Equity Markets – Domestic Equities

Despite political turmoil in Washington, equity markets propelled ahead, resilient to any political and media interference.

Heightened corporate cash levels and steady earnings growth continue to fundamentally fortify equities across various sectors.

The three worst performing sectors so far in 2017 have been energy, telecommunications, and financials, while consumer, healthcare, and technology stocks have led since the beginning of the year. (Sources: Reuters, Bloomberg)

Fixed Income Update – Domestic Bond Markets

U.S. Treasuries strengthened at month end as demand for government bonds increased in anticipation of lessening inflationary pressures. The yield on the 10-year U.S. Treasury ended May at 2.21%, down from 2.29% at the end of April.

Inflation, the primary determinant for the Federal Reserve to raise rates has been muted over the past few weeks, allowing confidence to build among investors that rates will not spike up anytime soon.

Fed members this past month suggested a slow yet consistent manner in raising rates. The Fed is being careful to communicate the rise in rates as slow and steady in order to avoid another “taper tantrum” as occurred in 2013 when the Fed spooked markets by aggressive rate hike language. (Sources: U.S. Treasury, Federal Reserve)

What Most Tax Payers Earn -Tax Fact

With tax cuts and IRS simplification proposals on the agenda, tax revenue statistics are focal points as certain taxpayers in various age and income groups may or may not see beneficial changes.

The Internal Revenue Service (IRS) keeps careful detail on tax revenue and how it is broken down. Tax revenue data is based on Adjusted Gross Income (AGI) which is compiled and revised during every tax season.

Of the more than 134 million tax returns filed for tax year 2016, the bulk of returns fell between the $30,000 to $200,000 income range. The median income group of taxpayers earning $50,000 to $75,000 comprised the largest segment of tax payers nationwide with over 18 million filers. The second largest group includes those earning between $100,000 to $200,000, with nearly 16 million filers in 2016. Demographical factors drive tax revenue, such as middle-aged, dual income households tending to earn more for a longer period of time. The amount of income also determines the number of filers in each income group. For 2016, there were only 3,469 taxpayers reporting $10,000,000 or more in income and 1,086,092 filers reporting no income. (Source: IRS)

Credit Scores On The Rise For Americans – Consumer Finance

Higher scores lead to more available credit as consumers tend to receive more financing offers and promotions. Eight years after the financial crisis, consumers that suffered bankruptcies and repossessions are seeing their credit scores improve. Theoretically, as credit scores increase, consumer expenditures also increase, but some believe it might be different this time. More favorable and higher credit scores are usually held by older consumers, who actually spend less as they enter retirement and empty nester years.

The onslaught of lower rates for over eight years now has also buffered consumers with the help of lower interest payments and more going towards paying down principal balances. (Sources: Fair Issac, Experian, Equifax, TransUnion)

China Buying U.S. Treasuries Again – Global Fixed Income

Currently valued at over $13 trillion, the U.S. Treasury Bond market continues to be the world’s largest and most liquid bond market, attracting capital from foreign central banks seeking safety and stability.

Federal Reserve data as of May17 shows that foreign central banks held nearly $3 trillion of the $13 trillion Treasury market, an increase of over $60 billion since the beginning of the year. Of the various foreign buyers, China’s central bank has increased its Treasury holdings the most by $29 billion to a total of $1.08 trillion. China is currently the second largest holder of Treasuries, with Japan the largest holder.

A reversal in the U.S. dollar has also helped propel buying by foreigners in order to help stabilize their local country currencies. U.S. Treasuries continue to offer higher yields than other developed country debt such as Japan or Germany, attracting yield seekers.

For the first time in almost 30 years, China’s government debt rating was lowered in May by one of the major credit reporting agencies, Moody’s. Such a move could diminish China’s ability to borrow funds from domestic and foreign investors. (Source: Federal Reserve Foreign Holdings Report, Moody’s)

USPS Delivering Less Mail – Market Fact

The United States Postal Service (USPS) remains an integral part of the economy and the country’s infrastructure even as the popularity of electronic payments and digital transactions have dramatically reduced the volume of mail processed by the USPS.

Of the more than 150 billion pieces of mail delivered in 2016, the most widely used service of the USPS is its first class mail service. As the volume of all mail has been dwindling, so has first class mail, falling from over 103 billion pieces in 2000 to just over 61 billion pieces in 2016, roughly a 40% drop in sixteen years.

As the volume has decreased, so have the number of postal employees. There were nearly 700,000 postal employees in 2006, falling to less than 500,000 in 2015, a sizeable drop in a short period of time. (Source: USPS)

U.S. Oil Reserves At Record Highs – Oil Market Review

A recent proposal by the Trump Administration to sell a portion of the U.S. Strategic Oil Reserves has brought the subject to the forefront. The higher level of oil reserves and supply over the past few months has led to a recent pullback in oil prices both domestically and internationally. The U.S. has become a dominant player in the global oil markets, becoming the 3rd largest producer of oil worldwide. The U.S. Energy Information Administration (EIA) estimates that U.S. production will reach 10 million barrels per day, surpassing Saudi production. The increase in U.S. production is primarily attributable to American technology and skills created by U.S. drillers using hydraulic fracturing, also know as fracking.Part of the downward pressure on oil prices has also been a lessening demand for oil by American consumers. Demand for imported oil has also fallen, as the U.S. reaches the highest production levels in over 45 years. Foreign oil imports now account for less than 21% of all U.S. consumption. (Source: EIA)

MA insurers bilking Medicare

Medicare Advantage plans have proven to be a very popular way for people to get their Medicare. Launched in 2002 as a way for private insurers to absorb some of Medicare’s $13 trillion funding gap, one-third of all Medicare beneficiaries are now enrolled in a Medicare Advantage plan. The program seems to be profitable for insurers, too. Major insurers like Aetna and United Healthcare, which are pulling out of the Obamacare marketplace, are fully embracing the Medicare Advantage program and continuing to sign up new members.

MA insurers get paid a base rate for each member based on the cost of care in that area under traditional Medicare. The idea is that insurers can use that money more effectively to keep patients healthy. To discourage cherry-picking, MA plans are paid an additional amount if members have certain conditions. For example, the base rate for a male age 70-74 might be $3,866. If the member has diabetes without complications, the plan might get an additional $1,058. If the member has diabetes with acute complications, the plan might get an additional $3,251. This system allows MA plans to function and profit, even when insuring very sick people. For Medicare, it provides a kind of cap on spending, which lessens Medicare’s risk.

Now it is coming out that MA plans are abusing the system by making members appear sicker than they really are in order to get those extra payments. A former finance director at UnitedHealth Group has filed suit to recover excess payments, and big penalties, for the Centers for Medicare and Medicaid Services (he would get a percentage of amounts recovered). Analysts estimate the improper payments could be as high as $10 billion a year. The whistleblower, Benjamin Pohling, began working at UnitedHealth in 2002. He filed his lawsuit in 2011 and left the company in 2012 when it was still under seal.

The Justice Department is now investigating UnitedHealth along with four other Medicare Advantage insurers: Aetna, Humana, Health Net and Cigna’s Bravo Health. This suggests that there are more whistle-blowers in the wings, potentially snarling more insurers in litigation and ultimately forcing a rethinking of the entire program.

UnitedHealth is disputing the allegations and has said it would contest them vigorously. It is also seeking to change a 2014 CMS rule requiring insurers to make sure that the diagnoses they report to the government are borne out in the patient’s medical chart. They say it unlawfully departs from the program’s statutory mandate of “actuarial equivalence” (i.e., that MA insurers get paid the same amount providers would be paid under original Medicare).

What is perhaps most disturbing about this New York Times article, A Whistle-Blower Tells of Health Insurers Bilking Medicare, is that the health plan’s executive bonuses are based on revenue targets, not patient health outcomes. “You or I or the average person is probably appalled by this,” Mr. Poehling said. “But the scheme here was not about delivering better care to members — the thing you would expect from a health care company. It was about increasing the bottom line.”