June 27, 2013
- Handicapping stock-market mudders on a soggy track: Chris Mayer identifies a favorite sector in the new rising-rate reality
- Your Thursday “taper” update: Checking in with the Fed’s favorite inflation gauge
- Four decades of nonsense at the Patent and Trademark Office: The 5 seeks out the profitable implications of a Supreme Court ruling
- The student debt bubble blows bigger: Unpacking the “mal-employment” rate among under-25 grads
- Banksters walk free, while a chalk artist outside a bank faces 13 years… a Bush-era emendation… feral hogs, both tasty and dangerous… and more!
“The stock market has been jumpy as it tries to handicap everything anew,” observes Chris Mayer.
“It’s as if a dry fast track at the Kentucky Derby now looks like it will be muddy and slow. The odds on the board have to be refigured. The prices of the mudders go up.”
The hard rain that fell at the track came in the form of rising Treasury rates. The 10-year note is back under 2.5% this morning… but that’s after a huge move since the first of May.
“It’s the trend that has people worried,” says Chris. “In percentage terms, it’s had better than a 50% move since.”
“The reason the 10-year is important,” adds Chris, “is that so much other debt is priced off what the 10-year rate is.
“The market magnifies the effect on lower-quality credits. So Tenet Healthcare, which is trying to pull off a $1.7 billion deal, saw its bond rate go from 5.9% on June 1 to 7.7% on June 25.”
That’s a 30% move. “Not too many firms can absorb a 30% increase in interest on new debts without it affecting corporate planning. Suddenly, the bar gets higher for new investments, new acquisitions, etc. Everybody’s pretty little models have to be reset.”
“The stock market has its mudders,” says Chris — getting back to his handicapping.
“Rising interest rates can do long-term good for some firms. As a generalization, banks are mudders. Low interest rates have hurt bank profit margins for years.”
There are caveats: “Higher rates are no good if the economy goes sour and loans start to spoil. And not all banks will benefit, and not in the same way. Banks have a mix of assets (and liabilities) with different cash flows and maturities.
“Overall, though, I continue to like bank stocks as a long-term investment. Especially, needless to say, the well-capitalized banks in our portfolio.”
Another day, another rally: As we write, the Dow has pushed ahead 1% to top 15,000.
“The bulls and bears are at war this week,” says STORM Signals editor Jonas Elmerraji. “And one side is going to lose big-time.
“I’m starting to hear a lot of chatter that Monday was a bottom. And while it very well could have been, the arguments sound a whole lot more like hope than evidence-driven analysis.”
His call in this space on Monday stands: “The high-probability scenario still looks like a corrective period followed by another move up. That changes if the S&P can retake its 50-day moving average.”
This morning, that average is 1,620… and at last check, the index is at 1,617.
American consumers opened their wallets again last month. The Commerce Department says consumer spending popped 0.3% in May, nearly erasing April’s drop.
Incomes grew at a faster clip, 0.5%. The household savings rate — which includes debt paydowns — remains abysmally low at 3.2%.
As always the key metric in this report is “core PCE” — the Federal Reserve’s favorite measure of inflation. It registered a 1.1% increase year over year.
That’s barely half of the Fed’s 2% target — and further reinforcement of the thesis taking shape in our digital pages the last several days, shared by both technician Jonas Elmerraji and fundamental guy Dan Amoss: Not only is a “taper” not in the cards, but QE might actually be stepped up before year’s end to stave off “deflation.”
[Just in: A CNBC alert on your editor’s iPad — “Fed’s Dudley: QE Could Increase if Labor Market Doesn’t Improve.” Wanna bet he rehearsed his remarks last night after seeing his preview release of the core PCE numbers?]
That didn’t last long: The People’s Bank of China (PBOC) is relenting on its tough-love stance with Chinese banks.
Bloomberg summarizes a statement on the central bank’s website thus: “The People’s Bank of China has provided liquidity to some financial institutions to stabilize money market rates and will use short-term liquidity operations and standing lending facility tools to ensure steady markets.”
So much for the PBOC’s assertion on Sunday that liquidity was at a “reasonable level.”
A one-day drop in a country’s main stock index of 5.3% — as happened in China on Monday — has a funny way of changing central bankers’ minds…
“We hold that a naturally occurring DNA segment,” Justice Clarence Thomas wrote in a recent Supreme Court opinion on patent laws, “is a product of nature and not patent eligible merely because it has been isolated.”
Patent laws, he explained, in the eyes of the court, have long contained “an important implicit exception: Laws of nature, natural phenomena and abstract ideas are not patentable.”
Seem obvious? Someone should’ve told the patent office.
“The Patent and Trademark Office,” columnist Ron Eachus writes, “has been awarding patents on human genes for three decades… A study of patents on human DNA published last March in the Journal of Genomic Medicine found that 41% of the human genome is covered by patents.”
Oops.
“The case was brought against Myriad Genetics,” our tech guru Ray Blanco writes, “which claimed a patent on the BRCA1 and BRCA2 genes. Mutations in these genes are important markers for breast cancer risk and were used in Myriad’s diagnostic tests.”
Competing biotech companies sued Myriad because they want to use these genes in their own tests. Since the ruling applies only to naturally occurring genes, not applications and methods involving existing genes, most biotech companies landed on the other end unscathed as a result.
And a few lucky companies are set to benefit from this ruling.
Case in point: “The Myriad Genetics ruling,” our own Patrick Cox chimes in by way of update on one of his favorite biotech plays, “indicates to me that this biotech company has the right to present the best current scientific information known about any of the genes in a sequenced genome.”
Myriad, Patrick explains, “has charged as much as $3,000 for their cancer mutation diagnostic, which looks at only two genes.”
On the other hand, Patrick’s company has a technology in the works that allows patients to detect all cancers in their early treatable stages for the price of a single cancer diagnostic. This wouldn’t have been possible if the patent ruling went the opposite way.
Coupled with the company’s research on efficiently sequencing the entire human genome, its groundwork in regenerative medicine and the vast implications their probing has for the health industry, this company has positioned itself as one of the few trendsetters in the biotech industry.
Best part? It’s still a “buy” in our tech portfolio… with, from what we can see, a bright future ahead. Through this coming Saturday you can find out why, right here at this link.
From our “living in Mom’s basement” file: One in three employed college graduates under 25 doesn’t need their degree for the job they hold.
A recent survey by the Center for Labor Market Studies at Northeastern University shows the college graduate “mal-employment rate” is 36%. Back in the year 2000, that number was under 28%. It tells a different story than the official 7% unemployment rate attributed to this category.
According to CNN Money, almost 100,000 “mal-employed” work as waiters, bartenders or in other food service posts. An additional 80,000 serve as clerks or customer service representatives and 60,000 more doing manual labor.
Students who majored in something technical, like engineering or accounting, have an easier time finding college-level work than, say, global studies majors. And graduates who worked during school had a better chance of finding a relevant job.
“Taking a job below your education level carries a high financial toll,” CNN paraphrases Andrew Sum, director of the center at Northwestern that published the study. “The mal-employed earn up to 40% less per week than their peers. That could make it harder for them to pay off their student loans, move into their own apartments and even get married.”
And at the worst possible time. “A deal in the U.S. Senate to prevent a doubling of interest rates on federal student loans looks unlikely,” says our Dan Amoss — who’s been on the student-debt bubble beat for years.
“Next Monday, July 1,” he informs us, “rates on new federally subsidized Stafford loans are set to double to 6.8% from 3.4%. The Congressional Budget Office (CBO) estimates 9 million students will take out subsidized Stafford loans this fall.”
Yikes. PRO-level readers can scroll down for the ugly on the growing mountain of red tape facing a company knee-deep in student loans.
Sometimes, we can only shake our heads and marvel: A man from California faces 13 years in prison for protesting Bank of America — using water-soluble chalk on a city sidewalk.
“Surveillance pictures showed him writing on the sidewalks of banks using children’s chalk to promote anti-big bank websites,” reports San Diego’s ABC affiliate. Explains Olson: “I was encouraging folks to close their accounts at big Wall Street banks to transfer their money to local nonprofit, community credit unions.”
As seen on surveillance video. Would the penalty be as severe if he chalked a hopscotch court?
BofA says the cleanup at one location cost $6,000. Tuesday a judge ordered Olson to stand trial.
Contrast Olson’s treatment with that of BofA. In one of those stories that’s become so commonplace we overlooked it, last week it emerged that BofA gave bonuses to employees who figured out clever and often illegal ways to dump homeowners into foreclosure.
“We were told to lie to customers and claim that Bank of America had not received documents it had requested,” says a former employee in a class action lawsuit filed against BofA in Boston.
Old wine in new bottles for 5 readers: Our outrage exhausted itself more than three years ago with a string of “oops — wrong house” repossessions by BofA.
“My first reaction was, ‘Huh?'” writes a reader after one of our correspondents yesterday asserted, “The serious question is why no one went looking for the person who ‘outed’ CIA operative Valerie Plame during the Bush years.
“That information has been available for years,” write’s today’s correspondent, “even before Scooter Libby took the fall for it. The ‘leaker’ was none other than Deputy Secretary of State Richard Armitage–not Scooter Libby, not Dick Cheney, not Karl Rove.”
The 5: Our own Byron King chimes in with further background your editor knew but forgot about: “Special Prosecutor Patrick “Javert” Fitzgerald found out, quite early in his investigation of the matter, that Armitage was the talkative perp.
“Then Fitzgerald kept the news quiet, while spending tens of millions of dollars on two more years of effort. In the end, Javert… whoops, Fitzgerald…. nailed GW Bush aide Scooter Libby for some sort of obstruction of justice call stemming from inconsistencies in statements made over several interview to several different investigators asking many questions in all manner of varying ways.”
“Feral hogs I hear are delicious,” reads the first of several emails inspired by Dallas Fed chief Richard Fisher’s remarks this week, “but when I hear that squeal they have, my mind just jumps to a scene from Deliverance with Ned Beatty that I would much rather not think of…”
“Feral hogs are quite as tasty as the domestic kind,” adds another, “and free food if you’re up to the challenge of hunting them. They’re also quite ferocious and have been known to reverse the process, i.e., hunt and eat the hunter. Rather like politicians.”
“Feral hog meat, according to those who hunt and then eat them, is delicious,” chimes in a third. “Much better than commercial pork. Better flavor, more nutrition.”
“In most states,” the third reader adds, “feral hogs are designated as an invasive species and as a varmint.
“The number of wild or feral hogs is increasing rapidly. They are a hazard for farmers because they destroy crops with lightning speed and efficiency. In some areas, they are a sufficiently pervasive presence that they are a danger in the towns. They are not really afraid of humans and can and will attack adults who come to their attention. Human children are very much at risk.
“No one seems to be at all concerned, or to believe: but it may not be more than a few more years or a decade or two before it will be dangerous almost everywhere to go outside a house or building without real danger of becoming dinner for a feral hog or a coyote.”
The 5: Hmmm… Guess we’re still more concerned about the politicians at the moment…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “You may have seen the full-page advertisements in the newspaper or online — national companies offering up coins and bills they say are collectibles,” reports the consumer news unit at KATU-TV in Portland, Ore.
You can probably guess what’s coming next: Some poor sap sent $129 to an outfit that sent her a bag of plain-old coins worth all of $30.
Thing is, you stand to make a handsome gain just from some of the coins lying under your sofa cushions… and we’re not talking collectibles. Our research team details the incredible — and potentially profitable — story at this link.