Navarroâ,"s Big Economic Picture: Economic Fundamentals Finally Catch Up
I know that a dollar earned on the long side is every bit as valuable as one earned on the short side, but somehow, the short side always seems sweeter. Thatâ,"s because it is usually earned by bucking the crowd. So last week was particularly sweet for me as I had closed all my longs and increased by QQQQ short. This in anticipation of a market top that Iâ,"ve been calling (prematurely as it has turned out) for some months now.
Now perhaps the top is finally in and the crowd is in a quandary. For several years now this crowd has been unexpectedly in control â,“ despite economic fundamentals that consistently have loomed as dark clouds on the market horizon. You know the list: oil and commodity price shocks, Fed rate hikes, budget and trade deficits, and a steadily shrinking dollar.
Nothing really changed last week â,“ except the direction of the momentum. No doubt the triggers were the parabolic rises of a number of sectors as retail investors piled on to the speculative heap â,“ and now lay with their bars (and stocks) of gold and silver and energy companies bleeding like the naƒ¯ve stuck pigs that so often retail investors are.
So now what? My move last Friday was to close out my QQQQ short with a nice gain as it started to move into the green above $39. I will now wait for the expected rally and then reload the short if technical conditions warrant. In the meantime, Iâ,"ll stay mostly in cash while scouring the high market seas for some sector rotation longs and parabolically ripe shorts.
This Weekâ,"s Market Movers â,“ GDP Surprise?
The weekâ,"s major reports donâ,"t hit until mid-week. My top pick for market mover is the GDP revision for Q1 on Thursday. The first report had it at 4.8%, which is well above sustainable potential output and inflationary. However, some analysts are calling for a whopping upward revision to 5.8%. If it comes in anywhere near that or above, this will further fan inflationary and Fed rate fears.
On Wednesday and Thursday, we get new and existing home sales, respectively. These reports have become largely irrelevant as the market has clearly accepted a declining sector. The only issue here in the coming months will be an evidence of a sharply bursting bubble as opposed to a semi-soft landing.
On Friday, its â,"consumer dayâ, as we get personal income, consumption, and consumer sentiment reports. Risk here is to the downside as the consumer has been holding up the market fort.
Matt Davioâ,"s Hedging Your Bets: Sea of Change
Last week, I discussed reflation and how excess liquidity causes all asset classes to rise simultaneously. I also warned that the reflation train will eventually wreck.
This last week the wheels did indeed start to come off. What exactly happened? Over the last seven trading sessions, we went from overbought on most equities to a short-term oversold. Amazing what momentum can do on both sides of the equation.
The game has now changed from a slow tick up on all asset classes to a more volatile game which demands even more precise stock/bond placement over the next few years. Volatility exploded this week and has broken from nearly a 4 year slumber.
These will be excellent â,"tradingâ, times over the near term and will provide particular difficulties for those looking for buy and hold investing scenarios. This is when the â,"buy and holdersâ, will suffer the most and the hedge funders and short term traders will likely thrive.
The accompanying chart provides a 6-year view of the volatility index (VIX). Since the reflation spigots were opened in early 2003, the markets have been in a â,"volatility hibernation.â, After this last weekâ,"s close, however, we are likely looking at a future bull market for volatility. This is why I say that the â,"buy-and-holdersâ, will have a much more difficult time moving forward. Those who have been selling volatility via puts have been particularly hurt by this recent volatility explosion.
In fact, this is a key reason why the market has continued to be taken down over the past 7 trading days. Those traders who have repeatedly been selling â,"put premiumsâ, â,“ essentially going synthetically long -- are now being punished for this process for the first time in over 3.5 years.
This is what the market does. As soon as you think you have a strategy that forever works, the market takes it away almost in the blink of the eye. Think about it: Buying the dips has repeatedly worked over the past 3.5 years.
However, we feel that moving forward from here the exact reverse will become true. That is, selling rallies will emerge as a strong strategy as what was previously support on the indices has now become resistance. Indeed, we have solidly broken down on most time frames and moving averages.
A word of caution: There will still be some strong rallies. However, the changes are clearly in place and must be respected moving forward. This does not mean you should sell or short â,"at willâ, right here, but our feeling is the market has enveloped a changing environment.
So be ready for some exciting times. This is a good thing as the markets have been in movement slumber for over 3.5 years.
Vainoâ,"s Biotech Corner: LCBM Missile? and a NBIX Wow
NBIX: I wrote a few weeks ago suggesting Neurocrine Bioscience (NBIX) was trading too high in the low 60s. Two weeks ago, after the stock dropped below $50, I sold my puts and was happy about it. Note, I am deliberately avoiding any trite aphorisms about barnyard animals and profits.
On the assumption that NBIXâ,"s drug Indiplon would be approved on May 15, I speculated and picked up some May 55 calls. I lost that bet and gave some of my winnings back.
Indeed, when I looked at the Market Tuesday morning I was flabbergasted. NBIX had dropped $32! Over a billion dollars of market cap evaporated overnight! The FDA had given NBIX an approvable letter for two of the lower doses of Indiplon even as it said a higher dose was not approvable. That is, it said it would accept the lower doses if more data was provided.
According to the AP: â,"The agency (FDA) said it did not have a chance to review all the information submitted by the company.â, What!? The FDA destroyed a billion dollars of capital because it didnâ,"t get around to reading the whole application? Now, Iâ,"ll admit to skimming over parts of student essays I mark, but this is ridiculous. Iâ,"m not suggesting the FDA made a bad decision. At least they didnâ,"t claim their dog ate the application.
In my first NBIX column I did mention I thought NBIX was a good company that was trading too high. I still like their pipeline and believe at least the lower doses of Indiplon will be approved. My take is that the Market has over-reacted and the price will bounce back. The stock isnâ,"t going back to $60, but $30-35 is a safe bet, I think.
LCBM: Investing in biotech these past few weeks has been as fun as a trip to the dentist. So, starring at the ceiling as my dentist drilled into my teeth last week I remembered a little company I like that I now think might be a safe harbor. Lifecore Biomedical (LCBM) isnâ,"t a big flashy biotech company, but they do a very nice job of using biomaterials for surgical and dental applications.
LCBM sells hyaluronic acid. This is a carbohydrate polymer used in cataract surgery, bone regeneration, and for coating other medical devices. They also sell an innovative system of dental implants.
The company has been around since 1965. LCBM is a good solid company; it has a decent balance sheet and has been reporting consistent increases in sales. LCBM took a hit in the market crash of 2001, but not a severe one.
According to SEC filings, LCBM acquired two smaller companies over the past couple of years. This approach to research, i.e. cherry-picking research from other companies once it has been proven, I think is the best way for R&D companies to operate. Big pharmaceutical companies are moving toward this type of outsourcing. I wouldnâ,"t be surprised if within a decade companies like Pfizer and Merck abandon all internal R&D in favor of acquiring small biotech companies for their technology. Biotech companies are more innovative than the Big Pharmas and their cost per employee is lower. It wonâ,"t be good for my students, but it will be good for the companies. Iâ,"m impressed that LCBM has the sophistication to grow this way.
This stock definitely has some macrowave elements to it. Biomaterials is one of the fastest growing segments of the healthcare market. Also, teeth and eyes wear out as we age. The baby boomers are getting older, and companies like LCBM will benefit from this. Maybe a visit to the dentist isnâ,"t so bad every now and then.
One last cautionary note: The average daily volume on this stock is abysmal so liquidity is an issue.. Plus, itâ,"s undergoing some technical deterioration. Start perhaps with this on your watch list and time any entry well.
Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com. Andrew Vaino is a Ph.D. chemist currently teaching at The University of Maine.
DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.
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