The Stalwart

68% of Medicare Spending From Only 23% of Users

Pulled this out of an article in the WSJ regarding medicare reform. This alarming fact is causing a shift in the way the US government reimburses private care providers- it will now try and tempt private care providers to take on very sick patients by compensating them more for doing so.

...a well-known challenge facing Medicare: 83% of its beneficiaries have at least one chronic condition. Most significantly, 23% of beneficiaries have five or more chronic conditions, and they account for 68% of Medicare spending, according to an article published last year in the New England Journal of Medicine by Gerard F. Anderson, a professor in the department of health policy and management at the Johns Hopkins Bloomberg School of Public Health. ...

As the government tries to encourage more beneficiaries to shift out of traditional Medicare and into plans run by private insurers, officials are trying out a new method of paying those insurers. Plans now receive higher payments when they attract sicker people. They get extra money for enrolling certain low-income people, too. ...

It's easy to see why insurers would be attracted to the new payment model. On top of the set amount a plan receives per patient in the managed-care arm of Medicare, known as Medicare Advantage, under the new model, additional payments are tacked on for each health problem the patient has -- a technique known as "risk adjustment." ...

Before risk adjustment, Medicare would have paid a health plan about $8,145 per year to take care of a 70-year-old woman with high blood pressure and osteoporosis, under an example formulated by XLHealth. The amount would have been the same regardless of the severity of her health conditions; only the age and sex of patients was taken into account. Under the new model, Medicare would pay widely varying amounts of money for the same patient, depending on how sick she was.

If her health problems were not severe, the insurer would receive about $4,075 for the year -- much less than under the old model. But if the woman had diabetes, the amount would jump to $6,197. If the diabetes had led to circulatory problems, the insurer would receive $12,182 -- much more than under the old model. If the patient also had emphysema, congestive heart failure and depression, the insurer would receive $30,126 for the year. ...

Seems sort of strange that this logical method hasn't existed before. Nevertheless, it looks as though such a change is seen as good news by health insurance companies such as United Health Group, (NYSE:UNH) as mentioned in this WSJ article. We note though that this company is having internal problems related to options back-dating.

Big health-insurance companies like UnitedHealth Group Inc. view the sector as an opportunity. UnitedHealth has long offered special-needs plans geared toward patients in nursing homes through an experimental Medicare program. Next year, the company plans to begin offering chronic-disease plans too.

Web Services Made By The Common Man

Programming seems to be getting easier by the day. We came across a friendly web services primer which tells you what it takes to create your very own web service. Turns out that it doesn't take much at all. Just as the computer is now a tool which not only the "geeks" can use. So too it seems to be for programming these days. Common-sense programming languages plus software interfaces are lettting even the common man manipulate computers to his advantage. Who is trying to capitalize on this an online movement? Amazon, (NSDQ:AMZN) with its new web service enablers.  Perhaps not the first of its kind, but the company had made a splash and is now trying to nurture a community of  web service developers.

Creating your first web service is incredibly easy. In fact, by using the wizards in Visual Studio. NET you can have your first service up and running in minutes with no coding. ... Writing WebServices is extremely easy. Using the Visual Studio. NET wizards makes writing and deploying these services a point and click affair, but even if you wish to do it by hand then the steps involved are extremely simple.

Virtual Banks

No, this headline is not referring to banks in Second Life, though that's been garnering some interest too.  What we're interested are virtual banks, the financial equivalent of an MVNO.  MVNOs (Mobile Virtual Network Operators) have been getting a lot of attention, some of it hype (ESPN Mobile!), some of it scrutiny for failure (ESPN Mobile).  These virtual operators rent capacity from the big wireless companies, like Sprint, and then repackage it, often with some theme, before renting it back out to the public.

The same is already done, to some extent, with banking.  Take, for example, an American Airlines credit card.  American Airlines markets it, and offers some points, but leaves the real work to its financial partners.  There are lots of branded credit cards, basically stripped-down virtual banks.  But why stop at just offering generic credit + rewards points.  Target (NYSE: TGT), which has its own credit card is moving into other financial services:

Target has introduced a new bill payment offering for its Target Visa REDcard cardholders that encourages the use of their Target Visa cards to make either automatic or manual bill payments at biller-direct web sites while earning rewards and avoiding having to write checks to pay bills.

So if you're own bank's bill-pay interface is difficult to use, why not head over to Target.com, where it might be easier, and where you can rack up more rewards.  And there's no reason it has to stop there.  How about mortgages from Target?  For every $300,000, you get 50% off on $2,000 worth of furniture.  Or a mortgage from JetBlue.  Buy a summer home in a city where JetBlue flies, get 5 free roundtrip tickets to that destination.  The possibilities are endless.

But if you think about this any longer it'll soon dawn on you that almost all banks are virtual banks.  Few of them really have a whole lot of cash sitting in a vault which they divvy up among borrowers.  No, they rent cash for wholesale prices, and then rent it out at retail prices.  And if they can put together a slick package, maybe some free checking, perhaps a $50 bonus for your first savings account, they win your business.

Unfortunately, we might not get to enjoy the fascinating permeations of retail finance if regulators have their way.  The Journal has a good piece on the failure of Wal-Mart to get its own bank, even while competitors, like the aforementioned Target got one of theirs.

Five Minute Smarts

The iPod turns fives years old. BusinessWeek outlines the iPod's five year life. In the beginning even Slashdot called the product "lame". But in the end Apple (NSDQ:AAPL) has sold 68 million units for a $14bn. The product now makes up 40% of Apple's revenue and is estimated to have 50% gross margins. Where do we go from here? Wireless technology and music sharing.

Yahoo! Japan profit up 22%. The US Yahoo (NSDQ:YHOO) owns a third of the japanese venture. Things going great in Japan... any ideas the struggling US operation could pick up from them? Well advertising revenue was actually flat QoQ, but interestingly enough business services drove revenue growth- rising 42% YoY.

"TOKYO, Oct 23 (Reuters) - Yahoo Japan Corp. (OTC:YAHOF.PK) the country's most popular Web portal, said on Monday its latest quarterly profit rose 22 percent after attracting more stores to its online auction and shopping sites." ...

Tokyo-based Yahoo Japan also said advertisement sales, which make up 40 percent of total revenue, were flat at 21.2 billion yen in the second quarter compared to the first quarter, because companies limited spending amid concern about rising oil prices and slowing stock markets. ...

The company said revenue at its business service segment, which does not include ad sales, rose 42 percent to 11.4 billion yen, helped by commissions from the increased number of shops at its online mall and auction service.

Nokia's massive market share in smart phones. Nokia's (NYSE:NOK) 3Q06 results show that the company, who is the market share leader in mobile phones overall, also has a massive market share position in one of the fastest growing phone segments- smart phones. Smart phone market share looks to be over 50% according to the company's estimates.

Converged device (smartphone) industry volumes increased to an estimated 19.9 million units, compared with an estimated 14 million units in Q3 2005. Nokia's own converged device volumes rose to 10.4 million units, compared with 7.1 million units in Q3 2005. The converged device segment continued to be one of the fastest growing areas in mobile device volumes globally. Nokia Nseries volumes grew strongly, shipping more than 4 million units during the quarter.

Advantages of small businesses vs. their larger kin. A list of six potential advantages to being small. Unfortunately the list of big business advantages is probably much larger. But for small businesses these strengths can be starting points for a successful strategy.

1) Small businesses can serve very narrow markets
2) Small businesses can do something because they want to
3) Small businesses can change - rapidly
4) Small businesses can listen to their customers
5) Small businesses can craft a compelling story
6) Small businesses are personal

The web as a parallel of the human brain. Interesting angle of what a network is from an HP blog, also we'd like to point out that grid computing is very much in line with how the human brain works. Single connections in the brain aren't very fast, the human brain is an example of massive parallel processing in action.

Kevin Kelly, the founding editor of Wired Magazine, shared an interesting parallel between the worldwide web and the human brain. The trillion links on the web equals the trillion synapses in the brain. The quintillion transistors equals the number of neurons. If you extrapolate this data, the web will exceed the entire humanity in processing power by 2020-2040…

So with all this processing power and information available on line, it looks as if the human eye can actually receive data as fast as today's Ethernet connection.

GDP Nuked

Hilarious headline from The Onion we found at about 2AM. Had us laughing pretty hard.

N. Korea Detonates 40 Years of GDP
Remains of Country's Economy Sent Deep Into Earth's Core

PYONGYANG, NORTH KOREA—A press release issued by the state-run Korean Central News Agency Monday confirmed that the Oct. 9 underground nuclear test in North Korea's Yanggang province successfully exploded the communist nation's total gross domestic product for the past four decades. ...

"A nuclear device that size explodes with the force of 10 to 15 tons of TNT, or a moderately sized economic boom," said Ronald Shimokawa, a physicist at Los Alamos National Laboratory. "The detonation most likely sent the burning, liquified remains of North Korea's economy deep into the Earth's core." ...

"This fraction-of-a-second blast is what I, and my parents before me, have given up everything to achieve," said tractor driver Chin Lee-Park, whose machine was cannibalized for bomb derrick parts in 1997. ...

The North Korean government has long been suspected of building up a clandestine stockpile of capital, evidenced by their tendency to shut down national programs that provide its citizens with food, clothing, medicine, shelter, transportation, water, sanitation, education, living wages, and means of communication. A North Korean diplomat defended the decision, saying that citizens "need to make certain sacrifices so their country can afford the basic human right of national security."

Sadly, this piece speaks the truth.

BAC's Solid Looking Dividend

Looking back at the last 15 years of Value Line data, we note that Bank of America (NYSE:BAC) has never reduced its dividend back during this period, and has even increased it every year. Stock currently has a 4.2% dividend yield despite being near all-time highs. Thus if you're very bearish on the stock you're asking for a pretty huge change in trend- a dividend cut. We're not taking a position either way right now, but just realized the high yield (upper end of its 15-year yield) & strong history (15 years of dividend hikes) vs. stock price trend. (its at all time highs).

Recent Yahoo Viewer Growth In-Line With Previous Trends

A datapoint from Yahoo's (NSDQ:YHOO) 3Q06 conference call. Page views still growing as they used to according to management. Perhaps then its just a matter of getting yields, ie profit per viewer, up as the new Panama system rolls out in 2007.

Anthony Noto - Goldman Sachs

Thank you. Sue, the reported page view number you quoted was up 24% year over year, which is a significant deceleration from 33% year over year in June. I was wondering if you could comment specifically on that trend. As you think about your guidance going into the fourth quarter and you talked about the component for search being up mid-single-digits, what do you think the page view growth and therefore graphical advertising growth will be? Thanks.

Susan L. Decker

Sure. Thanks, Anthony. I am going to start with your page view question. I think I want to take you back to Q2 when we had the incremental contribution of FIFA. I think we broke out that if you took the true average in the quarter and X’d FIFA, our page view growth in Q2 was around 27%, 28%. So this growth -- and we also said we thought that was a bit of an anomaly at 28%. If you go back two or three quarters before that, the growth rates have all been in this sort of 24% range, and even that number we think is very high on the enormous space we have at 4 billion per day. So we are very pleased with the overall page view numbers and think they are very consistent with our historical pattern, with the one anomaly of Q2 that we identified last quarter.

Management also reiterated that Panama could start hitting the bottomline just a quarter after roll-out. Perhaps we'll see sentiment improve for Yahoo as this becomes more visible.

I also want to reaffirm that the introduction of the marketplace design in the U.S. remains on schedule for the first quarter of next year. …

Terry reiterated that we would launch the marketplace design feature in the first quarter of next year, and what we have said historically and continue to think is the case is that we would not expect a financial impact for at least a quarter after that.

Bargaining Power of the Customer

Of course it never ends. Somehow security companies make massive profits by designing software for Microsoft (NSDQ:MSFT) Windows and then either A) talk as if they now own Windows or B) talk as if no one can secure us without them.

Symantec [NSDQ:SYMC] and McAfee [NYSE:MFE] have accused Microsoft of abusing its monopoly in deciding which security products can run on Vista, arguing that Microsoft is deliberately withholding information needed to develop products that work on the new system.

"Despite pledges, press conference and speeches by Microsoft, the community of independent security companies that consumers rely on for computer protection has seen little indication that Microsoft intends to live up to the promises it made last week," said Christopher Thomas, a lawyer representing McAfee in Brussels, in a statement.

Look in the end, yes Microsoft will seek to make the most money over the long haul, and you can't expect any less. But this will be done by providing the most secure Windows product lest they lose customers. If in the end Windows sans McAfee is such a nightmare, then why should McAfee worry? The value of its products will only be vindicated. Perhaps they can advertise with Apple and create a mass Windows exodus.

But securities vendors can't whine just because they are experiencing the bargaining power of a customer in effect. Maybe you guys should have diversified your businesses beforehand. If its more compelling for MSFT to create its own product rather than buy you out, then your company is overvalued and pulling in economically inefficient profits. Companies get squeezed out by single large customers all the time in business... so why should security companies deserve some sort of free pass from economics?

"We've been talking to them for over two years on this issue," said Rowan Trollope, Symantec's vice president for consumer engineering. "And now (with) basically a very short amount of time before the operating system comes out, we're not in a good position to provide that security to our customers."

Michael Porter, any comments here?

Microsoft now competes directly with Cupertino-based Symantec and Santa Clara-based McAfee with its own product, called OneCare, posing a substantial threat to vendors who have been vital to protecting generations of Microsoft operating systems.

European antitrust regulators have warned Microsoft not to shut out rivals in security software and other markets, and the European Union so far has fined the Redmond, Wash., company $970 million over the current flavor of Windows.

Again, its Microsoft's own risk to take if it wishes to go it alone. Its their product. And with power comes responsibility, thus if some major security problem happens for Vista then Microsoft will shoulder all of the blame. Symantec and McAfee would also then have their day in the sun. From Jupiter Research's Joe Wilcox:

Microsoft would be wise to make sure it really can block kernel access to everyone. Because a PR atom bomb will explode should hackers ever crack the kernel, while security vendors are prevented from hooking in to detect and protect Windows. Microsoft's former security partners would be sure to publicly exploit such a turn of events.

So again, if Vista is such a security nightmare, whats the fuss from security vendors? They are then about to have their products vindicated big time. Unfortunately actions speak louder than words and the whimpering from security vendors makes us more inclined to guess that their products risk being shown as unnecessary. If Microsoft's attempt to bundle security is truly an impending disaster then the 3rd party unbundled model is about to be proven, right?

So please, securities vendors and all the rest, please stop telling us how you're some sort of good Samaritan out to protect us (the consumer). This is business where there's no intrinsic right to existence.

As a humorous side note, looks like both Symantec and McAfee were accidentally (?) bumped out of a Microsoft net meeting with security vendors.

Microsoft had scheduled the meeting with security companies to discuss part of the changes it has promised to make to Windows Vista in response to competitive concerns. But the conference, which used Microsoft's Live Meeting technology, crashed about 15 minutes after it started, and both Symantec and McAfee were unable to log back in.

"Microsoft hosted an online meeting this morning, but it never really got started," said Siobhan MacDermott, a McAfee spokeswoman. "Despite numerous attempts to reconnect, we were never able to get back into the meeting. However, we were notified that the meeting had ended."

Symantec had a similar experience, said Cris Paden, a company spokesman. "Our team was shut out, and only one person was able to get back in," he said.

There were some "technical difficulties" with Live Meeting, a Microsoft representative said. Those issues were resolved and the meeting resumed, the representative said.

"More than 20 partners successfully signed on and participated in the meeting," the Microsoft representative said. "To ensure that all partners are able to listen, this is the first of many meetings to come."

Free Books Online = Higher Sales

We came across this interesting angle regarding Google's (NSDQ:GOOG) attempt, along with others, to  scan books and then make them searchable online for free.  While facing  litigation regarding copyright infringement, it looks like Oxford University Press, lo and behold, has actually seen higher sales due to searchers becoming consumers.

Oxford University Press noted that there was a significant uptick in sales due to readers encountering titles through Google Books.  No one is saying what the numbers are, but press reports indicate that Oxford is happy with sales figures.  That development may give Google some leverage in negotiating future deals with publishers. ...

From Reuters:

"Google Book Search has helped us turn searchers into consumers," said Colleen Scollans, the director of online sales for Oxford University Press

She declined to provide specific figures, but said that sales growth has been "significant". Scollans estimated that 1 million customers have viewed 12,000 Oxford titles using the Google program. ...

Specialty publisher Springer Science + Business reported sales growth of its backlist catalog using Google Book Search, with 99 percent of the 30,000 titles it has in the program getting viewed, including many published before 1992.

"We suspect that Google really helps us sell more books," said Kim Zwollo, Springer's global director of special licensing, declining to provide specific figures because the company is privately owned.

Walter de Gruyter/Mouton-De Gruyter, a German publisher, said its encyclopaedia of fairy tales has been viewed 471 times since appearing in the program, with 44 percent of them clicking on the "buy this book" Google link.

One of its many scientific titles, "Principles of Visual Anthropology", has seen about one-quarter of the 1,206 views click on "buy this book".

Arty coffee-table book publisher teNeues said its online sales have doubled over the past year, attributable primarily to a fresh marketing campaign and inclusion in Google's book search, Chief Executive Hendrik teNeues said.

But not everyone is so impressed...

"Our experience has been that the revenue generated from Google has been pretty modest, whereas the Amazon program has generated more book sales," Penguin Chief Executive John Makinson [said.] ...

Outsource to Bill Miller

A look at some of Bill Miller's recent buys, focusing on stocks which haven't done so well this year; perhaps there are good bargains. And as your broker might have told you...

"Heck if you liked it at X$ you gotta love it at (X-50%)$!"

So, for example, maybe if Bill Miller loved KB Homes (NYSE:KBH) at $70... then perhaps he loves it now even more at around $44. Or not. But its probably not a bad use of time checking fallen stock picks from top investors. So lets get to it- what hasn't worked out well recently for Mr. Miller?

• As we said, KBH bought around $70 early this year, now down over 35% to around $44. He has even added to this position as the stock has fallen, increasing his total stake in th company by 50% at an average price of about $54. He's down on both buys.
  
• Dell Computer (NSDQ:DELL). Mr. Miller almost doubled his position in 1Q06 at an average price of about $30, and is now down ~25% on that buy.
• Yahoo (NSDQ:YHOO). Added a 1/3 to his position a around $34 and now down 34% on that buy.
• XM Satellite Radio (NSDQ:XMSR). Added 25% to his position at around $17.7, now down 34% on that buy.

Now we can look at some recent Miller buys which have just tread water so far. Perhaps one can get in now at the same price. Two big names stand out:

• American International Group (NYSE:AIG). Opened a position at $67 early in the year, then increased it by mid-year at about $62. Now up 8% from the second buy, but AIG's current price still just below Mr. Miller's first buy price.
• General Electric (NYSE:GE). Opened a position early in the year at around $34, then added 192% more shares to the position  in 2Q06 at around $34 again.  GE currently trades about 5% above these entry points. Lazy fund managers looking for holdings could probably just follow Bill Miller's cue here.

There are of course many Bill Miller winners this year as well. And a caveat- check the position sizes at the link above for more information, they are all quite small which means that they are part of a very diversified portfolio. But in the end, when looking for ideas, no shame in checking out what the big boys are buying...

[Disclosure: the author is long shares of AIG]