ProVise Management Group, LLC, an SEC Registered Investment Advisor

PROVISE BULLETS ©

(October 30, 2009)

• Healthcare reform is just around the corner…or is it?  Earlier this month there was a much ballyhooed Senate Finance Committee vote which was split along party lines, with the exception of Senator Snowe (R–Maine), who voted with the Democrats.  Whether she will or will not support the final bill remains to be seen.  In fact, there are five different House and Senate Committees that have each passed their own versions of a health care reform bill.  You can imagine the “horse trading” taking place at the present time.  When it’s all said and done, who knows what the final bill will look like?  At this point, it appears there will be “something”, but exactly “what” is yet to be determined.  Look for Congress to pass a bill before they go home for the holidays.  In typical fashion, they will likely do it at the last minute. 

What should you expect?  First, the public insurance option is up for grabs because Republicans (and many conservative Democrats) are solidly against a government run insurance company.  This, of course, does not sit well with the liberals.  It is possible that we will end up with cooperatives designed to spur competition.  The unions are firmly against taxing any “super rich health plans” with the argument that they have given up wages over the years in order to get better health plans.  The fact is, everyone will have to pay and suffer to get the needed reform.  Whatever bill emerges will have to be certified by the Congressional Budget Office as being “budget neutral”.  The question then becomes, if their assumptions are correct today, will those same assumptions hold up over time?  Frankly, it’s hard for us to believe that health care isn’t going to cost the government money, but that probably comes as no surprise to any of our readers. 

There was a proposal to eliminate the tax deduction for health care plans that are provided through businesses.  After all, as some would argue, why should health insurance be tied to the workplace?  If they don’t eliminate this tax break for businesses, they will likely give tax credits to those who buy health insurance on their own.  There is an interesting twist to all of this.  Suppose they eliminate the tax break.  Our guess is that many businesses would stop providing health insurance and increase wages by a corresponding amount in order to allow the employees to purchase insurance coverage on their own.  On the surface, there is some merit to this idea.  However, should current health insurance premiums which are tax deductible to a business be given to an employee as part of their salary, (which would also be tax deductible), additional Social Security and/or Medicare taxes would then be paid by the employer and the employee and collected by the government.  In other words, health insurance could cost employers and/or employees more money.

Young people will have to be forced into the system.  Only by getting money from young, theoretically healthier, people can the risks and costs be spread out over a greater amount of the population.  If young people refuse to get health insurance, then the government has proposed that it will impose a penalty (let’s just call it what it is – a tax).  If this penalty/tax is not high enough, then the younger generation will not be motivated to obtain health insurance coverage.

We could go on, but isn’t this enough to give you a taste of how complicated this issue is?  Whatever bill emerges will likely upset more people than it will please.  Of course they will be upset about different things.

• It’s official now – various governmental entities have clarified exactly what will increase/decrease/remain the same for many inflation-adjusted items.  For example, there was a concern that the limits on contributions to 401(k) plans might actually decrease.  Currently those limits are $16,500 for everyone and an additional $5,500 for people age 50 or over.  Those limits will remain the same in 2010.  Social Security checks will remain the same (no increase), except that the cost for Medicare Part B will increase, therefore causing a decrease in cash flow for many people.  The President has proposed providing a $250 subsidy for every senior whose benefits decrease.  This subsidy will cost the government $13 billion.  Sorry, but setting politics aside, we just don’t see the sense in providing this subsidy other than the fact that it is a good political gambit.  Many pension plans also have a cost of living increase built in, and those plans will see little or no gain depending on how they are structured.  The same is true for some state minimum wage plans.  In fact, Colorado has actually already reduced its minimum wage, albeit by a very small amount.  Many union contracts are tied to the CPI which means that there will be some very unhappy union members.  All of this needs to be put into perspective.  Last year there was a huge gain in all of the above-mentioned areas as well as in many others due to the fact that inflation was measured anywhere between 5.5% and 6%, primarily due to higher energy costs.  If you average out the last two years, it’s like getting a gain of somewhere around 2.5% to 3% each year. 

• While we certainly agree that health care reform is an important priority for the country, we are becoming increasingly frustrated with the inability of Congress to put something on the table and vote it up or down.  It’s not so much about health care reform as it is the other priorities we face.  Is it just us, or do you also feel frustrated?  It seems that if the economy were healthier, health care reform, environmental issues, financial regulation, etc. would be in a much better place.  When the current debate ends on health care reform, we hope that Congress and the President focus on the other pressing issue we face today – improving the health of the economy so that jobs can be generated.  Sadly, they will likely continue bickering with each other.

• If you thought the federal deficit was bad last year, then you won’t be very happy about it this year.  It more than tripled the old record which was set during the fiscal year ended in 2008.  This year the federal deficit was $1.42 trillion as both the Bush and the Obama administrations tried to stimulate the economy in order to end the recession more quickly.  Revenues for the 2009 fiscal year were $2.1 trillion, which represented a 16.6% decline, while spending jumped to $3.52 trillion or an increase of 18.2%.  Of course the Democrats will blame most of this on the need to stimulate the economy which they claim suffered from the failed policies of the Bush administration.  The Republicans will blame it on spending by the liberal Democrats.  In an attempt to do some damage control, the Obama administration was quick to point out that while the deficit was high, it was about $300 billion less than what had been projected back in February.

• Do you remember where you were on October 19, 1987, commonly known as “Black Monday” when the S&P fell an amazing 20.5% in one trading session?  The Dow fell 508 points, or 22.6% on that day.  These declines handily beat the old record for a one day percentage drop which was established on October 28, 1929 at a “meager” loss of 12.8%. To help put this dramatic event into perspective, think about all of the volatility the market has experienced during the current year, particularly to the downside during the early part of the year.  The largest single day loss for 2009 was a drop of 5.3% on January 20th. 

• Well, September and October (historically difficult months for the markets) are now behind us, and nothing came crashing down.  Investors enter November feeling better than they did just a brief seven months ago.  November is the third best performing month for the S&P 500 since 1990, with an average return of 1.5%.  It is bested only by December and May, which have each averaged 1.9% gains.  While we have been pleased that the markets out-performed the averages for the past two months, and we certainly hope the trend continues for November and December, we must be pragmatic.  The reality is that there is likely to be a rest somewhere along the way.  (Source:  BTN Research)

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©10/30/09 ProVise Management Group, LLC

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