Time to Sell Health-Care Stocks?

                                                                  Aetna Inc. (AET)

Barron's - HEALTH-CARE STOCKS seemed to get a late Christmas gift last night in the form of a Republican victory in Massachusetts.

But as stunning as the final result might be coming from the liberal state, the market saw it coming.
The sector rallied in recent days, as a victory by Republican Scott Brown looked increasingly possible. Managed-care stocks were up significantly in the last five days, including 12% for UnitedHealth Group (ticker: UNH), 8% for Aetna (AET) and 7% for WellPoint (WLP). Pharmaceutical giant Pfizer (PFE) was up 7% and medical-device maker Boston Scientific (BSX) gained 5%. All of those returns are well ahead of the Standard & Poor's 500 index's 1% gain over the last week.

Given those impressive returns, we would "sell on the news" today. To be sure, analysts are generally dire in their predictions for health-care reform. "We think the Democratic push for the government takeover of health care is dead or effectively dead," David Maris, a well-respected health-care analyst for Calyon Securities wrote this morning.

Why a Tsunami Hit the Markets

WSJ's David Gaffen and Heidi Moore discuss the reasons for Monday's stock market free fall that saw the Dow drop below 6800 points.

Pressure to Re-evaluate Dow Index

The Wall Street Journal - As the Dow Jones Industrial Average hits lows not seen since the dot-com bust, Wall Street is getting antsy about its inclusion of low-priced stocks that some traders and analysts believe should be yanked from the 30-stock average.

Their gripes are based in simple arithmetic, since the average is weighted according to the nominal price quotes of its 30 components, hand-picked by top editors at Dow Jones & Co., which also publishes the Wall Street Journal.

With five stocks in the Dow trading under $10 – Bank of America, Citigroup, Alcoa, General Motors, and, as of today, General Electric – the average’s detractors say it’s become a skewed indicator of the market. They want the runts replaced for essentially the same reason the editors would never add in an extremely high-priced stock like Berkshire Hathaway, now trading above $76,000 a share, or Google, at $340.

“The committee is just not doing its job by leaving these names in,” said James Bianco, president of Bianco Research in Chicago, which recently sent a note to clients analyzing the impact of low-priced stocks in the Dow. He notes that a simultaneous drop in all five sub-$10 Dow components to zero would only cause the average to fall by less than 200 points. However, a 100% decline in the Dow’s most high-priced component, IBM, would cause a drop of more than 700 points.

In the eyes of many investors these days, several of the Dow’s sub-$10 stocks are indeed candidates to go to zero if the government nationalizes them, wiping out private shareholders’ equity. Bank of America and Citigroup are most often cited by traders as candidates for a takeover, though executives and government officials have attempted to dissuade investors from believing that will happen.

Dow Jones Indexes removed American International Group from the industrial average last fall after it received bailout funds that amounted to a de facto nationalization. Mr. Prestbo said the index committee is ready to remove other names quickly if a similar scenario comes to pass, but the committee won’t make moves in anticipation of any government takeovers.http://blogs.wsj.com/marketbeat/2009/02/20/the-unbalanced-dow-industrials/

Why Analysts Keep Telling Investors to Buy

Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy.

Still.

At the top of the market, they urged investors to buy or hold onto stocks about 95 percent of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9 percent of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

Maybe. But after so many bad calls on so many companies, why should investors believe them this time?

When Internet stocks imploded in 2000 and 2001, Wall Street analysts were widely scorned for fanning a frenzy that had inflated dot-com shares to unsustainable heights. But this time around, credit rating agencies, mortgage companies and Wall Street bankers have shouldered much of the blame for the Crash of 2008, and few have publicly questioned the analysts who urged investors to buy all the way down.

On Oct. 8, as Congress and the Treasury Department frantically tried to calm the plummeting markets, a Citigroup analyst upgraded Bank of America to buy. Since then, Bank of America shares have fallen 77 percent.

That same month, Jeffrey Harte, a top-rated analyst at Sandler O’Neill and Partners, also lifted Bank of America to buy, from hold, and a month later, he gave Citigroup the same upgrade, according to Bloomberg data.http://www.nytimes.com/2009/02/09/business/09analyst.html?partner=permalink&exprod=permalink

Drop in Inflation Lifts Europe Stocks

The New York Times - American stock markets opened higher on Tuesday while crude oil prices rose above $50 a barrel, their highest levels in more than a month, before falling back slightly.

Oil prices plunged from their summer peaks of $145 a barrel as the economic downturn spread, but they have rebounded from their lows as motorists took advantage of lower gasoline prices. A dispute over natural gas between Russia and Ukraine and a production cut by the OPEC cartel of 2.2 million barrels a day have highlighted concerns about tightening energy supplies.

“At least for the next couple months, it’s pretty much going to be strictly a supply and demand type of situation,” said Al Greenberg, head Chicago Board Options Exchange floor trader at BNY ConvergEx Group. http://www.nytimes.com/2009/01/07/business/07markets.html?partner=permalink&exprod=permalink