In Search of the Perfect Investment

Monday, December 22, 2014

GILD cratered after news today.  From Bloomberg:

Gilead Sciences Inc. (GILD) shares sank after the biggest drug-benefit manager in the U.S. chose a pill from AbbVie Inc. (ABBV) to be the sole hepatitis C treatment approved for many patients, as insurers seek to rein in the rising cost of medicine.

Express Scripts Holding Co. (ESRX), which helps insurers and large employers provide drug coverage, opted to narrow doctors’ treatment options in exchange for lower prices. On its most widely used list of approved drugs, Express Scripts will include AbbVie’s Viekira Pak for patients with genotype 1, the nation’s most common form of hepatitis C.

Express Scripts has waged a campaign all year against Gilead’s hepatitis C drugs, calling their cost of more than $1,000 a pill part of an unsustainable trend of surging prices for medicine designed to treat complex health conditions. Gilead’s Sovaldi and Harvoni will be left off Express Scripts’ list, which covers about 25 million people, starting Jan. 1 for most patients.

“We have asked pharma companies to work with us closer and demonstrate good judgment,” Express Scripts Chief Medical Officer Steve Miller said. “AbbVie heard our concerns and they came to the table in a very creative way.”

Gilead’s Sovaldi costs $84,000 for a 12-week course of treatment, and the company’s Harvoni, which combined Sovaldi with another medication in a single pill, costs $94,500. Viekira Pak, approved last week by the Food and Drug Administration, sells for $83,319 before any negotiated discount. AbbVie offered a “significant discount” in exchange for exclusivity, Miller said.

The FDA’s press release on approving Viekira Pak seems to indicate the the ABBV’s drug is as effective as Gilead’s miracle hepatitis C drugs and hence ESRX and its doctors are simply opting for a cheaper price. If they’re wrong, they’ll be sued up the whazoo. They must be pretty confident. I’m not optimistic for GILD. Read the FDA’s release here.

Lessons from 2014:

+ Events can develop very fast. Oil drops. (Oil pricing is done at the margin. See below.) Russia has problems. Your favorite CEO can make a bad decision. Diversification is your only weapon.

+ You can predict. But you’ll be mostly wrong. When you can’t control the outcome (i.e. you’re not the CEO), diversification is your only weapon.

+ If you can’t predict the next down cycle, make sure you don’t get crushed when it happens — which means, in its simplest, NO leverage. There’s nothing wrong with buying real estate for all cash

+  There’s no reason you shouldn’t own VFIAX and BRKA . They’re boring but they work. And they work through thick and thin.

+ A percentage of your portfolio should designated “High Risk.” Manage it for short-term gains. Don’t feel guilty if you bounce in and out of volatile stocks — GPRO, CYBR, BABA, GILD, etc.

+ There are “themes” — like organic food (WFM), cyber security (CYBR) and cameras for cops (TASR). But they go in and out of fashion fast. Now WFM is coming back strong. HAIN has done well. They’re our list — see right hand column.

+ Buy (not sell) when there’s blood in the street.

+ Your friend’s stock recommendations are usually wrong for you  — but not for them.

+ Sometimes it’s better to go on vacation and let the market gyrate its madness out of its system. I remember that two week safari vacation in Africa. The market went down. It went up. But when we returned, it was exactly where it was when we left. Exactly.

+ It’s OK to short stocks. There are screaming shorts out there. Remember PBR? We did well on that one. I’ll find more. You should too.

+ You’ll miss big moves. Try not kicking yourself for being stupid. We’re all “stupid.”

+ There’s nothing with watching BubbleVision. It often gives you a good feeling for “momentum.” Some of Cramer’s stocks have done well. Some have done awfully. Like all recommendations (including mine), you have think them through.

+ Fashion is key on Wall Street. Call it herd mentality. Fashion has a major impact. You can “measure” fashion by reading articles in the financial press and watching BubbleVision. Especially useful: Cramer’s interviews with CEOs. You could feel from how gold was being reported  that it was going out of fashion, and would start falling. Which it did.

+ Don’t hold onto stocks because you love them. When my stop loss rule kicked me out of Google, I kept 100 because I had faith, or love, or whatever for Google. I was wrong. Fortunately it’s bouncing. I have oodles of Apple (AAPL). They’re in fashion now. But could easily drop out in coming months if no one (except me) want an iPhone 6. (I want the PLUS.)

+ My “inviolate” stop loss rule of 8% or 10% of even 15% (choose your own level) works most of them. It worked for GOOGL:

 But now it’s coming back?

Please add your own Lessons from 2014 in the Comments section below.

News on stocks:

+ Annaly declared another 30 cents dividend. It’s paid 30 cents the last five dividends. It’s yielding 11%. And the stock price is holding. Here’s Annaly over the past two years.

+ Nike’s results last night were spectacular.  The company’s summary:

– Revenues up 15 percent to $ 7.4 billion
– Diluted earnings per share up 2 5 percent to $0.74
– Worldwide futures orders up 7 percent, 11 percent growth excluding currency changes
– Inventories as of November 30 , 2014 up 11 percent

But they may not be enough for over-estimating Wall Street analysts. The stock skidded 3% in late night trading. Good opportunity to pick up some additional shares. Great news: It’s been on our list (and in my portfolio for a while) and we’ve done well this year:

Mortgage rates are falling, once again. Time to refinance your mortgage — if you haven’t already. Home mortgages don’t face a prepayment penalty. But commercial ones do. We’re re-doing our apartment building’s mortgages. They don’t come due until May 2017. But we could borrow the balance plus the prepayment penalty at today’s lower interest rates and save thousands of dollars in monthly payments to the bank. Good news: Most fees are negotiable. And you’d better negotiate them. There are plenty of them, including local mortgage taxes.

How Low Can Oil Go? is the title of James Surowiecki’s latest piece in the New Yorker:

Just in time for Christmas, there’s a surprise present for consumers: plummeting oil prices. They have fallen forty per cent since July-gasoline now costs well below three dollars a gallon-saving Americans hundreds of millions of dollars a day. This has been a mini-stimulus for the economy, and one that was almost completely unexpected. Before the summer, prices had been high for years. Despite a lot of geopolitical turmoil and macroeconomic anxiety, the oil market had been remarkably stable, and it seemed possible that, as one study put it, “hundred-dollar oil is here to stay.” But in a matter of months all that changed.

So what happened? At the most basic level, it’s a simple supply-and-demand story. Europe’s continued troubles and a slowdown in the Chinese economy muted the demand for oil. Meanwhile, the U.S. shale-oil boom and a rebound of drilling in Libya boosted supply. “Libya’s ramping up of production caught people genuinely off guard,” Steven Kopits, the managing director of Princeton Energy Advisors, told me. “That’s the kind of thing that’s hard to predict unless you have really good intelligence assets on the ground.” The result was that the market was producing many more barrels of oil a day than were consumed. As oil was dumped on the market, prices inevitably fell.

In the oil market, though, nothing is simple. The real story of the past few months isn’t that oil prices have fallen; it’s that they’ve fallen so far so fast, and that they may still have a long way to go before hitting bottom. That suggests that the stability of the past few years has yielded to a new era of volatility, in which small changes in supply and demand will lead to big price swings.

Such volatility is exactly what the history of oil prices would lead us to expect. Commodities are more volatile than other assets-the price of copper fluctuates a lot more than that of a television set-and oil has historically been more volatile than most other commodities; a 2007 study found that in the U.S. it was more volatile than ninety-five per cent of other products. The biggest reason for this volatility is that short-term supply and demand for oil are what economists call “price-inelastic,” which means that they don’t respond much when the price of oil changes. People don’t immediately start driving less when gasoline prices spike-they just pay more for gasoline. On the supply side, drilling projects take a long time to start up or to shut down, so higher prices don’t immediately translate into more supply, or lower prices into less. This means that the way prices typically return to normal-through increasing supply or diminishing demand-doesn’t really happen in the oil market. So a two- or three-per-cent change in supply, which is about how much the shale boom and the Libyan rebound added to global daily production, can spark a huge move in price.

In recent years, hedge funds and commodity-index funds have put hundreds of billions into the oil market, and studies suggest that this flood of investment may have increased the market’s volatility. By its nature, oil trading is beset by uncertainty. It’s not just the precarious geopolitics of where most of the world’s oil reserves are. There’s also the fact that predicting future demand requires forecasting the performance of the entire world economy.

You might think that the existence of OPEC would guarantee stability. But OPEC is weaker than it once was, thanks to the emergence of big non-OPEC oil producers, like the U.S. Besides, enforcing stability at a time of falling prices is easier said than done. OPEC’s members face a classic collective-action problem. They’d be better off ultimately if they all agreed to curb production-Saudi Arabia, in particular, would have to cut back-but individually they have a greater incentive to continue pumping. And the Saudis know from history that cutbacks don’t always work. In the early nineteen-eighties, they slashed output in an attempt to prop up energy prices. “They cut production and cut production and cut production, and all it did, more or less, was wreck their economy for the next twenty years,” Kopits said. “This time around, they’re drawing a line in the sand and saying We’re going to keep pumping, and everyone else is going to have to adjust around us.”

The shale-oil boom has added to uncertainty, too. OPEC has no control over what U.S. producers do. And even though shale-oil producers often face higher production costs than traditional drillers do (which should make them quick to cut production when prices fall), many also have debt payments to make and fixed costs to meet if they don’t want to go out of business. So they’re likely to keep pumping, since that keeps revenue coming in until (they hope) the price recovers. But continuing to pump, of course, makes it harder for prices to stabilize.

It would be a mistake for oil producers to expect a return to the high, stable prices of recent years. By the same token, American consumers shouldn’t get too used to cheap gas, since in the long run low oil prices erode the conditions that brought them about. Producers are already starting to adjust: ConocoPhillips just announced that it’s cutting its drilling budget. And, because cheap oil gives everyone an economic boost, eventually it leads to higher demand. We’re awash in oil right now. Soon enough, we may be wondering where it all went. 

Favorite recent New Yorker cartoons:

Give a relative a subscription to the New Yorker for Christmas. It really is a wonderful magazine. And it’s not left-wing, pinko like some of my friends believe.

Harry Newton. The two BIG lessons from 2014 are personal health (exercise, food and rest) and family. I’m seeing all of them this weekend and most of next week. Hence, my next column will be Monday December 29, 2014.

Stephen Colbert is such a joy. Last night The Comedy Channel ran hours and hours of old Colbert Reports. I binge watched. Last night’s final show was fun. See if you can pick the celebs. Hint: One of them was Henry Kissinger.

 

You can watch it here.