Friday, August 28, 2009
In 2007, Jim Chanos became "The World's Best Short Seller." That year, his now-legendary bet against the banking industry earned him a reported $350 million paycheck.
This week, Chanos made headlines when he unveiled his latest short-selling target: health care. Here's what he had to say...
This might come as a surprise to Growth Stock Wire readers, but I agree with Chanos. Let me explain...
Remember the plan Big Pharma recently negotiated with President Obama? The world's largest drugmakers pledged $80 billion in cost savings for prescription drugs over 10 years. In exchange, the president conceded government price controls for Medicare drugs and promised not to facilitate channels to import cheaper drugs from Canada.
But Congressional Democrats have made it clear this deal is between drugmakers and the White House – not them. Ultimately, lawmakers will have final say on what the reform package includes. And now, White House staff is dropping hints the deal may have been signed in pencil.
I think there's an additional round or two of negotiation before Big Pharma declares a political victory. The same is true of the president's preliminary deal with hospitals and deals to come with insurers and doctors.
But there's no way to say for sure. And the market hates uncertainty. So it's no surprise money is flowing out of health care stocks faster than every sector but consumer goods.
That's the trend Chanos is eager to cash in on. And like Chanos, I think the sector is likely to get cheaper from here. In the near term, "Big Health" stocks – including drugmakers, hospitals, insurers, and medical-device makers – are headed for volatility... and some of them could get wiped out with the stroke of a politician's pen.
Over the long term, I believe health care expenses (read "revenue" for Big Health) will continue to grow by double digits in a post-ObamaCare environment. President Obama's first priority for health care reform is coverage for America's 45 million uninsured. No matter how you slice it, 45 million new "paying customers" will add to costs. And medical inflation points to long-term gains in health care stocks.
Yet, in the short-term, Congress' tinkering and bickering is likely to push blue-chip health care stocks down another 15%-20% from here. That's not chump change, especially for big caps.
If you've got a long-term position in Big Health, expect higher volatility. And don't be surprised to see your brokerage account shrink at least temporarily with all the uncertainty around reform efforts. If you haven't bought yet, sit tight. You'll likely see better prices down the road.
Aggressive traders who want to make a bet alongside the world's best short seller should look to buy puts on the Health Care Select Sector SPDR Fund (XLV). The exchange-traded fund holds the largest drug and device makers in the world.
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