So far, not so good - Obama needs to retool

Posted by Shyam Moondra

President Barack Obama and his team have badly stumbled on the health care proposal. Here are some observations:
· President Bill Clinton's health care proposal failed because the Clinton administration pretty much took over the job of writing the legislation and the Congress rebelled. This time, the Obama administration just outlined the key requirements and then became completely aloof from the process of writing the bill that was prepared by the members of the Congress with the help of lobbyists. This approach resulted in a draft bill riddled with loopholes diluting the reforms that were originally envisioned. Obama's lack of participation made him look like lacking leadership skills and it became impossible to have a unified message. The critics tore the plan apart, fueling a grass-root rebellion as witnessed at many town-hall meetings across the country.
· During the election campaign, Obama presented himself as a centrist, but the Democrat health care proposal in the House made it apparent that Obama is really a leftist in disguise. A vast majority of Americans are either at the center or slightly to the right of the center, so once it became clear that Obama was really a liberal, his support among the Democrat conservatives and Independents plummeted.
· During the depression of the 1930's, when people were suffering tremendously, President Franklin D. Roosevelt was able to push through his liberal agenda of starting new entitlement programs or creating what he called a "safety net." Some on the Obama team thought that, given the suffering among the masses because of the current financial crisis, they could push through a health care entitlement program costing $1 trillion for the first ten years. That approach seems to have backfired.
· Obama's superb speech making skills are not enough – he needs to be more hands-on. He needs to roll-up his sleeves and sit down with the Congressional leaders to hammer out the details of new bills rather than become completely detached from the whole process. In other words, he needs to do more walking than talking – people are tired of his speeches, press conferences, video blogs, and on-camera pronouncements.

The poor performance by the Obama team on the health care has far reaching consequences:
· Democrats could lose the control of the Senate and House in 2010, as happened during the Clinton's first term when his plan for universal health care coverage was rejected by the Congress. If Obama loses the support of Independents, he would not be able to win re-election in 2012, although it's too early to talk about that.
· Obama's other initiatives on climate change, education, regulatory reforms, energy independence, etc. may now be in jeopardy.
· If Obama is perceived as weak at home, it will embolden our adversaries abroad that would have negative security consequences for us and for our allies.

In general, the American people have the following core beliefs:
· They believe that the government is too inept to be able to run a program efficiently. Case in points, Amtrak and United States Postal Service – they both would go bankrupt if the government didn't bail them out. Even Medicare and Medicaid are fraught with corruption and fraud by service providers.
· The government can't be entrusted with their personal data and they would certainly not like the government to make any life and death decisions. The people simply don't like governmental intrusion in their personal lives, period.
· Those who work hard must be allowed to reap the fruits of their labor. They vehemently oppose the idea of government's taxing the rich and using that money to provide "free" services to the poor. They reject the idea of income re-distribution by the government in any form.
· They don't like a welfare state. The best thing that Clinton did was to dismantle the welfare programs that made many poor people too dependent on the government welfare checks, to the point that many poor people found it more profitable to remain unemployed. The American people oppose any Obama attempt to resurrect a welfare state.

So, where do we go from here?
· First, some changes within the White House are inevitable. To regain the trust of the American people, Obama needs to make personnel changes amongst the ranks of his advisors and perhaps some cabinet secretaries.
· Obama will be helped if the House Speaker Nancy Pelosi is replaced. She is far more to the left than Obama is and that's a real political problem because most of the population is more centrist. It would also help if some of the committee chairpersons in the House and Senate are also replaced by more younger, energetic, and innovative leaders.
· Scrap the existing health care proposals and start all over. Obama needs to focus on reducing health care costs and reforming insurance abuses and guarding against their greed. Obama should refrain from proposing any new expenditures (the people are not at all in the mood of starting any new entitlement program when the budget deficits are running at record levels – if we ever become prosperous again, we can reconsider new health care expenditures at that time but not right now).

Proposed health care plans are off track - intense opposition is genuine

Posted by Shyam Moondra

Most Americans thought the objective behind the proposed health care reform was to reduce costs by at least 30%. That means, a family that spends $6,000 on health care today would spend no more than $3,500 under the new plan. The idea was that if the costs came down, many uninsured people, who can't afford to buy medical insurance today, would be able to afford insurance and thus the ranks of uninsured will shrink. However, now it looks like the health care initiative has been hijacked by those who are pushing for universal coverage (read that as creating new entitlement programs). Rather than focusing on how to reduce costs, the debate is now centered on how to pay for new spending of $1 trillion over the next ten years (and perhaps more later) to cover every American. The universal coverage will be achieved by expanding the existing Medicaid program for the poor and by providing subsidies to those who are not "poor" but can't afford to buy medical insurance. Mandated health care would also lead to financial difficulties for those who don't qualify for Medicaid or other subsidies. The people are genuinely concerned that the proposed plan will in fact increase their health care costs and they will be worse off than today.

An overwhelming majority of Americans don't want any new entitlement program and they certainly don't want to spend $1 trillion, especially at a time when the federal budget deficit is running at a record level. And that explains the intense opposition by a majority of Americans to the proposals currently under consideration by the Democrats. As the people learn more and more about the details of the proposed reforms, the opposition grows exponentially, as is evident from the recent opinion polls. It would be a mistake to label the growing dissatisfaction as something instigated by the Republicans.

President Obama says that either we do the proposed health care plan or maintain the status quo (meaning costs will keep rising). However, that's a false choice. The American people are saying that we need to do health care reforms but without creating a new costly entitlement program - they just want to make some structural changes that will bring down the health care costs.

The present bills being considered in the Democrat controlled Senate and House should be scrapped and the lawmakers should go back to the drawing board. The Congress should focus on how to bring down costs by making appropriate structural changes in how health care is delivered to the American people. Below are a few examples what the Congress could do:

· Offer an optional government plan to induce more competition in the industry. This option will provide an added protection if the other methods of cost reductions don't work.
· Change the mal-practice laws so that doctors and hospitals will be able to lower their charges and they will not have to over-prescribe tests and treatments, thereby reducing costs. The current House bills do not touch upon the issue of tort reform, apparently because of the opposition of the trial lawyers who contribute heavily to the campaign coffers of the Democrats.
· Change drug patent laws to enable generic offerings sooner. Allow re-importation of drugs from Canada and Mexico. Under the government plan, negotiate lower drug prices.
· Reform insurance industry and regulate their profit margins (just like profits of utilities are regulated). Ban unfair practices such as charging more for or denying insurance for pre-existing conditions.
· Make the necessary changes in how the insurance is structured, so that the patients would be induced to weigh in the costs involved when choosing service providers or making decisions on treatment alternatives, just as they would when buying any other product or service. Incentives to save money will encourage patients to shop-around which would create a truly competitive environment and keep a lid on the prices.
· Eliminate health care system inefficiencies. Today's record-keeping procedures tend to be cumbersome that add to the health care costs. The government could help develop a comprehensive solution that takes advantage of the modern information technologies.

I don't think we need to undertake a grand plan and waste tax dollars. The widespread opposition to the Obama approach is genuine and if Democrats go ahead with this ill-conceived approach of universal coverage, they will pay dearly in 2010 when they could lose the control of the Senate and the House.

Investment strategies for the near-term

Posted by Shyam Moondra


Emerging economic trends are very encouraging. While unemployment rate remains high and consumer confidence is still in the doldrums, there are many signs that suggest that the recession may be over. For example:
· In the second quarter of 2009, the GDP declined by only 1%.
· New and previously owned home sales in June increased, thanks to low mortgage interest rates and about 30% lower prices from the peak set in 2007. The latest housing report showed a small increase in the average home price, indicating that the long slide in home prices have finally come to an end.
· Leading indicators went up three months in a row, strongly suggesting that the economic recovery is underway.
· Inflation remains under check, enabling the FED to keep interest rates low for the foreseeable future. Low interest rates will fuel the economic growth.
· The banking system has stabilized, as is evident from better than expected profits reported by many banks and steadily improving credit markets. Some banks are still in poor condition (but less critical than six months ago) because of continuing foreclosures and losses in commercial real estate and consumer credit card markets.
· In general, in the first half of 2009, corporate profits far exceeded analyst estimates. The private sector has done an excellent job in controlling inventories and costs. The mean and lean private sector is well positioned to rapidly expand profit margins as demand perks up in the coming quarters.

Looking forward, the federal stimulus program will continue to boost the economy. The $787 billion stimulus package was to be spread over the 2009-2010 period; therefore, as much as 80% of the stimulus money still remains to be spent in the coming six quarters. A big part of the remaining stimulus program will be directed to infrastructure projects that will create new jobs. The Congress just added another $2 billions to the enormously successful "cash for clunkers" program, which gives as much as $4,500 to consumers if they trade-in their old gas guzzlers for new fuel-efficient cars. This program will give a much-needed boost to the auto industry. In spite of the encouraging economic trends, the unemployment rate will not decline any time soon. However, consumers, who have been lately saving more than spending, will loosen-up the strings of their purses and thus provide the fuel for the economic growth engine.

Given that we are on our way to recovery, the stock market is again attracting investors that have trillions of dollars sidelined in safe investment vehicles such as Treasury bills and notes. That money will steadily move into the equity markets. A Dow Jones Industrial Average of 12,000 by early 2010 does not seem far fetched.

Many stocks are currently priced very attractively for the long-term gain, starting with the companies in the consumer sector. Companies that have had the steepest decline in their stock prices over the last twelve months will likely appreciate the most. Investors should start nibbling at selected stocks every time the market dips. Following are some of the segments to focus on:

· Consumer non-durables and discretionary goods/services including fast food restaurants.
· Travel and leisure: Airlines, hotels, and casinos.
· Machinery: Stimulus spending for infrastructure projects will increase profits for heavy machinery companies.
· Industrial: Aluminum, chemical, aircraft manufacturers.
· Media: Television networks and Internet companies (ad revenues will gradually increase).
· Selected financials: Financial companies that were beaten down hard will provide the best returns, although they may still be somewhat risky.
· Transportation: As the economy improves, air frieght, railroad, shipping, and trucking companies will do well.

Future challenges remain just as daunting as they were six months ago. As the economy starts growing, consumer and industrial demand will steadily grow, increasing inflationary expectations. Starting next year, the FED will have to start raising interest rates; it will be a challenging job for the FED to not increase interest rates too fast or too early that might choke off the economic growth. That balancing act will require the brilliance of the FED Chairman, whoever that might be coming January of 2010. The Obama administration and the FED will have to wind down financial stabilization programs and stimulus expenditures, and start focusing on how to reduce the budget deficit. Increasing income taxes for the super rich and closing-down tax loopholes for the corporations (e.g., off-shore tax havens) will be necessary to balance the federal budget.