Previous Columns
9:00 AM EST, Friday, July 24, 2009. I like what the market is doing, i.e. going up. But the fundamentals don't support this heady action. I'm not making a call, simply being cautious.

Bringing earnings into focus: From Chart of the Day.

Today, several companies (i.e. Ford, eBay and AT&T) reported better than expected earnings and as a result the stock market rallied on the news. While some companies have reported better than expected earnings for Q2 2009, others have struggled. Today's chart provides some perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.

The healthcare battle continues. Doctors and hospital search for ways to make a living. Insurance companies (especially Medicare, the biggest) search for ways to slice and dice. In the end, fees and billing are nightmare. And the whole thing is a continuing mess -- though, the irony is, for most of us, our healthcare is good.

Ever since I stated my concern that Obama's healthcare plans were being pushed through without sufficient mulling (see yesterday) I've been flooded with emails. Sample from reader Lucky Marr:

My wife is from Canada. We go there nearly every year to our summer cottage in Nova Scotia...we have seen many examples of delayed health care in Canada and many times the fatal results. For example, Lorette's sister-in-law was diagnosed with breast cancer...it took 3 months to schedule surgery (US 3 days max). Within one year she was dead. If you are under 65 in NS you must have private insurance or through your employer to pay for anything serious. You must also pay for prescription drugs. Many hospitals have made drastic cuts. Canadians pay through the nose in taxes to cover their "free" health care yet they still support it...out of national pride. I know we need improved health care...the Canadian way is not the solution.

This is a piece posted by Paul Howard, director of Manhattan Institute’s Center for Medical Progress.

The Reaper Is Cheaper
Preventing disease is praiseworthy, but it may not reduce healthcare costs.

President Obama has made many promises about his health-reform agenda, but none looms larger than: “You will save money.” Not only has the president promised to lower consumers’ health-insurance bills; he says his plan will trim federal spending as well. Thus, when the head of the Congressional Budget Office (Congress’s fiscal watchdog) testified last Friday that none of the bills under consideration in the House or Senate would rein in spending—and that all would likely increase it—the president’s reform push took a heavy hit. The CBO’s assessment underscored an important reality about health care. Lowering healthcare costs (which have been rising faster than inflation for decades, except for a brief period in the 1990s) while improving quality is possible, but it’s awfully hard, for one simple reason: when it comes to healthcare spending, death is the only really cheap option.

William Osler, a renowned nineteenth-century doctor and the first physician-in-chief at Johns Hopkins Hospital, once remarked, “Pneumonia may well be called the friend of the aged. Taken off by it in an acute, short, not often painful illness, the old man escapes the ‘cold gradations of decay,’ so distressing to himself and to his friends.” If Osler were alive today, he might call pneumonia the friend of Medicare accountants, since it kills victims quickly, in contrast with the lingering and expensive chronic illnesses that account for about three-quarters of all Medicare spending.

Few policymakers working on healthcare reform in Washington stop to consider the obvious corollary: dying early is cheap, and keeping people alive long enough to collect Medicare is expensive. Instead, experts talking about health spending promulgate what I call the Eat Your Vegetables Theory: we can save gobs of money by focusing on technological fixes (like electronic health records) and disease prevention, which will yield a healthier population that is cheaper to treat. The savings generated can then be used to subsidize coverage for millions of the uninsured. But this approach is unlikely to work as advertised: as Osler’s dictum suggests, increasing prevention efforts may wind up costing more.

Take pneumonia. We have relatively cheap and effective treatments for it, especially vaccines and antibiotics. As a result, many older Americans who might have died from pneumonia in Osler’s day now live years or decades longer—long enough to qualify for Medicare and then develop much more expensive ailments like diabetes, cancer, and Alzheimer’s. Researchers at the RAND Corporation noted the conundrum across several studies and came to roughly the same conclusion: “Medical innovations will result in better health and longer life, but they will likely increase, not decrease, Medicare spending.”

In one study, the researchers postulated three different scenarios for the health costs of seniors entering Medicare from 2002 to 2030. Scenario A took into account everything that we know today about the health of the current cohort of seniors entering Medicare and future enrollees, up to 2030. (This is a mixed bag. Seniors’ health started improving in the 1980s, but rates of chronic diseases have been increasing rapidly in recent years, and newer enrollees are likely to be sicker and thus more expensive.) Scenario B assumed that future cohorts would be as healthy as those in the 1990s. And Scenario C (the most optimistic) assumed that seniors’ health would continue to improve. Under rosy Scenario C, the researchers found, health spending would be $10,275 per Medicare enrollee in 2030—just 8 percent lower than under Scenario A. Why? Healthier seniors live longer and accumulate more costs; also, costs are rising faster among less disabled seniors, presumably because they use more new drugs and devices that prevent them from becoming disabled (knee replacements, for example).

In another study, RAND researchers looked at how ten important medical innovations likely to emerge in the near future might affect Medicare spending in 2030. These included anti-aging compounds for healthy people, cancer vaccines, tiny defibrillators implanted near the heart, better treatments for stroke and cancer, and Alzheimer’s prevention. Every hypothetical innovation, the researchers found, would increase Medicare spending. Even the cheapest, an anti-aging compound taken by healthy people that would cost just $11,245 per life-year saved, would increase healthcare spending by 14 percent in 2030—because there would be 13 million more beneficiaries collecting benefits.

Finally, RAND examined the effects of fighting four risk factors for heart disease. If we could get all the elderly to stop smoking and control their diabetes, their health would improve, of course, but costs would rise, again because those ex-smokers and diabetics would eventually be vulnerable to other health problems. If we effectively treated hypertension and slashed obesity rates by 50 percent, however, health would improve and costs would fall. Reducing obesity produced the clearest gains because obesity, though it sharply increases costs, doesn’t reduce longevity significantly.

What all three studies suggest, then, is technological innovations or disease prevention will likely result in slight savings or even increased costs (though obesity may be the exception to this trend). This doesn’t mean, of course, that we shouldn’t keep inventing drugs and devices to keep people alive longer, or that we shouldn’t develop better prevention strategies. It just means that we should stop pretending that good health is always cheaper. Sometimes, you really do get what you pay for.

The most devastating piece is from the Wall Street Journal:

A Reckless Congress
Democrats want to ram through one of the greatest raids on private income and business in American history.

Say this about the 1,018-page healthcare bill that House Democrats unveiled this week and that President Obama heartily endorsed: It finally reveals at least some of the price of the reckless ambitions of our current government. With huge majorities and a President in a rush to outrun the declining popularity of his agenda, Democrats are bidding to impose an unrepealable European-style welfare state in a matter of weeks.

Mr. Obama's February budget provided the outline, but the House bill now fills in the details. To wit, tax increases that would take U.S. rates higher even than most of Europe. Yet even those increases aren't nearly enough to finance the $1 trillion in new spending, which itself is surely a low-ball estimate. Meanwhile, the bill would create a new government health entitlement that will kill private insurance and lead to a government-run system.

Hyperbole? That's what people said when we warned about this last fall in "A Liberal Supermajority," but even we underestimated the ideological willfulness of today's national Democrats. Consider only a few of the details:

A huge new income surtax. The bill's main financing comes from another tax increase on top of the increase already scheduled for 2011 under Mr. Obama's budget. The surtax starts at one percentage point for adjusted gross income above $350,000 in 2011, rising to two points in 2013; a 1.5 point surtax at incomes above $500,000, rising to three in 2013; and a whopping 5.4 percentage points in 2011 and beyond on incomes above $1 million.

This would raise the top marginal federal tax rate back to roughly 47% or 48%, if you include the Medicare tax and the phase-out of certain deductions and exemptions. With the current top rate at 35%, this would be the largest rate increase outside the Great Depression or world wars.

The average U.S. top combined state-federal marginal tax rate would hit about 52%. This would be higher than in all but three (Denmark, Sweden, Belgium) of the 30 countries measured by the OECD. According to the nearby table compiled by the Heritage Foundation, taxpayers in at least five U.S. states would pay higher marginal rates even than Sweden. South Korea, which Democrats worry is stealing American jobs, would be able to grab even more as its highest rate is a far more competitive 38.5%.

House Democrats say they deserve credit for being honest about the tax increases needed to fund their ambitions. But then they also claim that this surtax would raise $544 billion in new revenue over 10 years. America's millionaires aren't that stupid; far fewer of them will pay these rates for very long, if at all. They will find ways to shelter income, either by investing differently or simply working less. Small businesses that pay at the individual rate will shift to pay the 35% corporate rate. When the revenue doesn't materialize, Democrats will move to soak the middle class with a European-style value-added tax.

Phony numbers. Democrats will have to come up with something, because even the surtax puts their bill at least $300 billion short of honest financing. The public insurance "option" doesn't even begin until 2013 and the costs are heavily weighted toward the later years, but the tax hikes start in 2011. So under Congress's 10-year budget window, the House bill is able to pay for seven years of spending with nine years of taxes. Andy Laperriere of the ISI Group estimates the bill would add $95 billion to the deficit in 2019 alone.

Then there's yesterday's testimony, from Congressional Budget Office (CBO) Director Doug Elmendorf, that ObamaCare's cost "savings" are an illusion. Mr. Obama claims government can cover more people and pay less to do it. But Mr. Elmendorf told the Senate Finance Committee that "In the legislation that has been reported we don't see the sort of fundamental changes that would be necessary to reduce the trajectory of federal spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs."

Further on the public plan: "It raises the amount of activity that is growing at this unsustainable rate."

No matter, Speaker Nancy Pelosi is whisking the bill through House committees even before CBO has had a chance to score it in detail. As Wisconsin Republican Paul Ryan put it to us, "We will not have read it, and we will not have a score of it, but we will have passed it out of committee."

A new payroll tax. Unemployment is at 9.5% and rising, but Democrats will nonetheless impose a new eight percentage point payroll tax on employers who don't provide health insurance for employees. This is on top of the current 15% payroll tax, and in addition to a new 2.5-percentage point tax on individuals who don't buy health insurance. This means that any employer with more than $400,000 in payroll would have to pay at least 25% above the salary to hire someone. Result: Many fewer new jobs, with a higher structural jobless rate, much as Europe has experienced as its welfare states have expanded.

Other new taxes, including an as yet undetermined levy on private health plans. This tax, which Democrats say could raise $100 billion or so, would make it even harder for private plans to compete with the government plan, which would already benefit from government subsidies and lower capital costs. For good measure, the House bill also gets the ball rolling on tax increases on foreign-source corporate income.

We could go on, and we will in coming days. But the most remarkable quality of this healthcare exercise is its reckless disregard for economic and fiscal reality. With the economy still far from a healthy recovery, and the federal fisc already nearly $2 trillion in deficit, Democrats want to ram through one of the greatest raids on private income and business in American history. The world is looking on, agog, and wondering why the United States seems intent on jumping off this cliff.

PC software I like: There are free trial versions. You can play before you buy.

+ MagicDVD Ripper. This thing copies a DVD to your computer's hard disk. You can watch a movie in bed, on a plane, on a train. Useful if you have one of those new laptops which don't have a DVD player. Click here.

+ Microsoft's OneNote. This thing is an elegant note-taking and note-filing software.. It has a devoted and growing following. Click here.

+ Copernic Desktop Search Professional. This is the best search engine for your PC laptop or desktop. It will allow you to find anything lickety-split. Make sure you put what you search for in quotation marks, i.e. search for "John Harold Smith." Otherwise you'll find zillions of Johns you don't want.

I'm a watch freak. I have a collection of cheap watches -- nothing over $200. Sometimes I fantasize that if I weren't cheap, what would I buy? Here for your viewing pleasure are my favorite watches:

This is a Baume & Mercier. It's actually quartz, which makes it reliable and accurate. Most pricey watches are mechanical, not reliable, not accurate and require too much maintenance. Retail, you can get this for under $2,000. This watch says "classy success." For one retailer, click here.

Brequet watches have distinctive hands. No other watchmaker has such beautiful hands. A watch with lots of junk, like this one, is called "complications." It is thick. It's also mechanical which means it's unreliable and inaccurate. It's also hideously expensive.

This watch looks great in photographs. Most watches do. But in person, it's clunky. It's designed to look like an aircraft gauge.

This is the watch I wear every day. It's a Timex Expedition. It cost $20 or so. It has three advantages: It's quartz, accurate and reliable. It's light. I hate heavy watches. It's hard to type with them. Third, and most important, it has Indiglo. Push the button and you can read the time in the theater or in bed, without turning on the light and upsetting you-know-who. I bought the watch on eBay. I took the photo with my Canon G10 on manual focus. Pretty good?

The North-East won't stop raining. But apply some Rainx to your car's front windshield and watch magic. Suddenly rain beads up and rolls off. Your old wipers will act like new. Don't put this stuff on painted surfaces or plastic.

Proof positive that too much beer...

For this weekend's festivities.. a portable outdoor barbecue.

Exercise is an addiction. The more you get, the healthier you feel. But ... at my age, skip a day and your body becomes like cement and your back aches.. That's the bad the news. The good news is that you can fix the aches and pains with stretching and heavy exercise. Which is why I'm off to play this afternoon. Meantime, our local club is abuzz with the comfort of new sneakers from Adidas called CC Genius.

This blue color is Novak Djokovic's first signature shoe, It also comes in silver and white/black (which is the color I'm getting). They're on sale for $79.95 at TennisWarehouse.

Favorite recent New Yorker cartoons:

Write your congressperson: "What's the rush on healthcare? Let's mull it over a little longer."

Have a great weekend.


This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.