Mellon on the Markets: Playing the rotation game
Just this minute, I have finished editing the second edition of Juvenescence; the first one came out about a year ago and already so much has changed in the field that we have had to do multiple revisions.
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There is real progress, and some companies involved in the longevity space are now coming public; notably, Unity Biotechnology (NASDAQ:UBX) – a leader in senolytic drugs – and Restorbio (NASDAQ:TORC) – a company involved in boosting the ageing immune system – have listed in the US. In the private arena, huge amounts of money are now being mobilised to expand human healthy lifespan, and one such beneficiary is our own Juvenescence Ltd., which has so far raised $63 million since it started less than ten months ago. Juvenescence will shortly embark on its Series B, in order to fund its expanding list of exciting subsidiaries.
In the meantime, most markets are either in bear territory or treading water, and even the US market, while marking new highs, is showing signs of exhaustion. The US has so significantly outperformed European and Emerging markets that it is surely time for a reversal in roles. The recent weakness in the US dollar might presage a rotation back into emerging markets, as a strong dollar is decidedly bad for countries which have government and/or corporate sectors which have heavy US dollar denominated borrowings. But, worldwide, this bull market is very long in the tooth, and the economic growth and financial engineering which has characterised its latest stages has been accomplished on a sea of easy money which is coming to an end.
Playing the rotation game
I remember as a young fund manager playing the sectoral rotation game; that is, when one sector looks a bit expensive (think tech today) you move into something that appears to be cheaper (think oil majors). This can work, but not forever; one day, the whole damn shooting match comes tumbling down, with the good girls going down with the bad. We are close to that point now, with just too many macroeconomic factors, not to mention the geopolitical stuff that assaults us every morning, to warrant getting overly bullish on anything.
Oh, except maybe gold and silver, where shorts are at all time record highs, just as inflation is beginning to take off – a classic moment for bottom fishers and smart money to start piling on positions. Yes, so though I have been painfully long on precious metals so far this year, I am holding firm. When they start to move, they go up rocket style.
Evil Knievil of this parish has written about Tesla (NASDAQ:TSLA) and its erratic CEO. I suppose there is a chance that Apple (NASDAQ:AAPL) or Alphabet (NASDAQ:GOOGL) buys Tesla, but if I were them I would just wait for the company to go bust. It owes suppliers $3 billion, has been extending payments, and has debts maturing – all classic warning symptoms of impending doom. The cult surrounding the great man has kept the stock levitated (recall that Tesla is still worth more than Ford), despite aggressive short positions. On balance, I remain sceptical about this company, and would remain short. The SEC is also taking a keen interest in the Tweetgate storm caused by Elon, and presumably they will not reflect that in a benign lack of action.
In similar mode, the weight of evidence against Facebook (NASDAQ:FB) as an investible stock is rising; this platform for timewasters and imbeciles is coming under concerted attack from just about everyone, and while WhatsApp and Instagram are viable businesses, they are as nothing compared to the main site, which is undoubtedly losing momentum. I would institute shorts here, in modest size, and ride the wave down.
Bullish options
One thing I like to do is to write bullish options (i.e. selling puts) against stocks that have decent dividend yields where the dividend is sustainable. This normally works, but sometimes you get caught with a company, seemingly without problems, that ends up having to cut the dividend due to unforeseen circumstances.
One such example is Bayer (ETR:BAYN), which having just acquired Monsanto for $60 billion, ended up with a negative judgement on Round Up, its ubiquitous weed killer, which was deemed to have caused a US gentleman to suffer from a terminal cancer. The damages awarded – nearly $300 million – will no doubt be reduced, but there are many thousands of people lining-up with similar lawsuits. A really good, stable business could be severely damaged by a black swan (think BP (LON:BP.) a few years ago with the blow-up of the Macondo well). That’s why ‘obviously’ cheap stocks aren’t always what they seem, and diversification remains of extreme importance.
On a bullish note, I would actually tuck some Restorbio away in the long-term longevity portfolio. It spiked on good results for its Phase 2 trial in boosting the immune system in elderly patients and has since come down. It has plenty of cash and is well run. I think you can buy this and leave it for five years or until it gets taken over. I also agree with Evil that M&S (LON:MKS) in the UK is probably a buy, based on Archie Norman’s presence and also on its substantial property backing. Archie has a really good record in shareholder returns and I would back him.
Caution is the watchword
For the moment however, caution is the watchword. We are becoming more liquid, and cash holdings should probably be held in sterling at this point, though the Japanese yen is also attractive. Sterling seems attractive as the risk of a no deal Brexit is low. Mrs May, despite all the criticism levelled at her, has done a pretty good job of navigating what must seem like a crazy golf course to her. No one really wants a UK crash out, no one (with the possible exception of Jeremy Corbyn) wants a fresh election, and common sense is likely to prevail.
I don’t know what the shape of a deal will look like, but sterling is pricing in some pretty bad stuff, especially at a time when government finances are looking up and UK economic growth is reasonable. Expect a deal outline by October.
Do not expect Donald Trump to be indicted or impeached; also don’t expect a rout at the midterms. It’s not going to happen. But what might happen is that Trump overplays his hand with the Chinese and the incipient trade war becomes something much, much worse.
In those conditions, surely there is a pot of gold at the end of the rainbow?!
Happy Hunting!
Jim Mellon
There were a few errors in the first juvanesence book. You might want to think twice about Crispr treatments for cancer. There is a professor who has nailed cancer by starving it of glucose and glutamine. Once he is published enough with long term treatment of hopeless stage 4 cases I suspect a short period of short selling of pharma stocks whose incomes depend on cancer.