Navarro’s Big Economic Picture:  A Bummer from Ben?

So there’s talk now that the Federal Reserve may not only hike interest rates yet again on June 29th.  The Fed may go the whole enchilada and raise the stakes by 50 basis points rather than the obligatory 25.

There’s no question that inflation is at the very top end of the Fed’s range.  That supports the 50-basis point bet.   Analysts are also citing a stronger than expected earnings season thus far as evidence that the economy is stronger than folks are giving it credit for.  On top of this, there is the two-week move in the ten-year treasury bond from under 5% to almost 5.25%.

Militating against this rash act by the Fed is a continued downshifting in the ECRI weekly leading index.  That index now has the U.S. economy projected to grow at an annualized rate of only 1.4%, less than half of potential output.

At least to this analyst, the data is suggesting a stagflation scenario – simultaneous inflation and slowing growth – that Fed policy will be unable to cure.  Any rate hike such as the 50-point hike being bandied about would further slow the economy down.  A failure to raise rates would be a failure to put the lid on growing inflationary pressure.  Checkmate.

Of course, all of this is an empty speculation without reference to how the markets might react.  After all, this column is about making money – or, in these perilous bearish times, at least not losing any.

My guess is that the Fed’s bind is also the stock market’s bind.   It’s hard to imagine a bullish move up on the back of a 50-point rate hike – although I’m sure there will be those Pollyannas who see such a move as the final “one and done” that would pave the way for a bullish resurgence. 

On the other hand, the bond market might rally nicely on a 50-point hike – sure in its convictions that such a big hike will indeed drive a stake through the economy’s heart, quell inflation, and drive yields down as bond prices go up.  How do you spell yield curve inversion?

So it will be if nothing else, a bit more of an interesting week than summer usually gives us.  Bon chance!

This Week’s Market Movers – Fed Moves

Earnings season will continue apace and, together with speculation about the Fed, dominate the week’s action.  On the economic report front, it will be useful to watch new home sales on Monday for any signs of a bursting bubble yet.  Plus, we get a double dose of consumer news on Tuesday and Friday with Consumer Confidence and Consumer Sentiment.  Last but not least, we’ll get our last revision of the 1st quarter GDP on Thursday, with little change expected.

Portfolio Picks and Pans: Epix and VIta

Both of my biotech holdings EPIX and VITA had a little air let out of their balloons last week after nice move’s up.  I’m holding and using the downshift to scale up on Vita.  Other than that, this is a good time to be in cash.

Vaino’s Biotech Corner: Oh Canada!  Oh Cardiome!

July 1 is Canada Day, the national celebration of Canada’s birth as a nation in 1867.  Aside from being, as many of my American friends like to point out, “America’s goody-two shoes little brother,” Canada is  also America’s largest trading partner.  Here’s a particular trade you might want to ponder: 

Cardiome Pharma (CRME) is a Canadian biotech company focusing on heart disease.    Cardiome’s lead clinical compound is the sexily named RSD 1235.  It is used to treat atrial fibrillation (abnormal heart rhythm), and it has undergone two successful phase three clinical trials.  Both studies were for administration via IV injection.  The drug works by regulating the sodium and potassium channels that control contraction of the heart.

On news that the FDA rejected their filing (with partner Astella) of a New Drug Application (NDA) the stock dropped from over $11 the last week of May, and is now trading just above $8.  The important aspect here is that the rejection of the application was not due to clinical issues, but rather with problems in the submission itself.  That is, there were inconsistencies between patient records in different parts of the filing. 

To be clear, this type of error is stupid carelessness that should never happen.  It’s a shame that the efforts of, likely, hundreds of scientists were devalued by the inattention of the regulatory affairs department.  Regardless, this type of mistake has happened before and will happen again.  While this is a setback, it doesn’t negate the beneficial effect of the drug. 

In data from the phase three study, IV formulation of RSD 1235 was found to return 52% of patients suffering atrial fibrillation to a normal heartbeat as compared to 4% of the placebo group.  The drug works, but getting it to market is going to be slowed down.  CRME also has an oral version of this drug in a phase two study. 

The stock dropped because investors panicked at bad news.  This is what most investors do.  My take is this creates a buying opportunity.  From a technical point of view the moving averages are (obviously) bearish, but MACD and stochastics are bullish.  The drug will be approved and the stock will go back up, eh.

Matt Davio’s Hedging Your Bets: Mark Ups or Downs & More Fed Musings

As we come to the last week of June and the end of the 2nd quarter, the markets haven broken out of their 4-year volatility snooze.  That is a good thing for traders. That is a bad thing for indexers and buy-and-holders.

The market finished flat again for the 2nd week in a row. Everyone seems to be  waiting for the FOMC and their next steps.  The market is clearly in tight control by the FOMC at this point.  Will it be .25 or .50 next week?  Depends on how hard a line the Fed wants to take. I would think .5 would achieve a hard lined attitude and allow them to wait and see for the remainder of the summer, but I don’t know if they have the guts to raise .5 and rock the boat.  Everyone has the innate desire to be loved and Bernanke is no different.  I think the market wants to rally and is greatly oversold on many technical levels at this point. The problem I struggle with is that everyone is a technician and sees all those same signs.  So . . the conundrum continues for both the Fed and the Traders.

There are some good arguments from both a bullish and bearish perspective.  The bulls can point to the nearly historic extremes of pessimism we saw a week ago and show all the stats about future equity returns we usually get from panics like that.  The bears can point to our so-far limited ability to rally in the face of those readings, which is a hallmark sign of weak markets.

I think we continue to wait for the FOMC Thursday and the month/quarter end mark up or mark downs this week. 

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.