- Patience pays off with a blockbuster biotech buyout
- What’s up with the nontech company that’s set up a Silicon Valley “incubator”?
- Is the thin air in Aspen getting to a top Fed official?
- The Fed’s damned-if-it-does-or-doesn’t dilemma… and what it means for you
- An airport gift shop you’ll never see in America… once again, The 5 accused of being political… low interest rates and high P/E multiples… and more!
The big financial story of the day is also great news for some of our readers.
Big Pharma player Pfizer has come to terms with a biotech firm called Medivation — a $14 billion deal and vindication for readers of Breakthrough Technology Alert. MDVN was one of Stephen Petranek’s first recommendations when he joined Agora Financial’s science-and-wealth team, in late 2013.
The ride has been up and down… but Stephen held the hands of nervous readers the whole way, and now patience is paying off with a 159% gain.
Stephen made the case to readers of The 5 in early 2014: “Most men think that prostate cancer is… not really a big C — more like a small c. But among cancers, prostate cancer is the second-leading cause of death in men, after lung cancer. There are at least 2.5 million American men alive who know they have it at this moment.”
Fast-forward and Medivation now has a blockbuster in the prostate-cancer drug Xtandi — already producing $2 billion a year in revenue, on its way to $4 billion.
No wonder Pfizer wants it. As we’ve been documenting since 2014, Big Pharma doesn’t innovate anymore; it relies on smaller biotechs to do the heavy lifting first.
The story might not be over. It’s conceivable someone will come along with a better offer than Pfizer’s $81.50 a share.
At least five other biotech and Big Pharma names were kicking Medivation’s tires in recent months.
True, if Medivation backs out, it has to fork over a $510 million termination fee to Pfizer. That said, “Assessing Medivation’s future value is extremely difficult,” Stephen wrote his readers today. “One could easily put a price tag on the company ranging from $70 a share to more than $200 a share, depending on how much you think the company’s pipeline is worth.”
That doesn’t make it a buy today… but it’s something we’ll keep an eye on.
If you didn’t take advantage, you might be wondering what we have lined up for a “next act.”
Some of the most lucrative opportunities turn up by accident.
And so it went last week when two other members of our science-and-wealth team — editor Ray Blanco and publisher Aaron Gentzler — attended a biotech conference last week in Silicon Valley.
“We chatted with a scientist from a large international company selling consumer products,” says Ray. “No, it was not a technology company employee, although I am sure you have heard of this company’s name. What was interesting was the fact that this researcher was specifically interested in how augmented reality, wearable electronics and the internet of things could help this well-known company grow new products for its customers.”
This large company has gone so far as to set up an “incubator” office in Silicon Valley to figure out how to integrate virtual reality and augmented reality into their business.
“If you knew the name of the company, which we can’t disclose, you’d scratch your head,” says Aaron. “But they’re spending serious money figuring out how to use AR right now.”
[Ed. note: That story is still in the germination stage. Watch this space for updates. But in the meantime, right now, Ray has wrapped up his research on another stop he made in Silicon Valley. It involves one of America’s major high-tech firms… a technological breakthrough 117 years in the making… and the potential to turn every $1 invested into nearly $800.
The opportunity is time-sensitive… for reasons you’ll see when you click here. Bonus: No long video to watch.]
The markets are treading water, traders again transfixed on every belch and wheeze emanating from the lips of a Federal Reserve pooh-bah.
At last check, the major U.S. stock indexes were pancake-flat. Treasury yields are backing down, the 10-year note at 1.55%. Gold is losing a bit of ground, at $1,338. Crude is the big mover, down more than 2.3%, at $47.38. And that’s not a function of dollar strength; indeed, the dollar index is sinking further, at 94.5.
The latest Fed jawboning came yesterday from No. 2 Stanley Fischer. “We are close to our targets” for unemployment and inflation, he said yesterday during a speech in Aspen, Colorado.
Unemployment? Maybe. Inflation? Give us a break. The Fed’s preferred measure of inflation — “core PCE” — has been stuck in the 1.6% range since March. That’s well below the Fed’s 2% target.
But really, the numbers don’t matter — only the market psychology. Mr. Fischer’s remarks aimed to leave the impression that a September interest rate increase is still “on the table.”
Later this week comes the Fed’s annual get-together in Jackson Hole, Wyoming. There we’re told the chatter will be all about what tools the Fed has at its disposal to deal with the next economic crisis.
Good luck with that. “The Fed is out of dry powder and out of time,” says David Stockman.
“The market has most definitely not ‘priced in’ a rate hike. It will sell off violently if the Fed goes ahead and raises rates.
“On the other hand, if it punts until another time, that decision will come with new concerns. Concerns that continuing head winds from China, Europe and the rest of the world have the potential to seriously harm the struggling domestic recovery.
“Even the day traders and robo-machines know that the Fed is out of dry powder,” Mr. Stockman goes on — writing from his own outpost in Aspen.
“It cannot go to subzero interest rates without triggering a Donald Trump-led domestic political conflagration. Nor can it abruptly shift to a huge new round of QE without confessing that $3.5 trillion of the same has been for naught.
“In short, if it fails to raise rates and even hints at the risk of domestic recession, there will be pandemonium in the casino. The gamblers recognize that there will be no monetary fire brigade waiting at the exits.
“Whatever the Fed does at its upcoming meeting on Sept. 20–21 will spook the market big-time.”
And David anticipates another market shock only days later — based on events that come around with the presidential election cycle every four years. It’s so important that David is organizing a live online briefing this coming Thursday evening at 7:00 p.m. EDT. It won’t cost a thing to watch, and you can submit questions during the event. Just drop us your email at this link and we’ll save you a spot.
From Europe today we have a preview of coming attractions — in which Fed policy will distort the activities of Corporate America far more than it already does.
Seems the European Central Bank has been buying corporate bonds of late, not on the open market but through private placements. These bonds were created by two companies specifically for the ECB to buy.
“The ECB doesn’t directly instruct companies to create specific bonds,” explains this morning’s Wall Street Journal. “But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list.
“The furious central bank buying has been a relief to companies and governments that can now borrow at rock-bottom interest rates. But it has also spurred criticism that the extreme policies are killing the returns available to other investors, such as pension funds, and loading up the economy and financial system with potentially overpriced debt.”
Oy… And the Journal story barely glances on the Bank of Japan’s nutty activities. We’ll have more about that later in the week. We figure whatever the BoJ and ECB are up to will become part of the Fed’s plan eventually…
Here’s a move we’ll never expect from U.S. gunmakers like Smith & Wesson and Sturm, Ruger: The Russian gunmaker Kalashnikov has opened a gift shop at Sheremetyevo Airport in Moscow — selling model guns, camouflage gear and “I love AK” T-shirts.
“Kalashnikov is one of the most popular brands that come to mind for most people in the world when they hear about Russia,” says the firm’s marketing chief, Vladimir Dmitriev. “So we are pleased to provide the opportunity for everyone to take away from Russia a souvenir with our company brand.”
The Reuters newswire, citing an airport official, elaborates: “The model guns — automatic pistols and rifles — would very clearly be imitations and would pose no security problems.”
Heh… Until an international traveler tries to bring it through U.S. Customs.
“When I subscribed to Agora Financial’s Technology Profits Confidential,” a reader writes, “I thought it would contain only information regarding stocks.
“The 5 Min Forecast that I just received is:
- Political.
- Biased to the right.
- Offensive.
“If Agora Financial wants to be involved in the presidential election and discuss same, please keep it within your company.”
The 5: Say what?!
In the first place, The 5 comes complimentary with your subscription to a paid Agora Financial publication. We have many other newsletters you might be interested in, and The 5 gives you a window into our editors’ best ideas, along with a daily dose of financial infotainment.
Now… assuming you’ve come on board in the last few weeks, we’re not sure what we’ve said about the presidential election that’s gotten your dander up.
In fact, we were silent about politics throughout the conventions last month, despite all the news they made. From our perch, there were too many other interesting and more important things going on.
More recently, our sales messages have ventured to say that certain financial or economic events our team anticipates have the potential to dash the hopes of one candidate or another… but again, those are just our observations and not a wish.
In fact, we daresay the campaign itself might trigger those events… and turn the campaign into a mere sideshow. Certainly, that’s David Stockman’s view — which we’ll share more of this week.
“Sorry, but a 25 P/E ratio is not irrational in today’s market,” a reader responds to David Stockman’s musings in this space on Friday.
“While it is true that historically P/E ratios have averaged 15.6, we don’t live in average times. For example, historically, the bond market has paid about 3% above the rate of inflation. If you adjust our current inflation rate (CPI) to what it measured historically, you’ll be getting about 5.5– 6% return on a 5-year U.S. Treasury note. Today, you are lucky to get 1.5%.
“If you look back historically when interest rates on U.S. bonds were paying 18%, the prevailing P/E ratios were only 5–6 (which makes perfect sense. E.g., 100/18 = 5.6); whereas when interest rates were 6%, P/E ratios averaged around 16–17 (which again makes sense. E.g., 100/6 = 16.7). Today, with 5-year notes paying 1.5%, you could justify P/E ratios far higher than 25 (e.g., 100/1.5 = 66.7 ).
“I am not trying to justify the stupidity of the Fed manipulating interest rates but to suggest that people are acting irrationally in today’s bond market is irrational… in my humble opinion.”
The 5: We get it… In a low-rate world, “investors” are willing to pay more for each dollar of earnings.
But the math of falling profit margins has to catch up sooner or later. “After hitting a cyclical peak of 10.1% in Q2 2014,” says David Stockman, “the profit margins of the S&P 500 companies have embarked upon the inexorable process of mean reversion. They have been sliding to 9.3% in Q2 last year and 9.1% in the quarter just completed.
“Moreover, that slide is just the beginning. In the event of an actual lapse into recession, current near-peak profit rates would really get slammed. Compared with the peak of 9.4% in Q2 2007, for instance, the S&P 500 average margin plunged to just 6.2% by the bottom in Q2 2009.”
Yikes…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. David Stockman has every reason to believe events reminiscent of 2007–09 are just over the horizon.
Just remember… the worst of the 2008 crisis took place with a presidential election only 50 days away. And right now we’re only 79 days away.
That’s why David is holding an urgent online event this Thursday evening at 7:00 p.m. EDT. You’ll learn about a phenomenon that’s influenced the markets during every presidential campaign since 1976… how Wall Street and Washington insiders use this phenomenon to pocket huge gains (whether there’s a crisis or not)… and how to apply their techniques in your own portfolio.
It won’t cost a thing to watch. Here’s where to sign up.
