Over-Elaborate and Pompous

March 29, 2010  |  

By Charles Payne, CEO & Principal Analyst

“It is not easy nowadays to remember anything so
Contrary to all appearances as that
Officials are the servants of the public; and the official must try
Not to foster the illusion that it is”

The other way around- Sir Ernest Gowers

Sir Ernest Gowers was a career civil servant in the United Kingdom who wrote several books on the English language in an attempt to get government officials from using over-elaborate and pompous writing. His “Plain Words, a guide to the use of English” was a big hit and led to another book. Not only was Gowers an astute observer of wasteful government operations, he investigated the role of women in branches of government and also became an abolitionist after serving as chairman on several commissions. I find it remarkable that more than 50-years after his book, government continues to baffle the public with over-elaborate words. Certainly, in America we just got a healthy dose of this illusionary sleight of hand and arrogance from would-be public servants.

As time goes on we are learning more and more about facts in the new healthcare law and we are also learning non-facts, too. The most outrageous is the repeated line that insurance companies will no longer be able to deny coverage to children with pre-existing conditions. That sounds fantastic, but this provision doesn’t kick in until 2014. Most people don’t realize this and it’s obvious none of the politicians that took a bow read this or the bill itself. Those over-elaborate words are hard to read, and harder to understand. The media will not make this a big deal; there will be no headlines and it will not be the top story in news broadcasts. Instead, headlines will continue to read or suggest the new law is fantastic for the nation and saved the White House.

If this wasn’t so disingenuous it would be silly. It’s going to take years to see what the net impact of this law will be but it’s not too early to look beyond the hype and focus on facts. In addition to dashing the hopes of parents that thought their children had coverage but actually don’t, there is the economic impact that is already rolling in waves after waves. This law is going to cost so much more than advertised. The law changes the government’s role and is a step toward direct competition against private industry. The law will not make healthcare cheaper but will dilute the quality of care. Yet, I’m not one of those that think all of the miscues found thus far are unintended consequences.

On the contrary, I can see the Administration going on the attack again before the majority of benefits kick in to say it has been a few years and the cost curve hasn’t come down, we gave insurance companies a chance now we must have a public option. By then, many people will be paying more whether they work at small businesses or large corporations.
Companies have already begun to report charges that will have an impact immediately because of the new healthcare law.

I think that the Administration has deliberately put big businesses

in a position of having to defend profits over healthcare for retirees. The guessing must be there will be no tears on Main Street because AT&T (T), Caterpillar (CAT), Deere (DE), and so many other corporations will see a hit to their bottom lines because of the new healthcare law.

That isn’t going to be the case for Main Street Dallas or Main Street Peoria or Main Street Moline Illinois or the thousands of other Main Streets where American corporations are headquartered.

Many corporations began receiving a 28% subsidy up to $1,330.00 per retiree and tax free help to pay for prescription drug coverage. The deduction is gone although the tax free benefit is in effect. Still, the changes in the rules of the game threaten benefits of future retirees’ at large businesses and could lead to job losses as other financial burdens play out from this, in addition changes to doing business in America. But business costs don’t stop at large corporations and retiree benefits.

By the way, as this news gets out and more businesses calculate what this is going to cost there will be a serious effort by the government to get them to shut up. As it stands now Representative Henry Waxman (D – CA) has already said he will convene companies that have said the new law hurts their bottom lines before a panel on Capitol Hill on April 21. We’ve seen this kind of intimidation over the past year and it’s just another reason businesses are afraid to hire even when there is a bump in demand.

In 1956, Dr. Paul M. Zoll became the first physician to successfully use an external defibrillator to regulate heart rhythms. In 1983, the precursor to Zoll Medical opened for business. The company went public in 1992, and has been a trailblazer in the medical device industry ever since. I watched the stock climb off the canvass in 1998, where it traded at $3.00 per share to stage a remarkable comeback.

The company will have to search that same well of resolve because the new healthcare law says that it must pony up $9.0 million. The problem is that in its last fiscal year the company only earned $9.5 million. This poses a serious dilemma. I’m not sure how many lives have been saved by the company’s defibrillators and other devices but I do know defibrillators keep many loved ones alive. I suspect the company will have to lay some people off and cut back in other areas, too. In the last fiscal year, the company laid out $39.5 million for research and development, or $7.0 million more than the previous year even although its revenues were lower. I understand these evil companies must be brought to their knees but how much is this really going to cost? Fewer medical advances seem to fly in the face of the entire hullabaloo about quality of life. We are going to pay more and get less.

What about Darden Restaurants (DRI)? It turns out that the parent company to the Olive Garden and Red Lobster says it will have to increase menu prices to deal with the cost of the new law. Here’s a toast to your health, bon appétit.

AMT All Over Again

Back in the late 1960s there was a tremendous amount of resentment against rich Americans that Congress decided to get into the act. The result was the Tax Reform Act of 1969, which included the Alternative Minimum Tax (AMT) aimed at 155 people. The goal was to break those greedy bastards. Well, as it turns out the rich have gotten richer and that AMT has become a monster for regular people. This year, 30,000,000 Americans will be hit with this insidious tax of which 94% are married filers with children making $75,000 to $100,000 a year. The reason that this is happening is the AMT was never indexed for inflation. Then again, it was another example of government hijacking public angst and fanning it to the point that a law could be passed that nobody would read.

The AMT was a good source of revenue for the Johnson and Nixon Administrations to help pay for the Vietnam War. Over the years, successive administrations haven’t been able to get a handle on this tax, which has become a major revenue center. In fact, many administrations decided against spending cuts and instead furthered the reach of the AMT, enlarging the net to capture more non-rich Americans. I bring up this little history lesson because in the new healthcare law there is a provision for taxing income above $200,000 for individuals and $250,000 for families at 3.8% on investments and dividends. First off, it is so stupid to tax investments in this manner. Our country needs to encourage this kind of financial commitment.

But for those that think this isn’t a big deal and will not impact their lives they better think again. This measure is not indexed for inflation. Maybe $250,000 seems like much money to a young husband and wife just out of college but in twenty years it could be seen as not enough money to cover their bills while they provide care for their three children and prepare to pay for college. The crazy thing is that the bill was deliberately not indexed to inflation. It’s conceivable that a decade from now millions of Americans will see their investments hit with heavy taxes, including the so-called Medicare Tax. It is also conceivable that twenty years from now tens of millions of Americans will also find the burden of this tax prohibitive and might skip certain kinds of investing.

Jobs Picture

This week it’s all about jobs, and everyone is looking for a whopper of a number. Officially, the Street is looking for 190,000 net new jobs when the March data is released on Friday. Unofficially, the number is much higher, including an estimate of 300,000 by my buddy Brian Wesbury, one of the sharpest economists on the Street. Over 100,000 jobs will come from hires to get the census work complete and others are expected to have been deferred from February when harsh weather delayed hiring. I’m not sure how this is going to play out because in months where there have been positive expectations about jobs the reports have come up short. I’m not sure what qualifies as a dud on Friday. The market not being open doesn’t help matters, either.

It was reported this last Friday that 27 states saw employment decline last month. The statistics are horrific.

Market Outlook

This is a short week where nobody will be around when the biggest news item of the month is released. These jobs report weeks have gotten off to fast starts only to cave in to angst and some kind of disappointing economic data.
Even though the market continues to move higher, anxiety is underscored by the fact the DJIA has outperformed the S&P 500 and NASDAQ in the last two weeks. Talk about jittery, a South Korean vessel sinks and so does the U.S. stock market. A plan to assist Greece sinks and so does the U.S. stock market. These are reminders of how great America is despite the path it’s on. It is also a reminder of how fickle investors are right now as they want a weak dollar and small hurdles to keep the rally going.

Economic Data

Personal Income and Spending

Futures weakened on the release of the report, which largely came in line with expectations. However, as we have detailed in numerous notes breaking down recent economic data, the report’s composition raises questions on the pace of economic recovery. For example, payrolls in goods producing and manufacturing industries declined noticeably in February relative to January, while services payrolls increased. What does this tell us about the economy? Well, potentially it tells us that new orders to factories are slowing, and those workers who were brought on board to meet the strong bounce in demand are no longer needed or are having hours trimmed. The increase in services payrolls may reflect the need to service orders that were already produced, and that a potential slowing will lead to weakness in this report component going forward. Overall, the report suggests a weak wage environment, one highlighted by increased efficiencies which diminish the need to hire new workers or boost overtime pay (if you yearn for a job, you take what you get and are likely content…don’t want to rock the boat for overtime pay).

February spending was +0.3% (consensus: +0.3%) and income was flat (consensus: +0.1%). In the cases of income and spending, the rates have slowed from November 2009. Personal savings rate was 3.1%, down slightly from 3.4% in January.!

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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