Are We Near The End Of A Correction Or Near The Start Of A Bear?

Everybody in the market is asking themselves this question. I don't know the answer, but I know what the overwhelming weight of the technical evidence says at this point. The major averages have broken down below their 200 day moving averages and seem to have taken up residence there. That's bad. Trump is bullheaded about tariffs. That's bad. Powell is bullheaded about the cost of money. That's bad.

But when you look much beyond these facts, you see a much brighter picture. For instance, the selloff is based on the economy staging a major slowdown. If you look at the price of Dr, Copper (he has a Phd in economics) you see nothing but a pathetic breakdown suggesting a recession soon. But this is based largely on the flap with Trump and China. We have the worst case scenario that both Trump and Powell can possibly present to the market. Trump is slapping tariffs on everything with China refusing to even talk, and Powell is continuing on his present course of over aggressive tightening.

The only change that can be reasonably expected is China and Trump getting together, and Powell lightening up. Either one or both of these developments would end the selloff with a bang. I think it's silly that market is perplexed by a 3% cost of money (10 yr) in a good economy when historically we have 6%-8% in a boom. 1995 saw near 8%, and that certainly wasn't an economy killer or a market killer. The market may loose its fright over interest rates. It seems to me it's just sticker shock from too many years of no interest rates at all.

Another thing that strongly indicates the economy isn't going to get killed is the Baltic Dry Index. This tracks the cost of shipping dry bulk commodities. What is that? Think ore and all manner of components that are not wet, like oil, and are in the most raw form and take awhile to be made into product for sale. It must look ahead farther, and discounts economic facts and reacts sooner than the stock markets better than just about anything,  If you look at its chart, you see that it has a strong habit of making major moves about 2 to 6 months in advance of the other market's big moves. (click on images to view)

For example, look at 2014, when oil and the CRB commodity index tanked like crazy mid-year. The CRB is heavily weighted in oil, which has nothing to do with the dry index, but it also includes a multitude of  economically sensitive materials. If you look at the chart, you see that it tanked fully six months ahead of the CRB, at the very beginning of the year. Also, the big dip in mid-2012 in the CRB and the stock market was foreshadowed six months earlier in the dry index. The stock market's swoon into the January 2016 disaster was preceded by the dry index swoon starting in early August, 2015.

Which brings us to the present, where we see the February-April, 2018 stock swoon happening in the dry index starting in December last year. But look at what it's doing now. It foreshadowed our October swoon beginning in August, and now is resuming a fairly sharp uptrend out of the February drop! This suggests the same will happen soon with stocks.

I have used the 600/500 day moving averages on this high beta item to define big trends, and this pair clearly shows a downtrend until late 2016, then a big change and moving average crossover in mid-2017. Here the moving average pair changed from resistance to support level, which we are clearly obeying. The effects of a stagnant economy until 2017 seem to be morphing into a much better economy.

Another key leader index has been the QQQ, and we are holding past support there, too.

Taking this bigger view of the 600/500 moving average pair to the stock market:

We see that the stock market is holding this support as it has several times in this bull. And another key leader index is the retail sector.

This is what is supposed to be in a bear from the tariffs. It doesn't look too bearish. It looks like it could stand some more abuse, and still be in a raging bull market.

Who knows what the markets will do, but the preponderance of the evidence, not from CNBC and market sentiment, but from the technicals of the bull leaders is suggesting that we are nearer the end than the beginning of a bull market correction, with much more bull to come. Some more compelling chart evidence for this is presented by Chris Ciovacco in his latest look.

SMAs - A Better Way For Long-Term Investors

I am part of what may be a frontier in investment products - SMAs or Separately Managed Accounts. These have been around for decades, but are now finding favor as a smart alternative. SMAs, have grown by 84% since 2010, according to a report by Morgan Stanley titled "What's Behind the Surge in Separately Managed Accounts?"

Per Investopedia:

The investment management world is divided into retail and institutional investors. Products designed for middle-income individual investors, such as the retail classes of mutual funds, have modest initial investment requirements. Managed strategies for institutions have imposing minimum investment requirements of $25 million or more. Between these ends of the spectrum, however, is the growing universe of separately managed accounts (SMAs) targeted toward wealthy (but not necessarily ultra-wealthy) individual investors. Whether you refer to them as "individually managed accounts" or "separately managed accounts," managed accounts have gone mainstream.

It is basically a personal brokerage account, yours to do with as you wish, run by one or more fund managers of your choice. And you can customize this "fund" in various ways to be your personal mutual fund. They can be a Roth or any tax advantaged type you want. SMAs are a smart alternative to mutual funds, where you must pay taxes on your gain every year. But with an SMA, you can make your account tax free where you can let all the gain compound year after year and not have to fuss with it at tax time. They must be run per SEC safety rules for diversification and investment type, long stocks only.

Another tax advantage with an SMA is the fact that when you buy shares of a mutual fund, you are penalized for the tax accrued by any gain on the fund going clear back to the first of the year, even though you didn't own those shares then. The fund gives just one tax statement for all holders each year. You can only fix that problem by purchasing fund shares on January 1st. However, with an SMA that is taxable, you are liable only for gain on the new purchases in your account, like any brokerage account.

SMAs have grown US Assets from 396 Billion in 2000 to over a $trillion now. That's about 6% of the mutual fund/SMA pie and growing fast. Where did SMAs come from? Per the Wikipedia account::

SMAs were developed in the 1970s to accommodate accounts and clients who needed to meet specific objectives that did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose), tax efficiency and general flexibility that have made SMAs popular among informed investors.

SMAs are basically different as reflected by the kind of statement you receive from them. Per Investopedia:

the statements will look different. For the mutual fund client, the position will show up as a single-line entry bearing the mutual fund ticker – most likely a five-letter acronym ending in "X." The value will be the net asset value at the close of business on the statement's effective date. The SMA investor's statement, however, will list each of the equity positions and values separately, and the total value of the account will be the aggregate value of each of the positions.

SMAs are a not only an alternative to the safety of mutual funds, but to higher risk hedge funds as well. Investopedia has a piece (Hedge Funds' Higher Returns Come At A Price) describing some of the problems with hedge fund products:

"Although hedge funds are subject to anti-fraud standards and require audits, you should not assume that managers are more forthcoming than they need to be. This lack of transparency can make it hard for investors to distinguish risky funds from tame ones."

This is another big advantage of SMAs. You are not writing a monster check to be entrusted to a hedge fund manager with lockups, possible theft, and other uncomfortable conditions. Your money is entirely separate and yours to do with as you please, like in any brokerage account.

"The hedge fund manager must have a pre-existing relationship with a potential investor. It is also acceptable to be introduced by a qualified intermediary, which may be the hedge fund's prime broker. Potential investors must also meet income or net-worth requirements. Those that meet these requirements are called "accredited investors" 

 You have to be very rich, in other words, and know somebody.

"all of the advantages of hedge funds can become a nightmare if the fund is highly leveraged and the market moves in a direction opposite of the manager's opinion. The higher opportunity is why hedge funds have proliferated over the last 15 years, and the higher risk is why we sometimes hear about the more spectacular hedge fund blow-ups."

Besides all the "blow ups" there are many hedge funds with big annualized returns over long periods that aren't so sensational with just the safer stock part of their work - away from the high risk leverage and derivative toys and commodities. Even high roller hedge fund king George Soros, who is recognized as having the best investment fund performance in the world with his hedge fund since inception in 1969 has had a relatively flat period with stocks in the time frame since 2000. You can see this at "George Soros' s Profile and Performance" at gurufocus.com. If somehow you could have placed money with him in just the lower risk stock part of his holdings, the total equities only portion would have grown by 220% since 2000.  This is way out-performing the Dow, but way under-performing Warren Buffett.

Another big problem with hedge funds is that they come and go by the hundreds each year. For nearly every new hedge fund that opens, another is forced to liquidate after poor performance. This frantic rotation has averaged nearly 1000 funds opened and 1000 funds liquidated each year for the last 8 years. Given that there has been around 8000 hedge funds existing the last 8 years, that makes a 12% casualty rate every year. That's an average life span of 8 years. You never know if your fund is going to disappear after maybe 3 years of dazzle but 8 to 12 years of struggle.

Yet another problem with hedge funds is that they are very difficult to get a long-term performance handle on. Have you ever tried to pin down a hedge fund's since-inception performance. They are not required to publish this, so you are greeted with a maze of "it did this in 2007" and "it did that in 2014", and "it is thought" their annualized return is this, all of which is gibberish noise and means nothing to the careful shopper.

A disadvantage of SMAs is the typically high account minimums, usually $100,000 or higher, although some firms, such as Morgan Stanley, have minimums as low as $25000. For mutual funds. it is far lower, but, as Investopedia puts it: "Separately-managed accounts are ultimately designed to provide individual investors with the kind of personalized money management that was formerly reserved for institutions and corporate clients" and they want to make it worth their while.

Another disadvantage of SMAs is that, because they are so individually customized, they do not issue a prospectus. So some additional due diligence on the fund manager and his style is warranted. A helpful tip from Investopedia in this regard:

A good question to ask here is whether the composite complies with the Global Investment Performance Standards set by the CFA Institute and whether a competent third-party auditor has provided a letter affirming compliance with the standards.

The flexibility, tax advantage, and risk problem solving for the mid-tier wealth level of investors is why I think SMAs could be the wave of the future. Hedge funds are going out of favor as an alternative to mutual funds because they don't significantly out-perform them. Check out "The Buffett Challenge: Year Nine Update" at Investopia.  As investors become more disenchanted with the usual mutual fund and hedge fund choices, SMAs may step into the void.

With the kind of SMA I'm involved in, your account is synced to one or more models you want with over 30 models to choose from, chosen from over 30,000 competing fund managers at Marketocracy. They have partnered with FOLIOfn Institutional to set up SMAs. Marketocracy has been around since 2000 and most of the funds chosen for SMA modeling have 15+ year track records.

Studies have found that about two thirds of all stock funds don't survive over 15 years due mainly to poor performance. Of those that do, only 5% beat the Dow. The average fund has under-performed the market by 3.5% annually the last 20 years. That's a massive amount of compounded money lost in any financial plan if you don't hunt down the good managers.The FOLIOfn SMAs can do the hard work of finding the good long-term managers. I run one of these SMA models, BPMF (Bruce Pile's Mutual Fund):

Warren Buffett is thought of as the world's greatest long-term stock investor. Most of the SMA model funds' since-inception performance, including mine, closely match or greatly exceed Buffett's performance over the same time period - all top 1% stuff for all mutual and hedge funds for 15+ year performance.

With the FOLIOfn SMAs, you just need to go to mytrackrecord.com to survey all the since-inception charts of every manager you might want to choose, complete with all the slumps and warts. And you can choose more than one manager or style to model your account after to further reduce your risk. All of them have the GIPS (Global Investment Performance Standards) seal of approval.

Amazon: Overbought Or Just Changing Gears?

 

A lot of angst is being felt amongst FANG investors over valuation and buying too high right now. I don't want to get into that debate here, but the market has a way of digesting and seeing changes in the business of the high flyers that may be hard to see through any individual's eyes, especially if he is staring at a stock chart that seemingly has climbed all out of control. I just want to note something strictly from a technical perspective from the combined wisdom of all market participants. This, by the way, is smarter than you or me.

Let's look at Amazon's chart and see how overbought it really is:

 

 

At first glance, it would seem to be all out of control to the upside. If you're going to buy it, you have to wait for a big pull back, right? But if you assume there is a change in climb steepness, related to some fundamental changes in their business, and you construct the trading channel change in slope associated with that, you see that it doesn't look so overbought. It is, in fact, resting on the bottom of the new channel preparing for the next run to the top.

I've also included the Accumulation/Distribution cycling for this channel along with the CMF money flow cycling. These weigh the considered opinion of what I call the "heavy" money - large funds and other very large pools of cash, which tend to do the best research. I find that these have very good predictive power in moving the needle when the cycling correlates well with runs in the stock. As the chart shows, there is very good correlation for Amazon now. Virtually every trip the A/D support trend line corresponds to the beginning of a good run to the upside for the stock, and we are smack on one right now. All this suggests AMZN is actually at a good buy point, even after the run it has had this year - it may just be changing gears.

This isn't the first time this kind of thing has happened. If you look at the following chart, you see a very similar situation:

Here we have the same A/D cycling setting in with the same change in channel. And what happened? Well, we all know what happened. This turned out to be the massive breakout NVDA did in 2015, and it made a bee line to $250 from the way "overbought" $35 price you see at the right end of this chart. Just staring at the above chart in April of 2016, your thought was that you'd have to be crazy reckless to buy it there. But the combined wisdom of the market was telling us that Nvidia's business was changing from gaming to artificial intelligence and a bunch of new, lucrative stuff. I suspect something similar may be going on now with Amazon.

The Problem With The Modern Gold Miner

If you are a gold bug, you have marveled lately at how historically cheap gold stocks have gotten relative to about everything: (click on images to enlarge)

Here we see that, despite gold climbing from $35 in 1968 to about $1250 today, the gold miners have dived the opposite direction from the metal price in each of the two big gold bull markets, from 1970 to 1980 and our present one starting in 2000. The mining stocks climbed, but badly under-performed the metal in both bull markets. Note that the two big dives in the above chart were during the bull markets and that our modern bull under-performed at a much lower lever that the previous bull of the 1970s. And they have certainly under-performed stocks in general, having turned back down to the relative level they were at at the beginning of the gold bull market:

Here we see that in the 1970s bull market, the gold miners solidly out-performed your average stock. But in our modern bull market, the miners started to out-perform, then something went horribly wrong and sent the miners spiraling back to where they were before the gold bull began in 2000, despite the price of gold hanging on to its advance from $300 to the mid $1000s today.

In our modern world, the big driver of gold stocks is supposed to be the proliferation of fiat money. But the miners haven't even performed relative to fiat money:

Here we have the gold price plotted vs FMQ (Fiat Money Quantity) and we see that the 1970s gold bull, which wasn't about fiat, solidly out-performed fiat money. Then the proliferation of fiat really began in the year 2000, when our present gold bull began:

Gold really didn't respond much to fiat, however, now being at the level in 2000 as if there were no modern fiat problem. FMQ took a sharp turn upward shortly after 2005, the same time the gold stocks began their turn south. The chart is for the metal price, so the miners, as seen in the above charts, have been way under-performing gold and thus very severely under-performing the proliferation of fiat money.

In these charts, one has to wonder just what is going horribly wrong with the modern gold miners, especially since about the year 2005. This seems to be the juncture where a disconnect began between a gold miner and everything it is supposed to be responding to. If you look again at the charts, you see that is about the time when the wheels started falling off.

Gold mining, as with any mining, is a very difficult and complicated business and a lot of things go into determining their stock price performance. I don't want to over simplify all that, but in this article, I want to look at just two things that I think go a very long way in explaining what we see in the charts above. These two things are very related and are governed by something that no government, economist, or council can fix. So we are pretty much stuck with both of them as they both will only get worse in the future.

The first thing is the price of oil. The primary job of a miner is to burn massive mounts of energy to extract massive amounts of ore and pulverize it into a few grams of precious metal. If you look at the history of oil, you see what the year 2005 means:

That was the year oil made the permanent break above the $30/bbl ceiling on decades of cheap energy. This has put the miners' cost structure into a world of hurt and at least partly explains why miners badly under-performed the gold price in the above charts in both gold bull markets. In the first bull, to the left of the above oil chart, oil had climbed from the standard $3/bbl price in the 1960s to $40/bbl in 1980 because of all the Middle East troubles.

Then starting in 2000, along with our present gold bull, oil takes off again. Both humongous climbs in oil put a severe damper on the gold miners' fortunes in both of the gold bull markets, helping them to under-perform the metal in the BGMI index above.

The oil problem becomes compounded with its evil twin, the other big problem with the modern gold miner - declining ore grades:

Gold content has fallen to about 1/10th of what it was in the 1970s - 1.18 g/t (grams per ton) per this report and quickly heading below 1.0 to the reserve figure. This may also be a big reason why miner stocks have not kept up with the metal price in this bull market:

If you take just the basic miner function of buying energy to extract grams of gold and look at how that cost has risen since the year 2000, you must consider that oil has gone from averaging about $22/bbl the 20 years pre-2005 to about $73 the last 10 years, a 3.3 fold rise, and compound that with ore grade declining from 2 to 1. The cost of the actual act of making gold then has increased by 3.3x2 or a 6.6 multiplier. Gold would have to be at $2000/oz. now just to have kept up with that cost rise from when gold really started its climb from $300 to now.

This is not the total cost for mining, of course, with energy accounting for around 20% of typical reported miners' costs. But it presents a bulging cost wad that miners have constantly got to be compensating for with cuts elsewhere. And that's hard to do. They must constantly be replacing their pipeline of new gold and that's costly and tough because all the good stuff has already been found:

The subject of "real" miners' cost is complicated and prompted the World Gold Council and miners, in 2013, to come up with AISC (All In Sustaining Cost) which accounts for some indirect costs. Direst costs are more easily measured, such as diesel usage. This study found a total diesel cost per once of gold produced going from $18 in 2003 to $101 in 2013. It was for the top five gold miners, who have more means to adjust other costs than the more typical miner, bringing the above mentioned 6.6x factor down to around 6X for their actual net cost increase for the act of making gold from ore, via the diesel usage.

A new giant study just out (July 10) by Goldmoney looks at the real energy cost of gold production, both reported and unreported in a very comprehensive tabulation of real cost, and the difference between direct and the rest. Their result may surprise you - it did me.

Here we see a big range in direct costs from mid-teens to 49%. But this is for 2016, where we had low oil and the average price was only $43/bbl - very low for these days. And the report echos the view that your average miner cost is probably much higher than those of the top 25:

"Importantly, these are the largest gold producers in the world. They are not the fringe producers that operate at the margin ... It is reasonable to assume that many of these companies have higher energy exposure than the largest traded gold producers we analyzed in this report."

So the average direct cost of these 25 miners, which is 20%, must be bumped up by at least a 71/43 ratio to get what these costs have been really averaging the last 6 years at a $71/bbl average Brent price. That comes to 33% for direct costs instead of 20%.

To add on the indirect costs, they do a thorough look at all the oil related costs, such as the giant tires those big-as-a-house transport trucks use. Each of those tires takes 50 barrels of oil to make. A big miner, like Barrick, for example, goes through 6000 of those tires a year. At $67 oil, that's $20 million a year they are spending just on the oil in those tires.  After accounting for a vast array of such factors, they conclude the study with this:

Considering that the average miner energy costs are higher than for the top 25 of this study, and that their data seems centered around the year 2016, a year of lower than average oil price, you'd have to say the miners' energy costs are actually averaging well over 50% of their total costs per this study. This helps to explain the sharp turn in the miners' fortunes shortly after 2005, the pivotal year in energy.

These two big problems, higher oil and lower grades, are both facts of geology that are not going to go away. US shale will go into the downside of its Hubbert curve at some point and will not keep a lid on oil prices forever. So why would anybody in their right mind buy a gold miner today if you're not betting on a $5000 gold price anytime soon?

It has to be done very carefully with all the above in mind. For instance, acquiring the remaining high grade properties, which is the name of the game in modern times, is best done by clever acquisition, not spending a fortune on an exploration budget. You can't do much about higher oil, but you can make sure your miner has ultra high grade ore presently and will seek nothing but high grade in the future. Grade is the key to gold mining today.

There is a mid-tier gold miner that is behaving like the best of the growth stocks with about the highest grade properties on earth and AISC the cheapest to be had. Since 2014, they have increased revenue by 4.9 fold, cash flow from operations by 12.8 fold, and EBITDA by 17.1 fold and sell at a 24 PE. Their stock chart is a copy of that of Netflix over the last three years, a smooth ascent to a 3 fold rise, despite the stagnant gold price. Their properties, both producing and soon to be produced, have ore grades more reminiscent of the 1920s than today. They are debt free and executing aggressive growth with robust cash flow. I just wrote an article at Forbes on this miner and you can read it here as well as see some information on our SMA (Separately Managed Accounts) offered by Marketocracy and FOLIOfn Institutional. I run a model fund for this, where I own this gold miner. It is the only gold miner I own, except for a very small handful that are mainly copper. Some performance stats on my model (as of 7/13/18):

If you've never checked out SMAs, you should. They offer some advantages of hedge funds (manager's own money invested) but with far more safety (models are per SEC mutual funds) and your account is entirely separate and your own (synced to the models you want) with over a dozen models to choose from, all with hard-to-find, exceptional, long-term track records, carefully chosen from over 30,000 competing fund managers.

Studies have found that about two thirds of all stock funds don't survive over 15 years due mainly to poor performance. Of those that do, less than 5% even match the Dow, let alone beat it. Those survivors that handily beat the Dow beyond 15 years are among the top 1%. These SMAs can do the hard work of finding the good long-term managers for you.

Your separate account can be a Roth or any tax advantaged type you want. Customization and control on what's in your account are driving an explosive growth in SMAs, having grown by 84% since 2010, according to this report by Morgan Stanley. 

Atomera and Moore's Law

Tiny, unheard of Atomera (ATOM) could be Act II of a really big high tech show. What was Act I? It was erbium doping, which revolutionized fiber optic high tech in the '90s. The growth of the network was hampered by lack of a clean way to amplify optical signals. You had to convert light speed down to a crawl at electron speed to amplify, then convert back to light. Then the erbium doped fiber amplifier or EDFA was born where glass fiber was doped with erbium allowing pure optical amplification. The rest is history.

Now high tech is up against another constraint where a similar invention is needed. When Intel put forth Moore's Law, it seemed it would go on forever with transistors on a chip doubling every 18 months bringing down cost while improving performance. It's debated, but 50 years later, it may be coming up against physical boundaries that will change the industry.

As was noted recently in Barron's, Moore’s Law is “no longer a law in terms of the time frame” of improvement of chips, according to Scott Bibaud. “In 2012, the cost per transistor for the first time did not go down,” he observes, an ominous sign for the industry. Bibaud has served as Senior Vice President and General Manager of Altera’s Communications and Broadcast Division (later bought by Intel) and was chief of Mobile Platforms Group at Broadcom. In 2015, he took over as CEO at Atomera.

With Moore's Law in control, chip makers eagerly retooled the next generation smaller node, currently going from 20 nanometer to 14 nanometer. But with the Internet of Things (IOT) the wave of the future, they are not so eager. According to Bibaud:

“People are saying 28-nanometer will be useful for many years ... And 40-nanometer chips are big in the world of automotive chips and for the Internet of Things. We’ve even heard that the 130-nanometer node has the most new design starts of any node today for things like analog and sensor and power applications.”

So the new IOT chips place less demand on Moore's Law continuance as does Nvidia's approach of parallel processing in their GPU. When video and gaming took over a lot of our computer viewing, Nvidia invented, in 1999, a totally different processor (Graphics Processing Unit) that didn't need high transistor density because it dumped its workload into many hundreds of parallel paths that together put all the color blobs and motion on our screens. Since then, however, they have discovered that these processors are very good at concurrent number crunching, and they are teaching them to do a lot of what the old school, Moore's Law dependent chips were doing. For more on this, see my recent Forbes article "Why Moore's Law Now Favors Nvidia Over Intel."

But GPUs and IOT will never replace the ever advancing need for higher semi efficiency. The chip industry desperately needs some kind of big efficiency invention right now, like the fiber networks received in the '90s with the EDFA, giving ramped up performance on existing node designs, calming the costly panic into the next node. Atomera is poised to hand them just that. And they're doing it with some more doping of silica - oxygen this time instead of erbium. And they're doing it with the very same PhD that invented the erbium doping - Dr. Robert Mears, the founder of Atomera. In 2001, it was private and known as Mears Technologies.

In the 2016 annual report (when they went public) they open with:

"There is no manufacturing process as complicated as making a semiconductor chip ... In January we changed the name of our company to more accurately represent the advanced material science we are providing to the industry in an era when semiconductor advances are increasingly happening at the atomic level."

Mears is now the Chief Technical Officer of Atomera. He has an array of patents on his invention called MST (Mears Silicon Technology) that dopes a transistor with oxygen atoms in a way that dramatically improves electron flow. This allows several benefits like smartphones with 50% better battery use, but more importantly it provides "more than Moore" tooling and cost benefits to chip makers, per their website.

The strong link between Robert Mears' Act I and II is evident in Wikipedia's box summary for him. It simply reads "Born: England    Occupation: Physicist and engineer   Known for: Invented EDFA, founded Atomera   Notable work: EDFA, Mears Silicon Technology." If the oxygen doping does what the erbium doping did, ATOM is in for some big things.

I called Atomera "unheard of" but that's not entirely true. There is no analyst coverage yet, but there was the article in Barron's August 17, 2017 "Atomera Hopes To Make Money Solving The Breakdown Of Moore's Law" and a nice article at Seeking Alpha February 1, 2018 focusing on the Internet Of Things, the web connected device revolution now engulfing us.

Then there is the January 30, 2018 press release "Atomera Continues To Grow Customer Pipeline" that seems to have brought some attention and activated the stagnant stock, sending it up about 50% the following week in the face of a sharp market selloff. I have been long the stock since December at $4 and feel it is a growth item you hang onto until the thesis is altered.

This is a risky, pre-revenue, one trick pony with heavily patented oxygen doping being the only product offered. But the market may now be grappling with the possibility of a $67 million market cap company engaging some $3.5 billion of addressable market.

In the Barron's article of late 2017, Bibaud said Atomera is “very well capitalized,” with “almost three years of burn left” in terms of cash on hand. If you look at cash and equivalents at end of the first public year, 2016, it was $26.7 million. By end of 2017, it was $17.4 million - a burn rate of $9.3 million per annum. So that suggests something more like two years of burn left before a dilution may be called on. But they seem poised to either start signing lucrative licence agreements (or start getting rejected) well before two years have elapsed. And they are not in any kind of debt trouble reporting debt and lease level at zero. In the latest quarter reported 5/3/18 they report:

• Grew the number of customers in Phase III Integration by 50% to nine
• Initiated first customer multi-process evaluations
• 17 engagements underway with 14 customers
• Completed Atomera's first installation of MST technology at a customer fab

From the Barron's article, quoting Scott Bibaud, Atomera CEO:

“I don’t know if I can quantify the degree of confidence I have in their signing,” he says, “but they are spending a lot of money in evaluation, it’s quite expensive,” suggesting that they wouldn’t be doing so only to end up walking away.

Atomera, with just under 20 employees at the moment, is currently staffing up because “we’re bringing in a lot of new customers” in the evaluation stage.

In August, when this piece was done, Atomera had four customers in the evaluation stage. Now they have 14 per the January 30 news release, representing about 50% of the biggest semiconductor companies in the world.

My bullish thesis would change, of course, if the first customer decision was a "no" as they seem likely to accept or reject the technology as a group.

My Two Cents On Bitcoin

Everybody and their dog is buzzing about Bitcoin, whether they're investing analysts or not. So I'll toss in my two pennies. Like most everybody, I thought it was a bizarre scheme when I first became aware of it. I hadn't heard of blockchain though, and the two are different animals. Blockchain is the enabling technology for cryto-currenies, but likely will be the enabling technology for all the business world of the future. It's just making its debut into our consciousness with a screwball thing like Bitcoin.

There is a school of thought that goes like this, "Blockchain is to value now as the internet was to information in 1995". By "value" is meant any business transaction where green visor humans push pencils to update everyone's ledger in a brick and mortar unit. They may push some of these results onto the internet, but the "unit" is now becoming the block in blockchains on the 'net.


As an article from back in June in ripple.com explains:

Venture capitalist William Mougayar calls blockchain “the second significant overlay on the internet, just as the web was the first layer back in 1990”. When most people think of blockchain, Bitcoin instantly comes to mind. But the potential that excites Mougayar and many others goes far beyond financial transactions made using such digital currencies. It touches on what we at Ripple have for many years called “the Internet of Value.” ...

In the US, a typical international payment takes 3-5 days to settle, has an error rate of at least 5% and an average cost of $42. Worldwide, there are $180 trillion worth of cross-border payments made every year, with a combined cost of more than $1.7 trillion a year.

This is archaic when we have something like the internet. Of course the first thing that comes to mind with this is security of all that value online. But the internet nerds claim blockchain itself has never been hacked is not hackable. The "on ramps" have all the normal problems such as lost or hacked passwords, thumbdrives and so on. But the blockchain itself is said to be an advancement in security.

But anyway, back to the Bitcoin craze. It is less predictable whether crpto-currency will be a standard in the future as blockchain will probably be. I am getting the impression that Bitcoin is now dragging the budding blockchain stocks around with it and thus making them a danger. I had three blockchain tech stocks in the fund, but they had run so much, two more than doubling, that I've parked them on the sidelines for now.  I'm a believer in blockchain, but I just don't know about crypto.

Bitcoin itself appears to me to be at a precarious technical juncture. I say "technical" because there appears to be no way to value Bitcoin fundamentally. About the closest thing to such a valuation I've seen is given by an article from The Economic Times  titled "Bitcoin: This One Factor Could Tell How Far Bitcoin Will Plunge". The idea is to value the Bitcoin price by the value of bitcoin transactions - by how much it is actually used as a medium of exchange. As the following graph from the article shows, this value gauge has grown in close proximity to the price, up until about a month ago.

I have added an estimate of what this transaction value has been since 12/20/17, where the graph stops, from the total number of transactions from the running total at blockchain.info, which assumes the value per transaction has stayed about the same and the processing flow has been operating OK.
The graph suggests the price of Bitcoin has overheated and is due for a cool down. This agrees with convention technical behavior in that the price action seems bent on forming a classic head and shoulders top way up there above its "value":

The price action seems like it's stalling around the shoulder area of $15000 to $17000, which would complete the right shoulder of a major top. I like the blockchain enablers, the real ones, not just the jokers with no credible history of running a business who are slapping on a "blockchain" hat to jump their stock. But I am going to wait until Bitcoin works its way out of this sticky wicket one way or the other before dabbling with blockchain anymore. The good stocks here may be a lot like the good networking stocks of 1995.

The New Xoma - A Modified Risk Way Of Investing In The Genetic Era

You may have heard that this year's Nobel Prize in Physiology or Medicine went to Jeffery Hall, Michael Rosbash, and Michael Young for their work in unraveling the workings of our body's daily clock - the circadian rhythm. You may not think too much about partying all night or getting up at 2 am for work, but your body thinks about it plenty. We know that the 24 hour light/dark cycle effects our chemistry and health, but they have found that plant leaves, for example, can open up and close even when put in complete dark - controlled not by light, but by genes.

As explained in the Biotechin.Asia report on the Nobel Prize, it's the genes that the prize winners solved to advance our understanding of the clock. This years Nobel Prize reflects the genetic revolution I wrote an article about. I called it "Insider Wisdom And The New Medicine". There is a revolution going on in medicine and it could usher in a whole new array of effective, more palatable therapy. But how do you invest safely in something this new? The genetic developers are typically tiny upstart companies going into a sea of red to put drugs through clinical trials for FDA approval. But only about one of 10 ever gets approved and the casualty rate of these stocks is high. You can own stock in the large biopharmas that are now more than ever tending to collaborate with the more promising candidates of the small caps, and often buy them out. This is lower risk, but you would likely be better off with a biotech ETF.

If you want to venture into the topsy turvy arena of the genetic revolution with the smaller companies, there is another choice now developing that offers much higher return. The Ligand "model" is what it's often called and Ligand Pharmaceuticals is the first to decisively go down this road. A Forbes 2015 article details this nicely. Up until 2008, Ligand had been swinging the trials bat with no earnings home runs to show for it. As the Forbes piece relates:

On his first day as chief executive of Ligand Pharmaceuticals in January 2007, John Higgins was shown into a conference room in the biotech firm's 135,000-square-foot San Diego headquarters. Inside was a table so mammoth, Higgins recalls, "you could practically land a corporate jet on it." 

The new CEO immediately instructed the head of facilities to find a carpenter and cut it up into smaller tables. Higgins wasn't some scientist-turned-empire builder trying to make Ligand into the next Amgen or Genentech. He was a hit man, brought in amid a raid by activist Daniel Loeb of Third Point LLC to stem the losses at the once-promising biotech firm and turn whatever was left into quick cash. 

What was left was an array of promising medicine needing big money for trials. Higgins started his hit by slashing Ligand's workforce from 365 down to around 20, where it is today. You could say he turned Ligand into the Wal-Mart of biotech. He proceeded to "farm out" Ligand's better prospects to the big companies with what you hear so much of today - royalty agreements, milestone payments on successful trials, and other high volume, less-than-home-run reward. The Higgins philosophy:

... no matter how many Nobel Prize-winning scientists you put on your advisory staff, there's no certainty your decision making about a drug will be right ... He's rebuilt the company along lines that would make a Texas wildcatter proud: spreading bets and relying on other people's money to find winners

I won't recount the results of this "hit man" other than to say they were extremely successful. After turning EBITDA positive, cash flow climbed like a clock from $2 million in 2012 to 60 million current TTM. The stock had swooned from a speculative $140 in 2004 to around $8 in 2010, when the Higgins plan took hold. It's now a cash flow rich $143 . As the article summed it up:

No question Higgins has wrung the romance of biotech right out of Ligand. But there's also no question he's made it Loeb-proof. There's nothing left for a takeover artist to cut. "No other biotech has this story," Higgins says. "No other biotech with success could show a flat expense line."

OK, so you've missed the train on Ligand. But there is another train boarding - Xoma Corp (XOMA). About three years after Higgins first took his seat at the much smaller tables at Ligand, Xoma began adopting this same business model. From a 2010 write-up in Wikenvest:

XOMA has evolved into a sort of research and development outsourcing company." 

But they didn't decisively ditch the old model until 2015, when disaster struck. A failed Phase III endpoint smashed the stock down from around $100 to the mid-teens in a day. The stock has been in this doghouse ever since, until now. Ironically, it was the same Gevokizumab that ran the stock up recently when it was announced it was being farmed out to Novartis for development against other things. It's a versatile monoclonal antibody, what the "mab" stands for at the end of the drug name.
This model switch is drawing some attention as seen by the massive upgrade in Barron's in September:

We are upgrading our rating on Xoma to Outperform from Neutral and increasing our 12-month price target to $19 from $9. 

We drew a line in the sand requiring a deal to validate the new business model of lean operating expenses and licensing revenues and Xoma (ticker: XOMA) delivered. So we are upgrading and increasing our price target to include potential royalties on gevokizumab and canakinumab for cardiovascular-disease sales.

In my insiders and genetic medicine article linked above, I detail why the Baker Brothers are perhaps the savviest insiders in medicine to pay attention to. The Bakers had XOMA as one of their small, select handful of mega-weighted stocks until the 2015 disaster, when they abandoned ship. But this was heavy validation of their basic concept and pipeline, as is the major corroboration now with Novartis. Genetically programmed antibodies are a major Baker interest.

The similarity between XOMA and LGND is being noticed by biotech pundits, but Xoma has a long hill to climb to be as successful with this as Ligand. However, if they continue to progress, they will inevitably command the kind of "royalty premium" that Ligand now enjoys - a five year average multiple on its revenue of 22! Adjusting Xoma's current 4 multiple to Ligand's current 27 implies another six fold increase in the stock, not even counting future revenue growth.

They reported their quarter Nov. 6 and it was a crazy, massive beat. As for their press releases, I find the latest one listed at their website from October 4 interesting. It's titled "XOMA Announces Multiple New License Agreements For Proprietary Phage Display Libraries." Phage displays are cataloged antibody configurations that apparently can be "looked up" to match the profile of specific disorders being worked on. The US National Library of Medicine, has a section called "Phage Display - A Powerful Technique For Immunotherapy" and Xoma is a major trafficker in phage display, claiming in the press release, "XOMA's premier antibody discovery platform includes three phage display libraries, which are among the largest in the world."