Posted by: Ben Steverman on July 02
Health care stocks are among the riskiest games investors can play these days. The reason, of course, is the health care reform effort, spearheaded by President Barack Obama and winding its way through Congress.
What makes this confusing is that reform could significantly help or hurt particular industries within health care -- depending on how the law is written.
BusinessWeek's Aaron Pressman discussed the debate over hospital stocks in this video.
Stifel Nicolaus (SF) recently issued a 63-page report analyzing the possible effect of health care reform on various health care stocks. A few of the key conclusions:
First, the bullish case for health care stocks is easy to understand: Health care reform could boost overall health care spending by bringing 48-million uninsured people onto insurance rolls. Stifel cites the Commonwealth Fund, which estimates a 16% increase in the insured could result in an extra $122 billion in spending each year.
But, second, Stifel analysts question this thesis, seeing an increased risk to firms' profits from health care reform. The political tone has changed because of worries about mounting deficits, "suggest[ing] that more aggressive cost cutting and increased regulation may result." That's a change from May, when health care stocks actually outperformed the market on better-than-expected earnings and hopes of positive effects from reform.
Finally, Stifel's experts warn this debate could take a long time:
Health reform legislation is likely to take most of 2009 to finalize and will continue to be a headline risk for most healthcare sectors throughout the process.
Some health care industries are less exposed to the debate -- "medical and drug distributors, generic pharmaceuticals and possibly large-cap pharmaceutical and biotechnology companies." But for most of the health care sector -- and for its investors -- this could be a long, volatile year.
Posted by: Ben Steverman on July 02
PNC, in its July 2009 Investment Outlook, asks whether the "buy and hold" investing philosophy no longer works. PNC's investment strategist, E. William Stone, does a good job of clarifying the key issue. He notes the last decade has been terrible for investors, and then writes:
Is the long-term expected real (after-inflation) return on stocks no longer positive? In other words, if the expected return is no longer positive, then an investor would need to trade in and out of stocks in order to earn a positive return.
Stone then reviews the evidence and concludes what most (though not all) financial advisors have been saying for decades. Stocks do tend to outperform other investments and also inflation over long time periods. Plus, jumping in and out of the market is difficult, because it's very hard to do so at the right time.
Whether you agree or not, some pieces of evidence from PNC are worth considering:
PNC looked at 881 rolling ten-year time periods for the S&P 500 since 1926. Adjusted for inflation, 119 of those time periods (13.5%) showed a negative return. That's a surprisingly high figure, which underscores the significant risk that investors do take when they put their money in stocks.
Second, Stone's team reviews studies, looking at dozens of countries, showing "essentially no correlation between the rate of GDP growth and real returns on stocks -- in fact the correlation is slightly negative."
That's an important point because many bearish investors expect slow economic growth for many years to come. And they cite these economic doldrums as a reason not to own stocks for now. Stone, citing this research, argues this is a poor rationale.
But how could it be that the economy could grow and equity investors earn nothing? Or that an economy is stagnant but stock investors benefit? I'm intrigued by one possible reason:
GDP can grow without gains accruing to equity shareholders. In some countries the GDP gains might accrue primarily to the government or workers.
Whether or not economic growth is slower in the next decade than in the last decade (and I think that's highly debatable), this passage raises a troubling question for investors. Might we also be facing a situation where political developments in Washington -- more generous health benefits, tighter financial regulation, pro-union labor laws and regulators, environmental rules -- limit investor gains even if the economy does grow?
We don't know the answer to this question, or to many others. And that uncertainty about the future is one reason why I remain, cautiously, a buy-and-hold investor. (The other reason is that I see few proven, viable alternatives to buy-and-hold.)
But what do you think? Is buy-and-hold still a useful investing philosophy?
Posted by: Ben Levisohn on June 30
Few investments performed better than oil during 2009's second quarter. Black gold is up 44% for the second quarter and has traded near $70 for the past four weeks.
But a consensus appears to have emerged that oil is overpriced and ready for a fall. The International Energy Agency released a report on June 29 showing weak demand. Furthermore, while fundamentals may be determining the direction of the price, speculation is responsible for oil's enormous price swings. In its Perspectives Quarterly, Credit Agricole says that $70 is unsustainable. "Looking at fundamentals, however, the recent rebound in prices appears overdone," the French bank says. It expects prices to return to $60 per barrel in the third quarter before increasing to $68 per barrel in the fourth quarter.
And the Wall Street Journal attacked the notion of $70 oil in two separate blogs, "$70 Oil, but Where's the Demand?" and "Is the Oil Bubble Back?"
British bank Barclays has a different take. In a new report, Commodity Refiner: Children of the Revolution, Barclays claims the fall in oil to below $40 a barrel was the aberration, and the recent rise in oil prices is a "return to normalcy." Look no further than the price of December 2015 futures contracts, which have traded above $66.77 since September 2008, despite market turmoil and the complete collapse of spot oil to under $40 a barrel.
"Even at the lowest point for macroeconomic expectations, and for oil demand forecasts and sentiment, the idea that a sub-$70 per barrel price could be sustainable did not seemingly gain any significant traction," the report says.
Barclays attributes oil's renewed vigor to the fact that the world economy didn't implode, an event that may have been priced into the market. (Sorry, no link.) It also says that the declines in oil production caused by the collapse in oil prices has yet to hit the economy. When it does, it will make up for the lack of demand cited by the IEA.
If Barclays is right, it's time to stop assigning blame for $70 oil and learn to live with it.
Posted by: Ben Levisohn on June 29
Investors appear to have put the banking crisis behind them, but they might want to reconsider. The Bank of International Settlement, an international organization of central banks, today announced today in its annual report that toxic assets still threaten the banks and a financial recovery. (Hat Tip: EuroIntelligence via Calculated Risk via the Guardian)
From the BIS report:
At this writing, the ability of those plans to generate a sustained recovery is an open question. The major reasons for doubt, discussed in the final section, are limited progress in addressing the underlying problems of the financial sector and the risks associated with the expansionary fiscal and monetary policies put into place during the period under review.
This probably shouldn't come as a surprise. As astute investors have noticed, the government's plans to get toxic assets off the bank's books have been undermined by the banks themselves, who refuse to sell the securities at distressed prices, and by changes in mark-to-market accounting rules, which have given them the ability to ignore the problem.
And more bank assets may be on the verge of going toxic. Everyone knows that commercial real estate is the next domino to fall, but the worst may not have been reflected in bank earnings, says Douglas Burtnick, investment manager on the Aberdeen Global Financial Services Fund. "We're still early in the game in knowing how that's going to play out," he says.
Posted by: Lauren Young on June 29
Does anyone ever really retire?
Not necessarily, according to a new study Growing Old in America: Expectations vs. Reality by the Pew Research Center.
Of the 2,969 adults surveyed, 83% of adults ages 65 and older describe themselves as retired, “but the word means different things to different people,” the data show. Just three-quarters of adults (76%) 65 and older fit "the classic stereotype of the retiree who has completely left the working world behind," the survey says. Which begs the question: What kind of jobs do the other 24% have? Is it volunteer work or are they employed as a greeter at Wal-Mart (WMT)?
The answer seems to be a mix of different jobs. For example, 8% of the “still-working” respondents say they are retired but working part time. Another 11% of the 65-and-older population describe themselves as still in the labor force, though not all of them have jobs.
We’ve been thinking the impact of the recession on retirement a lot lately. We are putting the finishing touches on our summer retirement issue, which will be out in early July. What’s encouraging for people who dream of spending their golden years at the golf course or on a porch sipping lemonade is that only 2% of the “still-working group” in the "Growing Old in America" survey they are retired but working full time while just 3% say they are retired but looking for work. Considering the economic downturn, those numbers seem surprisingly low. (Interviews were conducted from Feb. 23 to March 23, 2009.)
Whatever the fuzziness around these definitions, one trend is crystal clear from government data: After falling steadily for decades, the labor force participation rate of older adults began to trend back upward about 10 years ago. In the Pew Research survey, the average retiree is 75 years old and retired at age 62. (In 2002, it was 92.)
The Growing Old in America report is chock-full of data on other topics impacting the elderly, such as living arrangements, family relationships, and end-of-life wishes. Two data points that caught my eye: Respondents think old age begins at 68 while the ideal age to die is 89.
What do you think? Do you think you will be retired by age 62? If not, at what age do you plan to retire?
