GARY: “I am bringing this up again for the umpteenth time…just in case some of you did not hear it before. THERE HAVE BEEN A BUNCH OF IPOs that have come out recently with no sales. Yes…no sales. They are mostly in the BIOTECH area. Very simply, we have seen this before. Whenever a group gets hot, the wonderful human beings at the investment banking firms will bring public anything that breathes…regardless of fundamentals. They did it in 99 with the .com and it seems they are going at it again. ZSPH,KITE,AGTC,RARE,KPTI are recent examples. There are many more. Just these 5 recent IPOs, added up together have NO SALES. I repeat…NO SALES. Yet…the market cap of these 5 names are $5 billion.
The main point is simple. Our studies of bear markets show that if…and we use the word “if” these days as we are never going to see a bear market again…but if a bear market ever occurs again, these stocks will drop markedly, some as much as 90-100%. Again, how do we know? Studies. Bear markets drop the curtains. Bear markets expose. Bear markets take the ridiculously valued to where they should be. When I started in this business, I was in penny stocks. The company I was at brought companies public at 5 cents/share with market caps of $3-5 million. Those companies had sales. In other words, the investment banks are just packaging crap better.
We are still in a bullish market. This means some of these names can continue higher. Some can go ridiculously higher. ICPT went from $70-$500 in days because of a successful trial. ZSPH just came public at $18…opened at $30 and is currently over $40. NO SALES. RARE was a $21 deal which immediately went to $69 before backing off. NO SALES.
We believe in the BIOTECH industry. We are all for it. Fabulous discoveries will come from some of the companies Some of these discoveries may cure the worst of diseases. We are not mentioning all this because of that. We are mentioning this as a word to the wise. We do not believe companies with no sales should necessarily be put into the public domain. There is too much risk. Yes, the prospectus of these companies outline these risks but in a hot market, risk goes out the window. It is when the market is no longer hot that one should be worried. Right now, there really is not much to worry about. But the curtains will eventually come down. Just don’t be the last one in.” YOU HAVE BEEN WARNED!
GARY: “Intermune was bought out today by Roche Holdings. Why do I bring this up? Because we are simply told not to worry about froth and speculation and that is all well and good. Just want to let you know a couple of things that I noticed on Intermune today. First off, they have done two secondaries in the last year. In case you don’t know, that is adding stock onto the market or insider selling, whatever you want to call it. So, they are selling stock. And, of course, the year has been a good year for biotech and Roche decided to buy them, I think for 74 in cash. They are paying cash. You would think that when someone is paying cash that they would like to look at valuation. Ladies and gentlemen, here is the valuation on Intermune. Trailing fourth quarter sales, $110 million. How much money did they lose on that $110 million of sales? Looks to me about $200 million. We are not making this up. They did $110 million in sales but lost $200 million. Remember those numbers. Roche is paying in the neighborhood of $7.5 billion dollars, for a company that had a $110 million in sales and lost $200 million. But, there is no bubble. We are told there is no bubble. They are willing to pay nearly $8 billion dollars for a company in $100 million in sales and lost $200 million dollars. Just letting you know, they could have bought them a year ago for $1.5 billion. Anyway, this is a part of what we talk about froth and speculation and excessive valuation and by the way one of the characteristics is the buyouts at high prices, not just secondaries. We are just stating the facts. We are just letting you know. Not saying anything else, just stating a fact.”
MONTH END+BUYOUTS=2000 S&P
Roche is paying $8.3 billion for a company that has $110 million in sales and loses a couple hundred million on those sales. You think that 10 million shares that are short are happy today?
Europe economies soften…and that bottoms their markets as the still relatively weak Dax works it s way back up.
Financials started to perk up last week.
It is end of month.
Need not say more!
Gold vs. Financials
GARY: Gold and gold stocks are breaking down. Big financials are turning up, some of them coming out of range. It is as simple as that. If this continues…IF this continues, should be good for markets. equation. When you have a chance, here are a few things to look at and I am going to be brief. Put up the GLD, it hasn’t completely broken down but you can see it broke a little bit of support today. The GDX looked to be rolling over and then you have some individual names, AEM breaks the 50 day moving average today on volume. FNV, these are the stronger names, breaks the 50 dma on volume, GG breaks the 50 dma. On the other end of the spectrum, Citigroup moves above its six month range today on about 1.5 times average volume. Bank of America does about a four to five month move above range on almost three times volume. JP Morgan coming up to the top of range somewhat, and if you look at the XLF and this is where I am a little perplexed, the XLF broke into new high ground. This is the financial select sector index. I still can’t find financials at new highs but yet the XLF is at new highs so whatever the makeup is, they got a few things in there that are helping out. That’s it. One group going one way another group going another way and you know the motto here, not much bad happens if financials get a leg to the upside. If anything changes we will let you know.
GARY: Its not the news, its how the markets reacts to the the news. Why am I saying this? Because in the last week, just letting you know, Macy’s lowered their numbers. The stock had a little mini gap down last week, it’s gone right back up to highs. Today, Target, crappy numbers! The stock was down, finished up over a buck on volume, and just keep in mind Macys is at the highs, Target is more at the lows. Lowe’s, the brother of Home Depot, the stock gaps down, finishes up nicely on heavy volume. What do these three have in common? They are all retail.
We told you, up until about last week that retail stocks were acting horribly. We went through our retail list, horrid, gross and now all of a sudden bad news comes out and the stocks are getting jacked up. What is with that? Well, back to the point. It’s not the news it’s how the market reacts to the news. Maybe the market is looking at something forward, I don’t know but the laws of fear and greed and supply and demand are what we follow and I just found it interesting and just to mention to you at the outset here, retail looks like it’s getting the bid for the first time in a while. In fact, when I look at the two ETF’s that make up retail, RTH doesn’t trade a lot but you have one big gigantic ten month base that broke out yesterday. The XRT is the other one that is setting up for potentially breaking out. Combine that with Home Depot which I did a dissertation on yesterday, about how we thought that was a pretty darn good break away gap, but we were hopeful because of its lower beta that it would sit around a little bit…no it was up two and half bucks today. So, that helped too. As I went through retail earlier today and I’m going to do a little bit at the close, you are getting a bid there and they are on the radar for the first time in quite a while. And, some of the them have some big big bases that we are following.
So memo: lesson, when the news is reported as bad by the companies and the stocks reverse and go up, that is good news. When the news is reported as good by the companies and the stocks go down, that is bad and typically it defines bullish and bearish phases in the market, that sector or group. So, just letting you know, I noticed that today and I thought I would mention it early before we get into everything else.
Today, Home Depot’s stock gapped up out of a long trading range. Volume was about 3x average volume. This is the type of reaction that automatically goes onto our radar screen. It does not mean it has to work. But from our studies of the markets, whenever action like this occurs, it is a wake-up call. The gap broke it out of resistance (give or take $1) that capped the stock for approximately 10 months. We consider this akin to a breakaway gap. On occasion, the stock will just keep going but most often, the move will stall. This enables the stock to digest the move, take in a little profit taking, before potentially moving higher. This would show itself by the stock sitting around for a bit, either putting in a flag-like pattern or slightly pulling back on lower volume. One would then look for another higher volume day as it moves through those highs. We are not advocating buying, selling ort holding this stock. We are just saying it now goes onto our radar.
“Investors face IPO frustration, missed earnings fuel market skepticism.” Out of the USA Today front page. “Initial Public Offers are supposed to be a great opportunity for investors to jump into the ground floor of the next big thing. But, it turns out that investors may be buying into companies that are about to disappoint and can’t keep up with expectations. So far 165 of 244 companies that sold shares to the public for the first time between the second quarter of 2013 and the first quarter of 2014 including restaurant chain Noodles, water park Sea World and gaming company King Digital have missed earnings’ expectations at least one quarter.”
So, here is my dissertation again. Please listen carefully. The IPO market is your best friend and can also be your biggest enemy. Listen carefully. The biggest winners of the next 20 years, of the next 10 years will come from Initial Public Offerings. There may be some that go up 50 fold if not more. Seriously, we can go back through history. There have been many of them, companies that started with 20 million in revenues and ended up at 10 billion in revenues if not more. But, on the other end of the spectrum is the opposite. Unfortunately, Wall Street very often brings out a lot of ka-ka and I am not equating Noodles and especially Sea World because I love that place, with ka-ka. I’m talking about the ones that are being foisted upon you with big losses and some with no sales. Once a month I go through the recent IPOs. I go to their websites. I check out the companies. If they are retail or a restaurant I go visit them. If it is something that goes into an Apple IPhone, I want to know about it. Then I strip away the crap and that is easy to do and I watch the ones that I think I have the makings. Companies that are growing have great earnings or maybe they are losing money right now but they are growing big sales and estimates are for them to start making money. But, I will stay away fromthe 18 billion dollar market cap with a 100 million in sales and losing 90 million on that 100 million. It is simple logic. Stocks like that have gone up big in the last year and they have also gone down big. So, I just want to make note of this again. I think probably in the future, I’m going to do a better job with you guys about talking more about IPOs, companies that just came public. In fact, what we may do is what Investor Business Daily does is highlight an IPO maybe once or twice a month, especially one that is showing itself with the goods.
FRIDAY’S EVENT-DRIVEN WHIPSAW
The market opened well. The market was doing well, led by the Nasdaq and the Nasdaq 100. Now as you know, I am not one that believes in events and event driven things on a daily basis but I am going to have to give it today because, we hit 4481 on the Nasdaq at about 10:30 in the morning because the Nasdaq gapped up. From 10:30 till 10:55 the Nasdaq dropped like 40 points. It went as low as 4427 at noon, before recovering for the rest of the day. Basically what happened, there was something out of Russia. That was the excuse and to try to explain this best, you know we look for patterns of fear and greed here, when I look at all of these other major indices that are lagging badly, if we closed badly today it would have been ominous. But, due to the fact that we closed better it tells me that the money crowd is still out there helping this nascent bounce off of the lows of last Friday.
The S&P looks better than the Dow. The Russell 2000 and Smallcap 600 really are still underperforming. But, the transports are a smidge above the 50 day moving average and I repeat, Nasdaq 100 and the Nasdaq, when you have a chance go look at those charts vs the Russell 2000. There is a stark contrast between these areas. So, we don’t know when that changes. We just know that it is going on now. The place to be is the Nasdaq and the Nasdaq 100 and we will let you know as she goes. Biotechs are really starting to help the Nasdaq again. The market is finding right now a narrow group of names in these areas. Everything else is waffling all over the place or just downright bearish. That is the story, and if I was to title it, I would call it narrower and narrower and you know my thoughts on narrowing markets and what can ultimately happen, but it happened four times this year and four times the market came out of it. In a printing money market, all is possible.