CHILLOUT AT YOUR OWN PERIL

What didn't happen is usually as important if not more so than what did. Each year around this time we get projections and expectations about the market. There's no shortage of them. And there never will be.

For 2015 many were calling for 10 percent or better returns and near double digit increases in earnings of the S&P 500. Other surprises included the Fed's paralysis about hiking interest rates and just how low oil prices could go.

For a while the market celebrated those plunging oil prices, but if every cloud has a silver lining, every silver lining has a cloud, as an investor associate likes to remind. And as has been noted by many, the 45 percent drop in oil prices in 2014 didn't prevent a follow-up 30 percent decline so far in 2015.

Like a room full of measles, that can be contagious. See the current junk bond market and the panic there that now exceeds not just those highly-margined, peripheral producers who borrowed cheap money heavily and depended mightily on such to make a profit.

And a funny thing happen to consumers on the way to lower punp prices, a so-called beneficiary of those plummeting energy costs.

American consumers are getting a windfall of billions of dollars a week thanks to low fuel prices. The U.S. economy has little to show for it.

The price of a gallon of regular gasoline fell to $2 nationally Sunday and was well below that in much of the country, AAA said, marking the lowest price outside of a recession in more than a decade. As a result, Americans reaped more than $100 billion in savings this year alone, or about $550 per licensed driver, according to the motorists group. 

When gas prices began plummeting last fall—they were above $3.50 a gallon as recently as August 2014—many economists predicted the savings would act as a giant tax cut by jolting long-weary consumers into stronger spending and pushing up sluggish economic growth.

Instead, the economy remains mired in the slow-growth trajectory that has marked the economic expansion over the past 6½ years. Consumer-spending growth outside of gasoline has decelerated, advancing 3.8% from a year earlier in October, far slower than the comparable 4.9% gain in October 2014, according to Commerce Department data. Consumer spending accounts for more than two-thirds of U.S. economic output, according to the WSJ.


Another surprise has been the strength of the U. S. dollar and the havoc it been causing. The greenback is up 22 percent over the past two yeas with what many expect more strength to follow in 2016. For evidence of the damage check out multinationals and emerging markets.

The dollar is a major component of the divergence meme and the uncertainty and fear associated with that. Most commodities are dollar denominated, thus part of the reason countries like China want to un-peg from it. Spreads on sovereign bonds, especially at the long end, are also impacting dollar strength as the U.S. flashes growth hopes around the globe.

This might be seen as economic blaspheming but so be it. The strong dollar quite likely has hoodwinked the Fed into miscalculating low inflation. It's not nearly so low as any honest, straight forward, unfiltered man or woman on the street in Middle America would prove.

Healthcare costs are soaring, if you think not ask those who've seen a doubling or tripling in their premiums since Obamacare. Or ask employers facing ever-rising prescription drug spending costs for their employees. According to the WSJ, quoting a benefits consultant, "Nationally, employers' pharmacy costs are rising about 9.5% this year and will go up 10% in 2016."

“This is a tsunami,” said John Bennett, president and chief executive of Capital District Physicians’ Health Plan in Albany, N.Y., a nonprofit insurer with corporate clients. Pharmacy costs are “the single biggest driver of our medical inflation in the last few years.”

Recall prescription drugs were touted as a way to hold down costs by cutting down on the need for in-patient care or hospitalization. Recall also the usually loser here is the patient and the quality of services  received. Employers respond because push leads to shove.

In tackling them, employers are becoming more aggressive. Many have expanded requirements that doctors obtain advance approval from health-plan administrators for certain costly drugs, a practice called prior authorization. For instance, about 89% of employer health plans now mandate prior authorization for certain anti-inflammatory drugs for diseases like rheumatoid arthritis, up from 61% in 2007, according to survey by drugmaker EMD Serono Inc.

Another increasingly common strategy is “step therapy,” which requires that patients be treated with lower-cost drugs before the health plan will pay for a more expensive option. This year, about 69% of employers had step-therapy rules, compared with 56% in 2011, according to the Pharmacy Benefit Management Institute, a research organization. 

A newer tactic is pursuing supply contracts that cap annual price increases for drugs at a set percentage, says Jim DuCharme, CEO of Prime Therapeutics, a pharmacy-benefits manager that negotiates such deals.





Here's another chart about inflation. The bottom line is every cloud has a silver lining and every silver lining has a cloud. Forget that at your own peril. Now that the Fed has come up with a new way to tamper with things in the future, however, a foolproof way we are told, we should all just take a deep breath and chill out.