Global Market Commentary

April 01, 2016

When Too Much News Can Confuse

1.  GDP grew by 2.4 percent in 2015 — ignore flawed data, including GDPNow. Fourth-quarter 2015 GDP growth for the U.S. was just revised up to 1.4 percent annualized from an initial reading of 0.7 percent.  That brings growth for the year as a whole to 2.4 percent.  A host of talking heads, from financial journalists to brokers, are looking for dramatic news bites that will create fear and agitation in their readers and clients.  The Atlanta Fed’s “GDPNow” tracker provides a ready stream of such news.  As a reliable indicator of actual GDP growth, it is simply useless, as its own track record attests.  It is a case study of how investors should make use of such questionable data sources — disregarding them as indicators of underlying economic reality, but paying attention to them insofar as they reveal something about the psychology of other market participants.  But most importantly, investors should not let such sensationalistic news flows cloud their judgment, or make them anxious and agitated. 

2.  China stabilization confounds the bears.  Bears betting that China’s economy would crash and take the global economy with it, that the Yuan would be devalued, and that the People’s Bank of China would be crushed by foreign-exchange outflows, have been confounded.  The Chinese economy has continued to evade a hard landing; foreign exchange outflows have been stanched; and no big Yuan devaluation has appeared, with Bank officials communicating much more openly to global market participants about their policy intentions.  With a potential financial crisis taking shape in three to five years, the present stabilization is not an “all clear” for Chinese risk assets — but for those who want to dip their toes in the waters of Chinese stocks, this could be a way to play an emerging-market recovery in 2016.

3.  Biotech beaten down?  Not enough to be cheap.  Biotech is down big from its peak last year, with some indices falling back almost two-thirds of the bull run since the 2009 lows, and many stocks having fallen much more.  However, that doesn’t mean it’s cheap.  On a fundamental basis, biotechs are still very expensive — especially the small- and mid-sized companies.  Thus it makes no sense for investors to treat biotech as they would treat sectors or markets that have truly been beaten down below valuation levels supported by their fundamentals.  Biotech stocks trade on momentum and psychology; momentum looks unlikely to return, particularly in the face of market psychology shaped by an election campaign in which it’s “open season” on drug companies.  Even established and profitable biotechs may well languish as the rest of the sector labors under this negative psychology, so for now, we think investors should not be tempted to dip their toes.  

4.  “Off-label” uses may be a boon for pharma companies.  Many investors may not be aware that although drug companies can market their drugs only for specific indications approved by the Food and Drug Administration, doctors are allowed to prescribe them for any condition they wish.  Many of these “off-label” uses turn out to be significant — but until now the regulatory pathway to get official recognition from the FDA and official approval to promote drugs for these other uses has been expensive and arduous — even when the drugs have been proven safe.  A recent settlement by the FDA may indicate that a change is coming, and a new, less onerous regulatory process may be developed.  When and if this happens, it will be a boon for most pharma companies, since overall, nearly 20 percent of prescriptions written are for off-label uses.  We’ll watch the process carefully, and keep readers informed as it develops.  

5.  Market summary.  In spite of Main Street’s recession/deflation fears, we take a clear message from central bankers worldwide that inflation is the real risk — as countries around the world whose debts are holding back growth realize that inflation is the only way that their debt burden will be relieved.  Wise investors are already looking for ways to defend themselves from inflation: for example, gold, oil, and inflation-protected bonds.  We prefer to leave the over-crowded trades (long the U.S. Dollar; short emerging-market currencies, the Euro, and the Yen; short oil) and enter the trades that the crowd is still disregarding (particularly gold, and Brazilian stocks and currency with a two-year horizon or longer).  U.S. stocks are OK, but not exciting; we would favor cheap growth stocks of companies with strong balance sheets. 

March 31, 2016 Premium Global Market Commentary 

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