Americans finally got a look at the various health insurance plans being offered — and their relative costs — when the exchanges opened on October 1.
The number of people affected by Obamacare — tens of millions — is enough to create currents in the equity markets. That means opportunities for investors who properly assess the economic effects of the legislation.
The major impact on the economy is the law’s requirement to either purchase insurance or pay a fine. The HHS has itself determined that premiums will rise substantially in 47 states. A quick glance at California’s plans, for a family of four earning $50,000 a year, the premium runs from $2,400 to $3,600 (bronze to platinum), along with individual and family deductibles running into the thousands. For those not getting insurance, fines are starting at 1% of income but will eventually rise to 2.5%.
What this all means is that folks in the lower and middle income ranges — and even those making up to $100,000 or more who aren’t already covered — are going to be spending money on insurance rather than where they usually do. That means money that used to go into the economy will instead go to insurance companies — which doesn’t bode well for the overall economy. Demand for various goods and services will decline.
The obvious move, then, is to buy healthcare stocks. Molina Healthcare (MOH), UnitedHealth Group (UNH), and Centene (CNC) are some of the better choices. It’s always smart to diversify, so while the Health Care Select SPDR (XLV) gives you less exposure to the healthcare insurers in the aggregate, it still provides you with a position in them.
Families forced to redeploy their spending into health insurance will likely pull back on discretionary purchases to compensate. I think that means that money that used to go into things like vacations and new cars will go to healthcare instead.
Lower-end and midscale hotels may struggle a bit. I’d avoid Wyndham Worldwide (WYN), Choice Hotels (CHH), and Red Lion Hotels (RLH). I think theme parks will see fewer visitors, so I’d back off on Cedar Fair L.P. (FUN), SeaWorld Entertainment (SEAS) and Six Flags (SIX).
I think folks who were considering a new car will settle for used ones instead. Used cars have higher margins, so companies like AutoNation (AN) will benefit from higher margins while pure play used dealers like CarMax (KMX) may see a boost in business.
But there’s one other interesting angle to think about. The overall economy may continue to suffer as consumer capital is siphoned out of these goods and services and into insurance premiums. If that’s the case, and the reports of layoffs and reduced workers hours continue to filter through, unemployment will continue to rise. That may give the Fed an excuse to continue with quantitative easing rather than start to taper the program.
That means money will continue to flow out of the bond market and into equities — the exact behavior that has driven the market so powerfully in the past year or two. Thus, owning broad indices like the SPDR S&P 500 (SPY) may continue to serve you well.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.
