Market Digest – Week Ending 3/24
Stocks failed to achieve a sixth consecutive weekly advance. An increasing view that the Fed will follow-through with multiple rate increases in 2016 drove the dollar higher and sapped enthusiasm for stocks, commodities and emerging market assets. The S&P 500 lost 0.6% in a short week. Markets will be closed for Good Friday. A horrific terror attack in Brussels, just three months after the Paris attacks, heightened tensions but did not have a significant immediate impact on markets.
S&P 500: 2,036 (-0.6%)
FTSE All-World ex-US: (-1.9%)
US 10 Year Treasury Yield: 1.90% (+0.01%)
Gold: $1,217 (-3.0%)
USD/EUR: $1.118 (-0.9%)
• Monday – Moody’s Investors Service said it is reviewing Deutsche Bank AG’s credit rating for possible downgrade.
• Monday – Sales of previously owned homes sank 7.1% in February, a sign that demand for housing could be cooling amid rising prices and low inventory.
• Tuesday – Terrorists detonated bombs in the main airport and a metro station in Brussels, killing at least 31 people. ISIS claimed responsibility.
• Tuesday – Donald Trump and Hillary Clinton won primaries in Arizona, maintaining front-runner status. Ted Cruz won Utah and Bernie Sanders won Utah and Idaho.
• Wednesday – It was reported that regulators plan to require banks to hold back much of an executive’s bonus beyond the three years already adopted by many firms.
• Thursday – Hedge fund Starboard Value LP said it hopes to remove the entire Yahoo board.
For millennials, “Valeant” may replace “Enron” as the go-to example of a big, evil company bust. The pharmaceutical company used creative internal accounting and predatory financial tactics to charge higher prices for drugs while also promoting the practice of filling prescriptions with very expensive drugs it controlled when generic drugs likely would have been the same. The result is insurance companies paid billions more than needed, which at least in theory forces health costs up for all of us. The stock is down about 90% from its peak in August, and this week its CEO Michael Pearson was forced to resign.
An interesting difference with Enron is that Valeant is technically domiciled in Canada and so is not in S&P 500 funds or most US mutual funds. It is however, an important holding in many hedge funds – most prominently that of Bill Ackman, a good looking billionaire who ironically is also famous for shorting and attacking Herbalife as a Ponzi scheme and now finds himself on the Valeant board. His main fund is down around 25% this year. John Paulson got stung, as did the Sequoia fund, run by Buffett disciple Ruane Cuniff, who was forced to resign this week over Valeant-driven poor performance.
It is a complex story with interesting characters – someday there will no doubt be a movie made. But from an investing perspective, it is a simple example of the risks of concentrated holdings. If you have a single stock that represents a big chunk of your net worth there is a non-zero chance it will implode. No one expected Enron or Lehman or Bear Stearns or…… to get wiped out. Valeant is still alive, but on life support. Highly unpleasant but still less extreme examples, including solid companies such as LinkedIn being down 50% this year, are even more common.
Valeant is also an example of the benefits of rebalancing. Despite a disastrous six months, Valeant is trading about where it did for much of 2011. If you bought stock near the bottom of the bear market in 2008 and never sold, you’d still be up 400%. And if you had bought any time before 2013 and periodically took some profits in the form of rebalancing and allocating to areas of your portfolio which were not doing well, Valeant would have been very, very kind to you.