Thursday, February 26, 2009

Obama Delivers a Whopper of a Budget: Some Stock Implications

This thing is going to cost close $3.6 Trillion dollars for fiscal year 2010? Now that is some serious "change." I found a couple of things that will impact stocks directly:

Some of the Medicare savings would come from scaling back payments to private insurance plans that serve older Americans, which many analysts believe to be inflated.

They mean Medicare Advantage which helps retirees and the elderly. That sound you heard was the NARP rolling tanks. This will also be bad for companies like Humana which has 12% of their 11.6 million customers as part of Medicare Advantage.

In a note to clients, Charles Boorady of Citi Investment Research said stocks are selling off because of an overload of news in the last few days. He said competitive bidding could reduce profit margins for insurers, but increase their revenue. Humana, HealthSpring Inc. and Health Net Inc. are the most exposed to changes in Medicare Advantage, he said.

The other bad news came for Sallie Mae (SLM) which will probably be destroyed by this budget.

And in a proposal sure to rile the nation's lenders, Obama seeks to end government-guaranteed loans and to boost the government's own direct lending in an effort to insulate students from turmoil in financial markets.

Also Pell Grants which will get an inflation adjustment and will become a mandatory budget item like Social Security. This means that college lending just got nationalized.

The agriculture subsidy changes may be positive for Agriculture stocks like Bunge or Potash depending on the details. There won't be lump sums given to farmers no matter what amount or crop they plant. However, this will take the fight of the century to get passed. I will assure you that there will be bipartisan support in stopping this budget item in states like Kansas, Iowa, Indiana etc.

Obama would break from the five-year farm bill that Congress enacted last year, with his support. He proposes eliminating what are known as direct payments -- subsidies that are paid to farmers regardless of crop prices or how much they grow -- for producers with more than $500,000 in annual sales revenues.

This part will certainly help the Mutual Fund industry. There will be lots of new fees and capital inflows into the hands of investment professionals going forward. Aren't these the people Obama is damning for getting us into this mess? Well, any way forced saving takes place is a good thing in my eyes.

The administration is starting a new program to automatically enroll workers in employer pension plans or other retirement accounts to encourage retirement savings. About 75 million Americans lack employer-based retirement plans outside the Social Security system.

Obama estimated the new plan for automatic workplace pensions would increase the savings participation for low and middle income workers from 15% to 80%. Employees could opt out of the program if they didn't want to participate.

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