Boring Portfolio

Boring Portfolio Report
Tuesday, January 14, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (Jan. 14) -- Last Friday, the monthly report on changes in prices at the wholesale level revealed that inflation remained under control in December. This morning's report, focusing on prices that consumers paid last month reiterated the same message.

Just as my daughter never tired of hearing "Goodnight, Moon" read to her dozens of times, the stock market apparently remains enthralled with "Goodnight, Inflation."

On the great trading floor,
there was a telephone,
and a red Bloom(berg),
and a chart of stocks jumping over the moon.

The Dow may not have jumped over the moon, but it did leap 53 points to finish at 6762, the index's fourth-straight record. Once again, Big Board volume easily surpassed a half-billion shares. The S&P 500 soared 1.23%, while the Nasdaq rocketed 15 points, or 1.16% on enormous volume of 680 million shares. Records, all around.

The Boring Portfolio had a decent day, gaining 0.90% as seven stocks advanced, including the technology trio of Cisco Systems, Solectron, and Oracle. Cisco (Nasdaq: CSCO) gained $2 7/8 to set a new high of $72 (bid). Solectron (NYSE: SLR) picked up a dollar, and Oracle (Nasdaq: ORCL) arrested its recent slide with a $2 1/8 pop.

Only two Boring holdings fell. One of those falls was a dandy, though. Continuing yesterday's sell-off, shares of Oxford Health (Nasdaq: OXHP) cascaded $2 1/2 on the bid side. Trading volume was 7.7 million shares -- more action than the Ox sees in a typical week.

The reason for the sell-off yesterday and today is now amply clear -- if not entirely justified. As part of a plan to keep Medicare afloat, the White House is actively considering cutbacks in premiums the program pays to HMOs that enroll Medicare recipients. The Washington Post reported Sunday that the proposed reductions would total $20 billion over the next five years.

Administration supporters of the cuts claim that HMOs are being overpaid as compared with traditional fee-for-service insurers. The argument is that senior citizens who enroll in HMOs tend to be healthier on average than are Medicare recipients who remain in traditional fee-for-service plans, and therefore premiums to HMOs should be comparatively smaller. Not surprisingly, HMO officials dispute that contention, saying it is based on outdated studies.

At a news briefing Monday, presidential spokesman Mike McCurry said, "We believe that ... the increase in reimbursements that have gone to HMOs have been excessive. ... There is a strong argument for reducing some of the payments that are made."

euters story today, Roberta Walter, an analyst with Goldman Sachs, characterized the sell-off in OXHP and other HMO stocks as "a complete overreaction to news the market doesn't understand."

"The premium growth rates would slow to levels analysts already expect and have built into earnings estimates," Walter said.

In the Reuters story, other (unnamed) analysts are reported to have agreed that the cuts would have a negligible effect on HMOs' earnings. If premium growth rates in Medicare reimbursements shrank, "HMOs would initiate other measures -- such as surcharges -- to maintain revenues and earnings, said one analyst, who declined to be named."

President Clinton will unveil his budget plan on Feb. 6, two days after he delivers his State of the Union address to Congress.

So what does Oxford Health think about all of this? I wish I could tell you. I placed a number of calls to the company throughout the day, but all I could get from the assistant to company spokesman Jeff Boyd was that Mr. Boyd didn't think the news merited any comment.

When I explained that I was a shareholder and would be communicating to other Oxford shareholders this evening, the response from the person on the other end of the phone was, "Oh, and how many shares do you own?" -- the implication being, I infer, that whether or not the company had a comment depended upon the size of our stake.

Let me be clear that every other time I've called Oxford Health with a question, I received a reply promptly and courteously. I'll chalk up today's unhelpful non-response to a lapse at the end of what must have been a hectic day.

In the meantime, there's relatively little I can add. I can tell you that, during the third quarter, Oxford received $229 million in premiums from government programs (Medicare and Medicaid), which constituted 28% of the company's quarterly revenues. Medicare members were a bit less than half of Oxford's combined Medicare/Medicaid enrollment.

Back-of-the envelope guesstimation would suggest, then, that something on the order of 15% of Oxford's revenues came from Medicare premiums. Assuming that the proposed White House cutback would be in the single-digits, and assuming Congress passed it, and assuming further that Oxford would be unable to recoup any of the cutback in other ways, it's still difficult for me to see how this could amount to more than a few pennies out of Oxford's projected EPS of $1.75 to $1.80 for 1997.

It would be very helpful to get the company's take on this, however. I'll continue to seek clarification from them.

Today's Numbers

Stock  Change    Bid
BGP   +  1/2   37.63
CSL   +  1/8   60.13
CSCO  +2 7/8   72.00
GNT   -  1/4   35.38
ORCL  +2 1/8   43.13
OXHP  -2 1/2   52.50
PMSI  +  1/4   12.00
SLR   +1       56.88
TDW   +  1/8   48.88
                   Day   Month    Year  History
        BORING   +0.90%   2.11%   2.11%  17.50%
        S&P 500  +1.23%   3.80%   3.80%  23.69%
        NASDAQ:  +1.16%   4.29%   4.29%  29.34%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     37.63    67.13%
  6/26/96  100 Cisco Syst    53.90     72.00    33.58%
   3/8/96  400 Prime Medi    10.07     12.00    19.18%
   2/2/96  200 Green Tree    30.39     35.38    16.41%
  8/13/96  100 Carlisle C    52.65     60.13    14.20%
  5/24/96  100 Oxford Hea    48.02     52.50     9.32%
 12/23/96  100 Tidewater     46.52     48.88     5.05%
 10/15/96  100 Solectron     54.52     56.88     4.31%
 11/21/96  100 Oracle Cor    48.65     43.13   -11.36%

    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   7525.00  $3022.51
  6/26/96  100 Cisco Syst  5389.99   7200.00  $1810.01
   2/2/96  200 Green Tree  6077.49   7075.00   $997.51
   3/8/96  400 Prime Medi  4027.49   4800.00   $772.51
  8/13/96  100 Carlisle C  5264.99   6012.50   $747.51
  5/24/96  100 Oxford Hea  4802.49   5250.00   $447.51
 10/15/96  100 Solectron   5452.49   5687.50   $235.01
 12/23/96  100 Tidewater   4652.49   4887.50   $235.01
 11/21/96  100 Oracle Cor  4864.99   4312.50  -$552.49

                             CASH   $5999.08
                            TOTAL  $58749.08

Transmitted: 1/14/97