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Friday Roundup: The Geopolitical Situation Trumps Fundamentals


Times like this are made for sitting on one's hands.


The message for the week is that the geopolitical situation trumps fundamentals in a sector like biotech that is so dependent on psychology. Past that, there really isn't much to say on the sector.

  • The fundamentals of the biotech sector remain intact, though people continue to express concern that the FDA is becoming a serious roadblock. Our view here is that's true for lifestyle drugs (chronic cardiac, CNS, PE, ED, etc), but less true for drugs to treat acute and/or life-threatening conditions.

  • The Journal of the American Medical Association issued new guidelines for disclosure of drug company funds when publishing research. To our minds, they essentially said, "No, really. We want you to disclose any funds you get from companies." Still no word from them on the conflicts inherent from docs getting paid hundreds of dollars an hour from Wall Street.

  • Yesterday saw 11 advancers in the 164-stock NASDAQ Biotech Index (NBI). That's the ugliest the sector has been. The volume was not strong, however, presenting a silver lining to the macro-level doom and gloom.

  • Yes, I believe the markets are poised to rally. No, I don't think that happens until we get some clarity on how far this Middle East situation expands. Focusing attention on risk more than reward makes sense, at least for the next few days.

  • Keep watch on what's going on with the two kidnapped Israeli soldiers. If they show up as is rumored, that would be a bad thing.

  • I've mentioned this before on the Buzz, but keep an eye on ZymoGenetics (ZGEN). It's been a reliable tell for the biotech sector. It also happens to be a fine company run by smart managers whose lead product should report positive results later this year.

  • Did I mention I have a framing nailer coming in the mail? My wife, upon learning I acquired one of these tools, sent me snapshots off the web of how careless users of this tool end up in emergency rooms with long nails inserted into various body parts. Ouch!

  • If you've noticed an uptick in the number of drug patent lawsuits flying around, get used to it. As more biotech drugs come on the market, you'll see more lawsuits. Biotech drug development tends to happen in parallel modes as several companies come across similar concepts simultaneously. When one or more punches through the wall to market approval, you'll see lawsuits. SiRNA drugs are the poster child for this phenomenon as the three top companies all claim patent control over the technology. SiRNA is not this decade's technology (they'll be lucky if it is next decade's technology), but it serves as a good example.

  • And, in a completely predictable event, now we can add and to the worry list is accusing "elements" in of involvement in the recent train bombings. Please remember both of these countries have nuclear capability.

  • I've opined in brief on the Buzz, and in detail for our Subscribers, our belief the goal of recent central bank moves is to wring speculation out of the markets to control inflation. Unquestionably, a quick resolution to the Middle East situation will generate a rally. Some question whether that just means we're back into the central bank soup – limiting the strength of the rally. These geopolitical upsets occurred at important moments in the central bank process, which should serve to drive home to the bankers that they have to be extra careful not to drive the pendulum too far the other way. To me, that means a vacation for rate hikes and liquidity withdrawals for a while. That's bullish, but we have a lot of geopolitical soup to get through before we get there.

    Please be careful out there. Pare your risk to comfortable levels and don't get too cute in trying to game what's going on. Times like this are made for sitting on one's hands.

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No positions in stocks mentioned.

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