OTCPicks Market Blog

Now that an economic recovery appears likely, the markets have a new bogey-man they’re concerned about—Higher Interest Rates. In the government’s attempt to finance the economic recovery by selling billions of dollars of debt, interest rates have been steadily climbing of late. In fact, the resulting selloff in Treasury prices has not only pushed up their yields, but pushed up the all-important mortgage rates as well. This is already slowing down mortgage applications once again.

Another reason Treasury yields are rising may be because the market is anticipating positive economic growth in the second half of this year, coupled with a concern about inflation thanks to the huge increase in supply over the next two years owing to the growing budget deficit.

Finally, the purchase of T-bills by the central banks of Japan and China has also been considered a reason for the rise in intermediate and longer-term rates as well. They are creating money domestically and buying T-bills with it. They are doing this to keep down the price of their currencies in relation to the dollar which subsidizes exports. This monetary policy creates demand for dollar-denominated short-term U.S. government debt, which lowers the T-bill interest rate because the seller (the U.S. Treasury) can offer to pay a lower rate and still get buyers. Some then conclude that intermediate and longer-term interest rates rise because the economy is then likely to improve.

So what exactly is Hyperinflation? Well… in the simplest of terms, it is extremely high or “out of control” inflation in which prices rise rapidly while a currency loses its value. Other definitions used by the media include “a cumulative inflation rate over three years approaching 100%” to “inflation exceeding 50% a month.”

And while there is a great deal of debate regarding the root causes of hyperinflation, most Economists believe that it is caused by a massive and rapid increase in the supply of money, which is not supported by growth in the output of goods and services. This results is an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.

With the recent announcement by the Federal Reserve that they plan to pump an additional $1 trillion into the U.S. economy in the near future, it’s no wonder that hyperinflation seems to be on the minds of many traders these days. One such trader, Zachary Oxman of TrendMax Futures believes “We are facing what I think is one of the most aggressive inflationary periods in our country’s history. The minute these commodity markets sniff inflation, things are going to go through the roof and the dollar is going to get whacked.”

   Is one of the world's largest oil plays sitting right in the heart of Europe? Thanks to a light oil discovery only a few miles east of Europe's largest onshore oil field this is looking increasingly possible. Please call me at 1-800-404-8982 to hear about this amazing story....

President Obama’s Health Care Plan has arguably stirred more controversy than any of his other proposals to date. We at OTCPicks.com thought we would examine more closely the argument for and against this proposal… and what stocks could be influenced by his agenda.
Those that are AGAINST Obama’s Healthcare plan cite three main concerns:

• The reform will lower prices of drugs through Medicare and Medicaid which will eat away at corporate profits;
• It will allow the re-importation of prescription drugs from outside the United States;
• It will accelerate the approval of generic drugs and alter the tax code to limit the ability of U.S. companies to prevent overseas profits from taxation.

How any of the proposals in Obama's 2010 budget actually affect the healthcare and biotech sector, if at all, are far from clear. And there are many reasons why biotech's niche of developing life-saving drugs for serious diseases with unmet treatment needs won't suffer significant price or profit erosion.  

In fact, there are some policies that proponents argue could actually benefit the healthcare and biotech industries. Those that FAVOR the plan cite:

The fear and pessimism that has accompanied oil's correction is a classic (and from a contrarian viewpoint it's a compelling) buy signal on its own.

One fear is that a slowdown in China might clobber oil consumption.  For insight into this possibility we defer to Goldman Sachs.  They predict a re-acceleration of China's growth.  Critically, China's Central bank just said it has switched its priorities from fighting inflation to ensuring China's 10+ percent economic growth continues.  With most countries we might be skeptical.  But China has both the need (a few 100 million poor that will not tolerate any postponement of economic growth) and the means (over a trillion dollars in surplus reserves.)   We take its statement as a buy signal.

This is just one example of the growing list of reasons for consumption to remain strong and oil prices to soon rebound.  But while many investors worry about falling oil prices the real story to watch is about falling oil supply.  And now the world's perennial supply optimists, the International Energy Administrations have finally started to come to grips with what is a dire situation.  They have recently increased the global depletion rate from 4% to 5.2%.  The translation is that nearly 4 million barrels per day of additional production must be developed per year just to keep oil supplies stable, never mind accommodate future consumption growth.

We think the answer is YES! There are many reasons to get bullish on oil and, even more so, oil stocks. One is the fact that many indicators are beginning to suggest an economic recovery could be in the cards over the next several months. The three largest consumers of oil including the United States, the European Union and China should start to see things stabilize and by the Q3 or Q4 of this year their economies should start to recover. This recovery will bring the world's economic engine back to life and oil consumption should start to increase again.

But while the price of oil has risen from the $30s to $50, oil stocks have not really rallied much. Below we highlight the ratio of oil stocks (S&P 500 Oil & Gas index) to oil (the commodity). When the line is rising, oil stocks are outperforming oil, and vice versa for a declining line. As shown below, when oil spiked in early 2008, the ratio dropped to its lowest level in years. Then when oil tanked in late 2008, the ratio spiked to its highest level in years as oil stocks held up much better. Recently, however, oil has rallied and oil stocks have been stagnant, causing the ratio to come back down. At the moment, the ratio is resting just above the average since 1990.

We feel the breakout that occurred in early 2009, and the current stabilization just above the 20 year average suggest oil stocks may once again outperform the price of the commodity.

In interviews with more than a dozen small-, mid- and large-cap portfolio managers, most said they were taking the initial months of 2009 to increase their exposure to energy stocks. Largely thanks to the spending spree currently ongoing in Washington, these managers expect all that cash to create an inflationary environment for energy prices down the road.

Could be! Let's take a look. In the midst of the worst housing decline since the 1930s, new home sales are down more than 75 percent from their 2005 high. In fact, just last year homeowners lost $3.3 trillion in the value of their houses with national home prices dropping 11.6% compared to 2007.

Meanwhile, it should come as no surprise that all the major homebuilding stocks have also taken big hits in the last couple of years. But in the stock market, crisis creates opportunity. And we think the worst could be behind these beleaguered stocks? In light of the surprise merger on April 8th by homebuilders Pulte (PHM) and Centex (CTX), we think members should consider positioning themselves for further consolidation in the sector, and subsequent gains in stock prices.

And while being positioned to benefit from a consolidating industry is always exciting, the fundamentals for the homebuilders appear to be improving as well. In fact, an unexpected sales jump in February and a rise in mortgage applications in March may also signal the housing market is stabilizing. Even Pulte CEO Richard Dugas, explained, "We’re cautiously optimistic."

We Think So! We at OTCPicks.com are quite intrigued with the low earnings multiples we are seeing in many Chinese stocks. In fact, many are as low, if not lower, than those seen during the 1998 “Asian Contagion.” And while we fear that corporate profits in the U.S. will be in a secular decline (if for no other reason than the aging baby-boomers moving out of their peak spending years), economic growth in China is likely to continue to be extremely robust. Why? It’s simple. After more than 25 years of economic growth driven by exports and fixed-asset investment, China is turning towards consumption to sustain the boom. And while the average age here in the United States is 55, it’s only 42 in China. This suggests that while the U.S. baby-boomers will be exiting their peak consumption years, the largest segment of the Chinese population will be entering their peak spending years.

In fact, the Chinese government recently announced a series of policies to raise private income, including scrapping agriculture tax, raising thresholds on income tax, increasing minimum wages and civil servants' salaries, and providing free basic education in rural areas, and some health care reform will likely boost Chinese pharmaceutical stocks.

We are already seeing signs of a recovery manifesting itself in the Chinese stock market—no doubt inspired by a cut in interest rates and the country’s own $580 billon dollar stimulus package. In fact, coal miners, metals suppliers and real estate developers have already begun rising on the hopes for an economic recovery by year-end. Within the last several trading days Chinese stocks have touched their 7 months highs which is a sign things are starting to turn around.

What is the uptick-rule? Simply put; it is a rule used to regulate short selling in the financial markets. Specifically, the rule limits the timing of short sales. It mandates, subject to certain exceptions, that, when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was affected or at the last sale price if it is higher than the last different price. In 1938, the U.S. Securities and Exchange Commission (SEC) adopted the uptick-rule, more formally known as rule 10a-1, after conducting an inquiry into the effects of concentrated short selling during the market break of 1937.

The SEC eliminated the uptick-rule on July 6, 2007. The elimination of the rule was preceded by an SEC order, placed on July 28, 2004, to create a one-year pilot temporarily suspending the uptick rule on select securities. The purpose of the suspension was so that the commission could study the effectiveness of the rule. The SEC's Office of Economic Analysis and academic researchers provided the SEC with analysis of the data obtained during a six-month period starting May 2, 2005. The consensus was against the uptick rule, with the commission concluding that the uptick rule "modestly reduced liquidity but did not appear necessary to prevent manipulation.” However, the pilot test for one year did not test for a rogue wave thought to have partly caused the 1929 crash, and for which there was no known theory in money markets.

The rule was originally put in place to avoid the perpetration of a financial crime known as a bear raid. However, short sellers themselves viewed the rule as "largely symbolic" and having little actual effect on short selling.

Earlier this week President Obama signed an executive order lifting the ban on federal funding for embryonic stem-cell research. In his speech made to the American people, he explained that scientific decisions must be “based on facts, not ideology.”

Back in 2001, President Bush moved to restrict federal funding for human embryonic stem cell research, making it the subject of his first prime-time televised speech from the White House. Now, Obama has flipped the tables with one swipe of the pen, a prospect that pleases many Democrats in the Congress. "Signing this executive order sends a clear signal around the world that our nation supports research based on science, not politics," said Rep. Jim Langevin of Rhode Island, a strong backer of stem cell research.

While the Left argue that stem-cell research offers hope for millions of people suffering with debilitating conditions, right-to-life groups hotly oppose this move by the President because they equate it to murder.