wdhalgren

30 Years of Price to Book - Comstock

Couple of comments. First, using a 30 year chart is somewhat misleading because the insanity of the late 90's pushed price to book well above historical norms, and thus skewed the chart. Also, I'm not sure how Comstock did their calculations, but I'm positive that numerous other sources, including Barron's, reported S&P price to book greater than 6 at some point during the dotcom bubble. The chart above maxes out at 4.9 times.

Second, you make the following statement: "Furthermore, there has been a shift when it comes to industries in the S&P 500, with manufacturing companies playing a decreasing role while knowledge-based companies (e.g. software, consulting, other services etc.), where hard-assets are not a determining factor, comprise a larger portion of the index." It's an often used and somewhat alluring justification for the 30 year bull run in stocks, but may not be completely accurate.

Book value is a measure of the accumulated wealth of a company, whether it was contributed by investors or operating income. From that perspective, valuations have certainly risen above historical norms. The implication of the "soft asset" argument is that human or intellectual capital are now more important than in the past. While that may be true, it does, of course, require that human or intellectual capital of a company be more productive than that of its peers in order to justify a higher price to book. Otherwise, the company has negative intellectual capital which should subtract from valuation. So, an individual company might deserve an elevated price to book based on intellectual/soft capital, but I don't see how it can be true of the market as a whole. Unless this really is Lake Woebegon, and we're all above average.

Price of Gold Says Nothing About the Dollar

This article says nothing about anything.

Wary of the New Gold Rush

I see from your disclosure that you have no position in gold. So why are you wary? Worried that the gold rise will endanger the real bubble, paper asset prices that have been selectively targetted by trillions upon trillions of new issuance from the federal reserve?

Well, it's been clear from the outset that Bernanke could not control the consequences of his malfeasance. The move in gold isn't a bubble, it's a perfectly rational response to the destruction of global fiat currencies, particularly the US dollar. You should brace yourself for a lot more "wariness" by the time this all plays out.

Will the Dollar Decline Forever?

Of course the dollar won't go down forever. Eventually it will reach some level of intrinsic value. Think of all the things dollars can be used for: fuel, scratch paper, wallpaper, bathroom tissue, bedding material. The possibilities are endless. Hold onto those dollars, they will certainly be useful for something.

Bears Might Miss a Remarkable Recovery

Recovery is a very misleading term for what our economy is experiencing. Imagine a patient who goes to the doctor with malaise due to a serious underlying disease. The doctor gives the patient a stimulant, maybe amphetamines or cocaine, and the patient leaves the hospital with a gleam in his eye and a new spring in his step. Would you, knowing the details of the patient's condition and therapy, call that a recovery? I wouldn't.

What we have is an economy with a serious disease, too much debt, too much consumption, not enough savings or capital. Our government has treated that with a short term stimulant that will eventually wear off and leave us in worse shape than before. Recovery is not a good description for this insanity.

Feds to California: Drop Dead

Of course Obama will bail us Californians out. We need money for free health care and bi-lingual education for the illegal aliens who mow our lawns and pick our strawberries. We need money for the octomom's who breed our next generation. We need money to help pay our energy bills; these windmills aren't as cheap as the oil lying of our coast you know. We need money to afford our homes, have you seen the prices in the bay area? We need money for water, it doesn't rain much here and the upkeep on all this nice landscaping's a bitch.

We support the democrat party loyally, just like the UAW did and we expect, no demand, our fair recompense from the rest of you guys for that loyalty. And while your at it, throw in a little extra so we can enjoy our weekends at the Indian gaming establishments. All work and no play makes Jack a dull boy.

Just Another Day of Bad Reporting

You know what they say, "In for a penny, in for a pound". Well, the government and their media friends are in for $10 trillion and whatever US Constitution is worth. We seem to have passed the point of no return.

Gilead Looks Good on Strong Sales and Pipeline

Gilead is an expensive version of big pharma. They have no particular technology of interest to any acquirer, so valuation makes buyout highly unlikely. Gilead's HIV franchise is obviously the best in the industry, but the market has long since acknowledged the growth of that franchise by giving Gilead a premium valuation.

So the question is, what drives the stock from here. Unfortunately, the CVTX acquisition doesn't fit the bill. Ranexa is, and always will be a niche drug. Nitrates are dirt cheap and work well for the great majority of patients. The incremental benefit Ranexa affords to a few refractory patients is unlikely to command enough price premium to make a dent in GILD's bottom line, particularly in an increasingly price sensitive environment. The other CVTX drugs aren't big enough to even register for a company with GILD's market cap.

Bottom line, Gilead overpaid for CVTX, and part of the reason they overpaid was Darusentan hopes. Unfortunately, Gilead doesn't have expertise in mass market drugs and will soon understand the vast gulf between HIV and hypertension. With the side effect/efficacy profile seen to date, Darusentan has a 60/40 chance of making it past the FDA, IMO. If approved, it probably won't generate a positive ROI, since it will be competing on a fairly level playing field with several generics. That a marginal 3rd line antihypertensive is even being discussed as a driver for a 40+ billion dollar pharma company is evidence of overvaluation.

Gilead's main advantage has been the belief that management was somehow that much better than the rest of big pharma. The Myogen, CVTX and Corus acquisitions have pretty much obliterated that rationale. It's extremely difficult for any pharma to maintain a premium multiple based on growth through acquisition, the market is too efficient, yet Gilead management has clearly signalled (via acquisitions and stock buybacks) that their internal investment opportunities are insufficient to maintain the stock's premium multiple.

Over the past year, GILD stock has correlated well with, but slightly underperformed, the PPH index. At the same time the stock has been significantly more volatile than that benchmark. Given GILD's valuation premium and the high event risk of their premium pricing model as we enter an extended (forever?) period of global health care price pressures, I think this stock's risk reward is higher than relevant peers and expect that over time its valuation will gradually merge with the big pharma group, probably reaching parity about the time the tenofovir molecule loses patent protection.

Fears of Inflation Seem Overblown

Your article is about trading, not inflation. You're making a short term market call on the prices of bonds, gold, etc. That has nothing to do with the inflation fears/expectations of long term holders of bonds and dollars, i.e., savers. The US government can and will play little confidence games with the markets, trying to whipsaw speculators and gain some time, but the end result is virtually a foregone conclusion barring a massive change in policy direction.

We, as individuals, as corporations, and as a country, have already borrowed more than we can replay in current value dollars. We have promised substantially more in the future. These debts will be repaid in dollars worth a small fraction of current value simply because we don't have the earnings ability to pay full value. That is inflation and it's not a fear, it's a recognition of the inescapable future consequences of bad decision making.

Why Do CNBC and Bloomberg Report Operating Earnings?

Accounting subterfuge is one of the many ways that Wall St and their facilitators have conned the general public. PE Ratio is the one valuation metric that the general public pays attention to. Everyone knows, PE ratio of 15 is about right, higher is expensive, lower is cheap. So, the financial establishment gives us what we want, by massaging the numbers to get PE ratios down to that "cheap" threshold, or as close as possible. Data providers like the ones you mention (as well as several other prominent ones) are part of the game, using inflated "Non-GAAP" earnings numbers to manage the PE ratios for public consumption.

With a toothless FASB and SEC guarding the henhouse, companies routinely misrepresent their earnings by downplaying "one-time" charges that occur every quarter and are routine costs of their business model. As soon as a one time charge is announced, it is immediately disregarded by sell-side analysts as irrelevant to the company's valuation. Similarly, employee stock option expenses are ignored, because they're non-cash. If a company makes an acquisition, they throw past and future expenses into one "big bath" quarterly writeoff, which is conveniently and immediately forgotten by all concerned. Tech/biotech companies often write off 90% or more of an acquisition price as "Acquired In Process R&D", thus freeing up future revenues from those pesky amortization expenses.

There's nothing new about accounting shenanigans, but the scope of their occurrence is increasing and very few commentators tell the general public that it even occurs. As the general public has gotten more involved in stocks over the last few decades, the financial industry has become very adept at putting on a good face without overtly breaking the rules, with the tacit approval of regulators and the financial media of course. Wouldn't want the masses to lose confidence in the market, eh? The old maxim about a fool and his money will always be true.

We Can't Talk Our Way Out of This Market Mess

"Unless we start to get improved readings on the economic statistics at some point....the negatives will unfortunately overwhelm the thin “green shoots” investors are currently grasping."

It doesn't matter whether we get improved data or not. Price manipulation can paint a nice picture, for a while. But we've spent the better part of a half century degrading our ability to compete. Regulation, social welfare, bureaucratic entanglement, politically correct education system, tort lottery, environmental terrorism --- all of this has created a sclerotic and corrupt economic system that rewards pandering to the government above every other endeavor. There is no evidence of a willingness to reverse the functional decline, which means our debt load cannot be paid. Our lenders understand that now.

What Is the Bond Market Trying to Tell Us?

"There's also some debate about whether the Fed will have the discipline to do the right thing when the time for action arrives."

Really? You mean like a two sided debate where someone is actually taking the position that the fed will act responsibly and reveal that our economic growth has been a facade and we face declining living standards for the forseeable future? Someone who actually believes that the fed will take away the punch bowl before the next bubble has a chance to get started, much less firmly entrenched? Someone who posits that our fed intends to make sure that the US government pays its $60 trillion in current and future obligations in real dollars, despite the fact there is no way we can generate that kind of capital from the private sector to fund those obligations, much less the new programs still being dreamt up by our ever growing public sector? Someone who believes that the record levels of household debt will also be paid down in real dollars, thanks to the diligence of Ben Bernanke in protecting the vehicle to which we savers have entrusted the fruits of our labors, the mighty US dollar?

Huh. Interesting. Do you have a link?

Early Filing for Byetta: Will It Become a Blockbuster?

"But an FDA advisory panel recently raised concerns about a possible thyroid tumor risk that was seen in lab rodents on Victoza. And some analysts think the FDA will want to see if that is exclusive to NVO's drug or a so-called "class effect" that could also taint Byetta."

"The drug's fate could be determined by what the FDA decides to do about the small, possibly even unrelated risk of pancreatitis."

If I was going to worry about either of those two side effects, I'd worry about pancreatitis. I'm not aware of any mechanism that would suggest a class effect producing thyroid cancer. But, GLP-1 agonists do have direct stimulatory effects on the pancreas, so there's a better possibility the pancreatitis events are drug related, IMO. I believe the cases concerning the FDA were fulminant pancreatitis, which is not a trivial matter. Declining Byetta sales suggest that endocrinologists may be concerned about that linkage.

Tsunami of Cash Just Waiting to Be Invested

Just to make sure I have your scenario straight, let me summarize what you said. People will take some of their money out of that tsunami of money market cash and "put it to work" in the market. For every dollar they "put to work" by buying a stock, the seller takes a dollar out of the market and "puts it on vacation", most likely into a money market fund. Voila, the tsunami has stayed exactly the same size, completely unaffected by the transaction.

And just to be fair, the exact same thing happens whether the market is rising, falling, or flat. Money "on the sidelines" is not impacted by stock market transactions, because every buyer has a seller and every seller has a buyer. Money market funds are not used up, or accreted by the level of stock prices, because money cannot "flow into" the market. If we woke up with a cure for death tomorrow, and the Dow opened at 100,000 on the first trade, no money need have changed hands, or "flowed in from the sidelines".

Your impregnable floor is a fantasy and "sideline cash" is a mythical construct of the wall street marketing machine. Now, go do your bottoms up homework and you might get lucky and pick a winner or two.

Why Gold Is Losing Its Shine

"Gold is about to get a lot cheaper"

Danny, Danny, Danny. The only thing that's about to get cheaper is the dinners you buy for your little girlfriend, assuming you have acted on the silly ruminations above.