richinvesting posted: " I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly "Long Term" update will be on the second Wednesday of each month, and th"
I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly "Long Term" update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.
If you lose your bookmark to the blog, google "Rich Investing" and it should show up on the first page or so.
The monthly Long Term update follows just below this one.
Economy:
The CPI for July was up .5% for a 6% annual rate, which is way above the Fed target of 2% annual rate. The year-over-year increase in the CPI was +5.4%. Initial jobless claims for the prior week were 375K, and new pandemic low. The U of Michigan consumer sentiment index for mid-August fell a large 11 points to 70.2, on fears of the rise of the Covid delta variant and inflation. I have quit posting the mid-month consumer sentiment index, but this one was so dramatic, you needed to see it ASAP.
We better hope the Fed is right and that this high inflation rate backs down because if the Fed lets this get out of control they will have to raise rates faster than anyone wants to see and that would slow the economy, perhaps too much. I read that home prices and rents are up 15% in the last year, that's way too fast. There is talk that the Fed will announce a taper to the asset purchase program in Sept. to begin in Oct., maybe dropping from $120 billion a month to $100 billion a month. The first rate hike is projected by Fed watchers for late 2022 or early 2023, but if inflation keeps kicking up, that target could move in.
Geo-Political:
The Senate passed the $1 trillion bi-partisan infrastructure bill so now it goes over to the House.
There is a follow-on budget reconciliation bill where the Senate will pass a large spending increase, I hear numbers around $3 trillion, to fund long-held Democrat programs. That is how the repubs passed the tax cuts in 2017, under budget reconciliation, because that only requires a simple majority. This will be passed on a straight party line vote, 50 dems against 50 repubs, and the Vice President will cast the tie breaking vote to pass it for the dems. The proposal started at about $6 trillion, but Joe Manchin would not vote for it, and the dems MUST have his vote. He's a moderate and he has the swing vote in the Senate.
I want to talk a little about why health care costs so much in the US. There are two roots of the problem, 1) how we use health insurance, and 2) lobbyists.
Let's talk about health insurance. Health insurance is a "must have" item for anyone with reasonably enough money to afford it. Many people face bankruptcy if they have a serious illness and don't have insurance, so if you can afford it, you will get it. Most of us get our insurance through our employer, so it is subsidized to us in the workplace, but since health costs have risen by two or three times the general inflation rate, companies have pushed more and more of the cost onto the employees.
So, why do health care costs go up at twice the general inflation rate? The answer is that nobody with enough power has any incentive to hold down costs, and in particular, the insurance companies. Read the previous sentence again, because it is important, and if you think someone with sufficient power has an incentive to keep costs down, send me an email, explain who it is and what their incentive is, and I will publish it next week.
Health insurance companies collect premiums we pay for policies that say the insurance company will cover certain illnesses and procedures. Out of the premiums they collect, they pay out the benefits for the illnesses and procedures that the policy covers. Usually they collect more in premiums than they pay out, so they make a profit.
Now lets say you have 1000 shares of stock outstanding for your insurance company. If a drug company comes along with a drug and they say the cost is $100,000 to cure a patient, what incentive does the insurance company have to negotiate the price down to $50,000? Most health insurance companies operate on a 15% margin of profit. If your total costs were this one drug, say 100,000, then at a 15% profit you would take in $115,000 in premiums and profit $15,000, so your earnings per share would be $15 per share. If you negotiated down the cost of the drug to $50,000, you would be charging about $57,000 in premiums and paying out $50,000, you would show a profit of $7,000 and your company now would have earnings per share of $7, and you would have screwed the CEO's bonus, and screwed all the shareholders because the stock would not be as valuable earning $7 per share instead of $15 per share. My percentages are off a little, but the magnitude would be similar and I don't care to go through an arithmetic problem at 11:30 PM.
If you are not going to lose many customers if you raise the price of your product, you have pricing power, then there is no known incentive for insurance companies to negotiate the lowest price on anything with hospitals, service providers like imaging clinics or dialysis, or drug companies. If your profit is 15% of the pie, and your share count is constant, then you want the pie to be as large as possible to maximize your earnings per share and your stock price.
The above is true, until many people stop buying your product. If you don't think it is true, first I would say that by general observation that is what I see in the real world. Second I would say if you don't believe this and can produce a clear counter example and show what the incentive would be for an insurance company to negotiate large discounts from all of the service providers, then I will publish it. Also, feel free to use the comment feature.
Now let's look at a specific example of Sovaldi from Gilead in 2017:
Nov. 28, 2017 – In 2015, when executives at Gilead started negotiating with China's drug authorities on the price of its hepatitis C blockbuster Sovaldi in that country, the company was enjoying a leading position in the emerging market for antivirals that wipe out the disease in most patients. Fast forward two years and Gilead finds itself in quite a different position: Sovaldi is now approved in China, but it's facing competition there from Bristol-Myers Squibb and AbbVie, and a rival drug from Merck is on the way. What's more, pressure from payers around the world has brought Sovaldi's average price way down from its widely criticized $84,000-per-course launch price in the U.S.
No doubt all of those challenges played into Gilead's decision to price the drug at 58,980 yuan ($8,939) in China. The price, reported by a Chinese financial media service, is estimated to be one-fifth of the current cost of Sovaldi in the U.S., which has fallen precipitously since its 2013 launch.
It was expected that Gilead would deeply discount Sovaldi for the Chinese market, but the reported price is still much higher than in other emerging markets where it has licensed the drug to generics makers. In early 2015, while facing severe backlash for a U.S. list price that equated to $1,000 per pill, Gilead formed manufacturing and marketing licenses that slashed the price to $10 per pill in India and many other emerging markets.
Everyone thinks private industry is so much more efficient than government, but in this case, the Chinese government negotiated an 80% discount on Sovaldi versus what the US private insurance companies have negotiated. I cite this as proof that our insurance companies have no incentive to negotiate the lowest possible price from our service providers. In a word, it is because they are a third party payer with a profit incentive for themselves, and the result is a horribly inefficient system for the United States nation. (By the way, I found an article that the British National Institute of Health, their single payer government run healthcare system, negotiated a price for Sovaldi about 25% lower than what our insurance companies paid in the US, when the drug came out, so it's not just China.)
Healthcare makes up about 20% of our total spend as a nation. In most developed nations they spend around 10%. If you want to make US industry more competitive, make the delivery of healthcare more efficient. But the way we do it, with a third party payer with a profit incentive for themselves, I don't see any powerful entity with an incentive to bring down costs. To make it dramatically more efficient, we have to dramatically change the system, and if we keep the insurance companies, they must have an incentive to negotiate the lowest cost for services from their providers.
So, why doesn't the system change? Go up to the top and look at item #2, the lobbyist.
My dos centavos! I hope you like that, it wore me out to write it, but it's been on my mind for a while. I find it hard to tackle a topic as big as all outdoors and approach it concisely, in organized manner, with sound logic, and a good example.
What does it have to do with the stock market? If you are big in health insurance company stocks, you need to know how they operate, and what kind of risk they face if government policy changed. But, that may not be the most interesting aspect you derive from the discussion. And, I need some justification for going off the reservation regarding the intent of my blog.
Technical Analysis:
For the week the S&P 500 was up about a half of a percent, and closed at a new high.
Technically (see chart below) the market looks good. RSI at the top of the chart is high-neutral and slightly rising. Momentum shown by MACD at the bottom of the chart is flat, so the market does not show much energy as it creeps higher. The price action is positive.
Looking at the stock market, it says "hey, no problem" and creeps only upward. If you look at the economy, inflation is rising which could eventually affect corporate profits if they cannot pass along their labor and input price increases. Also, the Covid delta variant could slow economic growth. I don't expect any shutdown because we have the vaccine, but oldsters like me are not going to restaurants as much because we are trying to avoid a breakthrough infection.
What am I doing? I did a lot of option deals, selling covered calls and selling put options that might allow me to buy a stock at a lower price, and earns income of the option premium if the stock does not fall far enough, to the option strike price. I've continued to buy into XLF and XLV, with trailing stop loss percent orders under them for protection. I think those sectors may do better than the SPY since there are some hard hit sectors like airlines and hotels in the SPY.
----------------------- If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.
I would like to call your attention to a page of my blog called "CLASSICS". It is located at the top of the blog, on the banner just under the title. The banner has links to "Home", "About", and now "Classics". These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors. I will announce in the weekly blog when I add a new classic.
Your comments and questions are always appreciated, so feel free to comment using the "Leave a Comment" feature just under the title of the post.
You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window. The reader who suggested this wants to look at the chart side-by-side with the blog text. If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update.
I am a retired person and preserving capital and seeking income are important objectives for me. I also want a growth component to my portfolio, while minimizing major risk. My style of investing will not suit everyone. I like to sleep well at night.
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