Markets Archives - Page 21 of 77

The Week Ahead – FOMC Minutes, M2, and Early Close

Posted on May 22, 2023May 22, 2023 by phoffman@channelchek.com

The Market Hurdles Before the Holiday

The FOMC minutes on Wednesday detailing the debate at the Federal Reserve’s May 2-3 meeting could be an eye-opener for investors. Expectations for many had been that the Fed would pause tightening. The Fed has publicly insisted that the interest rate moves are data dependent and there isn’t a scheduled plan extending through the rest of the year. If the minutes suggest pausing, markets shouldn’t react severely, if instead, the minutes suggest the Fed is panicking at the pace of the economy and persistence of inflation, the stock market may itself pause the recent bullish moves. Inflation data in the form of the PCE report Friday is not expected to show much improvement.

Friday is one of the bigger days for economic reports as Consumer Sentiment is released in the morning. On Friday afternoon, SIFMA recommends an early close before the Memorial Day weekend.

Monday 5/22

8:30 AM ET, James Bullard will be speaking. Bullard is the President and CEO of the Federal Reserve Bank of St. Louis. Bullard is an FOMC member and has been very vocal in his support for higher interest rates.
10:50 AM ET, Thoms Barkin will be speaking. Barkin is the President and CEO of the Federal Reserve Bank of Richmond. He is a member of the FOMC Committee.
11:05 AM ET, Mary Daly will be speaking. Daly is the President and CEO of the Federal Reserve Bank of San Francisco. She is a member of the Federal Open Market Committee (FOMC).

Tuesday 5/23

9:00 AM ET, Lorie Logan, CEO of the Federal Reserve Bank of Dallas will be speaking. She represents her district on the FOMC.
9:45 AM ET, The Purchasing Managers Report (PMI) has been signaling higher output for the last three releases. A number above 50 indicates an increase; the consensus for May is 52.6 versus April’s 55.9.
10:00 AM ET, New Home Sales, after a decent jump to a 683,000 annualized rate in March, new home sales in April are expected to have declined to 670,000.
1:00 PM ET, Money Supply numbers will be released. M2 is expected to have declined by 257.3 billion to a level of $20,818 billion.

Wednesday 5/24

10:30 AM ET, The Energy Information Administration (EIA) will be providing its scheduled weekly information on petr
oleum inventories, whether produced in the US or abroad. The level of inventories helps determine prices for petroleum products.
2:00 PM ET, The Minutes of the FOMC meeting held on May2-3 will be released. The minutes detail the issues, discussions, and positions among policymakers; the Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.

Thursday 5/25

8:30 AM ET, Jobless claims for the week May 20, are expected to rise 6,000 to 248,000 following a 22,000 swing lower to 242,000 in the prior week.
8:30 AM ET, Corporate Profits are pulled from the national income and product accounts (NIPA) and are presented in different forms.
10:00 AM ET, Pending Home Sales data from April are expected to have risen 1.1%.
10:30 AM ET, Susan Collins is the President and CEO of the Federal Reserve Bank of Boston.

Friday 5/26

8:30 AM ET, Durable Goods Orders are expected to have fallen 1.1% in April following March’s 3.2% rise. Ex-transportation orders are seen down 0.1 percent.

8:30 AM ET, Personal Income and Outlays. Personal Income is expected to have increased 0.4% in April with consumption expenditures also expected to increase 0.4%. These would compare with March’s 0.3 percent for income and no change for consumption.

8:30 AM ET, Retail Inventories are expected to have risen by .73%.

8:30 AM ET, Wholesale Inventories are expected to have been flat in April risen by.

8:30 AM ET, International Trade numbers are expected to show the US goods deficit is expected to widen marginally to $85.6 billion in May after narrowing by $6.5 billion in April to $85.5 billion.

10:00 AM ET, Consumer Sentiment is expected to end May at 58.0, nearly 6 points below April but shigher by .30% from May’s mid-month 57.7 flash.International Trade numbers are expected to show the US goods deficit is expected to widen marginally to $85.6 billion in May after narrowing by $6.5 billion in April to $85.5 billion.

2:00 PM ET, SIFMA Recommends an Early Market Close on May 26 (2PM) and a Full Market Close on May 29 in the US in Observance of the Memorial Day Holiday.

What Else

Investment roadshows on company’s you own or have an interest in can lead to insights you’d never get anyplace else.

A stock that has the distinction of being Michael Burry’s longest held position (a long position) is a company named GEO Group (GEO).

On May 23^rd and May 24^th you may be able to attend a roadshow in South Florida presented by Senior Management of Geo Group.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://us.econoday.com/byweek.asp?cust=us

What Else

Investment roadshows on company’s you own or have an interest in can lead to insights you’d never get anyplace else.

A stock that has the distinction of being Michael Burry’s longest held position (a long position) is a company named GEO Group (GEO).

On May 23^rd and May 24^th you may be able to attend a roadshow in South Florida presented by Senior Management of Geo Group.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://us.econoday.com/byweek.asp?cust=us

Biotech M&A is Finally Rewarding Patient Investors

Posted on May 19, 2023May 19, 2023 by phoffman@channelchek.com

The Acceleration of Biotech Acquisitions, Why it Should Continue

The pace of mergers and acquisitions (M&A) in the biotech sector has accelerated in 2023 compared to 2022 and 2021. The factors driving this increase are numerous, and there is increasing urgency on both sides, the acquirers and acquirees to find a fit. This is playing out with deal value up significantly in 2023, with noticeable acceleration as the year has progressed. During the first quarter, investors in at least eight biotech companies found themselves in enviable positions. Below is a recap of what has already happened and the perceived trend. If it continues, it could lead to 2023 seeing far more biotech deals than the previous two.

According to data from William Blair’s quarterly biopharma review, the total deal volume in the sector was elevated, although far below record highs. Total M&A value for the first quarter was $52 billion versus $88 billion for all of 2022, and $77 billion in 2021. The report shows the average deal was $630 million (versus $367 million in 2022). The upfront cash and equity has doubled from the prior year at $508 million (versus $249 million in 2022).

Later stage companies seem to be what pharmaceutical firms have the most appetite for. The phase of development of the companies most sought was Phase II or later with 100% or all of the public acquisitions in this stage. Five of the eight were in the commercial stage.

Source: The Quarterly Rx: Q1 2023 U.S. Biopharma Recap (William Blair)

The details above are of the eight public companies that merged or were acquired during the first quarter. However, just this week alone, there have been three more biotech acquisitions announced:

On May 16, 2023, Merck & Co. announced that it would acquire Acceleron Pharma for $11.5 billion. Acceleron is a clinical-stage biopharmaceutical company, the acquisition will give Merck access to Acceleron’s lead drug candidate, luspatercept, which is currently in Phase 3 clinical trials for the treatment of anemia associated with chronic kidney disease.
On May 17, 2023, Gilead Sciences announced that it would acquire Immunomedics for $21 billion. Immunomedics is a clinical-stage biopharmaceutical company the acquisition will give Gilead access to Immunomedics’ lead drug candidate, Trodelvy, which is currently in Phase 3 clinical trials for the treatment of triple-negative breast cancer.
On May 18, 2023, AstraZeneca announced that it would acquire Daiichi Sankyo’s oncology business for $6.9 billion. Daiichi Sankyo’s oncology business includes a portfolio of marketed and late-stage cancer drugs. The acquisition will give AstraZeneca a broader portfolio of cancer drugs and will help the company to expand its presence in the oncology market.

What is Driving the Acceleration?

There are a number of “not-so-secret” factors that are helping the acceleration of M&A activity in the biotech sector. One factor is the increasing cost of product development. The average cost of developing a new drug has increased from $1 billion to $2.6 billion in the past decade. This has made it increasingly difficult for small and mid-sized biotech companies to develop viable candidates independent of big-pharma’s help. As a result, small companies are increasingly looking to merge, partner or be acquired by larger companies with deeper pockets.

Another factor driving the acceleration of M&A activity in the biotech sector is the increasing focus on innovation. Large pharmaceutical companies don’t have the talent that exists in the universe of small biotech companies. So they are increasingly looking to acquire companies with innovative technologies. These innovations can help them provide new drugs that can compete with the blockbuster drugs coming off patent in the next few years.

Finally, the acceleration of M&A activity in the biotech sector is also being driven by the increasing consolidation of the industry. In recent years, a number of large pharmaceutical companies have merged with or acquired each other. This has led to a smaller number of bigger companies that are now dominant in the industry. These companies are increasingly looking to acquire smaller companies in order to expand their product portfolios and overall reach.

Take Away

While deals in many industries, both public and private, have decelerated to a crawl, the cash-rich pharmaceutical industry giants are tactically looking to build their portfolios of next-generation treatments. And many biotech companies are in need of a lifeline to get their pipeline products the research dollars they deserve. This dynamic has accelerated public and private deals in the industry in 2023.

The acceleration of M&A activity in the biotech sector is a trend that is not expected to end soon. This is because the factors that are driving deals are likely to remain in place. Investors looking to explore smaller biotech companies may want to keep in mind the nuances of the average company attributes that found deals in the first quarter. Top-tier research on a number of smaller companies, provided by the sectors equity analysts at Noble Capital Markets can be found here. Company information and data on many other biotech and life sciences companies can be discovered by going to this link.

Paul Hoffman

Managing Editor, Channelchek

Sources

file:///C:/Users/prese/Downloads/WilliamBlair-Biopharma-Quarterly-Review-Q1-2023.pdf

https://community.ionanalytics.com/ma-highlights-1q23?account_created=1

https://dkf1ato8y5dsg.cloudfront.net/uploads/79/598/mahighlights1q23-final.pdf

The Russell Reconstitution Preliminary List

Posted on May 18, 2023May 18, 2023 by phoffman@channelchek.com

The New Russell Indexes Unconfirmed Versions – How Investors Use Them

The preliminary list of stocks to be included in the Russell Reconstitution, and also which Russell Index, is a huge day for many stock investors and the impacted companies as well. This year, it occurs on Friday, May 19. The list, although preliminary and subject to refinements each Friday through June, includes the stocks that are believed to meet the requirements based on valuations taken on April 28. This is the first official file from the popular index provider, in addition to informing the investor public what to expect when the indexes are reconstituted. The reconstitution can be expected to impact prices as index fund managers readjust holdings. The event also, for many, redefines market-cap levels that are considered small-cap, mid-cap, and large-cap.

Background

The Russell Reconstitution is an annual event that reconfigures the membership of the Russell indexes by defining the top 3000 stocks based on market-cap (Russell 3000), then the top 1000 stocks (Russell 1000), and reclassifying the smaller 2000 stocks to form the Russell 2000 Small Cap Index. These serve as a benchmark for many institutional investors, as the indexes reflect the performance of the U.S. equity market across different market-cap classifications. The reconstitution process adds, removes, and weights stocks to ensure the indexes accurately represent the market.

The Preliminary List which will be published after the market closes on May 19, 2023, is a crucial step in the market cap reclassification process. It provides market participants with an initial glimpse into potential additions and deletions from the indexes. The stocks listed on this preliminary roster may experience increased attention from investors, as it hints at potential buying or selling pressure once the final reconstitution is completed.

The newly reconstituted indexes become live after the market close on June 23.

Implications for Investors

The release of the Russell Preliminary List on May 19 could provide opportunities for investors, including:

Enhanced Market Visibility – Companies listed on the Preliminary List may experience increased trading volumes and heightened market popularity, or even scrutiny, as investors evaluate their potential inclusion in the Russell indexes.

Potential Price Movements – Stocks slated for addition or deletion from the indexes can experience price volatility as market participants adjust their positions to align with the anticipated reconstitution changes.

Portfolio Adjustments – Active managers who track the Russell indexes may need to realign their portfolios to reflect the new index constituents, potentially triggering buying or selling activity in affected stocks.

Investor Considerations

Stock market participants should consider the following factors when analyzing the Preliminary List and its potential impact:

Final Reconstitution – The Preliminary List is subject to changes in the final reconstitution, which is typically announced in late June. Investors should monitor subsequent updates to confirm the actual index membership changes. These updates may occur as the result of faulty data or dramatic changes to the company such as a merger since the April 28 market cap snapshot.

Fundamental Analysis – As always, the fundamentals and financial health of the companies should be among the most important factors for non-index investors to consider. In the past, potential additions often presented attractive investment opportunities, while potential deletions may mean the stock gets less attention from investors.

Take Away

The release of the Preliminary List on May 19, 2023, marks a significant milestone in the Russell Reconstitution process. Investors should pay close attention to the stocks listed, as they may experience increased market visibility and potential price movements. However, it is important to remember that the Preliminary List is subject to changes. Thorough fundamental analysis, including earnings, potential growth, and liquidity assessment, is prudent for most stock investments. For information to evaluate small-cap names, look to Channelchek as a source of data on over 6,000 small cap companies.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://research.ftserussell.com/products/downloads/FTSE_FAQ_Document_Russell_US_Equity_2023.pdf

Is Your Bank Prepared for a US Debt Default?

Posted on May 17, 2023May 18, 2023 by phoffman@channelchek.com

War Rooms and Bailouts: How Banks and the Fed are Preparing for a US Default – and the Chaos Expected to Follow

When you are the CEO responsible for a bank and all the related depositors and investors, you don’t take an “it’ll never happen” approach to the possibility of a U.S. debt default. The odds are it won’t happen, but if it does, being unprepared would be devastating. Banks of all sizes are getting their doomsday plans in place, and other industries are as well, but big banks, on many fronts would be most directly impacted. The following is an informative article on how banks are preparing. It’s authored by John W. Diamond the Director of the Center for Public Finance at the Baker Institute, Rice University, and republished with permission from The Conversation. – Paul Hoffman, Managing Editor, Channelchek

Convening war rooms, planning speedy bailouts and raising house-on-fire alarm bells: Those are a few of the ways the biggest banks and financial regulators are preparing for a potential default on U.S. debt.

“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, said in a television interview.

The doomsday planning is a reaction to a lack of progress in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – another round of negotiations took place on May 16, 2023. Without an increase in the debt limit, the U.S. can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.

What happens if a default occurs is an open question, but economists – including me – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers. A severe and prolonged global economic recession would be all but guaranteed, and the reputation of the U.S. and the dollar as beacons of stability and safety would be further tarnished.

But how do you prepare for an event that many expect would trigger the worst global recession since the 1930s?

Preparing for Panic

Jamie Dimon, who runs JPMorgan Chase, the biggest U.S. bank, told Bloomberg he’s been convening a weekly war room to discuss a potential default and how the bank should respond. The meetings are likely to become more frequent as June 1 – the date on which the U.S. might run out of cash – nears.

Dimon described the wide range of economic and financial effects that the group must consider such as the impact on “contracts, collateral, clearing houses, clients” – basically every corner of the financial system – at home and abroad.

“I don’t think it’s going to happen — because it gets catastrophic, and the closer you get to it, you will have panic,” he said.

That’s when rational decision-making gives way to fear and irrationality. Markets overtaken by these emotions are chaotic and leave lasting economic scars.

Banks haven’t revealed many of the details of how they are responding, but we can glean some clues from how they’ve reacted to past crises, such as the financial crisis in 2008 or the debt ceiling showdowns of 2011 and 2013.

One important way banks can prepare is by reducing exposure to Treasury securities – some or all of which could be considered to be in default once the U.S. exhausts its ability to pay all of its bill. All U.S. debts are referred to as Treasury bills or bonds.

The value of Treasurys is likely to plunge in the case of a default, which could weaken bank balance sheets even more. The recent bank crisis, in fact, was prompted primarily by a drop in the market value of Treasurys due to the sharp rise in interest rates over the past year. And a default would only make that problem worse, with close to 190 banks at risk of failure as of March 2023.

Another strategy banks can use to hedge their exposure to a sell-off in Treasurys is to buy credit default swaps, financial instruments that allow an investor to offset credit risk. Data suggests this is already happening, as the cost to protect U.S. government debt from default is higher than that of Brazil, Greece and Mexico, all of which have defaulted multiple times and have much lower credit ratings.

But buying credit default swaps at ever-higher prices limits a third key preventive measure for banks: keeping their cash balances as high as possible so they’re able and ready to deal with whatever happens in a default.

Keeping the Financial Plumbing Working

Financial industry groups and financial regulators have also gamed out a potential default with an eye toward keeping the financial system running as best they can.

The Securities Industry and Financial Markets Association, for example, has been updating its playbook to dictate how players in the Treasurys market will communicate in case of a default.

And the Federal Reserve, which is broadly responsible for ensuring financial stability, has been pondering a U.S. default for over a decade. One such instance came in 2013, when Republicans demanded the elimination of the Affordable Care Act in exchange for raising the debt ceiling. Ultimately, Republicans capitulated and raised the limit one day before the U.S. was expected to run out of cash.

One of the biggest concerns Fed officials had at the time, according to a meeting transcript recently made public, is that the U.S. Treasury would no longer be able to access financial markets to “roll over” maturing debt. While hitting the current ceiling prevents the U.S. from issuing new debt that exceeds $31.4 trillion, the government still has to roll existing debt into new debt as it comes due. On May 15, 2023, for example, the government issued just under $100 billion in notes and bonds to replace maturing debt and raise cash.

The risk is that there would be too few buyers at one of the government’s daily debt auctions – at which investors from around the world bid to buy Treasury bills and bonds. If that happens, the government would have to use its cash on hand to pay back investors who hold maturing debt.

That would further reduce the amount of cash available for Social Security payments, federal employees wages and countless other items the government spent over $6 trillion on in 2022. This would be nothing short of apocalyptic if the Fed could not save the day.

To mitigate that risk, the Fed said it could immediately step in as a buyer of last resort for Treasurys, quickly lower its lending rates and provide whatever funding is needed in an attempt to prevent financial contagion and collapse. The Fed is likely having the same conversations and preparing similar actions today.

A Self-Imposed Catastrophe

Ultimately, I hope that Congress does what it has done in every previous debt ceiling scare: raise the limit.

These contentious debates over lifting it have become too commonplace, even as lawmakers on both sides of the aisle express concerns about the growing federal debt and the need to rein in government spending. Even when these debates result in some bipartisan effort to rein in spending, as they did in 2011, history shows they fail, as energy analyst Autumn Engebretson and I recently explained in a review of that episode.

That’s why one of the most important ways banks are preparing for such an outcome is by speaking out about the serious damage not raising the ceiling is likely to inflict on not only their companies but everyone else, too. This increases the pressure on political leaders to reach a deal.

Going back to my original question, how do you prepare for such a self-imposed catastrophe? The answer is, no one should have to.

The Big Position – Michael Burry’s Holdings

Posted on May 16, 2023May 16, 2023 by phoffman@channelchek.com

Michael Burry, What He Bought, What He Sold, and What He Held

I mark my calendar for the four times a year that Michael Burry is required to make his quarterly holdings public. The founder of Scion Asset Management, who gained additional fame by the portrayal of him in the movie The Big Short, is not a follower of other investors. He does his own unique number crunching and analyzing and is often at odds with mainstream investor thinking. This week he filed his 13F with the SEC, which shows his holdings of publicly traded securities as of the close of business on March 31. It is important to note that his holdings at the close of the following trading day may not be the same.

The Dramatic Holdings Shift

There has been a conspicuous shift in the holdings in Burry’s hedge fund. For the first time that I can recall, he has taken large long positions in companies domiciled in China. This includes an increase in holdings in e-commerce company JD.com Inc. (JD) and retailer Alibaba (BABA).

These positions stood at quarter-end as the largest holdings of Scion, representing 20% of securities held. Many hedge funds have gone sour on investing in Chinese tech companies, Burry isn’t necessarily a contrarian, but it is not unusual for him to be at odds with his peers. Hedge funds’ net exposure to China has dropped to 10.5% from 13.3% in January, according to data from Goldman Sachs Group Inc.’s Prime Services unit. If other large investors are early to the party, or late, that allows him to buy into weakness, or sell into strength – if he’s right.

The Big Position

How big are his positions? After purchasing Alibaba and JD.com in the final months of 2022 as China ended its zero covid 19 policy, Burry, who had held JD.com as of the previous two 13F filings, added to the holdings. His bigger stake more than tripled to 250,000 shares, worth $11 million, or 11% of his portfolio. The report shows his holdings of Alibaba had doubled.

It is not just notable that Burry is long, but that he held larger long positions than he has in many quarters.

The report, which is a snapshot taken just a couple of weeks after Silicon Valley Bank (SVB) shook investors in financial stocks, shows that Michael Burry jumped in and bought shares of smaller banks in the first quarter – where there is fear, there are knee-jerk reactions to take advantage of. In fact, he appears to have jumped into the middle of the firestorm adding long positions of First Republic, Pacific Western (PACW), Western Alliance, New York Community Bank, and Huntington Bank (HBAN) last quarter. Burry also bought other financial stocks, specifically Wells Fargo (WFC) and Capital One (COF). There is no indication if these worked out for the investors in his fund.

Energy, Commodities, and Other Long Positions

Burry also ended last quarter with new positions in energy and commodity stocks. These may be an inflation hedge trade. Holding cash during periods of higher inflation is akin to sitting still while watching money blow away. While there is no guarantee that the investment alternative to cash will do better, the sectors have a long history that supports the trade. Scion was invested in Coterra Energy (CTR), Devon Energy (DVN), and Sibanye Stillwater (SBSW).

Burry closed out the quarter with shares in various other companies including Zoom Video (ZM), The RealReal (REAL), and Signet Jewelers (SIG).

He still maintains his long-term position in Geo Group (GEO). Geo is the world’s second largest private “prison company.” Geo Group has the honor of being Scion’s longest held position, put on sometime after the incoming administration sought to do away with privately owned prisons. Investors interested in how Geo Group navigated this challenge and is now finding other growth opportunities to utilize its assets, may wish to attend one of three no-cost roadshows in May that are part of the Noble Capital Markets and Channelchek Meet the Management Series. (Get more information here).

Closed Out and Longest Held Positions

Scion exited its positions in Wolverine Worldwide (WWW), MGM Resorts (MGM), Black Knight (BKI), Qurate Retail (QRTEA), and SkyWest (SKYW).

Take Away

The next Scion Asset Management 13F is expected to be filed on August 15^th. While current holdings are unknown, much can be discerned from what top investment managers traded at the time. This information can help guide current thinking. When he has conviction, Michael Burry is not afraid to pull the trigger, long or short. As we have seen, when he lacks conviction, he is equally unafraid to keep his powder dry and sit on the sidelines. Inflation adds a cost to sitting on the sidelines. In late March he was very long and seemed to be gravitating toward segments that were being shunned.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.goldmansachs.com/what-we-do/FICC-and-equities/prime-services/

https://www.sec.gov/Archives/edgar/data/1649339/000090514823000408/xslForm13F_X02/primary_doc.xml

https://capedge.com/filing/1649339/0000905148-23-000408/13FHR/file/2

The Reasons Veteran Investors are Now Eyeing Small-Cap Stocks

Posted on May 15, 2023May 15, 2023 by phoffman@channelchek.com

The Growing Case for Small-Cap Stocks: Is it Time to Make the Shift?

The more time that passes with small cap stocks lagging the large and mega caps, the louder very respected market voices are urging investors to move more assets to these smaller companies. The pro small cap stock outlook was reflected again in a recent Barron’s article. The piece highlighted what others continue to point out, that the large cap, S&P 500, is up nearly 8% on the year, but the gains have only been because of the performance of a few big tech stocks and the math used to measure the equity index.

A very eye-opening line in Barron’s points out that, “Apple (ticker: AAPL), Amazon.com (AMZN), Meta Platforms (META), Alphabet (GOOGL), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) are up between 29% and 99% for the year.” These stocks make up a significant weighting of the large cap index, which means that much of the other large cap stocks have been negative in order to only provide an 8% return. To demonstrate how the weighting of the larger companies distorts return, just look at the Invesco S&P 500 Equal Weight ETF (RSP). This ETF weighs each stock in the S&P 500 equally. This has the effect of avoiding overweighting and one stock. This ETF is flat year-to-date. In contrast, The few tech names listed above total just under a third of the entire index.

The article also pointed out the truth that smaller names, those not in the S&P 500, have struggled. What does this mean for investors? Barron’s wrote, “They also look cheap—-and it may be time to take a nibble.” The case that others are also making is based on a number of current market setups. These include value, market history, and even macroeconomic trends that now may favor smaller companies over larger ones.

Big Tech companies like those mentioned above borrow massive amounts of money, they have been the beneficiaries of lower bond rates out on the yield curve. In addition to borrowing costs still below normal, valuing these stocks based on future earnings and comparing the expected earnings to available interest rates have caused investors to be less inclined to tie up money for ten years or more, (at 3.50%). Also, better than expected first-quarter earnings of big tech-inspired investors – product enhancements using artificial intelligence was credited with much of this.

Royce Funds’ Premier Quality Fund invests in “small cap quality.” In a recent article to investors co-lead portfolio managers Lauren Romeo and Steven McBoyle explained why, “small-cap quality looks so compelling in today’s uncertain investment environment.” The portfolio managers wrote, “Secular changes in economic trends, interest rates, and monetary and fiscal policies are creating seismic shifts in the investment landscape. The types of companies that benefited most from the past decade’s zero interest rate, low inflation, and low nominal growth regime—specifically, mega-caps and growth stocks—are unlikely to lead going forward.” Under this backdrop, the two gave their perspective which is that, “the unfolding macro environment appears to be set for quality small caps to capture and sustain long-term outperformance over large cap” through an uncertain period that is characterized by a near certain transition.

If tech stocks again falter because rates rise, advancement slows, or competition grows, the appearance of the S&P 500 large cap index stocks performing well could diminish. “Market gains continue to be dominated by uber-caps, masking the fact that 48% of S&P 500 member stocks are down year to date,” wrote Chris Harvey, chief U.S. equity strategist at Wells Fargo, on May 12.

Within the same index family (S&P), is the S&P 600, which is a small cap index. It is not currently having a positive year, and is down about 3%. Interestingly, the reverse argument can be made for this benchmark since it is overweighted in one specific sector. Financials, which have taken a beating this year is the largest sector weighting in the S&P 600. It accounts for just over a fifth of the performance. This has dragged the index lower, as regional banks have seen billions of depositor dollars walk out the door as savers and investors move assets to higher-yielding money-market funds. This, as we know, has caused liquidity problems at many banks, and caused some to fail.

2023 has been a challenging market for stocks despite the S&P 500 performance. It has been challenging for small caps too, but not as challenging as the S&P 600 performance would have one believe without looking under the hood. Small caps, independent of the high weighting of financials in the benchmark are positive on the year. One very real concern large cap investors are now facing is whether the flow into large cap funds have overly inflated the value, based on most stock valuation metrics, above where they would naturally trade if not for indexed funds.

The economy is not expected to get much stronger this year. Higher interest rates have already begun to stress the US economy, and banking problems are expected to cause tighter lending and consumer spending. And as mentioned a few times, the widely quoted S&P 500’s performance, is covering up what has mostly been a tough equity market.

But while large caps look expensive, for the reasons mentioned, respected experts say small caps look cheap. The S&P 600’s aggregate forward price/earnings multiple is just under 13 times – this compares with the S&P 500 which is 18 times. While on the surface, this doesn’t seem striking, it is! While the difference between 13 times and 18 times doesn’t sound wide, it marks a 30% difference. That is a massive discount. Historically the small cap index trades at a slight premium to its large-cap counterpart, but even in times of economic stress, it doesn’t trade at such a wide discount. In March of 2020, the height of pandemic risk aversion, its multiple was only 25% below the S&P 500.

Take Away

It has been a tougher year for stocks than the performance of the large cap S&P 500 would have one think without digging below the surface and netting out its largest sector weighting. The small cap S&P 600 is down, but largely because of its own largest sector weighting. This is one of the many problems inherent in how popular index investing has become. While stocks in general seem to be facing increasing headwinds, investors that selectively evaluate small cap names for inclusion in the equity portion of their portfolio may find the payoff is better than the alternatives.

Evaluating small cap opportunities is easy with Channelchek as the platform specializes in supplying data, information, and no-nonsense research on smaller opportunities. Please feel free to explore further by scrolling up to the search bar and typing in an industry, company name, or ticker. Channelchek is a free platform designed to help investors and opportunities find each other.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.barrons.com/articles/small-cap-stocks-big-tech-15df5779?mod=hp_LEAD_2

https://www.royceinvest.com/insights/2023/2Q23/why-the-time-looks-right-for-quality?utm_source=royce-mktg&utm_medium=email&utm_campaign=insights&utm_content=txt-3

https://app.koyfin.com/share/084b52d626

The Week Ahead – Powell Panel, Retail Numbers, Debt Ceiling Negotiations

Posted on May 15, 2023May 15, 2023 by phoffman@channelchek.com

The Market Will Experience a Barrage of Appearances by Fed Officials

This will be another week of various regional Fed Presidents speaking and setting expectations of potential adjustments to monetary policy; this includes Jerome Powell and Former Fed Chair Ben Bernanke. Retail and consumer health could come into sharper focus during the week as major retailers report earnings and April retail sales are reported early in the week. The initial results for the Russell Reconstitution of its main indexes will be released after the close of trading on Friday. Also, late week, Fed Chair Jay Powell will make an appearance on a panel with Ben Bernanke.

Monday 5/15

8:30 AM ET, The Empire State Manufacturing Index for May is expected to fall back to negative territory at minus 2.0 after April’s 35-point surge into positive ground at 10.8. This monthly survey of manufacturers in New York State is seldom market moving, but combined with other reports helps draw a picture of economic health within the region and more broadly.
8:45 AM ET, Ralph Bostic, the CEO of the Atlanta Federal Reserve, will be speaking.
9:15 AM ET, Neel Nashkari, the President of the Minneapolis Federal Reserve, will be speaking.
12:30 PM ET, Thomas Barkin, the President of the Richmond Federal Reserve, will be speaking.

Tuesday 5/16

8:15 AM ET, Loretta Mester, CEO of the Federal Reserve Bank of Cleveland, will be speaking.
8:30 AM ET, April Retail Sales are expected to rise 0.7 percent versus March’s 1.0 percent decline that, much of the earlier decline was led by declines in car sales and gasoline.
8:55 AM ET, Raphael Bostic will be speaking. Bostic is the CEO of the Atlanta Fed.

9:15 AM ET, Industrial Production is expected to be unchanged in April after March’s 0.4 percent increase that was boosted by utilities output. Manufacturing output is seen as up 0.1 percent after falling 0.5 percent in March.
10:00 AM ET, Business Inventories in March are expected to remain unchanged following a 0.2 percent build in February.
10:00 AM ET, the Housing Market Index has not been experiencing the steep declines witnessed last year. After April’s previously reported 1-point gain to 45, May’s consensus is no change at 45.
12:15 PM ET, John Williams, the President of the New York Federal Reserve, will be speaking.
3:15 PM ET, Lorrie Logan is the President of the Federal Reserve Dallas, she will be speaking.
7:00 PM ET, Raphael Bostic, will be speaking. Bostic is the CEO of the Atlanta Fed.

Wednesday 5/17

7:30 AM ET, Mortgage Applications, compiled by the Mortgage Bankers’ Association will be released. compiles various mortgage loan indexes. The index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
8:30 AM ET, Housing Starts and Permits during March edged lower to a 1.420 million annualized rate; April is expected to slip further to 1.405 million. Permits, at 1.413 million in March and, though lower than expected, very near the starts rate, is expected to rise to 1.430 million.
10:30 AM ET, The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Thursday 5/18

8:30 AM ET, Jobless Claims Jobless claims for weekly period ended May 13 are expected to fall back to 255,000 after rising a steep 22,000 to 264,000 in the prior week.
10:00 AM ET, Philadelphia Fed Manufacturing Index, The Philadelphia Fed manufacturing index has been in contraction the last nine reports and very deeply so in April at minus 31.3. May’s contraction is seen at minus 20.0.
9:05 AM ET, Lorrie Logan, President of the Dallas Fed is scheduled to speak.
10:00 AM, Ecommerce Retail Sales, are sales of goods and services where an order is placed by the buyer or where price and terms of sale are negotiated over the Internet, an extranet, Electronic Data Interchange (EDI) network, or other online system.
10:00 AM, The Index of Leading Economic indicators, had plunged 1.2 percent in March, it is expected to fall a further 0.6 percent in April. This index has been in sharp decline and has long been signaling a pending recession.
10:30 AM, The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S. and five regions of the country. The level of inventories helps determine prices for natural gas products.

Friday 5/19

8:30 PM ET, Import/Export Prices. Import Prices, an inflation harbinger is expected to rise 0.3 percent for April, this would end nine straight declines. Export prices are expected to rise 0.2 percent.
8:45 AM, John Williams, the President of the New York Federal Reserve, will be speaking.
10:00 PM ET, Consumer Sentiment looking at the first indication for May, which in April fell 1.5 points to 63.5, is expected to fall another half point to 63.0.
10:00 AM ET, Quarterly Services is expected is focuses on information and technology-related service industries. These include information; professional, scientific and technical services; administrative & support services; and waste management and remediation services. These sectors correspond to three NAICS sectors (51, 54, and 56). The Quarterly Services Survey produces estimates of total operating revenue and the percentage of revenue by class of customer.
11:00 AM, ET, Fed Chair Powell, is joined on a panel titled “Perspectives on Monetary Policy” by former Fed Chair Ben Bernanke.
4:00 PM ET, The FTSE Russell Index reports the first list of stocks leading to the Russell’s Reconstitution in 2023.

What Else

Investment roadshows are like getting a front-row seat to information direct from management’s mouth. The most useful investor information often comes from the unplanned responses to questions during the roadshow – either asked by you, or other interested investors.

Noble Capital Markets has an expanding and interesting calendar of roadshows during the week and month. Some are in cities that are paid less attention to than the major financial centers. This week CoCrystal (COCP) will be presenting at roadshows in Miami, and Boca Raton, FL. For more details, and a complete list of roadshows and cities, Click here.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.federalreserve.gov/newsevents/calendar.htm

https://www.econoday.com/

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

Valuing a Stock: Can You Determine Its True Worth?

Posted on May 11, 2023May 11, 2023 by phoffman@channelchek.com

How Do I know if a Stock is Over or Under Priced?

Investors are always searching for the next great investment opportunity; one of the most fundamental factors in making an educated investment decision is determining if the market is undervaluing a specific stock. Valuing a stock involves analyzing various financial metrics and market conditions to determine the stock’s intrinsic value. This represents the true worth of the company, knowing it before others discover the value provides an investment edge and maybe above-average returns.

There are several key factors that investors should consider when valuing a stock. These include the P/E ratio (price/earnings), intrinsic value, GAAP earnings vs. adjusted earnings and other metrics and market expectations. When determining P/E and other ratios, variations that may come into play for a specific industry or economic environment are important measures as well. These could include industry comparisons of price/sales ratio, price/book ratio, and trends like industry grouping conditions improving or deteriorating.

Below we’ll look at many of the numbers that investors use as filters to create watch lists. The lists can then be used to weigh one opportunity against another based on market environments, demand trends, and competition.

P/E Ratio

The P/E ratio, or price-to-earnings ratio, is a commonly used metric for valuing stocks. It’s the ratio of a company’s stock price to its actual earnings per share (EPS). A high P/E ratio indicates that investors are paying a premium for the company’s continued earnings potential, while a low P/E ratio suggests that the company may be undervalued.

As an example, the price-to-earnings ratio (taking the latest closing price and dividing it by the most recent earnings per share) for Meta Platforms (META) as of May 10, 2023 is 23.95. That is to say that it each share is priced at almost 24 times earnings. By comparison, General Morors (GM) has a current P/E ratio of 5.11. This could indicate that the stability or growth potential of Meta (Facebook) is perceived by investors as greater than a traditional car company in an increasingly competitive environment – or that the value of one is not sustainable. This information gives the investor a foundation from which to make decisions.

Of course it is not that easy. It’s important to note that not all P/E ratios are created equal. The P/E ratio can be calculated using either GAAP (Generally Accepted Accounting Principles) earnings or adjusted earnings, which can have a significant impact on the valuation of a company. Non-GAAP financial measures exclude certain expenses. The exclusions include one-time expenses like restructuring charges, gains/losses from asset sales, and other non-operating items. The refined metric is often used by investors and analysts to assess a company’s earnings power excluding certain items that may not be representative of the company’s core business operations.

Variations of P/E Ratio

There are also several variations of the P/E ratio that investors should be aware of. The forward P/E ratio uses projected earnings instead of historical earnings to calculate the ratio, this can provide a more accurate picture of a company’s future valuation potential. Of course, this depends upon the accuracy of forecasts.

The trailing P/E ratio, on the other hand, uses historical earnings over the past 12 months to calculate the P/E ratio.

Price/Sales Ratio

The price/sales ratio is another valid measure of a stocks over or undervaluation. It represents the ratio of a company’s stock price to its sales per share. This ratio is particularly useful for valuing companies that have yet to turn a profit, as it focuses on the company’s revenue instead of its earnings.

Price/Book Ratio

The price/book ratio is a metric that compares a company’s stock price to its book value per share. Book value represents the total value of a company’s assets minus its liabilities, and it provides a measure of the company’s ability to earn per asset. A low price/book ratio may indicate that a company is efficient and undervalued, while a high price/book ratio may indicate that the company is overvalued.

Intrinsic Value

The intrinsic value of a stock represents its true worth based on the company’s underlying fundamentals, such as its revenue, earnings, and assets. Calculating intrinsic value can be a complex process that involves forecasts developed by analyzing financials, market trends, demand for product growth, and other relevant factors. The most common method for calculating intrinsic value is the discounted cash flow (DCF) method, this involves projecting a company’s future cash flows and discounting them back to their present value. Present valuing future cash flows results in what many use as the measure of intrinsic value of a company’s stock.

Business Conditions

It is always important to consider the overall business conditions when valuing a stock. This may be why GM has a much lower P/E than META. The growth in demand for tech is expected to continue to be greater than the growth in demand for cars. In other words, a company that is operating in a growing industry with strong demand may be more valuable than a company that is operating in a declining or increasingly competitive industry. Similarly, a company that is well-positioned to take advantage of new technologies or trends may be more valuable than a company that is lagging behind its competitors.

In all cases, it’s imperative that investors consider macroeconomic factors, such as interest rates, inflation, and geopolitical risks, that could impact the overall market conditions and the company’s performance.

Take Away

Self-directed investors typically have at their disposal a platform that can filter and sort through many criteria. This helps investors that are trying to determine if a stock is currently undervalued. The information that one pulls from these filters and ratio analysis is only as valid as its accuracy and completeness. But it can serve as a good starting point to avoid stocks that are currently overvalued and to uncover companies that are not getting the attention they need to have its stock trade at higher valuations.

An investor doesn’t have to be first to recognize an undervalued stock, but discovering it early and then hoping others follow may require an investor to look at companies not making headlines every week. The 6,000 small-cap stock names on Channelchek, complete with enough data to compare the ratios and other elements mentioned above, may be the only stock universe needed to help an investor create a watch list of potentially undervalued opportunities.

Paul Hoffman

Managing Editor, Channelchek

The U.S. Debt Limit and the False Sense of Security in Money Market Funds

Posted on May 9, 2023May 9, 2023 by phoffman@channelchek.com

Even a Short-Lived Default Would Hurt Money Market Fund Investors

While the U.S. Treasury is now at the mercy of politicians negotiating, positioning, and stonewalling as they work to raise the debt ceiling to avoid an economic catastrophe, money kept on the sidelines may be at risk. Generally, when investors reduce their involvement in stocks and other “risk-on” trades, they will park assets in money market funds. These investment products are now paying the highest interest rates in 15 years, which has made the decision to “take money off the table” even easier for those involved in the markets.

But, are investors experiencing a false sense of security?

Background

Money Market Funds (MMF) are mutual funds that invest in top credit-tier (low-risk) debt securities with fewer than 397 days to maturity. The SEC requires at least 10% to be maturing daily and 30% to be liquid within seven days. The acceptable securities in a general MMF include Treasury bills, commercial paper, and even bank CDs. The sole purpose of a money market fund is to provide investors with a stable value investment option with a low level of risk.

Unlike other mutual funds, money market funds are initially set and trade at a $1 price per share (NAV). As interest accrues, rather than the value of each share rising, investors are granted more shares (or fractional shares) at $1. However, the funds are marketed-to-market each day. Typically market prices don’t impact short-term debt securities at a rate above the daily interest accrual. But “typically” doesn’t mean always. Occasionally, asset values have dropped faster than the daily interest accrual. When this happens, the fund is worth less than $1 per share. It’s called “breaking the buck.”

When a money market fund “breaks the buck,” it means that the net asset value (NAV) per share of the fund falls below $1. In addition to quick valuation changes, it can also happen when the fund’s expense ratio exceeds its income. You may have gotten a notice during the extremely low interest period that your money market fund provider was absorbing expenses. This was to prevent it from breaking the buck.

Nothing is Risk Free

Just under $600 billion has moved into money-market funds in the past ten weeks. This is more than flowed into MM accounts after Lehman Brothers went belly up which set off panic and flights to safety. Currently, $5.3 trillion is invested in these funds; this is approaching an all-time record.

The Federal Reserve has been lifting interest rates at a record pace, the level they have the most control over is the bank overnight lending rate, or Fed Funds. This impacts short-term rates the most. Along with more attractive rates, stock market investors have become nervous. This is another reason asset levels in MMFs are so high – a high-yielding money-market fund that is viewed as risk-free looks attractive compared to the fear of getting caught in a stock market sell-off.

As discussed before, there are risks in money-market funds. And right now, the risks may be peaking. This is because government spending has exceeded the ability for the U.S. to borrow and pay for it under the current debt ceiling limit. The limit was actually reached last January when it was addressed by kicking the problem further down the road. Well, the road now ends sometime in June. In fact, U.S. Treasury Secretary Janet Yellen said the U.S. government may run out of cash by June 1 if Congress doesn’t act, and that economic chaos would ensue if the government couldn’t pay its obligations. Not paying obligations would include not paying interest on maturing U.S. Treasuries.

It isn’t a stretch to say the foundation of all other securities pricing is in relationship with the “risk-free” rate of U.S. debt. That is to say, price discovery has as its benchmark that which can be earned in U.S. debt which has been presumed to be without risk of non-payment.

What Happens to Money Market Funds in a Default?

In a default, the U.S. Treasury wouldn’t pay the full principle it owes on liabilities such as maturing Treasury debt – short term term government debt with extremely short average maturities is a staple of market funds. That is why the price of one-month Treasury debt has dropped recently, sending its yield up to above 5% from a 2023 low of about 3.3%. It has driven expected returns of MMFs up as well, but there is a risk that these short maturities may not get fully paid on time. Many fund providers’ money market funds would then break the $1 share price.

Breaking the buck can have significant consequences for investors, particularly those who rely on money market funds for their cash reserves. Because money market funds are considered a low-risk investment, investors may not expect to lose money on their investment. If a money market fund breaks the buck, it would diminish investor confidence in the stability of these funds, leading to a potential run on the fund and broader implications for the financial system.

Likelihood of Breaking the Buck

Money market funds breaking the buck is a relatively rare occurrence. According to the Securities and Exchange Commission (SEC), there have been only a few instances where MMFs have broken the buck in the history of the industry. The most significant of these occurred in 2008 during the financial crisis when one of the oldest money market funds, Reserve Primary Fund, dropped below $1 due to losses on its holdings of Lehman Brothers debt securities. This event led to a run on many money market funds creating significant instability in the financial system.

Since the Reserve Primary Fund incident, regulatory changes have been implemented to strengthen the money market fund industry and reduce the risk of funds breaking the buck. These changes include requirements for funds to maintain a minimum level of liquidity, hold more diversified portfolios, and limit their exposure to certain types of securities.

Take Away

Nothing is risk-free. Banks such as Silicon Valley Bank found that out when their investment portfolio, largely low credit risk, normally stable securities, wasn’t valued at what they needed it to be worth to fund large withdrawals.

Stock market investors that were drawn in invest in to rising bond yields also found that when yields keep rising, the values of their portfolios can drop just as quickly as if they were invested in stocks during a sell-off. While no one truly expects the current tug-of-war over debt levels in Washington to lead to a U.S. default, one can’t be sure at a time when there have been many firsts that we thought could never happen in America.

Paul Hoffman

Managing Editor, Channelchek

Can You Prepare for Hyperinflation?

Posted on May 8, 2023May 8, 2023 by phoffman@channelchek.com

Hyperinflation, Can Investors Protect Themselves?

Inflation in Argentina so far in 2023 is running at 126.4%. Meanwhile, its GDP has declined by 3.1%. This certainly meets the definition of hyperinflation. Can this situation occur in the U.S. economy? Hyperinflation is when prices of goods and services in the economy run up rapidly; at the same time, it causes the value of the nation’s currency to fall rapidly. It’s a devastating phenomenon that has serious consequences for businesses, investors, and households. Below we explore the causes of hyperinflation, its effects on the economy, and some ways to protect investable assets against it.

Causes of Hyperinflation

Hyperinflation can be caused by a variety of factors, but one ingredient that is most common is excessive money printing by the country’s central bank. When a central bank allows excessive cash in circulation, especially if it is during a period of low or negative growth, natural economic forces that occur when there is an abundance of currency chasing the same or fewer goods, serves to drive up prices and down currency values. This inflation can quickly spiral out of control, leading to hyperinflation. Other causes could include shortages of goods or services driving prices up as demand outstrips available supply.

Effects on the Economy

Excessive inflation is not good for anyone that holds the impacted currency. Businesses can command higher prices, but they will also be paying higher prices to run their business and receiving payment with notes with far less purchasing power. This is because hyperinflation increases costs for labor and raw materials, weighing down profit margins. Less obvious, but certainly adding to the hardship, is that businesses may have trouble securing financing and loans during hyperinflation; this can limit their ability to function or grow.

For households and individuals, hyperinflation also rapidly decreases purchasing power, as prices for goods and services jump up. This lowers living standards in the country as people are forced to pay more for the same goods and services. Additionally, hyperinflation can lead to a loss of confidence in the currency. Behavior including the belief that items should be purchased now because they will be more expensive tomorrow leads to hoarding and other actions that create shortages and drives up prices even further.

How Some Prepare for Hyperinflation

Hyperinflation is rare, yet, once the wheels start turning, such as they did in Venezuela in 2016, or Germany in 1923, it is important for businesses and individuals to take steps to prepare for the possibility. Here are ways that people have prepared for excessive inflation in their native currency.

Diversify Your Investments: While some believe it is always prudent to stay widely diversified, it may offer even more protection when the economy goes through the turmoil of excessive inflation. Preparing in this way means spreading your investments across a variety of asset classes, such as stocks, bonds, real estate, and commodities. This will help by avoiding any one particular asset class that gets hit hard. Keep in mind, stocks are often a good hedge against moderate inflation, and precious metals have historically been looked to for protection in times of extreme inflation. Earnings of companies that export are not expected to suffer as much as importers.

Hold Some Assets Denominated in Other Currencies: This can include established digital currencies, foreign stocks, bonds, that are not denominated in your own home currency. By holding assets denominated in other currencies, you can protect yourself from its devaluation versus others.

Invest in Hard Assets: Hard assets, such as gold and silver, land, and even tools can be a good way to protect yourself or your business from hyperinflation. These assets have intrinsic value and can retain their value even if the currency they are denominated in loses value. Remember that if inflation remains, it is likely to cost more in the coming months for the same piece of office equipment that helps your business run more efficiently.

Cryptocurrencies: Keeping within the guidelines of diversification, more established tokens such as bitcoin and ether are considered by some to help protect from hyperinflation. A word of caution, cryptocurrencies have little history against currency devaluation and inflation. The theory however is these digital currencies are decentralized and not subject to the same inflationary pressures as fiat currencies.

Take Away

In 2018 inflation in Venezuela exceeded 1,000,000%, proving, when the recipe for higher prices is in place, the unimaginable can happen.

While there is no consumer or investor that can proactively impact a rising price freight train, if hyperinflation is expected, there are steps one can take to reduce the negative impacts. These financial steps can be as simple as buying things today that you expect to need later, and more substantially diversifying your portfolio toward hard assets, companies that export to countries not experiencing inflation, and even bonds with either short maturities or an inflation factor as part of the return.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nasdaq.com/articles/argentina-inflation-seen-at-126.4-in-2023-central-bank-poll-shows

https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html#:~:text=In%201923%2C%20at%20the%20most,surprise%20by%20the%20financial%20tornado.

https://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/

Biotech Oncology Stocks Have Been Doing Well, Here’s Why

Posted on May 5, 2023May 5, 2023 by phoffman@channelchek.com

Image: Rendering of folate receptors on a cancer cell

Understanding ImmunoGen’s Great Performance, and Related Stocks

Discovering a company developing a novel and more effective mechanism or method of doing something, and then investing in shares, is one reason investors pay attention to small-cap stocks. Innovations that improve results of any kind are valuable and usually rewarded. Nowhere is this more true than in biotech or biopharma stocks. After all, better treatments for frightening diseases will always be in demand. However, the big difference between the biotech industry and say, computer technology, is the approval process. FDA requirements are many and approval is slow and uncertain – overall, it’s a high bar to overcome.

Is it Worth it for Investors?

Over the past two days, ImmunoGen (IMGN:Nasdaq) a U.S. based clinical-stage biotech company, has had the kind of moonshot trajectory that investors dream about. The company reported promising topline phase III data and overall survival benefits in folate receptor alpha (FRα)-positive platinum-resistant ovarian cancer patients. Immunogen plans to submit the drug for full approval in the U.S. and Europe. The company’s therapy is a is a first-in-class ADC comprising folate receptor alpha-binding antibody. The stock during the first four days of this week is up over 145%. The reason for the sudden moonshot is the company announced that it expects full FDA approval of one of its ADC candidates (Elahere). ADC, or antibody-drug conjugates, are a very targeted way to treat some solid tumor cancers, and seem to represent the “more effective mechanisms or method of doing something” mentioned above as sought after by small-cap investors.

Excitement Over ADC

An antibody-drug conjugate consists of an antibody that targets a specific antigen or receptor on cancer cells, it carries with it an impactful anticancer drug. The antibody which is linked to a toxin such as a chemotherapy drug, is found by folate receptors on the cancer cells; they will bind with the receptors on the cancer cells, the toxic payload is then delivered to the cells, which internalize it. Once in the cancer cell, the toxin is released. This therapy is designed to result in the selective killing of cancer cells while minimizing damage to healthy cells. ADCs have continued to show promising results in treating various types of cancer and are an active area of research by a few publicly traded small-cap biotechs developing alternatives in oncology.

Stock Market Behavior

As with other industries, the stocks of the peer group will often respond to news of the other. This was the case this week for the subgroup of stocks that are in various stages of researching ADC therapies against cancer.

As the chart below indicates, since May 1, the S&P 500 sank by more than 1.00%, yet cancer research biotech, which is not highly correlated to the overall market, rewarded investors in companies working with ADC technology for better cancer outcomes.

ADC Companies that Rallied this Week

Among the stocks that seemed to have gotten a boost from Immunogen’s good news are:

Ambrx Biopharma (AMAM:Nasdaq) is a clinical-stage biologics company. The company’s lead product candidate is ARX788, an anti-HER2 antibody-drug conjugate (ADC), which is being investigated in various clinical trials for the treatment of breast cancer, gastric/gastroesophageal junction cancer, and other solid tumors.

Mersana Therapeutics (MRSN:Nasdaq) is a clinical-stage biopharmaceutical company developing antibody-drug conjugates (ADC) for cancer patients with unmet needs.

Vincerx Pharma (VINC:Nasdaq) is a four-year-old clinical-stage biopharmaceutical company. VIP236, a small molecule drug conjugate that is in Phase 1 clinical trials to treat solid tumors. The company’s preclinical stage product candidates include VIP943 and VIP924 for the treatment of hematologic malignancies.

Sutro Biopharma (STRO:Nasdaq) is a clinical-stage oncology company that develops site-specific and novel-format antibody-drug conjugates (ADC). The company’s candidates include STRO-001, an ADC directed against the cancer target CD74 for patients with multiple myeloma and non-Hodgkin lymphoma, an ADC directed against folate receptor-alpha for patients with ovarian and endometrial cancers, which is in Phase 1 clinical trials.

As these biotech companies that are focused on ADC cancer treatment move their products through clinical trials, each success (or failure) is likely to impact the group. Not yet in the publicly traded group, but also being watched by those involved with ADC cancer stocks is OS Therapies.

OS Therapies (OSTX) is a U.S.-based biotech company that is developing therapies to treat specific cancers. The company completed its filing with the SEC last month to go public through an initial public offering (IPO). The biotech company hopes to list its shares on the NYSE American and trade under the symbol OSTX. It is a clinical-stage phase II biopharmaceutical company focused on the identification, development, and commercialization of treatments for Osteosarcoma (OS) and other solid tumors. There have not been any new treatments approved by the FDA for Osteosarcoma for more than 40 years.

The lead core product candidates OS Therapies is researching are OST-HER2 and the OST-Tunable Drug Conjugate (OST-TDC) platform. The company says it intends to expand its pipeline beyond osteosarcoma into solid tumors. The OST-Tunable Drug Conjugate (OST-TDC) platform could deliver the next-generation ADC technology with the intent of providing a more potent drug and better efficacy with an improved safety profile, a potential “Best-in-Class”. Importantly, OS Therapies lead ADC drug will target folate receptor alpha-binding utilizing a small molecule ligand the same druggable target to Immunogen’s (IMGN) folate receptor alpha-binding site which is something that could become extremely notable to investors and larger pharmaceutical companies. Immunogen has now proved that folate receptor alpha-binding site can work.

The next generation ADC, according to the company filing, will be targeting ovarian, lung and pancreatic cancers. “Tunable” is a term used in drug development that refers to the properties that can be influenced by chemical modifications, and “antibody-drug conjugate.”

An IPO date for OS Therapies has not yet been confirmed.

Take Away

Stocks tend to trade up or down depending on the mood of the market. The current mood is that the overall market may still be overpriced. As such, 2023 has been marked by the bulls and bears duking it out – without any clear direction.

Biotech stocks tend to be far less correlated to what is going on in other areas of the market. This makes the sector and various peer groups worth a visit in bad markets. For example, when the pandemic began to unfold, many biotech stocks rocketed during the same period the overall market was crashing.

Within biotech, companies those working on the production of related technology typically trade in rough tandem with each other. Biotech stocks developing ADC, presumed to be a breaktrough in treating many types of cancers, have gotten a lift in anticipation of the imminent success of one of their peers.

To do a deeper dive into small-cap names, scroll up to the search bar found next to the Channelchek logo, then enter a company name, ticker, or other keyword.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10137214/

https://www.sciencedirect.com/topics/medicine-and-dentistry/folate-receptor#:~:text=Folate%20receptors%20(FRs)%20are%20membrane,breast%2C%20bladder%2C%20and%20brain.

https://www.nature.com/articles/s41416-022-02031-x

https://www.elahere.com/

https://www.sec.gov/Archives/edgar/data/1795091/000121390023025493/fs12023_ostherapies.htm#T99001

Understanding Stock Options: A Comprehensive Guide for Investors

Posted on May 4, 2023May 4, 2023 by phoffman@channelchek.com

Stock Options Trading Explained

Stock options, sometimes referred to as derivatives, are a tool for managing risk when combined with a related equity holding, or as a means to amplify return on moves made by a stock or index. There are also related income strategies investors should know about. Newer investors often learn they could have benefited from options after it’s too late. Below we talk about stock options, what they are and how they are used to fill some investor knowledge gaps they may not even be aware they have. This discussion includes understanding what options are, why they are used, the different types of options available, and how you can use them to hedge against the market moving in the wrong direction. You’ll also discover how options can be used to amplify portfolio results.

What are Options?

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and date(s). The underlying asset can be anything from stocks, bonds, commodities, or even currencies, for the purpose of this article, we focus on stocks and stock indices.

There are two types of stock options: call options and put options. A call option gives the buyer the right, but not the obligation, to buy the underlying stock at a specified price and date. A put option gives the buyer the right, but not the obligation, to sell the underlying stock at a specified price and date.

When an investor buys an option, they are said to be “long” the option. When they sell an option, they are said to be “short” the option. Being long a call option is similar to being long the stock, as the investor profits if the stock rises. Being long a put option is similar to being short the stock, as the investor profits if the stock price falls.

Why Are Options Used?

Options are used for various reasons, such as speculation, hedging, and income generation. Speculators implement strategies to bet on the direction of the options underlying stock. For example, an investor that expects a stock price may rise will buy a call option. It they believe it will fall, they could get short exposure by going long a put option.

Options can also serve investors to hedge (protect) their holdings and offset potential losses in the underlying position. For example, if an investor owns XYZ Stock, they can buy a put option to protect against a potential drop in XYZ Stock. If the stock price falls, the put option will increase in value; depending on the shares controlled by the option, it can offset the decline in the stock.

Income generation using stock options is growing in usage. The scenario where this works is when an investor sells a call option against a stock they own, as part of the sale, they collect a premium for the option. If the stock price remains below the strike price of the call option, the investor keeps the premium and the stock. If the stock price rises above the strike price, the investor must sell the stock at the strike price, but still keeps the premium. This works best in a flat or declining market.

Using Options as a Hedge Against Losses

Options can be used as a hedge against the market moving against a stock position. For example, if an investor owns 100 shares of ABC Stock, currently trading at $50 per share. And the investor is concerned that the stock price may fall, but does not want to sell the stock and miss out on potential gains if the stock price rises, or in some cases, create a tax situation.

To hedge against a potential drop in ABC’s stock price, the investor may decide to buy a put option with a strike price of $45, expiring in three months, for a premium (cost) of $2 per share. If the stock price falls below $45, the put option will increase in value, offsetting the losses in the stock. If the stock price remains above $45, the put option will expire worthless, and the investor keeps the stock and the premium.

Time Decay, Intrinsic Value, and Extrinsic Value

So far, the use of options described here have been fairly straightforward. But there are considerations that might help keep this portfolio tool in the toolbox until it is most needed. The considerations are time decay, intrinsic value, and extrinsic value. Here is what is important to understand about these realities.

Time Decay:

Time decay, also known as theta, refers to the decrease in the value of an option as it approaches its expiration date. Options have a limited lifespan, and as time passes, the likelihood of the option ending up in the money decreases. Therefore, the time value of an option decreases as it approaches its expiration date, resulting in a decrease in the option premium.

Intrinsic Value:

Intrinsic value is the amount by which an option is in the money. In other words, it is the difference between the current market price of the stock and the strike price of the option. For example, if a call option has a strike price of $50 and the underlying stock is currently trading at $60, the intrinsic value of the option is $10 ($60 – $50).

Intrinsic value only applies to in-the-money options, as options that are out-of-the-money or at-the-money have no intrinsic value. The intrinsic value of an option is important because it represents the profit that an option holder would realize if they exercised the option immediately.

Extrinsic Value:

Extrinsic value, also known as time value, is the portion of an option’s premium that is not attributed to its intrinsic value. Extrinsic value is the amount that investors are willing to pay for the time left until expiration and the possibility of the underlying asset moving in their favor.

Extrinsic value is affected by several factors, including the time left until expiration, and the volatility of the underlying stock. As the expiration date approaches, the extrinsic value of an option decreases, and the option premium decreases as well.

Options Premium:

The options premium is the price that the buyer pays to purchase an option. The options premium is determined by various factors, including the current market price of the underlying asset, the strike price, the expiration date, and the level of volatility in the stocks price.

The options premium is made up of intrinsic value and extrinsic value. The intrinsic value represents the portion of the premium that is directly attributable to the difference between the current market price of the underlying asset and the strike price of the option. The extrinsic value represents the portion of the premium that is not attributable to the intrinsic value and is based on the time left until expiration, the level of volatility in the market, and other factors.

Understanding time decay, intrinsic value, and extrinsic value is crucial when it comes to trading stock options. Time decay affects the value of an option as it approaches its expiration date, while intrinsic value and extrinsic value make up the options premium. By understanding these concepts, investors can better understand their costs and make more enlightened decisions.

Take Away

Stock investors transact in stock options for various reasons. These include portfolio protection, income generation for an existing portfolio, and speculating on the direction of an asset. There are considerations associated with holding options beyond any commission or bid/offer spread. These are intrinsic premium costs for in-the-money trades, extrinsic as they relate to value and decay on the position as it approaches its expiration date.

Adding risk management using options to your investment tools to call upon when appropriate can reduce stress; speculating with the help of derivatives can be very rewarding but may have the impact of increasing portfolio swings in value along the way.

Paul Hoffman

Managing Editor, Channelchek

May’s FOMC Meeting and the Statement Pivot

Posted on May 3, 2023May 3, 2023 by phoffman@channelchek.com

The FOMC May Now Apply Less Brake Pedal to the Economy

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 4.75% – 5.00%. to the new target of 5.00% – 5.25%. This 25bp move was announced at the conclusion of the Committee’s May 2023 meeting. The monetary policy shift in bank lending rates had been expected but concerns of the impact of tightening on some economic sectors, including banking, had been called into question and left Fed-watchers unsure if the Fed would clearly indicate a pause in the tightening cycle. Inflation which had been easing somewhat going into the last FOMC held in March has since reversed direction and remains elevated.

As for the U.S. banking system, which is part of the Federal Reserves responsibility, the FOMC statement reads, “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

As for inflation which is hovering at more than twice the Fed’s target, the post FOMC statement reads, “The Committee remains highly attentive to inflation risks.” Both of these quotes can be viewed as not trying to panic markets in either direction.

There were few clues given in the statement about any next move, causing some to believe that the Fed is now going to take a wait-and-see position as previous rate hikes play out in the economy. The statement was shorter than previous releases following a two-day FOMC meeting, but it ended with the following forward-looking actions:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Fed Chair Powell generally shares more thoughts on the matter during a press conference beginning at 2:30 after the statement.

Paul Hoffman

Managing Editor, Channelchek