Written by Admin | Jun 17, 2009 4:00:00 AM
Health care stocks are enjoying a nice rally today. In fact, they are leading the markets higher for the first time I can remember in a very long time. What's also different about today's move is that it doesn't appear to be related to a reemergence of the defensive trade even though the market has pulled back some from its recent highs. While staples are performing in line with the market, consumer discretionary shares and semiconductors - improving economy plays - are also doing well. If the defensive trade was back, we wouldn't likely see these latter two areas outperforming as well.
Health care stocks may be staging inordinate gains today on hopes that Obama's ambitious health care plans may end up having a lot less bite than was promised during his campaign. In recent days, the Obama administration has received criticism from its own party for ratcheting back some promises and last night, the Congressional Budget Office sent the plan back for review after declaring it too expensive.
The administration also came out with some new regulatory ideas for the financial services industry. It feels weird to say this, but I actually agree with many of the ideas. I think the derivatives and credit default swap markets should be more regulated. These products brought down Lehman Brothers and have cost taxpayers billions in bailouts of companies like AIG. If we're not going to allow companies that make bad business decisions to fail or believe that some are too big to fail, then regulations may be the only alternative short of banning the products altogether. One great idea is a requirement that all financial institutions maintain an equity interest in any assets they securitize and then package for sale. This seems like a no brainer. I think we would all agree that owners tend to be better stewards of resources than renters, whether the assets are homes or mortgage loans.
Some, of course, will argue that these regulations are coming too little too late. Perhaps there is some truth to that, but at least in my opinion, the argument doesn't fly. After 9/11, would we have been better off doing nothing to beef up airport security measures under the argument that terrorists wouldn't likely try the same thing twice? I think a do nothing approach would have been foolish although I could never prove it. The financial markets have experienced tremendous levels of innovation over the last decade and perhaps the regulatory framework needs some innovation of its own.
The greatest thing about our government may also be its least appealing, especially if you're comparing us to speedy ole' China in recent months. Our system of checks and balances is so extensive that very little is usually accomplished, especially when it comes to extreme policy measures from both side of the aisle. The Clinton administration started in office with many aggressive policy ideas which were quickly tempered by government and market forces at work. And in the end, his Presidency wasn't nearly as bad for the economy as had originally been feared.
There's an important lesson for investors in there somewhere. Take note!