I really don’t understand Wall Street, part 98

On the campaign trail Obama said that he would if elected cut the overpayments to Medicare Advantage plans by about $15bn a year. Once elected he confirmed that he would.

Stupid me thought that this would mean people on Wall Street would listen and that this freely available information would have been priced into the stocks. After all Bob Laszewski and I have been asking each other about this for quite some time!

So did I spend the last few weeks building up a big short position in the for-profit health insurers? No, this news was well known and already reflected in the stock price.

And when Obama’s budget came out today and essentially showed that it would cut Medicare payments by about the same amount he said he would (OK the cut proposed is $17.5 bn not $15bn but close enough). So did the stocks stay flat? Err… look at the chart


They’re all off 10% today alone, and Humana, one of the biggest Medicare players is off 20% today and 40% for the week! Were you short? Or were you too clever—just like me?

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7 replies »

  1. If market-timing was so straight forward though, everybody would have shorted staring on Monday. Bulls have been trying to find some support and been chasing only a few sectors since the Nov lows including health care in a big way especially since this is one of the few sectors that has a bunch of companies with relatively decent cash reserves and a ton of debt that doesn’t need to be rolled over this year.
    Most broad US healthcare ETF (IYH, XLV, VHT) are up at least 10-15% since Dec. and have gotten hit especially hard this week. It hasn’t only been the health insurers that have large exposure to Medicare that have gotten hit hard this week. Uncertainty about what this reform is really going to look like has hit everybody in healthcare hard.

  2. Sounds like you bought into that old economic model of perfectly “rational” investors. There tend to be a lot of overreactions. Stocks trade on emotions as much as numbers. Stay calm while everyone else panics, wait a day or two, then trade on the overreactions.
    Great book on how irrational (we) investors are (neuroeconomics): “Your Money and Your Brain.” by Jason Zweig.

  3. The classic problem with shorting anything is figuring out when the mob “figures out” what’s going to happen to a stock, which is why I don’t short stocks anymore or buy puts. Mobs are stupid, so you need to get stupider. These companies aren’t necessarily going to shrink the way the mob thinks. Rather, they are going to see their payer mix deteriorate- lose Medicare/gain SCHIP, and lose corporate enrollment from the recession. Then they will start buying business (by taking it away from the Blues). Really tough to say what happens to earnings, but “down” is a good bet.

  4. “Stupid me thought that this would mean people on Wall Street would listen…?”
    They listened alright, but they made one serious mistake. Politicians in the past have told so many lies that this was presumed to be yet another campaign lie aimed at getting votes.
    But this guy comes along and sticks to what he said and they have an “oh-shit” moment and scramble to recover.

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