Now that healthcare reform legislation has passed, we thought it would be helpful to take a quick overview of the pros and cons.
New Health Care Bill – Pros:
1. Everybody can have health insurance if they want it.
2. Insurers will not be able to stop paying for people who are sick, even if they lose their jobs.
3. People who cannot afford health insurance won’t have to pay as much money.
4. People who are already sick will be eligible for healthcare.
5. In the long run it will (hopefully) reduce medical costs significantly. Rising medical costs are the main reason the long-term budget projections are so alarming. Unfortunately, this bill might not do enough. While there will definitely be some savings, it’s not clear that they will be as great as hoped.
6. Health insurers can no longer cap coverage. In other words, they will no longer say that they have spent enough on you and you’re on your own for the next hundred thousand dollars. This should reduce medical bankruptcy.
7. There will be increased competition in the insurance market. This might push the healthcare companies to lower costs and provide better service.
New Health Care Bill – Cons:
1. For the first ten years, it will cost about $100 billion a year. This is about the yearly cost of the Iraq War.
2. The bill might increase the cost of health insurance. This depends on whether the gains from increased efficiencies and increased competition are outweighed by the cost of providing additional benefits.
3. The Individual Mandate. You will have to either buy health insurance if you don’t have it or have a 2% tax increase. This insurance will be subsidized—but there is no guarantee that the subsidy will suffice for your specific situation.
4. There will be a tax increase on very high income people. If you are making more than half a million you will have about a 1% tax increase.
5. Increased government involvement in healthcare. Government already pays for huge amounts of healthcare—so this won’t be anything new.
6. Additional regulation on insurance companies. This might increase costs. It will increase quality.
7. Physicians will have increased access to information about what treatments are most effective for their cost. If two treatments work equally well and one is cheaper, doctors can recommend that one. This was almost universally considered a good thing until a few years ago, but some people have started criticizing it lately.
Here are some more facts about this new Health Care Bill on government extractions:
1. The US government will extract a fee of $2.3 billion annually from the pharmaceutical industry. If you are a pharmaceutical company what you will pay depends on the ratio of the number of brand-name drugs you sell to the total number of brand-name drugs sold in the U.S. So, if you sell 10% of the brand-name drugs in the U.S., what you pay will be 10% multiplied by $2.3 billion, or $230,000,000. (Under reconciliation, it starts at $2.55 billion, jumps to $3 billion in 2012, then to $3.5 billion in 2017 and $4.2 billion in 2018, before settling at $2.8 billion in 2019.
2. The US government will extract a fee of $2 billion annually from medical device makers. If you are a medical device maker what you will pay depends on your share of medical device sales in the U.S. So, if you sell 10% of the medical devices in the U.S., what you pay will be 10% multiplied by $2 billion, or $200,000,000.
3. The US government will extract a fee of $6.7 billion annually from insurance companies. If you are an insurer, what you will pay depends on your share of net premiums plus 200% of your administrative costs. So, if your net premiums and administrative costs are equal to 10% of the total, you will pay 10% of $6.7 billion, or $670,000,000. In the reconciliation bill, the fee will start at $8 billion in 2014, $11.3 billion in 2015, $1.9 billion in 2017, and $14.3 billion in 2018.
Many of the provisions of the reform don't go into effect until 2014, so depending on what happens in the November elections, it's possible it could be amended or changed. It is unlikely this will happen but it is possible.
Friday, March 26, 2010
Friday, March 19, 2010
Markets continue to rally
The S&P 500 Index has closed in positive territory 24 of the past 28 sessions and has risen to new highs for the year. If you think that is breathtaking, the Russell 2000 Index has rallied 20 of the past 23 days. A near-term corrective phase would be totally natural at this point and as long as the indices don't give back too much of the gain; that would be a constructive development for possible future gains.
The equity market at any given moment in time is basically one part reality to three parts perception. The perception part (and the reason behind the continued rally) is that 0% interest rates are good news for stock prices. With rates expected to stay low for an "extended period of time", the perception is that is good news all around.
Question we ponder is if 0% interest rates were a cure-all for all that ails the economy then we suspect Japan’s Nikkei Index (where zero percent interest rates have existed for years) would still not be 70% lower than it was in 1989? As we look back to 2009, didn’t the S&P 500 slide 30% in the opening months of the year with the same interest rate policy we have today? It was only when the Federal Reserve began quantitative easing, the government bought shares in the banks and injected stimulus, FASB made changes to accounting rules and the shorting community was sufficiently ostracized that the market made a bottom. Perceptions changed.
Perception is OK as long as the future reality matches up to the at the moment perception. And so far that has happened. Perception continues to match future reality and the market has rallied accordingly. The stock market perceives a robust recovery, which actually may happen. Economic numbers and earnings continue to come in above expectations. So far so good. Of course, there is always a twist.
The bond market's perception is vastly different from the stock market's. If the bond market (which is actually several times bigger than the stock market) is perceiving a recovery as robust as the stock market, intermediate and longer term interest rates should move higher, as they have in every post war recovery; in anticipation of the Federal Reserve raising rates due to strong economic growth. The 10 year treasury rate is the benchmark for the markets as many other lending rates, such as mortgages, are tied to this rate. In June of 2008, the 10 year treasury rate was 3.79%. In June of 2009, the 10 year treasury rate was 3.71%. Where is it today? As of this morning, the rate is 3.66%. At this point, the bond market doesn't expect the economic recovery to be as robust as the stock market perceives. So who has the correct perception - the bond market or the stock market?
If the economy is recovering at more than just a tepid pace, we should begin to see interest rates move higher as smart bond market investors begin to sell bonds anticipating higher rates. At first, the stock market will likely decline as higher rates tend to be a precursor to an allocation move out of stocks and into bonds as yields rise. However, longer term a rising interest rate environment is good for stocks because it signals stronger economic growth and in increase in pricing power for companies; requiring the Federal Reserve to raise rates to slow growth and tame inflation. If interest rates continue to remain steady or move lower, we should except a continued slow recovery and more muted expectations for earnings growth this year. Economic numbers over the next several weeks should give us a better idea of who is right.
The equity market at any given moment in time is basically one part reality to three parts perception. The perception part (and the reason behind the continued rally) is that 0% interest rates are good news for stock prices. With rates expected to stay low for an "extended period of time", the perception is that is good news all around.
Question we ponder is if 0% interest rates were a cure-all for all that ails the economy then we suspect Japan’s Nikkei Index (where zero percent interest rates have existed for years) would still not be 70% lower than it was in 1989? As we look back to 2009, didn’t the S&P 500 slide 30% in the opening months of the year with the same interest rate policy we have today? It was only when the Federal Reserve began quantitative easing, the government bought shares in the banks and injected stimulus, FASB made changes to accounting rules and the shorting community was sufficiently ostracized that the market made a bottom. Perceptions changed.
Perception is OK as long as the future reality matches up to the at the moment perception. And so far that has happened. Perception continues to match future reality and the market has rallied accordingly. The stock market perceives a robust recovery, which actually may happen. Economic numbers and earnings continue to come in above expectations. So far so good. Of course, there is always a twist.
The bond market's perception is vastly different from the stock market's. If the bond market (which is actually several times bigger than the stock market) is perceiving a recovery as robust as the stock market, intermediate and longer term interest rates should move higher, as they have in every post war recovery; in anticipation of the Federal Reserve raising rates due to strong economic growth. The 10 year treasury rate is the benchmark for the markets as many other lending rates, such as mortgages, are tied to this rate. In June of 2008, the 10 year treasury rate was 3.79%. In June of 2009, the 10 year treasury rate was 3.71%. Where is it today? As of this morning, the rate is 3.66%. At this point, the bond market doesn't expect the economic recovery to be as robust as the stock market perceives. So who has the correct perception - the bond market or the stock market?
If the economy is recovering at more than just a tepid pace, we should begin to see interest rates move higher as smart bond market investors begin to sell bonds anticipating higher rates. At first, the stock market will likely decline as higher rates tend to be a precursor to an allocation move out of stocks and into bonds as yields rise. However, longer term a rising interest rate environment is good for stocks because it signals stronger economic growth and in increase in pricing power for companies; requiring the Federal Reserve to raise rates to slow growth and tame inflation. If interest rates continue to remain steady or move lower, we should except a continued slow recovery and more muted expectations for earnings growth this year. Economic numbers over the next several weeks should give us a better idea of who is right.
Friday, March 12, 2010
Consumer Credit Expands in January
Total consumer credit outstanding expanded by $5 billion in January after contracting 15 of the previous 17 months. Hopefully this trend will continue as 60% of the US economy relies on consumers.
Consumer credit outstanding includes revolving and non revolving credit. Revolving credit is mostly credit card debt, and non revolving credit includes loans for items such as autos and boats. Even with the slight increase in January, total consumer credit (after adjusting for inflation) has contracted roughly 6 percent since the recession began in December 2007. This number might seem like a huge contraction but compared with three of the past four recessions, it actually looks rather typical, if not mild. Consumer credit contracted 9 percent in the 1973–75 recession, 11 percent in the 1980–82 recessions, and 8 percent in the 1990–91 recession.
Then, just when you think this recession is just like the others, in comes a curve ball - the report shows that if we the current recession is separated into revolving and non revolving credit, the relationship to past recessions changes. Typically in a recession, non revolving credit shrinks considerably while revolving credit shrinks little if at all. The trend so far in this recession has been the exact opposite; non revolving credit essentially has remained unchanged while revolving credit has shrunk 11 percent.
It is interesting to note that the surprise blip “up” in the most recent consumer credit report came entirely from non-revolving debt. Credit card debt continued to contract. Most likely this change in debt is due to the fact that interest rates for auto and boat loans are exceptionally low, while interest rates for credit cards are typically much higher.
Consumer credit outstanding includes revolving and non revolving credit. Revolving credit is mostly credit card debt, and non revolving credit includes loans for items such as autos and boats. Even with the slight increase in January, total consumer credit (after adjusting for inflation) has contracted roughly 6 percent since the recession began in December 2007. This number might seem like a huge contraction but compared with three of the past four recessions, it actually looks rather typical, if not mild. Consumer credit contracted 9 percent in the 1973–75 recession, 11 percent in the 1980–82 recessions, and 8 percent in the 1990–91 recession.
Then, just when you think this recession is just like the others, in comes a curve ball - the report shows that if we the current recession is separated into revolving and non revolving credit, the relationship to past recessions changes. Typically in a recession, non revolving credit shrinks considerably while revolving credit shrinks little if at all. The trend so far in this recession has been the exact opposite; non revolving credit essentially has remained unchanged while revolving credit has shrunk 11 percent.
It is interesting to note that the surprise blip “up” in the most recent consumer credit report came entirely from non-revolving debt. Credit card debt continued to contract. Most likely this change in debt is due to the fact that interest rates for auto and boat loans are exceptionally low, while interest rates for credit cards are typically much higher.
Friday, March 5, 2010
Tax Law Update for 2010
No phaseouts on itemized deductions & exemptions in 2010
This may provide an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions after a certain income threshold. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.
As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.
Lower long-term capital gains rates through 2010
Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.
The dreaded estate tax to be revised in 2010
Zero percent estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again this year. However, to prevent a complete repeal of the estate tax, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.
In other words, don't plan on a sudden demise in 2010 in order to pass your estate on to your heirs without estate tax.
Don't forget the homebuyer tax credit
The homebuyer tax credit appeared a couple of years ago. In 2009, lawmakers improved upon the original tax break. Now the homebuyer tax credit is a true credit. That means it reduces your tax bill dollar-for-dollar and in this case, could get you a refund if your IRS bill is zero.
The credit amount was increased to an $8,000 maximum and it's not limited to strictly first-time buyers. Homeowners who've lived in their residences for a while and want to buy another one can get a $6,500 maximum credit.
Under the Worker, Home ownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, you have until this April 30 to buy or sign a contract to buy a principal residence. You then get two more months, until June 30, to close on the property. If you're a first-time buyer, you also get the option of claiming the credit on either your 2009 tax return or waiting until you file your 2010 taxes next year.
This may provide an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions after a certain income threshold. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.
As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.
Lower long-term capital gains rates through 2010
Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.
The dreaded estate tax to be revised in 2010
Zero percent estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again this year. However, to prevent a complete repeal of the estate tax, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.
In other words, don't plan on a sudden demise in 2010 in order to pass your estate on to your heirs without estate tax.
Don't forget the homebuyer tax credit
The homebuyer tax credit appeared a couple of years ago. In 2009, lawmakers improved upon the original tax break. Now the homebuyer tax credit is a true credit. That means it reduces your tax bill dollar-for-dollar and in this case, could get you a refund if your IRS bill is zero.
The credit amount was increased to an $8,000 maximum and it's not limited to strictly first-time buyers. Homeowners who've lived in their residences for a while and want to buy another one can get a $6,500 maximum credit.
Under the Worker, Home ownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, you have until this April 30 to buy or sign a contract to buy a principal residence. You then get two more months, until June 30, to close on the property. If you're a first-time buyer, you also get the option of claiming the credit on either your 2009 tax return or waiting until you file your 2010 taxes next year.
News of the Week
Euro-Zone GDP growth slows
WSJ reported this week that economic growth in the 16 countries that use the euro slowed as expected in the fourth quarter, with the fragile recovery entirely dependant on exports, revised official data showed. Quarterly gross domestic product growth slowed to 0.1% in the final quarter of last year, down from 0.4% in the three months to the end of September, the European Union's Eurostat statistics agency stated. The figures are in line with the first estimate of euro-zone GDP published last month and the market consensus estimate from a Dow Jones survey of economists.
Monster Employment Index rises sharply in February
The Monster Employment Index rose by ten points in February, as employers resumed hiring activity after January's seasonal lull. The long-term growth rate turned positive, with the Index up 2 percent year-on-year, for the first time since December 2007 suggesting some improvement in the underlying demand for labor. During February, online job availability rose in 15 of the Index's 20 industry sectors and in 19 of the 23 occupational categories monitored... "Although some of the increase in the February Index can be attributed to seasonality, a rise in hiring for sectors like manufacturing, transportation and wholesale trade offers an encouraging sign of increased investment and business activity," said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide.
Weather Conditions Play No Role on Employment Data
Nonfarm payrolls fell by 36,000 in February after declining by 26,000 in January. The consensus expected payrolls to decline by 68,000. It seems forecasters overestimated the effects of the severe winter weather on the payrolls data. The consensus estimate included a decline of 100,000 in payrolls due to inclement weather. As the bureau stated in its press release, the estimate turned out to be bogus and weather conditions played almost no role in moving the payroll numbers. The unemployment rate held at 9.7% in February. The consensus expected it to increase to 9.8%. Importantly, the unemployment rate did not hold at 9.7% due to statistical manipulations. Instead, the data provide evidence of an influx in job creation. The number of employed increased by 308,000 while the labor force rose by 342,000. There is a strong caveat to the unemployment data. The increase in employment is not coming from full-time/high-wage positions. Employment growth was caused by workers taking part-time jobs because poor business conditions made it difficult to find full-time work. These new part-time hires topped the entire aggregate increase in employment.
WSJ reported this week that economic growth in the 16 countries that use the euro slowed as expected in the fourth quarter, with the fragile recovery entirely dependant on exports, revised official data showed. Quarterly gross domestic product growth slowed to 0.1% in the final quarter of last year, down from 0.4% in the three months to the end of September, the European Union's Eurostat statistics agency stated. The figures are in line with the first estimate of euro-zone GDP published last month and the market consensus estimate from a Dow Jones survey of economists.
Monster Employment Index rises sharply in February
The Monster Employment Index rose by ten points in February, as employers resumed hiring activity after January's seasonal lull. The long-term growth rate turned positive, with the Index up 2 percent year-on-year, for the first time since December 2007 suggesting some improvement in the underlying demand for labor. During February, online job availability rose in 15 of the Index's 20 industry sectors and in 19 of the 23 occupational categories monitored... "Although some of the increase in the February Index can be attributed to seasonality, a rise in hiring for sectors like manufacturing, transportation and wholesale trade offers an encouraging sign of increased investment and business activity," said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide.
Weather Conditions Play No Role on Employment Data
Nonfarm payrolls fell by 36,000 in February after declining by 26,000 in January. The consensus expected payrolls to decline by 68,000. It seems forecasters overestimated the effects of the severe winter weather on the payrolls data. The consensus estimate included a decline of 100,000 in payrolls due to inclement weather. As the bureau stated in its press release, the estimate turned out to be bogus and weather conditions played almost no role in moving the payroll numbers. The unemployment rate held at 9.7% in February. The consensus expected it to increase to 9.8%. Importantly, the unemployment rate did not hold at 9.7% due to statistical manipulations. Instead, the data provide evidence of an influx in job creation. The number of employed increased by 308,000 while the labor force rose by 342,000. There is a strong caveat to the unemployment data. The increase in employment is not coming from full-time/high-wage positions. Employment growth was caused by workers taking part-time jobs because poor business conditions made it difficult to find full-time work. These new part-time hires topped the entire aggregate increase in employment.
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