Medical

Putin’s puppet?

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Not surprising from Rasmussen overnight:

The latest Rasmussen Reports national telephone and online survey finds that 65% of Likely Democratic Voters believe critics of Trump’s recent meeting with Russian President Vladimir Putin truly believe he is a treasonous Russian puppet. Just as many Republicans (67%) disagree and think those critics are only making the charges for political purposes, a view shared by a plurality (47%) of voters not affiliated with either major party.”

Trump’s  unconventional (yet unsurprising) outburst of diplomacy against Iran (if it can be called that) on Twitter in capital letters does dispel this somewhat. To fire a social media salvo at Rosoboronexport’s second largest arms customer (one Russia has sold weapons to Iran  for 98 years) would somewhat dispel that myth of kowtowing to Putin’s every move. 85% of Iran’s military hardware is Russian. Syria is Russia’s #1 export client with the prize being the naval base in the Mediterranean port of Tartus.

In any event both Iran and Syria serve Russia’s ability to interfere with US policy in the Middle East. Israel now claims Iranian Revolutionary Guard soldiers have stepped up from being mere advisors in the Golan Heights to actively fighting. Israel has commenced day raids in Syria such has the threat escalated.

If POTUS is intending  to remove one or two of Putin’s clients (list here) then one suspects the Russian dictator should be pulling Iran’s strings to get them to arm in silence rather than pick a fight with the US.

Perhaps a more apt way to look at this is Trump’s hatred of Obama’s (foreign) policies far outweighs his supposed love of Putin. The evidence for that is not only obvious but entirely factual, backed with empirical evidence.

EU – 1.3m abortions, 5m births p.a.

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Eurostat statistics on abortion reveal that Germany, France, UK, Spain and Italy alone terminate a combined 760,000 fetuses per annum. Across the EU-28 there are 1.25mn terminations. Without getting into a debate on abortion rights, the pure statistical number points to 20.4% of fetuses never make it out of the womb alive. Every. Single. Year. At that rate over 10 years that is 12.5 mn children that could have added to EU population sustainability do not occur but the EU seems to think embarking on mass migration is the only solution to plug the gap. Is it? Ironically child support is one area the EU is happy to cede control to individual Member States.

The fertility rate across the EU-28 is now 1.58 children per woman, flat for the last decade and down from 2.9 in 1964. Demographers suggest that a fertility rate of 2.1 is required in developed world economies to maintain a constant population (in the absence of any migration). The number of live births in the EU-28 peaked in 1964 at 7.8 million. In 2017 this had fallen to 5 million. There was a brief period (2003-2008) when live births in the EU-28 started to rise again, returning to 5.5 million by 2008 but the GFC sent it down again – as economic hardship tends to cause a decrease in births. So are economic incentives too low to cause a rebound?

France has the best incentives for children and the highest birth rate inside the EU at 2.0 up from 1.7 in the 1990s. Germany is around 1.4 drifting from 1.6 in the 1990s. The lives for child rearing French are eased by cheap health care, inexpensive preschools – for infants as young as 6 months old – subsidized at-home care and generous maternity leave. Mothers with three children can take a year off of work – and receive a monthly paycheck of up to €1,000 from the government to stay home. Families get subsidized public transportation and rail travel and holiday vouchers.

In order to stop the declining working population over time, imagine if Europe hypothetically put the onus back on consenting couples to take responsibility for their actions and makes abortions harder to access without compulsory consultation over options? Why not graphically show the entire process to get some sense of reality for both parties? You can gross yourself on this link.

Perhaps, in today’s electronic world, automatically deducting child support from fathers that run from responsibility might make sense? Why should the state pay for others’ lack of accountability? Even if the child is placed in foster care, why not wire child support to foster parents indirectly via the Ministry in charge of its administration? The population crisis is not going away in Europe. Why not provide more incentives to married/same-household couples?

Mathematically speaking the numbers are huge. Imagine if the million-plus fetuses every year had a vote to be raised with foster parents as opposed to being terminated, what they would choose? Consider the €23bn Merkel has spent on mainly economic migrants in the last 2 years being put toward preventing 200,000 abortions in Germany over that period? €115,000 to avert each one might have been better spent. That is a huge sum of money period.

CM is not advocating control over the womb but surely transparency in policy over individual responsibility is not a bad thing with respect to many issues, not just abortion. What level of economic incentives are required to prevent some couples/women choosing to terminate? Surely that plays a part in deciding to terminate. Consultation services with respect to the subject don’t seem too commonplace or at least structured in such a way as to prevent them.

According to Eurostat, since 1964 the divorce rate in EU-28 equivalents has doubled and the marriage rate has halved. For every eight marriages in 1964 there was one divorce, now there is one divorce for every two marriages.

The proportion of births outside of marriage now stands at 40%, from 27% in 2000 to less than 7% in 1964. 8.8 % of the EU-28 population aged 20+ lived in a consensual union (de-facto). In Japan the number of births out of wedlock is 25% according to the MHLW. The dynamics of the traditional nuclear family are fading.

51% of the Swedish population is now single household. 51%! While some is attributed to an aging population, 19 of the EU-28 members has a single household ratio of over 30%. 12 over 35%. By way of comparison, Japan’s single household ratio stands at 34.6% from 27.6% in 2000.

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To further analyse the new ways of living together and to complement the legal aspect, statistics on consensual unions, which take into account those with a ‘marriage-like’ relationship with each other, and are not married to or in a registered partnership with each other, can also be analysed.  Sweden (18.3 %) has the highest rate followed by Estonia (16.4 %), France (14.3 %) and the lowest in Greece (1.7 %), Poland (2.1 %), Malta (2.5 %) and Croatia (2.9 %).

Is employment a factor?  It is mixed. Eurostat reported in Germany, the fertility of non-employed women has increased and that of employed women decreased, while in Spain, the opposite occurred; in Greece, the total fertility rate (TFR) of non employed women fell below that of employed women, changing from a positive differential of about 0.2 average live births.

Is education a factor? Apart from Nordic countries (Denmark, Finland and Norway), Portugal and Malta, in general, women with lower education had higher TFR between 2007 and 2011. Eurostat state the fertility of women across the EU over the same period with a medium level of education dropped by about 9%, while the decrease for women with high or low education was less significant.

Eurostat argues that economic recessions have correlation to falling child birth rates. Apart from the direct impact of economic crises at an individual level, the economic uncertainty that spreads during periods of hardship seem to influence fertility. From this point of view Eurostat believes the duration of a crisis may play an important role and, the duration and the depth of the current recession are unprecedented in some countries. The agency states,

The expected relationship is that negative changes in GDP correspond to negative changes in the TFR, possibly with some delay, thus showing a high positive correlation at particular lags. The correlation with the TFR is relevant in Spain and Latvia without any lag; in Bulgaria, Poland and Romania with one year of lag; and in the Czech Republic, Denmark, Estonia, Greece, the Netherlands, Finland, Sweden, Iceland, Norway and Croatia with two years of lag. Taking the overall average across countries, a change in GDP is mostly positively correlated with a change in the TFR within about 19 months.”

Do we cynically argue that stagnant child birth rates aren’t just a factor of societal changes? Perhaps a truer reflection on the higher levels of poverty in the EU since GFC and the harsh realities for a growing number of people behind the growing levels of populism who are suffering greater economic hardship than statisticians are presenting to the political class? Hard decisions must be made before they are made by external factors.

Israel to deduct terrorist salaries from PA transfers

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No sooner had Australia announced it would no longer give money directly to the Palestinian Authority (PA) than the Knesset put into law a previous bill that sought to deduct terrorists’ salaries from the roughly $130 million in monthly tax revenues Israel collects on behalf of them. PA President Mahmoud Abbas’ spokesman, Nabil Abu Rudeineh said,

The Palestinian presidency strongly refuses to accept this severe decision, which damages the foundations of the relations since the Oslo Agreement to this day…If this decision is implemented, it will prompt important Palestinian decisions to deal with it.”

How is it that even with the Oslo peace process coming into effect in 1993 that the PLO carried out 4,000 attacks till 1999. The Israelis so desperate (under Ehud Barak of all people) for peace gave the PLO 95% of their territorial demands yet they still kept up the attacks killing more than 1,000 Israelis, a total exceeding the previous 25 years combined. So the foundations of the Oslo Agreement remain flakey at best. 

What Abbas’ spokesman is technically saying is that they openly admit to spending money on terrorist salaries (nothing new) when their very own people want monies to be allocated on services (education, sanitation, water, electricity, healthcare) that benefit the whole. The press doesn’t report the 1,000s of Palestinians treated in Israeli hospitals.

While Israel remains an open, democratic and multi-ethnic society the PA has proven itself to be an intolerant, corrupt and self-serving dictatorship which has little interest in serving its constituents as the comptroller of its first ever audit revealed. International aid money lined the pockets of the leaders of the PLO. The French money laundering authorities discovered that Arafat’s wife’s bank account had amassed $3bn over 20 years. It is ironic that most of the original founders of the PLO didn’t live in the Palestinian Mandate when Israel was created. Arafat was born in Egypt. 

At the time of the founding of the State of Israel in 1948, 90% of Palestinian Arabs lived in Transjordan. At the time there was no movement to create a Palestinian state. It is somewhat ironic that no Arab outrage ensued when Jordan annexed the West Bank (what we know as the occupied territories) in 1950 blatantly disenfranchising the Palestinian Arabs in the process. Even then they never fought for self-determination. In fact it wasn’t until the PLO was first established in 1964, a time the West Bank belonged to Jordan, that they started to pursue it.

The irony of many leaders in Palestine is the blatant hypocrisy. In 2014, during the last conflict, former Hamas leader Ismail Haniyeh sent his daughter across the border to Israel for emergency medical treatment. On what grounds does a father trust his daughter to his mortal enemy to save her? Yahya Sinwar, a prisoner in an Israeli jail for murdering 12 Israelis was given life saving surgery after being diagnosed with cancer. He was released in a prisoner exchange in 2011 and took over from Haniyeh as leader of Hamas yet swears “we will tear out their hearts” of the very people who saved him.

What might have escaped many is that in the last few months terrorists have burnt more than 30,000 dunam (7,400 acres) of land near the border with Gaza. Israel’s honey industry has almost been wiped out. Israel is under pressure to do something to stop such destruction. Iran is the biggest headache for Israel at present. Despite digital diplomacy, the last thing the country wants to invite is a conflict with Iran-backed Hamas.

However do not be surprised if some skirmish kicks off on the border in coming months to contain the fire bombing of farmland. It will have nothing to do with cutting out payments to terrorists and martyrs although don’t be surprised if that pretext is used.

Israelis truly want peace. Yet the PA will only accept one which requires the destruction of the Jewish state. Ask yourself whether you would sign an agreement with that as a clause? Exactly.  Even Saudi Arabia’s crown prince, Mohammed bin Salman, said several months ago,

In the last several decades, the Palestinian leadership has missed one opportunity after the other and rejected all the peace proposals it was given…It is about time the Palestinians take the proposals and agree to come to the table or shut up.”

GE’s Angolan Kwanza exposure

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Sell-side analysts rarely read through the fine print of an annual report. Hidden away in the prose, one can find some pretty eye-opening paragraphs. From GE’s 2017 Annual Report,

“As of December 31, 2017, we held the U.S. dollar equivalent of $0.6 billion of cash in Angolan kwanza. As there is no liquid derivatives market for this currency, we have used Angolan kwanza to purchase $0.4 billion equivalent bonds issued by the central bank in Angola (Banco Nacional de Angola) with various maturities through 2020 to mitigate the related currency devaluation exposure risk. The bonds are denominated in Angolan kwanza as U.S. dollar equivalents, so that, upon payment of periodic interest and principal upon maturity, payment is made in Angolan kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate.”

On that basis the marked to market figure is actually another $250mn hole in 2017. One wonders what the exchange rate will be in 2020? Furthermore at what level will Travelex or Thomas Cook exchange that for? It would be safe to assume the ‘bid/offer’ spread will be horrendous. GE might find it more useful to run a Nigerian mail scam to hedge the expected losses. For a company as large as GE, potentially losing $850mn should look like a rounding error unless the company is bleeding as the monster is. GE took a pretax charge of $201mn on its Venezuela operations.

We shouldn’t forget that “GE provides implicit and explicit support to GE Capital through commitments, capital contributions and operating support. As previously discussed, GE debt assumed from GE Capital in connection with the merger of GE Capital into GE was $47.1 billion and GE guaranteed $44.0 billion of GE Capital debt at December 31, 2017. See Note 23 to the consolidated financial statements for additional information about the eliminations of intercompany transactions between GE and GE Capital.

As 13D Research noted, “GE spent roughly $45 billion on share buybacks over 2015 & 2016  despite the shares trading well above today’s levels all the while ignoring the $30 billion+ shortfall in its pensions. Management disclosed in a recent analyst meeting that it would have to borrow to fund a $6 billion contribution to its pension plans next year, as well as chopping capex by 26% in 2018.

As mentioned yesterday, there are some who have faith in the sustained turnaround in medical. Indeed it has seen some top line and margin improvement but management seems more concerned with focusing on cutting costs than pushing innovation. Efficiency drives should be part and parcel of all businesses but one must hope CEO John Flannery has far bigger hopes for its market share leading product line (which GE admits facing pricing pressure in some segments) than trimming the staff canteen cookie tin.

GE remains a risky investment. Flannery has it all to prove and to date his performances have been anything but inspiring. GE feels like a business suffering from the divine franchise syndrome synonymous with former CEO Jack Welch. That dog eat dog culture seems to be biting its own tail.

 

 

US Healthcare bankruptcies surge 270% in 2018 vs 2017

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6 months ago we wrote of the growing crisis of hospitals declaring bankruptcy in America. While The Affordable Care Act (Obamacare) is often lauded by some as noble legislation, according to bankruptcy lawyers, Polsinelli, the changes made to reimbursements that used to help cover hospitals who treated uninsured patients that were pulled under ACA have sent many hospitals to the bankruptcy A&E ward. Polsinelli wrote this month,

The Health Care Services Distress Research Index was 455.00 for the first quarter of 2018. This is an increase over 173 points from last quarter’s record high, approximately 62 percent. The index has experienced record or near-record highs in seven of the last eight quarters. Compared with the same period one year ago, the index has increased over 333 points, approximately 270 percent, and compared with the benchmark period of fourth quarter of 2010, it is up approximately 355 percent.”

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Polsinelli also wrote in 1Q 2017 that,

“Unlike the public markets, the Polsinelli/TrBK Distress Indices include both public and private companies, creating a broader economic view and one which may show developing trends on Main Street before they appear on Wall Street….Health care distress is high and it seems to be getting worse…

…The business of health care is unlike other industries, such as manufacturing, real estate, or retail. Health care faces all the traditional business challenges, such as competition, the impact of technology on services, and increasing wages. But more, the health care industry is needing to adapt to increasing regulations, changes in reimbursement rates from government or private payors, and a shift from traditional fee-for-service to value-based models that impact profitability…There is unprecedented pressure of major systemic changes to the existing health care system, particularly the implementation of the Affordable Care Act over the last several years and the current status of the program, which is alternately being repealed, repealed and replaced, phased out, or simply defunded…The (Obama) administration’s recent decision to terminate cost sharing reduction payments will also directly impact the health care market. Insurance companies may continue to provide insurance at a higher premium or decide to exit the markets. Eliminating these payments and the resulting premium increases may increase the cost to the government through premium subsidies.”

In short many Americans saw a doubling of premiums (an average increase of 113%) under Obamacare inside of 4 years causing many to forgo the insurance. The reimbursements under the old system (which helped compensate hospitals administering emergency treatment for the uninsured) that were stopped on the proviso people would take up ACA plans backfired. Not enough people signed up and more hospitals running on a days cashflow have been forced to close because the reimbursements designed to protect them against uninsured patients disappeared. When Jonathan Gruber, the architect of Obamacare, testified to Congress he candidly said,

The Affordable Healthcare bill was written in a tortured way to make sure the (Congressional Budget Office) did not score the mandate as taxes…If CBO scored the mandate as taxes, the bill dies, OK? Lack of transparency is a huge political advantage … call it the stupidity of the American voter or whatever … that was really, really critical to get the thing to pass … I wish … we could make it transparent, but I’d rather have the law than not.”

Makes one wonder what the status of the medical equipment suppliers who lease equipment to these hospitals does with the machines they repossess.

GEzus Priced super far?

US Corp prof.pngIt is not rocket science. Generally higher interest rates lead to lower profitability. The chart above shows that quarterly pre-tax US profitability is struggling. We took the liberty of comparing the profitability since 1980 and correlating it to what Moody’s Baa rated corporate bond effective 10yr yields. An R-squared of almost 90% was returned.

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With the Fed moving toward a tightening cycle, we note that the spreads of Baa 10yrs to the FFR has yet to climb out of its hole. During GFC it peaked at 8.82%. It is now around 3%.

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Why not use the Aaa spread instead? Well we could do that but looking over the last decade the average corporate debt rating profile looks like this. We have seen a massive deterioration in credit ratings. If we look at the corporate profitability with Baa interest rates over the past decade, correlation climbs even higher.

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Corporate America binged on cheap credit over the last decade and given the spreads to Aaa ranked corporate bonds were relatively small, it was a no brainer. In 2015, GE’s then-CEO Jeff Immelt said he was willing to add as much as $20 billion of additional debt to grow, even if it meant lower bond grades. We can see that the spread today is a measly 0.77%. Way off the 3.38% differential at the time of GFC. Still nearly 50% of corporate debt is rated at the nasty end.

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We shouldn’t forget that the US Government is also drunk on debt, much of it arriving at a store near you. $1.5 trillion in US Treasuries needs refinancing this year and $8.4tn over the next 3.5 years. Couple that with a Japan & China pulling back on UST purchases and the Fed itself promising to taper its balance sheet. So as an investor, would you prefer the safety of government debt or take a punt on paper next to junk heading into a tightening cycle?

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In any event, the 4.64% 10yr Baa corporate bond effective yield is half what it was at the time of GFC. Yet, what will profitability look like when the relative attractiveness of US Treasuries competes with a deteriorating corporate sector in terms of profitability or balance sheet?

Take GE as an example. Apart from all of the horror news of potential dividend cuts, bargain basement divestments and a CEO giving vague timelines on a turnaround in its energy business things do not bode well. Furthermore many overlook the fact that GE has $18.7bn of negative equity. Selling that dog of an insurance business will need to go for pennies in the dollar. There is no premium likely. GE had a AAA rating but lost it in March 2009. Even at AA- the risk is likely to the downside.

Take GE’s interest cover. This supposed financial juggernaut which was at the time of GFC the world’s largest market cap company now trades with a -0.17x interest coverage ratio. In FY2013 it was 13.8x. The ratio of debt to earnings, has surged from 1.5 in 2013 to 3.7 today. It has $42bn in debt due in 2020 for refinancing.

By 2020, what will the interest rate differentials be? There seems to be some blind faith in GE’s new CEO John Flannery’s ability to turn around the company. Yet he is staring at the peak of the aerospace cycle where any slowdown could hurt the spares business not to mention the high fixed cost nature of new engines under development. In a weird way, GE is suffering these terrible ratios at the top of the cycle rather than the bottom. Asset fire sales to patch that gaping hole in the balance sheet. Looks like a $4 stock not a $14 one.

Unseen WW2 battlefield letters from North Africa

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This is an excerpt from a letter written by my grandfather S/Sgt Norman Peterson on 11th Jan 1941.

Dear Auntie Marie, (he always wrote to her the truth and sent happy versions to his wife)

“…I travelled by truck to a place called Ikingi Maryut where I caught a train at 2 in the morning to Marsa Matruh…but I couldn’t get a seat for drunks and others asleep on the floor all coming back from Cairo from leave. So I thought “bugger this” I’m not going to sleep in the cold on an observation platform so I walked the length of the train & eventually gate crashed the postal van, occupied by a real lime house cockney who told me, “Ee laad, ye carnt room in ‘ere.” I said “Like _______ I can’t!” So I unrolled my swag, took off my boots and slept on the mail bags…I soon made good friends with the Tommies who were a good crowd but were mystified by the way I rolled my own cigarettes. Apparently only the poorest classes roll their own!…

…Matruh is a very pretty place with wide tree lined avenues….but I wouldn’t give 2 bob for it now as it has been bashed and bombed into an unrecognizable rubble…while I was here I saw a gallant piece of action by two Tommies. A train was at the station full of stores and ammunition when two Italian bombers came over and commenced to lay their eggs around the place. The Tommies jumped into the cab and it was a thrill to see puffs of smoke from the engine as it slowly drew away from the station out of danger…

…I was here for two days when the word came through that our forces were pushing westward and I was sent to a post between Sidi Barrani and Matruh and did the wounded roll in. I worked on the wounded prisoners and saw some ghastly sights, One Libyan had a shrapnel wound under the left shoulder blade that had ricocheted on the bone and come out near the collarbone. The whole wound was crawling with maggots (which really isn’t so bad as they eat the putrified tissues)…

…We were here for 3 days…I was sent to the 3/3rd English 7th Ambulance. I went through the battlefield of Sidi Barrani and the quantity of material would truly astound you. Tanks, motorcycles, lorries and cars just for the taking. I had a motorbike and when she ran out of juice dropped it and picked up another….I picked up my first souvenir – an Iti tin hat – once owned by a field ambulance man. These lids are very rare…

…anyway to cut my own story short…I saw a grisly sight, a Savoia 79, a tri motored bomber had been shot down and the pilot had tried to pancake down but when he hit the petrol tank exploded thus incinerating the occupants. The pilot was a charred skeleton, both legs snapped like dry twigs, The foregunner was in two pieces, sheared in halves from the waist, the top part in an attitude of prayer though both hands were missing. The heat must have been terrific as the motors were fused together in a solid mass. The rear gunner was sprawled in his compartment, not so badly charred, his fingers stiffened in rigor mortis on the keys of the bomb rack and bullet holes in his Adam’s apple and temple. I took the builder’s nameplate as a souvenir…If I only had my camera I’d make a fortune but of course it is stowed away in Alex….

…Along the roads were truckload after truckload of prisoners who didn’t seem very dejected…however some who were told to dig slit trenches broke down and cried…the position was rather embarrassing until an interpreter told them they weren’t digging their own graves…they broke out in huge smiles and dug like hell…

…I was in a quandary as to where my own unit was…I attached myself to a section of Royal Tank Corps who had told me they saw an Australian Field Ambulance near Sollium. I spent three days with this crowd and spent a night at an Air Force refueling dump with beers and cheers and told them some bullshit about Australia…I at last found my unit to be greeted with the news A company was in Libya. Incidentally up to this time I had had neither a wash or shave and looked a fright from 9 Dec to 22nd Dec…”