The Ultimate Win-Win

April 25, 2014

  • Doing well by doing good: The $80 billion battle against cancer
  • Amazon swoons, because suddenly profits matter
  • The chart that could drag the United States into a major war
  • 2005 time warp: The next attempt to juice the mortgage market
  • “Slacktivist” investing: Warren Buffett’s dereliction of duty
  • The people who beat “the Robin Hood of Spain” to the punch… the nuts and bolts of a new gold standard… The 5 going on 7… and more!

  In the year 2000, two cancer drugs topped $1 billion in annual sales. By 2010, 10 cancer drugs exceeded that threshold.

Before we launch into today’s episode, a disclaimer: “Biotech companies are focused on finding new ways to help cancer patients,” says our Paul Mampilly. “I believe this is an opportunity that creates winners all around. If biotech companies find new drugs to help patients, that’s good. And if that helps them make money, that’s good too.”

Paul is the new investment director here at Agora Financial. This week in The 5, he’s helped us tease out the upbeat news behind Apple and Facebook… and debunk two “surefire” market indicators that in reality are useless. He has an encyclopedic knowledge of maybe 4,000 publicly traded companies.

But after 25 years of investing, his special passion is in the biotech space. “I believe we are in a golden age for biotechnology and investing in biotechnology,” he said here two weeks ago. The current swoon in the sector, he believes, will be a forgotten blip years from now.

  “Cancer is one of the world’s biggest medical needs,” says Paul. That may be self-evident to you, but check out the numbers from the American Cancer Society’s 2014 fact book…

  • An estimated 1,665,550 new cancer cases will be diagnosed in the U.S. this year
  • An estimated 585,720 cancer patients will die in the U.S. this year
  • 44% of all men are likely to develop cancer within their lifetimes, and 23% are likely to die from it
  • 38% of women are likely to develop cancer in their lifetimes, and 19% are likely to die from it.

And then there’s this: “Spending on cancer drugs by U.S. employers and health insurers is soaring,” says Paul. “In 2012, global sales of cancer drugs are estimated to have hit $80 billion.”

 Anyone who’s anyone in cancer research will flock to Chicago in a month.

That’s when the American Society of Clinical Oncology (ASCO) will hold its annual meeting. “You can think about it like the tech conferences where companies like Apple and Samsung release their latest gadgets and devices. These tech conferences draw tech geeks and journalists reporting on the latest and greatest electronic gadgets, and new information comes out during these events that can move stock prices. So investors attend these conferences as well.”

Paul recently let us in on a trade secret: “It’s the kind of thing you would never know unless you had the right contacts,” he explained. “You see, there is a seasonal trade around ASCO in which you want to go long stocks that have cancer drugs in their pipeline.

  “All the publicity that comes out from ASCO usually excites Wall Street analysts,” Paul goes on. “And analysts from the big brokerage firms come back from ASCO and start telling their clients to buy cancer stocks.”

Meaning, “We need to buy when the stocks are cheap, before the ASCO conference and before these analysts get around to telling their clients to buy.”

Next week, Paul unveils a whole new way to invest in the biotech space — with well-timed buys in advance of major announcements. Think the ASCO conference. Or, even more commonly, FDA approvals.

When the FDA approved a cancer drug by Celgene, that was the start of a 10,761% run-up. That’s the sort of thing Paul has in mind.

He’ll reveal his strategy in a special briefing at 1:00 p.m. this coming Monday. You don’t have to sign up in advance for access; we’ll send you an email with a link. Just keep an eye on your inbox…

  Stocks are sliding for no obvious reason. Every major index is well into the red.

As we write, the S&P is holding up best, down about two-thirds of a percent. The Nasdaq has slid nearly 1.5%, dragged down by (more) cruddy numbers from Amazon.

After months — heck, years — traders are suddenly realizing that for all its fabulous sales growth, Amazon’s costs are growing at an even faster clip. “I appreciate the growth side of Amazon,” Reuters quotes a private equity guy, “but this is a reaction to the fact that you can only go so long without growing profits.”

At last check, AMZN is down almost 9% this morning. Even with that, it still sports a price-earnings multiple of 520. Heh…

In their constant search for handy explanations every time the market hiccups, the financial media are also latching onto the trouble in Ukraine. From where we sit, they’re looking in the wrong place…

  President Obama has formally committed himself to the defense of “strategically irrelevant and economically marginal islands” — as one expert put it in our virtual pages during late 2012.

The president is hopscotching across Asia this week. “He is not going to Beijing,” the BBC reports in its usual understated style, “but relations with China are expected to dominate his meetings with regional leaders.”

[You’ll have to imagine your editor doing a face-palm…]

So while meeting with Japan’s Prime Minister Shinzo Abe, Obama said the U.S. would be obligated to rise to Japan’s defense if China and Japan came to blows over the disputed Senkaku Islands. “What is a consistent part of the alliance,” he said, “is that the treaty covers all territories administered by Japan.”

And the chances of China and Japan coming to blows are growing steadily…

We keep coming back to a quip last year by Independent Institute scholar Ivan Eland: “America is now borrowing money from China to subsidize the defense of rich East Asian allies in their quest to militarily counter… well… China.”

  Would the last American to take out a mortgage please turn out the lights?

Mortgage lending during the first quarter fell to a 14-year low, according to the trade newsletter Inside Mortgage Finance. A total $235 billion in mortgage originations is 58% lower than the first quarter of 2013…

Almost all of the decline can be chalked up to a crash in the number of people refinancing: With rates up big from their 2012-13 lows, anyone who needed to refi has done so by now.

“Softness in the housing market, if it deepens and undermines the broader economic outlook, could complicate the Fed’s efforts to dial back easy-money policies designed to support the recovery,” says today’s Wall Street Journal. Gee, ya think?

  Nothing the advent of 3%-down mortgages can’t fix, right?

As we noted earlier this week, and as the numbers bear witness to today, homebuyers are drying up. Ordinary people’s incomes are stagnant. The hedge fund/private equity crowd is winding down its buying binge of single-family homes, turning them into rental properties.

Last Friday, TD Bank began accepting 3% down payments through a program for low- and moderate-income buyers that the firm has the temerity to call “Right Step.”

The Journal also cites the case of a New Jersey lender that recently lowered its down payment requirements from 25% to 5%. “To generate future profits,” says the paper, “banks will have to compete for borrowers who may not have perfect credit or large down payments.”

We promise you have not been transported through time warp back to 2005.

 Warren Buffett, paragon of “slacktivist” investing.

We spent a little time this week exploring the world of “activist” investing — hedge fund managers who shake up corporate boards and even the executive suite.

And then we have Warren. In a rambling interview with CNBC this week, he was asked about Coca-Cola — a core holding of Berkshire Hathaway since 1988. Coke shareholders were recently asked to vote on a cushy executive pay plan. Buffett thought it was too cushy.

But rather than vote against it, he took the Obama-in-the-Illinois-legislature approach and abstained because… well, let’s let Warren explain it in his own words to CNBC…

“Well, we abstained because — we didn’t agree with the plan. We thought it was excessive. And — I love Coke. I love the management, I love the directors. But — so I didn’t want to vote no. It’s kind of un-American to vote no at a Coke meeting. So (LAUGH) that’s — but we — I didn’t want to express any disapproval of management. But we did disapprove of the plan.”

As televised embarrassments go, this has to rank right up there with the time Warren picked up a ukulele and sang “I’ve Been Working on the Railroad.”

  “What a disgrace,” says our Chris Mayer. We knew Chris would have something colorful to say after he unloaded on the Oracle of Omaha last month.

“Here is the supposed paragon of capitalism showing all the backbone of a banana. Here is one of the most influential investors a company could possibly have, who openly admits he does not approve of the plan and yet refused to cast a no vote. By doing so, he turns the whole process into a sham.”

Chris recalled some wise words he once read about CEO pay: “Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional business performance. But for anything short of that, it’s time for directors to shout, ‘Less!’

“You know who wrote that?” asks Chris. “Warren Buffett. True, he is no longer on the board — having served for 17 years — but his no vote would’ve been more powerfully received than any single director’s vote.

“A more courageous investor is David Winters, who also owns a lot of Coke stock and pushed for the plan to be rejected — and even lobbied Buffett to vote against it. Alas, he was unsuccessful.”

Oy. Is it any wonder you’d have been better off in S&P index fund than Berkshire the last five years?

  “Please tell Mr. Enric Duran, re the cool half million euros he borrowed with no intention of ever paying it back to promote alternatives to capitalism, that this is very old news,” a reader writes after yesterday’s episode.

“Last I checked, other leftists of his ilk have borrowed around $20 trillion — with no intention (or means) of paying it back — in the 50-year-old war on poverty. Been there and done that, Senor Duran!

“If you still think this is a good idea, go spend a few nights in Detroit, the first major city to adopt this socialist paradigm. You know, Detroit, Enric… the only city where you can walk 12 blocks and still be at the scene of the crime….”

  “It seems Enric Duran and so many others have believed that the Western economy is of the capitalist variety,” chimes in another.

“I’m curious what his alternatives are. It seems all the world believes we operate under capitalist rules. If this is true, either the definition of the word itself has changed or they never knew the meaning in the first place. Either way, it seems to have gotten a bad name for itself.

“I guess if most people believe we are still a capitalist economy, we should change the name, because that we ain’t. ‘Corporatist,’ as Ron Paul puts it, seems more fitting a name.”

  “I was hoping to avoid having to read a number of books, was looking for an abbreviated concept explanation of actual implementation of a gold standard,” writes the fellow who inquired earnestly about the practicalities.

“The notion that gold, or money backed by it, cannot be manipulated seems to me wishful thinking. Any system is only as good as the trust in the controlling entity. What is a gold standard? Settle transactions only in ounces of gold? Impractical. Create notes backed by certain weights of gold? Who would control — the Fed, Congress? Could they handle that any better than the national debt and budget?”

The 5: You’ve thrown out a formidable challenge, but we’ll pluck a key passage from Lewis Lehrman’s The True Gold Standard: “Consider that no government authority varies the value of the defined unit of measurement of the 36-inch yardstick to 29 inches this year or to 39 inches next year; nor do governments vary the value of a unit of weight, the pound (16 ounces), to 12 ounces this year and 20 ounces next year; nor do they vary duration of the unit of time, the hour, from 60 minutes today to 50 or 70 minutes next year.”

Your next question, logically enough, is what should that “defined unit of measurement” of a dollar be relative to gold? Lehrman won’t be drawn on a number…. but he does say the level should be no less than the total per ounce cost to produce an ounce of gold… provided the nominal level of wages would not fall.

That last part is crucial: Britain failed miserably on that score when it returned to a gold standard after World War I. “It virtually destroyed the shipbuilding industry, the coal industry, and it led to the first major general strike by all the workers in England disrupting all of trade.”

  “The FDA claiming that it needs to regulate e-cigarettes to see what’s in them,” a reader writes, “sounds exactly like Nancy Pelosi’s assertion that we needed to pass the Affordable Care Act to see what’s in it.

“If the FDA wants to know what’s in e-cigs, why don’t they just buy some juices and analyze them?
That’s a rhetorical question, of course.”

  “Why would anyone in their right mind believe e-vapor products that mimic the real smoke experience will send the real thing into obsolescence?” writes our final contributor.

“They are two different things for different purposes, and I am sorry to disagree, but the real McCoy ain’t ever going away! If you’re telling me that an e-cigar sporting the label ‘Fine Cuban’ could ever come even close to the total experience of the real thing… I think ur crazy!

“On the other hand, having the option of stepping into the cabin bathroom at 35,000 feet and taking a nice, long, comforting drag on your e-Marlboro Red or other vapor of choice is a great way to make the smoking habit more palatable within the social venue.

“Thanks for all the great work you do giving us investable ideas!”

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. Seven years ago tomorrow, Agora Financial executive publisher Addison Wiggin hit the “send” button on the first-ever episode of The 5.

Your present editor is privileged to have had a hand in this effort from the get-go: First as an “extra set of eyes” offering tweaks and critiques before publication each day… and then helping Addison assemble the issue two days a week… then five days a week… and finally entrusting me with the solo care and feeding of his creation the last two years. I thank him for the vote of confidence.

And I thank you for your continued readership and engagement via The 5’s lively inbox. While it’s a cliche, that makes it no less true: None of it would be possible without you, dear reader.

rspertzel

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