We watched President Obama's press conference from yesterday and have spent the last 18 hours internalizing it. There are a couple of key takeaways that are worth emphasizing that relate to a few Research Edge TAIL (up to three years) investment themes.
The first relates to healthcare. Our Healthcare Sector Head Tom Tobin has been involved in grass root efforts to advise the Obama Administration on developing a palatable healthcare plan. He's also written some very poignant notes on the topic, so we'd encourage you to chat with him. In effect, healthcare reform is becoming a major political issue for President Obama. Our summary of President Obama's comments relating to healthcare from the press conference are outlined below:
"Complicated issue, very optimistic about progress. Forming the plan will not add to the deficit, thereby burdening the taxpayer. We will find the money within the existing healthcare system. Want to reduce cost, "can't throw good money against bad habits." If you like your existing plan, you can keep it, but maybe you don't. We need to fix the system now, so it won't be broken for everyone. 1 of 5 dollars we spend will be on healthcare in next decade. Status quo unacceptable. Reform is a necessity."
President Obama is making it very clear that he will expend political capital to reform healthcare, or at least attempt to reform healthcare. This is obviously very controversial, especially with independents who were the key factor in electing Obama. We have seen Obama's approval rating nose dive over the last few weeks, which has a direct correlation with the hospital stocks and, of course, his ability to actually get meaningful legislation passed.
Our healthcare team put together the chart that is attached below, which compares President Obama's approval versus the hospital index. In lockstep, the hospital index has declined with Obama's approval rating. The biggest drain on earnings for hospital companies is bad debt, which should only accelerate in the coming quarters with the increase of unemployment, even if at a lesser rate. Therefore, Obamacare would in theory benefit hospitals as the insured become a larger percentage of the populous, which should lead to a decline in bad debt. The action in hospital stocks seems to be suggesting that the viability of the Obama's plan is very much in question.
The other obvious call out from President Obama's press conference is a real lack of the focus on foreign affairs. As the Politico reported:
" A couple of surprising words were missing from President Obama's 55-minute news conference on Wednesday: "Iraq" - and "Afghanistan. Also MIA: "Korea," "Pakistan," "soldiers," "surge" and "war" - as well as the Army, Navy, Air Force and Marines. The omissions were partly a result of the short attention span of the press, which did not ask about those topics after the president did not mention them in his opening statement. But the silence on those subjects also provides a striking illustration of one of the singular differences between Obama and his predecessor."
We have been discussing this point repeatedly. For better or worse, President Obama is much less focused on foreign affairs than his predecessor. The TAIL risk here is that this public representation, i.e. not discussing foreign affairs, is a representation of a private allocation of time. In a time, when foreign policy risk is becoming more and more serious in North Korea, Iran, and Pakistan, there is risk that a lack of focus by the administration will lead to an inadequate, or reactionary response. While playing defense on a potential North Korean missile launch towards Hawaii is appropriate if the North Korean regime is not a serious risk, it does send a message to other enemies of the United States that could potentially embolden them, which is a TAIL risk we need to consider.