Barron’s Weekend Summary: Novo Nordisk and Eli Lilly are about to earn billions of dollars a year on their new obesity drugs, say Wall Street analysts
Cover Story:
-Novo Nordisk and Eli Lilly are about to earn billions of dollars a year on their new obesity drugs, say Wall Street analysts. The new medicines, known as GLP-1 receptor agonists, promise body weight reductions of as much as 20%, and may cut patients’ risk of heart attack or stroke. By all appearances, they’re the most effective safe weight-loss drugs in history. No surprise, then, that the demand for these medicines is huge and projected to get even larger as more supply comes on-line and more GLP-1s win Food and Drug Administration approval for weight loss. That’s great news for the drugmakers, certainly, but it could be a disaster for the companies and government agencies set to pick up the bill. The financial crunch would probably peak from 2025, when Medicare coverage of the medicines might begin, to 2027, when the cost of some of the drugs could start to drop.
Interview:
-Last week, Barron’s interviewed Dave Goodsell the executive director of the Natixis Center for Investor Insight. Goodsell is a retirement expert. He has been taking investors’ pulse on retirement for more than a decade. As, he has overseen research that reveals Americans’ complex and seemingly contradictory attitudes about life after work. His surveys show that Americans are optimistic about their prospects for retirement—on the surface. Beneath it lie worry and avoidance, and not without reason: The average 401(k) balance was $112,400 in this year’s second quarter, according to Fidelity. While that is far from enough to sustain a stage of life that could last for decades, there are encouraging trends: Millennials are saving a healthy 16.3% of their income for retirement, while baby boomers and Gen Xers are saving just under 10%, according to Natixis’ research. Goodsell told Barron’s how Americans can do a better job of preparing for retirement.
Tech Trader:
-Beware the IPO’s? Over the past two weeks, there have been three closely watched initial public offerings, and the results have been decidedly mixed. Rather than opening the door wide open, launching a new and exciting IPO season, the results have felt more as “if someone hurled a brick through the glass: You can get through the window, but you might get hurt.”
This past week, Instacart priced at $30 a share, opened at $42, and then began sinking. At Thursday’s close, it was 65 cents above the IPO price. Klaviyo, a marketing software company, also priced at $30, than started trading at $36.75; the stock at Thursday’s close was below $34. Meanwhile, Arm Holdings, the British -based semiconductor design house that kicked off this mini tech IPO parade earlier in the month, is now hovering right around its IPO price and 20% below its first day close.
The Trader:
-The market feels unbalanced. Ot’s been experiencing a spooky season, which will hopefully end as October begins. Still, the Dow Jones Industrial Average fell 1.9% this past week, while the S&P 500 index was off by 2.9% and the tech-weighted NASADAQ Composite slid 3.6%. For the S&P and the NASDAQ, it was the worst week since March. Some will be quick to blame the Federal Reserve. While it left interest rates unchanged, its dot-plot showed only two cuts next year, down from previous projections for four, in what was taken to be a hawkish pause. In his comments, Fed Chairman Jerome Powell tried to bring balance to the statement, to no avail.
The higher-for-longer rates put pressure on Treasuries. Those higher rates will also make it harder for the Fed to achieve a soft landing, something that Powell acknowledged by saying that’s not his base case.
-Unloved sectors sometimes make for great investment opportunities. This year, few sectors have received more scorn than banks. Higher-for-longer interest rates will keep funding costs high, eroding future profits. Recession worries haven’t faded, and borrowers will have a tougher time paying back their loans. Looming regulation—notably higher capital requirements imposed by the so-called Basel III framework—will raise costs and limit growth. None of that is good news for banks, but –it’s largely baked into the stocks. So far this year, the SPDR S&P Regional Banking ETF is down 30% and trading at nine times 12-month forward earnings. Several bank stocks, including Truist Financial—this week’s Barron’s stock pick—and Huntington Bancshares, trade at or below their book value, further suggesting that they are undervalued. The timing looks good from a technical perspective as well. One indicator, known as the TD Sequential, is now implying that the downward trend in the Financial Select Sector ETF (XLF) is ready to reverse at least for the next month or two, according to Rick Bensignor, founder of the Bensignor Group.
Features:
-Berkshire Hathaway sold 4.8M shares of HP worth about $130M in recent days, according to a Form 4 filing with the Securities and Exchange Commission late Friday. This follows the sale of 5.5M HP shares by Berkshire from Sept. 11 to 13 valued at about $160M. Berkshire Hathaway now owns 110.6M of the maker of personal computers and printers, a stake worth $3B. The stake amounts to an 11.2% interest in HP, whose shares closed Friday at $26.77, down 0.1% in the session. Berkshire accumulated the stake in HP in early 2022 and the sales last week were the first since the company finished buying the stock in April 2022. The recent sales could be a sign that Berkshire CEO Warren Buffett, who oversees the company’s roughly $350B equity portfolio, plans to continue reducing the HP stake.
-Edward Price, principal at Ergo, a global intelligence, consulting, and forecasting firm As Pax Americana disintegrates, the U.S. needs new friends. Relying on the UK, Germany, and Japan isn’t enough. Instead, America needs the VIPS: Vietnam, India, the Philippines, and Saudi Arabia. These are the countries Uncle Sam must really woo in the 21st century: Vietnam, India, the Philippines and Saudi Arabia. Each is far from a firm American ally. But each is also critical to America’s strategic success. They could prove to be the strategic counterweight to the BRICS.
Europe:
-German foreign minister Annalena Baerbock, with respect to the all-but-sacred auto sector. “The auto industry is faced with the question of whether and how we will be a global leader in the future,” she declared at the annual IAA Mobility trade show. While the US Big Three grapple with a strike organized by a revived United Auto Workers union, German counterparts Volkswagen, Mercedes-Benz Group and BMW have troubles of their own—trailing badly in the race toward the electric vehicle future.
Emerging Markets:
-US companies are feeling weary of China. Bilateral tensions and China’s economic slump have contributed to a low point in confidence among American businesses operating there.
Companies and US officials have shifted from talking about “decoupling,” or disengaging from China entirely to “de-risking,” or diversifying their businesses, a shift that emphasizes the difficulty in unplugging completely from a $1.8T economy with 1.4B people. China is still a top trading partner for 120 countries and is the biggest buyer of a range of goods, not to mention an irreplaceable part of the supply chain ecosystems. But pessimism about the trajectory for China’s economy and geopolitics prevails.
Commodities:
-Refining stocks have risen this year, boosted by growing demand for gasoline and diesel and a relative shortage of those products around the world. But this could change in 2024 as two long-delayed refineries outside the US are set to ramp up production, pumping out about 1M more barrels a day of fuel. Large new refineries in Mexico and Nigeria are ready to start producing fuel after a long start-up process that had left Wall Street skeptical that they’d open soon. The VanEck Oil Refiners ETF has gained 16% this year, and some stocks have performed even better. Valero Energy stock is up 23%, for instance. Added capacity could also weigh on gasoline prices, as it would add to global supplies of gasoline.
Streetwise:
-Higher interest rates appear to have wiped out much of the wackiness that has characterized the financial markets. Two years ago, the Federal Reserve was targeting a core interest rate of 0% to 0.25%. Now it’s at 5.25% to 5.5%. Suddenly, it costs real money to convert interest-earning deposits into something speculative. Meanwhile, prices for ordinary investments are as agreeable as they’ve been in years, with the possible exception of a handful of US stocks. A plain-vanilla US bond index fund like the Vanguard Total Bond Market ETF pays 4.7%, or a point more than the latest year-over-year reading on inflation. Policy makers this past week left rates unchanged but held open the possibility of another hike, and indicated that they expect rates to remain above pre-pandemic levels for years longer.