Overall Market Flat – HMO’s and Finance Strong
By Robert Perrego, at 5:13 pm on February 22nd, 2010On a day when the market indexes went nowhere, HMO’s logged nice gains as the public option is said to have been left out of the Obama Administration’s latest version of their proposed health care reform bill. Humana Inc. (NYSE: HUM) climbed 5.55% (+$2.52, $47.87) while the nation’s largest HMO, UnitedHealth Group Inc. (NYSE: UNH) gained 3.56% (+$1.14, $33.08). The top two components of the Dow Jones Industrial Average were banks as Bank of America Corp. (NYSE: BAC) was up 2.07% (+$0.33, $16.21) and JPMorgan Chase & Co. (NYSE: JPM) gained 2.04% (+$0.82, $40.85).
The market traded sideways most of the day until 3:30 p.m. when selling drove the Dow Jones Industrial Average down 18.97 points (-0.18%, 10,383.38) and the S&P 500 lost 1.16 points (-0.10%, 1,108.01). The Nasdaq 100 was weakest dropping 5.69 points (-0.31%, 1,817.63).
Looking at the charts of the HMO’s and I see ‘buy, buy, buy’. Humana had the biggest gain today but also the best chart when you balance risk and return. Humana traded off to its 50 day exponential moving average over the last month, held it as support, and rose today on heavy volume. The stochastic oscillator has bottomed out and is heading up and the short term down trendline was broken to the upside. Looks like the stock could easily reach its previous high close of $51.94 soon, which would give you an 8.5% return. The charts are similar for all the major HMO’s (AET, WLP, CI, UNH) but Humana’s chart offers the least amount of upside resistance, safety of support and percentage return combination.
Oil stocks were weak today which was unusual as the dollar was down slightly, Nymex crude broke $80 a barrel for the first time in a month and Schlumberger Ltd. (NYSE: SLB) officially announced their takeover of Smith International Inc. (NYSE: SII). Last Friday rumors of this deal flew around Wall Street trading desks driving the stock of Smith up 13% (+$3.33, $41.03). Today’s official announcement of the $11 billion deal added another 8.8% for a two day gain of 23%. New York spot gold dropped $5.00 to $1,112.10 an ounce (-0.45%, 4:25 p.m.)
Two good reasons to stay away from the municipal bond market are the very low current interest rate environment (with bonds, when rates are low prices are high) and news out from the National Governors Association that for 2011 states are seeing total cumulative budget deficits of $53.6 billion, rising to $61.6 billion in 2012. If you find a bond with a yield and credit you like and buy with the intention to hold until maturity, municipals might still be for you. The problem here is that with these deficits and tax receipts weak as a result of the high unemployment rate, any bond you buy may get downgraded and drop in value. States cannot print their own money and many are finding it politically difficult to cut spending, so without raising taxes the budget deficits will weaken the credit behind the bonds. I do not think buying a municipal bond and hoping they raise my taxes to make my bond not drop in value is a strategy for me as one giveth and one taketh away, leaving me with nothing-eth.
Speaking of being left with nothing-eth, one of the new taxes proposed in the resurrection of health care reform is a Medicare tax on capital gains. When I was studying economics in graduate school, commonly accepted good practice was to tax the area of the economy that the tax revenues were going to be used for. This is thought to be a more efficient way of instituting tax policy as when you ignore this proper practice you eventually end up with a million taxes coming from this area and going to that area, or a massive spider web of tax and effect confusion. When you levy a tax somewhere it distorts the way that taxed item functions, so the idea is if you have to tax, use the tax to shape what you are taxing in a more desirable manner. You do not just run around like it’s an Easter egg hunt going “Hey look, there’s money over here – tax it!”
The current Administration has already announced their intention to raise the capital gains tax so this would be an additional tax on top of the new tax hike. Why do I get the feeling there is a guy in Washington D.C. with a dartboard, a blindfold on and a handful of darts that say ‘new taxes’ on them? Also, didn’t Obama promise that if you made less than $200,000 a year your taxes would not go up ‘one penny?’ If you own any stocks outside of an IRA or 401(k) plan and do not make that kind of money, your taxes are going up.
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