Signs of Leadership Returning

 | Aug 13, 2014 | 1:18 PM EDT
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There's just too much good happening in biotech for those stocks to be held down for so long. We are seeing the money return to Regeneron (REGN), Celgene (CELG), Biogen Idec (BIIB) and Gilead (GILD), because they all delivered remarkable quarters but had the misfortune of reporting during the time when we were all focused on Ukraine-Russian tension. Plus, we were of the opinion that the U.S. economy was getting stronger and stronger, and these stocks are the ones that must be sold.

Of course, now, after we see the retail sales numbers and we watch commodities come down in price, including oil, the consensus is rapidly shifting to a slower-growth scenario. How is this possible in the time of rising employment and a decline in raw costs?

I think it is a combination of things. First, when interest rates go down relentlessly, the market makes a collective judgment that things have slowed in America. I have long since learned that you shouldn't question the consensus on a short-term basis.

We are a very "guru-ed" market, meaning we pay huge attention to people who know more than we do. When I think back to the Delivering Alpha conference, the most forceful presentation came from Stanley Druckenmiller, a very, very smart hedge fund manager who was adamant that the Federal Reserve should be raising rates, and he had the charts that showed that the economy was so hot that we should have a fed funds rate that should be much, much higher.

Now I agree with Druckenmiller that the Fed is pretty nuts to try to hold interest rates down here through buying bonds. It needs to taper more heavily, and then it needs to sell its bonds.

Where I disagree with him is the notion that somehow the Fed really is keeping interest rates down with its bond buying. Rates are down huge because the U.S. is running less of a deficit than it was, and at the same time the demand for U.S. paper from around the world is off the charts. The nations that are competing for money are often competing with lower rates and worse balance sheets.

We aren't used to this, because the world is supposed to be priced off of Treasuries. But in reality, the world is priced off of German bonds, because Germany is much more solvent than we are. Why people don't understand this is a mystery to me. We are just another bond house in the pecking order with a huge amount of supply and a lot of demand, prized for our liquidity, not for our balance sheet.

In the short term, it is true that the U.S. is running ahead of plan. It is always possible that healthcare costs are actually going down. I am now hearing that the market is setting healthcare costs now that the Affordable Care Act is in place and that the market is lowering healthcare because individuals are now actually having to pay for far more than they thought, while they are protected really only from catastrophic illness.

It is possible, though, that as we get more and more facile with the Affordable Care Act, hiring will slow down -- thank you to my colleague Matt Horween for endlessly pointing this out -- and we lose the prop of additional hiring. We know that government spending keeps going down at the federal level. So demand for money may have already peaked, and rates are going to stabilize at levels that are still too high compared with where they were last year, where they belong.

If all of that is the case, then why would anyone want to own anything but the highest growth companies that do better in a slower-growth, low-inflation world that we are now developing? That's why the Four Horsemen of the Big Pharma apocalypse are moving: slower growth, lower inflation.

That has always been their ticket.

Same with the Internet names. They are slower-growth, slower-inflation names. That's why the research calls were so timely this morning on the Internet security calls, as well as the Google (GOOGL) and Facebook (FB) praise. It's also why the Amazon (AMZN) story about a PayPal competitor has resonance. That gives you accelerated revenue growth when the world is slowing. It's why Tesla Motors (TSLA) has been coming back and why Netflix (NFLX) is about to run again.

I nailed the thesis of lower inflation but have been thrown off a tad by a thesis of better consumer spending on the basis of that lower inflation. It might be happening, but the price-cutting for merchandise is so glaring and the stalled housing market is so obvious that money managers are simply reaching for their old playbook of buying the highest growth stocks when we have the lower-growth economy.

The bond market masters are always supposed to be so smart and the stock guys so dumb. Boy, has that not been the case for ages. Right now, the stock guys aren't looking through the bond market, and they aren't willing, like everyone else I hear, to call the top in bonds. They are just buying what they know to buy when we have a bias toward lower rates, lower inflation and slower growth, namely the fastest-growing companies out there.

Yes, we see other stocks going up that had been brought down by Russia-Ukraine tensions, signaling that a diplomatic solution might be at hand. We have the consumer packaged goods stocks going up because their raw costs, chiefly energy, are going down, but we have leadership again, and have leaders, will travel. 

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