Momentum Is Good Right Now But Trouble Is Lurking

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Investors continue to struggle between the lure of easy money and the reality of a world where economic problems remain unsolved creating a hazy scenario for the intermediate term future.

The stock market still looks fairly good. Momentum to the up side remains relatively unscathed. Sure, there are a few more stocks that are hitting air pockets. But now, there are a few more deals being made, which increases the money that gets thrown around by the big guys. So those two variables are pretty much cancelling each other out and stocks keep rising.

The problem is that at some point, markets will have to deal with the lack of government attention to deficits, out of controlled spending, and the increasingly dangerous leap of faith known as the Affordable Care Act, which is as big a black box as there has ever been created.

What we know is that all of the projected cost savings that were used to see Obamacare to the public, are being called into question. The so called exchanges, which are to be the marketers of the "affordable" policies are now being built. But, it's still not clear as to what they will be selling, and to whom. Reports that the IRS is projecting that low end policies will cost $5000 per person covered per year, did little to clear up what the policies will cover, or what the upper end policies will cost.

Sure, the sensational headlines on the Drudge Report turned into the usual partisan arguing. But the fact is that no one really knows any more about this so called "coverage" now than they did before the IRS rules and projections were published. We looked at the 73 page report and, frankly, could make no sense of it, other than it seems that the IRS is deciding what is "affordable" based on how much money a person or a family makes a year, and is thus basing the "affordability" of the plan for the public on those assumptions.

But, who will be buying these policies? And who will actually be taking them as coverage? In other words, the exchange might sell a family a policy that offers bare bones coverage for $5000 per person, but it is plausible that no physician or corporate entity will actually accept it as coverage once they figure out that the policy is full of red tape and that reimbursement for treatment may have actually dropped to a point that falls below the provider's cost.

That's what may be happening. People may pay large amounts of money for something that doesn't actually buy them anything, while helping the bottom line of the already powerful and highly profitable insurance industry. At some point, the gravy train for hospitals will end as their reimbursement is decreased. Then, in order to keep margins high the hospital systems will begin to cut pay to employees, services provided to the public, and eventually will lay off staff, much as any other industry.

Here is something else to consider. Insurers are becoming aware of the fact that hospital systems are buying physician practices. The public statements by these hospital systems tell us that consolidating services under one roof will reduce costs. In fact, it raises costs because the same services provided at a freestanding doctor's office cost less than identical ones performed in a hospital setting. When a hospital buys a doctor's office, the doctor's office becomes a hospital level cost center. That means that costs just went up, not down.

The state governments are also contributing to the instability of the system. In some, like Texas, the secondary insurance costs covered by Medicaid, are now gone in many circumstances. Thus, a person with Medicare and Medicaid, often among the poorest of the elderly, is no longer being seen by many doctors, unless he can pay the portion of the 20% copay that Medicaid used to. The reason is that the states are no longer covering the portion of the 20% of costs that they used to cover for Medicare. Most of these people can't afford to pay the 20% that they owe to the doctor. The net outcome is that those people no longer get seen by private doctors. Soon, the numbers will swell to the point where even though those people are "insured" by Medicare, they won't have access to care because the states are no longer paying their secondary insurance costs.

This number of people does not include those that have Medicaid as their only "insurance." Many of those no longer have access to care except at large medical systems which rely on government grants and other programs as well as what they can collect from Medicaid, if anything at all.

For seniors on Medicare or Medicare-like programs provided by private insurers, the services and the speed with which they are being provided are both being reduced as well as slowed in their delivery, due to the need for "prior authorization," forms for anything as routine as pain medication or routine procedures. In many cases, the kind of medication, and the number of pills that insurance will cover is being limited. These practices will increase as time passes, and will likely be the norm for all patients, regardless of their age or their coverage.

What's our point? The current system is already displaying what lies ahead, an uncertain future, and is heading for big problems. Even before the Affordable Care Act is fully enacted, its repercussions are being felt and its shortcomings are increasingly visible. Costs are rising. Access to care is falling. And its other limitations, including choice of care by "providers" and patients is increasingly evident. Meanwhile, the government is moving, full steam ahead with the implementation of the program, at billions of dollars of expense, regardless of what is being seen on the ground.

What does this have to do with the current bull market in stocks? The Affordable Care Act, in our opinion, the bomb that is waiting to explode in the not too distant future. Markets eventually reflect the world. If 1/6 of the U.S. economy starts to wobble all at once, there will be repercussions in the economy. We expect that by this summer, the things that we are describing here will be very apparent to many more people than just an in the trenches observer such as this scribe.

Perhaps, this will help convince our readers to at least beware. According to a September 2012 report on The Hill: "Sequestration would cut $11 billion from Medicare and take millions of dollars away from Affordable Care Act implementation programs." The cuts that are set to go live on March 1, 2013, and that are most likely to hit without any significant action from Congress or the White House would mean "Medicare payments to doctors, hospitals and other healthcare providers would take an across-the-board 2 percent cut."

The 2% cut seems insignificant to anyone who isn't an insider at a private physician's office these days. Yet, in many cases, physicians and staffs are already overwhelmed by the increasing number of complicated patients, the large amount of paperwork, and the highly concerning rise in social problems that are linked to the axis created by the economic crisis. When you add these factors together, the psychological and physical effects on the population become increasingly palpable on a daily measure. This creates a very tight and stressful atmosphere at the doctor's office. Another pay cut, in many cases, could be the straw that breaks the camel's back.

Let's look at it from the patient, everyday guy point of view. Mr. Smith works as a customer service representative for XYZ firm. He makes $55,000 per year and has health insurance benefits from his employer. If his employer decides that the Obamacare policy for its employees is too expensive, it may opt to pay the penalty, instead of offering the benefit. Mr. Smith will no longer have insurance from his employer. No worries, right? There is now an exchange that will give Mr. Smith an "affordable" alternative.

Mr. Smith has two children and a wife who stays at home because one of the children is disabled. Mr. Smith, by law, will have to spend at least $20,000 on health insurance for his family. The government has made it clear that it will subsidize the worker's costs, but not the family's cost. If Mr. Smith were to qualify for this government subsidy, he would still have to pay $15,000 from his $55,000 per year salary. If Mr. Smith is like others in similar places, Mr. Smith has already taken a hit since his payroll taxes went up in January of 2013.

What it means is that Mr. Smith may not have enough disposable income to feed his family, pay his rent and his other bills, and to have health insurance. It just doesn't add up. So Mr. Smith will make decisions: food, shelter, or health insurance? It's a no brainer. How many Mr. Smiths are there out there? 70 million? 100 million? The hit to the economy will be staggering.

In other words, the health care system is already teetering because of the fact that it's too expensive to maintain at current levels. The sequester will likely weaken it further making it much easier for the implementation of the ill conceived Obamacare to topple it.

For now, momentum rules. But, don't get too comfortable. There is trouble that lies ahead. The flip side is that none of the above listed things really matter as long as the money printing presses are on steroids. And the way things look, they could be printing the stuff for a long time to come.

spx 15 feb 2013
Chart Courtesy of StockCharts.com

The S & P 500 (SPX) has been consolidating for the past two weeks, trading in a tight trading range. A move above the 1525 area would likely bring a flurry of activity into the market. 1575 is big time resistance, though, which means that a move to that level could trigger some selling and a more meaningful correction.

The Nasdaq Advance Decline line (NAAD) continues to act well. The indicator has made a series of new highs for the past several days. That's momentum.

naad 15 feb 2013
Chart Courtesy of StockCharts.com

The Nasdaq Hi Lo line (NAHL) also continues to make new highs. This remains a positive for this market.

nahl 15 feb 2013
Chart Courtesy of StockCharts.com

Conclusion

The bulls continue to get the benefit of the doubt for now. Yes, this market is a momentum run. Momentum runs end badly. Just keep that in mind as you monitor your portfolio and make good decisions.

We suggest patience and prudence here. But we don't suggest selling positions prematurely.

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