May 08, 2014

May 08, 2014

Are Airlines Poised For Continued Gains?

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April’s Final Confidence Readout Shows…

U.S. consumer confidence rose throughout April.  The final print of the Thomson Reuters/University of Michigan consumer sentiment survey increased to 84.1, up from March’s final reading of 80.0. 

This trend marks a continuation of the choppy upward movement of consumer sentiment that has marked the recovery so far:

Calculated Risk Blog.jpg
Source: Calculated Risk Blog

The index is constructed from at least 500 telephone interviews of consumers in the continental U.S. each month, seeking to gauge their perspectives on their own financial situation and their short- and long-term views of the health of the U.S. economy.

April’s last readout dovetails with our broad view of the U.S. economy.  We have seen a good earnings season, and we continue to anticipate strong growth in U.S. GDP and strong growth in corporate profits this year, with low inflation, historically low interest rates, and an accommodative monetary policy from the Federal Reserve.

Where is the top destination for investments?

Medicare Fraud Costs $50 Billion Per Year!

The deputy inspector general of the Department of Health and Human Services (HHS) told a House panel last week that fraud cost Medicare $50 billion last year.  That estimate might be a low-ball number; a 2012 study in the Journal of the American Medical Association found that cost likely to be between $30 and $100 billion annually, from a program which costs $604 billion annually.

That would indicate that a range of between 5 percent and 17 percent of Medicare’s annual budget is being diverted into fraudulent billings.

Recently, Medicare made $77 billion worth of payment records public, hoping that scrutiny leveled by reporters and private analysts would help lay bare some of the problems.  Since scores of questionable payees and billings were revealed, the question is simply why Medicare — with four “recovery audit contractors” and seven regional “program integrity coordinators” — couldn’t have found these problems first.

Data Released by HHS Show Regional Disparities in Medicare Billings Per Patient
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Medicare Payments to Individual Providers Per Enrollee
Source:  Bloomberg

The total cost of Medicare’s anti-fraud efforts last year was about $1.5 billion, and the agency did succeed in recouping some of its losses — about $4.3 billion worth, according to HHS.  However, given the estimated scale of the fraud that has gone unrecovered, that amount seems like small potatoes.

The Affordable Care Act has precipitated a rescreening of Medicare’s 1.5 million providers.  17,000 have been kicked off for various violations.  But as the results of the recent document release demonstrate, many remain.

The problem is simply the size of the system.  With 49 million Americans under its coverage, and more to come as the Affordable Care Act progresses, Medicare provides an ample ecosystem for fraud.

We believe that any public system presents greater opportunities for fraud, simply because there is not the same institutional zeal for fraud prevention that exists in a private company. Therefore, as the public delivery of U.S. healthcare becomes more and more the predominant form of delivery, a greater proportion of resources will likely be diverted due to fraud.  This is not just a health care phenomenon; many readers will recall the corresponding revelations of waste and excess in defense spending that became a public cause célèbre in the 1980s.  Remember the infamous $700 toilet seat for the Lockheed P-3 Orion?

Ultimately, we view this kind of waste and fraud as one more headwind for U.S. healthcare.  If a greater proportion of total spending is public, and a greater proportion of that spending is lost to fraud, it will mean that much less spending available to generate profits for legitimate healthcare businesses providing needed drugs, devices, diagnostics, and services.

However, these headwinds simply cause us to be more cautious and discerning in our exposure to healthcare.  We believe that longer-term trouble for the U.S. healthcare system is likely to be some distance in the future — and in the meantime we continue to see opportunity, especially since the recent decline in some biotechnology and healthcare stocks has caused a few excellent performers to approach inexpensive and attractive price levels.

What investments do we favor and have the greatest opportunity to growth amidst this environment?

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I Can Tell You’re Really Upset About This, Dave

Mobile devices may read your mind.  New sensors and more powerful neuro-modelled chip architectures may drive new generations of mobile devices.  Although the market may be saturated, we see the likelihood that qualitatively more powerful devices will be rolled out, creating huge disruptive opportunities — which may rest more in the old-line tech powerhouses than in the recent high-flying darlings of social, mobile, and cloud.

Guild Basic Needs IndexTM


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Market Summary

In this week’s market summary we discuss:

  • Update To Recommendation Tracker and commentary
  • What Markets May Show Signs of Improvements
  • The U.S., Europe, and Metals

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In Last Week’s Global Market Commentary, We Also Discussed:

  • Brazil’s Water Woes: Commodities and Infrastructure
  • Food Prices and El Niño –Will El Niño Develop This Year?
  • U.S. Manufacturing Muscle
  • U.S. Moves Towards a European Stance on GMOs
  • And Much More…