Tag Archives: biotechnology

ETF Strategy: Bullish On UDN, GDX, GLD After Weak Jobs Numbers; Bearish On SPY, IBB

The much anticipated labor market data was released at the time of writing this article. The report indicates that the U.S. economy is not out of the woods yet. The economy added just 160,000 jobs in the month of April, well below the consensus forecast of 202,000 job additions. While markets have slipped on the disappointing job numbers, it is possibly due to the fact that it creates uncertainty over the pace of rate hikes. Conflicting Signals From the Fed The Federal Reserve hiked benchmark interest rates for the first time in almost a decade in December last year. At the time the Fed had anticipated four more rate hikes in 2016. But extreme volatility in global markets seen at the start of this year has forced the Fed to change its stance. The Fed now expects two further rate hikes. Markets anticipate just one. With today’s disappointing job numbers, even a solitary rate hike now looks unlikely. I Am Bullish on UDN, GDX and GLD The Fed has reiterated time and again that it will be cautious with future rate hikes. Today’s weak job numbers give the central bank a strong reason to remain on the sidelines. This is good news for gold bulls. This week, gold prices crossed $1,300 an ounce. After being written off at the end of last year, the precious metal has made a strong comeback since the start of this year. The rally at the start of the year was sparked due to volatility in risk assets, which boosted gold’s safe haven appeal. But with the Fed factor back, expect further strengthening in gold prices. I am bullish on the SPDR Gold Trust (ETF) (NYSEARCA: GLD ), which is now up more than 21% for the year. The chart below shows GLD has broken through some key resistance levels. Click to enlarge Stockcharts.com. Importantly, GLD is seeing significant inflows. On Monday, GLD had net inflows $860 million, highlighting the bullish sentiment on gold. The table below from ETF.com shows GLD is at the top when it comes to fund inflows into ETF. This trend is likely to continue following today’s weak jobs report. Recently I covered Market Vectors Gold Miners (ETF) (NYSEARCA: GDX ), which is now up more than 84% for the year. I had noted in the article that the excellent run in GDX will continue based on the outlook for gold. That thesis has been strengthened further following the weak April jobs report. As I had highlighted in my GDX article, the ETF substantially underperforms gold when gold prices drop and vice versa. GDX’s gains have been four times those of GLD this year. Therefore, if prices continue to strengthen expect significant further upside in GDX. I am also bullish on Powershares DB US Dollar Index Bearish Fund (NYSEARCA: UDN ). The greenback strengthened significantly from mid-2014 onwards as it became clear that the Fed would start to tighten its monetary policy. The story has been different this year. Click to enlarge Google Finance. UDN has gained almost 5% this year but with a rate hike unlikely this year, I expect further gains. Bearish on SPY and IBB Finally, what does today’s weak jobs report mean for the SPDR S&P 500 ETF (NYSEARCA: SPY ). The S&P 500 has edged lower today but a weak jobs report, which leads to a delay in rate hike, is a positive for risk assets such as equities. But the weak earnings season suggests that the S&P 500 will remain under pressure, which is why I am bearish on the index. SPY, as the table below from ETF.com shows, has seen the highest redemption among ETFs. This trend could continue following the weak earnings. According to data from FactSet, the blended earnings decline for the S&P 500 in the ongoing earnings season (as on April 29, 2016) was 7.6%. While the Energy sector is to a great extent responsible for this steep drop, even after excluding the sector, the FactSet data shows 2.4% decline. I must add though that a weaker dollar will help Corporate America. However, the impact will not be felt in the near-term. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ: IBB ) has had another rough week. The fund dropped more than 5% for the week. IBB is in fact heading into bear market territory. Since April 25, it has fallen 13%. I discussed some of the factors in my article late last month that will keep pressure on IBB. One of the factors that I had mentioned was difficulty obtaining funding. In April, multiple biotech IPOs were withdrawn. This week we saw one more instance which highlights the fact that biotech companies are struggling to gain access to capital markets. Relypsa (NASDAQ: RLYP ), which has an approved product, obtained $150 million in debt financing. RLYP will be paying 11.50% in interest. Debt funding at such a high interest rate for a biotech company in early stages of commercialization is not good news. I expect difficult times ahead for the sector. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Healthcare Stocks Can Heal From Pricing Scares

By James T. Tierney, Jr. Click to enlarge Fears of price controls for drugs and the crisis at Valeant Pharmaceuticals have infected the US healthcare sector. But we believe that the sector isn’t fatally ill and that investors can still find companies that offer solid growth potential. During the first quarter, healthcare was the worst-performing sector in the S&P 500 Index, falling by 5.5%, compared to the market’s 1.3% gain. At the same time, the iShares NASDAQ Biotechnology Index dropped by more than 20%. Price Controls: Fact and Fiction So what happened? Let’s start with the comical explanations. The presidential election cycle continues to be a source of peculiar promises. Donald Trump surprised investors on February 7 by saying that he would negotiate $300 billion of price concessions for the US government from drug companies. But the math doesn’t quite add up; total industry revenues from federal spending were only $143 billion in 2014. That didn’t stop the headlines, which spooked investors. Some concerns were real. The Centers for Medicare & Medicaid Services announced a proposed rule that would change how they pay for drugs that are not self-administered. There will be a demonstration project to assess the impact of the proposed changes starting later this year, and it will probably run for a couple of years. The initial plan involves reimbursement changes for the providers (hospitals and physicians), rather than changes for the drug companies themselves. These proposals have raised concerns that drug-price controls may be introduced at some point. In our view, the repeated price-control scares are a red herring. Investors need to focus on companies with products that can deliver meaningful benefits for patients. Those that can’t meet these conditions will have a challenged future—price controls or not. Growth Stocks Lagged Market rotation was also a driver of underperformance for the healthcare sector in the first quarter. Generally speaking, investors sold last year’s winners such as Internet stocks and biotech companies, and bought the underperformers, including utilities and energy. In addition, value-related industries in the US market performed better than growth-oriented sectors like healthcare. But style winds can be deceiving. While we understand why more economically exposed cyclical sectors bounced back strongly as recession fears faded, in reality, the world is still in a slow-growth mode. So don’t expect all boats to rise—and growth will likely still be scarce. In these conditions, a sector like healthcare should be well positioned over time, given global demographic trends, as people are living longer and tend to need more pharmaceutical products as they get older. In addition, untapped treatment areas such as cancer and Alzheimer’s disease hold long-term promise for companies that can crack the code and discover effective treatments. Valeant Crisis Shakes Industry Against this messy backdrop, the troubles at Valeant Pharmaceuticals (NYSE: VRX ) have shaken the industry. Valeant’s controversial business model was driven by acquisitions, cost cuts and aggressive price increases. This year, the company’s shares have tumbled more than 65% amid a series of scandals that put it in the eye of the drug-pricing storm, with company executives being called upon to testify before a Senate and House of Representatives committee. Valeant’s high debt levels have raised fears of default, after the company missed its filing deadline for its 10-K report. The most surprising thing about Valeant’s predicament is how the fallout has spread over the rest of the healthcare industry. The increased focus on drug pricing—and negative sentiment around acquisitions—has been more profound than expected. We believe that this fallout will eventually diminish, and quality companies will prosper again, but the rebound will take time. Prescription for Investing Success So what should investors do? Don’t give up on healthcare stocks. It’s very easy to get distracted by the intense noise across the industry. But healthcare stocks offer equity investors defensive positioning and solid growth potential, even in a tough global economy. Companies with solid fundamentals that aren’t really vulnerable to recent developments can be found. Equity investors should focus on identifying companies with solid earnings growth potential and drugs that offer a differentiated and meaningful medical benefit. It’s also important to make sure that drug-pricing structures are in line with the benefit delivered by the product, and that the company’s business model is based on volume growth rather than aggressive price increases. We believe that these guidelines are a prescription for success in the healthcare sector—where many stocks are currently on sale. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.