Market Commentary

Sterling Market Commentary for Tuesday September 4th, 2012

by  • 

A Look at Friday’s Market: The overall market moved moderately higher in a broad based move that could best be summed up as short covering and the squaring up of positions ahead of the holiday weekend. In the commodities markets Oil was higher by $1.85 to $96.47 per barrel, and Gold was higher by $30.50 to $1,685.30 per ounce.  In the grain markets, Wheat was lower by $0.134 to $8.70 per bushel, while Corn was lower by $0.086 to $8.026 per bushel, and Soybeans were lower by $0.056 to $17.644 per bushel.

A Few Thoughts on Tuesday’s Market:  In looking at the charts of Friday’s trading activity, very few of the charts I looked at appeared to be demonstrating any sort of a break from their recent trading ranges.  The one exception to this is the gold and silver stocks.  They all had breaks above recent trading ranges; and appear to be headed at least to new short term highs.  Of course it is always wise to remember that gold and silver stocks have a tendency to be very volatile and can reverse course suddenly and without warning.  With that being said,  I found Newmont Mining ‘NEM’, Barrick Gold Corp. ‘ABX’, Gold Corp. ‘GG’, and Yamana Gold ‘AUY’ to have attractive chart patterns.

The Bottom Line:  While it clearly looks like we may be in a proverbial “dull market” I am certainly not expecting things to stay that way.  At this point in time, my estimate is for the 1st couple of days this week to be rather tame trading, and then I see a chance for things to get rather volatile towards the end of the week.

www.sterlinginvestments.com

 

Articles, Weekly Newsletter

Searching for a Micro-Cap Biotechnology Fund

by  • 

We are very pleased to announce that Erik Nelson, President of Sterling Investment Services had the following artilce, ‘Searching for a Micro-Cap Biotechnology Fund‘ published in the 2nd Quarter edition of Micro-Cap Review Magazine.  We have reprinted the article below for your reading, and a printer friendly copy of is available here.

Searching for a Micro-Cap Biotechnology Fund

By Erik S. Nelson

            When I was asked to write an article on micro?cap biotechnology mutual funds and exchange traded funds (ETFs) I thought, how hard can it be?  While I wasn’t expecting many ETFs to exist in the micro-cap biotechnology or pharmaceutical space, I thought there would be at least one or two. It turned out that I could not find a single ETF. While I was not completely surprised by this, I was somewhat surprised that no one had attempted to open this area of the market to the broader investing public. After all, the biotech industry is one of the great success stories of American business. The biotech industry has been a major force in creating jobs and improving the quality of life. It is also one of the few areas of the U.S. economy where innovation and discovery are still taking place.

The biotech and pharmaceutical industries are similar industries with potentially great returns.  These industries can also be very difficult for the average investor to understand because of the technology and discovery process, not to mention the real prospects for the product being developed. I will be the first to admit that I do not have the knowledge to know for certain whether biotech and pharmaceutical products under development will receive Food and Drug Administration (FDA) approval. As a result, I believe diversification and professional management are the key to invest in the micro-cap biotech and pharmaceutical space.

In researching micro and small-cap biotech and pharmaceutical funds, I managed to find only one mutual fund and no exchange traded funds.  I wondered why that was so.  What is it that makes this space unattractive to an ETF but workable for a mutual fund?  I wanted to gain some insight into that question to help me better understand the performance and evaluate the mutual fund in this market.

In looking at the overall characteristics of the micro and small-cap market, I discovered a couple key items which are going to make things hard for a mutual fund but exceptionally difficult for any ETF in this space.

First , there’s a lack of information about micro and small-cap companies. Few analysts cover companies in this space, and most do not have the budgets to attend the many conferences and trade shows. This means that fund managers who want to invest in this space have to do a lot of the research themselves. And the more complex the product, the more  difficult it is to assess the  company., which  makes it tougher to analyze and invest in biotech and pharmaceutical companies.

Second,  there’s a general lack of liquidity in the micro and small-cap space. Herein lies the single biggest reason why ETFs have not entered this space. Exchange traded funds typically post their positions and their holding percentages on web sites. This simply won’t work well when there is limited liquidity in the micro and small-cap market. With the real-time creation of shares in an ETF, we can only imagine the possibilities for sophisticated traders to front run the buying and selling of the positions owned by the ETFs. It would create unbelievable havoc. Mutual funds do not have this problem. Trades in mutual fund shares are considered to occur at the end of the day. Mutual funds have much greater flexibility with their investment decisions and cash holdings.  This allows them to better navigate the rough waters of the micro and small-cap market.

The only mutual fund that I found to invest in the small-cap biotechnology space is the Franklin Biotechnology Discovery A (FBDIX).  It is part of the Franklin series of mutual funds from Franklin Templeton Investments (www.frankintempleton.com). The fund has been around since 1997 and has approximately $327 million under management. The fund invests at least 80 percent of its net assets in the equity securities of biotech companies.  The fund appears to have a dual class structure, one with a sales charge, and one without.  I recommend the Advisor share class because it has a better rate of return.

The biotechnology and pharmaceutical sectors are tough industries to invest in.  Last year the funds posted a 17.28 percent return for the Advisor share class with a five?year annualized return of 3.99 percent and a lifetime annualized return of 8.12 percent.  Unfortunately over the last 10 years, the average return has been a negative 0.58 percent.

When considering an investment in this fund, one of the key questions to ask is how well does the fund stack up with the overall market and the biotech/pharmaceutical sectors?  The answer is somewhere in between. The Franklin Biotech Discovery A fund almost splits the difference in the performance of the two sectors. I looked at the performance of the Amex Biotechnology Index ‘BTK’ and the Amex Pharmaceuticals Index ‘DRG’ over the same period. Granted those two indices track large-cap stocks, but they are the best representatives of those two sectors for the period in review.  The Amex Biotechnology Index ‘BTK’ was the better performer of the two indices. For the 1-year, 5-year, 10-year, and comparative lifetime (starting in 1997) periods, the index returned 37.7 percent, 17.5 percent, 8.3 percent, and 18.9 percent. Unfortunately the Amex Pharmaceuticals Index ‘DRG’ faired far worse.  It returned -1.08% percent, -1.15% percent, -4.15 percent, and 1.15 percent for the same periods.

How would I rate the Franklin Biotech Discovery A fund in comparison? It is not too bad.  This is a very tough sector to invest in. Even the best fund managers are going to have a tough time matching the result of the best performing sector indices.  It should be noted that the Franklin Biotech Discovery A fund has out-performed the Dow Jones Industrial Average, which has posted returns of 11 percent, 1.95 percent,  0.79 percent, and 3.23 percent for the same periods.

Many investors with holdings in small and micro-cap companies in the biotech and pharmaceutical sectors are interested in advancing societal goals. Investors believe that they are not only helping to bring important drugs to the market, but also to create jobs. Those who are committed to invest in small and micro?cap companies in these sectors should consider the Franklin Biotechnology Discovery A (FBDIX) mutual fund. It is a solid option.

About the Author:

Erik S. Nelson is the president of Sterling Investment Services, Inc. (www.sterlinginvestments.com). Sterling is a publisher of a weekly market commentary and a daily trading newsletter. Mr. Nelson is also the president of Coral Capital Partners, Inc. (www.coralcapital.com). Coral Capital provides advisory services to private and publicly traded companies. He can be reached at (404) 816-8240 or enelson@sterlinginvestments.com.

 

Market Commentary

Sterling Market Commentary for Monday August 20th, 2012

by  • 

A Look at Friday’s Market: The overall market was slightly higher on Friday in a relatively lack luster session.  In the commodities markets, Oil was higher by $0.43 to $96.32 per barrel, while Gold was higher by $0.20 to $1,617.30 per ounce.  In the grain markets,  Wheat was higher by $0.126 to $8.744 per bushel, and Corn was higher by $0.006 to $7.984 per bushel, while Soybeans were higher by  $0.146 to $16.710 per bushel.

A Few Thoughts on Monday’s Market:  In looking at the charts from Friday’s market, I noticed a couple of things.  The 1st being that there were a significant number of stocks that broke through downside support on fairly heavy trading volume, and a lot less stocks broke through upside resistance on heavier than normal trading volume.  The other item I noticed is that the S&P 500 ‘SPX’ has yet to surpass its yearly high of 1,419.04 set on April 2nd of this year; while the S&P 100 ‘OEX’ (which we do not hear much about anymore) surpassed its yearly high of 645.29 set on April 2nd of this year with its close of 646.22 on August 10th.  While a couple of weeks of action may not be too significant in the long run, until we reach the long run there may be some significance in the short term message.  The message that I find in the S&P 100 ‘OEX’ out performing the S&P 500 ‘SPX’ is that larger companies are out performing smaller companies.

Normally smaller companies are the faster growing, and better performers in the stock market.  If smaller companies are no longer growing faster than larger companies, then I see this as a sign of weakness in economic growth.

The Bottom Line:  The trend of the market remains to the upside,  but I remain cautious.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for Wednesday August 15th, 2012

by  • 

A Look at Tuesday’s Market:  The overall market finished Tuesday relatively flat on low trading volume.  In the commodities markets,  Oil was higher by $0.70 to $93.43 per barrel, and Gold was lower by $10.20 to $10,600.40  In the grain markets where the drought is becoming more of an issue,  Wheat was lower by $0.170 to $8.396 per bushel, while Corn was lower by $0.030 to $7.796 per bushel, and Soybeans were higher by $0.012 to $16.234 per bushel.

One of the things I noticed in my review of the charts from yesterday’s market was that the Dow Jones Transportation Average has not really participated in the market’s move higher this year.  While the Dow Jones Industrial Average is higher by approximately 7.8% year to date;  the Dow Jones Transportation Average is higher by only 62.09 points or approximately 1.24% year to date.  For those who follow the Dow Theory and the relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Average,  the lack of movement in the Dow Transportation Average is a significant signal.  For me,  this usually signals that either the Dow Jones Transportation Average is going to move sharply higher and play a game of catch up;  or there is a significant risk that the Dow Jones Industrial Average will move back lower and give up the majority of its year to date gains.

My thoughts are that given that Europe appears to be moving back into a recession and our own fiscal mess, we are more likely to see the Dow Jones Industrial Average move lower than we are to see the Dow Transportation Average move higher.

A Few Thoughts on Wednesday’s Market:  I think the market looks to be at a level where it is encountering upside resistance. I think that there is a greater chance of the market moving lower from these levels than there is of it moving higher.

The Bottom Line:  I remain cautious on the market at this point in time.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for Monday August 13th, 2012

by  • 

It is good to be back!  I took a some time off from writing in preparation of the birth our son.  My wife and I very happy that our son and first child was born Sunday August 5th.  It has been a very happy and wonderful experience.  However, now it is time to start writing again; so I am back at my desk and looking forward to resuming my publishing duties.

A Look at Friday’s Market:  The Dow Jones Industrial Average closed Friday August 10th at 13,207.95  When I last published on April 13th the Dow Jones Industrial Average had closed the prior day at 12,986.58  This is a gain of approximately 221 points or approximately 1.7%  With respects to the other items we follow on a daily basis;  Oil closed $92.87 per barrel, down from $103.64 on April 12th.  Gold closed $1,620.70 per ounce,  down from $1,680.60 per ounce on April 12th.  Wheat closed at $8.852 per bushel, up from $6.392 per bushel on April 12th.  Corn closed at $8.00 per bushel, up from $6.374 per bushel on April 12th; and finally Soybeans closed at $16.732 per bushel, up from $14.410 per bushel on April 12th.

The grain markets are obviously showing the effects the drought gripping the country.  This drought will ultimately end up hitting consumers in the pocket book.  While a lot goes into food processing beside the cost of the raw food, we are undeniably seeing significant raw food increases.  Over the period of time since I last published,  Corn is higher by $1.626 or approximately 25.5%.  Wheat is higher by$2.46 or approximately 38.5%;  and Soybeans are up by $2.322 or approximately 16.1%.  Regardless of how you want to frame it,  I see these price increases putting a serious dent in the wallets of most Americans when they go to the grocery store.  This will have a negative impact on the U.S. economy.

A Few Thoughts on Monday’s Market:  I would not get too excited about the Dow Jones Industrial Average’s recent move above 13,000.  On March 15th of this year the Dow Jones Industrial Average closed at 13,252.76 only to move back lower.  On April 2nd of this year the Dow Jones Industrial Average closed at 13,264.49 only to move back lower.  On May 1st of this year, the Dow Jones Industrial closed at 13,279.32  I think this forms an upward sloping trendline that is upside resistance.  At the current levels, I see this resistance coming into play at approximately 13,330 on the Dow Jones Industrial Average.  Until the Dow Jones Industrial Average closes above this level, I would not get too excited about the current move higher.

The Bottom Line:  I think that once the conventions are over and the race for the White House heats up we are going to be in for a bumpy ride.

 www.sterlinginvestments.com

 

Market Commentary

Sterling Market Commentary for Friday April 13th, 2012

by  • 

A Look at Thursday’s Market:  The overall market moved sharply higher in a broad based move that saw basically every index I track move higher on the day.  Thursday’s move in my opinion was nothing more than a bounce from the previous move lower,  and was probably exaggerated to the upside by comments from the Fed about the possibility of continuing quantitative easing and greater than expected jobless claims.  It is a sad state of world affairs where comments about maintaining emergency level fiscal stimulus is having such an impact over 3 1/2 years after the financial crisis of 2008.  It is also a sad commentary on the market when so much of the activity is controlled by computers trolling the news wires for headlines to base their trading decisions on.  Think about for a minute.  This creates a market where the activities of a young writer, with no market experience at one of the networks or newspapers could influence the direction of the market by their mood of the morning. It also is a sign that fewer and fewer of the market participants are actually able to think for themselves.  This can’t be a good thing in the long run.

In the commodities markets, Oil was higher by $0.94 to $103.64 per barrel, and Gold was sharply higher by $20.30 to $1,680.60 per ounce. In the grain markets,  Wheat was higher by $0.112 to $6.392 per bushel, and Corn was higher by $0.014 to $6.374 per bushel, while Soybeans were higher by $0.19 to $14.410 per bushel.

A Few Thoughts on Friday’s Market:  In looking at the charts from Thursday’s market, despite Thursday’s sharp move higher, none of the various sector indices I looked at broke their current downward trend.  The same can be said for the individual stocks I looked at.  Basically Thursday’s move appears to have been a bounce from an sharply oversold position.  I think the move higher Thursday got some extra strength due to the greater than expected number of jobless claims.    The pre-market futures are negative this morning, and if we finish the day lower, then I believe we will be able to say that this confirms the downward trend.

The Bottom Line:  I am expecting the overall market to continue to move lower.

Twitter Model Portfolio Tweet Policy:  Currently Sterling Investment Services is managing a trading strategy based upon covered puts and calls.  Sterling Investments is currently running a “Model Portfolio” that is based upon this strategy.  You can follow us on Twitter under sterlinginv and get our intra-day comments on the market.  Sign up now to follow us and get our thoughts and comments as the market moves!  It should be noted, that at this point in time, Sterling Investment Services is only “paper trading” this model portfolio, and not actually executing trades and creating actual positions within this model portfolio.  Therefore, please do not look for actual volume associated with our options selections.  It is Sterling Investment Services goal to initiate trading in an actual account based upon our model portfolio in the near future.  When that change actually occurs, Sterling Investments will notify its readers via Twitter and our website.

www.sterlinginvestments.com