This Week in Barrons – 4-2-2017:
“Hey darling, I’m not going to hurt you.”
… Jack Nicholson in The Shining
Thoughts:
We talked last week about health insurance,
and this week I’d like to add a little to that discussion. According to the International Federation of
Health Plans, Americans pay from 2 to 6 TIMES more than the rest of the world
for brand name prescription drugs. For example: (a) Gleevec (cancer treatment)
is $6,214 (per month/per customer) in the U.S., vs $1,141 in Canada, and $2,697
in England. (b) Humira (rheumatoid
arthritis) is $2,246 in the U.S., vs $881 in Switzerland, and $1,102 in
England. And (c) Cymbalta
(depression) is $194 in the U.S., vs $46 in England, and $52 in the
Netherlands.
Why does the U.S. pay more than these other
nations? According to the PhRMA, high drug
prices are a reflection of the research and development costs associated with
bringing a drug to market. Dr. Peter Bach, Director of Sloan Kettering's
Center for Health Policy and Outcomes, says that pharmaceutical companies
charge high prices simply "because
they can." Factually, over half
of the scientifically innovative drugs approved in the U.S. since 1998 have
resulted from research at universities and biotech firms, and NOT from work
done by the large drug companies. And despite all of the R&D, drug
companies still spend 19 TIMES
more money on marketing than on
R&D.
It gets worse. America's largest purchaser of medications Medicare, CANNOT (by
law) negotiate pricing with the drug companies.
In 2003, our brilliant politicians passed a law that prohibited Medicare
from negotiating with the pharmaceutical companies for lower prices. This
law was no accident. As Rep. Walter Jones from North Carolina and Dan
Burton from Indiana tell it: “The pharmaceutical lobbyists wrote the
bill. The bill was over 1,000 pages. It got to the members of the House early one
morning, and we voted on it by 3 a.m. We
had to vote on it by 3 a.m. because a lot of shenanigans were going on that
night, that big pharma didn't want to appear on television the next day.”
Which brings me to the games big pharma continues
to play. For years, asthmatics could control their asthma with an over
the counter spray called Primatene Mist. Inhalers are a $4B market, and
the #1 over the counter medication used to help treat bronchial asthma was
Primatene Mist. One day in December of 2011, Primatene Mist was pulled
from the shelves. Armstrong
Pharmaceutical (the manufacturer) said that it was due to global warming.
Don't laugh. The FDA had issued a
ban against every asthma inhaler which contained chloroflouorocarbons. It just so happened that Primatene Mist was
the ONLY medication affected, and it was also the ONLY asthma inhaler that had
been approved to be sold without a prescription for under $20. Primatene
Mist was the #1 seller, yet the FDA suddenly banned it because they felt that
the mist could somehow eat into the Ozone layer. It’s ironic that the ONLY other
option was to buy a medication that was over $100 with dramatically inferior results.
We all know the extent to which big pharma
has bought and paid for both Congress and the FDA – we shouldn’t feel so bad
that many of our current insurance premiums are more than our mortgages. As SF assures me, that may be changing if I
live in Colorado, Kentucky, Missouri, or Ohio.
It seems that the insurance company Anthem is looking to exit a high
percentage of the 144 regions in which it currently operates. Anthem has
been single-handedly propping up Obamacare in many states, and its departure
would leave many consumers in Colorado, Kentucky, Missouri, and Ohio with
ZERO Obamacare available insurance options. Consumers will (therefore)
face fines for failing to buy a product that is no longer available to
them.
With the failure of the Republicans to
repeal Obamacare, we are about to witness an amazing shift in coverage from our
failing health care system. When the Republicans were campaigning to
repeal Obamacare, we were treated to glowing coverage of how the law has helped
pull us out of some sort of medical dark age. Now that the narrative can
include Republican inaction, “Hey darling, I’m not going to hurt you” has an
entirely different ring to it.
The Market:
“Handicapping the downturn”
Factually:
-
The
latest Atlanta FED model is telling us that the U.S. economy is on pace to
expand at a 0.9% pace this year. That is
DOWN from the 1% rate calculated as recently as March 24th. The downward revision was caused by the most
recent consumer spending numbers which edged up a paltry 0.1% - the smallest
increase since August.
-
Wall Street’s fear gauge (the VIX) is on pace to post its
second-lowest quarterly average ever at 11.68, which is well under its historic
average of 20 – telling us that complacency has indeed infused this rally.
-
Caterpillar (CAT) has announced the closing of its
facility near Aurora, Illinois, and the layoff of 800 workers.
- Losses on auto loans
are at an annualized rate of 9.1% - up from 7.9% a year ago, and the worst
since January of 2010. Meanwhile,
non-performing sub-prime
loans at Ally Financial are still tracking at 11.4%. Santander Holdings and Capital One both have
significant exposure to the sub-prime auto loan market.
- Salil Mehta, a statistician and former director
of analytics for the Treasury Department’s $700B TARP program, said there is a
13% chance of a short-term bear market, or a fall of at least 20% from a recent
peak. He sees a 36% chance of a downturn
of at least 10%, and a nearly 75% likelihood of a 5% drop (see table above).
A 5% drop would effectively wipe out all of this
year’s gains for the DOW and S&P, and chop the Nasdaq’s rise in half. But such a move is not out of the ordinary,
and some even view retreats on that order as cathartic. David Lafferty, chief market strategist at Natixis
Global Asset Management said: “The market may be stuck in a rut with an improving
global economy creating a floor for stocks, and lofty valuations capping
further sharp gains. The movement that you’ve seen has been based on optimism
surrounding Trump. If Trump is going to struggle and the market has
already gone up 12% - the Trump-inspired expectations are going to be called
into question, and the market for bonds will be going bid – driving down yields.”
Vassilis Dagioglu, a portfolio manager at
Mellon Capital thinks that: “We will see some pullbacks (5% is likely) but
barring some kind of external shock, the odds of a 15% or 20% drop are actually
quite low at this point.” And Wells
Fargo’s Manley said: “A lot of folks are thinking about, and even bracing for,
a correction. Sometimes, that serves as an antidote against a pullback. Nerves are a wonderful thing. The more we worry, the less likely things are
to happen.”
Many of you have written asking my opinion
on the metals (gold and silver).
Starting on the first of February, SLV (the ETF for silver) started
climbing higher – almost straight up.
Then on March 2nd, at exactly 11:30 EST (when the European
markets were closing) – some Central Bankster decided to SELL over $2B paper
silver contracts. So, silver was rising
(just as planned), and then came the dump.
Realize this is NOT someone delivering physical ounces by truck for
sale, but rather this is some Central Bankster printing up and then tossing
shorts onto the futures pit. This is nothing new. They did the exact same thing on: October 7th,
2016 with $2.25B, on August 31st, 2016 with $4.7B, on May 16th,
2016 with $2.3B, on April 22nd, 2016 with $2B, etc. It has taken the month of March for silver
to move back up and get close to where it was before they pushed it lower. If silver can surpass its March highs, then we
have a chance for another meaningful move higher in the metal.
But then you ask: Why won’t they just smash it down again? They could, but after watching how fast the metals have rebounded, I'm beginning to think that as the Shanghai metals exchange keeps growing – the Central Banksters are losing their ability to keep it down. It seems the ‘physical demand’ may finally be exceeding any bankster’s ability to print and dump. The question I’m constantly wrestling with is: Are the powers that be so strong that gold and silver can never break free? Or, is the rest of the world tired of our shenanigans and opening their own physical exchanges is finally going to put an end to this nonsense? It's really hard to fight against Central Banksters that can print a billion or two and toss it in to short the metals. And honestly – they are NOT going to stop trying. I think that physical demand will ultimately over run their paper shorting ability. I'm still looking for almost $3K gold and $75 silver at minimum. We almost got there in 2011 before the paper shorts regained control.
But then you ask: Why won’t they just smash it down again? They could, but after watching how fast the metals have rebounded, I'm beginning to think that as the Shanghai metals exchange keeps growing – the Central Banksters are losing their ability to keep it down. It seems the ‘physical demand’ may finally be exceeding any bankster’s ability to print and dump. The question I’m constantly wrestling with is: Are the powers that be so strong that gold and silver can never break free? Or, is the rest of the world tired of our shenanigans and opening their own physical exchanges is finally going to put an end to this nonsense? It's really hard to fight against Central Banksters that can print a billion or two and toss it in to short the metals. And honestly – they are NOT going to stop trying. I think that physical demand will ultimately over run their paper shorting ability. I'm still looking for almost $3K gold and $75 silver at minimum. We almost got there in 2011 before the paper shorts regained control.
As for the markets in general,
on February 21st the DOW
poked its head above 20,750 and spent the next month using 20,750 as the floor
and 21,000 as the ceiling. We then had that big down day on March 21, and
moved the floor down to 20,668. If
this market is going to put in another leg higher, it first needs a few closes
above the 20,750 level. Thus far, it has
not been able to do that.
-
On March 23rd, we
pushed above that level, but couldn't hold the day – ending at 20,656.
- On March 28th, we tried again but came up shy – putting in a high of
20,735.
-
On March 30th, they
attacked it again, got over it by 3 points – but couldn’t hold and ended the day
at 20,728.
-
And on Friday, after a
feeble attempt we ended at 20,663.
DOW
20,750 is now the first level of resistance.
Each day that they can't get up and over it, is a day closer to the idea
that we might actually see a market slide – instead of a leg higher. Yet at the same time we KNOW that the Central
Banksters and the PPT (Plunge Protection Team) is defending this market. The big-name stocks (Facebook, Apple,
Amazon, Netflix and Google) just seem to move higher no matter what. Others like Eli Lily, Pfizer, Costco – have
done nothing but move sideways for a month.
We’re in a period where even the best charts will fail to break out,
because we've run too far too fast. If
we can get over DOW 20,750, then stocks with good chart patterns will rise. After the next 10-days, we will be in earnings
season and that always brings its own set of issues. I didn't like the late day market fade on
Friday. Watch the levels here as this is
a very tired market. If the DOW can't
get up and over 20,750, it might finally take its first real rest in many
months.
Tips:
This quarter saw a strong close for
equities, though the case for a pullback can be made from these levels.
This week the S&P refused to pop above resistance – even with the Nasdaq
rallying. With the transportation sector
($DJT) still weak, and the S&Ps now in overbought territory, I expect the S&Ps
to try to test the 2325 level (down from their current 2362 position) in the
near future.
The volatility futures are showing us that
something dramatic happened on March 21st. It was on that day that the volatility
futures spiked, and has yet to reset itself.
In fact, we are seeing more volatility over the next 18 days than in the
next 46 days – which is abnormal.
Bonds continue to test the 151 level. If/when bonds break through that level to the
upside, the financials will go lower and so will the markets. If the
bonds continue to meander around 151 or lower, then the markets can remain
stable. In my opinion the Bonds are a ‘coin flip’ away from rocking the
market – which could explain the high volatility futures.
With the up-tick in bonds, the financials
(XLF) have moved from the 25.3 level down into the 23 level. If the bonds break thru 151, look for the
financials to head lower and Goldman Sachs (GS) to go down with them.
To put this in perspective: (a) the DOW has
risen over 4,000 points (25%) in 15 months, (b) the S&Ps have moved 29%
higher over the past 13 months, and (c) the Nasdaq (QQQ) has moved 35% higher
over the past 18 months. Forgetting
about valuation, all of the IPOs that are coming to market, and the sub-prime
auto loan disaster – this 30% move (in any direction) is not statistically
sustainable. There is a lot more downside risk out there than upside
potential.
Ideas:
-
If
you think a bearish strategy is in order on the Nasdaq (QQQ), then buy the $134
May put and short the $132 May put with 49 days until expiration (DTE). This is a bearish strategy with a 63% probability
of making 50% of the max profit before expiration, and has $0.25 of positive
daily theta.
-
If the
technology sector (XLK) continues to move higher, then JD, Microsoft (MSFT) and
Electronic Arts (EA) are all good thoughts.
-
If
bonds retreat and the financial sector (XLF) moves higher, watch PayPal (PYPL)
and its April 28 - $43 calls, and watch Visa (V) using the April 21 - $88
calls.
-
If
retail continues its upward move (XLY), then Home Depot (HD) is setting up
exactly as Amazon just did. And Amazon looks
like it’s on a mission to touch the $919 mark.
To
follow me on Twitter.com and on StockTwits.com to get my daily thoughts and
trades – my handle is: taylorpamm.
Please
be safe out there!
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