Tuesday, May 29, 2007

Global Warming, Politics, Laws and Opportunity--Part II

To summarize part I (below) the McCormick family invented the reaper, sales in the first nine years were zero and in the next seven averaged 31 per year. They then exploded to 800 machines in 1847. What happened?

As reported by The Economist May 16, 1846, the British House of Commons had repealed the "Corn Laws", eliminating the tariff on imported wheat, the day before. Corn in this usage is not maize but rather is generic for grain. Prime Minister Peel won the battle but lost his premiership, the quote of the day was "Peel and repeal."

Some historians have argued that Peel's motive for this early example of free trade was the ongoing famine in Ireland, Peel himself had raised the issue in an earlier speech. This idea is patently false as Ireland's landlords continued to export food throughout the famine, with the dead Irish (est. 800,000 although some historians put the number at two million) being replaced by 977,000 head of cattle.

In his May 15, 1846 speech Peel said: "But let me say, altho it has not been brought prominently under consideration, that, without any reference to the case of Ireland, the working of the law, as far as Great Britain is concerned, during the present year has not been satisfactory."

According to "Historical Statistics of the United States:" wheat exports from the U.S. to the U.K. more than doubled from 1846 to 1847 and the McCormick family fortunes were assured.

Two more recent examples of how changes in the law can lead to great opportunity were the "Taxpayer Relief Act of 1997" whose section 312 made the first half-million dollars of profit from the sale of a primary residence exempt from taxes and removed the requirement to reinvest the proceeds. Combined with the loose money policy of the Fed., the hot money/shenanigans at
Fannie Mae and some pretty fancy footwork on the part of mortgage originators, this law set the stage for the residential real estate boom.

The other example is less well known. The 2003 Medicare Modernization Act established the Medicare Prescription Drug benefit as anyone with an older relative or friend knows.
The Bill also had a "Title II" regarding Medicare Advantage Plans. These plans had been around for years, since 1998 with declining enrollment.

The funding included in the MMA led to enrollment increases from 5.12mm members in 2004 to 7.18mm members in 2006, pretty fast growth for the insurance companies.
More spectacularly, one particular type of plan, "Private-Fee-For-Service" went from 26,932 members in 2004 to 819,352 members in 2006. Insurance companies don't get this type of growth unless they're getting the politicians to change the laws.

The companies that recognized what the changed laws (which I think they bought) meant to them made their investors a lot of money. The biggest promoter of the PFFS plans, Humana, saw its stock go from under $10 in April 2003 to $67 in October 2006.

That's why I'm going to be watching the politicians, and the people giving money to them.