A Dash of Insight

Three Great Interviews

In the flood of news, it is easy to miss the very best stories.  In my regular Weighing the Week Ahead series I include plenty of links to great sources.  Sometimes there are other items that deserve special attention.  This weekend I recommend that you settle back with some popcorn and enjoy these three videos.

In each case you will get some very solid stock ideas from a great source.  You will also learn a common theme, understood only by a few market experts.  Let us take the stories one by one, and summarize the theme in the conclusion.

John Calamos

John runs the (very) largest investment firm in Naperville, our town.  His office -- now a building -- is a few blocks down the street from ours, and his assets a few zeroes higher.  I take a special interest in following his commentary.  I sometimes think that viewers might be giving him short shrift when compared to the slick guys from New York.  Someone told me that we midwesterners have an accent!  Really?  It sounds normal to me, and you should not let it deceive you.  John's success comes from a great team and good stock selection.

He has great ideas for stocks that will benefit from rising rates, including some technology ideas!  Watch the interview for more.

 

Ron Baron

CNBC's Squawk Box featured an extended interview with one of the leading fund managers and stock pickers, Ron Baron.

This interview is loaded with help for the individual investor, including great ideas about which companies have enduring  business models.  Here are some key bullet points:

• Very few succeed by trading the news!

• The average person who invests in mutual funds makes 3% compounded.  The average mutual fund makes 7% compounded.  People think they are George Soros.  So wrong.

• The stock market has been through a difficult 14-year period of time.  It is up 1-2% a year since 1999 while earnings have doubled.  It started at very over-valued levels. 

• Stocks are currently trading at median P/E ratios when interest rates have never been lower.

• Responding to a challenge from Doug Kass via email -- Given the secular headwinds to economic growth, why should stock  multiples hold up?

6.8% a year since 1960 is the growth rate of the economy.  For the last 14 years it has been 4.4% and it is accelerating.  People talk about 2% growth but you have to consider inflation.  When you had stocks at 15 times earnings for 100 years you did not have interest rates at zero.  Look at the comparison.  Businesses are growing and growing faster.  Money is cheap.  Businesses are attractively valued.  When the economy grew at 6.8% stocks were growing by 6.1% plus you have to add dividends which makes it about 8%.  That's for 120 years.  Will it keep up at that rate?  Maybe it will be a little less.  We are using 7%.  That means a double in 10 years -- 30K in ten years and 60K in 20 years.

As one who called for Dow 20K at the point of maximum skepticism, I understand and agree!  Once again, you will learn more by watching the entire interview.

 

 

Larry Robbins

Robbins is described by CNBC as a "hedge fund titan" who rarely does interviews.  Since I regularly hear misleading information from managers with high AUM's, I prefer to decide for myself when it comes to credentials.

Robbins demonstrated a special insight in the health and health management fields.  This is a great sector to study with plenty of cross-currents.  We have the demographic effects from an aging population and also the influence of ObamaCare.  We still do not know how the new policies will be implemented or which states will participate.

His interview includes several stock ideas in the health care field.

 

The Common Theme

All three sources demonstrated a very sophisticated understanding of the relationship between stocks and interest rates.  They all note that stock market multiples are actually strongest when interest rates are in the range of four percent.

• Baron emphasizes the importance of stocks in fighting inflation.
• Robbins notes the multiple, stating "When interest rates are between 3 and 7 percent, the long-term history of the market is to trade between 17 and 18 times earnings.  With our portfolio trading at 10 1/2, we'll take our chances."
• Calamos notes, "...if you go back even 50,60 years, when the 10-year bondwas 4% to 6%, p/es were 20,which means it's a much moregrowth environment.so i think we have to, you know,re-educate investors that, youknow, going back to normal ratesis not a bad thing."

Most traders and pundits, as usual, have an overly simplistic rule linking interest rates and stocks.  Higher rates are worse.  The loudest voices telling stock investors to worry about ten-year yields moving higher from two percent said the opposite when rates were moving down to two percent.  On the way down, it was a sign of economic weakness.  And now, on the way up.....?

For those who prefer data to speculation, please check out my "Scared Witless" (TM OldProf euphemism) post.  I describe a "final destination" where a four percent ten-year yield is something of a sweet spot for stocks.

At the start of the week we saw the knee-jerk reaction to higher interest rates.  Eventually, the normal relationships will return.  It provides an opportunity for those in the know.

Investment Themes: The first step in finding a great stock.

Some stock pickers start with a screen.  I start with a concept:  Look for the hated!

I search for investment themes that are decidely contrarian.  That means that few like the concept, the sector or the stock.  The themes must meet several important critera:

• Negative sentiment and/or polling
• Analyst skepticism
• Modest valuations

and most importantly -- hatred.

I am going to list some themes and you probably will not like them.  That is the point.

My mission here is to provide some specific ideas as well as suggestions about how the individual investor can search for and find profitable investments.

Contrarian Concepts

One problem is determining what most people believe.  That is the only way to find the contrarian (and possibly undervalued) side of the trade.  I want to encourage a free-wheeling discussion that will be helpful to all, but let me suggest two rules:

1. Nothing political.  I understand that you may think that Europe is in a socialist decline or be offended by Romney, but that is not the point.  This is about investments, not political philosophy.  We can predict political outcomes, but the purpose is to find investments.
2. The time frame must be reasonable.  I personally screen using three to six months.

Theme Ideas

Here are a number of themes that  I nominate for consideration.

The Economy

This is an easy choice.  Even the most optimistic economic forecasters only look for growth of 2.5% or so.  There are many recession callers including many/most pundits (especially non-economists) and the ECRI.  The recession forecasters have influenced earnings forecasts, now showing little growth in 2012, and stock prices.

Time frame:  uncertain.  The recessionistas started making their forecasts last Spring at the time of the Japanese earthquake.  Q3 economic growth did not support the theory.  Perhaps another strong quarter will move attitudes.

Stocks:  Cyclicals and Tech.  Caterpillar (CAT) and Oracle (ORCL) are contenders, but the nominations are open.

Europe Crisis

This is open to some debate.  The credit market has not shown any recognition of improved prospects.  Some think that stocks have recently been "euphoric" but it could also be a reaction to the good earnings season.

Time frame:  week to week, but some specific tests within two months.  I think the verdict (for US investors) will be in within eight months, although the social issues may linger.

Investments:  Greek bonds, Italian bonds, credit default swaps, European banks, the dollar/euro spread, US banks, US stock market -- listed in order of declining risk and reward.  My own play is lightly long US banks via JP Morgan (JPM).  Those taking either side should declare a time frame and also what would make them change opinions.

Value Trap Stocks

There are many stocks that nearly everyone agrees are cheap on a P/E basis.  The stocks remain "cheap" because of a general consensus that they will not appreciate no matter what happens.  The popular descriptive but unhelpful term is a "value trap."  It is supposedly a silly mistake to be invested in these names.

Time frame:  this quarter or next.  Many names in this category have continued to improve in value.  At some point this will be recognized.  Catalysts might be technical breakouts above key moving averages, changes in leadership, or an exceptional earnings quarter.

Investments:  Cisco (CSCO) and Microsoft (MSFT) come to mind.  Nominations welcome!

Obama Re-election

This seems like a toss-up, mostly because the Republicans are floundering in the search for an opponent.  Key factors in the race will be the economy and employment, reductions in troop commitment, and the qualifications of the GOP candidate.

Time frame:  the stock effect could occur well before the election, depending upon changes in the factors listed.

Investments:  Health care stocks lead this list, since every Republican is committed to unwinding ObamaCare.  There are many candidates, including insurance companies like United Health Care (UNH) and Wellpoint (WLP) and ETFs like XLV.  Many other drug stocks and device makers are also worth consideration.

The Supercommittee

This is my favorite current theme.  There is a lot of skepticism about progress and ultimate success.  The uncertainty has cast a pall over the sectors destined for cuts in the absence of a successful outcome -- mostly health care and defense stocks.

Time Frame:  the committee action is due  by November 23rd and an extension seems unlikely.  Congress and the President will need to approve, but the first hurdle is imminent.  Check out my preview from August.

Investments:  The health stocks are good candidates here as well, but so are defense names.  United Technologies (UTX), and Boeing (BA) are leading choices.

Please Join In

Do you like this approach?  The ideas here are a work in progress.  New themes and stock ideas are encouraged in the comments.

In addition, you can participate in a real-time discussion.  I have recently joined a group of investment experts at Wall Street All-Stars.  I am writing about investment ideas and responding to questions in a daily investment diary.  I invite readers to check this out and also to consider the free trial (just email our office:  main at newarc dot com).   There is also free content and other diaries on various subjects.  It is worth checking out.

Weighing the Week Ahead: A Tall Wall of Worry

The stock market continues to grind higher in the face of skepticism.  It is a familiar story.  Nearly a year ago we highlighted the "wall of worry" concept.  I wrote as follows:

Our Take

We have no illusion that every story will turn out to be wonderful.  Our own position has varied both with economic events and the tape.  Over the last several weeks there have been many positive signs and we have identified many profitable sectors.

The media and the blogosphere remain skeptical of any positive news.  This is the definition of the Wall of Worry.  The average front page at Seeking Alpha has a rash of featured bearish bloggers.  The links from Abnormal Returns now include many sassy skeptics.  The comments everywhere tilt heavily bearish.

We now know that this advice was very accurate.  It is time to revisit the concept.

Everyone Knows the Negatives

The economic worries are widely understood.  It was a focus for me in the last few days.

Having just returned from the Kauffman Foundation's Economic Blogger's Forum. I am inspired and invigorated.  The organizer and moving force was Tim Kane, who did a fine job in every respect.  I should also acknowledge Kauffman CEO Carl Schramm.  He had a scheduling conflict, so we only got to hear his closing remarks, but his support for this endeavor is crucial.  The conference  brought together economic  bloggers from widely differing perspectives and provided ample opportunity for interaction.  I love the format.  You had a chance for one-on-one discussions, small groups, breakout sessions, and a webcast.

I plan to write several articles drawn from my experience, but let me start with an overall perspective.  This group has plenty of worries.  The final panel was a gloomy approach to dealing with the budget deficit.  You can see the webcast here, including my friendly employment bet with Mish.  More on that later.

This conference represents a pinnacle -- the best summary --  of the economic blogosphere.  What should we conclude?  Let's take it a piece at a time.

Last Week's Action

Here is my take on the key data from last week.  I am not trying to be comprehensive, nor am I taking a viewpoint.  I will highlight what I found significant, trying to be objective.

The Good

The best news of the week was the stock market action -- a slow grind higher.  A number of indicators were solid -- inflation reads, Fed actions, etc. -- but these were all expected as I noted in last week's forecast.

There were no striking positives in the economic data.  The modest recovery is the accepted norm, with plenty of threats.  Michael Santolli, writing in Barron's, does a nice job of capturing the story.

Turning the page at Barron's we find a nice article from Gene Epstein.  He explains why most of the economists who are betting their careers on their predictions have a positive outlook. 

The Bad

None of last week's data were very important.  The inflation numbers were as expected and the Fed decision and statement were also in line.  Jobless claims were down a touch, but still bad.  This was all as I predicted.

There is a nice cottage industry for researchers.  The  requirement is that you have to find a new indicator that is bearish.  Or maybe you can find a new slant on an old indicator -- one that is in extreme bullish territory but off of the absolute highs.

If you want your dose of bad news, Alan Abelson is your man.  He cites a number of the regular bearish sources to provide confirmation bias for his followers.

From my perspective, I saw nothing bearish in the weekly data.  It would be nice to see jobless claims declining faster.

The Reality

I wrote about health care and the legislative prospects.  This is playing out exactly as I forecast, but many still disagree.  As I write this on Saturday night, we are facing an imminent vote.  I still expect the legislation to pass.  My viewpoint was widely contested last week, and challenged yesterday by colleagues at the Kauffman event.  We will see the outcome tomorrow.

I understand that many also disagree with the financial forecasts. Congress relies upon analysis from the nonpartisan CBO.  To check that out we need to find the best sources.  Don Marron was one of the Kauffman forum participants.  We were lucky to have someone with his background -- a Georgetown prof who is  a former Director of the CBO, former Council of Economic Advisors member, and veteran of the Joint Economic Committee Staff.  I enjoyed talking with him and regard him as  a strong  "outside" source on the CBO forecasts.  He parses the methodology, the assumptions, and explains the conclusions in this nice article.  This is the basis for the Congressional decision.  Check out the entire article.  There are many nuances to measuring the savings in health expenditures.

The Week Ahead

This week may have a few different themes.  Housing is important to the economic recovery, so existing home sales will be important.  Data on home prices are also of interest, since this relates to consumer confidence and consumption.

In practice, this rates to be a slow week for data, with plenty of opportunity for the technical analysis types and econ-spinners to do their thing.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are now neutral, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

• 58% (up from 27% last week) of our ETF's have positive ratings.  This is improving nicely.
• The median strength is -7.5  (up slightly from -15), still negative, but improving.
• 100%  of the sectors are in the "penalty box," showing an extremely high level of risk and uncertainty.
• Our Index Package has moved to neutral territory.

Investment Implications

Our investment angle still has a health care focus.  Our forecast last week played out pretty accurately.  The health care legislation is moving forward and figures to pass tomorrow.  Here is the chart of the trading market from InTrade:

I  have been accurate in predicting the outcome of the health care debate and most have disagreed.  Meanwhile, the stocks have not given us the pull back that we might expect from the passage of the legislation.  I have some health stocks in my basket, but I am still shopping.

Anyone who has been looking for an entry point has found the last few weeks to be quite frustrating.

Health Care Investing: Time to Pay Attention

In my 2010 preview, I highlighted health stocks as a group to own.  I mentioned the Health Care SPDR (XLV) as a basic choice, but I have a shopping list of specific names in mind.  These include providers, insurance companies, and health information technology.

With today's Health Care Summit, we can start to visualize the end game.

Not Political Opinion

As usual, I am not writing about the merits of the legislation.  I have my viewpoint, and you should, too, but that is not the subject of my work at "A Dash."  I am trying to do something quite different, and more valuable for investors:  Forecasting the end of the health care debate.

If we knew how this was going to turn out, we might be able to pick the right stocks.  That is the challenge.

My 2009 Prediction

In December, I predicted that a health care bill would pass.  I also suggested that the Democrats would threaten the use of a little-known procedure called "reconciliation." This process requires only a majority vote, not the 60 votes needed to overcome a Senate filibuster.  My prediction was completely accurate -- at least until the Massachusetts Senate election.  A bill had passed both Houses, including 60 votes in the Senate, but the bills were not exactly the same.  Before a conference committee could resolve the differences, the Massachusetts election reshuffled the deck.  The situation became very uncertain, with most expecting that no bill could succeed.

Updating the Health Care Prognosis

Today's Health Care Summit was a rich source for news commentary and analysis, but here is the most important fact:  President Obama is playing hardball.

Republicans repeatedly asked him to renounce the reconciliation procedure as a means to pass the legislation and the President would not agree.  I see this as a strong bargaining tactic.  Obama hopes that Republicans will compromise on key points, and a bill will pass with bipartisan support.  If not, he is willing to use whatever tactics are necessary.

Readers can check out my prior article for more detail about this, but there are two basic conclusions:

1. Some form of the legislation is likely to pass, despite current skepticism.
2. As this becomes apparent, there will be better buying opportunities for some of the key health care stocks.

When the issue has been resolved, the entire health care sector should trade higher.

[I am currently long THC and RMD in personal and client accounts.]

ETF Update: Health Care Legislation and Drug Stocks

Health Reform legislation seems to be assured of passage.  As I have suggested in past articles, all viewpoints are represented aggressively.  It is leading to a compromise that will not be loved by anyone, but will constitute a major policy change.

The Democrats, dealing with the known bottleneck of averting a Senate filibuster, have made the needed changes.  The liberal wing hates the changes, including some who want to start over.  The marginal voters have exploited their positions in virtually eliminating a "public option" and in limiting public funds for abortions.  The Republicans have gone all out to block any bill, pulling out all stops.  By insisting on the reading of every amendment and forcing procedural votes, they hope to delay the legislation despite the apparent super-majority in favor.

Each faction is using the best possible strategy.  The result?  It is not the best possible bill, but it might be the best bill possible.  Here is a nice summary of the compromises.

My focus this week is on another group of stocks affected by the health care legislation -- pharmaceuticals.

Background

Each week we provide a list of sectors that we expect to have the best performance over the next three weeks.  ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation.  While our ratings share characteristics with momentum and relative strength approaches, there are important differences.  Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system.  (For new readers, there is a more complete description of our methods at the end of the article.  We also have a free report with more detail on the system and results, available on request.)

The model provides a nice feel for the overall potential of the market.  It is not the forest nor the individual trees, but something in between.  I'll take a look at the macro picture first, and then take a look at our featured sector of the week.

The Macro View

From an overall market viewpoint, our indicators show continued risk.  The key elements are as follows:

• 84% of our ETF's in positive territory (up a touch from 81% last week).  The median strength rating for the overall list is a plus 21 (up slightly from +19 last week).   A score of "0" implies the average long-term ETF expectancy.
• We see reduced risk, with 66% (down from 88%) of our sectors are in the "penalty box."  This means that they are currently disqualified from the buy list for technical reasons.  You can think of this as a sophisticated "stop loss" rule, often applied in advance.  It also may indicate the need to take profits in a sector where we have done well, but see higher risk.  See our article here for a further explanation of this method.  We recently implemented some faster filters, accelerating moves both into and out of the Penalty Box.  We are also changing some rules to cut down the frequency of trading.
• Our index package is positive.  For this rating we look at the ETF's (both long and short)  for the S&P 500, the Dow, and the Nasdaq.  You can see these ratings is the results table for this week.  Despite the positive ratings, we note risk in both directions.  All of the index ETF's are in the penalty box.

This overall picture has been about the same for several weeks, but is showing slight improvement.

Highlighting Pharmaceuticals

Our featured ETF in the drug sector is SPDR S&P Pharmaceuticals ETF (XPH).  The fund has 24 holdings with very equal balance.  The beta is only 0.71.  The trailing P/E is almost 18.  As is the case with many equity opportunities this year, there is a dramatic difference between trailing and forward P/E's.  In this case, looking ahead shows a P/E ratio of 11.6.  This compares favorably with estimated earnings growth of about 17%.

As the chart shows, this is not the bottom in the sector, but it could still represent a good opportunity.

Other Experts

Among our regular experts there has been little discussion of the drug ETF's in recent weeks.  The best perspective came from Tom Lydon, who noted the following in November:

Each administration brings its own set of policies to the White House. Investing in ETFs may be a prudent way to experience a potential windfall from the country’s new direction without the high volatility inherent in individual stocks.

Lydon also has a nice piece describing innovation and the role of biotech in the pharma ETF's.

There is also some mention of health care ETF's in the monthly Seeking Alpha panel discussion.

Fundamentals and Health Reform

At our ElectionStocks site we have followed the twists and turns of the health care legislation in a series of articles.  I also emphasized this last week, describing the process of building a minimal winning coalition.

In particular, this article showed that there was more visibility on drug stocks.  The major companies agreed to a payment of $80 billion, about 2-3% of revenues.  That clarified the impact and helped investors see the potential.

As usual, I have tried to emphasize the need for investors to focus not on their own policy preferences, but on the likely policy outcome.  There is always a way to profit if you are a political agnostic.  We should all try to profit from policy changes no matter which party is in power, and regardless of our own opinions about what is best.  The actual legislation is a compromise that will help the health care stocks.

Weekly TCA-ETF Rankings

We lost about 1.3% last week, dropping 1.0% to the S&P 500.  The expiration-week activity created some volatility.  The dollar showed some strength, a short-term negative for most stocks.  There was continuing uncertainty on health stocks, now getting clarified.  The strength came from strong earnings reports in some tech stocks.

We provide these ratings as information for readers who may not trade as frequently as we do.  Those signing up for our free weekly email update can also get the entire list.

As noted above, the macro market indicators are in the penalty box, and most other ETF's are in the penalty box.  Based upon the current model signals (and noting the high risk levels), we have continued our bullish posture in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 280 ETF's.  The list also includes the values for the broad market ETF's and their inverses.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

ETF Update: The Home Stretch for Health Care

Health reform has been the big headline for the first year of the Obama Administration.  It is a major policy objective for Democrats.  It is the hot-button issue for Republicans.

For investors, there are many possible impacts.  On today's Meet the Press, Jim Cramer opined that job creation had been stalled because business did not know what to expect about future costs, including health care.  Alan Greenspan agreed.

The issue deserves attention.  As usual, I am not going to offer an opinion about the merits of the legislation.  Instead, I am going to analyze the prospects for passage, the likely outcomes, and what it means for an investor.

As usual, I will include the current ratings from our system.

Background

In our disciplined system, we study sectors continually, looking at the charts and ratings for hundreds of ETF's.  Each week we provide a list of our top-rated sectors for the next three weeks, along with some of our current observations.  ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation.  While our ratings share characterisitics with momentum and relative strength approaches, there are important differences.  Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system.  (For new readers, there is a more complete description of our methods at the end of the article.  We also have a free report with more detail on the system and results, available on request.)

The model provides a nice feel for the overall potential of the market.  It is not the forest and not the individual trees, but something in between.  I'll take a look at the macro picture first, and then take a look at our featured sector of the week.

The Macro View

From an overall market viewpoint, our indicators show continued risk.  The key elements are as follows:

• 81% of our ETF's in positive territory ( down from 86% last week).  The median strength rating for the overall list is a plus 19 (down  from +23 last week).   A score of "0" implies the average long-term ETF expectancy.
• Our risk evaluation became more negative, with 88% (up from 75%) of our sectors are in the "penalty box."  This means that they are currently disqualified from the buy list for technical reasons.  You can think of this as a sophisticated "stop loss" rule, often applied in advance.  It also may indicate the need to take profits in a sector where we have done well, but see higher risk.  See our article here for a further explanation of this method.  We recently implemented some faster filters, accelerating moves both into and out of the Penalty Box.  We are also changing some rules to cut down the frequency of trading.
• Our index package is positive.  For this rating we look at the ETF's (both long and short)  for the S&P 500, the Dow, and the Nasdaq.  You can see these ratings is the results table for this week.  Despite the positive ratings, we note risk in both directions.  All of the index ETF's are in the penalty box.

Highlighting Health Care

Our top-rated health sector is the Health Care SPDR - XLV.  The top five holdings constitute 45% of the fund, geared toward major drug companies.  The fund website does not seem to provide P/E or beta information.  (Readers feel free to provide a pointer that I missed.)  While this is not crucial for our system, it is meaningful for investors with a different time frame.

Here is the chart.

It reflects the market viewpoint about big pharma and the health legislation.

Other Experts

Some of our fellow ETF experts have noted the strength in XLV.

Scott Martindale, using a fundamental method, rates XLV at the top of his list.  It always gets our attention when a solid quantitative approach (with different methods) highlights one of our choices.

Maoxian has been long since June, a great call.

Our Fundamental Analysis

The health care legislation is one of the most complex issues I have seen in forty years of following the policy-making process.  Most of the twists and turns in financial media are off of the mark.  Here is a summary of key conclusions and some links.

• Some legislation will pass.  It will constitute a minimal winning coalition (described here) that passes a hurdle in the Senate.  The key thing to understand is how Congress works to achieve the needed votes.
• Minimal winning coalitions come from tradeoffs.  The managers of the legislation negotiate changes that will gain a certain number of votes while losing fewer votes.  The average observer hates the result, which is often criticized as "pandering."  The critics do not understand the normal legislative process where compromise is achieved.  No partisan is ever completely happy with compromise.
• We cover the twists and turns of the health bill on our sister site, ElectionStocks.  The "all clear" for big pharma came with a compromise on what they would need to pay.  We highlighted a key CNBC video showing the best pharma plays, as well as HMO ideas.  It is a good shopping list.
• The jury is still out.  The Hill is an excellent source neglected by many pundits.  They highlight the current tradeoffs.  The issues are whether there is a public option, whether it has a trigger, the CBO scoring of costs, and whether the leadership tries to use the reconciliation process to pass legislation in the Senate with a 50-vote majority instead of 60.  It is amazingly complex, as illustrated here.
• Health Reform and Jobs, raised by Cramer, is an interesting observation.  It will not affect the health care debate.  Democrats and Republicans alike understand that this is the only chance for passage.  "Washington" is creating the conflict, but it is the normal policy-making process.  The issue will not be subordinated to a generalized concern for immediate resolution.  Cramer is correct in the observation that all seek clarification.  This will come soon -- one way or the other.

I tried to explain this in an article describing my prognosis for health legislation.  It would be a good dissertation topic. In my professor days, I would find the right student to study it.  The ironic possibility is that those opposing a public option might have their strongest influence in negotiations about the 60-vote majority, needed for a cloture vote to preclude a filibuster.  If they do not negotiate on that basis, there is a threat of using the reconciliation process.  This would produce a public option without many provisions that they seek.  In my entire forty-year career of observing public policy, I have never seen this situation.

It is one of many cases where I felt I was writing something very unusual and important on the blog, but few agreed about the significance.  My explanation should have been better.

Weekly TCA-ETF Rankings

We lost about 1% last week, dropping 0.7% to the S&P 500.  There were a number of mid-week changes, updated through the close of Thursday's trading.

We provide these ratings as information for readers who may not trade as frequently as we do.  Those signing up for our free weekly email update can also get the entire list.

As noted above, the macro market indicators are in the penalty box, and most other ETF's are in the penalty box.  Based upon the current model signals (and noting the high risk levels), we have continued our bullish posture in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 280 ETF's.  The list also includes the values for the broad market ETF's and their inverses.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

[Long XLV and RMD]

Health Care Legislation: Our Prognosis

There is an interesting development in the health care debate.  Action by the opponents of health care reform may actually be counter-productive to their avowed interests.

Background

From my perspective, trying to help investors, the analysis of health care legislation has not been very good.  Most analysts were slow to grasp the fact that many committees had some power.  Eventually there was recognition that the bottleneck might be in the Senate, and everyone focused on the 60 votes needed for a cloture motion -- cutting off a filibuster.

The Wall Street firms and the media alike have really cut back on staffing, so there are few genuine experts in political science who are working on this problem.  This makes it an opportunity for investors with some real insight.

Recent Developments

Last week the Senate passed the 60-vote hurdle on Majority Leader Reid's plan.  That will now be the subject of a full debate.

Does it mean that there are enough votes for the plan?  No.

Does it mean that the public option will be included?  No.

One of the best sources of insight into the process comes from Nebraska Senator Ben Nelson, who is not in favor of the overall legislation, but nonetheless voted with the majority to move to a full debate.  Sen. Nelson wrote an op-ed piece in the Omaha World-Herald last week, explaining his vote for last week's motion. There is a very nice analysis of the article on our sister site, ElectionStocks.  (I set the agenda for this work and always review the output.  Investors who want to know how policy-making may affect their investments should add the site to their readers.  There is plenty of information about policy initiatives and which stocks could be winners and losers.)

Some Predictions

Regular readers of "A Dash" understand that we do not advocate particular policy positions.  We have opinions, of course, but that is not our mission.  We aim to enlighten readers about the stock implications from what is likely to happen.

With that in mind, here are some of my own fearless forecasts:)

• Some health reform legislation will pass this year.  There is a lot at stake for the President and the Congress.  Delay simply means defeat.  They will do whatever it takes.
• The legislation will meet the test of the "minimal winning coalition" which we described here.  It will be a compromise, with whatever inducements are necessary to get the needed votes.
• Most pundits will hate the compromise.  That is the nature of policy-making in a pluralistic society.  This is not recognized by the Wall Street analysts or Internet pundits.  Many have a political agenda, so there comments will relate to their interpretation of the merits, not the likely outcome.  Others view the wheeling and dealing that is essential to legislative action as some defect in representative government.  They need to take a class; it is covered in Poli Sci 101.  If you don't like it, find your favorite dictatorship.  It is how legislatures work in representative democracies.

The Twist

Here is the interesting part for political observers.  The Senate debate will attempt to gain a 60-vote majority, to avoid a filibuster.  Some liberals insist on the public option.  Some marginal voters want a trigger mechanism.  Others are adamant in opposing the public option since they see it as the start of a government takeover of health care.

If these opponents all hold firm, the most likely outcome at this point, the 60-vote requirement will not be met.

In this case, the Democrats might try to pass legislation through the reconciliation process, a budget procedure intended to facilitate tax cuts and spending cuts that otherwise could not get the 60-vote margin.  Sen. Reid has publicly disavowed this strategy, but the Nelson article makes clear the existence of this latent threat.

Health care legislation through reconciliation would be stripped of many specific provisions, but a public option would probably be included.  Why?  This may pass the test of a budget-cutting measure.  Other provisions would fail on a parliamentary challenge.

The Result

To understand the likely result, one has to have the reconciliation "twist" in mind.  It is possible that some  marginal voters will realize that they can have more leverage over the final bill by avoiding the reconciliation alternative.

We are going to see a few weeks of debate that will determine the final shape of the bill.

Stock Implications

So far in the process, many health care stocks have remained undervalued because of uncertainty.  Typically, they rally when chances for passage seem dim.

Our analysis is that there may be a dip as the market senses the likelihood of passage.  Then, whatever the specific outcome, there will be a rally in many of these stocks when the uncertainty is lifted.

We will go shopping in the health group, with specific sub-sectors and names in mind.