When Reality Sets In

Posted On Jan 22, 2015 By Dave Gonigam

  How far we’ve come in three years…


We’ll give you a moment for your gag reflex to recover…

In early 2012, conventional wisdom had it that central bankers in general and the Federal Reserve in particular could do no wrong.

No more. On Tuesday, we mentioned a Financial Times headline we spotted: “Gold Rally Due as Central Banks Add Risk: Incompetence and Monetary Dysfunction Make Gold Look Attractive.”

Now it’s Reuters’ turn: “The Swiss currency shock has raised an awkward question many investors have been fearful of asking — what if central banks become as unpredictable and fallible as they are powerful?”

Of course, the newswire poses the question as a hypothetical… heh. But we’ll call it progress.

  2015: The year faith was lost in central bankers. That’s what’s important this morning, even if the announcement from the European Central Bank seems more urgent.

The ECB is indeed launching full-blown quantitative easing/money printing — 60 billion euros a month, about $69 billion — through September of next year. More than a trillion euros, all told.

Traders appear to be greeting the news with a collective yawn: The euro has slipped against the dollar, but not dramatically, to $1.145. Gold has barely budged at $1,296. The major U.S. stock indexes are all up about a half percent, the S&P 500 at 2,042.

Central bankers will do whatever central bankers will do. Traders will react however traders will react… and we suspect they’ll react badly and unpredictably as the year goes on.

With that as the backdrop, we cast our gaze — in search of an asset class that might look impervious to the whims of central bankers and traders alike.

The Financial Times offers up one possibility: “In a low-growth environment, biotechs are seen by investors as one of the few sectors that can deliver compelling opportunities.”

We’re tempted to dismiss such talk, coming as it does from the mainstream. But…

  Biotechs are already up 5% this month, while the broad market is down more than 1%. And that’s on top of rising 100% the last two years.

That looks like further affirmation of FDA Trader editor Paul Mampilly’s assertion last year that “we are still in the early innings of the biggest and greatest biotech bull market in history.”

  One reason — the rush to create new cancer treatments. “In 2008,” Paul explains, “spending on cancer drugs was $71 billion. By 2013 — just five years later — it soared to $91 billion. And it’s only going higher. Next year, experts estimate a 21% spike.

“And did you know the average cancer drug now costs nearly $10,000 per month? Yes, per month. That’s nearly double what it was 10 years ago. In other words, there’s a fortune to be made in breakthrough cancer drugs.”

Paul has his eye on two small companies right now. “I believe both will be bought by big pharmaceutical companies before 2015 ends,” he says. “That’s because they have the things that pharma companies are looking for: potential blockbusting cancer drugs. And the market for these drugs will be off the charts. So is the market for companies that own blockbusting drugs.”

  Another factor in play — the biotech “patent cliff” we described last year.

“Big pharmaceutical companies are desperate to acquire smaller biotechs because many of their top-selling drugs are currently losing patent protection,” says Paul. “In fact, 2015 is going to be a record year for patent expirations. And the big boys need to replace them with new drugs…

“The moment a drug loses patent protection, another company can introduce a generic form of the drug costing 80% less. And of course, people taking the more expensive version will switch over to the generic drug. So the Big Pharma companies are left with nothing.

“Wall Street analysts estimate that $44 billion of drugs being sold by pharmaceutical companies are going to lose patent in 2015.”

For Big Pharma, it’s cheaper and quicker to acquire a small firm’s potential blockbuster than to spend years and billions developing it themselves.

Which is why Paul thinks the two firms working on cancer treatments are such promising buyout bait. “I think you could make 50% in a single day if these purchases happen like I think they will. That means a $5,000 investment could almost instantly put an extra $2,500 in your pocket.”

For access to all of Paul’s FDA Trader recommendations, look here.

  Crude is sinking again — down 3% as we write, to $46.34.

“Last week, I came across by far the most bullish chart for 2015 oil prices that I have seen since the bottom fell out of the market,” writes Jody Chudley, the oil industry pro now contributing to our natural resources team including Byron King and Matt Insley.

As compelling as the chart is, the source of the chart makes it a must-see: “It came from one of the more credible voices in the business, Steven Kopits of Princeton Energy Advisors.”

Kopits advises some of the most successful oil traders anywhere, including Andrew Hall — who made $100 million every year from 2007-09 as oil raced up to $147 a barrel and crashed to $33.

“The graph,” says Jody, “illustrates the daily difference between global oil demand and supply. A positive number means daily oil supply exceeds demand. A negative number means daily oil demand exceeds supply.”

The top three lines are the mainstream forecasts from the International Energy Agency, OPEC, and the U.S. Energy Information Administration. The bottom line is from Kopits’ firm, Prienga.

“Looking backward,” Jody goes on, “all four lines show an oversupplied oil market dating back to March 2014. Looking forward, the IEA, OPEC and the EIA all believe that oversupply will continue through the end of 2015 to various degrees. As you can clearly tell from the graph, Prienga has a very different view.

“The forward-looking numbers from Kopits show the market moving dramatically into a supply shortage of over 2 million barrels per day by June 2015 and getting larger as the year goes on.

  “To say this view is different from the consensus view would be an understatement, and not a mild one,” Jody goes on.

“If accurate, the data above suggest that oil prices are going to come roaring back in the second half of 2015.”

Jody tracked down Mr. Kopits for some explanation. It comes down to…

  • Rising U.S. demand. U.S. crude consumption last month was 4.4% higher than a year earlier
  • Falling U.S. production. Last week, 74 oil and gas rigs went out of service, bringing the active total down to 1,676. That’s the lowest since November 2010.

The mainstream forecasts simply don’t take these factors into account, says Jody: “I have no doubt that the IEA, the EIA and OPEC will be both ratcheting down their supply growth estimates and ratcheting up their demand growth estimates in the coming months.

“The short term could be tough for investors with exposure to energy stocks,” he concludes, “but six-12 months from now, things are going to look a whole lot brighter.”

  Standard & Poor’s will cough up $1.37 billion as penance for having the temerity to downgrade Uncle Sam’s debt from AAA in 2011.

No, you won’t see it characterized that way in the mainstream. There, you’ll see the Justice Department is holding S&P accountable for putting its AAA blessing on crappy subprime mortgages doomed to failure back in the day.

It’s not a done deal yet, although it’s been confirmed a separate case brought by the Securities and Exchange Commission is being settled for $80 million.

Of course S&P was not alone among the Big Three rating agencies in giving top ratings to garbage investments. Moody’s and Fitch did it too. But S&P does stand alone in paying a penalty.

S&P also stood alone downgrading U.S. Treasury debt in August 2011 after a last-minute deal in Washington to raise the debt ceiling.

Just sayin’…

  Imagine mining gold from… your local sewage treatment plant.

“Metals have long been known to concentrate in sewage, which mixes toilet water with effluent from industrial manufacturing, storm runoff and anything else flushed down the drain,” explains a report from New Scientist magazine. “It’s a headache for sewage utilities that must cope with toxic metals lacing wastewater headed for streams or sludge that might otherwise be spread on farm fields.”

Researchers from Arizona State University gathered samples of sewage sludge — the goo left behind after treating sewage — from all over the country. Then they measured the metal content.

Turns out a city of 1 million people generates up to $13 million in metals every year… including $2.6 million in gold and silver.

That’s not enough to tank the precious metals market… nor is it feasible to extract every last speck of metal. But the city of Suwa, Japan, is already collecting some 70 ounces from every metric ton of ash left from burning sludge.

Hmmm… As New Scientist confirms, the sludge is “more gold-rich than the ore in many mines.”

  “Finally, it makes sense!” writes the alert reader who brought the sewage-into-gold story to our attention. “We provide the poop and the Fed provides the paper!

“Given the massive short positions that the big banks have in silver, I wonder if JPMorgan Chase will find a way to short sewage sludge?”

  “If the jab at capital gains treatment gets any traction,” a reader writes after the State of the Union speech, “that will likely take a lot of wind out of the skilled minions ‘beavering away’ in Silicon Valley.

“In my previous startups, we all worked our tails not for the adventure, nor because we are bright minds, but because we had a shot at significant capital gains! Duh.”

  “My favorite National Lampoon (fake) letter,” writes a reader after one of our more, um, peculiar episodes yesterday, “came at the time when Ford was marketing their Grenada sedan as a look-alike to a Mercedes-Benz.

“The letter said, in effect: ‘Yeah, your Granada looks like my Mercedes, but try getting laid because you own one!’

“Forty years later, it still makes me laugh!”

The 5: Hmmm… Somebody spotted a well-preserved Granada in a parking lot as recently as 2004…


[Photo by Wikimedia Commons user Morven]

To us, it fails both the Mercedes look-alike test and the chick magnet test. But what do we know…

Best regards,

Dave Gonigam
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