Global Market Comments
February 14, 2019
Fiat Lux
Featured Trade:
(WHY I’M AVOIDING PFIZER LIKE THE PLAGUE)
(PFE), (MRK), (MVS),
(THE LIQUIDITY CRISIS COMING TO A MARKET NEAR YOU),
(TLT), (TBT), (MUB), (LQD),
(TESTIMONIAL)
You would think that the company that makes Viagra would be booming with all these baby boomers around.
It’s not.
As we come into the tag ends of the Q1 earnings season, it is hard to ignore the pitiful performance put on by Pfizer (PFE). Its fourth-quarter earnings were totally overshadowed by its disappointing outlook and underperforming shares.
The 168-year-old drug maker can expect sustainable growth in some of its product franchises, such as prostate cancer drug Xtandi, blood clot medication Eliquis, metastatic breast cancer drug Ibrance, and arthritis medicine Xeljanz.
However, generic competitors against Pfizer mainstays like Pristiq, an anti-depressant drug, and Viagra are threatening to trigger a massive decline in the former’s sales. With generic companies hot on its heels, Pfizer faces incredible pressure in terms of pricing and lower gross margins.
Expiring patents known as the loss of exclusivities (LOE) are also projected to contribute to their red ink by approximately $2.6 billion. In particular, Pfizer is expected to lose exclusive rights to its blockbuster drugs Lyrica in June 2019 and Chantix in the next few years. To date, their LOEs already cost Pfizer $2.1 billion in sales in 2017 and an additional $1.8 billion in 2018.
Pfizer is doing better than its competitors. In the past 12 months, Pfizer EPS stood at $1.86, which showed a 47.16% decline year-over-year. By comparison, major competitor Merck & Co., Inc. (MRK) EPS was at $0.69, suffering from a 281.58% decline year-over-year while Novartis (NVS) faced a 38.8% decline with an EPS of $0.52.
Pfizer’s recorded annual revenues of $53.4 billion, which puts it ahead of its major competitors Novartis ($51 billion) and Merck & Co., Inc. ($41.7 billion).
Bleak 2019 but promising 2022. That’s a long time to hold your breath.
As far as 2019 is concerned, the pharma heavyweight does not present any growth potential in both their top and bottom lines, with their midpoints offering slightly lower revenue and earnings compared with that in 2018.
Pfizer is projected to deliver a flat year-over-year performance regardless of the major headwinds primarily due to the strong sales of its remaining products. The company continues to remain confident as it awaits roughly 25 to 30 drug approvals up to year 2022.
Among these pending potential blockbuster products, 15 are expected to be approved by 2020. In addition, Xtandi, Ibrance, and Xeljanz/XR are slated for line extensions. With regard to long-term growth, Pfizer is well positioned to make headway on innovative medical breakthroughs in the next five years or so.
Pfizer is anticipated to reap the rewards of its $93 million investment in NextCure, which is a biopharmaceutical company focused on discovering and developing next-generation immuno-oncology-based drugs.
Pfizer has also been implementing various cost-cutting and productivity measures since 2017 in an effort to offset the effects of rising expenses and push for bottom line growth (read firing people).
Their efforts include investing in new market creation strategies as well as seizing opportunities to streamline their operations and cutting down organizational layers to eliminate (or at least reduce) bureaucracy.
These initiatives are anticipated to reach completion by 2019 and are expected to bring in approximately $1.4 billion in savings by 2020.
Given the challenges ahead, Pfizer seems to offer a promising future as seen in their efforts to curb their losses. While it remains to be seen if the company can come up with any notable acquisition to jumpstart their promised progress as early as 2020, Pfizer’s current products along with its pipeline candidates appear to be capable of delivering solid growth in succeeding years. Meanwhile, Pfizer is intent on providing a growing dividend to its shareholders.
In a nutshell, Pfizer’s current status is not ideal for investors interested in immediate profits. However, those who are patient enough to wait for a few more years could be in line to receive a dividend that could yield 3.5%.
Leave this one to the index funds and ETFs. There are better fish to fry in the space.
I had the great pleasure of having breakfast the other morning with my longtime friend, Mohamed El-Erian, former the co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all, and sooner than we think.
The result will be a structural increase in market volatility and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these. Look no further than superstar NVIDIA (NVDA), which announced earnings in line with expectations in November but nevertheless responded with a 50% decline. It was a classic “Buy the rumor, sell the news” type move.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You had a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some dough facilitating counter cycle customers trades. This means they would step up to bid in falling markets and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we at Morgan Stanley lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger number of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds and a handful of very large index mutual funds and ETFs. These assets are managed by people who are also much smarter too.
The small individual investor on which the industry was originally built has almost become an extinct species.
There is no more “dumb money” left in the market, at least until this month.
Now those placing large orders were at the complete mercy of the market, often with egregious results.
Enter volatility. Lot’s of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35-year bull market in bonds is ending.
An entire generation of bond fund managers, almost two generations worth, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your money tied up in precisely these kinds of funds. All I can say is, “Watch out below.”
When the flash fire hits the movie theater, you are unlikely to be the one guy who gets out alive.
You hear a lot about when the Federal Reserve finally gets around to raising interest rates in earnest this year. They say it will make no difference as rates are coming off such a low base.
You know what? It may make a difference, maybe a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. Almost all of these guys really understand are trends and the next one will have a big fat “SELL” pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999 and then moved on to manage the Harvard endowment fund.
He regularly makes the list of the world’s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in “constructive paranoia” and structure your portfolio to take advantage of these changes, rather than fall victim to them.
See the Long Term “Head and Shoulders” Top in the (TLT)?
I would like to express how much I enjoy reading your newsletter and the global views that I gain from it.
It has been the best, by far, and the most financially worthwhile letter I have ever bought. I find most newsletters spin and promote their returns during the good times, and never factor in or disclose their bad times.
I have had some bad trades with you, but the results from the good trades far outnumber them. I do take positions based on your recommendations and have done very well.
My portfolio has grown by over $1 million from shorting the yen, since late November, based on your calls. That is with no more than $200,000 invested in yen shorts at any one time. This has been far and away the single best trade of my life!
Thank you very much! May we all have many more of these!! Thanks John,
Rob,
Calgary, Alberta, Canada
"We may be moving from cautiousness to optimism, but euphoria is down the road," said Bob Doll of Nuveen Asset Management.
Mad Hedge Hot Tips
February 13, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) US National Debt Tops $22 Trillion, surpassing the GDP. And you wondered why I was making so much money selling short the bond market? The day when the Feds crowd out private borrowers is fast approaching. The last time we ran a tab like this we were winning WWII. Click here.
2) Trump is Going to Miss His March 1 China Deadline, and the stock market could care less. Imagine how high stocks would be flying now if we WEREN’T flighting a trade war. Click here.
3) Charles Schwab/Fidelity Price War Cuts Commissions to the Bone. It’s just a matter of time before they hit zero. All the money is made now selling your order flow to high-frequency traders. Time to renegotiate your relationship with your broker. Click here.
4) US Job Openings Hit Record High, with 7.6 million “help wanted” signs in December, says the JOLTS REPORT Yes, even your uncle Ernie can get a job now. So, where is the wage inflation? Click here.
5) In the Meantime, American Personal Debt is Soaring, hitting a new apex at $13.5 trillion. Some 9.1% of this is already delinquent and credit cards are being canceled at an alarming pace. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (NVDA)
(NOW THE FAT LADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT)
(WHY THE FUTURE IS NOT IN FURNITURE),
(W), (NWARF), (AMZN)
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
February 13, 2019
Fiat Lux
Featured Trade:
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (NVDA)
(NOW THE FAT LADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT)
Mad Hedge Technology Letter
February 13, 2019
Fiat Lux
Featured Trade:
(WHY THE FUTURE IS NOT IN FURNITURE),
(W), (NWARF), (AMZN)