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Healthcare In A Bear Market

CloseCloseCloseStocks plunge into a bear market as the viral outbreak threatens to devastate the economy.Healthcare has performed relatively better than the broader market which already has plunged over 30%.The healthcare sector is positioned much better.



A new reality dawned as the stock market entered a bear market.

It wasn't a tiptoe moment for the bear. The market simply plummeted into a bear market canyon. Just from March 4 to March 12, in about a week, the S&P 500 and Nasdaq declined 20% or more. The healthcare index did relatively better during that period, declining -17%, though still a painful performance.

However, this was the good part. The pullback as measured from recent highs is even worse. The table below shows the depth of the pullback and the extent of the damage.

One thing that stands out is that the healthcare index (XLV) has retreated relatively less than the broader market. Even the larger-cap weighted Nasdaq Biotech index has held its own, outperforming the market meaningfully, while the smaller-cap weighted S&P Biotech has declined around broader market levels and much better than the Russell 2000 index. There's a preference for well-capitalized large-cap biotechs.

An Economic Morass

The viral pandemic is triggering a shutdown of the economy. This shutdown is picking up its pace and now sweeping across multiple sectors of the economy, akin to closing hatches before a submarine dives. The extent of the damage is unknown but will most likely be severe though short term. A typical recession unfolds over many months triggered by a tightening monetary policy and a loss of consumer confidence. Consumer spending begins to slow and so does production. However, event-driven recessions have different dynamics, and none so pernicious as this pandemic-driven one. Consumption plummets in a matter of weeks. Production plummets in a matter of weeks. Labor participation plummets in a matter of weeks. Cash flows that lubricate the wheels of the economy simply vaporize for most industries and fixed costs begin to crush businesses. This happens as debt service and covenants come due. Access to liquidity or cash becomes a question of survival. Such things happen during a typical economic recession too, affecting different sectors with varying degrees of intensity like it did during The Great Recession. At that time, it was the financial sector that imploded. But it doesn't happen to a majority of the sectors in the economy in a rapid and synchronized retreat like it's happening now. There were more than 80 million hourly workers in the US in 2017, the last year from which data is available, as per the US Bureau of Labor Statistics (BLS). Needless to say, a number of them could be feeling pressured very quickly as their work hours shrink or disappear

Federal Reserve To The Rescue

The Federal Reserve can't fight the virus directly. But it can blunt its devastating economic consequences. The primary job of the Federal Reserve at this point is to limit the damage to the economy rather than the typical jump-starting it. It has to ensure that most of the businesses are preserved when things begin to turn around by most likely April end. And the Federal Reserve is doing that with rapid action, whether it's cutting rates or ensuring liquidity in the banking system or encouraging borrowing. Such interventions will continue and get more creative and coordinated for the crisis warrants such actions.

Time Is The Biggest Enemy

As is clear with the viral spread, time is the biggest enemy. This also is true for fiscal and monetary action. The Federal Reserve realized the urgency and moved swiftly in what was one of the biggest rate cuts ever done - 150 basis point in a week. The central bank also is deploying its balance sheet as a backstop to the credit markets.

The government needs to realize that as well that time is the biggest enemy. And it can't pick and choose now which industry receives a bailout or rescue package. That process will take too long, require too much buy-in from various constituencies, and much opposition to overcome. And the fact is that there will be just too many situations warranting a bailout or rescue.

As mentioned in our previous article, What's Ahead For The Stock Market, the Federal Reserve and the Federal Government need to set up zero-rate loan facilities that can allow businesses, big and small, to borrow based on uniform criteria. A bridge facility to tide over the crisis. This should contribute toward preserving consumer confidence, beyond the one-time $1,000 hardship bonus, that there will be jobs to go back to.

Incremental help is no longer an option. Remember when President Trump was talking about needing only $2 billion and now it is $1 trillion in a few days. There's a lesson in it - this is now a very fast-moving crisis as the delayed containment efforts have failed miserably and getting ahead of it requires bigger actions earlier.

Healthcare Moving In The Right Direction

Healthcare came into the year already facing high regulatory uncertainty. Besides a growing unease at climbing healthcare costs, the pharmaceutical industry also was facing a growing backlash against drug price increases. Democratic candidates for the presidential elections had made healthcare restructuring a central part of their policy portfolio.

Two plans emerged, which were referred to as Medicare for All and Medicare for All with a public option. While both plans are quite sweeping and progressive compared to the status quo, solely from an investing perspective, the Medicare for All plan has a relatively higher risk profile for investors as it would recast the industry structure and create a single point of healthcare payment. Earlier this month, the Medicare for All plan appears to have lost traction as the primary proponent of it, Sen. Bernie Sanders, lost the front-runner status in the nomination race. That was a significant risk-diminishing event for healthcare.

Healthcare is a defensive sector. In times of economic stress, it can tend to outperform the broader indexes on a relative basis. The sector still declines, but relatively less than the S&P 500. Its relative performance in the last recession is shown in the chart below. ~ Healthcare Performance Recession

Healthcare is composed of multiple industry groups that will get affected unevenly. But it's highly likely that everyone gets affected adversely to some degree.


At this time one of the key risks to biotechs is the same as the one that confronts all companies and the economy - access to liquidity and working capital.

With the public market window for offerings closed, biotechs will have to rely on existing resources. However, the risk of a biotech credit crunch is relatively much less since financially their balance sheets are much stronger today than even perhaps at any other time since the Great Recession. The ability of biotechs to sit out the crisis and continue with their work is relatively superior simply because in most cases the entire funding of operations is balance sheet-driven and not cash flow-driven. To the extent the balance sheets are weak, there will be financial stress, and such companies will have to cut expensive deals in private placements with investors. Lower cap companies may be ignored as investors prefer the security of larger-cap biotechs. But biotechs as an industry group will not encounter a meaningful liquidity crisis compared to other sectors of the economy.

A bigger risk for biotechs and biopharma though is a delay in trials. That is unavoidable in many cases as the viral outbreak makes it harder to maintain trial integrity while also keeping staff, monitors, and patients safe. Also, the FDA will prioritize virus-related trials and reallocate resources, PDUFA dates can no longer be met, and new trial studies may not receive timely approval, and be able to recruit or retain. This can potentially delay multiple biopharma programs by at least three months, pushing progress into the second half.

However, it must be acknowledged that delay in programs, the biggest risk for biotechs, will not build into an existential issue and biotechs will come out of this crisis almost whole. At this point, one cannot say that with great conviction for several sectors of the economy.

There also are unique advantages that benefit biotechs. The group is mostly insulated from the risks of an earnings decline. They will not face a meaningful demand falloff or even the risk of permanently lost demand. On the contrary, biotechs may even benefit from COVID-19 activity as antivirals and vaccine research remain the focus. A few companies in this area include Gilead (GILD), Regeneron Pharmaceuticals (REGN), Moderna (MRNA), Novavax (NVAX), Vir Biotechnology (VIR), and Biontech (BNTX).

A Silver Lining

The situation is really bad. But it's not the end.

There's a lot we don't know about the path of the outbreak and the final cost on the economy, but we still know some things.

The viral outbreak has a shelf life and it can likely peak by mid-April, judging by the Chinese experience. That peaking will be a market relief. But the stock market may anticipate it and begin to strengthen earlier.

We also know there will be a gigantic pent-up demand. And we also know there's a huge stimulus of 0% rates. Besides, we also know there will most likely be a $1 trillion to $3 trillion of federal spending stimulus by the time all rescue packages and bailouts are finished.

The stock market already is reflecting a bad economic scenario. The broader market has declined over ~32%, larger cap biotechs ~26%, and healthcare 24%. It's a brutal selloff. And it's a forward payment on what's still to come. The really bad things haven't happened yet. They will start happening as the death rate rises rapidly, the healthcare system is overwhelmed, unemployment claims surge, bailout requests increase, and businesses begin to file for bankruptcy. But much of it is already being discounted into the market. It's very likely the market can decline further in this deluge of negative news to emerge over the rest of the month, but one has to believe that we're through at least the bulk of the sell-off.

If the economic fabric is mostly preserved, one can hope for the rebound to be swifter as well then previous recoveries. That will mean third-quarter GDP growth can perhaps be better than the second quarter. And if that happens, it will still be a good opportunity for investors to accrue positive returns for the year.


The best-case scenario does not exist as the country has failed in implementing the first level of preemptive containment to significantly manage-down the disease. At this time, the viral outbreak has taken hold and all containment efforts are being aimed to slow down the virus spread and give the healthcare system a fighting chance to serve the most serious patients and not break down. Businesses and the population are moving fast now to get ahead.

The Federal Reserve has been brilliantly urgent on the task of keeping credit markets liquid and functioning. Although there's no guarantee that credit markets won't seize up, the Fed and the other major central banks recognize the gravity of the situation and appear to be ready to keep intervening. The government has meanwhile ramped up its efforts to get more virus testing available while lining up stimulus and bailout packages.

The financial markets have gone into a tailspin. If one was caught in this sell-off with a fully invested portfolio it has been a very difficult experience. But there's also light at the end of the tunnel, and the second half will provide an opportunity to recover. Healthcare will be damaged much less compared to many other sectors in the economy. The model portfolios of Prudent Healthcare, the Prudent Biotech, and the Graycell Smallcap are presently 25% to 30% invested. Lowering exposure remains a preferred strategy in what's undoubtedly a highly treacherous market.

However, it cannot be ignored that there's a lot of stimulus flowing into the market. When does the market believe the economy can win out? The crisis of confidence requires some positive news on the viral outbreak and that may come by early April. In the meantime, business recovery in China is happening rapidly as new infection rate has dropped. In the best-case scenario, the bear market will most likely end in May as the economy emerges from a recession potentially during the third quarter.

There are many healthcare companies that will continue to have their business mostly intact and promising prospects ahead. A few of the larger ones which can be considered at an appropriate time include Gilead Sciences, Vir Biotechnology, Moderna, Regeneron Pharmaceuticals, Momenta Pharmaceuticals, Vertex Pharmaceuticals (VRTX), Acceleron Pharma (XLRN), Quidel (OTC:QDEL), Luminex, Karuna Therapeutics (KRTX), Zai Lab (ZLAB), Kodiak Sciences (KOD), Neogenomics (NEO), Seattle Genetics (SGEN), and Biogen (BIIB).

The article was submitted on March 18 to Seeking Alpha.

The post Healthcare In A Bear Market appeared first on Prudent Biotech.

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.



Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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Forget Ron DeSantis: Walt Disney has a much bigger problem

The company’s political woes are a sideshow to the one key issue Bob Iger has to solve.



Walt Disney has a massive, but solvable, problem.

The company's current skirmishes with Florida Gov. DeSantis get a lot of headlines, but they're not having a major impact on the company's bottom line.

Related: What the Bud Light boycott means for Disney, Target, and Starbucks

DeSantis has made Walt Disney (DIS) - Get Free Report a target in what he calls his war on woke, an effort to win right-wing support as he tries to secure the Republican Party nomination for president. 

That effort has generated plenty of press and multiple lawsuits tied to the governor's takeover of the former Reedy Creek Improvement District, Disney's legislated self-governance operation. But it has not hurt revenue at the company's massive Florida theme-park complex.  

Disney Chief Executive Bob Iger addressed the matter during the company's third-quarter-earnings call, without directly mentioning DeSantis.

"Walt Disney World is still performing well above precovid levels: 21% higher in revenue and 29% higher in operating income compared to fiscal 2019," he said. 

And "following a number of recent changes we've implemented, we continue to see positive guest-experience ratings in our theme parks, including Walt Disney World, and positive indicators for guests looking to book future visits."

The theme parks are not Disney's problem. The death of the movie business is, however, a hurdle that Iger has yet to show that the company has a plan to clear.

Boba Fett starred in a show on Disney+.

Image source: Walt Disney

Disney needs a plan to monetize content 

In 2019 Walt Disney drew in more $11 billion in global box office, or $13 billion when you add in the former Fox properties it also owns. In that year seven Mouse House films crossed the billion-dollar threshold in theaters, according to data from Box Office Mojo.

This year, the company will struggle to reach half that and it has no billion-dollar films, with "Guardians of the Galaxy Vol. 3" closing its theatrical run at $845 million globally. 

(That's actually good for third place this year, as only "Barbie" and "The Super Mario Bros. Movie" have broken the billion-dollar mark and they may be the only two films to do that this year.)

In the precovid world Disney could release two Pixar movies, three Marvel films, a live-action remake of an animated classic, and maybe one other film that each would be nearly guaranteed to earn $1 billion at the box office.

That's simply not how the movie business works anymore. While theaters may remain part of Disney's plan to monetize its content, the past isn't coming back. Theaters may remain a piece of the movie-release puzzle, but 2023 isn't an anomaly or a bad release schedule.

Consumers have big TVs at home and they're more than happy to watch most films on them.

Disney owns the IP but charges too little

People aren't less interested in Marvel and Star Wars; they're just getting their fix from Disney+ at an absurdly low price. 

Over the past couple of months through the next few weeks, I will have watched about seven hours of premium Star Wars content and five hours of top-tier Marvel content with "Ahsoka" and "Loki" respectively. 

Before the covid pandemic, I gladly would have paid theater prices for each movie in those respective universes. Now, I have consumed about six movies worth of premium content for less than the price of two movie tickets.

By making its premium content television shows available on a service that people can buy for $7.99 a month Disney has devalued its most valuable asset, its intellectual property. 

Consumers have shown that they will pay the $10 to $15 cost of a movie ticket to see what happens next in the Marvel Cinematic Universe or the Star Wars galaxy. But the company has offered top-tier content from those franchises at a lower price.

Iger needs to find a way to replace billions of dollars in lost box office, but charging less for the company's content makes no sense. 

Now, some fans likely won't pay triple the price for Disney+. But if it were to bundle a direct-to-consumer ESPN along with content that currently gets released to movie theaters, Disney might create a package that it can price in a way that reflects the value of its IP.

Consumers want Disney's content and they will likely pay more for it. Iger simply has to find a way to make that happen.

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