Stocks drifted last week, buffeted by concerns over Europe due to the Italian elections and worries here at home as the “dreaded” sequester begins to take effect.
As the charts above illustrate, the stock market was marginally higher last week with the Dow Jones Industrial Average gaining .64% while the NASDAQ Composite, held back by Apple, moved higher by just .25%.
The Markets & Economy
Elections in Italy showed no bloc gaining enough seats to control the government. Thus the worries about Italy and Europe in general crept back into the markets. The Euro fell back from its unrealistic gains of a few weeks ago. This, along with other economic data, really has hammered home the notion that Europe has neither solved its problems of sovereign debt issues nor has it put behind it just what to do with member states that cannot finance themselves.
Closer to home, the fear mongering which has taken place by the Obama administration finally came to a halt late last week. At that point, it was acknowledged that the world would not end due to the sequester but that it was a “dumb” idea. Indeed, it was a dumb idea and it was admitted that President Obama proposed the idea in 2011 and it was passed with democrat votes in Congress. So the hypocrisy of running around the country blaming the other party is pretty blatant but it passes for politics these days.
In terms of the substance of the sequester, please review the chart below which shows thespending of the government both with and without the sequester. First of all you can hardly tell the difference and secondly you will notice there are not CUTS. Spending goes up every year with or without this policy. Thus, what is all the fuss about?
The private sector has been forced to deal with slower revenue growth due to the lousy economy and it is doing just fine, as witnessed by the recent five-year high in stock prices.
Indeed, last week saw testimony from Ben Bernanke and comments from Mario Draghi, the two central bankers with unlimited power to print money, that the global economy is too fragile to change policy and thus interest rates will stay at zero here at home and actually appear to be reduced in Europe when the ECB next meets.
As I mentioned last week, this is all the stock market traders needed to hear to cause markets to recover from last Monday’s Italian election results sell off. As long as the monetary authorities wish stock prices to go higher, they will, regardless of the fiscal follies being implemented in Washington DC and in Brussels, not to mention Japan which is printing Yen like there is no tomorrow. It may seem artificial (and it is) but the central banks want higher asset prices and stocks are the easiest asset class to manipulate. This means investors should not fight the central banks and invest.
What to Expect This Week
The big economic news comes on Friday when the employment data is released for February. Some 170,000 non-farm payroll jobs are expected with the unemployment report staying about the same. This number is very hard to analyze given the number of assumptions and revisions. Most importantly I don’t expect it to change, in any way, the perception that economic growth is not good.
The weekly review of the Economic Cycle Research Institute’s leading economic index shows another decline (see chart below). Thus the year 2013 is not off to a strong start. Higher taxes and higher gasoline prices along with weak foreign markets, and now the sequester, are just not providing the background upon which a spurt in growth should be anticipated. Perversely, that is good news for stock prices.
SYMBOL: BIIB
Shares of Biogen Idec are trading near all-time highs, as management announced the FDA has accepted the Company’s licensing application for the marketing approval for its new treatment of hemophilia B. This is the largest phase 3 study in the field, and will allow for less frequent injections while maintaining low annualized bleeding rates for patients. This is first significant development in the hemophilia B community in more than 15 years.
While this is positive news for the Company, last week the Wall Street Journal reported that Bristol-Myers is considering a takeover of Biogen. We believe this deal would make a lot of sense for all shareholders. Bristol-Myers needs to upgrade its product portfolio of new drugs, and there is no biotech company in the world with a better drug pipeline than Biogen. With the valuation of pharmaceutical stocks rising the past year, we expect more deals in this industry.
We would be pleased if Biogen were taken over, but we believe the Company couldn’t be positioned better for the next several years even if one doesn’t happen. We expect any acquisition would happen at a significantly higher valuation given its industry-leading drug pipeline. Even without a takeover we look for the shares to reach $200 within the next 12 months, and any buyout should be higher than that.
Three-Month Chart
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