WASHINGTON, September 21, 2017 – Thursday’s sullen trading action found all three major averages off moderately at the closing bell, with the Dow off 0.24 percent, the broader-based S&P 500 off 0.30 percent and the tech-heavy NASDAQ faring significantly worse, losing 0.52 percent of its value today.
Headline risk for the stock market remains negative and elevated. The Fed’s fairly aggressive Wednesday report on the economy and President Trump’s tough Executive Order that further turns the screws on “Rocket Man” hit the Internet, adding a measure of fear and loathing for investors already wary of encountering another nasty September Surprise. Rumors of war, no matter how unfounded, always weigh heavily on stocks.
The dismal action in the NASDAQ was strongly influenced by the continuing, post-product announcement beating Apple’s shares (symbol: AAPL) have been taking, primarily due to longstanding post-announcement tradition (i.e., AAPL invariably tanks right after the announcement).
But today’s continuing rapid decline may also be due to an apparently random glitch in the new Apple Watch 3’s ability to engage in wireless communications without being tethered to an iPhone.
The company has acknowledged the issue and promised a bug fix – at some point – leading to perhaps irrational fears of a strong negative impact on those all important Apple Q1 sales figures. Irrational or not, AAPL shares got clobbered again today, closing at $153.39 per share, off $2.75 on the day.
On the bright side, financials took heart from yesterday’s Fed report, given that profit-generating interest rates are likely to end higher by COB December 31, 2017. The prognosis for rates had remained stubbornly difficult to ascertain until Wednesday’s news.
For both us and our portfolios, this was one of those Maalox days we talk about from time to time. Not only was our recent position in Apple hit hard today. Our large position in Allergan’s convertible preferred “A” shares (AGN/PRA, your broker’s symbol may vary) was viciously pancaked once again today.
These expensive shares were relentlessly hammered by periodic waves of selling, closing down a catastrophic $27.57 per share to close at $730.07, putting a considerable hole in our large portfolio. We suffered from an earlier wave of selling roughly a year ago, with these nominally $1,000 par value shares briefly dropping below $700. It was only last month that the shares peaked at $900 and change.
The volatility in AGN/PRA is directly related to the equal volatility of its parent company, pharmaceutical giant Allergan (AGN), whose common shares, already brutally beaten this week, were body-slammed for a $7.30 loss on the day. That’s a one-day loss of roughly 3.5 percent. At the beginning of August, the common had hovered around the $260 per share mark, giving you an indication as to how far this stock has fallen in a very short time.
Much of the angst involving Allergan has to do with its controversial move to fend off patent litigation on a key drug by signing its patents over to the St. Regis Mohawk tribe of northern New York. American Indian courts, unbeknownst to most Americans, don’t have to adhere to U.S. court decisions, and thus, the Allergan patents could very well be out of reach for generic drug companies.
With this potentially huge legal moat in considerable question, investors seem to be fearing a negative outcome in the end, ignoring the fact that even if U.S. courts or the U.S. Supreme Court invalidates Allergan’s move, such a reversal will still add to the time Allergan can retain exclusive rights, given the time it would take for its opponents to re-file and re-litigate the issue.
With that extra time, Allergan will still enjoy considerable profits. Added to already optimistic numbers analysts expect the company to report in November, it’s likely that the company’s shares will begin to recover in mid-to-late October in a run-up to its next quarterly report.
But, in the meantime, those like yours truly who hold shares in either the common, the preferred or both, are suffering rather badly from Allergan’s massive, high volume selloff. It hurts. But we knew this pharma stock was uncommonly volatile, so we’ll be holding on to AGN/PRA, perhaps buying a bit more as these shares probe for a final bottom.
Investors like to brag about their “big wins,” and we’ve had our fair share. They rarely talk about the darker moments of investing, and may even deny they’ve endured the occasional drubbing Mr. Market likes to dish out without warning.
The point of this column is to show individual investors and those considering investing just how this game works. You’ll have bad days, yes, just like the string of bad days we’ve endured this week. But, like the tortoise and the hare, slow and steady wins the race. (Usually.)
In the case of our current Allergan mess, watchful waiting is likely the best course, as we sit tight waiting for the selling panic to reside, allowing bargain hunters to swoop in. At some point.
Today was not all gloom and doom. After all, we took some handsome profits yesterday in some of our positions, including a nearly 10 percent gain in big refiner Valero (VLO). Plus, we’re still feeling good about the nearly 16 percent gain we’ve seen thus far in our shares of Texas-based oil company Marathon (MRO), which finally seems to be on the comeback trail.
It’s all in a day’s work. At least that’s what we’re telling ourselves. Stay tuned.