In The $$$MONEY$$$

Michael Scally MD

Doctor of Medicine
Opinions on celgene corp / ticker: celg

Grading Pharma In 2014: 17 Drug Companies Ranked

2. Celgene
Total return: +32.4%
Market Capitalization: $89 billion
Latest quarterly sales: $1.98 billion
New drug approvals: 1
Five-year total return: +301.8%
Grade: A-

The big risk for Celgene is how well patents for its top-seller, Revlimid for multiple myeloma, will hold up. Bernstein Research expects they’ll hold until 2026. Has any company done as well at building a pipeline through licensing? Celgene has a piece of the hottest areas in cancer development: the metabolic drugs being developed by Agios Pharmaceuticals and the CAR-T cells it is working on with Bluebird Bio. Chief Executive Robert Hugin is simply doing a very, very good job.

Should you buy it? Yes. Keep an eye on the patent litigation, though.



IMO I would not buy anything in the Bio arena atm. Rule of thumb when a Dr. gives you a thumbs up on a stock buy it cheaper. :D Just kidding doc I know you do your research. CELG is the cream of the crop but the sector should take a hit and I could see picking it up under 100.

Michael Scally MD

Doctor of Medicine
Jeffrey Gundlach’s Surprising Forecast
The bond titan thinks the 10-year could potentially take out its modern-era low of 1.38%

It has been a magnificent year for both the stock and bond markets, even with the slight wobble in equity-market results in the last two trading sessions of 2014. But with the drop of the ball on the Year of the Horse, it’s time to look ahead to 2015.

And we could think of no one better to talk to than the widely acclaimed King of Bonds, Jeffrey Gundlach, who presides over the $64 billion asset-management complex DoubleLine. He is never shy in offering his opinion on all manner of securities in the U.S. and around the world.

During an interview on the second-to-last trading day of 2014, we found him in a relaxed, expansive mood. And why not? His funds had a banner year, with his flagship DoubleLine Total Return Bond fund (ticker: DBLTX), with $40 billion in assets, and DoubleLine Core Fixed Income fund (DBLFX), with $3.4 billion, finishing in the top decile of their Morningstar groups. Likewise, the DoubleLine Emerging Markets Fixed Income fund (DBLEX) ended in the 96th percentile of its Morningstar class. Meantime, some $4 billion in the DoubleLine go-anywhere hedge fund complex scored a better than 20% annual return, say investors.

It was a much happier new year for DoubleLine and Gundlach than it was for giant rival, Pacific Investment Management Co., and its now-departed chief Bill Gross. Outflows from Pimco’s flagship Total Return fund (PTTRX) rose to $19.4 billion in December. In the midst of Gross’ messy departure from the firm, he met for three hours with Gundlach about the possibility of teaming up. Gross landed at Janus Capital, but Gundlach evinces much respect for his sterling record over more than 40 years of running bond money. “He navigated Total Return magnificently during the 2008 credit crisis, for example,” Gundlach opines.

Per usual, Gundlach has an idiosyncratic view of where markets are headed in 2015. Like virtually everyone, he expects the Federal Reserve to begin raising the federal-funds rate this year, but he predicts that the impact will be the opposite of the conventional wisdom. To wit, longer-term bond yields will, in fact, decline rather than rise as a result of a surprising flattening of the yield curve, he argues.

Where the median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury Bond yield for year-end 2015 currently stands at 3.24%, Gundlach thinks the 10-year that finished 2014 at 2.17% could potentially take out its modern-era low of 1.38% yield hit in 2012. This would particularly be the case if crude-oil prices keep falling to, say, $40 a barrel from their 2014 year-end level of about $55. This further drop from the 46% decline suffered by crude in 2014 would only accentuate deflationary forces he sees at work globally that continue to drop long-bond yields.

Gundlach says he’s constantly asked “how low oil prices can go,” and he responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years -- trading consistently at $90 [a barrel] or above -- undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”

Likewise weighing on U.S. bond yields will be brisk foreign buying from investors in Japan and Europe, where long-term sovereign debt bond yields are mostly lower than U.S. rates and economic growth prospects are less bright. “Everybody worried about what would happen to the U.S. government [bond] market when the Fed ended [its third round of quantitative easing] last fall and stopped its heavy monthly government bond purchases,” he points out. “The answer, of course, is that foreign buying easily replaced declining government support of the market. And the strengthening dollar, which we think will continue, only makes U.S. bonds all the more attractive, for not only do foreign investors benefit from higher relative rates, but they also win on currency translation profits.”

GUNDLACH ISN’T PARTICULARLY sanguine about the prospects for U.S. stock markets. Early in the year, rebalancing of diversified institutional portfolios from stocks to bonds will create some price undertow for equities, he claims. Also, he worries that gross-domestic-product growth for next year and 2016 is unlikely to hit the 3%-plus annual targets that forecasters are assuming. That’s because the deflationary tide unleashed by a slowing world economy and excess capacity will begin to lap against U.S. shores by the middle of 2015. A strengthening dollar won’t help U.S. competitiveness.

Low oil prices will begin to wreak real havoc on employment, capital spending, loan collateral values, energy-company balance sheets, and the junk-bond market. “The boost to U.S. consumers from lower pump prices is the first shoe to drop, but the negative secondary effects from the crude-oil price collapse take longer to surface,” he says.

There’s plenty wrong globally that will eventually weigh on the stock market. He mentions the obvious. Emerging-market economies are sharply slowing. China, despite its current stock market boomlet, rests on shaky financial and economic foundations. Greece threatens to come apart again. Russia is a basket case. Sinking oil prices threaten to amp up geopolitical risks that Russia or Iran might do something dangerous out of economic desperation. Currency wars impend, led by Japan’s systematic yen-devaluation campaign.

But such factors constitute the wall of worry that bull markets typically climb. Bad news or weakening fundamentals can, as often as not, have scant impact on the course of the stock market.

For Gundlach, a mathematics whiz, some of the charts and technical indicators he religiously follows are what give him pause about stocks and the global economy. He sent us over 70 charts from a recent presentation to make various points about what is going on in the belly of the beast.

One shows U.S. CRB Index Futures -- weighted commodity prices going back five years. To the untrained eye, there’s not much to see beyond a vertiginous peak made between late 2009 and late 2010 with a series of smaller peaks saw-toothing down to present levels. But Gundlach draws another conclusion: “Look, commodity prices have fallen back to their lows of 2009, which of course was at the height of the financial crisis. Something is obviously very wrong these days in the global economy.”

Another chart, delineating the movement in yields of two-year government securities of various key euro-zone nations over the past 14 months, looks like a tangle of spaghetti. But Gundlach points to an interesting divergence that has shown up since September, when the rate on German debt sharply diverged from two-year rates on Italian and Spanish debt. The German yield turned negative, while the two Club Med countries’ yields headed the other way. This told Gundlach that trouble lies ahead for the euro zone beyond the headlines of European political unrest. “Folks in Europe are obviously losing confidence and scared if they are willing to pay Germany for the privilege of parking their funds there,” he says.

DURING OUR INTERVIEW, Gundlach reflected on his meeting with Gross, which has attracted much press coverage, largely based on Gundlach’s recollections. Some of the reports focused on Gross’ graciously passing his King of Bonds title to the latter, depicting himself as Kobe Bryant to Gundlach’s LeBron James. But as Gundlach recalls the exchange, it was something of a back-handed compliment. For Gross added that he now had five championship rings and Gundlach only two, though he might win three more some day. On to the new year.

Michael Scally MD

Doctor of Medicine
Gundlach 2015 Outlook "V"

Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.

He advanced three charts that backs up his bear-case for stocks.

· US stocks have never rallied seven years in a row, and we've just entered year seven of the current bull run.
· Margin debt is near record highs. In other words, that means traders are borrowing record amounts of money to bid up stocks. This makes the market sensitive to sell-offs.
· The Federal Reserve is scaling back stimulus. Specifically, its most recent round of quantitative easing is over.


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Michael Scally MD

Doctor of Medicine
Update: Predicting the Next Recession

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012). Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession. Both are off the table now, but there remains some risk of future policy errors.

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases. So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR Update: Most of the poor policy choices in the U.S. are behind us. Austerity hurt the recovery, but austerity appears over at the state and local level and diminished at the Federal level.]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR Update: This still seems correct - no recession this year.]

Michael Scally MD

Doctor of Medicine
Central bank prophet fears QE warfare pushing world financial system out of controlFormer BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015.

Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.

"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."

Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.

He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.

He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?" he told The Telegraph before the World Economic Forum in Davos.

"QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market," he said.

"Even after the stress tests the banks are still in 'hunkering down mode'. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up," he said.

The warnings come just as the European Central Bank prepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it.

The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best.

ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a "wealth effect", but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base.

Mr White said QE is a disguised form of competitive devaluation. "The Japanese are now doing it as well but nobody can complain because the US started it," he said.

"There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

"The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries - especially in Asia and Latin America - have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up."

Mr White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.

He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.

Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.

Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. "The only choice they had was to take a blow to the left cheek, or to the right cheek," he said.

He deplores the rush to QE as an "unthinking fashion". Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing "correlation with causality". The Anglo-Saxon pioneers have yet to pay the price. "It ain't over until the fat lady sings. There are serious side-effects building up and we don't know what will happen when they try to reverse what they have done."

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."

Michael Scally MD

Doctor of Medicine
Bolloré (BOL FP): Complexity Creating Arbitrage with over 95% Upside

This is the first time in our investment careers that we have come across a situation in which a company’s opacity is a reason to buy the stock. Our investment approach is to tackle complex situations, and attempt to understand the economic reality underlying the information (often misinformation). So it is with Bolloré SA (BOL FP), which has a horrifically complex corporate structure. However, through this structure, BOL effectively owns a significant portion of itself. Most of the market seems to take at face value BOL’s reported shares outstanding of 2.5 billion. We estimate that the effective shares outstanding are only 1.1 billion (57.2% lower than reported).

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