Buying Shares Today
The Stay Invested portfolio was: N/A
Overall GAIN/LOSS YTD: N/A
Our benchmark index, the S&P 500 is DOWN Year-To-Date (1.38%)
It Is a Bear Market
In previous posts I've commented that Bull Markets don't have an expiration date, Bear Markets do. Bull markets can go on for years, but bear markets tend to last from as little as 3 months to just over a year.
I don't think that we actually found the bottom in the stock market after Decembers wild ride as some analysts thought we did. In fact I was very suspicious of the 1,000 point rally, it felt more like an over reaction to the previous days over reaction 600 point decline. A bear market is a condition in which stock prices fall 20 percent or more from recent highs amid widespread pessimism and negative investor sentiment. We got that and the sentiment is only getting worse. Apple's pre-announcement of a bad quarter told most of the story showing that the weakness in the global economy is at a macro level that will impact almost every sector. But I think there's a shining spot to stay invested in.
Oil and the stock market have been tracking each other like Siamese twins. One would think that lower oil prices benefit businesses by lowering cost, but the stock market sees it the opposite way. Increased demand for oil raises oil prices and usually reduces supply, which indicates that the economy is strong and growing. Oil prices has been declining with record supply coming from the U.S. The reversal in oil, the decline in transports and the weakness in the PMI are all foretelling more damage to come. Results from financial data firm IHS Markit showed the U.S. manufacturing PMI (Purchasing Managers Index) was 53.8 in December, falling nearly 2 points from 55.3 in November. This represents a 15-month low for the index, while job creation also slowed to an 18-month low. Any number above 50 is considered expansionary, below 50 the economy is contracting. So its not all bad news but clearly we're slowing down. Now the ten year is hovering around 2.58%, when it should be around 3%, the bond market always knows. If anyone says, we might be in for a bear market, correct them, we are in a bear market and our investing needs to reflect that concern.
For a stock picker the current environment is perfect, mainly because everything is finally going wrong. Essentially a lot of great companies are now on sale and the discounts are going to keep coming. My thinking is that with sentiment as bad as it is now we should get a full cleansing washout when the S&P 500 bounces off 2,350 a few times. 2,350 looks like the point where sentiment can't get any worse and we get a full capitulation with buyers taking over. However, if we get a significant geopolitical event or some other event that markets aren't paying attention to, all bets are off, the markets can go lower or higher.
The Fed is Part of the Problem
Okay Jay, I say you're one and done. The Fed's J. Powell is tone deaf to the economy and economist who say he's doing the right things are blind to the real data, though his words say they are focused on the 'real economy'. If the Fed is really data dependent and focused on the real economy, not the stock market, then he's done, because the weakness in the real economy is real and the markets which are a discounting machine, particularly the bond market are signalling that weakness. Remember the Fed is effectively raising rates every month when they allow assets acquired during the financial crisis to run off the balance sheet. So when they raise again at regular meetings of the FOMC its like a double barrel shotgun to the markets. Your 401K is on the other end of that blast.
That Shinning Sector
The rallies we've seen over the past year have been sector rotations where investors and algorithmic trading programs have sought yields, then growth and then safety. Now there's no place to hide, except healthcare and biotech. We don't stop spending on healthcare because of a slow down in the global economy. U.S biotech companies don't stop developing new drugs because of a trade war with China; these industries should be insulated. However, our congress will ignore the data and the macro economy and attack the last safe haven for investment. If you really want to see the U.S economy come to a screeching halt, give the stock market no reason to invest. When the money stops flowing to our capital markets, so does the world. I've been assailed for not being 'Pro-Price Protection' on drugs. I don't like seeing a single pill sell for $30 anymore than anyone else, but drug prices are not the cause or the source of escalating healthcare costs; Congress is.
Don't burn down the barn to remove the flies
All we hear from Washington politicians is how evil the drug industry is and a few carefully selected examples are trotted out as support. Those same politicians beat into us that high prices are the result of greedy drug companies that don't care about patients; and paint the entire industry in that light. That sounds great on the campaign trail, but it won't reduce your healthcare costs in any meaningful way. In fact, reducing the revenues to the drug industry would likely have the opposite effect and raise overall healthcare costs. Let's look at some facts and decidedly stop listening to politicians, who frankly have other agendas that have nothing to do with our well being. Prescription drugs represent roughly 10% of U.S healthcare expenditures, down from 12% in 2014. Congress played no role in that improvement, the director of the FDA did it. The decline is attributable to increased competition and accelerating the approval process, most of which started in 2016. And those drugs reduce hospital stays and keep people healthier which reduces overall healthcare costs in other areas. The biggest expenditures are hospital stays and doctors followed by personal healthcare choices we make as individuals. That chart above from 2015 is a bit off, hospital stays and physician services now account for 52% of costs. To dramatically reduce healthcare costs requires going after the biggest expenditures, hospitals and doctors; name a politician who will do that? Even Trump avoids the fight.
The current system of drug approval was established and regulations approved by our very own congress. Does anyone actually believe that the U.S. Congress will create anything that delivers a product or service at lower cost? While there are many problematic areas in the review and approval process, one of the most significant cost increasing elements is a part of the FDA approval process that allows for anyone to petition the FDA with concerns about a new drug application. The intent was to follow a very American ideal that anyone can petition their government. However, in the majority of cases these concerns are voiced by competing drug companies that are seeking to protect their drugs from competitors entering the market. Okay, I'm all for competition, but the FDA has never rejected one of these petitions, which can add many months and millions of dollars to the approval of a new drug. Seems like there should be an out for the FDA when they see abuse of the system. The problem with this system is that very large drug companies have a distinct advantage against the very small, innovative companies that have little cash to fight prolonged battles and in many cases can't afford additional trials or modifications that even the FDA has already determined are unnecessary. Restrict the use of these petitions and drugs will come to market faster and at lower prices. Currently the cost to develop a new drug is 10 years and $1.5 billion dollars. The cost of the drug in a perfect world is a reflection of the cost to develop the drug, the size of the market for the drug and a reasonable profit that enables the drug company to continue developing more new drugs. But we don't live in a perfect world. Aside from bad actors who raise drug prices with abandonment, we also have a distribution system in between the drug company and the patient that has outlived its usefulness. The distribution and reimbursement system must be completely revamped in order to reduce drug prices in a meaningful way. Amazon's purchase of PillPack.com is a great example of one way to disrupt and streamline the system. I think if I have to bet on who will lower drug prices first; Congress or Amazon, I'll bet on Amazon.
My point is simple, healthcare and biotech should outperform in 2019 but beware the politicians who will go after drug companies and promote a system that caps prices; but will do nothing to cap prices on hospital stays and physician services. In this environment I'm looking closely at the bio-similar segment of this sector for companies that can continue to do well amidst political attacks. Biosimilars are often less expensive and are as effective as the original drug. Biosimilar drugs are not the same as generics which are usually just re-branded versions a drug companies own drug sold at lower prices. Biosimilar companies can generate significant margins while pricing below competitors, while a generic simply reduces a companies margins.
I do not think it is time to rush into the market with new money, but a very selective stock picker can nibble and begin to build positions as prices hopefully continue to decline in the near term, setting us up for healthy gains over the course of 2019. Below are some buys I plan to make today right before the close, I'll be buying about 25% of a full position. If I plan to buy 100 shares, I'll buy just 25 shares now and wait to see if it comes down more, watching the company and the overall market together. I'll follow up with more in-depth reviews of each company.
Xylem (XYL) @ about $64.25
Nvidia (NVDA) @ about $128.75
MiX Telematics Limited (MIXT) @ about $15.10
Sony (SNE) @ about $47.36
Goldman Sachs (GS) @ about $170
BioDelivery Sciences (BDSI) @ about $3.70
Royal Caribbean Cruises (RCL) @ about $93.25
ASML Holding (ASML) @ about $148.34
Insperity (NSP) @ about $89.75
SAP (SAP) @ about $95.80
Cabot Microelectronics Corp (CCMP) @ about $88.63
Monolithic Power Systems (MPWR) @ about $108.63
Veeva Systems (VEEV) @ about $88.40
First Interstate Bank (FIBK) @ about $37
Heico (HEI) @ about $73.38
TD Ameritrade (AMTD) @ about $48.50
Visa (V) @ about $128.90
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S&P 500 declines to 2,350 or more (1-3-2019)
Healthcare and Biotech sectors outperform (1-3-2019)
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.