There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

That’s the president talking, not Taipan Daily. Mr. Obama’s remarks came in response to a question from a Canadian journalist, at a North American summit held in Guadalajara, Mexico.

Meanwhile, U.S. Representative John Dingell was shouted down by an angry protester at a town hall meeting in Romulus, Mich., last week. The protester, pushing his wheelchair-bound son to the podium, called Dingell a “fraud” and said that proposed changes would not help his son.

Emotions are heating up all around the country, with strong outbursts on either side of the divide. Some are furious that healthcare reform does not go far enough. Others are furious that it is being foisted upon the country at all.

We touched on this debate two weeks or so ago – see “Throwing Rocks at the Healthcare Hornet’s Nest” – but it seems worth another look.

“Increasingly, the [healthcare reform] battle looks like a presidential contest,” says The New York Times, “with expensive advertising campaigns and Internet-driven efforts to mobilize support.”

Interestingly enough, the debate does not appear centered on how much all this might cost. Instead, it is more focused on quality of care… and whether Americans would be denied access to care, as some say happens routinely in other systems.

The below excerpt (slightly edited for clarity) from Taipan Daily reader Helen M. does a good job, in your humble editor’s point of view, in summing up the strengths and weaknesses of socialized medicine:

Let me tell you a bit about socialized medicine, this coming from someone who lived with it. First 28 yrs of my life I lived in Eastern Europe, in Czechoslovakia. This country strived to reach socialism and eventually communism, after the Russian example. Thank God it never reached any of them. You had a doctor that was assigned to your employer, or in absence of employer to the place where you lived.

Offices were always overcrowded, they did not [push] medicine on you as doctors in our country do, for [they] were in short supply. Medical care was rationed and so were the surgical procedures. When you did not like the doctor assigned to you you couldn’t switch, [most] people of my generation worked very hard even physically (exercise) ate very sensibly (they could not afford more than basic food cooked from scratch at home, thus healthier than the USA supermarket food, most of which is bad for you) and they said keep away from the doctors if you want to live long healthy life. All my ancestors from both parents side lived a very long healthy life and worked till the day they died.

Later my scientist husband and I lived in other European countries for months or a few years. The U.K. had a sort of socialized medicine. It was not any better: overcrowded offices (lonely old ladies [w]ent to see their doc to talk), medications and medical care was rationed.

Germany did not fare much better. Not only for patients but for the doctors as well. Government determine[s] what they are allowed to charge even to private patients and till recent days it did not change. During the month of June German doctors were on strike to object to their low fee scale. Actually in spring of 2008 I did go to Munich, where [a] top oral surgeon placed 7 implants into my mouth and his associated fine American dentist educated in USA… did 3 perfect bridges and both charged me equivalent of $ 20,000 whereas USA dentist and his oral surgeon would not even give me an estimate [beyond] saying could be up to $ 120,000. I chose German team and paid $16,000 or $20,000 including two trips to Munich. And that for the best team in Munich.

But due to their government ran system they are much less paid than their U.S. colleagues. Still they provide very fine care. [German] strike accomplished some fee scale increases but how would American doctors respond when their salaries go 300% and more down? We shall all get equal care regardless [of]our financial status – equally lousy. I would rather pay my last buck for a fine doctor of my choice.

These experiences are not based on speculation… but where I was and what I experience[d]. Lets all pray this sick scheme never passes.

Sincerely, Helen M. AIA, subscriber

Notice the interesting plot twist in regard to excellent German care. Helen’s long experience with socialized medicine was, overall, quite undesirable – “pray this sick scheme never passes” – but that did not stop her from saving $100,000 or so on an expensive dental procedure courtesy of a government-run system.

Does that count as hypocrisy? I would say no – it’s only common sense. Who wouldn’t want to save $100,000 without any noticeable reduction in quality if they could? There is real value in upholding one’s ideals and making decisions based on principle… but there is also real value in hard-nosed pragmatism and doing what makes sense in a world that will by and large remain screwed up anyway.

Saving $100K on a procedure is no small thing, and in many ways it goes to the heart of the healthcare reform debate. Many of those who passionately argued for reform, like Taipan Daily reader Ron E., had experience with financially debilitating healthcare-related events.

What about honest, hardworking Americans who have health care, insurance, good doctors, etc, but still face ruin in the event of a catastrophic health issue? For example, I am a hard working individual who has a fairly decent health policy. I have bulging of damaged vertebra in almost every disc in my back, and a fused neck. On top of that I had to have a valve replacement when my heart was attacked by infectious bacteria while on a trip to Singapore. My wife had brain surgery to clip an aneurism, she also suffers from Hepatitis C, and she has [a] ruptured disc due to an accident – a patient kicked her in the E.R. These health issues have required us to cash in 401Ks, IRAs, savings, and every penny we can get our hands on, and still led to financial ruin.

I don’t expect to have a free ride, nor do I expect the government to pay for all of my costs but it just isn’t right that I live in ruin due to poor health over which I have no control. Don’t tell me our health system is fine. It isn’t. I’m only one of millions in this position. I would say if you would take the anti-govt health plan constituent and give them a good healthy dose of my problems they would be changing camps in a hurry. Something must be done, and fast. There are way too many people with views like yourself. I’m not one to wish bad luck on anyone, but I do wish that all of the people that are “happy” with our health system would suffer (just temporarily) until they get a good taste of the consequences of poor health. They would change their minds in a hurry.
– Ron E.

TANSTAAFL

Ron E.’s situation powerfully underscores the source of strong emotions in this debate. In a free market system, the safety net is thin at best. Catastrophe can be absolutely devastating, no doubt.

This strikes many as a deep and grievous injustice… and who can blame them? Personally I would not wish poor health or capricious tragedy on anyone – there is already enough pain in the world – but given what Ron has gone through, I can understand why he would.

The debate also brings to mind one of the best science fiction novels of all time: The Moon Is a Harsh Mistress by Robert A. Heinlein. Written in 1966, the story is about a lunar colony’s revolt against exploitative Earthbound rule. The novel has been embraced by libertarians as one of the best expressions of libertarian thought to be found anywhere.

An acronym popularized by the Heinlein novel is TANSTAAFL, which stands for “There Ain’t No Such Thing As A Free Lunch.”

No matter how much we would wish it to be otherwise, everything has a cost. Like the moon, Mother Nature is a harsh mistress too. The discipline of economics is all about the allocation of scarce resources – “scarce” denoting the fact that there is not enough for all to have as much as they desire in the quantities they seek.

One might say TANSTAAFL applies to healthcare in terms of a trade-off… the trade-off between astronomically expensive (but rare) medical procedure coverage versus quality and availability of day-to-day care. Consider this from TD reader Joan:

As a Canadian I’m here to tell you our Health CARE(?) sucks. Our government has no problem making [its] citizens wait well over a year in pain for procedures to eliminate that pain. It doesn’t matter how much money you have you wait just like a bum on the streets. I needed a herniated disc operated on and waited 13 1/2 months to see a surgeon, who told me it would be another year to get into surgery. BUT, he wouldn’t operate on me then because 70% of hernias heal. (really?) Well, I had been in pain for a year and a half already and it was getting worse by the day. I was taking morphine and you know how addictive that is! I went to the U.S. and had the surgery in 2 weeks. I’m fine now and pain free. I look around me at all the people in pain and wish they could afford to go somewhere to be fixed. Now mind you, If you have a car accident and need immediate care, you jump to the first of the line. They also take cancer seriously. You only have to wait a month or so for that surgery. Imagine having cancer and waiting at all!!

Just my opinion, but I would take the U.S. health care over ours. Private insurance in the U.S. costs about $4500/year. I pay that here for additional health insurance and still have to wait in line for specialists.

Free ain’t what it’s cracked up to be…

Joan

Yep. That’s TANSTAAFL right there… anything with the appearance of “free” actually has a cost.

Where You Stand Depends on Where You Sit

The healthcare reform debate seems deeply driven by personal experience. “Where you stand depends on where you sit” as the old saying goes.

Those who have experienced catastrophic health events in their lives tilt strongly toward U.S. reform, of the sort that would have society (i.e. taxpayers by way of government) pay full freight. In contrast, those who have experienced the headaches of a dysfunctional government-run system on a day-to-day level tend to focus more on the general awfulness of that experience.

It isn’t quite that cut and dried, of course. Socialized healthcare systems also have horrible failings on the catastrophic side – think of patients dying on waiting lists – and free-market oriented systems can feel like a blatant rip-off to healthy individuals gouged by frivolous charges left and right.

Simple answers are hard to come by. TANSTAAFL still seems a fair guideline, though, because there will be major costs associated with whatever system America chooses. It’s never a pleasant exercise assigning financial weight to moral decisions – but the alternative is a fiscal road to ruin.

Source:  The Catastrophe Conundrum – Healthcare Revisited

My little brother and his fiancée dropped into Reno/Tahoe for the weekend. They were wending their way west to go apartment hunting in San Francisco, visiting friends and family along the way.

On Saturday we took a two-hour catamaran cruise up at the lake. It was as perfect a day as I’d ever seen it. The water was so clear and blue, you could see 30 feet down through the netting of the boat. The sky was just as blue – not a cloud to be seen – and the day was just hot enough to be perfected by a crisp Tahoe breeze.

At one point in the cruise we sailed past the “Ellison project” – a stretch of lakefront put under construction by Larry Ellison, the billionaire founder of Oracle (ORCL:NASDAQ). The two adjoining $15 million mansions weren’t big enough for Larry, so he had them torn down to build something more to his liking instead.

At another, equally secluded bend in the Tahoe shoreline (the lake is 22 miles long), we passed by the Stack family estate. Robert Stack, the late actor best known for The Untouchables and Unsolved Mysteries, spent his boyhood summers there. Adjacent to this, a 5- or 6-acre parcel of waterfront land was on the market for “only” $19 million – a bargain-basement price by Tahoe standards.

As we noshed on beer and wine and cheese and fruit, I joked with my little brother that we should go in on the property together – get the ball rolling on a new patch of Litle estate.

“Not just yet, big bro,” he replied. “Unless I can make do with, say, a zero-point-five percentage ownership.”

“Couple years,” I chuckled back. We were joking, of course… $19 mil is a bit rich for a piece of undeveloped real estate… but then again, five or 10 years from now, who knows?

Perfect weekends like the one that just unfolded in Tahoe remind me of something Einstein once said – you can live your life as if everything is a miracle, or nothing is. I think that’s true. In hearing the stories of some of the families who built those lakefront estates, I was also reminded of something else I believe.

Of all the traits that separate those who live their dreams from those who don’t, courage and determination seem to be the biggest two factors by far. Smarts, connections, money, and even lucky breaks seem to pale in comparison to those first two. Luck is still an undeniable factor, of course, but in some ways luck is like an ocean wave. It’s not enough just to be standing on the beach… you have to have the gumption to get out there and surf it.

Anyhow, just some quick thoughts from an idyllic weekend…

Cliff Asness, Hero

Back to the slightly more grim (but important) matter at hand. It’s not the custom of Taipan Daily to direct readers to outside essays written by outside writers. But in this case, the piece to which I call your attention now is well worth it.

The piece is called “Health Care Mythology” by Clifford Asness. A friend forwarded it to me, but you can find it on this Web site (the WSJ has been directing readers there too).

As the founder of a multibillion-dollar quantitative strategy hedge fund, Cliff Asness makes for an unlikely hero. Your humble editor calls him a hero, in a tongue-in-cheek but not totally undeserved sense of the term, because Asness is wealthy, outspoken and exposed. The things he says – and he says them quite forcefully – could lead to trouble for his wildly successful fund management business.

In “Health Care Mythology,” Asness eloquently and brutally dismantles certain myths about the healthcare industry. Lest you think this is a boring exercise from a stuffy fund manager, consider some of these excerpts:

…Step one is understanding how and why they are wrong. Step two is kicking their asses back to Cuba where they can get in line with Michael Moore for their free gastric bypasses.

…. if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I’m going to rupture their appendix and send them to a queue in the UK to get it fixed. Last we’ll see of them…

The Seven Myths, Summarized

In case you don’t have time to read Cliff’s more than 6,000-word commonsense manifesto – a good chunk of prose by even your humble editor’s standards! – the seven myths are summarized briefly here. (Keep in mind, though, that the summaries really are no substitute for reading the whole “Health Care Mythology” piece.)

Myth #1: Healthcare Costs Are Soaring

No they’re not, says Cliff Asness. They only appear to be soaring if you compare on price but forget to compare on quality. As Cliff puts it, “you cannot judge the cost of something simply by what you spend.” We may be spending a lot more dough than we did in the 1950s, but we’re also getting a lot more value for our money. As Asness puts it, “nobody in the US really wants 1950’s health care (or even 1990’s health care). They just want to pay 1950 prices for 2009 health care.”

Myth #2: The Canadian Drug Story

Those who cast a skeptical eye on healthcare reform are constantly beaten over the head with the Canadian success story. Our neighbors to the north have a far more humane and effective system, the reformers say. Cliff Asness calls B.S. on this argument by making a non-politically correct point…. the government-run Canadian system only works by leeching off the free-market U.S. one.

Asness’ case in point is the drug market. U.S.-based pharmaceutical companies have to spend ungodly sums of money on the testing, development and marketing of new drugs. Big pharma then has to charge a lot of money for their end product to recoup this massively expensive pipeline cost – otherwise the drug isn’t worth making in the first place.

But Canada, in its capacity to act as a single government-backed customer, puts big pharma over a barrel. After a drug is already developed for the U.S. market, it only makes sense to sell into Canada too, and big pharma needs all the profits it can get to fund further research.

So basically, Asness argues, many of Canada’s benefits come from piggybacking on a functional American system. Take the functioning U.S. market out of the equation and what do you get? No more cheap drugs, eh.

Myth #3: Socialized Medicine Works in Some Places

As Asness sees it, the leech argument further applies to all the government-run healthcare systems in the world that benefit from an influx of U.S.-based medical advances originally developed for a profitable market.

And so, Asness argues, if America tries to go the way of Canada or the U.K. or what have you, there will be no one for America to leech off of in terms of drug development and innovation… and the U.S. centric march of progress towards better medical technology will simply collapse.

So, please [Asness begs], stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting ten weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.

Myth #4: Socialized Medicine Is Better Because Their Cost/GDP for Healthcare Is Lower

Asness argues that this is a failing of logic rather than statistics.

While technically correct in a pure statistical sense, the fact that countries with socialized medicine spend less per capita on healthcare is misleading for a number of reasons. For one, Asness points out, many of these countries are subsidized by U.S. drug development and innovation. Second, differences in overall spending do not account for choices made in the United States that simply aren’t available elsewhere.

There are a number of other arguments Asness uses – basic point being, you can’t always trust an upfront number to tell an accurate story. As Mark Twain liked to say, “there are lies, damn lies, and statistics.”

Myth #5: A Public Option Can Co-Exist With a Private Option

This is the myth that, under the guise of national healthcare reform, those who want to keep access to a private system can do so without seeing significant degradation of their choices.

Asness argues at length that this is basically a ruse. If we go “public,” Asness asserts, we are signing up for socialized medicine whether we like it or not. There are all kinds of technicalities and wavers and ways to artfully dodge this assertion, and Asness tackles many if not most of them in his piece.

Myth #6: We Can Have Health Care Without Rationing

For this myth, Asness points to the elephant in the room, addressing an ugly word – “rationing” – that no one in Washington seems comfortable with.

It’s simple economics, Asness says. No matter how much we might wish it weren’t so, idealism won’t change the fact that a scarce good cannot be provided in unlimited, equal amounts to everyone. As Asness puts it,

If you have a material good or service, like health care, that is ever increasing in quality, and therefore cost, there is no way everyone on Earth can have the best at all times (actually the quality increases are not necessary for rationing to be needed, it just makes the example clearer). It’s going to be rationed by some means. The alternatives come down to the marketplace or the government.

Myth #7: Health Care Is a Right

“Nope, it’s not,” Asness says. “But we are at the nuclear bomb of the discussion. The one guaranteed to get me yelled at or perhaps picketed by a mob waving signs printed up with George Soros’s money.”

Asness makes the case as to why healthcare is not a “right” with a mix of insight and sarcasm. Much of his argument centers around the difference between positive and negative rights – e.g. the right to be left in peace versus the right to some form of entitlement – and also touches on the crazy idea that new technology, a driving force in medical care, should somehow be instantly appropriated for the masses. (At one point Asness asks, “Did you have a right to chemotherapy in 1600 AD?”)

Asness further goes on to point out one of the ironies of “unfair” free market healthcare versus “fair” government provided healthcare.

In an “unfair” system, the initial users of a new medical technology are willing to pay an expensive price – a price the masses could not afford. But the profits generated from this early use lead to innovation and price competition, eventually making the medical technology available to everyone.

Think of it like DVD players. These days you can buy a serviceable DVD player for a whopping 30 bucks. Considering the technology involved, that’s damn cheap… and that’s why DVD players are so popular. But DVD players started out being ridiculously expensive… too expensive for the average family to afford. It was the “early adopters” willing to pay hundreds and hundreds of dollars for experimental technology (the first DVD player prototypes) who enabled profit-driven improvements and the migration to a mass market.

So now imagine what would happen if the government had declared home entertainment equipment to be a “right” from the outset. Under this “rights” based system, the idea of a super-expensive DVD player that only some rich technophile could afford would be considered an outrage. And in the absence of expensive DVD players at the outset, the competition-driven free market would never have figured out how to serve up cheap ones.

The DVD player story is Silicon Valley in microcosm. “First expensive, then cheap” is how innovation spreads. The difference between healthcare technology and home entertainment technology is an emotional one, not a logical one… and so viewing healthcare as a “right” creates the same problems you get when the government is put in charge of most anything at all.

What do you think? Is Cliff Asness on target? Or do views such as these count more as part of the problem than the solution? Let me know: justice@taipandaily.com

Source:  The Seven Myths of U.S. Healthcare Reform

And to cap it all, we are about to close the first half of 2009, with all the consequences in terms of portfolio adjustments that need to take place.

The Treasury debt placement was well received by the markets.   We saw these issues amply oversubscribed and trading well after their placement.  This was very encouraging.  End of the half adjustments also saw a bid coming back into the U.S. dollar.  And, with the Federal Reserve issuing a statement in which they are not expanding quantitative easing further, the ghost of hyperinflation is delayed for the time being.

With all the slack in the U.S. economy there is no room for manufacturers to pass cost increases on to consumers.  As the fiscal and monetary stimuli become ingrained, this will change.  But for the moment, the great fears of a runaway monetary base have been moderated.

This view is also supported by the commentaries of both Warren Buffet and General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt.  The oracle of Omaha saw no recovery yet in his numbers.  And Buffett’s group holdings are diversified enough, and he and his management team are as well connected enough, to be ahead of any recovery.

Similarly, Immelt commented that the underpinnings for a recovery were in place.  And he also observed that China, and some government-driven emerging markets are strong and could be driving U.S. exports.  He did mention that the thrust of aircraft engine orders come from abroad rather than the United States.

In this column, we took early and aggressive advantage, starting last October and December, of low market valuations.  The market did not price then the strong monetary and fiscal stimuli that were devised to bolster the economy.

Without the Fed’s strong measures and quick actions, we would have fallen into a deflationary spiral and much deeper downturn.  But the Fed’s actions normalized markets one by one; starting at the epicenter, the interbank and money markets, and moving outward in concentric circles through mortgages, and student and car loans.  These actions helped bring the corporate bond markets and the equity markets back to life.

Stocks appreciated the Fed’s effort, as the market shifted its valuation from an “end-of-the world” scenario to a deep recession scenario or better.  But that trade is over.

As Warren Buffet says and Jeff Immelt implicitly recognize, the recovery will take a long time to materialize.  There are still huge numbers of homes facing foreclosures, and the slack in the U.S. economy is very pronounced.  We need to see some more good news in order to justify higher valuations.

Ahead of this realization by the market, we have been in profit-taking mode for the most volatile stocks and moved to hold for longer-term recommendations.

The Standard & Poor’s 500 Index has recognized this and had started moving sideways with a very slight downward bias as of late.  Do not construe this to be bad news.  In fact, the cup-and-handle formation in the S&P 500 usually precedes a sharp move up.

That is a very distinct possibility that we will eventually be playing with many of our existing ‘Buy’ recommendations, as well as with new ones, should the scenario materialize.  But we need to get over the cap-and-trade and healthcare reform humps.

If the cap and trade legislation passes, the overall cost of energy will go up, taxing the whole economy, and there will be a shift to renewables, creating many jobs in this industry and ample profits.  We need to see these issues defined before pulling the trigger in most hugely actionable trades.

So, I started screening different income-generating strategies and I discovered a great way to have both upside with high-yielding, yet low-default bonds, and at the same time enjoy dividends from mammoth companies that are likely to keep paying them: The TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW).

I normally shun from recommending funds.  Why pay management fees when I can come up with a similar strategy on my own and recommend it to you?

But there are two circumstances that make this case different:

• When there is such a level of expertise behind the strategy that it would be almost impossible for a non-expert to replicate with a decent chance to obtain similar results.
• And when the value of diversification is huge, and such diversification is unavailable or almost impossible for the individual investor to obtain.

Both of these reasons are huge factors here.  Let me explain.

Let’s start by explaining what this fund has in its belly.  It can invest from 50% to 60% of the fund in tax-free municipal securities and between 40% and 50% in equities and other income securities.  So we are not only playing the rally in bonds that stand to benefit from the markets’ realization that we are in for a longer recession than expected, that inflation is very subdued, and that the debt placements by the U.S. Treasury were well received.

It helps the bond market a lot to have seen that the Fed did not continue expanding its quantitative easing.  So why not benefit from this by buying high-yielding, tax–free bonds?

We are going to get both capital appreciation and a high yield.

The fund is positioned right now some 54% in munis and 10% in other income. And it is well diversified in 59 strong large caps with an average market capitalization of about $55 billion that pay an average dividend yield of 4.85%!

The key to the strategy is executing precisely in the muni world, given the fund’s higher weight in it.  Also, this very specialized asset class requires detailed credit analysis of municipal and project finances.  The beauty of most munis is that these jurisdictions have taxing power and they are careful to keep their credit ratings.

In fact, fund’s holdings are 42% in AAA-rated bonds, making it 88% of the bond holdings rated single A or better.  In addition, it has a duration of 15 years, which will be beneficial to returns with a bond rally.

But as many in the market learned painfully last year, “not all AAA bonds are made equal,” and many went straight to default.  I have known this for a long time and have always done my own research on credit quality, never relying on rating agencies.  Because of this discipline, I was able to get out of Enron, Worldcomm, the toxic-waste-laden structured investment vehicles, and innumerable securities well before they were downgraded to junk.

So why am I sending you to a muni-heavy fund, at a time that the US municipal and state finances are under such pressure?  Because I know the manager of the fund very, very well.  He is not just your typical fund manager.  He is someone that has been at the top of his class for decades.  He is extremely well known by his clients, issuers, and Wall Street, which grants him top-level access.

I used to work a few offices down the corridor from Vincent Giordano at Merrill Lynch Asset Management and cannot even begin to tell you how much I have learned from him over the years.  He was responsible for bringing the municipal bond management of the firm up to above $60 Billion from $2 Billion by the time he left to start this fund.  He did that on the basis of exemplary and disciplined performance, leveraging the superb distribution network that Merrill Lynch has.  “Vinnie,” as all his friends call him, is the poster-child of discipline, never becoming complacent and always questioning his own assumptions.  This requires inordinate amounts of reading, research and consulting the best sources in the market.  He is a master of risk-reward analysis, which is the key in any investment.

But get this:  The fund is trading at a 12.46% discount to Net Asset Value.  That is, as a closed-end fund you are buying exposure to the securities it holds at such discount to what you would have to pay just to buy them yourself.

In addition, the fund yield is an amazing 9.50%, most of which is tax free, since it is coming from munis.

Hence, on the back of a very supportive fixed-income environment and to keep a toe in high-dividend, strong large caps, we go for an expertly-managed and well diversified balanced muni-equities fund.

Recommendation: Buy the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) at market (**)

Source: Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield

For example, Health Systems Innovations, a healthcare consultant that has worked with private health insurers and the McCain presidential campaign, estimates that Senator Kennedy’s bill would cost $4 trillion over 10 years.

Should a healthcare plan be passed that even resembles anything like the current proposals, $2 trillion in costs would be a minor miracle.

A trillion here, a trillion there. Pretty soon, you’re talking about real money.

In my column last week, I offered three biotech stocks that should perform well, regardless of any healthcare reform plan that may be passed. As those reforms gather momentum, I’m going to explore a few more investments that should thrive, even in the face of a healthcare system overhaul…

Make Money From Bond Market Trouble

Despite the President’s popularity, he’s not likely to get everything he wants. Some sort of compromise is likely. But it’s safe to assume that the cost of the healthcare plan will be a 13-figure number (i.e. more than $1 trillion).

On a macroeconomic level, that would likely be inflationary and cause bond prices to decline. So if you’re a bond bear, here are two investments for you…

• UltraShort 20+ Year Treasury ProShares (NYSE: TBT): This ETF is not for the faint-hearted. It seeks to perform at twice the inverse results of the Lehman Brothers 20+ Year U.S. Treasury Index. So if the Index drops 5%, TBT should return rise about 10%.

• ProFunds Rising Rate Opportunity (RRPIX): This is a mutual fund that also seeks the inverse performance of the bond market. Its results aim to correspond to 125% of the inverse of the daily movement of the 30-year Treasury bond.

How To Buy Genzyme For $47.50

In last week’s column, I discussed the attractiveness of biotech companies that treat rare diseases.

But one of those names, Genzyme (Nasdaq: GENZ), had a major setback this week when it disclosed problems at one of its manufacturing facilities.

I believe these difficulties are temporary and I still like the company. But if you’d prefer to reduce your risk further, you can look at selling put options on GENZ at a lower strike price.

And when it comes to selling puts, look no further than Lee Lowell. He’s the master at this strategy and is currently riding a 100% winning streak since his Instant Money Trader, which focuses exclusively on this strategy, began last November.

I explained to Lee why I like GENZ, but wanted a good put-selling trade for investors who want to own the stock at a lower price. Here’s what he suggested…

• Sell the October 2009 $47.50 puts, currently trading at $1.85 on the bid. This means for every put that you sell, you will collect $185.

• Keep in mind that one put contract represents 100 shares.

• If GENZ never sees the $47.50 strike, you keep the $185.

• If the stock drops to or below $47.50 at expiration, you’ll be required to buy the stock for $47.50 (100 shares of GENZ for every put contract you sell). But remember, that you collected $1.85 already, reducing your cost basis to $45.65.

So if you like GENZ, but would prefer to own it at a lower price, this is one trade to consider.

Add Watson To Your Watchlist

In my column last week, I also suggested best-in-class generic drug maker Teva Pharmaceuticals (Nasdaq:TEVA).

Another generic drug maker to look at is Watson Pharmaceuticals (NYSE: WPI). Watson just announced its acquisition of privately held Arrow Group, a generic biotech drug maker, with significant international operations.

I like this move by Watson, as it broadens the company’s reach both in products and markets served.

The bottom line is that while healthcare reform could very well change the investing landscape within the sector, you can always find opportunities if you know where to look.

Source: Four More Ways To Profit From U.S. Healthcare Reform

Take a look at its chart below…

By making new lows, XLV should get down to its next support level at $20.72, possibly as low as $19.87 before a sustainable rally can get underway.

A rally back up to the trendline – currently around $24 – before the $20.72 area is reached, is probably a good selling opportunity.

Source: Ticker Of The Week: Healthcare SPDR (XLV)

With the U.S. unemployment rate jumping to its highest level  in a quarter century in February, it’s become abundantly clear that that the U.S. recession is much deeper than President Barack Obama anticipated, meaning it’s likely that additional measures will be undertaken to arrest the slide and restart growth.

Many experts are now calling for the Obama administration to focus on the fundamentals – fundamental economics, that is. They want him to drop some of its ancillary pet projects – such as healthcare reform – and are telling President Obama to focus all his time and the government’s resources on three things:

• Arresting the economy’s slide.
• Hastening its subsequent rebound.
• And fixing the U.S. banking system.

A focus on anything else is just a diversion and is a waste of time – especially because  there are questions about just how bad the economy actually is, says John Ryding, chief economist for RDQ Economics LLC in New York.

The Obama administration “should be focused on stabilization [of financial firms] and stimulus – and that should not only be ‘Job One,’ that should be the only job right now,” Ryding told Bloomberg Television. “The question is: Is it (a) recession or is it something worse than (a) recession” – like a depression?”

There’s definitely a cause for concern: The U.S. unemployment rate jumped to a higher-than-expected 8.1% percent in February, as employers reduced payrolls by 651,000, the U.S. Labor Department said Friday. Job losses have exceeded 600,000 for each of the last three straight months – something that hasn’t happened since the government started collecting jobless data all the way back in 1939.

As if that weren’t bad enough, consider this: Unemployment has already reached the average rate the White House had projected for the entire year, Bloomberg News reported.

Economists and other experts were already calling for the recession to last longer than had been expected; some are even calling for four more years of pain: a longer recession, followed by slow recovery that could have the malaise afflicting Americans until 2013. [For a related report on these revised views that appears elsewhere in today’s issue of Money Morning, please click here].

Experts don’t want the already dire situation to get even worse. But now there’s a growing concern that the Obama administration may be trying to do too much, and focus on too much – when the economy and its related ills should be – as Ryding said – “Job One.”

Market Matters

Just imagine what President Obama’s approval ratings would be if the country weren’t mired in the worst recession since the Great Depression?

With unemployment soaring to its worst level since 1983 and the U.S. Federal Reserve having declared that every sector of the economy is in the doldrums, President Obama moved into the 2nd month of his presidency with 41% of the American people believing that the country “is generally headed in the right direction.”  By comparison, 26% of those surveyed in January (and 12% in November before the election) expressed similar sentiment.

Though the economic data reveals more “challenges” ahead and the markets continue to move to much lower levels, two-thirds of Americans feel “hopeful” about Obama’s leadership.  In a small way, these results may be more telling than any earnings or economic report.  Consumer and business confidence will prove keys in moving the country back in the right direction.  Perhaps, these poll results indicate that such “optimism” may be returning to the American mindset (though ever so slowly)?

Although the administration’s $787 billion stimulus plan is designed to save or create a total of 3.5 million jobs, the American economy has already shed 4.4 million jobs since the recession “officially” began in December 2007. And experts say that more declines are coming.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. (DB) in New York, is one such expert. In a research note to clients, LaVorgna says he now sees the U.S. jobless rate reaching the 10% level by the end of this year. And he’s now abandoned his expectation that growth will emerge in the second half.

“Without any engines of growth, the labor market and the economy are likely to remain depressed for some time,” LaVorgna wrote.
Plunging domestic and overseas demand is inducing such firms as Sears Holdings Corp. (SHLD) and General Motors Corp. (GM) are stepping up their job cuts.

U.S. stocks posted their biggest weekly decline in three months last week after American International Group Inc. (AIG) reported a $61.7 billion loss – the biggest in history – and iconic billionaire investor Warren Buffett said the economy is in a “shambles.”

The Standard & Poor’s 500 Stock Index slumped 7% last week, meaning that broad index has plunged 20% since President Obama took office on Jan. 20. The Dow Jones Industrial Average tumbled below 7,000 and never looked back, hitting levels not seen since May 1997.  Other major indexes followed, with the Nasdaq Composite Index plummeting to a six-year low.

The Obama Administration and the Federal Reserve have rolled out two more measures designed to stabilize the credit markets and provide some much needed relief for struggling borrowers. The Term Asset-Backed  Securities Loan Facility is a $200 billion program that will stimulate lending activity for small businesses and consumers.  The $75 billion “Making Home Affordable” program is supposed  to assist 9 million homeowners with financial hardships to avoid foreclosure by modifying terms of their mortgages.

How long until Citigroup Inc. (C) is listed as a penny stock on the Pink Sheets?  With nationalization talks becoming more prevalent, the one-time banking giant fell below $1 a share last week and its market cap plunged to $5.4 billion (from $270 billion just two years ago).  Speaking of penny stocks, American  International Group Inc. (AIG) posted a $60+ billion quarterly loss, the largest in history, and stands prepared to accept another $30 billion in government funds.

US Bancorp (USB) and Wells Fargo & Co. (WFC) each took measures to shore up their financial positions as both cut their respective dividends by about 85% to a nominal nickel a share. Meanwhile, Wells’ management announced an additional $2 billion in expenditure reductions and claimed that the financial institution experienced “strong operating results” in early 2009.  The news outside of financials was not much better.  Computer shipments are projected to decrease by almost 12% in 2009, the worst level of activity ever reported.  Auto sales in February plummeted again and no one escaped the negativity: GM (-53%), Ford Motor Co. (F) (-48%), Toyota Motor Corp. (ADR: TM) (-40%).  GM also seemed to move a few steps closer to bankruptcy reorganization (and penny stock status).

Volatile oil prices settled above $45 a barrel as traders weighed the dire economic picture against inventory reports that showed an unexpected decline in crude supplies.  Prospects for a new stimulus plan from China brought short-lived optimism, though ultimately the pessimists won out as news about Citi and GM ruled the day.

Economically Speaking

With many countries mired in a global recession, China proclaimed that its $585 billion stimulus plan should produce about 8% annual growth for the world’s third largest economy.  Outsiders had hoped that China’s premier would announce a more robust package, but instead the government has adopted a “wait-and-see” attitude before determining if any further measures are needed.

Both the European Central Bank (1.5%) and the Bank of England (0.5%) reduced their key lending rates by 50 basis points, dropping those benchmarks to their lowest levels in their respective histories.

The Federal Reserve’s Beige Book reported that the prospects for recovery continue to look bleak for the short-term with any “pickup not expected before late 2009 or early 2010.”  Meanwhile, Fed Chairman Ben S. Bernanke confirmed that the recession is worsening as the labor market weakens; he also appeared to support the Obama administration’s stimulus package as the best hope to revive the domestic economy.

This week’s economic calendar is highlighted by the February retail sales report and some analysts are “cautiously” optimistic (which is really saying something in this environment).  The January report depicted the first monthly increase in seven months and the best showing for retailers in over a year.  After a dismal holiday season, perhaps folks are simply antsy to partake in the “Great American Pastime” of shopping again.

Remember, gift cards purchased for the holidays are still being redeemed and may have contributed to some additional activity last month.

And with equities facing their lowest valuations in 12 years, some investors may be becoming just as antsy to jump off the sidelines and take advantage of bargain-basement prices. Could this be the week?  Unfortunately, up to this point, there’s been far more talk than action.

Weekly Economic Calendar

Source: As the Economy Worsens, Experts Call for Obama to Focus on the Fundamentals