Published by clickbroker.blogspot.com.
Cracks in Canadian Healthcare Poster Child’s Story
Bloomberg’s “Canadian Health Care, Even With Queues, Bests U.S.” reports that “allegations [against the Canadian health insurance system] are wrong by almost every measure, according to research by the Organization for Economic Cooperation and Development and other independent studies published during the past five years.” Canadians live longer and have equal survival rates to the US in major diseases like heart attacks and cancer, at an insured cost per patient that is 47% less.
Preventable deaths and infant mortality are both lower in Canada. Both countries ration care: Canada by wait times and the US by cost. A 2008 survey by the Commonwealth Fund showed 54% of chronically ill Americans delaying care due to cost, including both doctor visits and drugs. While Canadians typically have to wait for non-critical medical procedures and operations, they consume only one fourth as many high cost medical images as the US. The US provides financial incentives to overuse medical technology.
Both political sides can tailor statistics to make their argument, and I don’t know how the numbers would come out if the US excluded their noninsured and under insured. Canada’s system can best be described as Medicare for all regulated and administrated at provincial or state level. Doctors are mostly in private practice – hardly socialistic. Canadians are far more satisfied with their system than Americans. If Canadians were dying in the streets I’m sure Glenn Beck and the rest of the FOX News team would let me know.
Now for the fading poster child of the American right: 45 year old Canadian Shona Holmes was told she would have to wait 99 days to have a slow growing benign cystic brain tumor removed in her local hospital. If she was willing to travel 10 miles the wait would have been reduced to 56 days and only a 36 day wait for a 460 mile journey. Instead she chose a 2237 mile journey and a $97K bill to go to the Mayo Clinic in Scottsdale, Arizona. Sounds fishy to me.
Now Shona wants to be reimbursed by the provincial government because traveling within Canada was inconvenient. How many Americans can go outside their private insurer’s network and expect full reimbursement? For a slow growing tumor I doubt that time was of the essence, especially if treatment within Canada would be available in about a month. Shona wanted to go “out of network” and she deserves to pay the full cost. While we should not feel any sympathy for her, we should not exploit her either.
Shona, understand that you are being used by the American right and they will discard you when our healthcare fight is over. But Shona, you should feel shame for speaking ill of your country and exaggerating the urgency of your condition just to gain your15 minutes of fame in a 60 second political commercial.
My message to the right is that if you are against the constraints of private or government provider networks than you should be trumpeting traditional Medicare over Medicare Advantage. The only advantage to Medicare Advantage is a severe financial spanking for going out of network. Total healthcare freedom is Medicare for all.
Can anyone tell me how long Shona had to wait for her operation at Mayo Clinic and whether she has been receiving satisfactory follow up care in Canada?
Beyond Cheerios
General Mills (GIS) got into a little trouble with the FDA for overstating the benefits of Cheerios in fighting high cholesterol. But now the French company Danone is ready to enter the world of serious medical foods. The Financial Times’ “Danone hails HIV trial breakthrough” reports the company claims it achieved a breakthrough medical nutrition trial targeted at the immune system of HIV patients. Last year Danone started a similar trial aimed at the nutritional needs of Alzheimer patients.
Given that we all have small traces of cancer kept in check by our immune system most of the time, I would like to see non-pharmaceutical methods of immune system enhancement in clinical cancer trials. Could cancers still evade a super-charged immune system? A double-blind chemo vs. nutrition study would be fascinating.
The synergies between food and medicine will raise the stature of serious research based food companies and force pharma into the business. True value adding food companies should see increasing margins, leaving the remaining package foods companies to experience continued margin decline.
Yields and Banking
The Wall Street Journal’s “Don't Trip in Your Search for Higher Bond Yields” reports that Vanguard’s customers are stretching both credit risk and interest rate risk (duration) to achieve yield in a zero-rate Fed environment. At the same time the Financial Times’ “Citadel and CME scrap platform plan” reports that investment banks have lost interest in an exchange for standardized CDS contracts being pushed by regulators. Under such an arrangement, the exchange would be the counterparty to all transactions and the participating investment banks would back the exchange.
ICE has begun clearing some CDS transactions for JP Morgan (JPM) and Goldman Sachs (GS), but the investment banks are facing the same yield constraints as consumers so protection of the opaque is critical to maintaining profits.
FHA Watching Mortgage Originators
The Wall Street Journal’s “FHA Will Tighten Credit Standards” reports that mortgage originators will have to increase their net worth from a minimum of $250K to $1M. FHA wants to make sure it will be compensated when it purchases loans that are later proven to have not met their quality standards. In addition new rules for income verification and appraisals have been implanted.
Abbott’s Gold Star belongs to Isis
The Wall Street Journal’s “The Wall Street Journal 2009 Technology Innovation Awards” selected Abbott’s (ABT) Ibis Biosciences’ T5000 sensor as its gold winner. Abbott completed the purchase of the Ibis Biosciences unit from Isis Pharmaceuticals (ISIS) on January 6, 2009 and Isis will continue to receive royalties of up to 5% on both equipment and supply sales.
The Ibis Biosensor identifies pathogens by molecular weight and mass spectrometry without having to know in advance what you’re looking for. Its development was primarily funded by the government using Isis technology. The Naval Health Research Center used the system to identify the H1N1 swine flu virus. 20 systems are already deployed including the Centers for Disease Control.
The real future market lies in hospital born viruses and bioterrorism. Since hospitals are not reimbursed by insurers for problems of their own making, early identification and remediation is critical to hospital profitability.
Discloser: Author is long ISIS.
Business Trends: Canadian Healthcare Exaggerations, Medical Foods, Opaque Banking, FHA and WSJ Gold Stars
Gold, the Money Supply and Inflation
Published by clickbroker.blogspot.com.
Liaquat Ahamed’s book “Lords of Finance: The Bankers Who Broke The World” unraveled every misconception I had over the gold standard and inflation. The book traces the central banks of the United States, the United Kingdom, France and Germany from before World War I until the close of World War II. So far I have read the book through the year 1928 and would like to share some thoughts.
The story is told primarily through the eyes of Benjamin Strong (Federal Reserve Bank of NY), Montagu Norman (Bank of England), Emile Moreau (Banque de France) and Hjalmar Schacht (Reichsbank). During the first half of the 20th century European countries had been on and off the gold standard several times and have had severe bouts of both inflation and deflation. Gold stockpiles have been maintained by central banks, government treasuries and large private banks. Currencies have been pegged to gold, other currencies, and even land.
Prior to World War I, the supply of gold increased with the economies of the major European nations so gold basically kept the money supply in line with GDP and inflation in check. The US was short on gold and borrowed heavily from Europe. By the conclusion of World War I, the tables have turned. The US had a disproportionately high amount of gold to its GDP and the UK, France and Germany were severely deficient gold. The UK and France not only paid for war supplies in gold, but also incurred substantial debt to the US. And Germany was stuck with reparations beyond its economic capacity.
The UK chose to deflate its economy to match its reduced gold supply, and incurred the suffering of high unemployment. The British wanted to reassert the pound as the world reserve currency. France chose moderate inflation and economic growth while rebuilding its gold supply. Germany chose hyper inflation with no backing of its currency at all.
The US lent gold to all three nations once Germany issued a new currency backed by land. All three nations had stable currencies by the 1920’s backed by owned and borrowed gold. But reparations still hindered Germany’s economic growth. And the UK and France fought for dominance of European finance.
When the US increased its money supply in relation to its increased gold supply, moderate inflation ensued. So when gold flowed between countries disproportionately to their GDPs, currencies did not function as a constant store of purchasing power. In reality, the more gold the less purchasing power of the currency.
Early central bank theory was that lending based on commodities or other hard assets was safer. But this proved as false in the early 20th century as in our recent housing bubble. Assets in focus receive more financing which inflated their prices, giving a false sense of collateral.
Modern currencies are primarily based on GDP, with some tier 2 economies pegging their currencies to the US dollar. Unfortunately, modern central bankers don’t want to match money supply growth to a moving average GDP. They want money supply growth to lead economic growth creating an inflationary bias. This has been a slight or heavy bias depending on who’s in charge. (Paul Volcker vs. Alan Greenspan and Ben Bernanke.)
From the investors perspective the question is how does one store purchasing power? Gold even at its multi-decade high has not matched inflation. And gold has faced many bouts of competition from commercial and residential real estate, oil and food commodities among other hard assets. All hard assets incur storage expense as well as lost income opportunity cost for the money invested. Even the diehards have to admit it would be difficult to trade your gold for bread at the supermarket.
My conclusion is that there is no hard asset that can store purchasing power. Not gold nor anything else. If the economy tanks gold is useless. If you believe that over time interest rates follow inflation, then the carrying cost of gold in lost opportunity cost is the greatest when you would desire gold the most.
Trigger happy modern central bankers keep fluctuating interest rates and Wall Street is constantly running a beauty contest between sectors. Long term investors should lock in quality high interest rates during bouts of high inflation, even if that would incur a temporary negative spread with purchasing power. Inflation ebbs and flows.
Long term investors should also focus on the Select Sector SPDR ETFs to buy the most out of favor sectors one at a time. This would avoid some of the complete wipeouts seen in the financial sector recently and materials sector in previous decades. Think WaMu and Bethlehem Steel. When Wall Street rotates your sectors to the front of the dance hall, you are a winner. In the meantime you’re collecting dividends.
The Select Sector SPDRs are: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financial (XLF), Health Care (XLV), Industrial (XLI), Materials (XLB), Technology (XLK) and Utilities (XLU).
The sectors provide an interesting opportunity for a reformed bottom fisher in individual stocks. You get to bottom fish sectors while playing the momentum within each sector. This is because the S&P 500 sectors market weight the stocks within each ETF.
My concession to those that run real estate as a positive cash flow business is that you might be storing purchasing power in your assets, but that is not the primary reason for your success.
No disclosures.
Wall Street Securitizations Reincarnated for Life Settlements
Published by clickbroker.blogspot.com.
The New York Times’ “Wall Street Pursues Profit in Bundles of Life Insurance” reports that Credit Suisse (CS) and Goldman Sachs (GS) are gearing up for wagers that would even make Sarah Palin’s “Death Panels” cringe. The new game in town is securitizing life settlements on a scale as massive as subprime mortgages to reap the same level of fat fees.
The $26T of life insurance policies is certainly temping compared to a peak 2005 $941B of Wall Street mortgage securitizations. Mortgage securitizations dropped to $169B year to date and Morgan Stanley (MS) estimates the repackaging of old CDO (read credit challenged) tranches should exceed $30B. The trick once again is to fool or bribe the ratings agencies into granting triple-A status to the life settlement trusts. Moody’s (MCO) has not seen a portfolio that qualifies.
The life insurers are concerned that their modeling of policies lapsing before death might no longer be valid if life settlements gain momentum. If a policy holder has the guaranteed right to renew but either no longer needs the benefit or can no longer afford the premium, no payout is required. However if most policies are active until death, higher premiums across the board would be required. Likewise the tax treatment of life insurance might change if it’s viewed as a negotiable (tradable) asset.
The insurers might also start taking a hard line and challenge payouts on policies that appear to be fraudulent. Regulations vary by state, but the policyholder generally should have an insurable interest. Policy values greater than the estate are questionable. Also commission rebates to pay applicants for the trouble of going through a medical exam for a policy that will be sold directly back to the insurance broker has questionable legality.
Following the subprime methodology, Credit Suisse has purchased an originator and is building a high throughput assembly line. Next to come should be independent brokers and warehouse financing. The complexity of state by state insurance regulation and the diversity of life insurance products could lead to much more difficult underwriting than even the most complex mortgages. Whether it is the time needed to conscientiously underwrite settlements slowing down the assembly line, or numerous mistakes and frauds to speed it up, either way trouble is brewing.
But the real difficulty lies in an insurance industry unwilling to cooperate. There is a conflict of interest between insurers and the other parties. Unlike the mortgage model where everyone benefited from the fraud except investors; the insurers see only more payouts. Additionally, securitization will negatively impact the affordability of their products and subsequently reduce their potential customer pool.
Investors in these securitizations will also face their share of risks. With a limited supply of viatical settlement eligible (terminally ill) policyholders, the machine will focus on life settlement agreements for the aging and health deteriorating policyholders. Risk management such as a diversity of diseases in the portfolio is being studied.
While the trusts are waiting for benefit payouts, they must continue to pay the policyholders premiums in addition to the initial settlements. Depending on the securitizations’ initial capitalization and the timing of premiums and benefits, investor cash calls might be required. Investors might also be deceived by fraudulent underwriting such as overpaying for settlements and overstate disease severity so that the originators can complete the sales and earn commissions. Sounds just like subprime.
A black swan such as curing cancer, diabetes and heart disease in one magic pill might cause all models to blowup. Keep in mind the Holy Grail for all pharmaceuticals are to harness the immune system, so don’t say it is not possible. And Sarah Palin’s worst nightmare Obamacare might even cause life expectancy to increase dramatically. Goldman Sachs is creating a tradable index to hedge this risk or simply bet on life expectancy.
The startup of this machine should be a clear warning to Federal Reserve Chairman Bernanke that interest rates are way too low. The Times says that pension funds and other large institutional investors chomping at the bit to get in. Is history repeating itself?
You’ll know when there is trouble when retail investors are invited in and institutions try to bailout. After all is that not the purpose of the newlyweds Morgan Stanley Smith Barney?
By the way, can anyone tell me how the securitization trustee knows when the policyholder has transitioned? It not like a spouse, child, friend, business associate or other relative beneficiaries were keeping tabs on the deceased or even attending the death bed. Obviously non-beneficiaries don’t care whether the trust gets its payout.
Disclosure: Author is long MCO.
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