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:
The headline February Consumer Price Index was +3.2% year-over-year, a skotch higher than the +3.1% expected and the +3.1% in January. The lagging shelter component accounted for about two-thirds of the increase. The month-over-month CPI was +0.4%, right on the consensus but a tenth above January's 0.3%.
The core CPI excluding food and energy was +3.8%, a bit lower than January's 3.9% but just above the 3.7% consensus. The month-over-month core also was +0.4%, right on the consensus but a tenth over January's 0.3%. All in all, it was an unsurprising report that should keep the fed in “High – but not higher – for longer” mode.
Stocks rose because it wasn't bad, while the dollar rose and gold fell because the Fed won't be cutting any time soon. I expect headline inflation of 3.1% in March and 3.0% in April as the lagging shelter index very slowly falls. (“Owners equivalent rent” is 26.7% of the headline index and “rent of primary residence” is another 7.7%.) The core rate should be about 3.6% in March and April.
Yesterday's Producer Price Index was a better measure of market sentiment than inflation. February wholesale prices rose 0.6% from January, double January's 0.3% increase from December, mostly due to an increase in wholesale gasoline prices. The S&P 500 dutifully sold off 42 points before recovering. But the core month-over-month increase was 0.3%, down from a 0.5% jump in January. The Fed meets March 19-20. John Mauldin's Thoughts From The Frontline has a million subscribers and the latest one is headed:
Click for larger graphic h/t @JohnFMauldin
I guess the word is out. Goldman Sachs said Wednesday’s CPI ran hot but the composition “was disinflationary .. with a sharp normalization in non-housing services inflation and a return to the Q4 trend for the owners’ equivalent rent category. .. We also expect the rise in used car prices to more than reverse this spring. .. We continue to expect the FOMC to leave the Fed funds rate unchanged at the March meeting and to begin the easing cycle in June.”
But the 10-year Treasury yield is making a massive up candle as it take out the 4.2% resistance. Note that it now is above the 200-day moving average and closing in on a potential golden cross.
h/t @TheMarketEar
And, as happens during Presidential election years, the initial economic reports are surprisingly good for the administration in power, and then a month later are quietly revised down. The non-farm payroll report is getting especially silly:
h/t @DiMartinoBooth
The non-political Conference Board Employment Trends Index “decreased in February to 112.29, from a downwardly revised 113.18 in January...the labor market is likely to cool off, with modest job gains expected through Q3 and Q4 of 2024.”
The Fed knows all this, of course, and they have said point blank: “The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”
The Fed is watching the PCE, which is down to +2.4% overall and +2.8% for the core rate. I still think they won't cut until they see real GDP weakness. That means a mild recession is coming.
Market Outlook
The S&P 500 dropped a minuscule 0.1% since last Thursday. Remember that 5% pullbacks tend to occur three times a year and 10% corrections have occurred once per year. The Index is up 8.0% year-to-date. The rally is broadening out - 26% of NYSE stocks have made a 52-week high in the past two weeks.
The Nasdaq Composite lost 0.9% as tech funds had the largest outflow ever last week, $4.4 billion. It was the first outflow in nine weeks.
The Naz is up 7.4% for the year. The SPDR S&P Biotech Exchange-Traded Fund (XBI) fell 4.4% as the biotech rally retraced a bit. It is up 5.8% year-to-date. The small-cap Russell 2000 dropped 2.6% and now is only up 0.2% in 2024.
The fractal dimension pushed further into uncharted territory as the pause that refreshes was postponed for another week.
The percentage of the S&P 500 stocks hitting new highs faded for three years into the market top in 2000.
h/t @GinaMartinAdams
But the percentage is increasing now.
h/t @GinaMartinAdams
Still, I am very aware that next-12-months Price/Earnings multiples have stayed elevated even as rate cut expectations have faded.
h/t Morgan Stanley
And the latest data from Investor's Intelligence shows the most optimism and the least pessimism since the summer of 2021.
h/t @himountresearch
That's why I suggested portfolio insurance in the February 23 issue - unneeded so far.
Economy
The Atlanta Fed's GDPNow model reduced its estimate for March quarter real GDP growth from +2.5% to +2.3% due to slower personal consumption expenditures growth.
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Biotech Focus
Next week, Nvidia (NVDA) is holding its annual GTC Conference on all things AI. On Wednesday, March 20, Ben Mabey, the CTO of Recursion (RXRX), will speak at noon Eastern Time on “How AI Will Decode Biology to Radically Improve Lives” [Session S62526].
The next day, March 21 t 11:00am ET, there is a panel on “AI-Driven Drug Discovery: Unraveling Biological Complexities” [Session S62583] with:
Anthony Costa, Group Lead, of Life Sciences Developer Relations at Nvidia
Daphne Koller, Founder and CEO of Insitro & Adjunct Professor of Computer Science at Stanford
Luca Naef, Co-Founder and CTO of VantAI
Gary Glick, Founder and CEO of Odyssey Therapeutics
Edith Hessel, CSO of Relation Therapeutics
I have a key question: What will be the effect of widespread AI tools on drug developers whose value proposition is built on proprietary AI technology? Will they wind up like most pioneers, with arrows in their back?
There's no doubt that the widespread adoption of AI tools in biotech will have several significant effects, including enhanced target identification. AI algorithms can rapidly analyze complex biological data to identify novel drug targets and understand disease mechanisms more comprehensively. That lets drug developers pursue innovative therapeutic approaches or target diseases with unmet medical needs.
We'll also see much-accelerated drug discovery as AI analyzes huge amounts of data, identifies potential drug candidates, predicts their properties, and optimizes their design. AI-accelerated discovery will lead to faster development timelines, fewer clinical failures, and reduced costs.
Eventually, AI-driven analytics will be able to accurately identify biomarkers and patient subpopulations most likely to benefit from specific treatments - personalized medicine, with improved treatment outcomes and reduced healthcare costs.
But AI biotech is likely to evolve to an open-source model as companies like Nvidia and Amazon Web Services provide the software at low or no cost to sell high-margin hardware or compute time. The AI pioneers will have to move fast to stay ahead, and in the end the winners will be determined by FDA and EMA approval.
As AI becomes more integral to drug development, regulators will have to adapt their guidelines and evaluation criteria to assess the safety, efficacy, and quality of AI-generated drug candidates. Do they have the foresight, brainpower, and budget to do that? I don't see much evidence of that yet. Drug developers with advanced AI technology will need to educate regulators as they navigate an evolving landscape to ensure compliance and eventual market approval.
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All times below are ET.
Tuesday, March 19
Vernal Equinox - 11:06pm
Wednesday, March 20
Fed meeting - 2:00pm – Press release; 2:30pm press conference
Biotech Moonshots Portfolio Update
This was a tough week for biotech. The Moonshots portfolio fell 6.0%, still backtracking from the +19.6% jump two weeks ago. But there's enough clinical and other data coming to drive our performance much higher in 2023. Let's dig in…
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Each color shows $1 trillion getting added to the national debt.
Not that long ago, it took six years to add a bar.
We’re now adding one every 90-120 days.
h/t @RobertMSterling
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Your getting ready for the crisis Editor,
Paid subscriber or not, if you would click the ♥ symbol below it would really help me get the word out.