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Subprime Melt Down Effects on Biotech
Mar 20th
I was going through my email today when I came across some really insightful comments made by Jayson Parker, who is an associate professor of my Biotechnology program. With his expressed consent, please review some key points that highlight the effects of the US “subprime melt down” that is taking place and their relevance to the biotechnology industry.
He explains that there are two basic outcomes:
1. Core inflation is priority. If interest rates go up, it hurts biotech (as it is capital intensive and increases the cost of money for loans).
2. The housing market continues to meltdown in the US. If interest rates go down in response to a recession precipitated by the housing meltdown it will also hurt biotech (money is cheaper, but investors will assign a much higher risk to stocks and the flow of money will decrease).
Recapping some events that have take place so far:
- The US economy has defied gravity for the past several years given the unexpected strength of consumer spending.
- Consumer spending has been made possible by unprecedented appreciation in housing values and historically low interest rates – consumers have borrowed against this to maintain their purchases.
- Unlike previous market bubbles, a substantial portion of consumers have leveraged themselves to be part of this current bubble – the housing market.
- Some consumers have borrowed heavily enough against the price appreciation of their homes – that a strong market correction could leave them owing more money on their homes (negative equity).
- In a historically low interest rate environment, some mortgage companies have offered loans to high risk clientale (e.g. NINJA – loans to folks with no income, no job and no assets) assuming far greater risk in their client base than is normally prudent.
These risky loans have been “securitized” – meaning the debt has been repackaged – and through a series of events I don’t follow – have been included in other investment vehicles that affect more broadly the retail market. - The housing market in the US – which has seen more growth than in Canada – is the “canary” of US economic outlook – recent interest rate increases have seen an increase in bankruptacy rates among homeowners who cannot make their monthly payments.
Currently, the US federal reserve is meeting over the next two days to decide on whether interest rates will climb – the expectation is that it will remain status quo. Core measures of inflation (excluding indices of energy), indicate that inflation may be a concern which will eventually demand an interest rate increase. Finally, giving the “recap” above, the Federal reserve will likely will be more focused on the Housing market and in keeping bankruptacies to a miniumum by keeping interest rates as low as possible to avoid a recession. Keep your eyes on the subprime meltdown in the US over the next quarter. If we enter into a recession, there will be harder times for biotech.
Once again, I would like to thank Jayson for his insightful comments!
Banking on Global Warming
Mar 15th
Many variables are contributing to the warmth of the world, at at the same time a whole of set of opportunities are arising as a result of the global warming bug.
Opportunities lay in:
- Biotechnology applications for coal plants to “scrub” emissions before they are released
- Cleaner oil refinery processing, to emit less carbon dioxide from oil sands particularly in Alberta, Canada
- Carbon sequestration technologies to capture and store carbon dioxide deep within the Earth (still to be determined if this is a good idea)
- Real estate and community planning of areas that are either going to become habitable and a lucrative shipping/trading centers (such as Nunavut, Canada described in this article)
- Places will become flooded as ocean levels rise and entire cities are going to find themselves under 20 feet of water – technologies may be needed in advanced insulation from water, dam building, or something I can’t even imagine right now.
- Cleantech: as an increasing number of emission laws come into place, there will be an escalating need for cleaner technologies to develop energy efficiently. This is not a new concept, merely a reinforcement of the need. I recently found out that Sustainable Development Technology Canada (SDTC) now has a $550 million not-for-profit foundation that bridges the gap in the innovation chain by fast-tracking groundbreaking clean technologies through development and demonstration in preparation for commercialization. There is certainly incentive for some businesses to consider developing their technologies in Canada, or perhaps, in partnership with Canadian businesses and educational institutions. Interested? Leave me your email in a comment and I’ll put you in touch with some people here in Canada!
The retreat of glaciers and arctic ice sheets are going to open up new shipping routes, key ports and new economic centers. One such gateway community is discussed an interview with a writer from The Atlantic, Gregg Easterbrook. I have to credit Paul Kedrosky for introducing me to this piece from his blog “Paul Kedrosky’s Infectious Greed“. The interview is as follows:
Early in this article you ask, “If the world warms, who will win? Who will lose?” But even the winners in this equation would seem to face grave risks. The Inuit of Canada may come to own valuable ports, for instance, but their traditional ways of feeding themselves and making a living will be decimated as the animals they hunt disappear. I suspect many people will consider the question and answer, “We will all lose.”
No, I don’t think so. In economics we don’t find many zero sum games and I don’t think this is a zero sum game. I think a lot of people and nations will come out ahead. The Inuit–the little semi-nation of Nunavut–is going to become significantly more valuable in a warming world. Right now Nunavut’s a frozen wasteland. I would love to be the guy with the Nunavut promotion account twenty years from now because I’m going to rechristen the place “the gateway to the hemispheres” and invite celebrities, and cruise ships will be stopping by, and the sign on the dock will say, “Welcome to Nunavut, Gateway to the Hemispheres!” We’ll see all kinds of wild economic activity up there. There will be change, yes. The traditional way of life will fade and be replaced with something else, maybe something zany, but change seems an inevitability of human experience. Really no society on earth, maybe the ones in the Amazon basin are the only exception, has been able to insulate itself from change. We can’t insulate ourselves from it and I doubt the Inuit will ever be able to do that, either.
On Technorati:
cleantech
biotechnology
biotech
global warming
Global Market Volatility: Sub-Prime Mortgages
Mar 14th
This has been another wild week in the markets. The U.S. sub-prime mortgage problem is effecting markets worldwide. Yesterday, there was a massive sell-off in North America [GlobeInvestor], which caused a 2% decline in Asian and European markets. Specifically, the Nikkei 225 index dropped 2.92%, the Hang Seng lost 2.8%, Indian stocks dropped 3%, and Phillipine stocks lost 3.4% overnight. Subprime lending to people with poor credit ratings is the culprit behind this downward market pressure. We are seeing a number of large financial institutions finding themselves in a bit of trouble. An announcement from H&R Block Inc. dictates that they had to writedown $29 million off its mortgage arm due to bad debt. The HSCB is also having some problems of its own as they have mismanaged their US mortgage portfolio, having bad debts soar to $10.6 billion.
Lee Cheng Hooi at EON Capital in Kuala Lampur stated “the worry is that it could spill over and cause the U.S. economy to slow down, and this will cause a domino effect on the world economy.” Kim Yung-min, a fund manager at SH Asset Management in Seoul added, “if the U.S. sub-prime mortgage problems get worse, it could begin to hurt U.S. consumers, and that would be very hurtful for exporters. This month could be very bad.”
In Canada, the market may be supported by metals and energy stocks as oil hovers around $58 a barrel. The Canadian index is up 13.93 points so far today, let’s see how it finishes up the day!
This is the second time within the past half month that we have seen distinct cases demonstrating global volatility to actions that occur in geographically dispersed markets. Remembering back to the end of February 2007, the Chinese stock markets plunged to set off a worldwide sell-off with the Shanghai composite losing 8.8%, and the Shenzhen composite losing 8.5%; this caused markets to fluctuate around the globe including a 3.3% loss on the Dow. Some think that this was simply a correction due to large gains seen on the Asian markets for the many months preceding.
This is a different story. Could we be on the brink of a recession in the US? Will Canada also fall into this spiral? If mortgages, and subsequently, real estate markets tumble, consumers will not be able to spend as much on goods and services, etc, etc …
Let’s just hope this was another ‘correction’ in the marketplace.
India Update: Finance Bill 2007
Mar 11th
Some changes are going to happen in the finance communities in India. Their Finance Minister, Palaniappan Chidambaram, recently presented the Finance Bill 2007. PricewaterhouseCoopers put out an extensive report discussing the implications for Ireland, but also discusses many of the changes affecting overseas investments among other tax and investment changes.
India’s venture capital scene is highlighted by a tax pass through status eligible to foreign and domestic funds, as discussed in The Financial Express. What does this mean? It means that they are exempt from tax on income from investments in venture capital undertakings. However, this is not the case for all industries. This tax pass through is only applicable to investments in the IT, biotech and nanotech industries.
Another article in The Financial Express highlights a new clause put into Finance Bill 2007 surrounding gas distribution networks.
“A new clause (vi) inserted in sub-section (4) of Section 80-IA provides that any undertaking carrying on the business of laying and operating cross-country natural gas distribution network, including gas pipelines and storage facilities being an integral part of the network, will be eligible for deduction under the section if it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation established constituted or constituted under any Central or state Act…” (Full text available at The Financial Express)
It isn’t surprising to see the Indian government giving special provisions to gas distribution networks. At the rate business enterprise and consumer wealth is growing in India, much more energy is needed; a more comprehensive network of gas distribution will be required to get the energy where it needs to go. This is backed by a huge demand in automotive vehicles. A news report from Hindu Busines Line mentions that Hyundai Motor India realized a 74% increase in domestic vehicle sales during February 2007 compared to the same month last year. This is complemented by a 60% increase from Honda Siel Cars India (HSCI), and an 81% increase from General Motors. Nice trend. Where are you putting your money?
Want to learn more about doing business in the new Indian economy, consider a few bestselling books to gain some insight:
- In Spite of the Gods: The Strange Rise of Modern India by Edward Luce
- Doing Business in India by Rajesh Kumar and Anand Sethi
- What’s This India Business?: Offshoring, Outsourcing, and the Global Services Revolution by Paul Davies
Put yourself in the know so that you can make the most of your investment strategy whether you’re a day trader, a fund manager or an average joe.