Connelly on Commerce

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media. 

At a recent meeting of Silicon Valley executives focusing on the issue of health care for the uninsured, one CEO lamented that Americans have “a right to a lawyer, but not to a doctor”.  But a senior executives of a major health care provider/insurer observed in another meeting that we do, in law if not always in fact, provide the uninsured with access to medical treatment (at least if he or she happens to be near an emergency room), it’s just that we shift a large part of the cost of that treatment to those already insured in the form of higher premiums, or to the providers themselves.  Between these two statements lies the potential for a business-like solution to our health care dilemma.

In the State of California today, 20% of the population does not have health insurance, yet two-thirds of those persons are full-time employees! The hidden “premium” the insured population pays to subsidize health care for the uninsured amounts to $445 per individual and $ 1186 per family according to the Governor’s office.California is not unique in these statistics. Small wonder, then, that annual premium increases are running at 11% per year, while the number of employers providing job-based coverage is declining nationally.

Preventive care measures, which would reduce overall system cost, unfortunately are not incentivized sufficiently either by publicly-funded programs like Medicare or Medicaid, or by private insurance packagers that concentrate on funding and insuring the healthiest customers while avoiding the riskiest.

The vapid debate about health care issues that concentrates on the end-points of the spectrum like “single-payer” or “socialized “medicine” – - or “Harry and Louise” vs. “Hillary and the Consultants” – - has passed its “use-by” date. More promising are the state-by-state efforts, from one end of the country to the other, to come to grips with the issues of both access and insurance, including the recent proposals of
California’s Governor Schwarzenegger.

These new initiatives seem to focus not on old political arguments but on very business-like strategic concepts like incentives, stakeholder engagement and strategic fit.

 1) Start with the concept of mandatory insurance coverage for all. This approach turns on its head the issue of paying for ”covering the uninsured” by putting a new premise at the center: if everyone must obtain coverage and nobody can be denied coverage, a new, broad concept of “risk pool” is established to spread the risk and thereby reduce premium costs.

2) Add incentives to focus on prevention, early detection and wellness programs to further mitigate risk and cost.

3) Use the savings from (1) and (2) to fund more transparently the subsidies for those unable to afford the premiums.

4) Use the tax system not primarily to fund premiums but to expand pretax funding mechanisms for higher deductibles that also reduce premium cost.

5) Focus any additional government role on providing catastrophe coverage, as it has done in other risk situations like hurricanes and terrorism.

It took a massive private equity deal to lift the burden of legacy, American-style health care cost off the back ofGermany’s Daimler.US business in general cannot afford to wait until it is in Chrysler-shape to grasp the possibility of addresses the health care crisis in a business-like, de-politicized way. Merely abandoning the role of workforce coverage provider, or shifting more insurance costs to employees, does nothing to address the productivity loss associated with poor health maintenance, or the business-killing drag on consumers’ disposable income associated with accelerating health care costs. Those costs now account for about half of all personal bankruptcy filings in the US, according to a Senate Committee study.

Even the health insurance industry is coming to see that it has a greater stake in framing the solution than in servicing the problem. Harry and Louise, meet the Governors! 

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Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Like nature abhors a vacuum, business abhors uncertainty. And legitimate business abhors a black market, whether in goods or services or currency- – or people.
The current focus on a potential Federal legislative resolution of the ongoing US debate about immigration policy directly addresses the “black market” in human traffic that characterizes immigration reality today. In that sense, without getting into specifics, the bipartisan effort to achieve an agreeable solution that works for a’’ is clearly a “pro-business” move that merits applause for its objective, if not support for each of it specific terms.

The proposed compromise legislation has, of course been attacked in terms of its specifics by advocates for interest groups on all sides of the immigration issue, and this has been mega-phoned by national media obsessed with framing debate and dialog from the extremes. Proponents for “the left” and “the right” are booked to slug it out: rarely, if ever, is a spokesperson invited “for the center”, and increasingly the press does not play that role either. This pattern is unfortunately being followed in the case of the new immigration proposals, while the much–discussed national yearning for unity and a “sensible center” is left largely without an advocate.Business, in terms of its best interests, needs to be that advocate – - not for any particular policy formula perhaps, but for the proposition that a compromise solution to our immigration black market must be found.Black markets tend to develop when the formal market becomes disconnected from reality. The free marketplace has informed us that our economy has a need for almost 12 million foreign-born persons that our regulatory structure will not admit. Certainly this mismatch has been an open invitation to exploitation – - that’s what a “black market” is all about.Even the government (and by extension, the US taxpayer) has been a beneficiary of this black market: all those social security taxes paid against false social security numbers don’t just disappear into the ether.At the same time, we are all subject to the adverse effects of a black market situation. Nearly a quarter of all drivers in the State of

California, for example – - a State broadly impacted by undocumented workers and their families – - are without insurance, and often also without a drivers license. All citizens of

California pay the price, in terms of higher insurance premiums, for this aspect of the immigration black market.There are many positive economic effects of immigration are negative, of course: Carl Guardino, CEO of the Silicon Valley Leadership Group, has pointed out that three out of ten new job-creating businesses in the Valley are started by foreign-born persons. The proposed new legislation charts a middle way in terms of the annual H1-b skilled worker Visa program, which Silicon Valley wishes to see expanded – - adding 50,000 new openings annually, up from the current 65,000 level, which was exhausted on one morning!An even bigger win for businesses would be a successful overall fix of what all sides, even the extremes, concede is a broken immigration regime. Beyond the positive effects of such an outcome on the black market aspects of this situation, a successful policy solution would also give hope for a resolution of an even bigger problem for US business—the broken

US health care system, which has its own “black market” aspects that Michael Moore is surely not alone in pointing out.

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Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Some wonder these days why the US public equity market continues to stretch to almost daily new highs (at least of the Dow) while there is apparently much evidence of a real slowdown in economic growth. One answer is from the chartists, including my colleague Dr. Hank Pruden who heads Golden Gate University’s Technical Market Analysis Program, who probably was the first (circa 2003) to predict the current Dow run-up to 14,000 (now adopted by Jim Cramer and many Street analysts for a late 2007 arrival).

Another reason, noted in my prior posting regarding the Federal Reserve’s inscrutability (I’m not sure whether we want the Fed to be “scrutable”), could be that some of the data about economic torpor may just be wrong — specifically, the early estimate of Q1 GDP. We’ll know more with the next estimate at the end of May, but it does seem apparent from more direct data that the consumer did slow down spending in April (if only to stay out of the cold; which should not have affected Internet shopping, however).

A third and more simple reason may just be the basic dynamics of supply and demand. Just as in the boom years of the late 90′s, when as much public equity was retired by buy-outs and repurchases as was added by IPO’s, the simple shortage of aggregate equity may be having an upward impact on overall prices. The 90′s decade also witnessed a rush of new money into equity funds because of conversion of “defined benefit” into “defined contribution” pension plans across a wide swath of corporate America, and contributed to the imbalance of supply and demand in the boom period. This phenomenon has not continued at the same pace since 2000. On the other hand, the current period reveals an actual DECREASE in aggregate public equity year-over-year (about 5% in the latest measures) as a number of factors have contributed to a literal “privatization” of the market for equity shares.

Share repurchases, funded by still cheap debt in relative historical terms, are proceeding at high levels; so are leveraged and other private equity buyouts. And M&A transactions, though down in number lately, are nonethless up in volume, and deals done for cash take more equity “off the market”.

At the same time, Sarbanes Oxley seems to have made IPO’s “safe, legal and rare”. Thus we have another example of the “unintended consequences” of reform legislation: just as the 1993 tax deduction cap on cash compensation to top executives began the explosion in stock option compensation in the 90′s, we are witnessing a not-so-gradual reduction in aggregate public disclosure about equity issuers’ business and financial condition because more and more companies are choosing to “go private” or stay that way, if only because they cannot afford Sarbanes-Oxley audit costs.

Also, many small but growing companies may not wish to go public without the prospect of a reasonable amount of research coverage, which post-Sarbanes has become uneconomic for investment banks except in respect to the largest equity names with broad institutional ownership already in place, because the banks can no longer fund research costs from banking fees either directly or indirectly.

Finally, as the US equity market becomes more private, it it also seems to be becoming even more an ‘insider’s game”. A new form of “whisper market” is emerging with the growth of equity options exchanges, where the rumor of a merger or buyout bid can now be monetized very cheaply with call purchases which in turn can be counted on to drive up the price of the underlying equity if only for a short time until the rumor is either confirmed or discounted.

Indeed, market professionals (as well as the SEC) are noting with interest the rather substantial number of such rumors and related trading patterns that have proven to be presciently accurate — think of the action around the Dow Jones bid as only the most recent example. As I write on this Friday, rumors abound about at least a half-dozen public equity stocks, looking perhaps to “merger Monday” announcements. Will this new form of the old “pump and dump” boiler room game, albeit with its positive effect on the market’s march to 14,000, prove to be the “options backdating” scandal of 2007?

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The economic/inflation data continues to be mixed and the economy’s “turn signals” seem to be flashing left, right and caution all at the same time. In this environment, the notion of a “pause” in interest rate hikes has now taken on a life of its own.

The market is no longer focused primarily on when the Fed will “un-pause” and start increasing rates again, but rather how long it will stay in neutral and whether there may be cause (by way of recession risk – see, among other, Mr. Greenspan) to perhaps begin lowering rates. Yet the Fed maintains consistent in its meeting statements and public commentary that it views inflation as the primary risk, not a slowing economy, while acknowledging some risk of the latter.

In that context, the Fed is in a bit of a bind and seems to be reasoning by resorting to a kind of “paper-jawboning” of the market in terms of inflation, even to the extent of using its release of meeting minutes as a kind of “virtual rate increase” by way of the emphasis stated therein that it continues to be concerned about price increases outside of its comfort zone, even while continuing its internal debate as to whether it should publish and adhere to a targeted range of inflation against an identified measure that would compel (and thus foretell) its action no matter what the state of the economy or the job market might be from time to time (as is supposed to be done in Europe and some other countries). In that context, perhaps the market is more than a little grateful for the Fed’s unpredictability (aka “data dependence’).

The main point is that the Fed can’t really risk raising interest rates now for fear of pushing the housing market into free-fall (and triggering a “Bernanke Recession”), but cannot say it is satisfied with current inflation levels (although there is some evidence of a pull-back in prices away from energy and food) for fear of saddling-up the bond vigilantes in terms of perceptions that the Fed is going soft on inflation. So it “talks” a good anti-inflationary bias by means of its minutes and hopes that suffices to damp down any inflationary expectations in the pricing market without seeming to do so by signaling any lack of confidence in economic growth going forward (which could be a self-fulfilling prophesy).

While the market participants are watching the Fed, the Fed also wants to watch market participants, at least in terms of what private economists and perhaps more importantly CEO’s are saying about the direction of the economy. Thus , although Fed policy seems like it is made in an August conference room in DC, but it is really made in a Hall of Mirrors on the economy (some with ‘fun-house’ distortions like the recent release of preliminary (not to say “premature”) first quarter GDP figures showing a meek 1.3% increase. The only thing we know about that number with reasonable certainty is that it is wrong, as most recent early quarterly estimate have proven to be: often by very large percentages.

Why the Government continues to release such deeply-flawed “statistics” (with their concomitant influence on the public equity and debt markets for good or ill in terms of billions of dollars in instant trading gains and losses) is beyond reason. The early numbers on GDP are mostly “quarterizations” of two-month data which itself is often also corrected by the time the next, usually more reliable GDP number is released (see the end of May).

Nonetheless, like all of official Washington, the Fed must fight its war “‘with the data it has” – and market participants can only guess along with the Fed at least until the minutes of the meeting come out and we see the full range of data the Fed was looking at before its rate decision, and more importantly, see what factors it chooses to emphasize in its minutes. If the Fed really wants to send us a message that is more nuanced than its post-meeting script, that’s where it probably will be found.

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

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