The year has gotten off to a good start with low interest rates and market momentum pushing investors to put cash into equities. We’re seeing cash that had been on the sidelines going to work once more, as those who sat out last year fear missing out on gains again this year. While there is a contrarian argument to be made that investors are simply reacting to market forces and not economic fundamentals, it has become clear in my several decades in this industry, that they regularly act with a short-term orientation and often in ways that seem illogical if taken out of context. However, I also find true the adage that, “markets can stay irrational longer than you can stay solvent.” While I’m not suggesting that the stock market is irrational right now, it is hard to disagree that stock appreciation on the back of flat earnings growth is sustainable. Fortunately, we expect earnings to pick up as the year progresses.
Speaking of earnings, the financial sector had several large banks report earnings this week and virtually all reported, with a couple exceptions, beating expectations. In fact, the biggest banks seem to have an advantage over smaller banks, given the depth and scope of their business lines. Analysts believe the largest banks will have a good year as interest rates cuts appear to be off the table for the foreseeable future. Early earnings announcements and forward guidance from these banks seem to support this view.
In related news, having lived through the financial crisis of 2008, we are all aware that the Federal Reserve (Fed) had to do some unorthodox things to keep the financial sector afloat. Most, if not all, of the inadequacies have been addressed to prevent a similar meltdown from occurring in the same fashion. However, this week we learned the Fed has a new idea how to shore things up further. I’ve touched on the repurchase market (repo) a few times since last fall when suddenly, and without much transparency, the largest banks decided to stop overnight lending. Since then, the Federal Reserve has stepped in to provide the necessary funds to ensure that no financial institution goes the way of Lehman Brothers. It now appears the Fed wants to overhaul the entire repo market by replacing the largest banks as middlemen, with itself acting as primary lender. Not everyone loves this idea, seeing that it ensures gains are captured by the private market, while losses are born by the government. One of the benefits of free markets is that they have a way of guiding one’s decisions due to the self-preservation nature of it. If risk is shifted elsewhere, it goes without saying that those who stand to benefit might make riskier bets.
In other news, pharmaceutical companies are getting even more creative with pricing. This started a few years ago when the issue of high drug costs took center stage. Given the ever increase cost of new medications, they’re not just experimenting in patient trials, but also on ways to get paid for their priciest offerings. One company, Alnylam Pharmaceuticals will charge the full price of $575K for Givlaari, but only if a patient receives a benefit on par with what was observed in clinical trials. Sanofi is offering a subscription service for insulin at a discounted price of $99 per month and Novartis will allow insurers to pay for its gene therapy, priced at $2.1 million, over five years. According to a research report by CVS Health, gene therapies for just 11 conditions are projected to cost $45 billion over the next five years.
In closing, I’ve spent the past few weeks talking about job opportunities from the head of the Canadian Central Bank, to a well-paid Taco Bell manager last week. Keeping up with this theme, I've come across another potentially lucrative job opening which you may want to consider. Uber’s Chief of Scooters (yes that’s a real title) has left the company to start up a new venture. Rachel Holt, the previous scooter devotee, will be a tough act to follow having joined the firm in 2011 and worked her way up to scooters and bikes in 2018. However, if you have a burning passion for scooters, this could just be your dream job. I don’t know what it pays, but I’m pretty sure it would be a great job. Now you know.
Bruce J. Mason, MBA