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A different kind of healthcare reform

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I don't think today's decline for the HMO Index (HMO.X) 870.41 -9.37% was what Americans had in mind when discussing the pros and cons of government-initiated healthcare reform.

For a second time in less than a week, the insurance industry was rocked, this time health insurers, on news that Eliot Spitzer, New York's Attorney General, was widening his office's inquiry into fees paid by HMOs to brokers, acting as intermediaries between employers and the HMOs.

UnumProvident (NYSE:UNM) $12.19 -9.83% got the ball rolling when the nations largest provider of disability insurance said it received a fresh subpoena from Eliot Spitzer's office.

UnumProvident pledged to cooperate with the probe and, at the same time, examine its own business practices.

"We will further review our compensation policies and procedures to be sure that we appropriately compensate our brokers but do not create any actual or perceived conflict between the broker and the customer," UnumProvident CEO Thomas Watjen stated. Mr. Watjen added that "UnumProvident will not enter into any new compensation agreements until this review is completed."

S&P 100 Index (OEX.X) 530.00 -0.78% component Cigna (NYSE:CI) $59.73 -10.28% said it received a new subpoena from the New York Attorney General.

Aetna (NYSE:AET) $86.17 -11.8% plunged below $83 intra-day, with rumors circulating that it may have received a new subpoena from Sptizer's office. After today's close, Aetna's shares slipped to $85 when the company confirmed it had indeed received a subpoena.

As investors continue to juggle the potential outcomes, several being downright frightening for shareholders, investor confidence toward insurers was dealt further blow when representatives from California and Pennsylvania said they are examining allegations raised in Eliot Spitzer's lawsuit against insurance broker Marsh & McLennan (NYSE:MMC) $24.10 -5.74%.

"We are analyzing the allegations and are in touch with the New York regulators that are assisting Attorney General Spitzer to assess what additional actions we can and will engage in," said Melissa Fox, spokeswoman at the Pennsylvania Insurance Department.

Goldman Sachs did make comment late this afternoon that they felt the selling among HMOs was "overdone," reminding investors that commissions are not paid under purchasing agreements for the large employer business. In what seemed to be a cautious note, Goldman Sachs did mention that commission payment practices for smaller employer business may come under scrutiny and that the bulk of liability rests with brokers, not HMOs themselves.

HMO Index (HMO.X) Chart - WEEKLY Intervals

Declines among the health insurers spoiled what may have been an otherwise bullish session as last night's quarterly earnings from IBM (NYSE:IBM) $89.37 +4.01% and Texas Instruments (NYSE:TXN) $22.51 +6.92% were met with a bullish response.

According to Standard and Poors, profits for the 17 top U.S. health providers rose 114% to $414 million from $193 million since 2004, while profit margins doubled to 5%, the highest level in at least a decade for the industry's top 10 insurers.

By comparison, the S&P 500 (SPX.X) 1,103.23 -0.98% saw profits rise a more modest 5% the past four years.

U.S. Market Watch - 10/19/04 Close

I can't say that the recent declines for insurance brokers and now health insurers have had a significant "fundamental" impact on the broader S&P 500 Index (SPX.X), but I do think the UNCERTAINTY surrounding the eventual outcome of Eliot Spitzer's investigation provides negative, if not cautious sentiment among investors.

Market Snapshot / Internals - 10/19/04 Close

While the health insurers started their decline just after the opening bell, the major indices reached their intra-day highs about 40-minutes into the session. Strength among semiconductors and broader tech lasted longer.

Uncertainty is such a difficult trade. Some things I saw, or perhaps heard, is what can often times happen when one concern suddenly becomes a second concern. Let's call it "Eliot Wave."

For example, with news of an insurance broker investigation last week, building to further investigation of the health insurers, brokers came under selling pressure on RUMOR that Mr. Spitzer's office might be investigating brokers and their dealings with various derivatives.

Dow component JP Morgan (NYSE:JPM) $37.98 -2.61% fell from the $39.20 level just prior to 11:00 AM EDT, as it was one of the brokers RUMORED as being a target.

Similar RUMORS circulated that Fannie Mae (NYSE:FNM) $67.67 -1.51% might be under greater scrutiny from the SEC, where an informal probe has been underway as to some of its accounting methods. After the closing bell, the mortgage lender confirmed that the SEC had changed the status of its investigation of the company's accounting to formal from informal.

The Washington, D.C.-based company, which stands behind more than $2 trillion in mortgages, said it will continue to cooperate fully with the SEC.

A formal SEC investigation implies that the SEC has now assigned staff, budget and subpoena power to the ongoing investigation.

S&P 500 Index (SPX.X) Chart - Daily Intervals

The SPX has really gone nowhere the past 4 sessions, and whether any of us fully understand the implications of Mr. Spitzer's probe, it may be broader market psychology that dictates trade, with the though being it best to either take profits, or play things conservatively, let things cool down a bit, and get more information before committing new capital.

While it has been somewhat refreshing to discuss something other than oil prices, today's main driver was the widening probe of Mr. Spitzer.

Things can change quickly though. We've got oil inventories tomorrow, and while oil prices remained firm after yesterday's decline, oil didn't trade new highs either and the SPX.X still holds above MONTHLY S1 and 1,100.

Pivot Matrix -

The VIX.X traded a session low of 14.32 and high of 15.20, which comes just shy of its WEEKLY Pivot. Traders might keep tabs on VIX.X 15.25 tomorrow should the SPX.X edge under the 1,100 level and near 3 levels of correlative support at 1,098 in tomorrow's trade. Especially into the 10:30 AM EDT mark, when we should get weekly oil inventory data.

The NDX/QQQ came within fractions of their WEEKLY R2, with the SOX.X providing a push to its WEEKLY R1.

Jeff Bailey

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