WASHINGTON, November 30, 2017 – Frankly, we’ve missed a lot of this latest bull market rally, daggone it, due to our albatross position in Allergan’s convertible preferred “A” shares (symbol: AGN/PRA, your broker’s symbol may vary). It’s another way that selective panic selling has hit a pair of our key stock picks.
That said, even these dog-shares were up some 22 points this morning, courtesy of a Morgan Stanley buy rating. (But the sellers are at it again Thursday, at least as of 2 p.m. ET.)
Even given our bias in favor of these shares, the post-Restasis decision sell-a-thon in both the preferred and the common shares (AGN) has been way, way overdone at this point. As with Tulip Mania, panic selling itself in any investment or commodity can get seriously overdone leading to an equal and opposite reaction. Allergan common stock and its preferred siblings are a case in point. Having started as a trickle in both the common and preferred shares this past August, this now irrational torrent of selling continued unabated until recent days.
There’s probably a rational reason for at least some of this, beyond that initial blow-off of intense panic selling during the month of October. Much of AGN’s and AGN/PRA’s subsequent decline is likely due to the increasing habit of traders and investors to indulge in year-end tax-loss selling activities earlier and earlier each year. It’s a little like the way America’s once relatively short election season has extended to this century’s perpetual campaigns. You always want to start your move first, before anyone else. Lemming-like moves in investments, both up and down, are not much different.
With the Allergan twins in sellers’ crosshairs since the Restasis patent fiasco hit the rumor mill in mid-August, millions upon millions of shares have been unloaded since the October patent judgment went against Allergan. This has sent the forward PE of Allergan’s common shares lower than that of nearly all utility stocks, whose average PE ratios are traditionally the lowest of the low.
In the case of the Allergan twins, it’s likely that the opening roung of intense October panic selling scared the longs out wholesale. Frightened funds and investors mass dumped these shares, exciting 2017’s profit-deprived shorts who arrived en masse to bang the shares down even harder. This led in turn to what is apparently a mass decision by Allergan longs to dump their entire positions during the months of October and November, given that such a clear-cut tax-loss selling opportunity had already been ignited.
Looking ahead, we don’t expect Allergan to move back to parity with its Big Pharma peers until after the turn of the new year. That’s when the 2017 tax-loss selling binge will finally be visible only in the rear-view mirror. We’ll take what we can get on an encouraging day like Wednesday. But the bottoming process in both stocks may have a bit longer to go before the longs re-enter en masse. Comebacks are hard to come by after a waterfall decline, not to mention a loss of confidence in Allergan’s current management.
On other fronts, Apple (AAPL) along with what seems like the entire tech-chip sector, got pounded Wednesday as investor lemmings take profits and flee from tech to slam money instead into the financial sector. Why this fresh bout of panic-selling? Rumors that the GOP tax reform package, flaws and all, might actually pass. This caused trigger-happy fair weather tech investors to dump their tech shares and re-invest their likely profits into the financial sector (banks and insurance companies, plus mortgage REITs). Those beaten-down shares soared while tech stocks like Apple plummeted.
If you close your eyes for just a second in this market, you’ll miss trades like this. Fortunately, while our position in Apple as well as our fairly large position in Guggenheim’s equal-weight tech ETF (RYT) got pancaked, our positions in Guggenheim’s equal weight financial ETF (RYF) and small but growing number of JP Morgan Chase (JP) and Regions Financial (RF) shares are traveling skyward at an unnaturally fast clip, at least for these usually staid financial stocks.
Even happier, AAPL shares are trying to make a comeback Thursday, ticking up rather nicely and boasting a roughly $2 per share gain as of 1:15 p.m. The entire tech is trying to follow, again attempting a recovery after Wednesday’s beating. Financials, however, also continue to attract investment dollars.
It’s hard to trust a market that’s been so weird throughout this entire year. The weirdness has been unkind to investors like yours truly who generally invest in undervalued stocks and boring stocks that pay high dividends. But the increasing population of investor lemmings are running faster and faster to dump shares in one sector and head quickly for another. This increasing volume of panic buying and panic selling is occurring at a dizzying, rumor-driven pace that’s hard to game unless you have access to a supercomputer cranking away with the latest algorithms. Without such access, today’s markets often don’t make any sense.
That’s why we’re slowly tilting more of our over all investment strategy into investments in market average and sector ETFs. It’s likely that these massive mutual funds that trade like stocks are at least one reason lurking behind the size of today’s whipawing in and out movements in individual stocks. It’s getting hard to ignore all this capricious galloping. Even if it makes little sense, you sometimes have to board a new and untried train and take a ride, even if you don’t exactly know where you’re going.
BTW, with regard to Bitcoin and its candidacy for 21st century Tulip Mania status, we’ll have more to say in a companion column and future columns as well. There are days when we feel like we’re missing the train on this one, too. Clearly, Bitcoin is in the throes of a major speculative fever like most other forms of imaginary currency in 2017. But is this a real investment? Or is it another edition of Tulip Mania?
Whatever the case, it’s always small or novice investors that gets hurt the worst when a speculative bubble bursts.