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:
Last Friday's payroll number was stronger than expected and yesterday's December Consumer Price Index announcement came in hotter than expected. In part, it was driven by base effects – a low December 2022 number - and will drop significantly next month due to...base effects. The headline annual increase was 3.4% year-over-year (YoY), just above the 3.2% estimate and November's 3.1%. The month-over-month (MoM) increase was 0.3% versus estimates of 0.2% and last month’s 0.1%.
However, the shelter index, which is 32% of the CPI, was up 0.5% from November and accounted for over two-thirds of the total annual increase. Everybody knows it is a lagged measure that even the Bureau of Labor Statistics has written about and acknowledged the 4-6 quarter lag. Most importantly, the Fed knows this.
Here is a breakdown of the categories that impacted inflation. The second and third largest drives are rent:
h/t Daily Economics
The bulk of all inflation now is rent (the yellow bars):
h/t @JosephPolitano
Annual core inflation down-ticked to 3.9% from 4.0% in November, just above the 3.8% expected. MoM core inflation rose 0.3%, in line with expectations and unchanged from November. It was an unsurprising, no-big-deal report. The Fed is likely to continue to pause at its January 31 meeting.
There are two more CPI reports and a couple of nonfarm payrolls releases before the March 20 meeting. The Dallas Fed President Lorie Logan noted some concern about markets getting ahead of the Fed on rate cut expectations: “We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions.” As I've been saying, High (but not higher) for Longer. Think of it as The Pause That Refreshes.
So why did the stock market sell off sharply yesterday morning? Because the first traders are computers and AI bots that “read” the headline and then short any downside surprise or buy any upside surprise. Then the daytraders pile on, followed by retail bagholders who sell to the computers at the bottom, just before the market turns up. Being able to ignore this noise is your superpower.
The January Effect
Last week, stocks snapped a nine-week winning streak as the S&P 500 had its worst start since 2016.
Since 1950, when the S&P 500 has logged gains over the first five trading days of the year, it had an average return of 14.2% for the whole year. When it was down over the first five days, it recorded an average return of 0.3% for the full year. According to Deutsche Bank: “When the S&P 500 is down at various points in January, the full-year performance tends to notably underperform the long-term average. When up, it notably outperforms.”
h/t The Market Ear
Market Outlook
The S&P 500 added 2.0% since last Thursday in spite of a strong payrolls number and above-consensus inflation. Could we be entering a time when good news is good news instead of good news equals Fed increases? The Index is up 0.2% year-to-date. The Nasdaq Composite gained 3.2% but is down 0.3% for the year. The SPDR S&P Biotech Exchange-Traded Fund (XBI) climbed 1.1% and just witnessed the best two-month stretch EVER for the sector. It has seen eight consecutive weeks of gains, up +14% in November and +18% more in December, or 39% from the October lows. It is up 1.3% year-to-date. The small-cap Russell 2000 dropped 0.1% and still is underperforming, down 3.5% in 2024.
The fractal dimension kicked back into trend mode, so I expect another three or four weeks of upside before the next consolidation. Remember that consolidations can be anything from weeks of churning – a time consolidation – to a sharp move in the opposite direction – a price consolidation.
December quarter earnings releases are about to start. BofA says the strong Bloomberg Economic Surprise Index suggests a strong earnings beat.
h/t @dailychartbook
Economy
The Atlanta Fed's GDPNow model estimate of December quarter real GDP growth has down-ticked a bit to +2.2% while the Blue Chip economists are catching up. 2.0% to 2.5% growth will look like a soft landing to the Fed.
Biotech
Using artificial intelligence to improve drug discovery and development has been the Holy Grail for years, and several techbio companies have built their mission and market capitalizations around it. They include Absci (ABSI), Enzolytics (ENZC), Exscienta plc (EXAI), ImmunoPrecise Antibodies (IPA), Recursion Pharmaceuticals (RXRX), Relay Therapeutics (RLAY), and many others. All of them are at risk of failure.
The reason is the Grandmother Effect that killed hot rodding. After my 16th birthday, like many other 16yo males, I spent hours working on my hot rod ('50 Plymouth Convertible, black with a red interior, lowered 2”, nosed and decked, fender skirts, dual glasspacks – total babe magnet). Then Detroit started producing muscle cars, and it seemed kind of silly to work that hard when your grandmother could go to the local dealer and buy a car that could dust you.
Replace “ muscle car” with “comprehensive AI software” and replace “Detroit” with “Nvidia” and you'll see the problem. Nvidia started this week at the JPMorgan Healthcare Conference (SLIDES HERE and TRANSCRIPT HERE). Is Nvidia all of a sudden a biotech company? Well...sort of, in that AI will revolutionize drug discovery and the practice of medicine and Nvidia is making a comprehensive AI software suite available to anyone, grandmothers included. Any company that wants to stay relevant can access the software over the cloud or on their own supercomputer, either of which will add to the demand for Nvidia's AI chips. Seed-round startups can be top-tier AI biotech companies.
Kimberly Powell, Nvidia's VP: Healthcare, said Nvidia is developing software that any company can use, either in their own data center or on the cloud. Deep Cells REMI is a new platform for cell imaging, sorting, and high dimensional analysis, all in one instrument. It is creating a new field called morpholomics. She showed a video simulating a melanoma cell physically transforming to a functional state that gives it the ability to transmit to other tissues...metastasis.
Spatial Genomics is the study of single cell genomics in 2D and 3D to understand their organization across tissue samples. It helps researchers understand how cells interact and the genes they each express, so it has broad application in basic biology, clinical diagnostics, and drug discovery.
Their NanoStrings CosMx system is capable of taking a tissue of over a million cells and visualizing 600 different gene and protein targets per cell. That's, 600 different genes and protein targets for all one million cells. Nvidia is powering the next generation of drug discovery:
The company is building a compelling suite of drug development products.
Industry leader Amgen is building generative AI models – imagine a laser-focused ChatGPT – to find new human data insights for drug discovery. If anyone, including your grandma, can be a techbio company, then what is AI+biotech really worth?
Coming Events
All times below are ET, and most presentations and slides are archived on the companies' websites so you can listen to them.
Monday, January 15
Markets Closed - MLK day
Biotech Moonshots Portfolio Update
Even though this was Biotech Week in San Francisco, it was a bad week for the stocks. The Moonshots portfolio fell 12.4% due mostly to one stock that in my opinion (but obviously not Wall Street's) had good news. That more than offset the first week's 8.8% gain. This sector is very volatile, but there's enough clinical and other data coming to drive our performance much higher in 2024. Let's dig in…
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The 2024 Global Risks Report from the World Economic Forum, based on the opinions of 1,500 experts, ranks misinformation and disinformation as the #1 societal risk in the next two years. As @NateSilver538 said: “If the experts think that misinformation is a bigger problem than war, then a way bigger problem than misinformation is that the experts are f**king idiots.”
h/t @Sander_vdLinden
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