The Very Big Picture: The Affordable Care Act and the Stock Market

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This Time Is So Different That It's Difficult To Truly Grasp Its Significance

Editor's note: This edition of IQ is a good one to read in a comfortable chair with a nice cup of something soothing.

The latest economic data and the action in the financial markets suggests that the markets know something and that people outside the markets and the naysayers are completely out of touch with reality.

If you are a student of history, as it pertains to the markets, you spend a great deal of time looking for patterns that repeat, in hopes that by recognizing them you can make money. Charts are the most common and easy way to often identify trading patterns that can fit a particular theme. More important and larger secular, ie. long term decisions about markets, though, are possible when events and charts align. We may be living through one of those moments.

The most recent period of time when the markets and the economic reality aligned in a similar pattern were the heady days of the Internet boom. And although that period of prosperity ended in a destructive bust, the amounts of wealth transferred and created during the years that preceded the crash were legendary and worthy of study.

Today there are clearly similar characteristics simultaneously occurring alongside some very peculiar variations. It is in understanding those variations that large amounts of money have been made and can likely still be made, even now, after the Dow Jones Industrial Average has made record highs on consecutive days.

The Political Landscape

The United States is living through its most polarized political landscape since the Civil War. The political extremists, on the left, and on the right, are pushing the envelope in both directions to a point not seen in decades. And the general outcome is a redistribution of wealth. That much is clear to anyone who wants to take the time to look around. What is not so evident, is where the money is coming from, where it is going, why it is doing so and why it can't be stopped. This is the key to making money in the current markets, the understanding of the flow of money.

During his 2008 presidential campaign, then Senator Obama, in a now forgotten but prescient exchange with "Joe the Plumber," made his intentions clear to any one who would listen. He wanted to "spread the wealth around." That phrase was political jargon for wealth redistribution, the old take from the rich and give to the poor tactic. It usually works as an election tactic. And it did for Obama. Our point here is not to become political. We are just providing the reader with the background required to make sense of our larger argument.

President Obama's most significant contribution to the current landscape is the Affordable Care Act. This is the massive law that will transform the U.S. healthcare system. Again, our goal here is not to opine on the potential outcome and wider socioeconomic effects of the law, but more on the effects that the whole dynamic is having on society. More specifically, we are interested in its effects on the way money is being moved around in the U.S. economy.

The Employment Report

Last week's employment report is an extremely important focal point of our discussion, as it crystallizes our conclusion, that the wealth is being "spread around," although not exactly as the mainstream thought pool and the intelligentsia might have expected.

The 236,000 new jobs number made it quite clear that there is now a well established trend of people finding jobs. It is also clear that a large portion of them are finding work in the healthcare sector. In February 2013 32,000 (13.5% of 236,000 new jobs) were created in the healthcare sector. In the services area, 11,000 new jobs were created in accounting and bookkeeping. The employment data for the month also noted continued growth "in computer systems design and in management and technical consulting services." Retail trade, construction and information services also added jobs. That's not the picture of an economy that is faltering. Those are signs that things are improving. That's not a popular conclusion if you are in the opposition to the incumbents. But that's what's happening. And anecdotal data supports it. People are finding jobs these days.

Yet, there are plenty of asterisks buried within the data. There are still 8 million part time workers in the work force. There were still 885,000 discouraged workers and 1.7 million people who want to work but hadn't looked for work in at least four weeks. That's still a system with lots of slack in it. And that suggests that employers are still being choosy about who they hire and the terms of hiring. Yet, overall, especially in comparison to countries like Spain and Greece, where unemployment rates are above 20%, things are still in better shape in the U.S.

What the data also says is that new jobs are being created, where they are being created, and presumably that these jobs are being filled. At the same time, the data also shows that there are roughly 2.6 million people that are "discouraged," either not looking for work, or not working under the circumstances in which they would like to be working.

The Affordable Care Act, Gridlock, And The Markets

The Affordable Care Act is a critical component of life at this moment. It is both the reason for the sluggish pace of rehiring in many sectors of the economy, even as it is a reason for the hiring increase in healthcare and related areas. Recent data from the Fed's Beige Book suggests plenty of unease from employers with regard to the healthcare law. Remarks in last week's Beige Book culled from the Richmond and Dallas Feds reported that employers were planning layoffs and slowing hiring plans due to the unknown and expected negative effects of the Affordable Care Act.

Politically, there are significant developments that are also influencing the markets. Mr. Obama, after having failed to convince anyone, anywhere, that the "sequester" was going to end life as we once knew it, is now busying himself in trying to convince Republicans to come up with some grand bargain to forestall further financial crises scenarios. The GOP, on the other hand, is starting to fracture. The recent filibuster by Senator Rand Paul (R-KY), and the angry response by Senator McCain (R-AZ) is proof that the ultraconservative, newer members of the club, and the old guard of the party are starting to have some significant differences of opinion.

This fighting between Republicans, and continued sparring between the Republicans and the Democrats is actually a new take on an old theme, gridlock. As the politicians fight among themselves and with each other, a new dynamic is starting to manifest itself, the economy is stabilizing and showing signs that it could grow in the future. That is also what usually happens after the politicians are neutralized. Normal people get back to work as their need for food and shelter replaces the worry of what the politicians will do next. And that particular dynamic is what sets America apart from other places. There are still enough people that are willing to take a chance in order to improve their means, even if the odds are clearly against them.

That willingness to take chances, in an of itself, is remarkable, but not unexpected. It's been nearly five years since the 2007-2008 collapse caused by the subprime mortage crisis. And the Federal Reserve has pumped so much money into the system that some of it has actually begun to do some work, mostly in the markets, but some of it also in the econommy, which is why some people are finding work.

Where The Action Is Happening

Now comes the interesting stuff. If there are still 2.6 million discouraged workers, where are the people that are filling the new jobs coming from? Some of them are likely coming from the discouraged pool, which is being replenished by new people who are becoming discouraged. That explains why those numbers remain flat. But, others, and this is the key, are people who are moving to new positions. When they leave one essential job, for another essential job, there is sometimes a job opening. Otherwise the position is closed, attributed to attrition. Thus, the new job is not really a new job, but an essential job which has to be filled, and which is a replacement job in the overall scheme of things. Thus, the current jobs market is a zero sum game. There is no real gain.

The system has, thus, found balance. Essential jobs are being filled while non-essential jobs are being filled by apps and technology or given up for unfillable. There are no real new jobs being created. Enough people are finding work to make the statistics look good. Yet, just as many are finding no solace or refuge from joblessness. That's why the discouraged worker numbers are flat. It is likely that jobs would be shrinking if it weren't for the demands created by the implementation of the Affordable Care Act.

This is because doctor's offices are having to hire people to help them with the new clerical demands brought on by the new laws. Insurance companies are also hiring people for the same reason. Also likely is the fact that healthcare related businesses, as well as others are having to hire consultants, bookkeepers, and accountants to help them sort out the new vagaries of the Affordable Care Act.

At the same time, hospitals and large groups are buying up smaller doctor groups in order to be ready for the implementation of the Affordable Care Act, and its immense bureaucratic demands, fueled by electronic medical records, whose contents, by law, will have to be made accessible to the government at some point in the future. That's because the government will want to quantify the "quality" of care being provided to Medicare patients. Private health care systems, also known as Accountable Care Organizatins (ACOs) who buy doctor practices, or who affiliate with private doctors or doctor groups, will also have access to the electronic medical records. Insurance exchanges are being created out of thin air. Thousands of technology related jobs are being created or redirected to these endeavors, the connection of the entire healthcare system to central databases which will calculate how doctors and hospitals get paid.

Here is a perfect example of the dynamic. In the past two weeks we have spoken to two people who lost jobs within the last twelve months. One is an experienced doctor's office receptionist, bookkeeper and secretary. She recently found a job. The other is an experienced welder. He can't even find temporary contract work. He told us that in his interviews he is being told that he is over qualified. His employers are fearful that he will soon find something else and that he will leave them hanging. They would rather do without him.

The Bottom Line: The Convergence Of Two Gigantic Pools Of Money

Where are we going with this? There is a great deal of activity in some areas of the economy. But these are areas that are fueled by workers with high levels of education, adaptability and technical expertise and the need of a new bureaucracy. These are people that are needed to implement, activate, and perpetuate the Affordable Care Act. That means that those people who can contribute to the dynamics of the Affordable Care Act are going to have work. This dynamic does very little for those people that don't. And the sequester, as it slowly kicks in, will make it more difficult for those on the margin to advance while making it easier for those who are barely hanging on to fall off.

In essence, the redistribution of wealth that Mr. Obama was hoping for isn't happening the way that he expected that it would. Yes, he has taken money away from physicians. But the money that has been transferred from doctors and the private practice of medicine is still going to companies that hire and use educated people. The demographic has not changed. And in the path of the new and irreversible change there is no new tomorrow. There is only a variation of the same theme, those who are better equipped to adapt, will survive. Those at the bottom of the socioeconomic ladder will remain there, unless they can acquire the skills and the savvy to adapt to the new rules of the game, which now change on a monthly basis every time a new set of rules that deploy the Affordable Care Act are released.

The Affordable Care Act has changed everything and has changed nothing. It has created a two tiered playing field. The top tier is populated by those who will create and deploy the mission of the law. The bottom tier will be those who fall from grace and those who are already at the bottom of the heap and can never rise. More important, for many in the top tier, and in the middle, there will be no further advancement. Many who are finding employment in this new sector may survive, but will not likely thrive, as the mechanism of the wealth transfer that has been created has a negative bias. It is increasingly clear that higher effort, in many cases now, is leading to diminishing returns.

The market is rallying because it has figured this out, all of it. Gridlock is back. That means that the government will be too busy to mind the store on Wall Street. And the the Fed and the Affordable Care Act are printing oodles of money that is being spread around to selective areas of the economy. It's a similar theme to the Clinton years. Money came out of healthcare and defense and went into technology. The difference in those years is that market forces were still operative and the recipient of the easy money was the Internet, a winner picked by the market, not by the government.

In this incarnation, it's more subtle. There are two pools of money converging. Money allocated by the Treasury, via allocations to fund the Affordable Care Act is moving toward smaller, private tech companies, often via contracts with giant companies like IBM who can't grow anymore but can still make huge sums of money. It's a subcontractor and consultant world again. It's a landscape of small private companies with highly motivated IT and programming technicians with little choice but to join the fray or perish.

The stock market is being fueled by the money being pumped into the big banks by the Federal Reserve. Wall Street knows that there is something big going on, and it's reacting in the best way possible, by buying what it can, now that it knows the dynamic. If you can't buy shares in XYZ Tech Deployment Small Company, the next best thing is to buy a proxy, like IBM, or an ETF that houses technology stocks, or maybe the whole market. In other words, the stock market is going up because the prevailing theme is that so much money is being thrown around that something, anything, should be going up. And in many cases that's just what's happening.

The net effect is that big money is getting bigger. Little money, if it's the right sector, is hanging on. And the poor are getting squashed. Put another way, the rich are getting obscenely rich. Those that are o.k., are o.k. for now but many are starting to fade. The poor, are getting crushed beyond reair. And the new measuring stick has come down to this: any small company that can make it another month is considered successful. That's why there are no boffo IPOs. And that's why no one has reached the scale needed to become the bellwether of the Affordable Care Act boom. It's too spread out and hard to fathom. It's too much of a plodding government guided regulated thing. It's too big and too hard to consolidate into a buzzword that sells. There is no Amazon.com, no Yahoo, no Google company to rally around or to duplicate, promote, and take public. There isn't even a Facebook, Zynga or similar flash in the pan to rally around. That's because no one has ever heard of the companies that are servicing the doctor's offices, installing new computer systems, monitoring security, and creating and deploying electronic medical record systems. Most of them are small businesses with less than 50 employees and lots of temps and part timers. And ironically, those are the businesses that are exempt from buying insurance for their workers. And if they are smart, they will stay small, in order to avoid regulation, much less the notice of the government or the markets.

Yes, there are three major electronic medical system companies at the moment: Cerner (Nasdaq: CERN), Athena Health (Nasdaq: ATHN) and ADP (NYSE: ADP). These are all companies with significant stakes in electronic medical records and as a result in the Affordable Care Act. But all of their record systems have issues, especially when deployed at the enterprise level of the hospital. It's not all rosy at that level. And it takes a lot of time and effort for physicians and office staff to learn the systems. More important, there is no way for the systems from each of these providers to communicate, which defeats the purpose of the electronic record, availability to physicians anywhere in the U.S. to have access. And these stocks have already had quite a run.

So what's our point? This time is different. This a much more complicated set of issues than the usual Wall Street sell side pump and dump con job. This market is being fueled by easy money and its interaction with the most important dynamic of the times, the double edged sword also known as The Affordable Care Act, the thing that gives to some and takes away from others, but lets no one truly advance. It's all about taking up room, running in place, moving sideways, staying on the treadmill, but never stopping. If you're moving you won't really notice where you're going. If you don't stop, you won't see what you're doing, so it must be all right. You're moving and that's all that matters.

The bottom line is that the Affordable Health Care act is unstoppable. And the stock market is going up because there is a lot of money being spread around key areas of the economy. Most of that money is newly printed by the Fed. And most of it, right now is being spent on the deployment of the Affordable Care Act. And here is a final thought. There is not much of a chance that the Federal Reserve, unless it wants to crash the country, will stop printing money until the Affordable Care Act is well on its way to being established. That could well mean that a much longer bull market than many expect could be under way.

Oh, we almost forgot. The sequester will eventually squeeze just about everything in the economy unless it has to do with The Affordable Care Act. But the full implementation of the key infrastructure of the act, for all intents and purposes, is still a good year to year and a half away. By that time the bull market will be completely and irreparably on its way to a very nasty and painful end. Until, then, though, it's going to be something to see.

The Markets

indu
Chart Courtesy of StockCharts.com

The Dow Jones Industrials (INDU) made another new all time high on Friday. This, in our opinion, will now become a fairly regular event, which will most likely be confirmed by the other indexes. Right now, the S & P 500 (SPX) is within striking distance of its own all time intraday high as well.

spx
Chart Courtesy of StockCharts.com

The S & P 500 (SPX) closed above 1550, a good sign, as the index delivered a new closing high, confirming the action in the Dow Jones Industrial Average. 1576 is the all time intraday high.

naad
Chart Courtesy of StockCharts.com

The Nasdaq Advance Decline line (NAAD) and The Nasdaq Hi Lo line (NAHL) both confirmed the latest rounds of new highs from the Dow and the S & P 500, which means that momentum to the up side has resumed.

nahl
Chart Courtesy of StockCharts.com

Conclusion

Today's IQ was a lengthy piece. It has a lot of information. We thought it was needed in order to understand the current dynamics of this market and the new synchronization of the market with the activity in the economy. We appreciate your attention and hope that you glean positive, actionable information from the report.

Our conclusions are: 1)The stock market has more up side. 2) The Affordable Care Act is the key to both the up and the down side of the economy, and thus, the markets. 3) The current recovery is a zero sum game where only those who are able to adapt to the new game will either prosper or survive. More people in the lucky group will survive. Few will prosper. Many more in society will fall to new lows.

If you are an investor in stocks you must be a nervous buyer and holder of stocks. You must also be a nimble portfolio manager. And you must be prepared to hit the sell button, as the last day of the bull could come at any time.

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