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March 17, 2014

March 17, 2014

Will We Get an April-to-October Market Correction in 2014?  

Do we anticipate that the U.S. and European markets continue to rally in 2014, or is a market correction on the horizon? 

The crisis in Ukraine and fears (probably misplaced) about China melting down are creating a crisis of confidence in the European and emerging markets.

Gold continues to rally as a result of fears about Ukraine — which are well-founded.  We have no doubt that Russia plans to reestablish parts of the former Soviet empire.  Russia’s military is weak, understaffed, and filled with draftees who have inadequate military skills.  Russia is a poor country in spite of their mineral and oil wealth; corruption has sapped their economic strength.  Russia will be vulnerable to economic sanctions.  Clearly, Europe and the U.S. are afraid of military action, and if they institute economic sanctions, the sanctions will slow European economic growth. 

Therefore, Russia — in spite of their weakened military status — should be able to hold onto Crimea and possibly gain other parts of eastern Ukraine without any real objection from Europe and the U.S.  Seeing what they percieve as western weakness, Russia will continue their adventures and over the next few years they will try to take back the Baltic states and other parts of the former Soviet empire.

The markets may ignore this for awhile, but the beginning of a new minor cold war — even with a weakened and close-to-bankrupt Russia — will have a depressing effect on optimism in the U.S. and Europe.

Another worrying event is the appearance of speculation in stocks that are grossly overpriced, especially in two areas.  Some biotech stocks and some tech stocks are selling at infinite P/E ratios, while others in these sectors are more rationally valued.  This is beginning to be reminiscent of the stock bubble of 2000.  Most stocks are fairly priced, and the market can move ahead gradually, but we will be careful.

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More Healthcare Volatility

We see more volatility ahead in the healthcare sector.  Biotechs may be starting a rotation out of “most favored status” due to high valuations and price challenges from Affordable Care Act legislation.  New ACA policies were also announced that will squeeze the profit margins of private home health care providers, which have been Medicare cost-savers and big employment growth drivers during the past decade

Who do we continue to favor in this market?


The Big Data Mantra:  What Does It Mean For Investors?

Several companies that went public in last fall’s crop of new offerings had businesses related to “big data.”  One, Foundation Medicine (FMI), provides detailed analysis of a specific cancer patient’s tumor — and then gives a rundown of how tumors with those characteristics have fared under different treatment regimens.  A patient’s physician can then select a treatment more intelligently — and even discover if clinical trials are currently recruiting patients for tests of drugs that would be particularly effective.  (Note: we are not recommending FMI, nor are we recommending any of the other companies discussed in this section for investment.  We are mentioning names of participant companies but making no recommedations to buy or sell any of them.)  Several other similar companies now operate in this space, such as Illumina (ILMN), often operating at a loss, and carrying extremely high valuations.

Big Data for Business and Security

Outside the healthcare space, we have offerings from companies such as Verint Systems (VRNT), which accumulates data from clients’ customer interactions and from audio and video security recordings, and then mines it for actionable information.  Likewise, newcomer Varonis Systems (VRNS) takes a company’s “unstructured” data, such as the documents and spreadsheets that multiply like weeds in the world’s corporate databases, and structures them — combing them for information that can help a company reduce waste, render communications more efficient, and plug unnoticed security vulnerabilities.

Besides public companies such as these, there are, of course, a host of private startups doing similar things — in fields such as healthcare, education, insurance, finance, and advertising.

Whether or not any of these companies ultimately succeed, we note a common characteristic of the way big data is now being discussed.  The “big data” mantra has shifted from the mere accumulation of data to the more practical question of what can be done with the accumulated data that’s valuable to its owner — or to its owner’s clients. 

Healthcare Applications

In healthcare, big data is linked closely to the promise of “personalized medicine.”

Personalized medicine means that the big words we use to describe diseases have been rendered obsolete — and common medical practice has not yet caught up with that fact.  Cancer, for example, is described according to its location in the body.  But far more relevant is the precise genetic makeup of the cancer cells.  A contact of ours in the biotech industry recently noted to us that, in theory, the precise knowledge of a cancer’s genetic structure would permit the synthesis of a drug targeted only at cells with that structure.  In short, the drug would address your specific cancer, and would do so without laying down a “scorched earth” attack on all of your healthy cells, the way chemotherapy does.

Similarly, the notion of “diabetes” is really a misnomer.  When we say “diabetes,” we refer to a downstream phenomenon or set of symptoms.  But upstream of those symptoms, there are scores of different potential biochemical dysfunctions in many different organs and systems that could be causing what your doctor calls your “diabetes.”  And the promise of personalized medicine here also is that a precise knowledge of your biochemical and genetic makeup will permit treatments specifically targeted at the causes of your diabetic symptoms.

Until now, the unaided processes of the human mind couldn’t contain or explore the millions of pathways and possibilities in this kind of analysis.  Eventually, talk of “throat cancer” may well sound like medieval surgeons talking about the four humors — and chemotherapy may seem like cupping and bleeding.  Now that big data are being accumulated and examined, thanks to the increase of computing power and the cheapness of genomic sequencing, that world is no longer a science-fiction fantasy.

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Guild Basic Needs IndexTM
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Rising cost of essential, basic needs can be tracked at www.gbni.info.


India

Political violence has dropped drastically in India over the past decade.  We see several trends that suggest a virtuous cycle of growth in India — with increased rural affluence, grassroots democracy, better access to finance, education, and regional mobility leading Indian voters to demand more pro-growth policies from their local and national governments.  


Speed Reading 

Read a novel in an hour?  There’s an app for that.  The new Spritz app came across our desks last week, and we thought it was neat — we invite you to check it out.

http://www.spritzinc.com/blog/


In Last Week’s Global Market Commentary, We Also Discussed:

  • Regulatory Burden, Productivity Growth, and Jobs
  • Is Farmland Another Real-Estate Bubble?
  • Japan Comes Back to Nuclear
  • The People’s Bank of China Plays Hardball 

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