The Bear Market Has Just Begun


Today the narrow-minded canyons of Wall Street are littered almost entirely of trend-following bulls and cheerleaders who don’t realize how little there is to actually cheer about. Stock values are far less attractive than they were on that day back in 2009 and this selloff has a lot longer to run. There are hordes of perma-bulls calling for a V-shaped recovery in stocks, even after multiple years of nary a downtick.

Here are six reasons why I believe the bear market in the major averages has only just begun:

1) Stocks are overvalued by almost every metric.One of my favorite metrics is the price-to-sales ratio, which shows stock prices in relation to the company’s revenue per share and omits the financial engineering associated with borrowing money to buy back shares for the purpose of boosting EPS growth. For the S&P 500 (INDEX: .SPX), this ratio is currently 1.7, which is far above the mean value of 1.4. The benchmark index is also near record high valuations when measured as a percentage of GDP and in relation to the replacement costs of its companies.


2) There is currently a lack of revenue and earnings growth for S&P 500 companies. Second-quarter earnings shrank 0.7 percent, while revenues declined by 3.4 percent from a year earlier, according to FactSet. The Q2 revenue contraction marks the first time the benchmark index’s revenue shrank two quarters in a row since 2009.

S&P 500
  • Virtually the entire global economy is either in, or teetering on, a recession. In 2009, China stepped further into a huge stimulus cycle that would eventually lead to the largest misallocation of capital in the history of the modern world. Empty cities don’t build themselves: They require enormous spurious demand of natural resources, which, in turn, leads to excess capacity from resource-producing countries such as Brazil, Australia, Russia, Canada, et al. Now those economies are in recession because China has become debt disabled and is painfully working down that misallocation of capital. And now Japan and the entire European Union appear poised to follow the same fate.

This is causing the rate of inflation to fall according to the Core PCE index. And the CRB Index, which is at the panic lows of early 2009, is corroborating the decreasing rate of inflation.


But the bulls on Wall Street would have you believe the cratering price of oil is a good thing because the “gas tax cut” will drive consumer spending – never mind the fact that energy prices are crashing due to crumbling global demand. Nevertheless, there will be no such boost to consumer spending from lower oil prices because consumers are being hurt by a lack of real income growth, huge health-care spending increases and soaring shelter costs.

4) U.S. manufacturing and GDP is headed south. The Dallas Fed’s manufacturing report showed its general activity index fell to -15.8 in August, from an already weak -4.6 reading in July. The oil-fracking industry had been one of the sole bright spots for the US economy since the Great Recession and has been the lead impetus of job creation. However, many Wall Street charlatans contend the United States is immune from deflation and a global slowdown and remain blindly optimistic about a strong second half.

Unfortunately, we are already two-thirds of the way into the third quarter and the Atlanta Fed is predicting GDP will grow at an unimpressive rate of 1.3 percent. Furthermore, the August ISM manufacturing index fell to 51.1, from 52.7, its weakest read in over two years. And while gross domestic product in the second quarter came in at a 3.7 percent annual rate, due in large part to a huge inventory build, gross domestic income increased at an annual rate of only 0.6 percent.

GDP tracks all expenditures on final goods and services produced in the United States and GDI tracks all income received by those who produced that output. These two metrics should be equal because every dollar spent on a good or service flows as income to a household, a firm, or the government. The two numbers will, at times, differ in practice due to measurement errors. However this is a fairly large measurement error and it leads one to wonder if that 0.6 percent GDI number should get a bit more attention.

5) Global trade is currently in freefall. Reuters reported that exports from South Korea dropped nearly 15 percent in August from a year earlier, with shipments to China, the United States and Europe all weaker. U.S. exports of goods and general merchandise are at the lowest level since September of 2011. The latest measurement of $370 billion is down from $408 billion, or -9.46 percent from Q4 2014. And CNBC reported this week that the volume of exports from the Port of Long Beach to China dropped by 10 percent YOY. The metastasizing global slowdown will only continue to exacerbate the plummeting value of U.S. trade.


6) The Fed is promising to no longer support the stock market. Back in 2009, our central bank was willing to provide all the wind for the market’s sail. And despite a lackluster 2 percent average annual GDP print since 2010, the stock market doubled in value on the back of zero interest rates and the Federal Reserve ‘s $3.7 trillion money-printing spree. Thus, for the past several years, there has been a huge disparity building between economic fundamentals and the value of stocks.

But now, the end of all monetary accommodations may soon occur, while markets have become massively over-leveraged and overvalued. The end of quantitative easing and a zero interest-rate policy will also coincide with slowing U.S. and global GDP, falling inflation and negative earnings growth. And the Fed will be raising rates and putting more upward pressure on the U.S. dollar while the manufacturing and export sectors are already rolling over.

I am glad Ms. Yellen and Co. appear to have finally assented to removing the safety net from underneath the stock market. Nevertheless, Wall Street may soon learn the baneful lesson that the artificial supports of QE and ZIRP were the only things preventing the unfolding of the greatest bear market in history.

Michael Pento produces the weekly podcast “The Mid-week Reality Check,” is the president and founder of Pento Portfolio Strategies and author of the book “The Coming Bond Market Collapse.”


SAGE Therapeutics BUY Target Price $40

SAGE : NASDAQ : US$29.05
Target: US$40.00

SAGE Therapeutics is a development/clinical stage
biopharmaceutical company founded in 2010 that is
focused on developing and commercializing drugs to
treat central nervous system (CNS) disorders where no
effective or FDA approved options exist.
Life Sciences — Biotechnology
Investment highlights
Estimate $980M US peak sales for SAGE-547
We estimate $980M US peak sales from ~13,300 SRSE patients,
representing 55% of total super refractory status epilepticus (SRSE)
patients and 13.8% of all ~96,000 patients treated for status epilepticus
in the hospital. We assume a cost of ~$75,000 per patient annually,
which we believe is appropriate for the hospital setting given these
patients are critically ill and are on last lines of therapy.
SAGE-547 has clear mechanism of action
SAGE-547’s mechanism is well understood, upregulating GABA at two
synapses (α1 and α 4) while current therapies only hit GABA at α1
receptor. We believe this gives the drug an advantage over other
therapies because the dual interaction can potentiate stronger GABA
duration, leading to improved seizure control.
Current therapies remain ineffective
Current therapies remain ineffective in controlling SRSE (response rates
<40%) or have intolerable side effects, giving SAGE-547 a low risk of
penetrating in this market. Additionally, we want to emphasize the
severity of this disease where patients in the ICU carry a mortality risk
of close to ~50%, making this an area of high unmet medical need.
Expect positive SAGE-547 weaning data in December
We expect positive data for SAGE-547 when patients are weaned off
drug and brought out of coma in December for at least n=10 patients.
Previous data suggested resolution of SRSE in 9/10 patients, whereas
new data will discuss weaning patients off drug and reversing coma

Why Investors Love Drug Companies

  APRIL 28, 2014

Few people have done better in the recent stock boom than biotech investors. Biotech was the best-performing market sector last year, and in the past two years its stocks rose a hundred and twenty per cent. But suddenly, in late March, the stocks tanked, some falling more than twenty per cent in a few weeks. The selloff can be explained to some extent as a market correction and part of a wider flight from risk. But the real story concerns a revolutionary new hepatitis-C drug developed by the biotech giant Gilead.

Hepatitis C affects 3.2 million Americans; untreated, it leads to scarring of the liver and to liver cancer. Until now, the best treatments cured only about half of patients and often had debilitating side effects. But in December the F.D.A. approved the first in a new wave of hep-C drugs, Gilead’s Sovaldi. This is huge news—not just in medicine but on Wall Street. Vamil Divan, a drug-industry analyst at Credit Suisse, told me, “Sovaldi and the other new hep-C drugs are great drugs for a tough disease.” Sovaldi can cure ninety per cent of patients in three to six months, with only minor side effects. There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand.

For Gilead this is great. Take an expensive treatment, multiply by a huge number of hepatitis-C patients, and you get a very lucrative business proposition. It’s also good news for patients. But it’s a big problem for insurers and taxpayers, who—given that hepatitis-C patients have an average annual income of just twenty-three thousand dollars—are going to end up footing much of the bill. There has been an uproar of criticism. Private insurers blasted Gilead’s pricing strategy; the pharmacy-benefit manager Express Scripts said that it wanted its clients to stop using Sovaldi once an alternative appears. Then, on March 20th, three Democratic members of Congress sent Gilead a letter asking it to explain why Sovaldi costs so much. The letter had no force of law, but it spooked investors by raising the spectre of what they most fear—price regulation.

Investors love drug companies in part because they often have tremendous pricing power. Drugs designed to fight rare diseases routinely cost two or three hundred thousand dollars; cancer drugs often cost a hundred grand. And, whereas product prices in most industries drop over time, pharmaceuticals actually get more expensive. The price of the anti-leukemia drug Gleevec, for instance, has tripled since 2001. And, across the board, drug prices rise much faster than inflation. The reason for this is that prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had “virtually zero” ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market—the federal government—is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will.

Still, this is an inherently fragile arrangement, dependent on our willingness to keep paying whatever the companies ask. The signs of a backlash are clear. More than a hundred cancer specialists have called for action to lower the price of cancer drugs. The chair of M. D. Anderson’s leukemia department co-authored an article saying that the cost of cancer drugs is “out of control.” The United Kingdom has announced a cap on annual drug spending, and Germany has adopted stringent rules to determine what drugs it pays for. Now Sovaldi has people talking again about allowing the U.S. government to do something similar. “It’s a growing issue, and this outcry may be a sign that we’re going to see more pushback,” Divan said. Every other developed country, after all, has some form of drug-price regulation, and it’s not as if drug companies then abandon those markets. Gilead sells Sovaldi in the U.K. for fifty-seven thousand dollars per treatment, nearly thirty per cent less than the price we pay.

Price restrictions have always been a political non-starter here, but at some point the math of the situation will be hard to resist. According to a study by the research group I.S.I., by 2018 spending on “specialty drugs” like Sovaldi could account for half of all drug spending in the U.S. Furthermore, one traditional argument against price controls is looking weaker: biotech companies claim that prices need to be high to reward risky and expensive innovation, but the fact that they’re churning out drugs and profits so consistently seems to undermine that claim. Biotech, in other words, may become the victim of its own success: the bigger the profits, the bigger the likelihood of regulation.

You might think that this prospect would encourage companies to be more cautious. But, if you assume that price controls are coming, the rational play is to squeeze out all the profits you can now. The uproar over Sovaldi may, somewhere down the line, help contain drug prices. But in the short run it could well make drugs even more expensive. And that’s what you call a serious side effect.


At AMP we are looking to Harris and Harris Group ( TINY) – little know and about to file for three or more IPOs in the next year.They avoid long periods of research and expensive investing by investing in advanced research projects.

OPKO Health ( OPK) is following the same route and has the backing of Dr. Phillip Frost – former head of TEVA.

or to the cynic


OPKO Health NR – Aquisition

OPKO Acquires Next Generation Dry Powder Inhaler to Treat Respiratory Disorders


As of 17 Apr 2014 at 11:53 AM EDT.  


Open 8.29 P/E Ratio (TTM)
Last Bid/Size 8.19 / 12 EPS (TTM) -0.33
Last Ask/Size 8.20 / 20 Next Earnings 5 May 2014
Previous Close 8.33 Beta 1.01
Volume 1,351,913 Last Dividend
Average Volume 3,501,287 Dividend Yield 0.00%
Day High 8.37 Ex-Dividend Date
Day Low 8.12 Shares Outstanding 412.9M
52 Week High 12.95 # of Floating Shares 221.0759M
52 Week Low 6.14 Short Interest as % of Float 21.06%

Inspiromatic™ Improves Drug Delivery, Monitors Patient Inhalation and Provides Real-Time Patient Feedback

MIAMI–(BUSINESS WIRE)– OPKO Health, Inc. (NYSE:OPK) has entered into a definitive agreement to acquire Inspiro Medical Ltd. (“Inspiro”), an Israeli medical device company developing a new platform to deliver small molecule drugs such as corticosteroids and beta agonists or larger molecules to treat respiratory diseases. Inspiro’s Inspiromatic™ is a “smart” easy-to-use dry powder inhaler with several advantages over existing devices.

Inspiromatic™ offers improved drug deposition to the lower airways of patients and real time data for patient compliance monitoring. The device has an internal microcontroller and flow sensor that controls the delivery of the medication and, using micro-pump technology, dispenses the drug particles at the right speed without the need for forceful inhalation. It also provides instant feedback to the patient with a green or red flasher light to indicate proper inhalation and a beeper after the dose has been delivered. For physicians, Inspiromatic™ provides a built-in logger that stores patient use data for easy access and transmission by electronic devices such as smart phones.

In a recently completed, First In Man double blinded clinical study conducted in 30 asthmatic children comparing Inspiromatic™ to a market leading dry powder inhaler, Inspiromatic™ demonstrated superior pulmonary delivery of the active drug.

“We are pleased to add this next generation inhaler to OPKO’s growing product portfolio,” stated Phillip Frost, M.D., OPKO’s CEO and Chairman. “We expect this innovative device to play a valuable role in the improvement of therapy for asthma, chronic obstructive pulmonary disease, cystic fibrosis and other respiratory diseases. We plan to use the Inspiromatic™ device to test the inhaled form of OPKO’s new sulfated disaccharide drug against these disorders. This drug product is still undergoing pre-clinical testing prior to submission of an IND, but animal data indicates safety and efficacy for both inhaled and orally delivered forms. Of course, we believe that Inspiromatic™ can improve outcomes of treatment with other drugs, those presently available in more ‘standard’ type inhalers, as well as new inhalation drugs being developed. This acquisition fits our strategy of developing new products that address large markets in need of more effective therapeutic solutions.”

Nimrod Kaufmann, CEO and Co-Founder of Inspiro, commented, “We are extremely proud of Inspiro’s success in bringing our smart Inspiromatic™ respiratory drug-delivery device to market. With Inspiro now a part of OPKO, we will be able to help more people faster. Inspiro joining OPKO is a big win for the shareholders of both Inspiro and OPKO, as well as good news for our patients and physicians.”

Eran Feldhay, M.D., CEO of Trendlines Medical, Inspiro’s largest shareholder, added, “The acquisition of Inspiro is our third exit in eight months, all to U.S.-based multinational corporations. This success brings continuing confirmation of the strength of the Trendlines team in fulfilling our vision of creating and developing companies to improve the human condition. We are very pleased to see OPKO take the Inspiro opportunity forward.”

Motley Fool Damns OPKO with Faint Praise

Opko Health (NYSE: OPK) – Friday March 28
Finally, we have hybrid diagnostic and pharmaceutical product developer Opko Health, which offers a great degree of promise thanks to a pipeline that spans a number of indications, but also looks as if its valuation may be way ahead of its potential.

On the bright side Opko has delivered a number of positives in recent months based on its pipeline. For instance rolapitant, an experimental therapy for the prevention of chemotherapy-induced nausea & vomiting, which it licensed to Tesaro (NASDAQ: TSRO) in 2010, met its primary endpoint in both of its phase 3 trials. As part of the deal when it was signed, Opko is eligible to receive up to $121 million in milestone payments as well as share in profits from commercialization in Japan. In addition, Opko has the option to market rolapitant in Latin America. Opko is also in the process of conducting a phase 3 trial of lead drug rayaldy for patients with stage 3 or 4 chronic kidney disease, secondary hyperparathyroidism, and vitamin D insufficiency, which has blockbuster potential.

So while there are good things happening with aspects of Opko’s development process, the underlying fundamentals right now are downright ugly. Despite its revenue doubling in 2013 to $96.5 million, the company’s current valuation of $3.9 billion implies a price-to-sales of about 40! Meanwhile, Opko burned through $58.2 million in cash as its loss more than tripled to $114.8 million for the full year from $31.3 million in the previous year.

Fundamentals aside, the real concern I have is that investors have already factored in stellar results from its late-stage rayaldy trial. I’m not implying that rayaldy hasn’t been demonstrated as safe or effective, because its phase 2 trial did meet its primary endpoint. However, until we know just how effective rayaldy is based on its top-line phase 3 results — due next quarter — it’s probably not wise to push Opko’s valuation near $4 billion. Call me a stickler, but I’d prefer to count my chickens after they’ve hatched.

Long story short, we have a company with a few high profile potential blockbusters, but a valuation that would imply success is a near given. That looks like a formula which implies more downside than upside potential, making it a good watchlist add for risk-taking short-sellers.

TINY New Investment

Much like our interest in Opko Health ( OPK) is a new ( to us ) company that invests in other companies . By not investing in pure research OPK hopes to be at the stage  – or closer to the stage of commercial development. In the case of TINY the company  seeks out investments in the field of nanotechnology .

The portfolio of more than two dozen stocks is ” harvested ” as the investments are taken over by larger firms. At this point Harris is trying to raise its own profile . Until that happens the company is undervalued, unknown and unappreciated . This is a long term position for Jack A. Bass Managed Accounts.

Harris & Harris Group, Inc. (TINY)


3.57 Up 0.05(1.42%) Mar 28, 4:00PM EDT
Prev Close: 3.52
Open: 3.50
Bid: 2.86 x 3000
Ask: 4.27 x 1000
1y Target Est: 4.25
Beta: 1.59
Earnings Date: May 5 – May 9 (Est.)
Day’s Range: 3.50 – 3.61
52wk Range: 2.83 – 3.94
Volume: 75,918
Avg Vol (3m): 136,115
Market Cap: 111.37M
P/E (ttm): N/A
EPS (ttm): -0.25
Div & Yield: N/A (N/A)
Quotes delayed, except where indicated otherwise. Currency in USD.

Harris & Harris Group, Inc. (TINY)

For an overview here is a potion of their letter to Shareholders

2013 Annual Letter to Shareholders

Fellow Shareholders:

In our 2012 Annual Letter to Shareholders, we ended with the following statement. “The
current market is one in which to be investing, not harvesting. We believe our actions in
2012 position us to realize greater value when the time to harvest is upon us.” We
believe the market of 2012 has evolved into a market, currently, in which we may have
the potential to harvest returns.

In 2013, investments from our portfolio returned $30.4 million in cash to Harris & Harris
Group. In July 2013, our portfolio company Xradia, Inc., was purchased by Carl Zeiss.
We will receive up to $15.2 million in proceeds from the sale, including amounts held in
escrow. To date, we have received $14 million of this $15.2 million. Our investment cost
in Xradia was $4 million. In 2013, we also sold certain assets of SynGlyco, Inc.,
(previously Ancora Pharmaceuticals) to CordenPharma. We retained the vaccine-related
assets. In January 2014, Kovio, Inc., was acquired by Thin Film Electronics ASA, but we
received no proceeds from this sale.

On February 14, 2014, we announced the signing of definitive documents for the sale of
Molecular Imprints Inc’s. semiconductor business to Canon. The merger currently is
expected to be completed by the end of April 2014, after normal shareholder and
government approvals. We expect to receive $7.0 million in proceeds from the sale,
including amounts to be held in escrow. We could receive an additional $1.7 million
upon the achievement of certain milestone payments. Our investment cost in Molecular
Imprints was $4.6 million. Interestingly, because of a strategic investment we were able
to make in April and June 2011, primarily owing to our evergreen status, we will be the
only financial investor to realize a return on our investment at the initial closing.
Additionally, we will hold ownership in a financed new company established to utilize
Molecular Imprints’ technology for applications in the biomedical and consumer
electronics fields without needing to make an additional new investment. This gives us
another opportunity to generate a return on our original investment in Molecular Imprints
on top of the return generated from the acquisition by Canon



Insmed Update

INSM : NASDAQ : US$15.91

Target: US$30.00

Insmed is focused on developing novel, targeted inhaled
therapies for the treatment of serious orphan lung diseases. Its
lead product candidate is Arikace, a liposomal formulation of FDA
approved antibiotic, amikacin.

All amounts in US$ unless otherwise noted.


Life Sciences — Biotechnology
Investment recommendation
Reiterate BUY, $30 PT on Arikace’s potential in nontuberculous
mycobacteria (NTM).

INSM’s lead drug Arikace is an inhaled liposomal form of FDA-approved amikacin. We view the Ph2 US NTM data as
clearly positive, and culture conversion/safety data as supportive of expedited approval. Our $30 target is based on a pNPV analysis.
Investment highlights
 We see a clear, and likely abbreviated path to approval strongly
supported by culture conversion and QoL data. We think six-month
extension culture conversion, conversion over time, and QoL data to
be presented May 20th at ATS (San Diego) will support a subpart H
filing, a positive AdComm and conditional approval, given what we
see as strong clinically meaningful data in an unmet need.
 Primary endpoint statistics confounded by small numbers, unrelated
death. The sensitivity of the primary endpoint Wilcox rank sum
analysis is underscored by the change in p-value from p=0.148 to
p=0.02 when a repeated measures analysis is conducted excluding
the unrelated patient death. We think FDA’s previous strong focus
on cures/QoL (supported by our talks with KOLs) hasn’t changed.
 QDIP/GAIN gives FDA the flexibility to focus on the drug’s activity:
we think breakthrough status is highly likely. While some investors
are focused on safety, we think the lack of renal and ototoxicity and
note FDA has approved antibiotics for unmet needs with much more
problematic safety profiles (e.g. Sirturo’s black box warning