President Obama is swinging a big axe at capitalism, or so that is the perception on Wall Street. The reality is stocks have fallen more than 20% since he rolled out his Stimulus Package, TALF Banking Bailout and Proposed Budget of $3.6 trillion. For whatever reason and for whomever is to blame, the fact is the market continues to decline on a lack of confidence and perception of a war on capitalism. My question is does this create an opportunity or not?
Let's start with the healthcare sector which took a 25% haircut after the announced budget and nationalization of healthcare services. HMOs (service providers) were the hardest hit by the cuts in Medicare payments. But, digging into the sector you find United Healthcare (NYSE: UNH) and Aetna (NYSE: AET) have a small exposure to Medicare and took the same haircut as the balance of the sector. According the companies reports UNH has roughly 15% of revenue and AET nearly 8% of revenue exposed to Medicare plans. However, HealthSpring (NYSE: HS) receives nearly 80% and Humana (NYSE: HUM) is approximately 60%. Technically UNH and AET are near their respective support of the November lows. HS and HUM have broken those lows and continue to move lower. They (UNH & AET) are worth putting on a watch list for a rebound from the aggressive selling. (NYSE: IHF), ishares Dow US Healthcare Providers ETF is the ETF for the sector to track, which is also near support of the November low. It is also important to note the budget is not finalized yet. It was a trial balloon to see how it floated with the masses. The final budget will be presented in April for Congress to debate. Time will tell how this plays out, so be patient. First quarter earnings will shed some light on the sector as well.
Financials are starting to look like Rocky Balboa in the late rounds of his fights, bloody, puffy eyes, staggering, but still wanting to fight for survival. Of course that assumes that the trainer (the government) can keep them standing. We (taxpayers) are spending trillions of dollars to preserve billions of dollars in market capital? This is an interesting exercise in economics that will be studied in years to come as an exercise in futility. All the arguments on free markets and allowing them to work themselves out are being ignored for now. I have avoided this sectors since October of 2007. It still is not attractive, but like a moth and light you just keep looking at the sector. I keep thinking at some point this will be a buy, but the more news we get the worse it seems. General Electric is the latest to destroy the faith or hope that something good is on the horizon. General Motors is on the verge of bankruptcy (big surprise) and Citigroup is below a $1 now. Still not an opportunity here, but I continue to watch - more in amazement than opportunity.
The energy sector broke below support of the recent trading range to show the potential of more downside. However, I am more in the camp of opportunity here. Crude supplies seem to be flattening out and that could mean higher prices. Gasoline has already moved higher as the refineries are finding a way to pass on price increases. The major integrated oil and gas companies have moved lower of late as well. ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), BP P.L.C. (NYSE: BP) and ConocoPhillips (NYSE: COP) are all at near term lows or testing their November lows. I have these on a watch list as an opportunities to buy if crude starts to move higher. ConocoPhillips offers the most potential from my view fundamentally, but also has some risk associated with it from the natural gas side. United Stated Oil ETF (NYSE: USO) is the play for crude and United States Gas Fund (NYSE: UNG) is the play for natural gas. The undercurrent of optimism is building towards the sector and that could lead to upside pressure on the sector.
There are other sectors in similar situations to the healthcare and energy. I will cover them in future posts, but in the meantime you may want to spend some time digging in the technology, consumer services and consumer durables for opportunities as well. Don't forget the international markets either. If the US finds reason to rally the global markets will come along for the ride.
Be disciplined in your approach. Building a watch list like that above gives you a defined entry point to add positions to your portfolio.
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