Obamacare Dominoes: If Federal Subsidies Fall At The Supreme Court, So Do The Individual And Employer Mandates — Game Over!

Everybody seems to be missing the real issue at stake in the recent decision by at least four Supreme Court Justices to hear an appeal of a Fourth Circuit Court of Appeals decision affirming the applicability of Federal insurance subsidies for qualified individuals who purchase “ObamaCare” insurance policies on Federal Exchanges set up for States whose governments chose not to establish one for their State.

This case, King v. Burwell, involves not a Constitutional question per se but rather a challenge to an IRS interpretation that allows subsidies for insurance purchased on Federal Exchanges despite statutory language that could be read to limit their availability only to those who purchase insurance only on an Exchange which a State has chosen under the law to “establish” itself directly rather than leaving it to the Federal government to set one up for it. The plaintiffs in the case (King et al) are Virginia residents who argued that the IRS decision allowing subsidies provided via the Federal Exchange set up when Virginia’s government refused to establish an ObamaCare Exchange on its own deprived them of an exemption from the Affordable Care Act’s “individual mandate” to purchase health insurance. They claim that absent such subsidies all policies available to them on the Federal Exchange would cost more than the 8% of their income that serves as a trigger for such exemptions.

While the legitimacy of the IRS determination to allow such subsidies would seem to simply involve a Federal  statutory question concerning  the scope of administrative flexibility in interpreting the ACA’s grant of subsidies, the plaintiff’s argument in King v.  Burwell opens the door to a much broader impact on ObamaCare than just the matter of subsidies. It would be huge if the Supreme Court determines the Court was wrong in affirming the IRS interpretation.  Estimates indicate that, for the poor and lower middle class, upwards of seven million would lose over $ 36 billion in subsidies. These losses would affect residents of Texas and Florida (the biggest losers) and 32 other states subject to the King v. Burwell Supreme Court decision.  These states are mostly in the hands of Republican governors and legislatures that oppose ObamaCare in principle and the potential “work-around” would depend on those  governors and legislators agreeing to “establish” State Exchanges possibly “outsourcing” their operations to the existing Federal Exchange, using their states’ own money instead of the Federal funds provided under the ACA  because eligibility for those funds just happens to have run out on November 14, 2015! No word as yet on whether the Centers for Medicare and Medicaid would consider extending that deadline in view of the pending Supreme Court decision.

With no “work around,” moreover, the dominoes at the heart of the ACA would, as noted above, begin to fall. If no subsidies are available in a particular state (or in the 34 states subject to a King v. Burwell reversal), then the premiums on the policies now on offer in the Federal Exchanges serving those states would exceed 8% of their income and therefore they would automatically become exempt from the individual mandate to purchase any health insurance at all. This result would not just affect the poorest families. Young, healthy college graduates – many burdened by tens of thousands of dollars in student loan debt – would be free to opt out of buying any insurance on a Federal Exchange or otherwise, and the economics of the Federal Exchange would be severely adversely affected without a balance of relatively healthy individuals to weigh against the insurance claims of more mature families and sub-Medicare elderly. Premiums would go up, enrollments would go down with a ruptured individual mandate.

But that’s not the end of the effects of a Supreme Court decision to invalidate Federal subsidies obtained through the Federal Exchange in two-thirds of our states. The employer mandate under the ACA  requires employers of more than 50 full-time workers (currently defined as all those working at least 30 hours per week) to either provide a Federally-approved health insurance package or pay an increasingly onerous per-worker tax penalty. For a variety of reasons, some clearly operational, some probably political, the Obama Administration gave employers extra time to comply, but the mandate will now begin in 2015 for employers with over 100 full-time workers, and for those with between 50 and 100 in 2016. But if the Supreme Court reverses King v. Burwell by overturning the IRS rule with respect to Federal subsidies, which are in fact delivered by means of tax credits which is why an IRS rule is at issue, the employer mandate is just as fatally wounded as the individual mandate, and the biggest ObamaCare domino of all falls.

The ruling by a Federal Court panel majority in another case brought against the IRS rule on ObamaCare tax credit subsidies, Halbig v. Burwell, points directly to this conclusion. The majority ruled against the IRS subsidy interpretation (the decision has since been appealed to the entire D.C. circuit Court of Appeals), and along the way to this conclusion, laid out its objections to the IRS interpretation precisely focusing on the effect on both the individual and the employer mandate:

“[B]y making tax credits available in the…states with Federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.”

The IRS Rule affects (sic) the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers – defined as those with at least 50 employees, see 26 U>S>C> section 4980H9c) (2) (A) – to provide their full-time employees with health insurance.  Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll…in a qualified health plan with respect to which an applicable tax credit… is allowed or paid with respect to the employee.’ Id. Section 4980(a)(2); see also id. Section 4980h (b) (linking another penalty on employers to employees’ receipt of tax credits).”

Lest there be any mistaking the view of this judicial panel majority as to the impact of their ultimate decision precluding tax credit subsidies to purchasers on the Federal Exchange, the judges went on to rub it in quite precisely:

“Thus, even more than with the individual mandate, the employer mandate penalties hinge on the availability of tax credits. If credits were unavailable in states with Federal Exchanges, employers there would face no penalties for failing to offer coverage.”

If a majority of the Unites States Supreme Court were to agree with the Halbig v. Burwell majority, the last ObamaCare domino would seem to fall, more or less automatically.

And yet the media and even the most ardent supporters of ObamaCare seem to ignore this potential effect. Assuredly, the “large employers” and their lobbyists who are funding the Halbig and King cases have not. Not to mix too many metaphors, but it is most important to understand that both the King and the Halbig cases are twin Trojan Horses: ostensibly about killing ObamaCare subsidies, but really all about indirectly but effectively destroying the individual and employer mandate. In the concluding words of the majority in the Halbig case, its ruling against Federal Exchange subsidies “will likely have significant consequences both for the millions of individuals receiving tax credits through federal r exchanges and for health insurance markets more broadly.” (Halbig v. Burwell at p 41.)

All the more so if the Supreme Court agrees.

Recently published by Huffington Post.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Elections Have Consequences – And Truth: Here’s Some of Both

Here’s to the winners!  But who are they exactly, after the recent Republican sweep into power in the Senate and in a significant majority of governorships?

On the latter, the incumbent Chair of the Republican Governors Conference, Chris Christie of  New Jersey, took a modest “victory lap” for his efforts in support of major “Blue State” wins by the GOP candidates in Massachusetts, Maryland  and Illinois, not to mention important victories by Republican incumbents in Florida, Ohio  and Wisconsin. The New Jersey Governor certainly traveled widely and raised money handsomely for some of these winners, but that does not mean he moves to the front of the statehouse line for his party’s 2016 presidential nomination.

Surely Wisconsin Governor Scott Walker, who has now won three consecutive elections, including a recall attempt, against the Democrats in a “Purple” state, will not credit his win to Christie. Far from it. He was less than pleased that Christie cut back on funding from the GOP Governor’s Conference for his campaign. And Walker has also won the race to be the first to get an “exclusive” interview on “Meet the Press” (but does that program matter still?), presumably because Chuck Todd wanted him more than Christie or the other governors.

Among the other Republican governors, John Kasich of Ohio looks even more attractive now because he won again in the ultimate Electoral College “swing state.” He has adroitly positioned himself to take credit for most of the good things happening in that state other than LeBron James’ return (and maybe even that!), while managing to institute policies not unlike Walker’s without continuing to offend so many people. Why pick Christie and who could wind up losing even his home state of New Jersey in 2016 to Clinton, according to current opinion polls, when the GOP could pick up a possibly decisive electoral win in Ohio or Wisconsin?

Same goes for Rick Perry of Texas, who is sporting new “serious thinker” eyewear, but whose state did not cover itself in glory in terms of the Ebola “outbreak.”  He went on a European field trip while the problem peaked. Christie also messed this up a bit too, calling the momentarily famous Maine nurse “obviously” sick when she obviously wasn’t.  Perry suffers from the “safe state syndrome” that puts Texas safely in the GOP electoral count, with or without him. Plus he has Ted Cruz in the Senate who can deliver even more Tea Party bombast to the ticket.  Staying in the southwest, however, Governors Martinez of New Mexico and Sandoval of Nevada (no, not Pablo, but he has an even better Fall season) may have helped themselves in terms of vice-presidential consideration with easy wins with support from their Hispanic voter brethren who the GOP may need to court in 2016 depending on the outcome of coming immigration showdown with President Obama.

As to the rumored entry into the 2016 race of former Governor George Pataki of New York? As they say in Brooklyn – “fageddaboutit!”

Looking next at the GOP senators who gaze in the mirror and see a President, Kentucky’s Rand Paul seems to have won the most from the election results, even when candidates he campaigned for didn’t win (like Scott Brown in New Hampshire). The only Republican with  “metrosexual” appeal (the ‘30’s Hollywood shades, blazers and slacks, and unruly hair), Paul has reached out to single women and blacks as well as younger voters, who show signs of not being permanently enthralled with Democrats and whom some may think have run an economy, that for all the recent good data on jobs and GDP, has kept them living at Mom and Dad’s for far too long.  On the international relations front, too, Senator Paul’s view that ISIS should face mainly “local” boots on the ground obviously has appeal to younger voters that may prove to outweigh the venerable McCain/Graham war hawk wing of the GOP. At the least, Senator Paul actually has a foreign policy. Unless he wants to overly mend fences with Israel, expect Paul to be relatively quiet about an Obama nuclear deal with Iran while the rest of his Party’s likely candidates go ballistic about it, but are silently thankful that they won’t have to campaign in favor of an Iran war, too.

Speaking of ballistic, Ted Cruz will commandeer the nearest flamethrower in the Senate chambers, while new Majority Leader Mitch McConnell deftly mans the fire extinguisher. Yet frustrated Tea Party members may hand Cruz some surprising early primary victories — he’s running for sure. Cruz will side with Rush Limbaugh and the National Review in pushing the GOP precisely not to try proving they can “govern” over the next two years but rather just keep “obstructing” Obama and then urge voters to give them both the White House and Congress in 2016 as the only way to break DC gridlock. But even if they could get to 1600 PA Ave in ’16 with the right candidate, the GOP chances of holding the Senate in 2016 look as bad as the Democrats proved to be in 2014, because of the electoral map. Nonetheless, Dr. Ben Carson’s probably in this camp as well, since he’s in no position as an outsider to show he can “govern” anyway, but he will soon have his own video infomercial.

The guess here is that Senator Rob Portman of Ohio probably isn’t going to run despite his own solid credentials.  Kasich, his home state’s governor, is better positioned, and Portman would step back if Jeb Bush runs, anyway (and be in his Cabinet at a very high level). That leads us to the House and Congressman and former VP candidate Paul Ryan, who will be a central figure in the coming budget negotiations, perhaps too central given the GOP commitment to massive cuts in social welfare programs and entitlements. Like Portman, he too has a home state governor (Walker) who surely thinks he is now in line ahead of the mere Congressman, especially when one of the key GOP talking points for 2015-6 will be the need for “executive experience” in the White House, post-Obama.

Jeb Bush has that and more: a GOP home state governor who is not running for President, a foreign policy and fund-raising apparatus second to none, a Bush 43 with a reputation that has improved with absence, but also an immigration stance that is out of step with his Party’s. But the prevailing wisdom that the GOP won this round by being more “moderate” than before should encourage him. At the very least, he will have a lot of potential Vice Presidents to choose from in the above list of hopefuls and wannabes.

No so the Democrats. Quick, can you name the likely running mate candidates for Hillary? Can you name one? Biden? The Clintons and Obama have left the Democrats’ talent “bench” looking like a basketball team (the JV’s) facing off against a GOP hockey team ready to change on the fly. Three of their best up-and-coming politicians are women: Warren, Gillibrand and Klobuchar. But these Senators are all from safely Blue states that are already in Clinton’s electoral count, so she is unlikely to take any risk of a two-female ticket “first,” and keep the focus on her own “first” status. Moreover, the Constitution prohibits a Gillibrand VP candidacy so long as Clinton is also a New York resident. The same applies to Governor Cuomo.

As for the other “mentionable” men: Governor McNally of Maryland wants to shine, but left his state in the hands of a Republican. Governor Brashear of Tennessee comes to mind; he has been a reformer and knows health care, but not many know him. And then there are the two Senators from Virginia, a state Clinton will surely need to win. Senator Mark Warner, a smart centrist with a genuine world view worthy of a President, might have been first in line with a stronger victory, but Ed Gillespie darn near beat him (possibly with his last-minute “Hail to the Redskins” commercial.) The guess here is that Senator Tim Kaine, former DNC Chair, like Warner, an ex-Governor but also a Catholic who has taken a careful stance on the ISIS war, would be at the top of Hillary’s list.

And without Hillary as the presidential nominee, the Democratic bench sort of speaks for itself – and none too loudly.

Recently published on Huffington Post.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Fear-Mongers On TV Spook Equities: Just In Time To Buy Cheap Before Great Earnings!

Curses: fooled again!

Regular readers of this blog will recall the prediction a couple of weeks ago: short sellers on Wall Street and their accomplices in the financial media, especially cable TV, would use a confluence of threatening (but not yet realized) situations to whip up a frenzy of fear to trigger the market  “correction” they had long waited for. And bet big on.

The October convergence included: the emergence of ISIS (including the likely fall of a well-positioned  Syrian town on the Turkish border); new fears of a potential European recession due to an August slowdown in factory activity (who would have ever expected a slowdown in Europe in August??); an imported fatal case of Ebola in the US that was mishandled by the hospital and wound up infecting  two nurses and led to mindless calls for “flight bans” from the affected African nations to the US (although those flights don’t exist) to prevent a US epidemic; and even the murder of two soldiers by two Canadian jihadi converts. All these were cited day-in-and-day-out as urgent reasons to, as one trader put it “sell first and ask questions later.”  Bad advice, if you took it, as many did in 2010, 2011, 2012 and 2013 when the same type of traders confidently projected a string of stock-mageddon events:  a Greek default leading to a Euro currency collapse; a US debt default; a German exit from the Euro; run-away US inflation as the Federal Reserve provided extraordinary market liquidity to fight asset deflation (including stocks); and even predictions that the Fed would “Septaper” its stimulus too early (2013) or too late (September 2014).

None of these eventualities actually happened, of course. But traders made a fortune when minor market corrections ranging up to 13% occurred just before the reality of strong corporate earnings or economic performance emerged. Not that the risks inherent in the situations noted above were not real. But they were intentionally blown out of proportion to shake stocks out of “weak hands” by traders who new darn well that the likelihood of stock-mageddon was remote and the evidence of continued growth was actually strong.

Theologians (unlike traders with a position to optimize) will tell you if asked that all sin starts with exaggeration. And the sin here was clearly exaggeration. Predictions of a new global recession began to appear in the financial media in early October just before the market took its dive, recycling much the same forecast that CNBC trotted out the previous October! This despite the fact of surging 4.6% US GDP growth in the second quarter of this year announced at the end of September, and employment growth announced in the first week of October reflected the best annual rate of job creation since the glory days of 1999!

How does this record of strong economic performance get replaced by a chorus of doom and gloom in just a week? Ask the cable news cycle and its vulnerability to the urge to “bring on the car crash” so we can cover it, providing a megaphone to the traders positioned to profit from a quick downturn on exaggerated fear, followed by a quick jump back up when the fears turn out to be far more manufactured than manifest. Call it the Bungee Market. Let’s look at some examples.

UNITED RENTALS (ticker symbol URI): a well-regarded proxy for global economic activity. Its shares dropped in October from over 100 to the mid-80’s as the fear trade took over in the second week of the month, but quickly and decisively rallied back to 107 at this writing (10/23/14) on the back of strong earnings and projections.

ILLINOIS TOOL WORKS (ITW):  a symbol of “nuts and bolts” industrial America, it dropped from an early-October high of 83 down to 79, but then blew through its previous high all the way to 87 after reporting stellar financial results.

HONEYWELL (HON): we feared results of this global, diversified industrial and technology company would reflect a bad European slowdown, but HON met earnings estimates and raised its forward guidance and its stock. Having fallen from 91 to 85 in early October, it jumped even higher to reach 94 after its report.

AMERICAN AIRLINES (AAL): the “index patient” of the transportation sector that was taken down from 36 to 28 on fears of Ebola contagion and travel bans, jumped back quickly to 38 once its strong earnings report came out.

PACKAGING CORPORATION OF AMERICA (PKG); a proxy for all manner of commercial activity, saw its stock beaten down from 63 to 58 amid downbeat economic chatter in the second week of October. But like others, PKG blew right through to an even higher price of 69 after strong earnings.  “Sell first and ask questions later” would have cost you 10% with this stock in half a month and buying at the bottom would have produced a 19% return in just a few days. Annualize that!

SKYWORKS (SWKS): a semiconductor company that is a mainstay of the mobile revolution was blown down from 55 to 45 prior to earnings on a report of a purported market turn in the chip sector, but sprang right back to 55 when that rumor was debunked by its own earnings.

CELGENE (CELG): a leading biotech innovator, this stock slumped with the fear trade from 92 to 85, but jumped all the way to 100 on its monster quarterly financial report.

HARLEY-DAVIDSON (HOG): this well-known name slumped 60 to 55 on fears of consumer fright, but ran all the way through to 63 on great earnings.

HALLIBURTON (HAL): this well-known name in oil exploration tied to the fracking industry with the rumored “death of fracking,” based on the sharp fall in oil prices due to global recession fears as well as abundant supply, slumped from 62 to 50, but is now back up 10% from its bottom after surprisingly strong quarterly earnings report.

Seen enough?  Of course there were companies like IBM that went down and kept on going down after its horrible earnings report. That’s as it should be, case by case, fact by fact. But since many market participants seem to have experienced a collective brain freeze about how they got fooled by the Armageddon trades of 2010 through 2013, maybe a few examples of how they got skinned again in October 2014 will serve as a memory aid for the rest of the year.

Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

A “Hung” Senate with No Majority on November 4? Could Senate Independents Take Charge, Break Gridlock?

In Australia at present, a small group of Senators, elected not under the party banner of either Prime Minister Tony Abbott’s Liberal/National Coalition or the opposition Labor Party led in Parliament by Bill Shorten, but rather of the People United Party or PUP, led by mining and property magnate Clive Palmer.  PUP has effectively taken charge because they are in a position to deny the Government a working majority for its legislative proposals.  This handful of senators has been in a position since the last Australian election  to control the future direction of pubic policy and even the terms of debate on key issues including taxes, environment and immigration.  Could the same situation arise in the United States as a result of the upcoming Congressional elections on November 4? Maybe so.

We do not follow a parliamentary system of government like Australia, of course, but our situations are otherwise not dissimilar. In both countries, the lower house of the legislature has a clear and virtually impregnable majority. In Australia, it is the Party of the Prime Minister, however, and in the US, the Republican opposition to the Chief Executive. But the Senate  in each country is the key to enacting any legislation and is elected under different calendars of terms just as in the US, so it can swing from time to time away from the pattern of control in the lower house and the Executive branch. Moreover, in the US, it can exercise significant control on the Executive branch, especially in terms of appointment of key officials and judges.  It also operates under special rules where debate and appointments can be blocked by a minority of Senators and, for a limited time, even by one Senator.

Occasionally, US Senators have been elected under an “Independent” banner, but Senate rules and traditions push them to “caucus” or join forces in terms electing Senate leadership with the party that holds the majority since that party will control assignments relating to committees, office space and other perks that are important to their states and constituents. This situation has prevailed in the current Congress, where the two Independent Senators (Sanders of Vermont and King of Maine) have caucused with, rather than challenged, the Democratic Party, which holds an arithmetic governing majority sufficient on its own, to elect Senate leadership and control the terms of debate. But the numbers in terms of voting control is expected to certainly change for the Congress taking office in January 2015 with the November 4 election results.

Current polling and statistical analysis suggests at least a 60% likelihood that Republicans will swing to outright majority control of the new Senate. Some surveys suggest their chances are even better:  up to 95% according to a late-breaking Washington Post poll. Nate Silver, who famously calculated the 2012 Presidential election results with uncanny accuracy, puts the odds of Republican takeover, however, a bit lower than that: more like a range of 60% to 75%, but also raises the possibility that polling may be inadvertently statistically biased enough to make the outcome closer.  Moreover, there are signs that two new “Independent” candidacies in Kansas and South Dakota are making serious inroads into traditional Republican majorities in those two States – enough perhaps to shift the odds tighter. Is there a scenario in which a victory by these candidates  could result in a situation where neither Party winds up with even 50 votes in Senate (let alone a majority of 51) or even with a dead heat below 50 – such as 48?

If that were to occur, it would create a serious diversion from the usual situation where Senate Independents simply tag along with the “majority” Party in order to secure favorable committee assignments. The battle lines would start with neither side holding a majority and needing at least three of the four Independents to join up in the case of the Republicans (to get to 51) and two for the Democrats (since they can count on Vice president Biden’s votes to break a 50-50 leadership tie).  The questions then gets down to whether there is a credible pathway to a 48-48 balance of power resulting from the midterms and when will we know.

Apart from current Senate seats not involved in these midterms, and seats in elections that are universally considered “safe” for one party or the other, there are 16 seats in play in this year’s midterms, with varying odds for victory mostly tilted Republican, against the background of 43 safe or continuing Republican seats, 39 Democratic and two Independents, who are currently caucusing with Democrats.

Let’s assume for the moment that Democrats win all four seats in which they are generally polled to win fairly easily: Michigan (long-serving Senator Carl Levin’s retired seat); Minnesota (incumbent Al Franken); Oregon (incumbent Jeff Merkley in a state Obama won handily) and Virginia (where incumbent Mark Warner leads all polls albeit against a well-funded opponent). That would bring their total to 43.

Doing the same for  states where Republicans clearly leads in most polls, they would pick up West Virginia (which shifted strongly to the Republican side in recent years and where long-time incumbent Democrat Jay Rockefeller is retiring); Kentucky (with incumbent and current minority leader leader Mitch McConnell seeking a sixth term); Arkansas (where incumbent Democrat Mark Pryor, a former senator’s son, is widely considered to be in trouble in a “Clinton State” that is virulently anti-Obama); and Alaska (where Democrat incumbent Mark Begich is polling consistently behind his GOP challenger and needs a strong turnout in remote Eskimo villages to have any chance). Those four would give the Republicans a total of 47. The Montana race to replace outgoing Democrat Max Baucus is considered so far gone from the Democrats that the Congressional “Roll Call” analysis above already has it in the “safe” Republican base count of 43.

That leaves eight races left with the count at 47 Republican and 43 Democrat and two Independents. Let’s assume for the moment that the strong Independent candidates running against Republicans in Kansas and South Dakota pull off what many would have considered upsets until recently. That would up the Independent total to four.  In that case, Republicans would need to win in four of the remaining six races to get to a clear 51 seat majority and make the Independents essentially irrelevant to the Senate leadership decision. Let’s give them Colorado to start with, where their candidate against incumbent Democrat Mark Udall is polling very solidly, holding a steady lead in mid-single digits. That would get them to 48. But if Democrat Jean Shaheen should hold her seat in New Hampshire by a slim a margin over former Massachusetts Senator Scott Brown, and Bruce Braley manages to win Iowa in Democrat Tom Harkin’s old seat against a strong Republican challenger, and incumbent Kay Hagan does the same in North Carolina, that would take the Democrat total to 46, just two behind the Republicans.

The battle would then come down to the races in Louisiana and Georgia, where Republicans are favored but Democrats may stand a chance due to third party candidacies and, in the case of Georgia, the fact that their candidate is the daughter of well-regarded, centrist former Senator Sam Nunn. Two wins would bring the Democrats even with Republicans at 48, but with neither holding a pure majority of Senators. This situation would create maximum leverage for the Independent “Gang of Four” if they could hang together in the “hung Senate.”

If two of the four hooked up with the Democrats, that would take them to 50 and a marginal majority with the Vice President’s tie-breaking vote. And if three of them caucused with the Republicans, Mitch McConnell would become majority leader with 51 votes. But if the four held out to see which Party would agree to their terms, they would have the chance to demand at least procedural changes to break the partisan divide. For example, by guaranteed up-or-down votes on such gridlocked matters as immigration reform – the previous Senate’s approval would not a carry-over – climate policy, tax reform, entitlement reform, the Surgeon General nomination, and so forth.

Unfortunately, if this scenario emerges from the results of the November 4 elections, the Independents would have a lot of time to plot their strategy. Both the Louisiana and Georgia races could be kicked into runoffs in December and January if nobody wins more than 50% on the first round.

A “hung Senate” would be bad for the economy at least in the short run, as was the “hung Presidency” in 2000, which may have triggered a recession.  But it could be good in the long run if the new “Gang of Four” makes a breakthrough on gridlock.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: Tmidhe New Normal In Higher Education.

Will CNBC Market Negativity Again Bail Out Short Hedge Funds?

All during the run-up in the stock market over the past couple of years, the major cable news outfit covering the financial markets, CNBC, has been relentlessly pushing the idea that the market needs to have “correction” of at least 10% to warrant further investment equities. Day after day, night after night, the CNBC website carries stories with ominous headlines predicting a coming dramatic fall in the market, trotting out gloom and doom prophets on its programs like Marc Faber, to renew their predictions of a crash of 30-50% just around the corner because they perceive the market to be “ahead of the curve” of the real US economy.

Here are some examples from just the past couple of days of CNBC’s own  fear-promoting  stories, despite the fact that that US unemployment is down to 5.9%, job growth per month at 227,000 for 2014 is the best year-to-date performance since the heady days of 1999, and US dollar is reaching the “King dollar” heights advocated by leading CNBC commentator Larry Kudlow:  fear of “black swan,” fear of earnings; fear of the rising dollar trade.

CNBC “Armageddon” scare stories have been cited previously in this blog, going all the way back to the previous CNBC promotions of the theory that Greece was going to collapse, that the Euro was going to collapse, that Germany was going to leave the Euro, that Spain was going to collapse, that Italy was going to collapse, that the US was going to default on its debt, etc., all of which of course would potentially trigger a market crash.  Not one of which actually happened. But, never mind. For a while, each of these hysteria scenarios heavily promoted by CNBC drove down the equity markets for a few days or weeks. This provided enough time to allow short hedge fund positions to be unwound at a big gain and for the same funds to buy into leading stocks more cheaply to reap gains when the scenarios turned out to false – which the hedge fund managers probably knew they were!

The same pattern emerged last fall when CNBC actively promoted the outright lie that the Federal Reserve had decided to begin to unwind its extraordinary stimulus at its September meeting, which many market participants thought would be too early given the state of the economy. Not surprisingly, this led to a sharp drop in stock prices and an even more pronounced rise in bond yields. In fact, the Fed deferred its decision to “taper” its bond purchases until later in the year, and bond yields have actually come down as it has continued an orderly pace of wind-down to the present moment. Again, the equity markets also quickly recovered to gain a massive 30% increase, as measured by the S&P 500 for all of last year, once it was clear that the doom scenarios promoted by CNBC did not hold water and the short hedge funds had relatively poor results, which carried on into 2014.

But on CNBC, hope (and hype) springs eternal for a “correction” to bail out these hedge funds. At first, there was a gift from Mother Nature to the short side. The past winter was terrible and GDP fell by 2.6% in Q1 (along with expectations for the economy for the rest of the year). Stock markets were moribund, and bond prices surged, and the shorts began finally to look smart.  But, as Chauncey Gardiner of “Being There” predicted, “In the Spring’ there turned out to be real signs of growth.  In late July, we learned that the economy grew in the second quarter by 4%, a figure later revised up to 4.6% in the final data. Suddenly the shorts didn’t look so smart and in fact were fighting off more losses. The stock market revived, but CNBC, right on cue, was ready with a new chamber of horrors facing the market: the Gaza war, the Ukraine war, the ISIS emergence, the Ebola outbreak, the European near-recession and deflation, the Chinese students in the streets of Hong Kong.

It’s not that any of these occurrences haven’t in fact been happening. All of them are real. But are they signals for a US stock market correction or crash? Do they singly or collectively threaten the surge of growth in the US economy? Do they justify a fall to 2.0% in the ten-year treasury bond interest rate, a level consistent with a US recession, confidently predicted currently by a leading trader on CNBC’s “Fast Money” program?

Granted that any TV news organization would rather cover a train wreck than an on-time arrival at the station. But CNBC’s constant denigration of the equity market begs a question: why on earth would the cable network do their level best day in and day out to scare viewers out of the markets that they covers?  If the only players left in equities are machines run by hedge funds, who needs to bother watch CNBC?  CNBC seems to daily go out of its way to talk down the market and talk investors out of investing. So why should they bother watching TV when it constantly tells the viewers that “Stockmageddon” is just around the corner? Or as one “Fast Money” trader said last week about Ebola: “Sell first and ask questions later!”

CNBC is not alone in this game. Without a shred of data to back up its assertion, USA Today warned that the surprisingly good jobs report of October 3 could lead the Federal Reserve to increase base interest rates sooner than the financial markets expects in 2015, despite the absence of any evidence of emerging inflation.  But CNBC is leading the charge to warn viewers that the fall in the Russell “small cap’ stock index by over 10%, technically a “correction,” is “trying to tell us something” about a coming downward direction of the US economy (multiple quotes from CNBC trading guru Guy Adami, who is the one who predicts the 2.0% ten-year note, consistent with a coming US recession).  Seems to this blog that traders are trying to tell the rest of us to sell out of the market so they can swoop in to buy it cheap because they know darn well the US is not heading or a recession.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Unanswered Questions for a Consequential Autumn

Chinese Checkers?

The Dow Jones Industrial Average set an all-time record during the trading week of September 15, but fell 104 points along with NASDAQ and the S&P 500 Average on September 22. The hot new Chinese internet IPO also fell 4% after its 38% pop on day one of trading. The sell-off was foretold even before the market opened by futures prices that were dropping on word that the Chinese Finance Minister said the country was not looking to change policy to provide additional stimulus to its slowing economy, beyond actions already taken. The unasked question: was the Minister’s statement really a disguised way to have same effect on European bond markets, while the Chinese clip the wings of the uber-capitalist Jack Ma given his inordinate (by Chinese standards) success in building a US dollar fortune on the backs of Chinese consumers?  If so, then the markets may be misreading the macro-economic impact of the statement itself. Indeed, one can imagine the Chinese taking further near-terms stimulus actions if growth continues to fall and simply characterize them as not representing any “change in policy.”

Draghi’s Inferno?

When European Central Bank (ECB) head Mario Draghi spoke on the last day of summer with a particularly downbeat take on the European economy, he had much the same depressing effect on values in the European bond markets as the Chinese Minister’s overnight speech had on the US stock market.  While the ECB head promised that the Bank would take further stimulus actions, if needed, to try to halt the rot, is it possible that Draghi was really trying to light a fire under European governments  (particularly Germany) to take stimulus actions of their own to expand economic growth, particularly if the Germans – despite Draghi’s assurances his Bank’s principals were “unanimous” in their commitment to further monetary stimulus – don’t really want the Bank to engage in American-style Quantitative Easing (i.e., German bond buying)?  Was Super-Mario in fact making a speech that might sounded defeatist to European bond traders but nevertheless was heard as an “offer they can’t refuse” threat to his political opponents who have resisted expansionary economic policies? He must be truly frustrated by Germany’s preference for preserving its relatively large slice of Europe’s shrinking economic pie at the expense of helping to bake a larger pie that might help other European nations trade their way out of recession.

Obama’s Disapproval Ratings: A Three-Way Street?

As we head full-tilt into the 2014 election season, much is being made of President Obama’s unpopularity in the polls, particularly as drag on any Democratic chances to capture additional seats in the House of Representatives or prevent a new Republican majority in the Senate. On almost every major issue, the polls show, for both domestic economy and foreign policy issues, that Obama’s approval ratings have trended to the low 40% range, with disapproval moving well into the 50th percentile. But the question left unanswered by the polls is whether or not these figures mean that those “majorities” that disapprove of Obama’s handling of ISIS, or Russia’s attack on Ukraine,  immigration, or unemployment, have coalesced around policy options opposite to those chosen by Obama. For example, do those who disagree with Obama’s decision to attack ISIS in Iraq and Syria largely through US (with some Arab) air power, a coalition of neighboring states and Syrian volunteer armies, and no US “boots on the ground” except special forces, all agree with John McCain and Lindsay Graham that the US should commit combat troops to defeat ISIS? Or do they side with those like Representative Barbara Lee who have expressed their strong reservations about any bombing campaign, let alone any troop commitments?

Although that precise question has not been polled, one could well strongly suspect that neither of those positions would command anything close to a majority of American public support. Could it be that, on the question of confronting ISIS, Obama’s announced policy actually commands a quite respectable 40% of American support, while those urging clearly alternative policies, have yet to persuade more than about 25% of the populace?

Similar “grains of salt” might season the polls that suggest that American are united behind a rejection of Obama’s policies on immigration. They have led to a fairly significant majority vote in the Senate approving comprehensive immigration reform along the lines of the President’s proposal to enhance border security while providing both penalties and a path to citizenship for undocumented immigrants who have not committed crimes and additional “Dream Act” style benefits for any children they brought to this country. While politicians decrying “amnesty” (which by definition does not apply to a program involving mandatory penalties) and urge “enforcing existing laws” might seem in the reported polling data to have the upper hand versus Obama’s approach, there is, in fact, no polling that supports mass deportation (which is of course what “enforce existing laws” means). Likewise, apparent disapproval of Obama’s plans to act by executive order if Congress fails again in its forthcoming “lame duck” session to consider comprehensive reform almost certainly consists of those who believe Congress should act, those who believe it would be an overreach of Presidential power, and those who believe Obama should have acted already. Again, Obama’s policy on the immigration issue is most probably consistent with approximately a 40% plurality of American opinion.

Finally, while a majority are recorded as disapproving of Obama’s handling of Russia in the context of President Putin’s actions in seizing parts of Ukraine, there is utterly no polling data to support the proposition that we should be attacking Russia militarily rather than only by the economic sanctions Obama has led a coalition to impose. The unanswered question, on this issue also, is: exactly what is the majority opinion on how Russia should be handled? The hard truth is, there isn’t one. In this age where public policy discourse in unfortunately dominated by cable TV and talk radio networks that exclusively present one-sided and biased views of virtually all important events to suit their audience “base,” it is any wonder that the President or Congress can espouse and command majority support for any policy whatsoever?

In the American democracy we have collectively (or by passive default) chosen to have at the moment, to serve and assuage our divergent biases, the question is whether a governing plurality, as Jack Nicholson said, is “as good as it gets.”


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Market Manipulators Are Back In Season for The Fed “Septaper” Sequel: “Septighten”

The summer is coming to an end without much success at the movie box office, but one “sequel” has emerged a winner this week although its ultimate fate awaits further developments.

Readers of this blog will recall that questions were raised here in late August last year about the steady drumbeat of financial market expectations that the Federal Reserve Board’s Open Market Committee would announce that it would commence “tapering” its program of bond purchases known as Quantitative Easing III which was intended to stimulate increased economic activity. Speculation that this would happen had begun late in the spring and continued throughout the summer based on a response by then-Fed Chair Ben Bernanke to a question at a Congressional Committee hearing as to whether such tapering would ensue by Labor Day. Bernanke said if the economic conditions improved sufficiently, tapering could be commenced “later in the year.”

In the wake of those comments, interest rates on ten-year Treasury securities spiked upwards rather violently, causing the stock market to swoon down as well. Commentators parsed every word and phrase used by Fed Board members over the summer months, and some commentators even detected that the Fed had actually “said” it would taper in September (Dennis Gartman live on CNBC). This was, as a matter of record, completely untrue, but by then the market was definitely in a “print the legend” mood.

In particular, hedge funds that had in 2013 and 2014 staked out a net short position in both the stock and bond markets (and as a result were carrying massive losing positions for their clients into the summer) were salivating at the prospect of reversing their fortunes thanks to the market perception that the Fed would move quickly to begin to reverse its “highly accommodative,” easy-money policies. Any perception of monetary policy “tightening” was then likely to send both bond and stock markets down as it did, thus bailing out the short hedgies.

Well, it didn’t all work out that way. The Fed in fact took its time to get more and better data before it began tapering; the markets, after the initial September surprise rather than the “expected” (or at least highly promoted) idea of a “Septaper.” That timing was always premature, as anyone who was paying attention to this blog, or more importantly to Chairman Bernanke when he called out the anticipatory run-up in interest rates, caused by those twisting his words on TV for self-serving purposes into a “Septaper” commitment, as distinctly “unwarranted.”  Yet many fools and their money were parted by the wily hedgies, who were sucked in the Cable TV producers anxious to have a crash to cover (or at least call it in advance).

The only clear winners were the hedge funds. Having scared so many into selling in advance of the “Septaper,” which turned out to a be as much a phantasm as the El Nino that never came to spare us the brutal 2014 winter, they were in pole position to scoop up bonds and stocks on the cheap and profit from the inevitable rally that they knew damn well would come when the expected (but in hindsight clearly premature) “Septaper” didn’t happen!

Does all this sound a bit familiar? It should. The hedge fund market players find themselves in the same position as they were last summer: short and wrong. Both stocks and bonds based on ideology or just dogged insistence that both markets are long overdue for a “correction,” as more than one CNBC commentator confidently predicted was on the visible horizon as summer’s end approached. The crises in Iraq, Israel and Ukraine were cited by certain large investors as firm grounds for a severe market crash of up to 60%,  others disagreed, contending the market has more room to run up, despite the international situation. And for a while this September, that view carried the day as markets continued their climb. No doubt, this was much to the chagrin of the short hedge funds, who by now were counting on a literal re-run of the play from just 12 months ago.

But before the market open on Monday September 8, the shorts got a gift that kept on giving right through the week thanks to an overnight Financial Times article suggesting  that the Fed’s standing policy that interest rates would not be increased (“tightening”  policy) for a “considerable time” – generally thought to mean about six months – after the end of QE III would at least “at the September 16-17 meeting, based on conflicting comments some of both the “hawk” and the ‘dove’ rates camps within the Board. The article went on to speculate that a decision to change this policy statement to a more hawkish posture (presumably a less “date-based” fixation and a more purely “data based” giving emphasis to improving economic statistics) was not in fact likely until the late-October meeting.  Market commentators, however, perhaps egged-on by hedge fund shorts who saw a chance to snatch victory from defeat with a last minute “Septaper 2.0” play, ran with the mere possibility and turned it into a virtual certainly of a policy tightening change at the September meeting!

By Friday, the bond market had rung up bond yields to over 2.60 from a level closing in on 2.30 just a couple weeks ago, bailing out bond bears, and the equity markets had turned south with a first losing week in six. Even seasoned and respected CNBC market analysts like Steve Leisman and Art Cashin had jumped on the “Septighten” bandwagon by week’s end. Leisman cited observers who focused on a very recent San Francisco Fed paper calling attention to the gap between Fed member’s collated estimate of a 1.2% overnight money rate by year end 2015 versus the trading market’s expectations are anchored at .76% as evidence of a Fed desire to change its guidance sooner rather than later to tighten up that gap. And Cashin, by week’s end, was telling listeners (including this writer) near the close of trading that markets now “expect’ a policy change at the September meeting.

To be clear: Leisman and Cashin are certainly not manipulators.  They are simply reporting the extent to which the market has talked itself from a “possibility” into a near certainty. And yet others were not so sure, as Barron’s reported, citing a leading analyst to the effect that the Fed may be even more concerned that a guidance change just now might lead markets to get ahead of the Fed in terms of the likely onset and pace of rate tightening. That problem would be harder to fix than the opposite case.

The sense here is that the latter analysis points to a similar result as with “Septaper” expectations in September last. Fed Chair Janet Yellen will wait one more month to be more certain of the overall direction of the job market and the economy and how employers are approaching them in their 2015 planning cycle. She will have September payrolls and the latest read on both Q2 and Q3 GDP, so a “data-based” change would be far more appropriate around Halloween than the Autumnal equinox. Like Margaret Thatcher, “the Lady’s not for turning”, even by the hedge funds!


Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.