Brace Yourself For Another Wild Month In Stock Markets

For the year, the Dow is down -6%, the S&P 500 is down just over -9%, and the Nasdaq has lost -14.7%. The previous record-holder is January 2009, an ugly moment for the economy, when the stock market fell -8.6%. In addition, the VIX – aka the CBOE Volatility Index – has actually dropped back to around 31 after topping 37 earlier this week, its highest point since November 2020.

Keep in mind, the index isn’t registering anywhere close to levels reached during other periods of “extreme” volatility. For example, the index, which is measured between zero and 100, hit its highest point of almost 83 during the financial crisis in 2008. Its most extreme point during the pandemic was around 66 in March 2020. So, by comparison, this week’s volatility has been rather mild.

Federal Reserve

Some insiders equate the wild swings in stock prices to investors, particularly “big money,” trying to establish a new baseline for stock valuations minus the Fed’s easy money policies that have driven a massive amount of cash into markets since the pandemic began in 2020.

At its height, the Fed was pumping as much as +$120 billion per month into the system via its asset purchase program, ballooning its balance sheet to now nearly $9 trillion.

At the same time, the Fed has held its benchmark rate at near-zero and, before that, hadn’t even attempted to raise rates since 2018, and then only briefly. The last full-cycle of rate hikes was 2015. What’s more, investors haven’t really had to factor for inflation since the early 90s and it hasn’t been this high since the 80s.

Bottom line, whatever the new “normal” ends up looking like, it will be dramatically different from the pre-pandemic investing landscape. I’ve heard several large stock traders saying it seems to be the return of Alpha instead of the race to levered Beta. I hear others on Wall Street referencing it to a bit of league recreational youth baseball team where everybody now gets an award simply for participation, but then kids run into a rude awakening when performance really starts to matter.

It feels like we are there in the stock market; every business that was coming into the market was simply being rewarded with participation points, now people are starting to keep a real scorebook and counting the strikeouts and runs scored.

Economy still roars

The good news is that the U.S. economy continues to roar. Historically, a combination of moderate inflation and moderate interest rates has led to some of the biggest boom times for U.S. Last week, the Commerce Department said Q4 Gross Domestic Product (GDP) grew at an annualized rate of +6.9%, stronger than Q3’s +2.3% and well above Wall Street expectations of around +5.7% growth.

Consumer spending climbed at a +3.3% annual pace led by a +4.7% increase in services spending. But the real stand out was private investment which rocketed +32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, contributed nearly +5% to Q4 GDP growth.

On the one hand, the inventory build is positive because it indicates an easing of supply chain dislocations that should in turn help with inflation pressures. On the other hand, many economists note that the big boost from retailer and wholesaler restocking is not likely to be repeated.

Companies will also likely start to unwind at least some of that inventory in the quarters ahead, which could drag overall 2022 GDP, especially if consumer spending also drops off. And investors are more closely tracking consumer behavior as inflation continues to rise.

With consumer spending accounting for about 70% of the U.S. economy, any signs that belts are tightening or moods are getting overly pessimistic will likely set off some alarm bells.

Data to watch

Turning to next week, it will be another busy one for both key economic data as well as earnings. The main economic data highlight will be the January Employment Situation on Friday. Other key data includes ISM Manufacturing, Construction Spending, and the JOLTS report on Tuesday; ADP’s private payrolls report on Wednesday; Productivity & Costs, Factory Orders, and the ISM Non-Manufacturing Index on Thursday.

Earnings wise, results are due from NXP Semiconductor and Trane on Monday; Advanced Micro Devices, Alphabet, Amgen, Chubb, Electronic Arts, Exxon, General Motors, Gilead Sciences, Match Group, PayPal, Sirius XM, Starbucks, and UPS on Tuesday; AbbVie, Aflac, Allstate, Boston Scientific, CNH, Corteva, D.R. Horton, Ferrari, Humana, Johnson Controls, Meta (Facebook), MetLife, Novartis, Novo Nordisk, Qualcomm, Siemens, Thermo Fisher, TMobile, and Waste Management on Wednesday; Activision Blizzard, Amazon, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, Snap, SnapOn, Wynn Resorts, and Xylem on Thursday; and BristolMyersSquibb, CBOE, Phillips 66, Regeneron, and Sanofi on Friday.

Bottom line, brace for another huge week of extreme volatility.

Bristol Myers Squibb to Acquire MyoKardia for $13 Billion; Target Price $69

A U.S. based pharmaceutical company Bristol Myers Squibb said on Monday that it will acquire MyoKardia for about $13 billion, or $225.00 per share in cash to develop its portfolio of heart disease treatments, sending shares of MyoKardia up about 60% in pre-market trading.

Under the terms of the merger agreement, a subsidiary of Bristol Myers Squibb will promptly commence a tender offer to acquire all of the outstanding shares of MyoKardia’s common stock for $225.00 per share in cash. MyoKardia’s Board of Directors unanimously recommends that MyoKardia shareholders tender their shares in the tender offer.

The deal is anticipated to close during the fourth quarter of 2020.

The transaction is expected to add a significant growth driver during the medium- to long-term. It is expected to be minimally dilutive to Bristol Myers Squibb’s non-GAAP earnings per share (EPS) in 2021 and 2022 and accretive beginning in 2023. Bristol Myers Squibb reaffirms its existing 2021 non-GAAP EPS guidance range.

Bristol Myers’ shares closed flat at $58.72 on Friday; the stock is also down over 8% so far this year. However, the MyoKardia’s shares jumped 60% to $220.15 in pre-market trading.

Bristol Myers forecast

Eight analysts forecast the average price in 12 months at $69.60 with a high forecast of $74.00 and a low forecast of $64.00. The average price target represents an 18.53% increase from the last price of $58.72. From those eight, seven analysts rated ‘Buy’, one analyst rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $67 with a high of $83 under a bull scenario and $48 under the worst-case scenario. Bristol-Myers Squibb had its price target increased by Raymond James to $78 from $75. The firm presently has an “outperform” rating on the biopharmaceutical company’s stock. Berenberg initiates with buy, $73 target price.

Several other analysts also recently issued reports on the company. Cantor Fitzgerald boosted their price objective on Bristol-Myers Squibb to $88 from $68. ValuEngine downgraded Bristol-Myers Squibb from a “sell” rating to a “strong sell” rating. Cfra reiterated a “buy” rating and issued a $70.00 target price. At last, Seaport Global Securities issued an “outperform” rating and a $75.00 target price on the stock.

Analyst comment

“We see a positively skewed risk-reward due to attractive valuation and pipeline optionality. We see compelling potential for ozanimod and BMY’s broader pipeline despite COVID-19 related delays. We believe the market is discounting erosion to key franchises mid-late decade,” said David Risinger, equity analyst at Morgan Stanley.

“We project 3-year (2020e-2023e) revenue CAGR of 4% and EPS CAGR of 10%. Positive/negative pipeline developments could drive longer-term projections higher/lower than we model. Bristol could pursue external transactions to add future growth drivers,” he added.

Upside and Downside Risks

Upside: Risks are financial results above expectations, synergy upside, positive pipeline newsflow, competitor disappointments, and external strategic action, highlighted by Morgan Stanley.

Downside: risks are financial shortfalls, product launch/trial delay, merger integration issues, disappointing pipeline data, litigation/regulatory risks, and disappointing strategic action.