s share of premium contributions. Cost: $37bn.


Personal Tax Increase. The Medicare payroll tax on wages above $250k will be increased by 0.9%, bringing the total employee share to 2.35%. The bill would also impose a new 3.8% tax on unearned income (incl. cap gains, dividends, and taxable interest) for taxpayers with total income over $250k. Revenue collected: $210bn.

Health-related Tax Increases. The bill will levy taxes on pharmaceutical, medical device and health insurance companies. It would also impose a 40% excise tax on insurers offering health plans costing more than $27.5k (for a family) per year starting in 2018. Revenue collected: $210bn.

Medicare and Medicaid Cuts.  Most parts of Medicare will be affected, with small changes to Medicaid. Key cuts involve health insurers and hospitals. Savings: $455bn.

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