Another Idiotic Advice From Jim Cramer

IBB2The chart of (IBB) is from March 20th. One can easily argue that Biotech is the most overpriced and highly speculative sector within the overall stock market structure today. That doesn’t bother Jim Cramer — If You’re Not in Biotech for the Long Haul, Hit the Road  I’ll give him one thing, Mr. Cramer has perfect timing for identifying the worst investments out there.

Here is what I said about Biotech on March 20th, the day it arguable topped out. Did Biotech (IBB) Top Out TODAY?

The Nasdaq hit an Intraday high of 5,132 on March 10th, 2000, then promptly turned around and proceeded to collapse 80%. Is it possible that the Biotech Index (IBB) did the same thing exactly 15 years later?

Not only is it possible, it is highly probable. Back in 2000 it was Pets.com and NortelNetworks. Today, it is hundreds of impressive sounding “Genome” Biotech names that have

  • A few Ph.D’s on their payroll.
  • An impressive idea.
  • A white paper on how their new generation drug will change the world and make Trillions….a  paper that maybe 10 people on this Earth can fully understand.
  • No way in hell of making a cent or getting their drug to the market.
  • A whole bunch of stupid investors that believe they will get rich.

Make no mistake, Biotech is an a giant bubble that will pop. And it’s not only Biotech. We are witnessing the same thing in the Silicon Valley’s “Mark Cuban” illiquidity bubble and even on the Nasdaq. Alibaba deal values Snapchat at $15 billion Do I really need to say anything when an app with no revenue is valued at $15 Billion by a company that is in its own spectacular overvaluation bubble? I hope note.

Anyway, why do I believe we might have hit the top in Biotech (IBB) today? Today’s blow off (gap) open and some of my other work within the sector.  That is to say, don’t be surprised if we get a massive sell-off in Biotech over the next few months.

Z31

Another Idiotic Advice From Jim Cramer  Google

Why Marc Faber Believes You Should Buy Gold & Short Biotech, Social Media

A very good interview with Marc Faber. Definitely worth 5 minutes of your time. Why? Well, Marc believes the FED is starting to lose control, the US economy is rolling over and the stock market is massively overpriced. Particularly sectors such as Biotech (IBB) and Social Media (SOCL). He suggests shorting them through ETF’s. And the good news? According to Marc, gold is about to surge as it becomes the ultimate hedge against today’s currency wars. I mostly agree.

Z30

Why Marc Faber Believes You Should Buy Gold & Short Biotech, Social Media Google

Is It Time To Short Biotech (IBB)?

IBB

Since 2009 bottom or over the last 6 years Biotech ETF (IBB) has been one of the best performing financial instruments out there. Up +310% Vs the Dow +177%. The question is…..

Will this outperformance continue or are you better off shorting the index?

I would be the first to admit that the long-term technical picture for IBB remains incredibly bullish. Despite its fundamental overvaluation and high-risk investment opportunities typically associated with this ETF. With that in mind, at least the short-term picture is starting to deteriorate, demanding our further attention. 

For instance, the spike lower into February 4th low suggests that the index might be ready to go lower. Not that it will, that it might. Here is the bottom line. Whether you are long the index or thinking about going short, pay particularly close attention to IBB over the next 2-8 weeks. Should this ETF break below February lows, we might see a very quickly re-test of October lows (20% decline). And that wouldn’t be a bad short-term move on the short side. So, pay close attention.

z32

Is It Time To Short Biotech (IBB)? Google

Warning: Biotech Is In A Giant Bubble

Josh Brown, the CEO of Ritholtz Wealth Management provides us with a superb analysis of the Biotech section (see full article below). There is  very little I can add on the valuation and the fundamental side.  He is right on the money. My only contribution comes in the form of WHEN. 

Or….when will the Biotech Bubble blow sky high.

Based on our mathematical and timing work that time is at hand. Even thought the Biotechnology sector escaped the bear market of 2007-2009 relatively unscathed, I don’t believe that will be case this time around. Quite the opposite. I firmly believe that the Biotech sector will lead the market lower due to its relative overvaluation and massive speculation within the sector. In fact, you can equate it to the Tech Bubble of 2000 or the Real Estate/Credit Bubble of 2007.  

In short, the Biotech sector (in conjunction with the Tech sector) will lead the bear market of 2014-2017 lower. That is exactly what we have seen over the last couple of days. If you would be interested in learning when the bear market of 2014-2017 will start (to the day) and it’s internal composition, please Click Here.  

Did you enjoy this article? If so, please share our blog with your friends as we try to get traction. Gratitude!!!


Click here to subscribe to my mailing list

 

Warning: Biotech Is In Giant Bubble  Google

biotech bubble investwithalex

The Exchange: Yes, biotech is a bubble

Josh Brown is the CEO of Ritholtz Wealth Management. He writes daily at the widely read Reformed Broker Blog. His first book, Backstage Wall Street, is a brutally honest look at the investment business. Follow Josh’s smart and hilarious Twitter Feed >@ReformedBroker.

 

Let’s start here with George Soros, from a speech he delivered in June 2010:

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.

It’s likely that you’ve been exposed to the recent market conversation/freak-out du jour – “Is biotech a bubble?” If you haven’t yet, you will be, as TV producers scour the financial web for things to make segments about. Either way, more and more people are going to weigh in – many of them completely unqualified – and they’ll cloud the issue even further. One of the things I try to do is cut through the clutter for readers and present them with a good framework with which to think about a given topic.

Everyone, myself included, can and will get things wrong in the markets. The goal should be to get less things wrong as time goes on and to avoid getting things wrong for the wrong reasons – easier said than done but a highly attainable goal worthy of pursuit.

No one has all the answers, but many people don’t even have the right questions to begin with. I think having the right questions is an underrated starting point.

Back to the biotech sector. Let’s start with the positives (many of which have been cited by Elliot Turner): Time-to-market for biotech drugs has been dramatically shortened thanks to technology and the maturation of these companies’ management teams. In addition, new drug FDA approval has exploded – according to Bloomberg BusinessWeek, 2013 was “a year of 27 clearances at the FDA that included several under a new ‘breakthrough therapy’ designation prioritizing reviews of promising medicines. That followed a record 2012 in which 39 novel drugs were approved, the most in 15 years.” Also, aging populations mean almost guaranteed growth for the sector’s products while the dwindling R&D efforts and pipelines of traditional pharma companies mean a steady drumbeat of takeovers as far as the eye can see.

Okay, we can acknowledge the bull case with a straight face and no fingers crossed behind our backs. It’s legit. “But is it already more than priced in?” is the question.

Is the biotech sector in a bubble?

Yes. Full stop.

Below are the questions I’ve used to arrive at this answer (with some supporting data / links). You can ask them of yourself and possibly come up with a different answer:

Is there a divine origin story for the rally?

How it all began: From 2009 through 2011 there was no public market capital for anything even remotely risky and so young biotech companies were forced to sell out to larger drug companies on the private market. This was fine with them as valuations on the private market were actually much better – my friend Adam Feuerstein from TheStreet.com explained to me that if a biotech was going public circa 2011, it meant their science wasn’t good enough for an acquisition exit.

Meanwhile, as sluggish global growth persisted, investors began to favor secular growth stories in the stock market – companies that didn’t need GDP growth to accelerate. This favored Big Biotech, your Celgenes (CELG) and Amgens (AMGN) and the like. Unfortunately, there weren’t enough reputable biotech franchises to go around thanks to a handful of mega-mergers (buyouts of Genzyme, Genentech, Pharmasset, Amylin, Human Genome, Illumina etc) and the aforementioned dearth of public offerings. Institutions took the handful of good-sized biotech stocks that were leftover to all-time highs. Sure, fundamentals are important, but scarcity is even more important when the fever strikes.

Have the gains been astronomical? 

Yes. The S&P 500′s biotech stocks are up more than 400% from the March 2009 bottom versus a gain of roughly 180% for the rest of the market. And this does not include the hundreds of small- and mid-cap biotechs that have gone up even more. The Nasdaq Biotechnology Index, which does include some of these smaller names, is up 14% year-to-date or a sevenfold return over the broader market. Last year it was up 66% or double the S&P 500′s return, which is to say the gains are accelerating in both absolute and relative terms.

Are there egregious examples of unbridled enthusiasm for lottery-esque opportunities?

 

There’s a biotech company called Intercept Pharmaceuticals (ICPT) that announced some positive data from a drug trial in January of this year and promptly exploded by 281%. The stock is now up some 500% year-to-date and every aggressive trader on earth has it on their screen. In addition, they’ve driven up dozens of other similar companies in the hopes of being in “the next ICPT”. Stop me if you’ve heard this one before from other bubbles in other sectors. Actually, don’t stop me, I’m not done.

Outrageous gains are not limited to smaller biotech stocks. Gilead Sciences (GILD) bought out Pharmasset for $11 billion to get their hands on Solvaldi, a hepatitis C drug. Gilead’s stock price has tripled in the less than three years following that acquisition with $85 billion in market value added!  Sovaldi is hitting the market this year and is expected to generate $2.5 billion in sales annually. Awesome – but $85 billion in additional market cap awesome? To be clear, Gilead has tacked on the market cap of Goldman Sachs, Union Pacific or United Health Group in two-and-a-half years.

Is capital flowing to the sector like ambrosia and honey from the mythological Horn of Plenty? 

This year, so far, there have been roughly 50 initial public offerings and half of those have been early-stage biotech companies. The average gain for these new biotech offerings through the middle of March is over 50%. Anyone with a protein compound under a microscope and a clean suit can go public right now. You actually might not even need the compound, just the idea for one.

Also, the deal activity is a runaway train. According to Pricewaterhouse Coopers, last quarter was one for the ages: M&A in the life sciences sector spiked 24% and 31 companies were bought for a total of $37 billion.

Have valuations lost all connection with reality?

With a few exceptions, yes – broadly speaking and throughout the sector, they absolutely have. Without getting into the weeds on a case-by-case basis (of course we can always find exceptions), here’s the big picture viaBrendan Conway of Barron’s:

The price-earnings ratio of the SPDR S&P Biotech ETF is a rich 33 times trailing earnings, versus the S&P 500′s 17, says Morningstar. But Morningstar removes unprofitable firms from the tally. Add them back in and tally the losses against the prices, and the P/E multiple would be a negative 19, according to ETF.com’s Matt Hougan–if such a thing were possible.

I could cite some really extreme examples and then a bull could find some cheaper examples to offset them. So let’s think about the averages here. I’ll acknowledge that, individually, any of the companies I’m lumping in as bubbly could be working on a world-changing drug that more than justifies its current lofty price. Unfortunately, this will not be the case for most of them.

Are these extreme changes in valuation wreaking havoc and bringing distortion to other parts of the market? 

My friend Jon Krinsky informally crunched the numbers this weekend and shared with me that, since 2012, biotech stocks began a full-scale invasion and colonization of the health care sector. He looked at the percentage of biotech market cap weighting in the health care sector SPDR (XLV) by year and then compared health care stocks with their constituent biotechs:

    % weighting of XLV that biotech makes up

    March 2010 – 11.62%
    March 2011 – 9.6%
    March 2012 – 10.65%
    March 2013 – 14.44%
    March 2014 – 19%

 

Are we saying crazy stuff to make ourselves feel better about the frenzy?

A little, if we’re going to be honest.  Here’s someone referencing Bespoke Investment Group data earlier this month saying it’s not so crazy because biotech hasn’t yet eclipsed the dot com bubble of 2000 or the home building bubble of 2005:

the 361% gain in the Nasdaq Biotechnology Index NBI  since hitting a trough — along with the rest of the market — in March 2009, pales in comparison with some other recent bubbles.

 

For one, the Nasdaq 100 made a leap of 1,118% during the period from December 1994 to March 2000 that included the dot-com bubble. That’s over a period of 1,935 days, only slightly longer than the current 1,822-day biotech rally.

There’s at least one more bubble to examine, the note says. The housing runup of the early 2000s brought with it an 835% gain for homebuilders in the S&P 1,500, Bespoke points out. That rally was similar in length to the dot-com bubble, lasting 1,954 days.

There are other examples of excuse-making for the sector – too many to cover here. Lots of people are making money and no one wants it to end, so I get it. I’ve been guilty of this kind of rationalization in the past as well.

Josh, are you just being a hater?

This is the last question I’ll rhetorically ask, and it should always be a question we ask ourselves when discussing market trends. “How much of my reticence to accept the prevailing wisdom is due to my having missed out?” In this case, it is inapplicable. We’ve been invested in the biotech space for years. I’ve been an unabashed biotech bull in public ever since I’ve been in the public eye. Here’s me in May of 2012 calling biotechs a stealth bull market, as one example. Even now, we are highly exposed to the health care sector which is itself laden with these stocks. I’m not hating, just keeping it real.

One last thing I will say – yes it’s a bubble, but so what? Greenspan coined the phrase “Irrational Exuberance” to describe the stock market in 1996 and it took four years and hundreds of percentage points of additional upside before it mattered. What am I, the Bubble Police? Don’t let my calling it what it is affect your investing. If you’re disciplined and think you’re a big boy or girl and know how to get out in time, knock yourself out. If you’re playing small, go for it, what do I care?

But if and when the hot money moves on and these stocks come hurtling back down toward the Earth’s atmosphere, don’t be mad if I say “Told ya so.”

Nasdaq and Biotech Breakdown….What’s Next?

biotech chart investwithalex

In my weekly update to my premium subscriber I spent a considerable amount of time talking about the Nasdaq and the iShares Nasdaq Biotechnology (IBB). Today, even though the Dow is down slightly, the Nasdaq (-1.6%) and the IBB (-3.5%) continue to collapse. While I cannot share my exact findings (available to premium subscribers only), this sort of market action is indicative of a major turning point.

Is this a simple correction or a major turning point?

While both indices are oversold and due for a short term bounce, long term picture remains very clear. Our mathematical and timing work continues to indicate that the US Equity markets will go through a severe bear market between 2014-2017. Has it started already? If you would be interested in learning exactly when the bear market will start (to the day) and it’s internal composition please Click Here.   

Did you enjoy this article? If so, please share our blog with your friends as we try to get traction. Gratitude!!!


Click here to subscribe to my mailing list

 

Nasdaq and Biotech Breakdown….What’s Next Google

Warning: Which Sector Will Lead The Upcoming Bear Market Down?

IBB

Which industry Index will be the first to go in the upcoming bear market. Tech, Internet, Biotech, etc..? My bet is on Biotech as per today’s market action. Even though S&P is hitting an intraday all time high, Nasdaq’s Biotech index is breaking down as we speak. In fact, some of the “short biotech stocks” I outlined on this blog last week are down 10% in just 3 days.This works very well with our overall premise of 2014-2017 Bear Market. that is scheduled to start shortly. If you would like to know the exact date of bear market start as well as it’s internal structure, please Click Here.   

Did you enjoy this article? If so, please share our blog with your friends as we try to get traction. Gratitude!!!


Click here to subscribe to my mailing list

Warning: Which Sector Will Lead The Upcoming Bear Market Down? Google