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Monday, September 28, 2015 5:01 PM

#1 Reason Stocks are Declining; Is Hillary to Blame for Biotech Smash?

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In the wake of yet another big market selloff (biotechs down over 6% today), the Nasdaq 100 index down 2.87%, and the S&P down 2.56%, mainstream media parrots floated numerous reasons behind the selloff.

All of the parrots are wrong.

Lack of Inflation?

Bloomberg interviewed Jeff Korzenik, Fifth Third Bank's chief strategist in its piece What's Really Driving Today's Selloff in U.S. Stocks?.

In the accompanying video, Korzenik blamed the Fed and a "lack of visible inflation".

In the same video segment, Jamie Dimon bragged about the strength of the US economy and the health of the US consumer. As long as a bubble is expanding, things always look good.

Of course the idea that inflation is a benefit to stocks and the economy is preposterous, but that's what puppets have been trained to believe, and say. 

China to Blame?

Reuters writer Noel Randewich says Wall Street Drops as Anxious Investors Eye China.

"U.S. stocks finished sharply lower on Monday and were on track for their worst quarter in four years as investors worried about the health of China's economy and its potential impact on the timing of a U.S. interest rate increase."

Is Hillary to Blame for Biotech Smash?

Reuters writers Ransdell Pierson and Bill Berkrot say Democrats Take Aim at Drug Prices, Prompting Sharp Drops in Biotech Stocks.

Democratic lawmakers on Monday attacked "massive" price increases of two heart drugs from Canada's Valeant Pharmaceuticals International Inc, fueling a rout in drugmaker shares on worries of a government and insurer clampdown on U.S. drug prices.

The Democratic House members also urged panel Chairman Jason Chaffetz, a Republican, to invite Valeant Chief Executive Michael Pearson to testify at a hearing next week. That would put him in the same hot seat as Martin Shkreli, chief executive officer of privately held Turing Pharmaceuticals, who had already been called to testify.

Tiny Turing has been widely criticized for a price hike of more than 5,000 percent for its Daraprim treatment for a dangerous parasitic infection.

Clinton on Monday called on Turing to roll back the $750 price to its original $13.50.

Clinton last week unveiled a plan that includes a $250 monthly cap on out-of-pocket costs for prescription drugs; it would allow the Medicare plan for the elderly to negotiate drug pricing, and permit Americans to buy drugs more cheaply from other countries.

"(Stock) selling hasn't really stopped since Hillary Clinton made her comments last week on Monday," said Jeff Jonas, a portfolio manager with Gabelli funds. "The Democratic committee members would certainly continue that trend that Hillary started."
Biotech Sector Daily

That looks pretty ominous. But let's put a proper perspective on things.

Biotech Sector Weekly

History suggests the recent selloff is just a start of a correction. Charts like those above smack of bubbles, and bubbles typically do not deflate in an orderly manner.

#1 Reason Stocks are Declining

To paraphrase Bill "It's the economy, stupid" Clinton, I suggest "It's the valuations, stupid."

Valuations are well beyond absurd. Many biotechs won't ever make a dime. And it's not just biotechs. Most market segments have absurd valuations.

The market is starting to care, a reflection of a change in sentiment. Hillary's statements may have been a catalyst for a sentiment change, but most likely she merely goosed sentiment that had already changed.

Not to Blame

  • China is not to blame.
  • Hillary is not to blame.
  • Fed hikes are not to blame.

To Blame

Rate hike discussion is not to blame.

However, the Fed itself is to blame for creating the loosey-goosey conditions that fostered a bubble in equities and junk bonds.

The Fed will now have to deal with yet another asset bubble crash (they don't even see coming). Price deflation the Fed foolishly attempted to defeat, is now more likely than ever.

Price deflation never was, nor ever will be, an economic problem. Asset bubbles are always a problem. The Fed still has not figured this out. Thanks to group think, the Fed never will figure this out.

Bubble Debate

For more on bubble valuations and why I expect negative real returns for 7-10 years, please see Bubble Debate; Equity Allocations vs. Shiller PE; Simple World.

Mike "Mish" Shedlock

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