U.S. 2Qtr. GDP Surprises To Upside; Argentine Default Imminent; SRPT And ARWR
Stocks closed mixed today after U.S. GDP came in at a surprisingly strong +4 percent in the second quarter of 2014, after a -2.1 number in Q1. There was something for everyone in that number. “The bulls look at the strength of the second quarter; while, the skeptics say you’re getting a bounce-back from a negative first-quarter,” that was significantly affected by weather, said Bruce McCain, Chief Investment Strategist at key Private Bank. “The question is,” he said, “how do things look in the third and fourth quarters; and, the answer is we don’t know. A lot hinges on the employment report on Friday,” he added. If you average the -2.1 (revised from previous -2.9) Q1 GDP number and, a +4 Q2 GDP handle today, you get an average U.S. GDP growth of about 1.9 to 2 percent — still the weakest post-recession ‘recovery’ since WWII. Unemployment is still an issue and the Labor Participation Rate in the 60s is the lowest in 40 yrs. And, there is quite a bit of concern that the +4 GDP handle was in-part aided by a significant growth in subprime loans — especially in the auto sector.
The Federal Reserve Open Market Committee (FOMC) statement by Fed Chair Janet Yellen this afternoon was still very dovish and mostly about inflation; and, the lack thereof. “Federal Reserve of Philadelphia President Charles Plosser was the lone dissenter, objecting to the “considerable time” phrasing as related to the window of how long the Central Bank would wait until it begins raising the Feds fund rate”, wrote Kate Gibson on CNBCs website this evening.
The bottom line in my view is that the bulls heard what they needed to hear; and, the bears did not.
Argentine Default On Debt ‘Imminent’
Reuters, the Associated Press, and CNBC are reporting this evening that Argentina, Latin America’s third-largest economy, is in technical default this evening, as Standard and Poor’s downgraded the country’s debt to Selective Default. The country owes $539M to bondholders, $1.33B to holdout bondholders, and a total of $1.87B in the red. As CNBC reports this evening, “the holdouts, a group of hedge funds that bought bonds at steep discount following Argentina’s default on $100B of debt in 2002, also refused to ask the U.S. court to stay an order that blocks Argentina from paying its other creditors.”
“The full consequences of default are not predictable, but they are certainly not positive,” said Argentina’s Economic Minister, Axel Kicillof, today. Argentine bonds surged today to 15 percent. This would be Argentina’s second default on debt in the past 12 years; and, will no doubt make it much more difficult for the country to borrow money at any reasonable rate in the short-to-mid-term — as evidenced by the surge in bond yields to 15 percent.
How the U.S. stock market reacts to the Argentine news is anyone’s guess; but, when second-quarter earnings end in about two weeks, the market may focus more on geopolitical events like Russia/Ukraine, Israel/Gaza, Iran Nuclear, and Argentina default. Add to that news this evening that Japan’s economy may be headed back into recession. Cracks are also reportedly starting to appear inside the Kremlin with respect to Putin’s actions with respect to Ukraine. But, the smart money is betting that this kind of pressure isn’t going to tame the Russian bear; but instead, may prompt him to take even more aggressive action with respect to Ukraine.
I don’t think we see contagion from this default; and, it doesn’t — on its own — cause a selloff in stocks. Indeed, an Argentine default was expected and has already been priced into the market. Having said that, we are long overdue for a 10 percent or greater correction; and, I fear after earnings — we may well get one.
Notable Moves Higher In Bio-Pharma Stocks I Own
Sarepta Theraputics (SRPT) was a star performer today, as its shares rose $2,60, or 12.8 percent to $22.93; and, shares are up another 22 cents after hours — all on big volume. The FDA said it was “actively engaged” with the company regarding its Phase II experimental drug eteplirsen for Duchenne Muscular Dystrophy (DMD). DMD is a fatal form of the disease which strikes mostly young boys who usually die in their late teens, to early 20s. SRPT has applied for New Drug Approval (NDA) from the FDA and the company is expected to hear sometime in the third quarter of this year regarding the FDA’s view. I own shares in SRPT and have selectively added on pullbacks this year. Wedbush Securities recently upgraded their view on SRPT to Outperform/Strong Buy; and, shares could surge significantly if the company receives FDA approval. Nothing is guaranteed however, so make sure you do your own due diligence and have the risk tolerance for speculative bio-tech plays.
Another company who’s stock saw strong gains today was Arrowhead Research Corporation (ARWR) who’s shares rose today $1.23, or 10.3 percent to $13.18. The company has an experimental drug for hepatitis B, the most common form of debilitating liver disease affecting some 350M worldwide. ARWR’s drug suppresses a protein in hepatitis B that is primarily responsible for turning off the liver’s immune system. Again, I own shares in the company; but, I have a strong-risk tolerance and understand the risks. Make sure you do – if you decide to take a chance. All for now. V/R, RCP