The Reformed Broker
Traders gather on the floor of the New York Stock Exchange, January 18, 2012. According to Brown, biotech stocks are enjoying a multi-year breakout, but the market sector is risky. (Brendan McDermid/Reuters/File)
Biotech stocks are the market's breakout stars
It's not a corner of the market that I follow very closely but I am blown away by the action in the biotech sector. I want to show you the $IBB ETF, an index fund that owns 119 biotech stocks, on a monthly chart to get the scope of we're talking about here (click to embiggen):
No need to draw any special lines - this one is as clear as a bell.
I did a little bit of buying this morning and I intend to add on pullbacks so long as she holds above the breakout.
The upside here is that large pharmas will continue to acquire these companies so long as their own R&D departments are starving. They have tons of cash and a burning desire to add pipeline - which makes almost every publicly-traded biotech a target for someone.
The risk here is that IBB has a very concentrated portfolio, the top ten holdings (AMGN, ALXN, CELG, GILD etc) make up 55% of the fund. There is also the risk that these companies merge with one another which would add to the concentration - as an example, Pharmasset (VRUS) was bought by Gilead (GILD) - and both are top ten holdings.
This is all very bullish action but investors with a weak risk tolerance need to be careful of course - this ain't your daddy's healthcare index fund.
The European Union flag flutters in the wind at the Acropolis Hill, in Athens in this file photo. Europe created a program called EFSF (European Financial Stability Facility) to help sovereign debt issuers and Euro Zone banks cope with the ratings agency cuts, but yesterday S&P downgraded the fund itself. (Petros Giannakouris/AP)
S&P downgrades the Eurozone bailout fund
In case you stopped keeping score:
The beleaguered nations of Europe created a program called EFSF (European Financial Stability Facility) to help sovereign debt issuers and Euro Zone banks cope with the ratings agency cuts to their debt ratings and rising interest rates they'd be forced to pay on their bond issuance.
And yesterday Standard & Poors downgraded the EFSF itself.
From the Financial Times:
Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor.
S&P lowered the European Financial Stability Facility’s rating to AA+, following its decision on Friday to remove the triple-A ratings of France and Austria, two of the find’s guarantors.
The EFSF relies on the triple-A ratings of its guarantors to raise cash in debt markets, which it then lends to stricken eurozone governments at a small mark-up. France and Austria account for some €180bn of the credit guarantees underlining the fund, created after the first Greek bailout in May 2010 and supposed to serve as a firewall sealing the eurozone’s core economies from the crisis.
But here's the punchline - European stocks are up this morning overseas as are US stock futures (as of 3:30 am), proving my theory that our markets are no longer capable of surprise at most Euro-related headlines. We got better than expected data from China and that's really all the market cares about now.
Bruce Springsteen, left, joins lead singer Brian Fallon of the band The Gaslight Anthem on stage at Convention Hall in Asbury Park, N.J in December. Springsteen. whose music has long focused on economic inequality, has a new album coming out soon. (Mark R. Sullivan/AP/Home News Tribune/File)
Bruce Springsteen, Occupier
I'm one of those people who can appreciate the music for the music and not get too excited or upset by the message if I don't agree with it. That's why I have a record collection that ranges from Rage Against the Machine (Leftist anarchists) to Rush (dyed-in-the-wool Objectivists - they're like Ayn Rand with percussion).
We'll see how Bruce Springsteen's boomer fan base, many of whom have done quite well for themselves since the late 1970s, cottons to his forthcoming release, said to be an economic unfairness rabble-rouser of an album...
From the Huffington Post:
The Boss has your back.
Bruce Springsteen, the blue collar poet laureate who has spent much of his forty year career singing about and for the working class men and women he grew up with in New Jersey, is said to have recorded a new album with the E Street Band that focuses squarely on the hard times being felt nationwide.
"He gets into economic justice quite a bit," a source with knowledge of the upcoming album told The Hollywood Reporter. "It's very rock'n' roll. He feels it's the angriest album he's ever made. Bear in mind, though, that [Springsteen] wrote and recorded the majority of the album before the Occupy movements started, so he's not just setting headlines to music."
Though he has not played an active part in the protests that broke out last fall, Springsteen has long emphasized the struggle for economic fairness in his songs.
I'll probably buy it.
The 7,000 pound statue called 'Charging Bull,' a reference to the 'bulls' or optimists on nearby Wall Street, in New York's financial district. It may seem obvious, but according to Brown, many traders lose sight of the importance of picking good stocks. (Melanie Stetson Freeman/The Christian Science Monitor/File)
Success in the markets means picking the best stocks
My friend Joe Fahmy is one of the best traders I've ever met.
Schooled at the side of the legendary Mark Minervini, Fahmy's style is both momentum-driven and risk averse at the same time. He trades when the market is healthy and bides his time doing research when the market is sick. And he is a Big Game Hunter - he's looking to bag elephants and find stocks to trade that have the ability to go up exponentially ($AAPL, $HANS, $NFLX, $ISRG etc), not 5 or 10%.
Joe is doing his first ever full-day seminar in NYC on March 3rd. Barry Ritholtz is speaking there and I am drinking free ginger ale in the audience. He is also doing one in LA. Go here to learn more about it.
Joe and I had a great conversation over sushi the other day and I asked him to expand on his philosophy for a series of three blog posts. In this post, we talk about why good trading begins with good stock selection more than anything else:
Josh: Your concept that most investors fail because they start off not knowing where to look for winners is very powerful, could you expand on that?
Joe Fahmy: When the head coach of an NFL team has the 14th pick in the draft, the media always asks him: "Who are you going to pick?" The coach usually says: "The best player available." In the stock market, we have roughly 6,000 stocks to choose from (3,000 in the NYSE and 3,000 in the NASDAQ). The problem is that most investors do not choose "the best stocks available."
The biggest mistake investors make right off the bat is poor stock selection. To continue with the sports analogy, if you randomly draft 5 football players from LSU or 5 players from The Yeshiva University, don't you have a higher probability of finding a better player from the LSU pool of athletes? The same goes for the stock market. At least give yourself a shot by starting with a quality group of stocks. The problem is that most people don't know what to look for because they haven't studied the big winners throughout history. Therefore, they settle for poor quality stocks that have low probabilities of outperforming the market.
My goal is not to produce results that are simply "in line" with the market. My goal is to achieve superior returns. Screening for stocks that match the characteristics of the greatest winning stocks in history is a great way to narrow the field of 6,000 down to a solid group of names. This is a major topic that I cover in my seminar because it can greatly improve your chances of selecting a potential big winner.
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Stay tuned for more.
Trader Gregory Rowe works on the floor of the New York Stock Exchange in this file photo. According to Brown, stocks have been rallying since Christmas, but investors are opting out. (Richard Drew/AP/File)
Stock prices rally, but investors drop out
It is unbelievable how much investors seems to despise the stock market here at the start of the year. The first week of January is typically a time of inflows and optimism - of signing gym membership contracts and plowing that year-end bonus right into the ole' brokerage account.
Not this year. Stock prices have been rallying since just before Christmas but investors want no part of it so far. ICI is reporting stock fund outflows of more than $9 billion for the week ended January 4th...
Equity funds had estimated outflows of $9.35 billion for the week, compared to estimated outflows of $5.10 billion in the previous week. Domestic equity funds had estimated outflows of $7.06 billion, while estimated outflows from foreign equity funds were $2.29 billion.
Should the S&P truly (and finally) breakout, expect a hard reverse in this data. People change their minds very quickly when fear of loss is replaced by fear of not keeping up with everyone else.
Republican presidential candidate, former Utah Gov. Jon Huntsman speaks at a town hall meeting at Keene State College in Keene, N.H. In a recent op-ed, Huntsman criticizes the Wall Street bailouts and proposes a breakup of the nations six largest financial institutions. (Evan Vucci/AP)
Jon Huntsman is right about Wall Street
Mitt Romney is leading but his Wall Street policies lie somewhere between status quo proponent and Big Bank apologist.
His fellow candidate Jon Huntsman penned an op-ed for Fox News that's been getting a lot of attention as it makes its way around the web - because he is the ONLY candidate talking about the fact that we've made our Too Big To Fail banks even Too Biggier.
In 2008, with the nation’s economy in crisis, Washington and Wall Street offered American taxpayers a Sophie’s Choice: spend hundreds of billions of dollars to save big banks from failure, or witness the collapse of our financial system and irreparable economic harm.
This was not only a betrayal of the public’s trust; it was also a betrayal of our free market system, which only works when every business plays by the same rules.
Taxpayers were promised those bailouts would be a one-time, emergency measure. Yet today, we can already see the outlines of the next financial crisis and bailouts.
The six largest financial institutions are significantly bigger than they were in 2008, having been encouraged to snap up Bear Stearns and other competitors at bargain prices.
These banks now have assets worth over 66% of gross domestic product – at least $9.4 trillion – up from 20% of GDP in the 1990s.
Huntsman's solution is to break them up.
Now obviously Jon can't win, at least not in this cycle. The hardcore in the party are convinced that he's been turned - either by the Chinese, with whom he lived as ambassador or by Obama himself, the man who sent him there.
But the irony is that Jon may well be the most qualified to actually run the country. He's level headed, has run a state as Governor, is worldly and forward-thinking and knows how to do business in a global economy. So of course, he's running neck-and-neck with a can of stewed tomatoes in the back of the GOP pack.
Oh well.
A bird prepares to drop money into a piggy bank in this file photo. Brown argues that in order to compete in the markets, mutual funds will have to become riskier and more interesting. (Muhammed Muheisen/AP/File)
A brave new mutual fund
If the mutual fund industry is to survive in anything even remotely like its present form, it's going to have to get tough and creative. Launching another hundred index-huggers every year simply won't do it, especially with the internal expense ratios and tendency toward mean reversion that make virtually all mutual funds inferior to their passive index ETF counterparts.
But the Gabelli Funds people are stepping up to the plate, check this out...
From Investment News:
Gamco Investors Inc. is going high conviction with its newest fund, the Gabelli Focus Five Fund (GWSAX), intending to put up to half its chips on just five stocks.
“It's our five very best ideas,” said Dan Miller, the fund's portfolio manager. The fund will invest about 10% of assets in each company, with the rest of the fund in anywhere from 10 to 20 stocks Mr. Miller calls “really good ideas.”
The fund is based on Gamco's quarterly research report, “The Focus Five,” which has been published since 2006. Mr. Miller has spearheaded the report since its inception. Each quarter, the report lists five companies determined to be undervalued and have near-term catalysts to spur appreciation.
It's not the first focused fund, of course, but it is a new entrant in a category that has grown stale with Ken Heebner (CGM Focused Fund) wannabes.
The plan is to have 50% of the of the fund be in their Focus Five names (which will be stocks like Madison Square Garden ($MSG) that they believe to absolute homeruns on a valuation basis). That's pretty courageous and I like it. Whether or not it will work is another story, but here's something on the Gabelli Focus Five track record...
Since it was launched, the report's picks have tripled the return of the S&P 500, when measured quarterly. Even though the report's returns are measured by five new stocks every quarter, Mr. Miller doesn't expect that much turnover in the fund's top five holdings. “We're not going to change our minds overnight,” he said.
I'm sure we'll be hearing more as the fund comes to market.
A trader works on the floor of the New York Stock Exchange January 4, 2012. Brown argues that the increased speed and effectiveness with which we process raw data will have a positive effect on investing. (Brendan McDermid/Reuters)
The 'Moneyball' effect hits the markets
Run, don't walk, to check out Dennis K. Berman's latest column at the Journal about about how Big Data will be impacting companies large and small in 2012.
Our collective ability to process raw data from disparate sources has gotten faster and meaner in a hurry, and this has major implications for almost any vertical you could dream of...
Computer systems are now becoming powerful enough, and subtle enough, to help us reduce human biases from our decision-making. And this is a key: They can do it in real-time. Inevitably, that "objective observer" will be a kind of organic, evolving database.
These systems can now chew through billions of bits of data, analyze them via self-learning algorithms, and package the insights for immediate use. Neither we nor the computers are perfect, but in tandem, we might neutralize our biased, intuitive failings when we price a car, prescribe a medicine, or deploy a sales force. This is playing "Moneyball" at life.
I used to trade the stocks that are involved in the trend (Tibco - $TIBX - has been a favorite story of mine for years). They've been winners by and large but are subject to the same market pressures as everything else - which could represent opportunity.
Check out Berman's piece now and get excited - this trend could be another powerful wave that boosts productivity, affords us investing opportunities and makes the world a better place. Nice to see quants working somewhere outside of finance
In this file photo, Federal Reserve Chairman Ben Bernanke listens to a question during a town hall meeting for soldiers and their families in El Paso, TX. The Federal Reserve has unveiled a plan to be more transparent, a policy that many economists think will only create more confusion in the financial markets. (Rudy Gutierrez/AP/El Paso Times/File)
The Fed's new openness policy will create confusion, not clarity
UBS economists Maury Harris and Drew Matus address the new "openness" of the Fed and their desire to become more transparent with interest rate actions. The concept gets a thumbs down on the grounds that it will probably be yet another noisy, misleading thing to disrupt markets:
More on Fed’s communications policy. In addition to the new estimates the Fed also noted that it would release “[A]n accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.” This adjustment to Fed communications is unlikely to be the last. The minutes show that “[a] number of participants suggested further enhancements to the SEP; the Chairman asked the subcommittee to explore such enhancements over coming months.”
We believe Fed officials publishing their expectations for the timing of the first rate increase could increase market volatility as differences between the members’ economic forecasts and actual figures that do not impact the projected policy path may confuse market participants. The Fed acknowledges these risks but views these concerns as “manageable.” We view the step as making the Fed more transparent while not doing much to improve clarity.
Elsewhere, this new transparency is being likened to a form of QE3 in disguise says UniCredit and JPMorgan (via Pedro da Costa at Reuters).
This 2010 file photo shows the National Debt Clock in New York. A new year doesn't mean that the world's greatest financial problems, including deep government debt, will disappear, Brown argues. (Mark Lennihan/AP/File)
For the economy, a new year with old problems
How was your vacation? Spend some time with the family? Catch up on that Homeland show everyone's obsessed with like I did?
Good.
But while the calendar has flipped from 2011 to 2012, there are some realities that do not simply resolve themselves or show themselves to the door by virtue of the fact that a new year has begun. Here's one such unresolved thing (via Bloomberg):
Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.
Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.
But US stock futures are flying this morning, up over 200 Dow points at last glance, on better than expected consumer and manufacturing data out of China. We've got an ISM number coming this morning as well.
Welcome to 2012. It's like 2011, only younger. Buckle up.
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