The biotech bear market from February 2021 through October 2023 created some dramatically underpriced stocks. There is free money lying on the sidewalk, just waiting for you to pick it up.
Dear Biotechies:
Wednesday, the Fed continued their pause and said: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
They said the risks to achieving price stability and maintaining full employment are “moving into better balance” and completely stripped out language from prior statements that left room for rate hikes. As I've been saying, High – but not Higher – for Longer.
In the press conference, Chairman Powell said: “I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March at as the time to do that (cut rates), but that is to be seen.” Yet the CME's FedWatch Tool says markets are still pricing in a 36% chance of a March rate cut, down from a 73% chance seen a month ago, and a nearly 90% chance of a rate cut in May. Sigh.
The S&P 500 dropped 79 points Wednesday as all 11 S&P 500 sectors closed with a loss. CNBC said it caught Wall Street by surprise, but as we know the drop is just a psyop to shake some stock loose out of weak hands. The next piece of news to “catch Wall Street by surprise” will be the recognition that there's going to be a recession. The JOLTS Job Openings Report increased to 9.026 million, above the forecast for 8.75 million and last month's 8.925 million. But at the same time, actual hiring slid and quits plunged to pre-Covid levels as nobody dares to leave their job.
h/t @zerohedge
h/t @DiMartinoBooth
Even better, the Employment Cost Index came in at 0.9% for the December quarter, below the estimate of 1.0% and the September quarter's 1.1%. This is the most complete measure of compensation for workers, and is reflecting the decline in inflation.
h/t @LizYoungStrat
Market Outlook
The S&P 500 added 0.2% since last Thursday, including a record close on Monday and a record intraday high on Tuesday, before the Fed lowered the boom. The Index is up 2.9% year-to-date. The Nasdaq Composite lost 1.0% after Wednesday's tech sell-off. It is up 2.3% for the year. The SPDR S&P Biotech Exchange-Traded Fund (XBI) climbed 0.5% but is down 0.4% year-to-date. The small-cap Russell 2000 was almost unchanged and remains down 2.6% in 2024.
The fractal dimension hit the 30 mark, indicating the uptrend is about over. We should expect a consolidation ahead, either through nothing much happening until April (a good time to write call options for premium income) or a sharp, scary three- to five-week decline.
Since 1953, when the S&P 500 ended January up at least 2%, it finished the rest of the year with a median gain of 13.5% and finished green 84% of the time.
h/t @TheMarketEar
It's true that the share of Top 10 stocks is nearing the 2000 peak, so strategists are warning of a pullback led by top US equities. That is inevitable – but probably in 2025.
h/t @Mayhem4Markets
Treasury Secretary Janet Yellen is causing stock market rallies with her quarterly refunding announcements. As Ayesha Tariq CFA pointed out, with the Fed stepping aside as the biggest buyer, regular buyers demand a premium. Yellen responds by issuing more short-term paper because the term premium makes it less appealing to term out the debt.
Consequently, long-term debt issuance is relatively lower than expected and yields decline. It's quite likely the Treasury will continue with shorter-term issuances, thinking rate cuts are on the horizon and tax receipts are running slightly higher on the back of a stronger-than-expected economy. This means lower long-term yields, which means risk assets fly.
Economy
The Atlanta Fed's GDPNow model initial estimate for the March quarter was +3.0% on January 26, far above the Blue Chip consensus for +1.0%. Thursday morning they revised that up to a whopping +4.2%. I think that will come own dramatically over the next couple of months, but it certainly looks like the recession I'm predicting won't start in the first quarter.
Coming Events
All times below are ET, and most presentations and slides are archived on the companies' websites so you can listen to them.
Friday, February 9
Short Interest - After the close
Oil
Wednesday, oil booked its first monthly gain in four months. Oil traders were stunned when, in a huge reversal to its prior plans, the Saudi state ordered Aramco to stop work on expanding its maximum sustainable capacity to 13 million barrels a day (bpd), instead keeping it at 12 million bpd. That ensures that peak capacity will remain lower than projected rising demand for years to come, effectively pressuring oil prices much higher over the long run.
Back in 2021, Saudi Arabia’s state oil company said it was working to boost its production capacity to 13 million bpd, a capacity expansion it predicted would come fully online by 2027. As recently as November, the world’s biggest oil exporter said it was progressing “very well” with the multibillion-dollar project to boost capacity as demand in China and India continues to grow. They noted that upstream investment has a long lead time.
Ironically, Aramco’s CEO has often warned the market that the industry is underinvesting in new oil supply that will continue to be needed for decades. Now the biggest underinvestor is none other than Aramco. Curbing its growth plans leaves Saudi Arabia with a thinner production buffer in the future in the event of supply shocks, especially in a volatile Middle East. Overall, it guarantees not only a much more volatile price but a much higher one as well, especially once the current production thrust (driven by relentless M&A) by US shale finally peaks.
Every single gap up on the United States Oil Fund, LP (USO) open was sold down. Someone has clearly seized control of the oil paper market.
h/t @MPelletierCIO
Yesterday, Al Jazeera tweeted that Israel agreed to pause fighting for peace talks. Oil plunged $3. At 1:36pm EST they deleted the tweet after the Houthis denied the rumor. Oil rallied. As @HFI_Research wrote:
h/t @HFI_Research
Despite having absorbed about 288 million barrels from the US Strategic Political Reserve (SPR), global oil inventories now sit at their lowest levels since at least 2017. Bullish.
h/t @ericnuttall
US oil production is reported at record highs because the Energy Information Administration reclassified distillates as oil – they aren't. It's important to know The Ugly Truth About US Oil Production And Why You Should Pay Attention. The end of US shale is near.
Biotech
A huge event in the biotech and Big Pharma industry began yesterday: Formal negotiations between the US government and the pharma industry on the price of 10 specific drugs that cost Medicare about $50 billion every year. The 10 drugs are Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp (also known as Novolog). They include treatments for cancer, diabetes, and other complex medical conditions.
h/t @yaireinhorn and @FinancialTimes
This could be significant not just for Big Pharma, but quickly trickle down to affect their willingness to partner with or acquire smaller companies. Heavy regulatory pressure at the top could affect everyone's business model.
The issue of negotiating drug prices is multifaceted, and both perspectives bring important considerations to the table. The argument in favor is based on the idea that negotiating drug prices is a critical aspect of responsible healthcare policy. In Europe, the UK, and Canada, where governments negotiate drug prices, we see improved affordability and accessibility for patients. This not only ensures the financial sustainability of healthcare systems but also promotes public health.
When comparing this to the US, where Medicare has unable to negotiate drug prices, we see higher drug prices and financial strain on patients. By leveraging the bargaining power of a unified system, the government can secure reasonable prices for essential medications, providing relief to both patients and the healthcare system.
The argument against is based on unforeseen consequences, primarily the impact on R&D spending by drug companies. If the government imposes price controls, it may hamper innovation and the development of groundbreaking drugs that can significantly improve patient outcomes.
Without direct government negotiation, the US has been a leader in pharmaceutical innovation. It's important to maintain an environment that encourages R&D investments, ultimately leading to the discovery of life-saving medications. But there are plenty of European, UK, and Canadian drug companies, so negotiating drug prices does not necessarily stifle R&D. The difficult job will be negotiating prices without compromising the development of new drugs. If we can strike a balance that ensures accessibility while maintaining incentives for innovation, we might find a middle ground that benefits both patients and the pharmaceutical industry.
That's a big IF. Drug companies often invest billions of dollars in research and clinical trials to bring a single drug to market. Imposing stringent price controls may discourage those investments – we just don't know - leading to a slowdown in the development of new and improved medications. Will negotiating drug prices lead to a reduction in R&D funding, impacting the development of future medications? No one knows.
So this has to treated as an experiment, with a cautious, incremental approach that tracks indicators like corporate formation and funding, the number of New Chemical Entities in clinical trials, and the number of drug approvals. The US leads the world in innovation in the pharmaceutical industry, and any changes to the current system must consider the delicate balance between accessibility, innovation, and sustainability.
Biotech Moonshots Portfolio Update
This was another good week for the portfolio, adding 3.2% after last week's +3.3%. There's enough clinical and other data coming to drive our performance much higher in 2023. Let's dig in...
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RIP Melanie (Thank you for one of the sexiest songs ever)
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