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Today it’s JPMorgan Chase (JPM) CEO Jamie Dimon telling a conference in Paris that the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think.
Tomorrow (and Thursday) it’s Federal Reserve chair Janet Yellen giving Congress her mid-year outlook on inflation, the job market, the economy, and most significant at the moment, some clue (maybe) on when the Fed will begin to reduce its $4.5 trillion portfolio of Treasury and mortgage-backed debt instruments.
Dimon was very clear in his worries about what might happen when global central banks begin to sell some of the $14 trillion in assets they bought in quantitative easing programs designed to stabilize and then jump start the global economy after the global financial crisis. “We’ve never have had QE like this before; we’ve never had unwinding like this before,” Dimon said. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.” So far, as Dimon noted, the financial markets don’t seem especially worried. Which is one reason that Dimon is concerned. “We act like we know exactly how it’s going to happen and we don’t.”
The Fed’s Yellen will be much more circumspect in her testimony tomorrow–since she realizes that a single phase could send markets into a repeat of the Taper Tantrum that then Fed chair Ben Bernanke set off in 2013. Financial markets will be looking for anything that might be a signal on when the Fed will begin to reduce the size of its balance sheet by, in effect, selling Treasury debt and mortgage-backed debt into the market. (The Fed has said it will begin any reduction in its portfolio by ceasing to buy new debt when instruments already in its portfolio mature.) Recent comments from several Fed officials and Yellen have suggested that the Fed is uncomfortable with current equity prices and the extremely low levels of yields on Treasury. The Fed has raised the short-term interest rates that it controls three times since December 2016 but longer term rates–such as those on the 10-year notes that benchmark mortgage rates–have stayed remarkably low. Which defeats the purpose of those Fed rate increases, no? By many of the measures that the Fed tracks monetary conditions are easier now than they were when the Fed began to raise rates back in December 2015.
The market knows that Yellen won’t say anything directly to this point, but Wall Street will be listening for anything that suggest the Fed is paying more attention to stock prices. Stocks have been propped up before and since this most recent rally by what has been called the “Fed Put,” a belief that if asset prices start to fall, the Fed will step in to support prices. Wall Street knows this put won’t go on forever but no one is ready for it to be over quite yet.
Let’s see how Yellen tip-toes around that issue tomorrow and Thursday.
Yesterday’s rally in technology stocks and the NASDAQ Composite has disappeared this morning. At 12:30 New York time the NASDAQ was off 1.6%; the Technology Sector Select SPDR (XLK) was down 1.72%; and individual technology stocks were also in the red. Amazon (AMZN), for example, was lower by 1.58%; Nvidia (NVDA) was down 3.57%; Apple (AAPL) had retreated 1.58%; and Facebook had lost 1.16%.
The troubles in the tech sector were more than enough to outweigh good news for the financials. The Federal Reserve gave 34 big U.S. banks a green light on increasing dividend payouts after these banks passed the latest stress test from the Fed. The Financial Sector Select SPDR (XLF) was up 0.29% this morning.And good news from the Commerce Department on the latest revision of first quarter GDP growth. This release took GDP growth in the first quarter up to a year over year 1.4% from the 1.2% of the last revision. Remember that the first read on Q1 GDP growth came in at just 0.7%.
The return of the downward trend in the technology sector today certainly indicates that sellers haven’t gone away and it suggests that yesterday’s rally might have come as a result of short sellers buying shares to cover their positions–and take profits–with the idea of putting those shorts back on today.
The CBEO S&P 500 Volatility Index (VIX) was up 19.7% to 12.01 as of 12:30 p.m. New York time.
Back on March 9, 2017 I added Grupo Financiero Galicia (GGAL) to my Volatility Portfolio ahead of tomorrow’s decision by Morgan Stanley Capital International (MSCI) on whether or not to upgrade Argentina to emerging market status from frontier market status. The upgrade would return Argentina to the emerging markets index most favored by portfolio managers and index funds. MSCI downgraded Argentina to frontier market status in 2009. About 100 times more money tracks emerging markets than frontier markets.
This was a speculative trade but I thought a reasonable one since the administration of Mauricio Macri has guided Argentina back into global financial markets. About 18 months ago Argentina succeeded in selling an $18 billion bond issue. That ended a decade of the country’s exclusion from global financial markets.
The pick of Group Financiero Galicia, an Argentine financial company, has gained 30.58% since March 9.
Today, just ahead of the MSCI decision, I’m adding more Argentina exposure to my volatility portfolio with the pick of Global X MSCI Argentina ETF (ARGT.) The ETF has $174 million in total assets, giving you decent liquidity. The expense ratio is 0.59%. The ETF is highly volatile, I’d note. It’s up 31.43% year to date and 28.03% for 2016, but that follows on a loss of 2.77% in 2015 and a loss of 3.65% in 2014.
I’m not calling it a trend yet. Every time over the past six months that it has looked like volatility on the Standard & Poor’s 500 stock index has been ready to move up in a significant way, the move has been a head fake. And volatility as measured by the CBOE S&P Volatility Index (VIX) has headed down again to hover near historic lows once more. The VIX hasn’t been above 14 since December 30, 2016 (at 14.04) and for 2017 it’s been stuck around 11 or 12. From 1990 to October 2008, the VIX averaged 19.04. The 200-day moving average for the last 10 years is 20.15. It’s one of the puzzles of the current market, one that I’ve written about repeatedly, why this measure of volatility remains so low when other volatility indexes come in much higher and when the economic and political background seems so volatile.
I am looking for volatility as measured by the VIX to return to something like its historical average.
The not so minor question is “When?”
And I’m starting to see what might be a trend.
Here’s what I’m seeing in the VIX chart for 2017.
There’s certainly a string of higher lows, which is usually a sign of an upward trend. On January 27, the VIX hit a low of 10.58. On February 14, the low was 10.74 and then on March 3 the dip was to 10.96. On March 16, the drop hit 11.21 and then on March 29 the VIX fell to 11.49.
What you want to see on a chart with higher lows, of course, is a series of higher highs. The pattern for the VIX isn’t quite as strong on this side of the chart. On February 2 the VIX hit a high at 11.93. Then came 11.97 on February 15 and 12.92 on February 28.
Then come two data points that put the higher highs trend in jeopardy. On March 9 the high was just 12.30, below the February 28 high of 12.92. And on March 14, the VIX stalled at that same 12.30.
The VIX did manage a new and higher high of 13.12, above the February 28 high, on March 23.
On Friday the VIX closed at 12.37. That’s obviously below the March 23 high of 13.12. For confirmation that an upward trend actually exists we need to see the VIX move over 13.12 sometime in the next week or two. If I see that kind of move, then it may be time to put a little money to work behind
Stay tuned.
Today, March 6, was a day for risk off. The indexes ended up negative for the day but not by a huge amount. The Standard & Poor’s 500 stock index, for example, was down just 0.33% on the day.
Riskier indexes took a bigger hit. The NASDAQ Composite was off 0.37% and the small cap Russell 2000 was lower by 0.69%. The iShares NASDAQ Biotechnology ETF (IBB) was down 0.88%.
But if you were looking for bigger drops today, the place to cast your eyes was on individual biotech stocks, especially those that had been rallying recently. For example, Incyte (INCY) was off by 1.85%. The Medicines Company (MDCO) fell 2.28%. Ionis Pharmaceuticals (IONS) got a double dose of downward pressure from the market in general and from bad news on a drug trial and tumbled 8.26%.
This dip in biotech stocks comes at, what can I call it, a very interesting time. Especially if it continues for a day or two or three.
That’s because we’re right at the beginning of the medical conference season, which gives biotechs with any news at all a big showcase for the promising new drugs in their pipelines. The American College of Cardiology’s annual conference runs from March 13 to 15 in Washington, D.C.. The annual meeting of the American Association for Cancer Research begins on April 1 and extends to April 5, also in Washington. The American Academy of Neurology meets from April 22 to April 28 in Boston.
How big a showcase can one of these conferences be for a biotech company?
Here’s the opportunity for Incyte at the American Association for Cancer Research meeting, according to the Bioinvest’s Medical Technology Stock Letter (Bioinvest.com.) Incyte will present 20 abstracts from its R&D portfolio at the conference including a clinical presentation of the dose-escalation phase of the ongoing trial of its FGFR 1/2/3 inhibitor, and preclinical data from inhibitor programs targeting PI3Kd, LSDa, JAK1, BRD/BET and IFFR4, as well as from its epacadostat and immuno-oncology programs.
Whew!
Companies don’t go to these conferences to announce bad news and failing tests. So these meetings can provide a big dose of market-moving good news.
Besides Incyte, other biotechs that look to be in a position to get a boost from these annual meetings include Acadia Pharmaceuticals (ACAD) and Ionis from the American Academy of Neurology meeting; and Nektar Therapeutics (NKTR) at the American Association for Cancer Research Meeting.
Trying to figure out where you might get the most conference bang for your buck can get pretty complicated. Incyte is likely to make the biggest splash during meeting season but the stock has run up strongly so it doesn’t necessarily offer the biggest potential pop. At the March 6 close at $134.38 the shares are less than $10 below my target price of $142. Acadia is promising since it has pulled back lately. I think my target price of $42 set back in November now lags the progress at the company so as of this post I’m raising my target to $55, which gives the stock almost $20 a share to run higher from the March 6 close at $36.79. Nektar Therapeutics might offer the most upside from a good conference season since the stock has been hurt by some disappointing research results and the conferences offer a big chance to recoup. The company is also at work in a currently hot area where its new painkiller, an opiod with less likelihood to produce addiction, addresses the current national opiod epidemic. (The drug would be the first novel opiod molecule in decades.) The current trial of that molecule has a fairly high chance of disappointment, which could take the stock down 30% or so. But the company is also presenting five data abstracts at the American Association for Cancer Research meeting from its immune-oncology pipeline. Nektar is definitely the high risk/high reward pick from the group. I’d say the target price is $28 with the downside to $10. The stock closed at $14.38 on March 6.
If you’re looking for leverage, all of these stocks offer options and all except for Nektar offer long-term LEAPS options. The problem is that the implied volatility, and thus the cost of these options, is relatively high. The implied volatility on Incyte’s January 19, 2018 call option with a strike at $140 is 45.89%. That means you’re paying a lot for the option since demand from other traders for this call, just 5% above the recent price, is very heavy. That heavy premium is present pretty much everywhere I’ve looked. Acadia’s January 19, 2018 call at $45 comes with implied volatility of 52.48%. The implied volatility of The Medicines Company’s January 19, 2018 call with a strike at $70 is 61.98%.
That’s just a fact of life for volatile biotech’s, however. According to IVolatility.com the LOW implied volatility for a 180-day call option on Inctye is 39% (back on February 23, 2017). That’s the kind of implied volatility you get at the high for implied volatility in other sectors. The HIGH implied volatility for Inctye is 62.99% on April 11, 2016. To take another example, the implied volatility for a 180-day call on Acadia ranges from a low of 55.3 to a high of 76.86. (For future reference, the high implied volatility according to the historical data tends to come in March and April and the low implied volatility occurs in October and November. Makes me wonder if there’s not an options play on this seasonal pattern with a buy in October and a sell in April on the rise in implied volatility.)
Considering all these alternatives–and the fact that I already own Incyte, Ionis, and Acadia in my Jubak Picks portfolio–as of tomorrow I’m going to add Nektar Therapeutics as a volatility play on meeting season to, what else, my new Volatility Portfolio.
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