WHAT COMES AFTER INITIAL 2-3 YEAR SURGE OUT OF 50% BEAR MARKETS?

 "Those who cannot remember the past are condemned to repeat it"  Vol 1, Reason in Common Sense, George Santayana


AFTER MAJOR MULTIYEAR BEAR MARKET LOWS OF 1843, 1861, 1878, 1932, 1938 & 1974 THAT SAW DECLINES OF –45% TO –89%, THE MARKET HAD AN INITIAL EXPLOSIVE 2-3 YEAR BULL MOVES OF AROUND 100%.  GREATER THAN 60% BEAR MARKETS, THE ADVANCE WAS AROUND 150%. AFTER THAT, NO MATTER WHAT THE VALUATIONS OR IMPROVED ECONOMIC CONDITIONS, MARKETS TRANSITIONED TO A VOLATILE MULTI-YEAR RANGE BOUND  PHASE THAT WILL FAVOR DIFFERENT INVESTMENT STRATEGIES THAN SIMPLE BUY AND HOLD COMING OUT OF THE LOW.


LETS LOOK AT 5 AND COMPARE IT TO THE CURRENT OUTLOOK.

1.       AFTER THE 1835-42 – 60% BEAR MARKET , THE STOCKS SURGED 95% FOR 2 YEARS (1843-45), THEN WENT SIDEWAYS FOR 7 YEARS  UNTIL  1852, WHEN AFTER A FALSE BREAKOUT,  LED TO ANOTHER 5 YEAR -70% BEAR  MARKET.

 

2.       AFTER THE 1857 -70% BEAR MARKET LOW, THE MARKET CHOPPED IN A BASE FOR 4 YEARS, THEN SURGED FOR 3 YEARS WHEN THE INFLATIONARY CIVIL WAR BROKE OUT.  IT THEN MEANDERED UP FOR 7 YEARS

3.       1872-1877 -50% BEAR MARKET, IS THEN FOLLOWED BY THE 1878-1881 BULL MARKET FUELED BY THE RAILROAD BUILDING BOOM AS CAPITAL POURED INTO THE US FROM EUROPE CAUSING A +150% BULL MOVE. AFTER THAT PEAK, THE MARKET MEANDERED DOWN FOR 15 YEARS.

4.       AFTER THE GREAT DEPRESSION DECLINE OF -89%, THE MARKET SURGED OFF THE LOWS, THEN CHOPPED DOWN FOR A COUPLE MORE YEARS, SURGED AGAIN IN 1935-1936, BEFORE RETRACING ALL THE WAY BACK TO 1933 LEVELS.  THE MARKET RANGE WAS CAPPED FOR 19 YEARS BETWEEN 1931 & 1950

5.    OUT OF THE –50% 1973-74 BEAR MARKET AND GENERATIONAL LOW VALUATIONS, THE MARKET SURGED ALMOST 100% IN 2 YEARS, BEFORE MEANDERED UP FOR THE NEXT VOLATILE 6 YEARS THAT INCLUDED 3 BEAR MARKETS AND FOR GOOD MEASURE AN “OCTOBER MASSACRE” OF 1978.

6.    BULL MOVE OUT OF MARCH 2009 TO CARRY INTO MID-2011?  100% MOVE OFF 666 IS 1330 S&P

The point of this exercise is to determine whether we are at the cusp of something big on the upside in the years ahead or something different.  History of bull markets following greater than 50% bear markets - that usually indicates structural damage of some kind for which equilibrium must be restored and the lessons of the prior secular bull must be unlearned.  In past 6 such bear markets back to 1835, the market has rallied about 100% in the first 2-3 years, then meandered sideways in volatile activity while it waits for the system to delever and repair structural damage.  This implies that 90% of the bull market is complete pricewise, and sometime next year will morph into a volatile multiyear trading range that absorbs aftershocks from 2008 generational event.

Framing the last century in context of decade long cycles of ebbing between the need to manage risk, and flowing, when risk should be embraced and setbacks only lead to higher highs.  When adjusted for the rising value of money (deflation) and the falling value of money (inflation) we get a perspective of when equities have been a store of value or a cost to wealth.  As such, from the chart below we see 16 to 20 year periods when equities adjusted for CPI generally decline. Those periods include 1903-1921, 1929-1949, 1966-1982, and the latest period beginning in 1999.  While deflation adjusts the price upward, its generally harder on the absolute stock prices than inflation which hurts the real value but inflates the absolute levels of the indexes. 

Eden Rahim

IS SAVIENT AT THE CUSP OF A BIG MOVE? Volatility band spread has collapsed from $20 to $1.30

Savient has been on the roller coaster of roller coaster ride.  First soaring in September on FDA approval of Krystexxa for Refractory Gout, then pushing higher when management indicated it would pursue the sale of the company, then shockingly crashing 50% when a takeover price could not be agreed upon despite 2 or 3 interested acquirers.  Yet looking at the late October 50% crash in the SVNT one would think it must be due to something catastrophic such as a) an FDA non-approval, b) a pivotal trial failure, c) a superior competing drug, d) a patent suit outcome, e) a manufacturing contamination issue, toxicity or fatality development, f) a labeling restriction that will impact its potential market size.  Yet it was none of these issues.

Savient made new highs into mid-2008 then crashed not for company specific issues, along with everything else between Sept 2008-March 09 - particularly companies that would have future need to access the capital market.  So essentially, the stock is trading BELOW where its was in 41 out of the past 48 months - despite having a) overcome clinical trial outcome risk of phase 3 data, b) funding risk having raised capital,  c) and then FDA approval and labelling risk that was received in September.  This for an orphan drug with 7 years exclusivity for a niche market with an unmet medical need that will garner premium pricing.  Go figure.

If there were 3 perhaps more interested buyers above $20, would they not be interested at $12 - especially if they haggling over price while disputing market size?  Or do companies trade like we do, buying high and selling low? We don't have sufficient fingers on our hands to list the number of product starved Pharma & specialty pharma companies walking the plank of the looming patent cliff - all in desperate need of focused premium therapeutics that are about to be launched. The market has penalized them with single digit multiples for this reason.  How many more late stage drug failures can a PFE or LLY absorb as they have over the past 12-18 months? Something has to change for them.

With a 50% bear market in place for Savient, the hot money betting on the takeover or the post-approval price momentum has been flushed out.  The short position has soared from 9 million to 12.95mm or +43% over the past month.  The Volatility band spread has collapsed from $20 to $1.30 - implying a BIG move is very possibly the next event.  We'll see.  At a minimum, a rebound to the pre-approval range of $15 seems possible as value players enchanted by the unique risk/reward profile of SVNT at $12 will absorb the supply from momentum  and year end tax sellers and short sellers.

Perhaps the buyers will wait out SVNT's management failed experiment of unrealistic expectations of a multibillion market size, but at some point the buyers in need of a high value Rheumatology therapeutic to detail, may break ranks with kin and reach for the company - realizing a $300mm - $500 drug is still difficult to come by, especially one that has overcome all clinical hurdles.  A bearish estimate of market size for Krystexxa is ultimately penetrating 30% of 50,000 refractory gout patients (vs 97,000 estimate by the FDA & 172,000 by management), priced at $30,000 annually vs over $50,000 by management, amounts to $500 million - assuming NO off label expansion of the market or the European market that is equal to the US market size.  This is not a market size at the cusp of launch that worth pursuing by product starved big pharma?  Good trading.