Featuring Lutts’ Logic:
Thoughts on Obama’s Healthcare Summit
Thoughts on AIG
Three Leaders of the Next Bull Market
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Our healthcare system is broken. Insurance costs, for both consumers and businesses, have risen inexorably. Doctors are frustrated at being paid less than they are worth. Millions of Americans are unable to afford basic insurance. And Americans are in terrible health, above all because of obesity and all its side effects.
Yet previous attempts to fix the system have failed.
So President Barack Obama, who is intent on using every bit of his political capital while he is still popular, is hunting for a less expensive system that will keep more of us healthy.
I say, “Good luck,” sincerely but skeptically, because while I truly desire a better system I believe the institutionalized powers will make achieving change very difficult. In fact, I think what we need for this challenge is not a president but a dictator.
If I were dictator, for example, I’d address health care at its root by targeting nutrition first, making it a mandatory subject in school. I’d teach kids the benefits of a healthy diet heavy in vegetables, fruits, nuts and whole grains. Furthermore, I’d teach about the real costs, both financial and health-wise, of a diet rich in refined sugars, saturated fats, processed grains and red meat. The sugar industry would protest loudly and the beef lobby would have a cow, but I wouldn’t stop there. After donning my bulletproof vest and checking on my Secret Service protection, I’d then tax junk food, incurring the wrath of the shareholders of Coke, Pepsi, Kraft, Nestle and more.
After all, we tax alcohol and cigarettes because they’re bad for your health; why not tax Doritos and Mountain Dew as well?
I wouldn’t actually outlaw any foods; I do believe in the right to choose. And if your Super Bowl tradition involves a pile of nachos and a case of beer, I say enjoy it. But I also believe in taking responsibility and in paying a price for your actions, so my tax, which would be funneled to the health care system just as cigarette taxes are, would work to do that.
After that I’d target the Food and Drug Administration, the American Medical Association, the drug industry, the medical devices industry and the insurance industry.
For starters, I think the FDA, with a budget of roughly $2 billion, is a bloated federal bureaucracy that makes drug development more expensive and slower than it should be. I’d slash their budget and trust the market to do more of their work.
I’m sympathetic that the doctors in the AMA have suffered at the hand of the insurance companies, who control the purse strings of the industry these days. But I think the AMA should open its doors to practitioners of alternative medicine like chiropractors, osteopaths, acupuncturists and more. And I think they should get behind the move to practice simple medicine in drugstores and other retail outlets that are far more efficient than hospitals.
As to the drug industry, which has enjoyed many wonderful decades as they persuaded Americans to buy pills to address their various complaints when in many cases a drink of water and a long walk would have served as well, they’d suffer once my junk food taxes and nutrition education kicked in.
Ditto for the makers of medical devices. The ride was fun while the money flowed, but a concerted focus on maintaining health will shrink demand for their products.
Finally, we get to the insurance industry, which has thoroughly imposed itself between the consumer and the doctor. If these insurers had actually improved Americans’ health in the process, I’d applaud them for the achievement. But they haven’t. Decades ago, they came up with the idea of the HMO (Health Maintenance Organization), the first two words of which suggested their focus, and their results, might change. But they didn’t.
The insurance industry, in my opinion, provides little value while adding complexity. It’s made itself the gatekeeper to the medical establishment, collecting a fee for access, and those fees have made the insurance industry very rich ... but they haven’t made us healthier. The best way to reduce the insurance industry’s power from here is to not get sick.
And that’s exactly what would happen under my dictatorship. More attention would be paid to health, not disease, and the institutions that have prospered in recent decades by addressing disease would shrink.
And I’m not alone in this prescription. Exactly two months ago, the Wall Street Journal printed an opinion piece coauthored by Deepak Chopra, Dean Ornish, Rustum Roy and Andrew Weil. In it, the authors put forth the thesis that the best cures for our afflictions will come from changes in diet and lifestyle, writing, “Last year, $2.1 trillion was spent in the U.S. on medical care, or 16.5% of the gross national product. Of these trillions, 95 cents of every dollar was spent to treat disease after it had already occurred. At least 75% of these costs were spent on treating chronic diseases, such as heart disease and diabetes, that are preventable or even reversible.”
Furthermore, the authors noted that Americans spent more than $100 billion for 1.3 million coronary angioplasty procedures (at an average cost of $48,399) and 448,000 coronary bypass operations (at an average cost of $99,743) in 2006. Yet there’s growing evidence that coronary bypass surgery prolongs life in only 3% of the patients who receive it, while angioplasties and stents fail to prolong life or even prevent heart attacks in the 95% of patients who are stable when they receive them.
That’s a lot of wasted money (perhaps $103 billion!) on heart procedures.
And what bothers me is that Obama and the medical establishment at his summits seem not to recognize this.
They appear to be focused on getting more Americans into the insurance-centric healthcare system than on actually making Americans healthy. In effect, they’re just re-jiggering the flow of money.
What we’re likely to end up with, in my opinion, is a two-tier system that provides a basic level of rationed care for everyone, with the option of paying more for either higher levels of insurance or actual services. In effect, this would be a partial single-payer system. The insurance companies, of course, complain that moving to a single-payer system would unfairly compete with them, but I’m guessing that we’ll end up with a system in which the insurance companies still have plenty of power and that other parts of the medical establishment see minimal changes.
And that’s a shame. Obama knows about healthy living habits, and he’s chosen to upend the apple cart in many other places where the benefits are questionable, but it appears to me that he’s going to leave most of our expensive medical establishment intact.
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Last week, when the big East Coast storm dumped on us, travel was so difficult that some employees chose to stay home, leaving me to handle a few more phone calls than usual. One was from a reader named Willie, who said he needed some help deciding which of our investment advisory newsletters to subscribe to. He said, “My wife and I are both retired, so I have the time to do it. And the guys who were managing my account before did a horrible job. I just need to know how to get started.”
Here’s what I told him.
First, you need a broker. Charles Schwab and Fidelity are tops among the discount brokers, as you can always get a human to talk to. But if you really want to pinch pennies, I suggest you look at Scottrade, TD Ameritrade and optionsXpress.
Then I suggest you choose either Cabot Stock of the Month Report or Cabot Market Letter. Cabot Stock of the Month Report’s main advantage is that it is very affordable, only $49 for the first year. And it’s very focused, recommending only one stock per month. Cabot Market Letter, on the other hand, costs $99 for the first year, but you get a lot more. Issues arrive every two weeks, and include expert market timing, education (we teach you what actually works in the market, not what the pundits think works) and portfolio management, as well as stock selection, with maybe 10 stocks discussed in an average issue. Cabot Market Letter is our flagship publication, and the very best choice for new investors who want a trusted guide to the stock market.
Willie processed all that and said he’d review the information on our Web site ... and then he asked another question.
“What do you think about AIG?”
I replied, “You don’t own it, right?”
He answered, “Right, but it’s down to 49.”
So I quickly pulled up a chart, saw the stock trading at 49 CENTS, and launched into an explanation that was probably longer than Willie expected. But the fallacy of buying has-been stocks when they’re dirt-cheap is one of my favorite topics, so here’s my opinion on AIG (and similar stocks) for you as well.
First, every investor and everyone in business in America knows AIG (American International Group). A few years ago, it was one of the market’s favorite stocks, owned by more than a thousand mutual funds. But in the past year, the news has been all bad, and the professional managers of those funds have been selling their stock. Trouble is it’s a lot of stock, some 600 million shares, and every time they’ve sold some (in general) they’ve had to accept a price that’s a little lower.
In the early months of the downturn, some of these professionals were taking profits. But now, with the stock lower than it’s been in thirty years, they’ve all been taking losses.
Furthermore, every time they sold on the way down, there was a buyer, who was buying “low” and fully expecting that the stock would reverse course and head higher, making his investment look very smart. But every one of those buyers has been proved wrong and now has a loss. So many of them have sold ... to new buyers who have the same ideas about buying low ... trying to pick the bottom.
The main message here is this: Trends tend to persist longer and go further than most investors expect. In the case of downtrends, the more loved and more heavily owned a stock, the longer it takes for investors to unwind those positions and the further the stock will fall.
Or, as the old maxim goes, the bigger they are, the harder they fall.
For the record, AIG was the 18th largest company in the world last year. But on March 2, 2009, the company reported a fourth quarter loss of $61.7 billion, the largest quarterly loss in corporate history. Now, you can argue that the stock is undervalued now, and you may be right. It may well have been undervalued back in February, too, when it was still trading for more than a dollar. Just because a stock is a good value doesn’t mean it can’t go lower.
Another message to take from the decline of AIG is this: When you’re venturing to invest in a company that’s very well known, you know less than the professional investors in that stock. So unless all trends are in your favor, you probably shouldn’t do it.
As to the future of AIG, I hope management can stabilize its business and return to being a creator of jobs and wealth. But hope is not an investment strategy. I choose not to invest in AIG because the trend is down and because I know I have no informational advantage. Furthermore, there is too much about the company that is unknown (such as the real value of its debt and derivatives), and not in the company’s control. The same goes for General Motors, Citigroup, Bank of America and every other over-owned stock that’s on the skids.
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So where should you invest?
Ideally, in the uptrending stocks of companies that are not yet well-loved. Here are two we’ve mentioned before and one new one.
Netflix (NFLX) delivers DVDs through the mail, and boasts a growing, loyal customer base. People are watching more movies, both at home and in theaters, so business is growing. And Netflix is ahead of the curve in allowing subscribers to watch unlimited movies online. The stock hit a new high today.
Starent Networks (STAR) is a technology infrastructure company whose hardware/software solutions enable mobile operators to deliver multimedia services to their subscribers. They’re used by over 85 mobile operators in more than 35 countries, though Verizon accounts for half their revenue. In the fourth quarter, revenues grew 40%. The stock hit new highs last Thursday.
China Distance Education (DL) is a tiny Chinese company that offers online education programs. In the fourth quarter, revenues grew 171%. Chinese stocks in recent weeks have been acting better than U.S. stocks, and DL is one of the leaders, loved by almost no one in the U.S. Just note that it’s low-priced and volatile. It topped 5.50 today but would be more attractive on a pullback toward its 25-day moving average, now around 4.80.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
Editor’s Note: China Distance Education has been recommended by Cabot China & Emerging Markets Report, your best source of advice when it comes to investing in Chinese stocks. In fact, Cabot China & Emerging Markets Report was the top performer of all investment advisory newsletters in both 2006 and 2007, bringing subscribers who followed editor Paul Goodwin’s advice gains of 78.6% and 74.1%. For most of the past year, Paul’s subscribers have been heavy in cash, preserving their profits. But Chinese stocks have been heating up, and we’re very optimistic about their prospects in 2009. If you’d like to own the top-performing Chinese stocks as they rocket ahead in the next bull market, I strong recommend that you join them. To get started with a no-risk trial subscription, simply click here.
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