U.S. markets were relatively quiet last week with the Dow Jones Industrial Average (INDEXDJX:.DJI) dropping 0.4% to 17,946.68, the S&P 500 (INDEXSP:.INX) also slipping 0.4% to 2101.49 and the NASDAQ Composite (INDEXNASDAQ:.IXIC) shedding 0.7% to 5080.51.
The real action was in China, where the Shanghai Composite Index collapsed by 7.4% on Friday and neared a 20% drop which would constitute bear market territory. Chinese stocks saw their biggest two-week plunge since December 1996.
While the Shanghai market is still up an extraordinary 70% since last November, China’s central bank ran to the rescue Saturday morning by cutting its benchmark lending rate to a record low and lowering reserve requirements for some lenders.
Farmers may have to return to their fields if Chinese authorities aren’t able to stop the obviously insane stock market bubble from bursting.
For us, Europe is the more dangerous place to be right now…
Greece Is Set to Go Over the Edge
Europe was also much more active than the U.S. markets as the Greek farce continued to play itself out.
It looks increasingly unlikely that Greece will be able to make a key payment to the IMF on June 30th and Prime Minister Alexis Tsipras called late on Friday for Greek voters to vote on July 5 on whether to approve further austerity demands by international creditors.
Most observers have been behaving as though Greece is bluffing and will not default, but that leaves markets woefully mispriced in the event that they are wrong. If Greece does in fact default, that will lead to capital controls, bank closures and the potential exit of Greece from the Eurozone – events for which the markets are not prepared.
While markets have been ignoring the risk of such an event, a Greek default would be the most severe market disruption since the Lehman Brothers bankruptcy in September 2008. If that event taught us one thing, it is that such situations have a tendency to run out of control once they start to unwind.
It would behoove all of the parties involved in negotiating a solution to the Greek crisis to get their acts together quickly before markets take the decision out of their hands. At last report, Greeks were lined up at ATMs at 2 a.m. on Friday night trying to withdraw their remaining funds from Greek banks.
The one part of the U.S. markets that did move last week were interest rates. The yield on the benchmark 10-year Treasury bond jumped to 2.48%, its highest level since September 30. The 2-year Treasury yield, which is most sensitive to expected Fed moves, popped back up to 71 basis points as well.
If events in Greece and China continue to unwind, these rates are likely to move back down as investors seek a flight to safety.
Healthcare Stocks Will Do Even Better Now
Healthcare stocks received a major boost by the Supreme Court’s decision to rescue Obamacare last week in King v. Burwell. Healthcare companies have already been major beneficiaries of the healthcare law, which has created millions of new patients whose bills are being paid by American taxpayers.
The Supreme Court’s decision now renders that situation permanent. In King v. Burwell, the Court was presented with the issue of whether the law allowed for subsidies to be provided to patients on healthcare exchanges set up by the federal government rather than the states. The law specifically limits subsidies to the latter.
The majority opinion, written by Chief Justice John Roberts, rewrote the plain language of the law to extend the subsidies to exchanges set up by the federal government, claiming that “the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.” Therefore, because the law was badly written, the Supreme Court decided that it had to rewrite it.
There is only one problem with this approach – it violates the basic tenets of statutory construction that have governed American jurisprudence since the days of Marbury v. Madison.
Legislatures make laws, not courts.
Only where the language of a statute is ambiguous can a court seek to interpret the statute. In this case, however, with a clear agenda to salvage this law, a clearly politicized majority manufactured an ambiguity in the statute where none existed.
In the case of statutory ambiguity, the proper procedure is to look at the legislative history. In this case, however, the legislative history shows that Congress intended to limit subsidies to “Exchanges established by the State” in order to pressure states to establish their own exchanges.
Due to intense opposition to the law, however, a majority of states refused to establish such exchanges, forcing the federal government to step in and establish exchanges. Justice Roberts therefore not only ignored the plain language of the law – which expressed Congress’s intent – but also the legislative history that further demonstrated that intent.
This is nothing other than judicial legislation, which is an oxymoron under the American Constitution. Like it or not, the law states in plain language that only a person who buys insurance on an “Exchange established by the State” is entitled to a tax credit.
Through a tortured and specious twisting of words, Justice Roberts transformed that language into an “Exchange established by the State or the Federal Government,” despite the fact that the italicized words are nowhere written in the law.
This is the second time Justice Roberts has ignored his oath as a judge and ignored the plain language of the Affordable Care Act to rescue it from its drafters. Three years ago he authored another tortured and intellectually dishonest opinion that held that the word “penalty” really meant “tax.”
This is not merely sloppy adjudicating; it is a violation of the separation of powers and a usurpation of the legislative branch’s role to write laws. This decision will stand among the worst decisions in the history of the Supreme Court and will damage not only Justice Robert’s reputation but that of the Court.
From an investment standpoint, however, it will continue to feed the M&A boom in healthcare and health insurance stocks. Unfortunately, the ultimate bill is going to be paid by American taxpayers.
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Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.