Last week was a very difficult week for fund managers, including ourselves. The week started on very strong advances which made us increase our long positions and reduce our hedges only to end last Friday on a strong fall and reversal just after we had cut our short positions on Thursday.
Luckily, we were able to re-instate our short Nasdaq and increase our shorts SP 500 on Friday as the markets were falling.
What is clear is that the correction that we had been expecting all along is finally upon us and we expect the SP500 to lose between 100 to 150 points before it is over and we move into the next leg of the bear market rally in Q2 2019.
When looking at the MSCi World Index, the correction should last a few weeks and take the index towards 2000, a 5 % correction form here, that we will use to take profits on our hedges.
When it comes to our Model Portfolio, we clearly would have preferred to stay put last week and ride the up move without changing anything but the move up was powerful and the surprisingly dovish attitude of the FED was sending very positive liquidity messages to the markets and we started doubting our preferred scenario for a correction.
It took extremely negative economic figures in Europe on Friday to stop the advance and send the markets down 2.5 % on the day, marking a very significant top to the entire Dec 27 March advance.
Factory activity in the 19-country euro zone contracted at the fastest pace in nearly six years sending shivers into the financial markets and contradictions any hopes for recovery.
The drop in the euro zone’s manufacturing purchasing managers index to a 71-month low of 47.7 from 49.4 in February raised the risk trade flows could turn even more negative in the short term. The number was way below expectations and it comes on the heels of other negative industrial production numbers.
Manufacturers in Europe, Japan and the United States suffered in March as surveys showed trade tensions had left their mark on factory output. As we have advocated regularly, Donald Trumps Trade Wars halted the world’s coincident economic growth momentum by creating uncertainty, a collapse in investments and a slow down in global trade.
In Japan, manufacturing output shrank the most in almost three year and a measure of U.S. manufacturing was its weakest since June 2017 while forecasters at the Federal Reserve Bank of Philadelphia slashed their estimate for economic growth in early 2019.
This global round of negative figures made investors nervous about corporate earnings going forward and our scenario for a significant Deflation scare later in the year is becoming more likely every week.
As can be seen from the Transaction list below, last week was probably one of the busiest week we ever had as we were building up our exposure to Europe and Asia last Monday and Tuesday, built exposure to the soft commodity sphere, cut our strategic short position in technology stocks on Thursday and some of our Index hedges only to put them back on Friday.
Clearly the performance of our Model Portfolio was affected by the whipsaw but we are nevertheless hedged and confident that things will ultimately turn out positively even if it would have been better to stay idle.
In the Commodity Spaceour coffee position was not successful but the other three Wheat, Sugar and Corn contributed positively. Our arbitrage SHORT Palladium LONG Platinum state to go in our favor and we believe that Palladium has finally made a top. Our increase in our short position was well-timed last week.
In the US, Dynavax had another terrible week, losing 10 % in line with the rest of the biotech world.
By and large, biotech stocks had a most forgettable 2018, and the beginning of 2019 is not really better. Within that negative environment Dynavax was one of the worst-performing biotech stocks among companies with a product on the market, losing 51 % in 2018.
This was one of the reasons we actually bought the stock in 2019. Since we bought it, it fell another 25 %.
The long-awaited commercial launch of Dynavax’s hepatitis B vaccine, Heplisav-B, did knelt match the market’s expectations in terms of sales of the vaccine, taking in only 2.9 Millions US dollars of revenues in 2018
Heplisav-B was championed, prior to its launch, as the heir apparent to GlaxoSmithKline‘s aging hepatitis B vaccine Engerix-B, thanks to its pronounced dosing and potency advantages over the current market share leader. The market was rightly disappointed and punished the stock price.
However, Heplisav-B’s slow commercial launch should not be viewed as a failure. Dynavax had to build a commercial infrastructure from the ground up to launch Heplisav-B on its own and that process takes time — especially for a company with a rather limited budget and other pressing capital allocation needs.
Fortunately, Dynavax’s hard work appears to be paying off. At the recent J.P. Morgan Healthcare Conference, the company announced that Heplisav-B’s fourth-quarter sales came in at a respectable $3.7 million for the last three-month period. The vaccine’s commercial launch, therefore, appears to be gaining traction. And if so, Dynavax may have what it takes to mount a comeback in 2019. At least we hope so. We averaged down on our positions the week before.
All our European positions ended the week sharply down. Our timing was just awful but we still see these positions doing well into the second quarter of the year.
Japan was positive, China was mixed with Tongda Group delivering our best performance last week with a 9 % advance and our Shenzhen stocks doing well.