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Biotech / Medical : Biotech Valuation

CRSP 53.85

-4.5%

Jan 9 9:30 AM EST

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To: Biomaven who wrote (7033)	9/4/2002 9:07:10 PM
From: IRWIN JAMES FRANKEL	Read Replies (2) of 52153

The yield curve started flattening two weeks ago. It seems to me that the flattening corresponds to the market taking the view that the fed would not be lowering short term rates (fed funds). The market senses fundamental weakness in the economy and is responding with lower rates, at least where higher risks of repayment are not acting as an offset. Regarding the lack of the normal inverse movement: I think that we saw a decline in expected earnings* from the S&P large enough to offset the higher multiplier resulting from lower interest rates. I think that the high valuations of biotechs and the market in early 2000 may be more related to the peaking of money supply than interst rates peaking. I agree that the flattening of the yield curve is good for the economy and the market. But it would be far better for the fed to do it's job and lower short end interest rates and expand liquidity until the economy starts picking up. I am very discouraged with the way the fed is managing the economy. I fear that they are causing damage that is enormous. The US downturn now looks like it is turning into a global slide. The weak economy in the US may prove to be the final blow for US airlines. They are on a course which will likely result in all the major* US airlines filing bankruptcy over the next 18 months. Attempts (assuming the bankruptcy courts allow it) to contract airline capacity cannot deal with the high lease and interest obligations rapidly enough to slow the red ink. Even given capacity reductions the elasticity of demand will prevent large rate increases. These factors make it unlikely that the airlines can be turned around. (Take a look at the BV or cash of the majors compared to the stock prices - the market is confirming my statement.) A rapid turn in the economy (not likely) or massive government subsidies could change this. The airlines also have huge unfunded/underfunded pension* plans. This is another cost of AG slamming on the money supply brakes. If this disaster is not averted people will start to learn just how costly it is when their pensions are marked down to the guaranty levels accorded by the PGBC. ij * Another of the effects of AG (Alan Greenspan) slamming on the money supply brakes. It is hard to quantify the cost of AG's reckless monetary policy. ** LUV may be the exception.

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