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Spencer Knight
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Chief Economic and Investment Officer of a macro based investment management company.
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  • Why Hiring Is Sluggish, But A Perfect Storm Is Brewing

    During an economic expansion it is imperative that employers hire at a rapid pace. Economic expansion (i.e. GDP expansion) and hiring are two concepts that essentially tied hand in hand, courtesy of how GDP is calculated, because you cannot have an economic expansion without an increase in production and expenditures, among many other things. And you cannot have consistent consumer expenditures without wage paying jobs. Similarly, businesses are not going to produce new goods if consumers are not spending (i.e. housing inventories over the last four years). Thus, you get a scenario where hiring is extremely sluggish as businesses are afraid to take the plunge and hire more employees. And when you throw in the Affordable Healthcare Act (ACA) you get a substantially more complicated situation.

    A more down to earth way of putting this is: businesses (large and small) are not willing to hire until orders are placed. For example, a company that produces, let's say, wheels, will not embark on any substantial hiring until large enough orders are placed that cause the current labor force to, well, for a lack of a better word, labor. Furthering this example, if a customer orders 10,000 wheels, it is very likely that this wheel company will need to hire new staff because the alternative solution is delay the order and ruin your reputation. Think about what happens every time Apple (NASDAQ:AAPL) announces a delay in their latest gadget that everybody already has anyways.

    Nevertheless, businesses are finding it hard to find a reason to hire in the first place, and the ACA is not helping. Regardless of whether business owners have correct knowledge about the new changes, most business owners are frozen with fear and are not willing to hire. There are, however, obvious provisions/subsidies in the ACA that can and will help the smallest businesses save up to 50% on their healthcare costs. Unfortunately, despite these facts, business owners are struck with fear and unwilling to hire without new business orders. This cycles back to the fact that consumers are not able to place orders if they do not have jobs in the first place. Likewise, other businesses are not able to place new orders with other businesses without the income from consumers.

    What we have is an economic scenario where businesses are hiring too slowly to make any immediate or meaningful impact on the country's employment situation. Many detractors will point out that the UE rate is decreasing because, for the most part, consumers are leaving the work force in droves. I for one do not care how the UE rate declines, as long as QE ends, and I am expecting an announcement of a slow winding down of QE to begin in 4Q13 or 1Q14 to occur shortly.

    Nevertheless, there will be a point when a perfect storm is created and hiring jumps substantially. I am expecting to see, at some point, consumer expenditures reach a specified unknown amount that causes business to hire. And once a majority of businesses begin to hire the avalanche will begin. In this scenario you can expect to see consumer expenditures increase and subsequent hirings to follow. When will this be? Good luck on that one.

    One final thought to take home is that the current economic expansion cannot take full effect without decent amounts of employment. Therefore the current expansion will in all likelihood last longer than previous expansionary phases. The difference will be that GDP and other economic indicators will appear sluggish, but at the end of the expansionary phase, the nominal data will be the same as the previous shorter expansionary phases.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 23 1:17 AM | Link | 1 Comment
  • IntelGenx: A Fourth Quarter Diamond in the OBB Rough
    Many times companies on the OBB market are forgotten due to the small size. However one company that is poised to have a great fourth quarter of this year is IntelGenx Technologies Corporation (OTCQX:IGXT). IntelGenx focuses on improving existing drugs by adding IntelGenx's novel advanced controlled release technologies. IntelGenx is currently developing drugs that treat depression, osteoarthritis, hypertension, erectile dysfunction, and pain management. As the company continues to expand, investors should not be surprised to see IntelGenx pop up on a major healthcare companies buy list.

    In December of 2010, President and CEO of IntelGenx Horst Zerbe spoke about the company and his objectives. When asked how he got started with new drug delivery systems; Zerbe discussed how pharmaceutical films are a much more efficient way for drug delivery. He also mentioned how he developed the Listerine film strips for fresh breath. Furthermore Zerbe stated how applying IntelGenx's novel delivery platforms to pre existing drugs allows the company to bypass phase two and phase three trials most of the time; which saves money. 

    Zerbe was also asked about the current market of pharmaceutical films and how these films work. Zerbe stated the market for pharmaceutical films is still very new as less than a handful of companies are working on pharmaceutical films. Also, two recently developed films for cough and cold in children have been approved for Novartis (NYSE:NVS). He also mentioned how films make the drug more bioavailable and uptake is quicker as the medicine dissolves faster.

    Zerbe gave the most speculative answer of the interview when asked what films the company currently has in development. Zerbe stated IntelGenx portfolio of products has a "large blockbuster potential and targets a combined market in the tens of billions of dollars." I wont say the combination of erectile dysfunction, migraine, insomnia, bipolar disorder, and pain management isn't a $10 billion market; but I think the numbers are a bit speculative at this point. I may be wrong 5-10 years from now, but currently over $10 billion potential is speculative rabble.

    As I previously mentioned, IntelGenx will make a run in the fourth quarter. This is because the company has a PDUFA set for November 13, 2011. The NDA for CPI-300 was submitted in May of 2010. Briefly, CPI-300 is an anti-depressant to treat major depressive disorder (NYSEARCA:MDD) and contains a high strength form of Bupropion HCl. CPI-300 was rejected in February of 2010 due to some food affects and manufacturing issues. The manufacturing issue was an easy fix as the company simply had to fix the problems at a specific facility. In terms of the food affect issues, IntelGenx is confident a label specification and restrictions will lead to an approval.

    As the PDUFA date approaches expect a long drawn out run that could see the share price stay around the 0.90-1.10 range. The current 52 week high is the lower end of this scale and it should be eclipsed as November gets closer. We may see the all time high eclipsed on approval as well. IntelGenx's all time high is about 1.58 from August of 2007. Also, as November becomes more near, we may see investment firms initiate coverage; which would cause an instant share price jump. IntelGenx is a stock to watch in the fourth quarter, and I recommend doing research now to see if this company is right for your portfolio.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: IGXT
    Jul 01 1:24 AM | Link | 5 Comments
  • How Domino's Pizza Will Turn Into Chipotle Mexican Grill

    Stocks Mentions: Domino's Pizza (DPZ), Chipotle Mexican Grill (CMG)

    Over the past year Domino's Pizza (DPZ) has embarked on a mission to serve better quality food to satisfy the customer.  One of these gimmicks have been to have people take photos of the pizza they recieve and post it online.  In doing so this would show the CEO, J. Patrick Doyle, to see if the resturants are living up to expectations and make changes if needed.  This plan is much better than handing out surveys for people to fill out because quite frankly nobody wants to fill out a survey with no real compensation.  Therefore allowing people to upload photos of the beautiful pizzas they get everybody can see what kind of food Dominos Pizza serves.  Also, the company is able to show these photos in their commercials, which in turn shows a greater audience the food that is being served.

    In the past many people have dubbed Dominos Pizza as having "cardboard" crust and far from fresh ingredients, particularly the sauce.  Dominos took note of these comments and started a mission to show they have fresh ingredients that are great tasting and good for you.  One way they did this was change the sauce that is on the pizzas.  I can admit from my own experiences that the sauce is much better than it was years ago.  So I believe they probably did begin using fresher ingredients to make the sauce.  Not only did they rename the sauce to "Robust Inspired Tomato" sauce, but they advertised that so people know that they changed the sauce.  Since they knew that one of the biggest complaints was the fact that the sauce never tasted that fresh and that it probably comes from a can.  Now I think saying it comes from a can is a bit ridiculous, but I do believe they changed the sauce for the better and it is showing by surge in the stock price.  Another change with the pizzas is that they added garlic to the crust. Therefore it is almost like you are getting a pizza with garlic bread, but only paying for the pizza.  The company does not advertise this as much as the other promotions, but this is something that has changed for the better.

    Another more recent promotion they have started is the new chicken recipe.  Anybody who watches television has probably seen the humurous commercials about the new boxes for the chicken that lets you decide how much you enjoyed the chicken.  This new promotion has caused the stock price to recently eclipse the 52 week high yet again.  It is quite remarkable how Dominos was not hit too hard by the recent downturn in the market, comparably to other companies.  Some think that stocks such as Dominos will not keep motoring along, however I believe it will keep going because the price of the stock is undervalued.  It may not be undervalued to the current level of the company, but it is undervalued if you look at the potential of the company.  Since right now Dominos has not expanded on a huge global level yet, so when they do that, we will see even higher revenue.

    One of the problems with Domino's is the fact that commodity prices are rising, so it is becoming difficult for them to maintain the level they are at right now.  But I think they can get past that bump because as I said, the stock price is too low.  I know it is difficult to buy into a company that has been eclipsing 52 week highs on a weekly basis, but sometimes you have to realize that some companies have the ability to keep gaining with no bound.  I would warn you to wait to buy Domino's right now because they just hit a 52 week high today, but I would say on a $0.50 pull back it would look enticing.

    Another resturant that is well known for fresh ingredients is Chipotle Mexican Grill (CMG).  This company has had quite the explosion over the past few years.  Investors who bought into the great idea from the onsight are very happy right now.  However, this company is a perfect example of how Dominos has plenty of room to keep growing.  Chipotle is over $240 per share and Dominos is only at $18, and I do not see any reason why Dominos can't reach that level in 10 years.  Since J. Patrick Doyle is doing a great job at moving the company in a forward direction by using fresher ingredients.  One of the biggest thorns in Domino's side is the fact that pizza is deemed an unhealthy food; while the food Chipotle serves is relatively healthy.  This is a huge difference in modern times because right now there is a massive wave of healthier eating habits due to the obesity epidemic.  On the contrary, a wise investor will look at the fact that the obesity epidemic is in full swing which means that more people are looking to buy pizza on a more consistant basis, which leads to more sales for Dominos.

    The key point to take away from this is that resturants are great investments at times.  Since the long term growth is sometimes not where it should then you have to do extra research and keep checking on the company over time to see if the results are moving forward or stagnating.  If you start to see any form of slowing in the growth of the company than it is better to pull out while you can.  However, Domino's is a great opportunity to make a substantial amount of revenue over the next 3-5 years.


    Disclosure: I have no positions on the companies mentioned above.

    Tags: DPZ, CMG
    Mar 27 5:54 PM | Link | 3 Comments
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