Healthcare Plummets Because Of Politics As S&P 500 Nears Record High

Healthcare Plummets - As Stocks Creep Higher

Even though the stock market is extremely overbought, it managed to inch closer to its record closing high on Tuesday. S&P 500 was up 5 basis points to 2,907.06. It has increased 12 times in 14 days. I still expect it to break its record closing high of 2,930.75 in this holiday shortened week. 

CNN fear and greed index increased 2 points to 70 which puts it on the cusp of extreme greed again. On April 15th, the junk bond demand part of the index switched from fear to neutral. Only two parts of the index show in the extreme greed category. Those are the net new 52 week highs and lows on the NYSE and the McClellan volume summation index. The latter measures stock market breadth.

Healthcare Plummets - Sector Review

Nasdaq increased 0.3% and Russell 2000 increased 0.23%. Russell 2000 is the furthest away from its record high of the major indexes as it is down about 9% since its peak last August. VIX fell 1.14% to 12.18. It’s still very low. I’m looking for a breakout in the VIX sometime soon after the S&P 500 hits a record high. The market is way too calm. Even though it doesn’t seem like it, there’s still uncertainty that could catalyze a mini-correction of about 5%.

Declines on Tuesday were centered in 3 sectors. Utilities, real estate, and healthcare fell 1.39%, 2.38%, and 2.03%. Biggest losers were mostly healthcare names as the sector continued its sharp underperformance. HCA Holdings, Cigna Corp, Humana Inc, and Anthem Inc fell 10%, 7.8%, 7.4%, and 6.8%. 

The sector plummeted because the CEO of UnitedHealth stated “Medicare for All would destabilize the nation’s health system.” That’s the healthcare plan promoted by left wing Democrats led by Bernie Sanders.

Healthcare Plummets - Some believe these stocks are going to continue to fall if Bernie Sanders gains in the polls. 

2 latest national polls showed Bernie Sanders up 5 points over Joe Biden and Biden up by 8 points over Sanders. The RealClearPolitics average has Biden up by 9.3 points. One left leaning challenger will likely give Biden a run for his money whether it is Bernie or someone else. The first Democratic debate will be held on June 26th and June 27th.

By the time the nomination occurs, this potential negative will mostly be priced in these names. At that point, even if a left leaning candidate wins, these stocks might rally. I always lean on the side of expecting politicians to not get something done rather than expecting them to get something done. 

It’s a huge risk to change the healthcare system. Politicians like getting elected on big promises. However, they often deliver incremental changes because they don’t want to make tough choices.

Best 2 sectors on Tuesday were the financials and energy. Financials like increasing rates and energy likes increasing oil. 10 year yield is now at 2.6% and the 2 year yield is at 2.42%. As I predicted, the 2 year yield is now above the Fed funds rate. The curve steepened which helps net interest margins. 

Tech sector was up 0.49% because Qualcomm increased 23.21% as it settled a patent dispute and stuck a multi-year deal with Apple.

Healthcare Plummets - Bank Of America’s Earnings

Bank of America continued the streak of big banks reporting earnings beats as the firm had 70 cents in EPS which was 4 cents above estimates. Profits grew 6% yearly to $7.3 billion. Revenues were flat as compared to last year and met estimates as they were $23 billion. The stock fell 2.6% at the start of trading, but then rallied in the afternoon to close up 17 basis points.

The bank’s CFO Paul Donofrio had a cautiously optimistic tone which isn’t in tune with the euphoria seen on Wall Street this year. 

Specifically, he stated, “The economy is expected to grow more moderately in 2019 and rate expectations have been lowered, plus we have some seasonable headwinds in Q2. Ultimately, we expect NII for the full year of 2019 to be up roughly half the pace of 2018. This perspective assumes today’s forward curve and loan and deposit growth consistent with the current economy.”

To be clear, NII is net interest income. This quote isn’t that positive, but I don’t think you should take it at face value. If the economy improves, like some leading indicators suggest, and if rate hike expectations increase, the firm will do well. In the past few weeks, the odds of a cut this year have plummeted. There is now a 40.6% chance the Fed cuts rates this year.

Healthcare Plummets - Netflix Destroys EPS Estimates & Beats Revenue Estimates Slightly

After rallying 3.04% on Tuesday, Netflix stock fell slightly after hours after the firm beat EPS and revenue estimates. The stock is about 14% below its July 2018 high. Firm reported 76 cents of EPS which beat estimates for 57 cents. Revenues were $4.52 billion instead of $4.5 billion. 

Domestic paid subscriber additions were 1.74 million which beat estimates for 1.61 million. International subscriber additions were 7.86 million which beat estimates for 7.31 million. Revenues were up 22.2% and EPS was up 18.8%. Q2 guidance called for 55 cents in EPS which missed estimates for 99 cents.

I agree with Netflix’s assertion that Apple and Disney’s new services won’t hurt subscriber growth. There is already high competition in the entertainment industry. Those new services won’t move the needle much even if they are successful. You can literally do anything with your free time. Netflix competes with video games, theme parks, traditional TV, live sports, etc.

The disaster that is the negative free cash flow continued as the firm had negative $380 million in free cash flow which was up from negative $287 million last year. Negative free cash flow is expected to be $3.5 billion this year instead of the previously expected negative $3 billion. I’m still waiting for the firm to turn the corner.

Personally, I think the stock will move up in the near term on this subscriber beat, but I can’t own it for the long term because I don’t believe free cash flow will be positive in the next 1-2 years.   

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