Biotech - Way to go

In this tough market what is looking good? Practically all sectors are beaten down, in a downtrend and are not in any way showing signs of a revival. There may be intermediate rallies in the short term (like the banks which rebounded almost 50-100% from their lows) but those would just be traps for investors. The real problems of the economy which are built on years of mismanagement of the credit and housing markets, would not go by so easily.

There is one sector though which although risky is hitting new highs and may buck this downtrend. And the better part is the more the economy worsens the better it can turn out. And that sector is Biotech. If you look at the HOLDRS Biotech ETF which is near a 3 year high and looks to shine in the current market. It's top 10 holdings contain mega biotechs including Genentech, Gilead, Amgen, Biogen Idec and more. Normally in a recession economy biotechs do well. And this time it looks no different. But it maybe that we are right at the start of a cycle that can take the biotechs to their next level. A lot of these companies have strong drug pipelines. And the sector as a whole has languished in recent years.

A note of caution though. The whole sector is at a multi-year high and in no way broken out to start a new upturn. So critical resistance levels are near and it may take sometime for the sector to break out from there. But I am optimistic that it will do so looking at the current trend. The BBH would enter a resistence level at around 205-210 which is it's 2005 high. And currently it is in an overbought state. So except some consolidation in the near term. But over a period of 3-6 months there is a possibility that it may break out to new highs.

Disclosure: I do not hold position in BBH or any of the stocks mentioned here.

The Bubble Century

There is a hot debate going on currently regarding oil prices. Is it fundamental or speculation? It seems like we have enough people on both sides. The ones who are looking from outside at the spectacular rise in the prices mostly think it is the speculators. And Wall Street is crying hard telling everybody that it is not the speculators. They say "it is the demand fools, don't you see". But then the biggest oil supplier in the world, Saudi Arabia, is saying, we don't see the demand. Where is it? Anyway, oil prices have risen more than 30% just this year, and more than doubled since the start of 2007 when crude was trading between 60-70$ a barrel.

Whom do you believe? I don't think in today's world anybody is believable. There are enough people out there profiting nicely from this fiasco. And as always the people who run the mill are paying the price. Does it matter whether it is speculators or the fundamentals. The only thing in their hands is to pay what is asked.

Probably this had to occur in one way or the other. And still it seems the sky is not falling. The only thing happening is patience being tried. Personally I feel this is not about fundamentals. Everywhere you see today you find bubbles. Bubbles everywhere. As George Soros puts it in his latest book The New Paradigm for Financial Markets, we are living in a Super Bubble era. Although his super bubble spans the world economy nevertheless it is a bubble he is talking of. At start we had the Internet Bubble, then came the Real Estate Bubble (or should I say the Credit Bubble which stoked the fire for the Real Estate Bubble), and now we are seeing the same is commodities. You have the bubble in food prices, oil prices and on and on.

When the real estate prices were going up, people who should have acted, the Fed, the bank honchos kept on playing the game. This is what Citi's Chuck Prince said in July 2007 - "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing". And I think he could not have been more right. This is exactly what all the bank CEOs whether knowingly or unknowingly were doing till the music really came to a grinding halt. You are living the aftermath now. The most affected are the people who were induced into it. So why cannot this be going on in the rise in the oil prices. The "fundamental" guys can always say that that's what they saw before.

We are either in or on the verge of a transition from the Oil economy to some "other" economy. This other is in the evolution stages right now and no one knows for sure what that is. That unknown is the cause for exploitation. And this phase is going to be an ugly one. Ugly for the people who will have to live through it. I am sure our children are going to be a part of this pain. We can only hope if not we they would find a solution.

So back to the point. The market which has driven the prices so high is just trying to check the demand. Or so should I say. The price will keep on going up till it can. Till it gets so high that things really come to a stand still. Till the pain becomes so high we cannot endure it. And then we will be forced to give up our habit. And when that happens the market will automatically retract. It is natural. That is the fundamental rule, isn't it? In that case then, why you would say, do I feel that the speculators are at play? Because things are not always black and white. If that was not the case, what has changed today that has moved the pendulum so much on the demand side? Yes the supply is not increasing fast enough. And yes the demand (or expected demand) is on the rise. But it is not so much to justify such a rise in such a short time. That is why the Saudi's are also baffled, because they also do not see the demand coming yet. Clearly then the market is driving up the prices in expectations of the future. The future which it thinks is eventual. But we all know that that future is not coming tomorrow, not in the next few months or even years. So why is the market asking such a high price today? Well as it is being proven, because the forces are in it's favor. Because the consumers are hand-tied and are ready to pay the price what is asked. The market thus is tightening the grip as hard as possible to find where is the break point. Once that is know then we will again revert back to what would be sustainable.

And so the bubble in the Oil markets will also burst. And between today and that day it will have done the damage that every bubble does. Exploiting the weak and strengthening the already strong. When they say Capital markets are ruthless, this is what it is. It is something we have created. We will have to live by it!

Take some heart, there is light at the end of the tunnel.

Who pays for the blowups?

As you can see the market eventually has come to terms with reality. I had been bearish about the market since September of 2006. Well, lot of people knew this was coming. And the bank executives also would have probably known about it. But who wants to pull the trigger on oneself? Who wants to kill the goose laying golden eggs? Even if you know this goose is going to die soon, isn't it worth to get as much possible till she is alive! That's what I guess everybody thought and kept playing on.

But somebody is going to pay for this for all this? Who else other than the American tax payer! The poor middle class guy who has no time to know nor cares, the guy who except owning IRAs and 401ks knows nothing about what is going on with the big money. I have to admit I am one of them. And if not we then it would have to be taken from our children. To make things look better the emergency tax relief (few hundred dollars) is soon going to be in the mail. And the people who created this mess, soon are going to walk free with millions for them and their heirs. Don't you see all the bank executives who have stepped down, their banks written down billions of dollars, will be enjoying millions in severence packages, early retirements and the like. Will they be prosecuted? Absolutely not. What can those poor guys do? They were just playing by the rules and the nasty market turned on them right?

So what do you think looking at the financial crisis of banks today? Well what the heck those guys were doing all these years? Printing loans rather than money! The Fed was more than happy to lend to them. And they were more than happy to entice poor buyers into terms they felt were sent by God to them. In those days everybody was happy. Home prices were bid up backing up the costly terms banks were underwriting the loans for. But then the banks forgot their own rules - that things don't go for ever. The executives thought that with tiered risk instruments, they can make only a few people burn keeping the rest safe. But that probably only made it last a bit longer and that's about it. The basic rule is even if you create a flawless truss structure to spread stress (risk in financial terms) if the weight of the whole structure grows too much the foundation itself gives way. And then it does not matter what kind of truss you built and how good it it. The whole thing has to come down. That's what you see happening now.

The Fed and the US Treasury are trying to solve the problem in a short term way. I strongly feel that this is creating a longer term problem that is going to make things worse in the future. At every turn the Fed is taking bold steps thinking that it knows and can control everything. But what was Bernanke doing some months ago? Telling everybody that he did not see the subprime mess hitting other parts of the economy. That all their indicators told them that there will only be a mild slowdown. And as you can see things have got sour on a dialy basis. So can the Fed be believed in what it is doing right now? I have my serious doubts.

Look what happened to Bear Sterns. An 85 year our investment mega house came down in days. The company that traded at 60+ bucks gets sold at a paltry couple of bucks a share!! Is this a joke or what?

For me this is like a hollywood movie. No less spicy. It is spectacular. Read "Black Swan" by Nassim Taleb and you will know. He rightly says that all bankers are suckers. And they really are.

I am not calling for dooms day here. We will eventually come out of this. Please forgive me for my harsh language. I am not frustrated. For me this is a vindication. I had expected this long time back. Finally we are facing it. I really had a very hard time understanding and justifying of what was going on. And now that we are back on earth it feels a bit at home.

Lets hope that good times are ahead and not so far!

Google going below 350

So is going the headline at Barron's this week. Well I don't feel that you will see this next week or even in the coming months. But I see quite a high possibility of that happening in the next 6 months or so. If the economy languishes and Google misses on it's targets, then eventually people are going to stop paying any premium and even start discounting the stock. Well that would put it in that range.

The silver lining is that at that point Google shares would be discounted. Meaning a comeback would be almost inevitable. The only question would be how low can they go? This is a difficult nut to crack. If eps growth slows and is going to remain suppressed for sometime the multiple will shrink as well. And that can push the price targets down. Look at all the banking and real-estate stocks. As the bad news kept coming and hitting the revenues and earnings, analyst kept on reducing price targets. It has started for google now. We are down from 750 something to the 680 something. If they miss that may come down to the low 600s or even may fall to 550ish. But by the time this happens the stock might as well be playing in the mid to low 300 range.

So if you are thinking of investing in Google it would be prudent to wait. Wait not just a few weeks but at least a couple of earnings cycles, before the picture gets a bit clear.

Good luck!

Disclosure: I do own a small google stake.

The Hare and the Tortoise

That's what comes to my mind looking at Google and Amazon today. Amazon has been building it's business and brand much longer than Google. Google gets the most attention and it's rise is much steeper than Amazon's. Amazon is all about delivering physical goods (the old way - shipping them to your door). And Google is all about delivering what cannot be touched - information. You can have other parallels for these two as well. Look at manufacturing and services industries. Walmart which is a purely services company topped the Fortune 500 list for several consequtive years overshadowing the big heavyweight manufacturing giants like General Motors and Ford. Walmart does not produce anything. It is just a delivery channel. This is quite similar to what currently we see with Amazon and Google.

The point I am trying to make is to underscore Amazon (not Google :) By being persistent in doing the old mundane things much much better in the new world Amazon is showing how tomorrow's business will be done using technology. It is not that Amazon is the only company doing that. But Amazon is the best available proxy to those kind of companies. I have been using Amazon for almost 8 years now. And even today the most things I buy from them are books and nothing else. But in my mind the barrier to entry for doing business with Amazon is today almost negligible. For me Amazon is as good or even better than the store a few blocks from my home. And with the variety of products that Amazon is keeping today it is just a matter of time that I would be doing most of my buying from there. I am not doing it today, but I can see the day coming.

A few days ago I bought two books from Borders because I just couldn't wait for them to be shipped and delivered. No not even overnight although I would have been ready to pay for it. I wanted the books NOW! So I paid about 120 bucks for the books. I had already researched the books on Amazon. The Amazon price for the two books was a mere 70 bucks. I had no choice but to return those books back to Borders and get them from Amazon. Which I did.

Okay I have to disclose that I do own a few shares of Amazon as well as Google. But I am not writing this post to drive people to buy Amazon. Please be your own judge and do your own research. Both Amazon and Google are companies who are going to shape the world we live in.