WASHINGTON, November 16, 2017 – As we note in our companion column Thursday, both market averages and our beloved investment portfolios have been suffering a severe beating this week. Our positions in both Apple (symbol: AAPL) and Allergan’s convertible preferre “A” shares (AGN/PRA) were taken out back and shot.
Major averages have plummeted some 3-4 percent since hitting historic highs earlier this month, adding a potential for some very real gloom and doom for year-end trading plans.
A lot of the past week’s rolling disaster has, we suspect, been due to simple, year-end profit taking and portfolio shuffling. This stuff used to reliably happen in late December as the last trading day of the calendar year approached.
In recent years, however, traders and high-speed computers alike have been starting to play this game earlier and earlier, attempting to game the old system. Instead, they’ve made year-end trading action a lot more unreliable as a barometer for the future.
As stocks across all sectors – but particularly those residing in the healthcare sector and the oil patch – took massive hits earlier in the week, everything else seemed anxious to fall into lockstep. That was particularly true in the tech sector.
Case in point: Our moderately large position in Apple (AAPL) was gobsmacked right after hitting a major high, even as it was added to more buy-lists and as its target price was hiked up to the $200 per share neighborhood. Contradictory and irresponsible rumors about this feature or that alleged defect in the company’s recently released iPhone X were largely to blame.
Headline risk itself is proving to be far more dangerous than ever to the average investor, as the “fake news” phenomenon has invaded financial reporting, big time. Sure, we long ago got used to the portfolio-touting shills that hawk their dubious wares to Deplorable investors who manage to catch one or two daily programs on CNBC.
But with high-speed, high-frequency trading outfits relying on computer algorithms that capture and process trades based solely on headlines rather than PE ratios, we’ve entered a whole new universe of fake news investment. For our part, we’re still trying to decipher how this is affecting technical and fundamental investment techniques in the longer run. No answers yet.
Meanwhile, we continue to gnash our teeth over our onetime golden position in Allergan’s convertible preferred “A” shares (AGN/PRA, your brokerage’s symbol may vary).
The good news is that the shares went ex-dividend this week, meaning that we’ll soon get another Hungry Man-sized dividend check.
The bad news: Both AGN/PRA and parent company, pharmaceutical giant and Botox king Allergan (AGN) continue to play the “How low can they go” game with a vengeance.
Both securities have plummeted some 25 percent since September’s adverse court ruling, essentially terminating Allergan’s patents on its blockbuster dry-eye treatment, Restasis. (The company’s novel patent sale to a New York State-based Indian tribe also didn’t help the company in the court of public opinion.)
Both stocks finally seem to be bottoming, AGN/PRA in the low $600s per share, and AGN in the high $100s. No matter how adversely affected the company is from the court’s action in FY 2018 – Restasis currently accounts for 2-3 percent of Allergan’s current profit figures – the company itself
- Will not die.
- Will prosper once again in any event, and fairly soon, due to some promising new drugs currently in the late-stage pipeline.
In other words, Allergan will recover nicely from its current disaster. The main question, however, is exactly when?
That’s always a major problem when any investment takes a massive hit. There are really only two things you can do when this happens:
- Get out, book a massive loss for the current tax year, do some heavy drinking during the holidays and start with a clean slate on January 2; or
- Hold onto the investment if you’re confident it will come back, realizing that in the meantime, your over all return numbers will look embarrassingly horrible, depriving you of bragging rights during this year’s New Year’s Eve festivities.
As for us, we’ve pared our Allergan preferred position down a bit, judging our exposure to be too high. But we’re going to hang in there. That includes allowing our shares to mandatorily convert to common shares on March 1, 2018 as they are scheduled to do.
The selling in both classes of Allergan shares has been grossly overdone. It was likely caused in part by short sellers who haven’t had too much fun otherwise in the current Donald Trump-inspired 2017 bull market extension. But Allergan has a great many smoothly functioning parts. That’s why we can’t imagine its current malaise will last much longer than 6 months to a year before new drug approvals begin to outweigh the current Restasis disaster.
Meanwhile, we’ve lightened up, for now, on oil positions, given that the price per barrel got these stocks overly juiced before oil’s inevitable retreat, currently ongoing. The oil patch is still a good place to be these days, particularly when it comes to relatively high-yielding majors. But oil is also violently cyclical, and for the moment, the cycle is headed down.
Supply constraint, likely to start happening soon once again, will stem and then reverse the decline. But, lest we forget, if either the Saudi government’s escalating pressure on Iran or Little Rocket Man’s antics in East Asia suddenly get out of hand, headline risk will once again send oil prices into the stratosphere.
Unfortunately, as far as these “what-if” scenarios go, we don’t have a clue. So we’re probably best off keeping at least a small position in the oil patch, just in case. That’s no way to invest in the long run. But in the short run, those with a better-than-average trading game can still generate nifty profits in this sector. If their timing is dead-on, that is.