A new DOW record is in the books and world stocks were moving higher on Wednesday as a result. As mentioned earlier this week, we're at a serious pivot point now as to whether the markets can sustain these or whether a pullback will materialize based on the developments of other general conditions and geopolitical events. A positive private jobs report on Wednesday AM was key in determining the strength of the new record over the short term, but investors will now look towards the effects of sequestration and how budget cuts can have an impact over the coming weeks.
Most of the expected cuts that were regarded as a doomsday scenario by many politicians leading into the March 1 deadline, however, are not due to be implemented until the April time frame, according to the most recent reports from Washington. That allows more time for our elected officials to come up with something solid in terms of a budget for the first time in years, but it also leaves us in a position where investors could feel complacent with the bullish momentum just before the real impact could be seen. Many government programs are slated to lose at least portions of their funding and - maybe even more important for the already sluggish recovery - federally paid workers could be in for a slate of pay cuts and furloughs. Those cuts could offer the markets a look at the potential impacts of having an increasing portion of the population relying on government money, whether it be through government jobs or handouts.
For the time being, investors are satisfied enough with what Fed Chairman Ben Bernanke had to say last week to keep the markets elevated, but now is also not the time for complacency. With the uncertainty regarding budget cuts and federal furloughs, investors should prepare for multiple eventualities, which includes positioning for a pullback, should one - no matter how modest it may be - materialize.
Over the short term, the job numbers are the key indicator to watch, but in the absence of a budget deal - and the politicians don't look to be in a rush to push one through - watch for signs of how sequestration could impact consumer spending, consumer sentiment and overall growth.
As always, there will be plenty of individual stocks and stories to keep an eye on while the major news plays out. Here are just a few of them for Wednesday, 6 March 2013...
Explosive Trace Detection (ETD) / Global Defense:
Implant Could Potentially Be Impacted By DC's Stalled Budget Talks
In discussing the potential effects of sequestration and Washington's stalled budget talks, it may be worthwhile to consider the potential Impacts that these issues could have on Implant Sciences (IMSC) and other companies that may be looking towards government money to fuel growth. In the case of Implant, investors had speculated that recent TSA approval of its Quantum Sniffer B220 explosive trace detector would result in the landing of some key deals potentially associated with Washington's anti-terrorism efforts in relation to air cargo and overall aircraft and airline security. While the potential remains for Implant to land deals in the private sector for air cargo providers, the company's potential to enter into the government sector could be stalled by the budget woes in Washington, and investors should take note of that fact.
As news trickles out from DC regarding spending cuts and furloughs, one item mentioned is that Washington is in a period now where money already obligated to existing contracts will not be effected, but any new contracts or requests for fiscal obligations will be just as stalled as an elected official's 'to do' list once they arrive for work post-election. That could impact the type of new money that would be necessary for Implant to secure the government contracts - that's another aspect to consider in the patience game.
Such a scenario could lead to a period where investors may grow anxious at a point when large government-related deals were anticipated, but those looking towards the long term may appreciate the recent price pullback as an opportune time to add or continue with accumulation. As previously discussed, the advantages of Implant's ETD technology over the competition are distinct, and that underlies the potential for the company to play a large role in the growing homeland defense market. For that to occur, though, homeland defense needs to be funded and as we all know, the Mets might win the 'outfield of the year' award before a budget gets passed in DC.
A slowdown in domestic growth does not mean that the company can't come through on the international market, as has been noted in the past. On Tuesday, too, Implant noted that an existing aviation security customer in Africa had purchased three QS-H150 handheld units as part of a follow-on order. Having demonstrated a significant amount of overseas growth over the past year, including a multi-million dollar order to India, this company is not overly-reliant on the US market right now - but a budget resolution could help, as it'll free up new money for contracts again.
Also take note of the credit extension with DMRJ that places the company on stable financial grounding, at least for the next year.
BlackBerry Sinks As Market Soars
Global markets may be setting multi-year highs these days, but shares of BlackBerry (BBRY) have retreated off their recent highs and were down another near-two percent on Tuesday. Speculation is still rampant about just how successful the launch of the new BlackBerry 10 platform is going, but most are reserving judgement until the full US launch is underway. Many consumer reviews have been positive thus far and the instant overseas statistics are encouraging, although there is some concern that abundant inventories and pricing promotions - both of which could lead to revenue reductions - may eat into margins.
The recent decline in the BBRY share price should not be attributed fully to expectations of a weak launch. As the market has inched higher just about every day over the past couple of weeks - culminating in Tuesday's triple-digit rally to break the record high - many investors have been concentrating their cash towards the hot DOW players and other market movers to enjoy the bull ride. As they say, everyone makes money in the bull market, so many investors tend to concentrate cash into those more stable investments that are likely to ride the broad-market wave. BlackBerry, still being highly speculative until those de-facto sales numbers start rolling in, doesn't quite fit that bill as it's still a potential rebound and recovery story, not necessarily a 'trade in-line with the market' play.
That could change if the BB10 platform proves to be a hit, or at least proves capable at stealing back some market share from its competitors.
If the market stabilizes where it is or starts to pull back, then investors are likely to start taking some profits from the table and that's when money could start flowing back into the more speculative stocks. At that point, BBRY may be the target of some of that money and start to inch higher again. Conveniently enough, that may coincide with the release of valid sales data from around the globe and propel shares higher towards their recent highs, assuming those numbers are positive or in line with general expectations.
It hasn't helped shares lately either that a couple of analysts have issued downgrades over the past few weeks and predict that the BBRY share price will not settle until it hits prices of at or just below the ten dollar mark. The respective analyst reports cite slow sales and shipments, but some may judge them as premature, given that the full global launch is not quite in full throttle and hype is not yet at its peak.
The recent pullback makes BlackBerry a much more attractive speculative play now than what it was when shares were sitting near twenty bucks. The overall potential recovery will still depend on sales numbers later on down the road, but as investors start taking profits from this easy-money bull run, then some cash could start slipping back into the speculative plays that have the potential to go up when/if the market comes back down.
Healthcare, Biotech, Pharmaceutical:
AEterna Zentaris Could Rise Even In Market Pulls Back
AEterna Zentaris (AEZS) is another more speculative play that has slipped lower recently but could rise even if the market decides to pull back from its record highs, mainly due to catalysts that are still to unfold over the coming weeks and months. Another reason that AEZS could trade independently of the broad market action, if news and developments warrant, is for the same reasons discussed in the BlackBerry discussion above. As investors pull profits from the highs of this record-setting rally, then money could flow back into those investments more speculative in nature that have the potential to spike - even in a down market - based on unfolding catalysts.
As previously identified, one potential near-term catalyst for AEterna is the expected NDA filing for AEZS-130 as a diagnostic test for Adult Growth Hormone Deficiency. This product candidate is not quite expected to become a huge money maker, if only because of the relative size of the intended market, but AEterna maintains world-wide rights to and - if approved - could provide a future revenue stream to assist in funding other pipeline products.
Also watch for developments on the AEZS-108 front. AEterna recently announced that the first patient had been treated in a Phase II trial testing AEZS-108 in the treatment of triple-negative breast cancer, but Phase II studies also continue for AEZS-108 the treatment of prostate and bladder cancers. Interim results from these trials are expected at various points throughout 2013. AEZS-108 is also being prepared for a near-term launch of a Phase III trial in the indication of endometrial cancer, according to the latest information published to the company's website, after already having established a proven record of success in other early to mid-stage trials. Investors looking for a place to insert some speculative money following the broad-market run, may like what the see on the AEZS catalyst plate.
Another key milestone to watch relates to Perifisone, a product whose potential may not be valued into the AEZS share price any more due to its Phase III failure in treating colon cancer. AEterna, however, retained full rights to Perifisone when then-partner Keryx Biopharmacueticals (KERX) pulled out and a Phase III trial continues in the treatment of multiple myeloma. An independent monitoring committee is slated to analyze interim results from this trial within the current quarter and if the committee recommends that the trial continue, investors still skeptical after the colon cancer outcome may be reassured to take another chance on the product's future, which provides yet another near-term catalyst.
The immediate market rally looks as if it will continue for now, but look for investors to start taking advantage of potential catalyst plays as profits start coming off the table and cash enters the speculative market again. AEZS could benefit at that time.
Roundup: Judging by international market action and Wednesday's encouraging private jobs data, we're likely to see new record highs during the course of the day. As mentioned above, though, it's not the time to get complacent as the global recovery is hardly set in stone and there are still many speed bumps that can materialize along the way, especially in the absence of resolution in Washington. While enjoying the broad market run that has filled up those 401Ks again, now's the time to start looking for the individual stocks and stories that have the potential to move higher based on catalysts and development, even if a pullback occurs.
Disclosure: Long IMSC, AEZS.
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