Doc, Lissa's ears musta been burning. She posted this on RealMoney.com (the pay subscription arm of TheStreet.com) yesterday:
The BioDancer
Note to Cramer: Buzz Off on Biotech!
By Lissa Morgenthaler
Special to TheStreet.com
1/8/01 8:38 PM ET
URL: thestreet.com
Our beloved Cramer wrote a dump job on biotech last Friday. My partner Mike Murphy and I just grinned when we saw Cramer's rant -- biotech is going down, all right, but not for as long as Cramer thinks.
Then two minutes later, the executive editor at TheStreet.com emailed me and said: "You just gonna stand there? Cramer whacking your sector up and down, left and right. You don't have to take that without a fight."
Frankly, it wasn't much of a whack. I could've done better with two pinkies. But the gauntlet's down, so I'll cheerfully respond. Cramer deserves to languish in ignorance as the biotech revolution takes him unawares. But you don't --- and you are the people we care about.
I'll grant you that biotech will be a very bouncy ride over the next month or two. An estimated $2.5 trillion of stock market capitalization was vaporized in the past year's tergiversations, and what's left is understandably nervous. In a world where the dollar peaked against the euro six months ago and bond spreads are shifting, there is no safety anywhere. (JJC, remember the day Lilly (LLY:NYSE) lost $30 billion in two seconds?)
Heck, the Amex Drug Index started last week with a market cap north of $1.6 billion, and in two days lost $150 billion. That drop makes the hit biotech took look like chump change.
How They Fared
Most indices took a hard hit between Dec. 29 and Jan. 5.
Index 12/29/2000 1/5/2001 Pct. Change
Dow Jones 30 Industrials 10786.8 10662 -1.16%
Amex Pharamceuticals 447.38 404.94 -9.49%
Amex Biotech 634.32 533.57 -15.88%
Nasdaq Biotech 1084.51 936.69 -13.63%
Nasdaq 100 2341.7 2267.85 -3.15%
Nasdaq Composite 2470.52 2407.65 -2.54%
SOX 576.61 617.49 7.09%
Nasdaq Telecomm Index 463.44 467.15 0.80%
Nasdaq Computer 1294.97 1276.19 -1.45%
Yes, biotech was hit harder than the drugs last week, but the sector only has a $500 billion market cap on its best day. So the $60 billion hit it took didn't punish its adherents the way the drug stocks punished theirs. (When I think of the amount of bilge I got for pointing out when Merck (MRK:NYSE) was at $94 that it probably wouldn't make $100 last December!)
These haven't been biotech's best days, but the indices have yet to reach the levels they did in the manic selling of last April and May. I wouldn't be surprised if biotech tests those levels, but biotech is like a bop bag: You hit it and it springs back up.
What's happening now, and has been over the past few days, is an orgy of redemptions from mutual funds. We've had very few in our fund, but then our fund is pretty small and most of our shareholders know us well. They know biotech stocks have averaged a 250% move from low to high in any 12-month period over the past 15 years (because we keep repeating that fact over and over). So, most of our shareholders understand that owning shares in a biotech fund is an e-ticket ride at Disneyland --- and they're content to come along for the gains.
By contrast, the billion-dollar biotech funds have the kind of run-and-gun shareholders who bolt at the drop of a chart. Or as one of my mutual fund buddies said last week (a manager who was in the top 10 of all 11,600-plus mutual funds last year when our fund was merely 17th): "I'm calling you in lieu of building a bomb shelter under my desk." Which is to say, for health care fund managers, this has not been a good month. And we're only in the second week.
That leads to the second factor hitting biotech stocks: technical analysis. Several technicians have come out in the past week and said the biotech charts look like death. (Hah! You want lethal? Look at the charts last spring!) Folks like Gary B. Smith understandably give investors the heebie-jeebies when they put the kibosh on biotech, as GBS has just done.
Now, I'm a fan of technical analysis to help time our moves in stocks. But nothing, I repeat, nothing can replace a good understanding of the fundamentals. This is presumably why technical analysis is so erratic at calling turns. For example, I was fretting on this site about the double-tops in the biotech indices last September, and Gary B. tried to comfort me by projecting that biotech might move up and through. It didn't. No surprise, really. Biotech had run a long way as the rest of the market was dissolving beneath it. But that was a very recent and vivid lesson to me in the limitations of technical analysis when turns are happening.
Long ago, I learned to be much more interested in where money is flowing, which is part of what technical analysis tries to encapsulate. At the moment, money is pulling itself together, trying to get its confidence back. And in this environment, it ain't easy. The rumor was that Janus had $10 billion outflow in the last week of 2000, but those are AMG Data numbers and Charles Bidermann's Liquidity Trim Tabs disputes them. His numbers suggest $13 billion flowed out of all U.S. funds last Tuesday, but $17 billion flowed in on Thursday after the Fed cut rates. The estimates of money on the sideline now runs to the hundreds of billions. But with all the rumpus that's been going on, it's understandable if that money sits on the sideline for a while, blinking and wheezing and screwing up its courage.
One very real problem I wish somebody would address is the "Qualified Intermediaries" law that went into effect on Jan. 1. The U.S. equity and bond markets rely heavily on foreign investment, and this rule effectively requires foreign banks to become tax collectors for the Internal Revenue Service. I don't believe it will have quite the effect of the Smoot Hawley tariffs, but Congress did an appallingly good job of deterring foreign investors from leaving their money here.
Moreover, the timing could not have been worse. Given the dollar's decline against the euro since last July and the Fed cutting rates as our economy slows, foreign investors would have to be nuts to leave their money here. I'm sure most of them will leave money here, as tax attorneys figure out a way to work around the new rule. But I fear this law is making foreign dollars hasten out of the U.S. at an accelerated rate.
Whatever money is left after this carnage will flow into the most beaten-down sectors like semiconductors, semiconductor equipment and telecom stocks. As you can tell from the chart above, money has actually already started doing so. Indeed, among the sectors I watch, the Philadelphia Semiconductor Index and the Nasdaq Telecom Index were the only indices that were up last week.
However, in the next few weeks and months, money will also start flowing back into biotech stocks. As RealMoney.com readers know, I've been worried about two things hanging over the biotech sector: the Amgen/Transkaryotic Therapies decision, and what will happen next month when it dawns on people that there aren't 100,000 genes in the human genome. There are more like 30,000. Such news can't be good for the dozens of gene-hunting companies that have gone public in the past few years.
And yet, such news should be very good for the companies that have patents filed on thousands of genes, like Human Genome Sciences (HGSI:Nasdaq) with its 9,700 filings. Moreover, biotech is taking such a haircut at the moment that in the process it is discounting a lot of what I've feared, though the discounting is happening for different reasons -- such as, investors like Cramer who figure Fed rate cuts are the death knell for biotech. (Why the biotechs skyrocketed last winter when the drug stocks were tanking, then fell in April and rose again with the drug stocks over the summer, Cramer doesn't examine. It is because interest rates are irrelevant to biotech, but never mind.)
So here I am at the J.P. Morgan H&Q 19th Annual Health Care Conference in San Francisco, along with RealMoney.com contributors Gabe Hoffman, probably Don Luskin, and every other money manager on the planet. Some 4,500 attendees came last year, and 6,000 are expected this year. Which means the halls are even more jammed. (Since nobody thought that was possible, chalk up another miracle for biotech.)
These money managers are here for many reasons -- but they all know a potential winner when they see one. (I'm not the only investor who has noticed that 250% annual move I mentioned above.)
For most traders, such volatility is a godsend. Those who can't stand the heat are smart to get out of the kitchen. But some of us like it hot. Where's Gabe?
Note to Cramer: I am sick and tired of explaining why this sector isn't going away. Buzz may be gone, but I'm still here and somebody needs to whap you upside the head. Biotech is not the Internet all over again. These companies are finding cures for cancer and weight gain and tooth decay and all the other miseries afflicting 45-year-old former hedgies who sit around typing too much and exercising too little. When your tobacco companies are the footnote to disease they so richly deserve to be, biotech companies will still be cranking out cures.
You got it?
I don't know why The Goddess puts up with you.
Note to Cramer fanatics: I donated all of my TSC earnings last year and more to Cramer's TSC for Schools program. If you haven't donated, I don't want to hear a peep out of you. |
