The Sector That Defies Deflation

by Addison Wiggin & Ian Mathias

  • Prescription drugs defy gravity… prices increase 8% in 2009 despite global deflation

  • More federal “assault on enterprise”… judge bans certain stem cell research

  • Patrick Cox on how the ruling will alter breakthrough medical technology

  • Byron King on oil prices and a new frontier for alternative energy — the Balkans

  • Plus, readers chime in… your thoughts on legalizing marijuana and the plight of American teachers, below

 We seem to have stumbled on a theme this week: drugs, drugs, drugs.

In spite of the “deflation” that has much of the banking world spooked, brand-name drug prices increased 8.3% in 2009, says a study AARP released this morning. They’ve nearly doubled in the past five years.

AARP tracked the prices of the 217 drugs most commonly used by elderly Americans and found last year had the highest rate of inflation since at least 2006, when the Medicare drug benefit kicked in.

Coincidence? We think not.

  Just in time, a federal judge in South Carolina put the kibosh on President Obama’s plan to allow federal funding for embryonic stem cell research.

“If one step or ‘piece of research’ of an embryonic stem cell research project results in the destruction of an embryo,” ordered South Carolina Judge Royce Lamberth, “the entire project is precluded from receiving federal funding.”

Judge Lamberth cited the 1996 Dickey-Wicker Amendment, which bans federal funding of embryonic destruction. (Thank goodness someone in the federal government is willing to stand up for moral rightness and correctitude.)

  Fortunately, “the ruling will have little impact on private companies that have been living with the ban on the use of federal funding for unapproved embryonic stem cell lines for years,” says Patrick Cox, in whose wheelhouse this bit of the news cycle firmly resides.

“Primarily, the ban will effect academic institutions that accept federal research money, which counts for a very small fraction of the money that has gone into stem cell research.

“And ironically, the biggest impact will be felt by important universities. They’ll no longer be able to profit from collaborations that produce marketable technologies. Today, these collaboration incomes are a significant source of funding for many academic research labs. And ultimately, it will slow the progress of regenerative medicine.

“But assuming it stands, the ban will concentrate stem cell IP in private firms that are unaffected by the ruling,” which could be good for investors in the right companies.

  Further, “the ruling,” Patrick continues with a recurring theme since the financial crisis began, “reduces the motive for leading stem cell companies to stay in the U.S. Stem cell companies want to collaborate with U.S. researchers. If they cannot, they will probably look elsewhere.”

Already, one of Patrick’s leading stem cell research companies has launched an operation in China, because the regulatory environment there is in many ways more lenient.

“Whereas our FDA often acts to protect established pharma interests,” says Patrick, “Asian authorities are consciously attempting to establish new medical industries to compete with American companies and technologies.

“For investors, this is largely irrelevant, but for Americans it means that we will probably see the current trend toward offshore research and development continue. Luckily, investors are not restricted by national borders and can follow the science and profits wherever they find a friendly home.”

Two stem cell companies in Patrick's Breakthrough Technology Alert portfolio have given readers 134% and 471% gains since Patrick’s initial recommendation. And at the moment, they aren’t selling… they’re holding on for the potentially life-altering gains that coincide with these kinds of generational medical advances. If you want to swing for the fences too, you should check out Breakthrough Technology Alert.

 The stock market appears to have bigger fish to fry this week, namely yesterday’s continuing, painfully slow destruction of the U.S. housing market.

July’s 25.5% crash in existing home sales helped the S&P 500 drop over 1.4% yesterday. The Dow eked out some surprisingly strong support at 10,000, bouncing back to 10,040 by day’s end.

Still, yesterday’s loss helped turn a nice gain for Options Hotline readers. The S&P sell-off bumped their Intel puts to a 102% gain in just five weeks — the ninth time this year subscribers have had the chance to book 100% gains or more.

Five other positions in Steve’s portfolio hit new highs yesterday too… that’s pretty good for an otherwise dismal day in the markets. For insight into Steve’s options strategy, look here.

  Following yesterday’s sell order for stocks, the dollar index edged up a few tenths of a point, to 83.2. Spot gold jumped $30 over the last 24 hours, to a healthy $1,240 an ounce.

  Oil continues its slide today, breaching the $71 a barrel level. It’s been a downright lousy month for light sweet crude. The front month contract is down about $13 in August.

“Oil prices are in the end-of-summer doldrums,” comments Byron King. “It's not as if anything very good, or very bad, has happened to the world supply-demand situation. It's more likely that the oil traders are at the beach, and not at their trading desks running up the prices.

“Still, lower oil prices mean that many oil companies and oil service players are on sale.” Might be worth a look.

  “The Balkans are starting to get over the bad rap that developed with the Bosnian war 10 years ago,” Byron continues on another tangent, having just returned from a research trip to Serbia. “Now that the war is over, there are an increasing number of opportunities for us.

“What the Balkan nations need now are companies to take the first move to put together this new energy resources, like hydropower. One legacy of communism is that much of the hydropower potential in southeastern Europe was never developed. Plus, in the years after the fall of the Iron Curtain in Europe, there was continuing war and destruction in the region, which throttled development.

“The legal and trade regimes in Serbia and the rest of the Balkans are set up for investor success. Today, most of the nations in southeast Europe have joined or are for all practical purposes part of the EU. So they’re used to dealing in the EU legal and regulatory regime, as well as working and accounting with euros. You don’t see nationalizations in these areas, as is the case in places like Venezuela.

“Also in southeastern Europe today, there’s a free trade agreement managed by the EU that covers the regional power grid. Add in the benefit that most EU countries have preferential feed-in tariffs and other subsidies (called “green certificates”) for renewable energy. And then there’s attractive energy pricing in Europe, by any commercial standard.

“It gets better. Just next door, Italy plans to fulfill its EU renewable energy obligations by drawing green power from the Balkans. Italy already has a series of bilateral deals in place to import electricity from Montenegro, Bosnia and Serbia. Italian utilities, with the cooperation of the Italian government, have committed 5 billion euros of hard investment to date, for generation and grid updates.

“So I’m looking at companies in the region that are taking the lead in an almost undeveloped hydropower field… first-mover advantage in a distressed area, so to speak.” With Byron’s help, we’ll be keeping an eye on energy trends in Eastern Europe as they develop. Watch this space.

“I saw that Wall Street workers are using marijuana,” a reader responds to yesterday’s 5, “and you poked fun at it. The time has come for this $40 billion product to be decriminalized, legalized, distributed and taxed in a responsible way. Decriminalized, it would be a $100 billion-plus industry.

“The U.S. needs marijuana to be legalized. Where else are we going to find a product of this magnitude?

“Why is marijuana illegal? It is too productive. The lobbyist groups running our country now are fighting tooth and nail to keep it that way. Here are some of the lobbyist groups fighting it: Big Pharma…imagine something that really helps many ailments and doesn't poison you; Big Oil… a fuel source that doesn't poison our planet; Big Cotton… clothing that costs less; Big Paper… the amount of paper produced by marijuana would dwarf the amounts of paper produced by the same area of land.

“Not to mention maybe we could stop subsidizing our farmers. They could each be allotted a certain area to grow this product. We still need them to grow food — and probably a little bit more when this law passes. How much money has our government wasted on its war on drugs, while Big Pharma continues to legally poison us while influencing the FDA? And what our medical schools teach future health care workers?”

The 5: Love it. One size fits all. Bob Marley is going to be stuck in my head all day. I like how you used this phrase too: “taxed in a responsible way.” That one gave us a chuckle.

Yesterday, Colorado Gov. Bill Ritter announced he’d be using the $9 million in “profits” his state gained from “medical” marijuana registration to help pay down their $60 million budget gap.

It’s a start.

Here’s another idea: Let’s issue the 58 million people who are currently drawing from Social Security “retirement” marijuana. Then when their checks stop coming, they’ll just think it’s a bummer, dude.

  “The teachers teaching in Los Angeles are smart enough,” another reader writes, this one responding to our suggestion that instead of spending $578 million to build one high school, they could use that money to wise up their staff. “I live in a suburb of Los Angeles, so I'm somewhat familiar with the situation.

“The problem, as I see it, is the Board of Education in LA that tells teachers how to teach and what to teach, and when it doesn't work, it's the teachers fault. The only way I see to fix the problem is something that will never happen: Fire the Board of Education members. Sell all the schools with nonprofit status. And give private schools the first chance to buy them. Then give every school an allowance for each student they have, regardless of the type of school, based on the property tax collected and the sale of all Los Angeles Unified property.

“Only then would our children would finally get a useful education, I believe.”

The 5: You’re right: That would never happen.


Addison Wiggin

The 5 Min. Forecast

P.S. We’ll be co-hosting a radio program on the local NPR station today between 1-2 p.m. EST. We’re following a gentleman who argued in 2008 that the only way to protect the Chesapeake Bay — and, by extension, the United Sates — is to limit population and economic growth. The conversation ought to prove entertaining, if nothing else.



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