Helping the Fellow Out

By: Fred Sheehan | Wed, Apr 16, 2014
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After biotech stocks hiccupped on Thursday, April 11, 2014, ISI analyst Mark Schenebaum told the world: "Horrible day in biotech. I'm frankly at a loss for an explanation. And it's my job to know why. [The reason he gets paid the big bucks - FJS.] Schenebaum "has been following the sector since 2000," but maybe spent too much time golfing.

NASDAQ 2000: To the Brink and Back

  Closing Price Point Change Percent Change
March 10 5048 +182 +1.7%
March 13 4907 -141 -2.8%
March 14 4706 -201 -4.1%
March 15 4582 -124 -2.6%
March 16 4717 +135 +2.9%
March 17 4798 +81 +1.7%
March 20 4610 -188 -3.9%
March 21 4711 +101 +2.3%
March 22 4864 +153 +3.2%
March 23 4940 +76 +1.6%
March 24 4963 +23 +0.5%
March 27 4958 -5 -0.1%
March 28 4833 -125 -2.5%
March 29 4644 -189 -3.9%
March 30 4457 -186 -4.0%
March 31 4572 +115 +2.5%
April 3 4223 -349 -7.6%
April 4 4148 -75 -1.8%
April 5 4169 -21 +0.5%
April 6 4267 +98 +2.3%
April 7 4446 +179 +4.1%
April 10 4188 -258 -5.8%
April 11 4055 -133 -3.2%
April 12 3769 -286 -7.1%
April 13 3676 -93 -2.4%
April 14 3321 -355 -9.6%
April 17 3539 +218 +6.6%
April 18 3793 +254 +7.4%
Source: John Hancock Quarterly Market Review and Outlook, July 3, 2000, Frederick J. Sheehan, Andrea Whalen

Schenebaum is not alone. "Biotech Rout Perplexes Analysts," ran the Wall Street Journal headline. On April 10, the NASDAQ Biotechnology Index (NBI) fell 5.6%. The day before, it rose 4.1%. This is familiar ground. The NASDAQ (composite) chart from early 2000 - "The NASDAQ - To the Brink and Back" - shows many days a believer found encouragement to plunge on, but this was not the wise course.

Dr. Joseph Lawler, Senior Managing Partner at Merus Capital Management, told a Grant's Interest Rate Observer conference audience (April 8, 2014) the NBI trades at 42 times reported earnings. To arrive at that multiple, several leaky faucets need to be plugged. Removing the contrivances, including losses, the NBI is poised at 2,200 times current earnings. The NBI market capitalization is greater than the domestic automobile and aerospace industries added together.

Speculators want to make money. They buy what is going up. If it keeps going up, they buy more of it. They may "climb the wall of worry," as the saying goes, but get used to that. More savers decide they need to gamble so that they can eat, so jump in. The increasing participation is common to market excesses. Then more savers stare at the cat food in the cupboard and climb aboard.

Leverage contributes to the rising tide. Glenn Holderreed at Quacera L.L.C. in Sacramento, California reported on April 6, 2014, New York Stock Exchange margin debt is close to $500 billion. This is well above the highs in 2000 and 2007, after adjusting for price inflation.

It is often said how much faster a bull market dives than the time it took to rise. The reason involves panic, or a synonym of that. There is also a mechanical reason. It resides somewhere in our minds but the mechanism is worth repeating after a period of relative calm. From the April 6, 2014, Quacera Chronicle: "When setting up a margin account with a stock brokerage, the typical maximum for margin debt is 50% of the value of the account. In order to prevent a margin call (a request to raise collateral* in the account), the margin debt must remain below a specified percentage level of the total account balance, known as the minimum margin requirement. If stock prices fall the brokerage insists the margin debt be reduced, either by putting up additional money or selling stocks.... Unfortunately [for the margined punter in bio or Tesla - FJS] brokerage firms and banks want margin calls (demand for debt payments) paid on the same day." A brother-in-law broker might "want" and wait, for the rest, without payment, their stocks are sold.

*Collateral: There is probably no part of what remains of the so-called financial system that is more an illusion than collateral. The central banks have taken possession of government and agency securities that are ranked at or near the top in the hierarchy.

At the most basic level of collateral, we can wonder until Doomsday why the United States government has refused to return the German government's gold stored in New York. In January 2013, Germany demanded the U.S return 300 tons of the 1,500 tons it keeps stored at the New York Federal Reserve. At last count, the U.S. has returned three (3) tons. As a working assumption, the U.S. government cannot return it. It therefore does what it can to drive the price of gold down. A few minutes after Ukrainians and Russians (or their proxies) started shooting this morning, April 15, 2014, gold opened for trading in New York. Almost immediately, "over half a billion dollars of notional... gold futures contracts" were dumped. "This smashed gold futures down over $12 instantaneously, breaking below the 200 [day moving average] and triggered the futures exchange to halt trading in the precious metals for 10 seconds." (Zero Hedge)

It does not pay (over time, one must add) to mess with mother nature. Nothing is worse (in the long run) than attempting to destroy the very roots of money. For at least 5,000 years, money has been an immovable object planted in bedrock to protect the people from the folly and vanity of human weakness. To cripple gold's function destabilizes the financial ecosystem at every level. Witchcraft hexes on currencies, through money markets, bonds, common stocks, and uncommon stocks including the never-never, nothing-nothing, gossip and Peeping Tom shares as well as the medicine man miracle cures begs for annihilation.


Frederick Sheehan writes a blog at



Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

Copyright © 2007-2014 Frederick J. Sheehan Jr.


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