Tag Archives: management

IBB Shockwave: Temporary Hiccup Or Start Of The Bear Market?

Summary IBB has corrected from its all time high by up to 30%. Hillary Clinton’s snowball was catched right in the eye of the pharma industry. The scare is partially unjustified. We look on pharma future growth figures and M&A activity that will drive the secular bull market higher. We believe that IBB is a good place to invest in the long term. We mention two recent picks where we expect further share price growth. iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB ) has corrected 30% from its all time high of around $401. Several investors start to ask if we have been in the bubble territory. We discuss in this article the facts why the pharmaceuticals industry will continue in a secular bull market towards 2020. We do have a correction now, but it is not the start of the bear market in our opinion. Let’s discuss this in more details. Chart Analysis The IBB bull market started a quick acceleration in 2012. Looking on the quick rise, it is normal to have a correction. No bull market runs up without any significant corrections. Now as China spends more money on drugs also IBB is more correlated with Shanghai SSE index as compared to 2007-2008. IBB data by YCharts Now that we have touched the famous 30% correction line, could we go lower to touch 50%? Let’s have a closer look on what drives this bull market. Pharma Revenues Total pharmaceutical industry revenues are expected to increase from $1.23 trillion in 2014 to $1.61 trillion in 2018. This corresponds to a growth rate of 6-8% annually. Such a 30% increase in revenues would drive the secular bull market higher. Some leading economies are also liberating their drug prices. In June 2015 the communist party in China decided to remove the price caps on a majority of the drugs. That serves as a step towards a more liberalized drug market. We wonder if they tweeted this news to Hillary Clinton. Hillary Clinton’s initiatives might cut the healthcare spending in the United States and set some drug price caps or limitations. We hope that her initiative would not be too disruptive for the industry – if it would be implemented one day. Increasing amount of regulations, restrictions and taxes is typically pushing the businesses to delocalize. These drug firms might also allocate differently their risk capital and not always in the benefit of the patients. For this reason we think that Hillary Clinton’s initiative would end up to be a good compromise. Speaking of delocalizations, we will surely see a wave of startups in China. Currently most big drug firms have large R&D centers in China and the pool of talent has been growing up rapidly. Belgium is no worse, there the politicians compete in attracting new pharmaceutical businesses in the country with tax breaks and benefits. Should Hillary read the tweet streams from Belgium? We think so because Belgium has the highest concentration of life science employees in the whole world and the highest number of Phase I to Phase III drugs in development per capita. Consequently, that has a huge impact on the nation’s economy. We talk later of one Belgian biotechnology company in particular where we hold a long position. Pharma Expenses A topic that is rarely covered in the press is pharma industry’s expenses, i.e. operational costs. Cutting cost is an excellent and quick way to improve the P&L. Well managed companies might be busy cutting down the purchasing and inventory costs and rationalizing the working processes to be more lean and efficient. Pharma industry is still far behind the traditional industries in this. Recent study shows that in 2014 only 32% of the pharma companies procurement organizations’ executives had a full leadership of their key spend areas. The savings generated were slumping down by 45% from year 2009. The study investigated some 185 pharma sector companies with an average revenue of $15 billion. 41% of the companies were based in the U.S. So, the investors should better check how the spend dollars are controlled when investing in individual big pharma companies. A good control over the expenses is the key for creating very profitable businesses. This is why we wanted to discuss this largely uncovered reality of non-optimally managed spends in the pharma industry. There is an opportunity of billions of dollars in savings. Such a greater discipline could have a great impact on IBB over the upcoming years through higher net profitabilities. M&A’s Are Booming There have been a triple amount of mergers and acquisitions in H1 2015 as compared to H1 2014. We have already seen $221b worth of pharmaceutical deals in H1 2015. This hasn’t been considered yet in the long term industry forecasts. It is a very recent news. These M&A’s will give a further necessary tailwind for IBB. These deals will increase the industry’s key players’ profitability through operational synergies. Risks & Opportunities There are many risks and opportunities and we want to highlight here just a few: Risks Hillary Clinton’s initiatives to push down the healthcare spending in the U.S. Patents expiry on several blockbuster drugs Changing regulatory requirements Rich industry valuations: IBB is trading at a PE of 25.19 and Price/Sales ratio of 7.72 Opportunities Increased focus on Orphan indications with higher margin opportunities Drug price cap removal in China Emerging digital healthcare applications market (drug administration, patient monitoring, etc.) Faster drug development with more modern technologies available in R&D Increase of aging patient populations We believe that by balancing out the risks and opportunities the overall picture is quite positive for the pharma industry. The digital healthcare applications will become a hot market in our opinion. Speaking of the healthcare industry in the wide sense we have covered prior some surgical robotics companies. This is a good example of how the modern technology can revolutionize the market segments and bring benefits to the patients and payers. The readers may have a look on TransEnterix as one example. How To Invest? Surprisingly, we are not holding IBB in our portfolio. Such index is better suited for a passive investor. We prefer to pick individual names and do lots of due diligence on them, that we partially publish at SA articles. We currently have two promising companies in our radar with an imminent share price catalyst in Q1-16. If you want to learn more you can read our articles on Mast Therapeutics and TiGenix. Wake-Up Calls for Two Hidden Gems TiGenix has run up already over 44% since our exclusive article at SA but its valuation is still at a ridiculous level in our opinion. TiGenix (OTC: TGXSF ) already published on 23rd August 2015 that their Phase III study primary end-point was met with the final and full results coming out in Q1-16 for a treatment of perianal fistulas in Crohn’s disease. Their Cx601 allogeneic expanded stem cells drug seems to be very safe as no difference was observed between the drug and placebo groups. The peak sales potential is estimated at $900m and TiGenix trades currently at a market cap of $182m. We think that is making no sense and the share price might have quite a lot of potential to go up with the final Phase III results coming out in Q1-16. We covered Mast Therapeutics (NYSEMKT: MSTX ) at SA on 28th September 2015. It has went up quite a lot after our article was published. It is again an example of a very misunderstood company with a good pipeline drug MST-188 running in late Phase III to treat sickle cell patients. SCD patients have had no proper drug for the past 17 years and this is the first one we expect to arrive on the markets. Both these micro-cap stocks offer a good example of what we look for when picking individual names across the biotechnology sector. We are having long positions with both. Conclusions We believe that IBB is in a secular bull market. This index could still correct lower than the latest 30% drop from the all time high. Eventually, the increased industry revenues towards 2018, recent tripling in M&A activity and a better control over the spend dollars could send IBB to much higher levels. We believe that active investors might be more successful in hand picking individual companies instead of buying IBB. This would go along with a higher risk. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Picking The Right Silver ETF

Summary Those who consider investing in silver could consider using silver ETFs. The major ones follow the price of silver by stocking up on the precious metal. Other ETFs and ETNs follow silver by using forward contracts. The silver market has seen better days, but some still think silver could recover in the coming years and reach its former glory. The main idea in investing in silver is either for hedging purposes or for those who think silver will go up in the future. Let’s quickly examine the developments in the silver market and the main ETFs representing it. Up to the beginning of 2013, the rising demand for silver was fueled by people and institutions investing in silver via, among other ways, silver ETFs , in part, due to growing fear of a possible spike in inflation driven by the Federal Reserve’s monetary policy – mostly consistent of near zero interest rates and quantitative easing — and the devaluation of the U.S. dollar. These fears haven’t materialized, up to now. In fact, inflation has come down in past year and the U.S. dollar has appreciated against major currencies. The slowly recovery in the U.S. economy, the shift in the Fed’s policy, rise in mine production and little change in silver demand in the industrial sector drove down silver prices in the past few years. Some still expect the silver market to recover in the coming years on account of growing demand for silver in the industrial sector or slower growth in production (on account of the current low prices). Others may need a silver financial instrument to hedge their silver inventory. One way to take a long or short position on silver is via ETFs. Why choose silver-focused ETFs over other available silver instruments? The other possibilities include buying physical silver, silver contracts or silver companies. Buying a stock of physical silver, especially for speculators, may not be the best options. Silver companies are also one way to go long on silver. In this category, investors could pick silver producers such as Pan American Silver (NASDAQ: PAAS ) or silver streaming and royalty companies such as Silver Wheaton (NYSE: SLW ). But there are three issues to consider: These companies may incur risk that isn’t related to the movement in the price of silver such as growing debt and cash flow strain; Silver companies don’t only focus on silver (after all silver is usually a byproduct of other metals); they also have other metals in their portfolio – in most cases gold and copper – and as such bullion companies’ stocks aren’t only impacted by the movement of silver prices. For the most part, silver is strongly correlated to gold, but this relation isn’t consistent over time; The stocks of silver companies are also affected by these companies’ growth in operations (or lack of it); so if they expand their business — stocks tend to rise and vice versa. This is another variable, which isn’t necessarily related to the changes in the price of silver. These issues don’t mean the option of going with a silver company isn’t a good play, but it may not suit your investment needs. With that said, let’s review some of the available silver ETFs for hedges, investors and speculators and the main difference among the ETFs. Investors that have a long term investment horizon wishing to go long on silver or those that need a hedge for the future price of silver — if for example you plan to purchase silver for your business (e.g. for industrial usage) at a later date and need to lock the current price of silver to avoid risk related to fluctuations in the future – could consider the iShares Silver Trust (NYSEARCA: SLV ). This is also the largest traded ETF in this space with a market cap of $4.8 billion. The ETF follows the price of silver by holding the precious metal – as of September 24, the ETF holds 318.2 million ounces. The only caveat is the management fee, which is 0.5%, one needs to pay for holding this ETF. And just in case you were wondering, since this ETF holds physical silver and doesn’t buy future contracts each month – as oil and natural gas ETF tend to do – there is no Contango or Backwardation that lead to roll decay to worry about. Another ETF that follows silver in the same way as SLV is Physical Silver Shares (NYSEARCA: SIVR ), which has a slightly lower management fee of 0.3%. But the ETF is also smaller with a market cap of $280 million and 18.4 million ounces of silver. For speculators with a short term trading horizon (usually daily) and suspect the silver market is heading up may consider ProShares Ultra Silver (NYSEARCA: AGQ ). This ETF follows twice the daily return of the silver. For those who think silver is heading down may use ProShares UltraShort Silver (NYSEARCA: ZSL ), which follows twice the inverse return of silver. Both of these ETFs use silver contracts (forwards) and don’t buy silver bars. Therefore, these ETFs may face roll decay issues related to Contango/Backwardation. These ETFs also have a compounding issue that affects the returns of investments (e.g. if the price of silver rises by 10% in the first day and another 10% the next day, then the total gain is 21% due to compounding). That’s why these investments are mostly for short term investments. It’s also worth mentioning that besides ETFs there are also Exchange traded notes or ETNs . ETNs are structured products issued as senior debt notes. They are based on the future contracts. ETNs are highly volatility, tend to be riskier than ETFs (due to debt risk), and are mostly considered for short term holdings. For a leveraged long silver position, the VelocityShares 3x Long Silver ETN (NASDAQ: USLV ) offers three times the daily return of a silver index (S&P GSCI Silver Index ER). For those seeking to go short over short period of time, VelocityShares 3x Inverse Silver ETN (NASDAQ: DSLV ) is one way to go. Since these ETN are leveraged, they also have compound issues as listed above for ZSL and AGQ as well as Contango/ Backwardation issues. It’s also worth reading these ETNs prospectus to get a better sense of their risks ( pdf ). These ETNs are also very small cap and may include a liquidity issue. The following table summarizes the possible ETFs and ETNs that are currently available with market share and fees. (click to enlarge) Sources: ETFs’ and ETNs’ websites. The above ETFs and ETNs offer an array of investment possibilities for investors, day-traders and hedgers. Based on your needs and outlook, you could utilize the above-mentioned financial instruments. (For more please see: ” Will Higher Physical Demand for Silver Drive Up SLV? “)

Was Dalio Risk Parity Strategy Responsible For Recent Turmoil?

Within minutes after the opening bell on Black Monday, August 24, the Dow plummeted 1,089 points, surpassing even the flash crash of 2010. Dramatic declines caused stocks and exchange-traded funds to be automatically halted by stock exchanges more than 1,200 times. The market remained volatile in next weeks also, pulling down both the Dow and the S&P 500 indices down by more than 6 percent in August. The risk parity strategy, pioneered by Ray Dalio, the founder of world’s largest hedge fund, came under fire for this market volatility. The risk parity investment strategy was developed and first adopted as All Weather Fund in Bridgewater Associates in 1996 and has become increasingly popular in the industry. This has been one of most successful investment strategies since last two decades. But its recent performance has been poor. Of late some analysts and fund managers such as Lee Cooperman of Omega Advisors have started blaming the risk parity strategy for the market turmoil seen in recent weeks. This pushed Dalio to a defensive position, prompting his firm to come out with a report for its clients defending his risk parity approach. The Bridgewater report tries to dispel many of the concerns surrounding risk parity and the All Weather fund. Let us see what this risk parity strategy is, how it works, what blames are and what Dalio wants to say. What is All Weather risk-parity strategy and how does it work? The risk- parity strategy is Bridgewater’s flagship strategy, known as All Weather strategy. It is one of the two investing strategies consistently followed since last two decades by Bridgewater Associates, the world’s largest hedge fund with $170bn in assets under management. While the Bridgewater’s other strategy, known as Pure Alpha, is a traditional hedge fund strategy, All Weather is a risk-parity and leveraged beta strategy. It is based on the philosophy that there are four basic economic scenarios: rising or falling growth, rising or falling inflation. And different class of assets behave differently in each of these economic scenarios. The risk-parity’s objective is to reduce the volatility of investing in assets that normally move in the opposite direction in different economic environment. The All Weather strategy allocates 25% of a portfolio’s risk to each of these scenarios. It is allocation of risk and is different from allocation of assets. The portfolio makes money in any economic environment and is considered as a solid strategy in both good and bad markets. All Weather has given 8.95 percent average annual return since its inception in 1996. Its long-term success has helped the industry expand. But this August, $80bn “All-Weather” risk parity fund lost 4.2 per cent and is down nearly 5% YTD. The famous all weather strategy is facing rough weather from critics. What are blames on the risk parity strategy? First, the risk parity strategy allocates assets based on volatility. The ‘smart beta’ passive equity strategies adjust their exposures according to algorithms in response to market moves. The risk parity funds and momentum investors known as CTAs are typically computer driven. Any in volatility can trigger a rash of automated selling. Second, the risk parity strategy involves use of leverage, derivatives and borrowed money, to amplify their bets tied to the performance of bonds, stocks and commodities. Fund Managers often shift their allocations of assets to maintain an equal distribution of risk. They invest passively in a range of financial assets according to their mathematical volatility. In August as volatility increased, these funds are accused to have begun selling with increased intensity. The selling created more selling. This effect then cascaded through markets, and asset correlations increased. As a result assets like stocks and bonds, which often trade in opposite directions, began to fall at the same time. Market collapsed. The risk parity strategy too underperformed. What does Ray Dalio say in defense of risk parity strategy? The inventor of risk parity strategy, Ray Dalio, strongly defends his strategy and Bridgewater’s approach amid criticism. While the strategy might occasionally underperform other investment techniques, but it was still the best long-term strategy. Unlike other funds, Bridgewater does not tend to sell assets when prices fall and buy them when prices rise. It does the opposite to rebalance to achieve a constant strategic asset allocation mix. All Weather portfolio is well diversified so as not to be exposed to any particular economic environment. It has no such systematic bias to do better when interest rates are falling compared to that when they are rising. So it is not vulnerable to a bond sell-off. Dalio says Bridgewater is not responsible for the stock market increased volatility seen last month. Relative to the size of global asset markets, the risk parity strategy funds is too small to move market. It is like a drop in the bucket. Allocations are not adjusted due to swings in volatility, and therefore could not have created the market impact. “All Weather is a strategic asset allocation mix, not an active strategy. As such, All Weather tends to rebalance that mix which leads us to tend to buy those assets that go down in relation to those that went up so that we keep the allocations to them constant. This behavior would tend to smooth market movements rather than to exacerbate them,” fires back Dalio in the Bridgewater Report .