Endo endgame? Pharma trouble, employment hit stock averages

Circa 2013 view of the Dublin skyline and port facilities and Dublin Bay beyond, from Guinness storehouse museum facility. (Image via Flickr and Wikipedia entry on Dublin, Ireland, CC 2.0 share and share alike generic license.)

WASHINGTON, May 6, 2016 – Sell in May syndrome seems to be in full effect in Friday trading action. All major averages are modestly down as of the noon hour today, but the damage generally occurring in the utility and pharmaceutical sectors is major, driven today, apparently, by gloomy numbers from Dublin, Ireland headquartered Endo International PLC (symbol: ENDP), which is down some 40 percent as we write this article. Endo was one of the last of the formerly U.S.-based companies to successfully invert and decamp for the tax friendlier shores of the Oulde Sod.

But the drug sector’s issues pre-date the current problems being endured by Endo, which, among other things, is still busy trying to settle multiple millions of dollars’ worth of vaginal mesh lawsuits—you know, the ones the ambulance-chasing thieves lawyers pitch constantly on late night cable TV channels.

Relentless selling has been ongoing in the drug sector since rogue pharma Valeant (symbol: VRX) hit the skids, first with its unfriendly battle to take over fellow drug maker Allergan (AGN), and later for its involvement in the abrupt over-pricing of certain key proprietary drugs, including those about to go off-patent.

That game, as we’ve been discovering, was far from unique to VRX, leading to U.S. and international government scrutiny of the industry, thus putting those pharma stock prices under pressure.

Add to this the “lower than expected) 160,000 jobs the U.S. Department of Labor says were created in April, and you get general over all market unhappiness, which looks to extend this week’s losses further by Friday’s close.

CNBC tries to help the job-destroying Obama administration out by claiming

“On the bright side, wages rose during the month, with average hourly earnings up 8 cents an hour, representing a 2.5 percent annualized gain. The average work week edged higher to 34.5 hours, according to the Bureau of Labor Statistics, which issues the monthly jobs report.”

Golly gee, that “annualized” gain figure masks the pathetic 0.2 percent monthly figure, which is essentially zero in an economy the size of ours. And when was the last time the “average work week” managed to “edge up” to 34.5 hours. Color the Maven rapidly aging, but isn’t the work week supposed to be 40 hours, not “edging up” to 34.5? Anything to do with Obamacare “mandates,” hmmm? Amazing.

Oil did edge up a bit today, but the employment numbers are starting to make it clear that the Fed is going to have a hard time justifying any interest rate increases this year, which clouds the economic picture further.

But the mass dumping of pharmaceuticals is the real story today. A short piece today from ZeroHedge gives us the reason why. It seems that hedge funds have suffered the most damage from the current selling wave, which has also engulfed other sectors widely held in this community.

Endo is one of the biggest positions in hedge fund land, as evidenced by this Goldman chart of hedge fund current top holdings as it appears in ZeroHedge.

Largest current hedge fund holdings. (Goldman via ZeroHedge)
Largest current hedge fund holdings. (Goldman via ZeroHedge)

As the chart indicates, other big hedgie positions are in the battered energy and consumer discretionary sectors. With hedge fund bailouts and forced sales causing massive exits in these investments, now including pharma, is it any wonder why averages have been tanking since at least the beginning of May. This selling isn’t likely to end until all these smart-guy hedge funds have dumped all their shares while panicking their way out the tiny door that remains open for them.

Trading diary

Unfortunately for the Maven’s now mostly-successfully downsized portfolio, his favorite current investment, Allergan Preferred A shares (AGN/PRA) have been getting the blitzkrieg treatment Friday. They’ve been hammered all week but are getting pulverized even worse today, off some $35 per share at the moment, close to a 5 percent loss on the day.

Apparently, in their haste to exit all pharma, the hedgies can’t figure out the difference between Allergan’s common stock (AGN)—also clobbered today like most other pharmas—and its preferred, which pays a large, fixed dividend. Further, AGN/PRA is a “term preferred” that will expire in March 2018 and be redeemed at that time at par value, which, in this case, is a healthy $1,000 per share.

Now at or around its 52-week low of $752 per share, at least in today’s volatile and heavy trading action, just a buy and hold here is likely to be rewarded when buyers trade those shares back to the company for $1000 apiece in 2018. Plus, the stock goes ex-dividend next week, meaning that the morons who are stampeding for the exits are leaving a whopping $13.75 quarterly dividend on the table by panicking now.

We had been incrementally buying these shares at a considerably higher price when this got started. But we’re slowly averaging down as this nonsense continues. Frankly, the stock is likely to take an additional, at least modest hit next week when it goes ex-dividend—all dividend-paying stocks due, since on that day, new buyers won’t be entitled to the current dividend. But that move is likely to mark something close to the bottom in this issue, given that its redemption date is now less than two years from now.

That’s no guarantee, of course, that Allergan common, preferred, and for that matter any other drug stock won’t continue to get hammered. Mr. Market has rarely shown any deference to the Maven, and he doesn’t expect that to change any time soon. But this is one of those investments where patience is likely to be rewarded, at least as long as this pharmaceutical giant, famed for botox and other cosmetic and health remedies and drugs, remains in business.

What puzzles the Maven somewhat, however, is why Allergan’s preferred continues to take a beating, unless there’s something dark and sinister he hasn’t yet discovered. Preferred stocks don’t usually suffer a dividend cut unless the common dividend is cut first, and/or something terrible happens.

True, AGN pays no dividend at all. But it should recover in a quarter or two from its Washington-quashed attempt to join with Pfizer (PFE). (Backgrounder: Allergan, fleeing from a hostile takeover by the aforementioned Valeant, found a white knight in Dublin-based Actavis and merged while inversions were still working, with Actavis adopting its more famous acquisition’s name.)

But even if it eliminated the dividend next week for the duration, which could really kill this issue, the preferred still must be redeemed in 2018 at par. Given that AGN is a serious A-list big-cap company, it would take a lot to derail that redemption. So, we’ll hang in there no matter what happens, more or less. (When trading stocks, you can never say never.)

Otherwise, we’re sitting tight. We shouldn’t have dumped our small position in SGOL, the Swiss gold bullion ETF. It’s back up sharply today. But this also proves our point. May’s market action has gotten very, very treacherous. We’ve finally exceeded our breakeven point for 2016 after taking a serious drubbing in January and February. We’re about 70 percent cash right now. And we’re in no particular hurry to add much to the portfolio until the latest nonsense in the market—including panic selling by the hedge funds—finally runs its course.

Election 2016, however, is another matter entirely. But we’ll worry about that next week.

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