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Foundation Podcast 10/25

Show Notes

Show Overview

  • Review of:
    • The Biotech Sector
    • Cloud Computing Tech Names
    • Europe and Japan
    • Oil
  • Plus a discussion on why tips and picks from newsletters aren’t enough to be successful in markets  

Biotech Sector

  • Price action signaled the top – Head and Shoulders pattern
  • Macro Outlook – end of current business cycle with rates likely to tighten
  • Biotech was an overvalued sector the last few years – too much hype, yet not enough real results for many of these companies
    • Theranos – a blood testing company valued at over $9 billion that has yet to prove that its technology really works
    • Valeant – recent fraud allegations
  • Low interest rate environments lead to capital misallocation everywhere, not just in biotech
    • Sakti3 – a supposedly “revolutionary” battery company that could not produce any results  
  • The catalyst for the biotech drop was attributed to Hillary Clinton’s statements on drug prices, but in reality, those statements were not the real key to the drop. The real key was the underlying conditions that were already very apparent in the biotech sector. Any catalyst would have done the trick to send biotechs lower.  

Cloud Computing Tech Names

  • “Winner Take All” mentality – tech stocks are the last real area of growth due to their cloud computing presence
  • These stocks are building a giant moat in the cloud industry that will ensure protected profits for years to come
  • The macro equity pictures isn’t great, but the “winner take all” narrative is taking over and launching these stocks to new highs
  • Going long these tech stocks is a good hedge against any shorts you may have on in the market
  • Volatility is greatest at turning points, which currently makes it a difficult time to invest in the equity markets  

Japan

  • Breakout from triangle
  • Japan’s economy is stuck in a deflationary malaise due to unending government support for dying companies, a tight labor market, and terrible demographics
  • Is sex drive correlated to economic performance?  
  • Japan also suffers from extreme debt levels, and the only way they can fix that is by destroying their currency
  • The Currency Wars will also affect Japan’s decision to devalue their currency

Euro

  • Breakout of giant triangle
  • The catalyst for the move was Draghi’s dovishness in the last ECB meeting
  • Fundamentally, Europe is a mess. Their “union” will never work. Trying to manage competing fiscal policies under one monetary policy is a recipe for disaster.
  • There is a rise of anti-europe and anti-immigration parties all while the refugee crisis rages on
  • Europe will keep devaluing their currency to fight off inflation

Oil

  • Oil price is sitting at the lows and not recovering
  • Many oil companies have had to really tighten their belts and cut all expenses
  • Years of capital investment with the thinking that oil would stay at $100 a barrel is now making the pain for these companies much worse as they are forced to readjust to the new normal
  • The top 40 frackers in the U.S. use around 86% of their cash flows are going to service their debt costs. This is obviously unsustainable

Newsletter Picks Are Not Enough

  • Trying to profit off random newsletter picks does not work because there is no process behind this method
  • Process is KEY – it’s hard, but it’s what works