Two Companies Follow Unmet Needs to Biotech Profits: Echo He

Source: George S. Mack of The Life Sciences Report  (1/30/14)

Disease progression and drug resistance mean that very sick patients ultimately run out of options. In the case of orphan diseases, patients often run out of alternatives immediately after they are diagnosed. In this interview with The Life Sciences Report, Echo He of the Maxim Group discusses her focus on how patients with unmet needs might ultimately get a fighting chance. To that end, she has selected two names that could produce both welcome cures and stunning share price results for investors who understand the value proposition of last-resort therapies.

The Life Sciences Report: I understand you attended the annual JPMorgan Healthcare Conference in San Francisco in January. Was there anything there that caught your eye?

EH: Basically, companies were updating their ongoing efforts in clinical development and their timetables for near-term catalysts. Some results were announced, but I was there to look at early-stage drug development in disease areas with higher unmet medical needs.

TLSR: A lot of companies these days are talking about and seeking U.S. Food and Drug Administration (FDA) breakthrough therapy designation for drugs in development. Did you notice that at the conference?

EH: Yes. I noticed more companies talking about breakthrough designation, but that doesn’t mean they are getting it. I don’t have data on that yet. It seems like the trend at the FDA is toward more flexible approval of drugs—even those with only phase 2 data, and most especially those in areas where patients are running out of options.

TLSR: The FDA approved fewer new molecular entities in 2013 than it did in 2012, but it seems to be acting quickly on products that are innovative. Have you noticed that pattern?

EH: I don’t believe FDA is approving these drugs because the mechanisms are innovative. It’s because these drugs are targeting disease populations where there are inadequate treatments.

TLSR: Is that your theme for the coming year? Is it about unmet needs in patients who are running out of choices?

EH: Yes, I’m thinking that way. I think drug approval is disease-demand-driven instead of mechanism-driven.

TLSR: Could we talk about a couple of companies, please?

EH: Yes. Let’s first talk about a small company called Catalyst Pharmaceutical Partners Inc. (CPRX:NASDAQ). Its market cap is only around $105 million ($105M), and it’s an orphan drug developer. The company’s lead drug candidate is Firdapse (amifampridine), targeting a neurological disorder called Lambert-Eaton myasthenic syndrome (LEMS).

LEMS patients gradually lose muscle strength over time, and become severely disabled. It’s a disease of low prevalence, with just more than 3,000 patients in the U.S. and a few more in Canada. These are just the ones who have been diagnosed. The drug has both orphan drug status and breakthrough designation. Amifampridine is approved in Europe for LEMS, but there are no FDA-approved therapies for LEMS in the U.S. However, some compounding pharmacies provide the drug to physicians and patients in the U.S. right now. When a product gets approval, the compounding goes away.

TLSR: That brings up a question. The company says Firdapse would address a $100M market opportunity in the U.S. I’m aware that children are automatically covered under Medicaid when catastrophic disease strikes, but this is not just a childhood syndrome, and drug companies must accept what Medicaid will pay. How do you derive that much revenue from that few patients?

EH: We are estimating that there are 3,500 cases in the U.S. and Canada. Assuming a year of treatment costs $50,000–60,000M and that eventually 60% patients are treated with Firdapse, that suggests peak sales of about $100M.

TLSR: Echo, as far as you know, did Catalyst complete enrollment of its 30-patient, phase 3 trial (NCT01377922) with Firdapse in LEMS by year-end 2013? I haven’t seen a press release to that effect.

EH: It has not. The company is actually planning to enroll 36 patients, but that’s probably not in the database yet. It will probably complete enrollment sometime in Q1/14.

TLSR: Your target price on Catalyst Pharmaceutical Partners is $4, which represents an implied return of almost 100%, a double from current levels. What is the timeframe on that target price?

EH: It’s a 12-month target price, which I published on Jan. 8. That’s supported by catalysts/milestones, which include completion of phase 3 enrollment, a phase 3 efficacy data report in Q3/14, completion of safety studies and the new drug application (NDA) submission early in 2015. The cardiovascular toxicity study was reported on Jan. 8 in human subjects. The reproductive toxicity will be reported from animal data, and that is required for the NDA.

TLSR: Do you imagine that we’re looking at a 2016 launch for Firdapse in LEMS?

EH: Yes. It wouldn’t take that long for a larger company, but Catalyst needs some time to get everything in place to submit a complete NDA. Probably that will stretch to 2015. Then I give the FDA a full year for approval. Then we’re looking at the drug’s launch.

TLSR: I noted an interesting data point coming from the company. Half of LEMS cases are associated with small cell lung cancer, rather than the autoimmune etiology. Antibodies bind to the tumor cell antigens and to calcium channels in nerve cells, thereby creating this muscle weakness. I’m thinking that there may be several diseases involving muscle weakness where Firdapse could be helpful to patients.

EH: If there is a possibility to expand the drug to new therapeutic areas, I would think it’s in other neurodegenerative diseases, or in calcium channel disorders that cause neurological disease. The company previously suggested that if other diseases share the same symptoms as LEMS, it could expand this drug to those diseases. The FDA may require some new trials.

TLSR: When you think about it, a phase 3 trial with 36 patients is very inexpensive and can be done very rapidly. The idea, obviously, is to get the drug approved, and then the company can expand its indications. If and when Firdapse is approved, it might be used on an off-label basis for some of these other disease indications. What do you think?

EH: Your assumption may be correct. In the U.S. market, doctors tend to use drugs on an off-label basis if the clinician believes it could help a patient. But the company definitely is not allowed to promote it in other indications—only for what is on the drug’s label. If the physician prescribes it without promotion from the company’s representative, that’s usually allowed in this market.

TLSR: The problem here is obviously reimbursement. Would that work with the drug being used on an off-label basis?

EH: If doctors can justify the drug’s cost by documenting symptom relief or other patient benefits, the payers would pay for that. We have seen that in quite a few cases in the U.S., even if the drug is used off label.

TLSR: Go ahead to another company, please.

EH: Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT) is also a small company, with a market cap of about $150M right now. It’s a cancer drug development company, and its lead product is Archexin (antisense RNA inhibitor of Akt1), targeting a signal transduction pathway in cancers. Right now, the drug is in a phase 2a trialin renal cell carcinoma (RCC); this is the most advanced development program for this company.

Rexahn also has two early-stage compounds: supinoxin (phosphorylated-p68 RNA helicase inhibitor) in phase 1 and RX-3117, which entered the clinic in phase 1 at the end of 2013. These phase 1 drugs are interesting, but Archexin is the value driver right now because it’s in phase 2.

TLSR: Is Archexin partnered with anyone?

EH: Rexahn has 100% rights to this compound, but the company is working to get development partners in North America, as well as ex-U.S. My discounted cash flow (DCF) model 10 years out is based on the company having a partner and taking a royalty on this drug, and that DCF model is what supports my current price target of $1.50.

TLSR: Recently Rexahn was trading at $1/share, so I’m thinking that you must not be looking for any near-term catalysts.

EH: I did talk to management recently. The company will probably report some data on its two phase 1 candidates during 2014, but not on the phase 2 trial for Archexin. One catalyst might be a partnership with a big pharma on the two oral compounds in phase 1. There is a possibility on that front.

TLSR: But your target price is based on Archexin as the value driver.

EH: Archexin is my main driver. I have not placed any valuation on the other molecules, mainly because I don’t believe the company has specific disease indications for them as yet. It is just saying solid tumors at this point. It will probably test these drugs—RX-3117 and supinoxin (RX-5902)—in multiple solid tumors, but after the phase 1 trials, the company will have a better sense of which solid tumor to go after. Then I can build my assumptions.


TLSR: RCC is a difficult indication, and the company’s phase 2 trial is even more difficult because Rexahn is testing Archexin in metastatic RCC. The company says this is a $6 billion ($6B) market. How much of that market could Rexahn carve out with this drug?


EH: First of all, Rexahn is not targeting the entire RCC patient population. It’s just the metastatic, as you say. Also, Archexin will come in after a first-line treatment fails. The indication is second-line metastatic RCC, which is probably a small portion of the total population. I would not factor in $6B. My assumption is going to be for a very limited eligible patient population.


TLSR: Thank you so much, Echo.


EH: Thank you, too.


Echo Yinghui He, M.D., Ph.D, joined Maxim Group LLC in 2009 as a senior vice president in equity research. Prior to joining Maxim Group, Dr. He was a director at Oppenheimer & Co (formerly CIBC World Markets), where she was an equity analyst covering U.S.-listed Chinese stocks. Prior to Oppenheimer & Co., Dr. He served as a vice president at CRT Capital Group, where she conducted equity and credit analysis on Chinese and U.S. biotechnology companies. Earlier in her career, Dr. He served as a research scientist at the National Institutes of Health (NIH), where she participated Human Genome Project aimed at interpreting diseases and their risks by genetic patterns. Prior to the NIH, she worked as a post-doctoral research fellow at Indiana University Medical Center, where she investigated gene therapy for pulmonary diseases and potential drug targets of human HIV infected cells. Dr. He received a M.D. in clinical medicine from Beijing University Medical School, a Ph.D. in medical sciences from the Medical College of Ohio and a master’s degree in business administration from the University of Chicago Booth School of Business.


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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Catalyst Pharmaceutical Partners Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Echo He: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Maxim Group has received compensation for investment banking services from Rexahn Pharmaceuticals Inc. in the past 12 months. Maxim Group expects to receive or intends to seek compensation for investment banking services from Rexahn Pharmaceuticals Inc, in the next three months. Maxim Group makes a market in Rexahn Pharmaceuticals Inc. Maxim Group managed/co-managed a public offering of the securities for Catalyst Pharmaceuticals Partners, Inc. in the past 12 months. Maxim Group expects to receive or intends to seek compensation for investment banking services from Catalyst Pharmaceuticals Partners Inc. in the next three months. Maxim Group received compensation for investment banking services from Catalyst Pharmaceuticals Partners Inc. in the past 12 months. Maxim Group makes a market in Catalyst Pharmaceuticals Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Doug Casey: “Gold Stocks Are About to Create a Whole New Class of Millionaires”

By Jeff Clark, Senior Precious Metals Analyst, Casey Research

Bear markets always end. Has this one?

Evidence is mounting that the bottom for gold may be in. While there’s still risk, there’s a new air of bullishness in the industry, something we haven’t seen in over two years.

An ever-growing number of industry insiders and investment analysts believe the downturn has come to a close. If that’s true, it has immediate and critical implications for investors.

Doug Casey told me last week: “In my lifetime, the best time to have bought gold was 1971, at $35; it ran to over $800 by 1980. In 2001, gold was $250: in real terms even cheaper than in 1971. It ran to over $1,900 in 2011.

“It’s now at $1,250. Not as cheap, in real terms, as in 1971 or 2001, but the world’s financial and economic state is far more shaky.

“Gold is, once again, not just a prudent holding, but an excellent, high-potential, low-risk speculation. And gold stocks are about to create a whole new class of millionaires.”

Just a couple of months ago, you would have had a hard time finding even one analyst saying something positive about gold and gold stocks—even some of the most bullish investment pros had gone silent.

But that’s changing. Case in point: When Chief Metals & Mining Strategist Louis James and I attended last week’s Resource Investment Conference in Vancouver, we witnessed quite a few very optimistic speakers.

Take Frank Giustra, for example, a self-made billionaire and philanthropist who made his fortune both in the mining sector and the entertainment industry. He’s the founder of Lionsgate Entertainment, which is responsible for blockbuster movies like The Hunger Games, but he was just as heavily involved with mining blockbusters such as Iamgold, Wheaton River Minerals, Silver Wheaton, and others.

More Upturn Advocates

Here’s a quick scan of the growing number of voices that think the decline is over, some of which are outright bullish:

“The worst is over with gold. It’s time to call your broker.” —Frank Holmes, US Global Investors

“Sentiment is as black as night on gold, so I’m actually long on some gold miners.”
—Jeffrey Gundlach, bond guru and DoubleLine Capital founder

“We’ll see a gradual recovering throughout the year, because all the negative factors are already in the price.” —Eugen Weinberg, head of commodities research at Commerzbank

“Looking ahead, the downside risks seem to be diminishing, and overall we feel that the big shocks we’ve seen over the last two or three years are done…” —Marc Elliott, Investec

“The mainstream narrative on gold is changing, indicating a possible bottom.” —Bron Suchecki, Perth Mint

“Orthodox investments are working on a cyclical peak, as precious metals are working on a cyclical bottom. The big pattern could be fully reversed by February-March, with gold becoming one of the best-performing sectors through the rest of 2014. The advice is to seriously reduce exposure in stocks and bonds and get fully invested in the precious metals sector. This should be completed in the first quarter.” —Bob Hoye, Institutional Advisors

I’m telling you, you’ve seen the bottom of the gold market,” he told the rapt audience at the conference, offering a bet to the Goldman Sachs analyst who claimed gold is going to $1,000.

The stakes: Whoever loses has to stand on a popular street in downtown Vancouver dressed in women’s underwear.

Tom McClellan, editor of the McClellan Market Report, stated in a recent interview on CNBC: “The commercial traders are at their most bullish stance since the 2001 low, and they usually get proven right. It’s a hugely bullish condition for gold, and I’m expecting a really large rebound.

“The moment we see a major gold producer announce that it’s curtailing production or it’s going out of business,” McClellan continued, “that’ll be the moment we mark the low in gold. I expect to have one of those announcements any minute. We’re getting down to the production price of gold right now, and they won’t continue producing gold at that level for very long.”

Are they just guessing? To answer that, first consider the historical context of this bear market—it’s getting very long in the tooth:

  • The current correction in gold stocks is the fourth longest since 1879. The decline of 66% ranks in the top 10 of recorded history.
  • In silver, only two corrections have lasted longer—the ones that ended in 1936 and 1983.

Some technical analysts have pointed to positive chart formations, most notably the powerful “double bottom” that can portend a strong upward move. Based on intraday prices…

  • Gold formed a double bottom last year, hitting $1,180.64 on June 28 and $1,182.60 on December 31, a convincing six-month span.
  • Silver formed a higher low: $18.20 on June 28 vs. $18.72 on December 31, a bullish development.
  • Gold stocks (XAU) formed a slightly lower low: $82.29 on June 26 vs. $79.73 December 19, 2103, a difference of 3.2%. However, as our friend Dominick Graziano, who successfully helped us earn doubles on three GLD puts last year, recently pointed out…
  • The TSX Venture Index, where most junior mining stocks trade, has stayed above its June low. In fact, it recently soared above both the 50-day and 40-week moving averages for the first time since 2011.

Meanwhile, Goldcorp (GG) sent a huge bullish signal to the market earlier this month. It decided to pounce on the opportunities available right now, launching a takeover bid of Osisko Mining for $2.6 billion. The company wouldn’t be buying now if it thought gold was headed to $1,000.

As Dennis Gartman, editor and publisher of The Gartman Letter, says, “It’s time to be quietly bullish.”

The smart money, like resource billionaire Rick Rule, is not just quietly bullish, though—they are actively buying top-quality junior mining stocks at bargain-basement prices to make a killing when prices rise.

To make sure that you can invest right alongside them, we decided to host a sequel to our 2013 Downturn Millionaires event, titled Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market.

Back then, we made a strong case for this once-in-a-generation opportunity—but it was still undetermined when the bottom would be in. It looks like that time is now very near, and we believe it’s time to act.

On Wednesday, February 5, at 2 p.m. EST, resource legends Frank Giustra, Doug Casey, Rick Rule, and Ross Beaty, investment gurus John Mauldin and Porter Stansberry, and Casey Research resource experts Louis James and Marin Katusa will present the evidence and discuss the possibilities for life-changing gains for investors with the cash and courage to grab this bull by the horns.

How do we know the absolute bottom is in? I’ll answer that with a quote from a recent Mineweb interview with mining giant Rob McEwen, former chairman and CEO of Goldcorp:

“I’d say we’re either at or extremely close to the bottom, and as an investor I’m not prepared to wait to see if the bottom’s there because it’s very hard to pick it. Because … if you’re not taking advantage of it right now, you’re going to miss a big part of the move. And when you look at the distance these stocks have to travel to get to their old highs, there’s some wonderful numbers in terms of performance that I think we’re going to see.”

Granted, these voices are still in the minority—but that’s what makes this opportunity wonderfully contrarian. After all, once “Buy gold stocks” is investor consensus, we’ll be approaching the time to sell.

Our Upturn Millionaires experts believe that our patience is about to be rewarded. And when that happens, gold stocks will be easy doubles—and the best juniors potential ten-baggers.

Don’t miss the free Upturn Millionaires video event—register here to save your seat. (Even if you don’t have time to watch the premiere, register anyway to receive a video recording of the event.)






Moldova holds rate, balances risk of inflation vs deflation

    Moldova’s central bank maintained its basic policy rate at 3.5 percent, along with its other main rates, saying monetary policy continues to be affected by the complex balance of the risk of inflation and the risk of deflation.
    The National Bank of Moldova, which last cut its rate by 100 basis points in April 2013, said the disinflationary pressure is arising from low aggregate demand and a depreciation of the currencies of its trading partners while the recovery of European economies and a sharp rise in food prices could offset this pressure.
    The bank said its board had approved the first inflation report of 2014, which will be presented on Feb. 6, in which it forecasts inflation in 2014 and 2015 within the central bank’s target range of 5.0 percent, plus/minus 1.5 percentage points.
    Moldova’s inflation rate rose to 5.2 percent in December, up from 4.9 percent, the central bank said, adding that inflation has remained within the bank’s range for the last 23 months.
    Moldova’s Gross Domestic Product grew by an annual 12.9 percent in the third quarter, up from a growth rate of 6.1 percent in the second quarter, mainly due to a significant increase in the value of agricultural products after a year of drought, which resulted in higher exports and a modest rise in imports.

Outside the Box: Hoisington Investment Management: Quarterly Review and Outlook Fourth Quarter 2013

By John Mauldin

Last week Greg Weldon made the case for rising interest rates on US treasuries. This week Lacy Hunt offers us the case for a continued low-interest-rate environment for long-term treasuries. This is one of the most fascinating tugs-of-war in the investment world today. I’ve made the argument that we are in a deflationary deleveraging world for quite some time to come, or at least until the velocity of money turns around. Lacy makes that point, too, and offers some insights into the velocity of money. This is a fascinating Outside the Box, and I won’t spoil it by stealing any more of Lacy’s thunder.

I write from a sunny, if cold, Dallas. The thermostat has been a topic of conversation in my apartment lately, and not just because we need to keep turning it up. By now, the entire world knows that Google bought the thermostat company Nest for $3.2 billion, a good 50% more than the valuation Nest was trying to raise money on just a month earlier. I was rather surprised at the price, but I was also surprised that Google paid $1.65 billion for YouTube. Now, six years later, the YouTube franchise produced almost $6 billion in revenues last year. Clearly, the founders of Google saw something that much of the world did not see at the time. My suspicion is that Nest will end up ranking in the same category of return on investment for Google.

I have installed the cool new Nest thermostats in my new apartment. Having bought and installed thermostats on my own for various homes in the past, I was thoroughly surprised at the value of the Nest thermostat. Just a few years ago it would’ve cost some three to four times more to buy the same functionality that the Nest thermostat has. And this little toy does so much more. It actually adjusts itself to my personal habits and preferences and allows me to change everything from my iPad when I go to bed in the evening or get up in the morning, with a thoroughly programmable slate of settings. It even senses when I come close to it. It is just one element in what will soon be the Internet of Things that Cisco CEO John Chambers says will rapidly come to be worth $20 trillion.

I’m enjoying all the new technology that we’ve installed in the apartment, and we’ve designed and wired it to be able to adapt to what we think will be the direction of further change. I’m just hoping I don’t have to buy antivirus software for my oven.

Have a great week.

Your thinking about mortgage interest rates analyst,

John Mauldin, Editor
Outside the Box
[email protected]

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Hoisington Investment Management – Quarterly Review and Outlook – Fourth Quarter 2013

In The Theory of Interest, Irving Fisher, who Nobel Laureate Milton Friedman called America’s greatest economist, created the Fisher equation, which states the nominal bond yield is equal to the real yield plus expected inflation. It serves as the pillar of macroeconomics and as the foundational relationship of the bond market. It has been reconfirmed many times by scholarly examination and by the sheer force of historical experience. Examining periods of both low and high inflation offers insight into how each variable in the Fisher equation affects the outcome.

From 1871 to 1948, a period of relatively low inflation, the Treasury bond yield averaged 2.9%, with the inflation rate 1.0% and the real yield 1.9%. From 1948 to 1989, a period of higher inflation, the Treasury bond yield increased to 6.0%, inflation jumped to 4.3% on average, but the real yield remained close to historical levels at 1.7% (Chart 1). In more recent times, the inflation rate has changed, but the real rate has remained close to historical averages. The significant point is that while average inflation and bond yields were volatile, the average real yield was far more stable. Over these longer stretches the average real yield was never far from the post 1871 average of 2.2%. Thus, over long periods of time, bond yields fluctuated in response to rising and falling inflation. However, the real bond yield steadily reverted to its mean indicating that inflation was the driving force in determining the bond yield over time.


A host of different factors caused inflation to vary in the aforementioned periods, but two points of significance are identifiable. First, the seventy-year plus span between 1871 and 1948 (excluding the World War years) was an extended global market era. It began about the time of uninterrupted transcontinental railroad travel and the completion of the Suez Canal and resulted in a period of rapidly expanding global trade. By 1871, 10% of U.S. railroad traffic carried goods that were traded globally. This era produced increasing returns to scale and minimized price pressures. Second, the 1871-1948 period encompassed two episodes of high indebtedness: the 1870s and then the 1920s until the mid-to-late 1940s. Both severely destabilized economic activity and produced minimal inflation, which in turn led to bond yields that eventually reached slightly less than 2%.

From 1871 to 1948, there were two, twenty-year periods when the total return on long- term Treasury bonds exceeded the total return on the S&P 500: one from the 1870s to the 1890s and another from 1928 to 1948. Additionally, the traditional vibrancy in demographic trends in the United States ended during the 1930s as both the birth rate and total increase in population slowed dramatically.

The period from 1948 to 1989 differs markedly. By 1948, a global market did not exist, and the excessive indebtedness of the 1920-1930s had been eliminated. In the late 1940s, the Iron and Bamboo Curtains imposed by Russia and China removed roughly 50% of the world’s population from global trade, reducing economies of scale. During the war years, from 1933 to 1948, the U.S. ratio of public and private debt to GDP dropped from 295% to 139%, as the personal saving rate jumped from below zero to 28% (Chart 2). With normal and sustainable debt levels the U.S. entered the post-war boom, a period of rapidly rising prosperity that produced greater returns in the S&P 500 than on long-term Treasury bonds. Additionally, the abysmal demographics of the 1930s gave way to the post-war baby boom as households became more positive about their economic prospects.

Today, conditions resemble the 1871-1948 period. Global trade is once again less inhibited and public and private debt is high and rising. The saving rate is also greatly depressed. In this modern era of high indebtedness, there have been long periods of negative risk premium which have lasted over a decade. Demographics have also soured. The birth rate in 2013 fell to the lowest level on record, and the population increase was the slowest since the depression era year of 1937. Thus, fundamental conditions are now conducive for an inflation rate averaging 1% or less. Based on the Fisher equation, long-term bond yields should be comfortable trading at 3% or lower.

The global inflation rate is influenced by many factors, but the current bout of low inflation and the insufficiency of demand are both symptoms of extreme over-indebtedness. Weakness in prices is evident in various price indices. Over the twelve months ending in November, the price of goods in the CPI actually decreased 0.5%, while the more accurately measured durable and nondurable components of the U.S. personal consumption deflator fell by 2.0% and 0.6%, respectively. Prices of imported goods fell 1.5% over the same period; excluding oil the decline was nearly as large. Facing weak domestic demand, foreign producers cut prices on goods headed toward the U.S. market, and this forced domestic producers to match those lower prices.

A lack of pricing power is likely to continue in 2014. First, the global economy continues to incur more indebtedness. Both public and private debt in the major economies of the world continue to move further above the levels that create a sustained negative impact on economic activity. Second, monetary conditions moved in the wrong direction last year, partially as a result of misguided policy efforts at quantitative manipulation of reserves. Third, although the sequester of government expenditures will be less in 2014 than in 2013, fiscal policy in the broadest sense is not supportive of economic growth.


Academic research has shown that a public and private debt to GDP ratio above the range of 260-275% has a depressing impact on economic growth. In 2000 the U.S. debt level exceeded this range. Since then, the bond yield has averaged 4.6%, with inflation 2.1% and the real yield 2.5%. By comparing growth and debt figures prior to 2000 with those afterward, the magnitude of the problem and likelihood of its persistence can be assessed. From 1871 to 1999, private and public debt averaged less than 165% of GDP (well below the 260-275% critical level), and the trend growth in real GDP was 3.8%. From 2000 through 2013, growth has faltered to just 1.9%. Based on the latest 2013 figures, total private and public debt amounted to $58.2 trillion or 344% of GDP (Chart 3). If the debt to GDP ratio were currently the same as the average from 1871 to 1999, total debt should only amount to $30.5 trillion, or almost half of the existing level. The debt to GDP ratio declined since peaking in 2009 but not sufficiently to re-enter the normal range. Moreover, the ratio resumed its upward trend in 2013. Thus, the U.S. appears to be following the Japanese example of trying to cure an indebtedness problem by accumulating more debt.

Scholarly research conducted in the U.S. and Europe over the past three years indicates that existing levels of government debt relative to GDP have reached the point that historically have produced a deleterious effect on economic growth. In the past this effect has lasted two decades or longer. As termed by European researchers, the current levels have reached the “non-linear zone”. This means that the negative effects on growth are likely to intensify as this debt ratio moves higher. Ignoring this research is ill advised, especially since the debt levels are advancing. Although the U.S. budget deficit was smaller last year, the more critical debt ratio continued to rise.

According to the Organization for Economic Cooperation and Development (OECD), General U.S. Government Gross Financial Liabilities as a percent of GDP reached 104.1% in 2013, the highest level since the early 1950s (Table 1). (Gross, rather than net, government debt is the appropriate measure; netting out the government debt held in other government accounts is not appropriate since the social insurance trusts have far greater liabilities than they have government securities to fund those future commitments.) By the end of 2015 the OECD projects this figure to jump to 106.5%. Over the next twenty-five years the Congressional Budget Office projects government debt to GDP to move dramatically higher.

Since European fiscal policies mirror those in the U.S., it is not surprising that growth prospects there remain dismal. According to the OECD, General Government Gross Financial Liabilities in the Euro area reached 106.4% of GDP in 2013, up from 95.6% in 2011, an even faster rise than in the United States (Table 1). New research shows that the world average of total public debt, expressed as a percent of global GDP, is approximating its highest level since 1826 (IMF Working Paper WP/13/266, “Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten”, December 2013, by Carmen M. Reinhart and Kenneth S. Rogoff). Private debt to GDP in the Euro currency zone and the UK (and interestingly, in Japan) are all higher than in the U.S. and even further above the levels that research has identified as being detrimental to growth.

Monetary Conditions

As discussed in our last quarterly letter, three academic papers presented at the Jackson Hole conference determined that the present approach of quantitative easing by the Federal Reserve has actually slowed economic activity. Three considerations – real interest rates, the money multiplier and the velocity of money – indicate that monetary policy is working against economic growth.

First, monetary policy works primarily through price effects. The level of real interest rates determines the price of credit. In 2013, long-term Treasury bond yields rose 100 basis points, or 1.0%. The inflation rate, measured by the year-over-year change in the Fed’s targeted core personal consumption expenditure deflator, dropped 50 basis points. This pushed the real yield on the thirty-year bond to nearly 3% at the close of 2013. Thus, real yields currently carry a significant premium to the long-term average. The effects of this rising price of credit are visible in the high frequency housing data. Pending and existing home sales in November were below year ago levels. Mortgage applications for home purchases in December were at their lowest level in more than a decade.

Second, the money multiplier, which reflects the conversion of bank reserves into deposits (money) by the banking system, fell to a new 100 year low of less than 3 in late December 2013. This is an indication that the Fed’s Large Scale Asset Purchases (LSAP) are not currently producing real, tangible economic effects and are not likely to in the future. Since 1913, $1 of high-powered money has, on average, resulted in an increase of $8.20 of M2 (Chart 4). The current multiplier constitutes an unprecedented historical gap. To begin the process of accelerating economic growth from a monetary perspective, an increase in the multiplier would be necessary. The best indicator of whether this process is working would be the expansion of bank credit, which includes bank investments and bank loans. Unfortunately, the expansion of total bank credit is only 2.0% higher than a year ago, and bank loans have expanded by only 1.9%. In spite of the Fed’s massive LSAP, M2 expanded at a slightly slower pace in the latest twelve months than it did in 2012.

Third, the even more important velocity of money (V) rejects the argument that monetary policies are gaining traction. Velocity, or the speed at which money turns over, links M2 to the level of nominal economic activity. With the money supply expanding at 5.6% in the latest year, it would be reasonable to expect the same growth rate in nominal GDP if V were stable. Unfortunately, since 1997 velocity has been falling, and in the last twelve months it has dropped by 3% to 1.57, the lowest level in six decades (Chart 4). While velocity is influenced by a myriad of factors, the rate of change of financial innovation and lending for productive purposes affect its direction. If debt generates an income stream that repays principal and interest and creates other activities, it will tend to expand economic activity and cause V to rise. Student, auto and other loans for consumption (which represent the bulk of the increase in consumer credit in 2013) do not meet the necessary criteria, so debt is merely an acceleration of future consumption. This will tend to inhibit the borrower’s ability to increase consumption in the future. Further, new regulations on our financial industries are discouraging financial innovation, and this will bring further downward pressure on velocity. In 2014, if velocity continues to erode at a 3% pace and money supply continues to grow around 6%, it is reasonable to anticipate that nominal GDP will expand at about a 3% growth rate.

Fiscal Issues

Based on scholarly research, only half of the negative economic impact emanating from the $275 billion 2013 tax increase has been registered. Due to the recognition and implementation lags, the remaining drag on growth from the tax increase will occur this year and again in 2015. Carrying a negative multiplier of 2 to 3, this impact far outweighs the sequester (which is expected to be slightly less in 2014 than in 2013) since the multiplier for government expenditures is zero, if not slightly negative.

An important fiscal policy event for 2014 is the Affordable Care Act (ACA). Healthcare is the largest U.S. industry, comprising 17.2% of the economy in 2012. This is more than twice as large as residential construction, oil and gas exploration and the automotive sectors combined. The scope and scale of ACA may divert energy and activity away from more productive endeavors. The ACA’s employer mandate was waived in 2013, as were similar obligations of labor unions and others, but these waivers expire this year. Firms may have to cut some full time employees to part time, reduce total employment or cut benefits since they lack pricing power to cover these costs. As such, this will place the burden of adjustment on consumers. On January 1, health insurance premiums that target small businesses and individuals were raised. These groups create jobs and are vital for growth, thus even though the amount of the increase is small, this is still a net drag for economic growth. While the ACA is an unprecedented event for which no historical point of comparison exists, history does confirm that substantial increases in government regulation are not a springboard for innovation, the lifeblood of economic activity.

The slow nominal growth rate anticipated for 2014 should continue to put downward pressure on the inflation rate as the insufficiency of demand continues to create highly competitive markets. With slower inflation, lower long-term interest rates are a probable outcome.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

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Business Development Companies

By Andrey Dashkov

Business Development Companies (BDCs) are publicly traded private debt and equity funds. I know that description isn’t terribly sexy, but keep reading and you’ll find there’s a lot to be excited about.

BDCs provide financing to firms too small to seek traditional bank financing or to do an IPO, but at the same time are too advanced to interest the earliest-stage venture capitalist. These companies are often near or at profitability and just need extra cash to reach the next milestone. Filling this void, BDCs provide funds to target companies in exchange for interest payments and/or an equity stake.

BDCs earn their living by lending at interest rates higher than those at which they borrow. Conceptually, they act like banks or bond funds, but with access to yields unlike any you’ll see from a traditional bond fund. The interest rate spread—meaning the difference between their capital costs and interest they charge their clients—is a major component of their business.

Oftentimes, a BDC will increase its dividend when market interest rates have not changed. Like a bank, the more loans it has in force, the more it profits. Increasing its dividend payout will generally have a very positive effect on its share price.

Unlike banks or many other traditional financial institutions, however, BDCs are structured to pay out more than 90% of their net profits to the shareholders. In return, BDCs don’t pay any income tax. In essence, their profits flow through to the owners. Many investors like to own BDCs in an IRA to create tax-deferred or tax-free income. The opportunity to use them for tax planning purposes, access to diversified early-stage financing, and the impressive dividend yields they deliver make them a perfect fit for the Bulletproof Income strategy we employ at Miller’s Money Forever.

The Clients

As a business model, BDCs emerged in response to a particular need: early-stage companies needed funding but couldn’t do it publicly due to their small size. At the same time, these companies didn’t match the investment criteria of so-called angel investors or venture capital providers. Enter the Business Development Company.

BDC teams, through expertise and connections, select the most promising companies in their fields and provide funds in return for a debt or equity stake, expecting gains from a potential acquisition scenario and a flow of interest payments in the meantime. The ability to selectively lend money to the right startup companies is paramount. It makes little difference how much interest they charge if the client defaults on the loan.

With limited financing options, BDCs’ clients may incur strict terms regarding their debt arrangements. The debt often comes with a high interest rate, has senior-level status, and is often accompanied by deal sweeteners like warrants which add to the upside potential for those with a stake in the borrowing company.

In return for these stringent terms, the borrower can use the funds to:

•Increase its cash reserve for added security;

•Accelerate product development;

•Hire staff and purchase licenses necessary to advance R&D, etc.

•Invest in property, plant, and equipment to produce its product and bring it to market.

Turning to a BDC for funds allows a company to finance its development and minimize dilution of equity investors while reaching key value-adding milestones in the process.

What’s in It for Investors?

In addition to the unique opportunity to access early-stage financing, we like BDCs for their dividend policy and high yield. The Investment Act of 1940 requires vehicles such as BDCs to pay out a minimum of 90% of their earnings. In practice, they tend to pay out more than that, plus their short-term capital gains.

This often results in a high yield. Yields of 7-12% are common, which makes this vehicle unique in today’s low-yield environment. The risk is minimized by diversification—like a good bond fund, they spread their assets over many sectors. This rational approach and the resulting income make the right BDC(s) a great addition to our Bulletproof Income strategy.

BDCs and the Bulletproof Income Strategy

In short, BDCs serve our strategy by:

  • Providing inflation protection in the form of high yields and dividend growth;
  • Limiting our exposure to interest-rate risk, thereby adding a level of security (some BDCs borrow funds at variable rates, but not the ones we like);
  • Maintaining low leverage, which BDCs are legally required to do;
  • Distributing the vast majority of their income to shareholders, thereby creating an immediate link between the company’s operating success and the shareholders’ wellbeing… in other words, to keep their shareholders happy, BDCs have to perform well.

How Should You Pick a BDC?

Not every BDC out there qualifies as a sound investment. Here’s a list of qualities that make a BDC attractive.

  • Dividend distributions come from earnings. This may sound like common sense, but it’s worth reiterating. A successful BDC should generate enough quarterly income to pay off its dividend obligations. If it doesn’t, it will have to go to the market for funds and either issue equity or borrow—or deplete cash reserves it would otherwise use to fund future investments. An equity issuance would result in share dilution; debt would increase leverage with no imminent potential to generate gains; and a lower cash reserve is no good either. We prefer stocks that balance their commitments to the shareholders with a long-term growth strategy.
  • The dividends are growing. This is another characteristic of a solid income pick, BDC or otherwise. Ideally, the dividend growth would outpace inflation, in addition to the yield itself being higher than the official CPI numbers. This growth can come from increasing the interest rate spread and also having more loans on the books.
  • Yields should be realistic. We’d be cautious about a BDC that pays more than 12% of its income in dividends. Remember, gains come from the interest it receives from the borrowers. Higher interest indicates higher-risk debt on a BDC’s balance sheet, which should be monitored regularly.
  • Fixed-rate liabilities are preferred. We need our BDC to be able to cover its obligations if interest rates rise. Fixed rates are more predictable than floating rates; we like the more conservative approach.
  • Their betas should be (way) below 1. We don’t want our investment to move together with the broad market or be too interest-rate sensitive. Keeping our betas as low as possible provides additional opportunities to reduce risk, which is a critical part of our strategy.
  • They are diversified across many sectors. A BDC that has 100 tech companies in its portfolio is not as well diversified as a one with 50 firms scattered across a dozen sectors, including aerospace, defense, packaging, pharmaceuticals, and others. Review a company’s SEC filings to see how many baskets its eggs are in.


Right now, BDCs look very interesting to income-seeking investors. They provide excellent yields, diversification opportunities, and access to early-stage companies that previously only institutions enjoyed. They also fit in with Miller Money Forever‘s Bulletproof Income strategy, the purpose of which is to provide seniors and savers with real returns, while offering maximum safety and diversification.

Catching a peek our Bulletproof portfolio is risk-free if you try today. Access it now by subscribing to Miller’s Money Forever, with a 90-day money-back guarantee. If you don’t like it, simply return the subscription within those first three months and we’ll refund your payment, no questions asked. And the knowledge you gain in those months will be yours to keep forever.


See original article: Business Development Companies





Iraqi Government Threatens Action Against Kurds as Oil Exports Set to Begin


Iraq’s Deputy Prime Minister for Energy Affairs firmly stated the central government will take action, “including fiscal measures,” if Kurdistan begins exporting oil without coming to an agreement with Baghdad. The remarks came as Minister Hussain al-Shahristani spoke at a conference in London on January 28. The Kurdish Regional Government (KRG) announced in mid-January that oil had begun to flow through a pipeline towards Turkey and that exports would officially start by the end of the month.

Shahristani argues that Kurdish oil must be exported through the State Oil Marketing Organization (SOMO), a government-owned entity responsible for marketing Iraq’s oil. He reiterated that oil extracted from any region of Iraq, including Kurdistan, is the “property of the Iraqi people,” meaning that it is owned by the central government.

The tough statement follows similar threats from other Iraqi government officials in recent weeks as the Kurds prepare to export oil to Turkey. On January 17 Iraqi Oil Minister Abdul Kareem Luaibi said Iraq will take legal steps to punish Turkey, Kurdistan, and the international oil companies involved in exporting oil. And on January 12 Iraqi Prime Minister Nuri al-Maliki promised to cut KRG’s share of the national budget if it begins exports without approval from the central government.

The conflict escalated when Baghdad followed through on Maliki’s threat. It released a draft national budget on January 15 that completely cut off funding for Kurdistan, a move meant to put pressure on the KRG to heed the central government’s demands. Kurdish ministers walked out of the cabinet session when the budget was released.

The central government has been angling to prevent Kurdistan from unilaterally exporting oil to Turkey, but that does not mean Baghdad doesn’t want Kurdish oil to flow. Indeed, according to the budget, the central government is requiring 400,000 barrels of oil from Kurdistan to be exported, and any shortfall will be made up by deducting from Kurdistan’s share of national revenues. Kurdistan is entitled to a 17% share of revenues collected as part of Iraq’s revenue sharing arrangement. The KRG argues that those funds are often not delivered.

Yet it also appears that Kurdistan is pushing for much more than merely to export oil on its own terms. Ali Balu, a former head of Iraqi parliament’s oil and gas committee recently stated that within a few years “Kurdistan is going to be rid of its status as a region within Iraq,” according to an article in Rudaw, a Kurdish news web site. Balu went on, “a plan is underway for Kurdistan to be an independent state in the near future.”

Exporting oil from Kurdistan is a key step in the KRG’s plan to eventually declare independence from Iraq. Clearly, Baghdad is not oblivious to this fact, seeing which way the winds are blowing. This is why the central government is so adamant about centralizing the oil export process. Both sides may be unwilling to give in, but the situation appears to be coming to a head, as Kurdistan expects to initiate exports within days.


By. Nick Cunningham of




Fiji holds rate, economy set to top 3% growth in 2014

    Fiji’s central bank maintained its current accommodative policy stance by keeping its Overnight Policy Rate (OPR) steady at 0.5 percent and said domestic demand continues to be buoyant so the economy in 2014 should surpass the pre-budget forecast of 3.0 percent growth.
    The Reserve Bank of Fiji, which has maintained rates since December 2011, also said economic activity in 2013 was broadly positive and the economy should achieve the forecast 3.6 percent growth.
    In October the central bank revised upwards its 2013 growth forecast to 3.6 percent and its 2014 growth forecast to 3.0 percent.
    Domestic demand in Fiji is being supported by improving labour market conditions, an expansionary government budget, record low commercial bank lending rates and a favorable business environment.
    Barry Whiteside, governor of the central bank, said in a statement that partial indicators for investment showed that the pace of investment strengthened last year and will remain above 25 percent of Gross Domestic Product this year, adding that this was reflected in rising domestic credit growth, which had accelerated to 14.3 percent in December.

    The central bank’s policy objectives also remained intact, Whiteside said, with Fiji’s foreign reserves at US$ 1.77 billion as of Jan. 29, enough for 4.7 months of imports, and inflation is expected to trend toward 3.0 percent by year-end.
    In November Fiji’s inflation rate rose marginally to 3.4 percent from 3.3 percent in October, mainly  due to higher prices of food and non-alcoholic beverages.

USDCAD Elliott Wave Analysis: Wave 3 Near Top

USDCAD is moving sharply to the upside for the last couple of weeks since pair managed to move above 1.0660 resistance zone, back from 2011. Sharp and big move in short period of time like this one on USDCAD usually occurs in the middle of wave three of an impulsive price action. As such we adjusted the wave count and around now tracking an incomplete five wave recovery, either in wave (C) or (3). In both cases we expect higher levels, up to 1.1600/1.1700 as long as 1.0600 level holds.

USDCAD Weekly Elliott Wave Analysis


USDCAD seems to be trading in the middle of an impulsive red wave 3) from a weekly chart that needs to be made by five subwaves. That’s still not the case from 1.0177 swing region so we expect to see even higher prices in 2014. At the moment we are tracking a subwave 3 that may stop around 1.1200 figure.

USDCAD Daily Elliott Wave Analysis

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Crude Oil Prices Climbs on Stockpiles Report

By HY Markets Forex Blog

Crude oil prices advanced following the report released by the EIA, which showed that inventories climbed higher than expected last week. West Texas Intermediate (WTI) rose , trimming the biggest monthly fall for January since 2010 as market participants focus on the release of the US GDP later in the day.

Meanwhile following the Federal Reserve’s two day policy meeting, fed officials decided to reduce its bond buying program by an additional $10 billion.

WTI crude oil for March delivery added 0.56% higher, trading at $97.91 per barrel on the New York Mercantile Exchange as of 9:59a, GMT. At the same time Brent for March settlement rose 0.35%, standing at $108.23 per barrel on the ICE Futures Europe exchange. The European benchmark crude was at a premium of $10.25 to WTI on the ICE exchange.

US Crude Inventories

Data from the Energy Information Administration (EIA) showed that crude inventories climbed by 6.4 million barrels in the week ended January 24. The figures surpassed analysts forecast of a rise by 2.15 million barrels.

The same data also revealed that the demand for distillates; which includes heating oil, climbed to the highest level in nearly six years. Meanwhile, Cushing crude stockpiles reported a 237,000 rise, compared with the 722,000 rise seen in the previous week.

The American Petroleum Institute (API) report reveled oil inventories added 4.7 million barrels in the week ending January 24, compared to analysts forecast of an additional 2.3 million barrels.

US GDP in Spotlight

Market participants are expecting to see an upbeat gross domestic product (GDP) report which is forecasted to show a 3.2% annualized rise. The upbeat reading is based on approximately 45% of the whole quarter data.

On Wednesday, The Federal Open Market Committee (FOMC) concluded its two-day meeting by deciding to reduce the central bank’s monthly purchases of treasuries and mortgage-backed securities (MBS) by an additional $5 billion each.

“Growth in economic activity picked up in recent quarters,” The statement from the Federal Reserve stated. “Household spending and business fixed investment advanced more quickly in recent months.”


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Australian Dollar Drops From Previous Gains

By HY Markets Forex Blog

The Australian dollar rebounded from its recent gains on Thursday. The Australian currency was dragged lower by the Federal Reserve’s (Fed) decision to reduce its monthly bond purchases and China’s weak Purchasing Managers’ Index (PMI).

Following the Federal Reserve’s two day policy meeting, Fed policymakers concluded the meeting by deciding to reduce the central bank’s stimulus further by $10 billion to $65 billion, showing signs that the world’s largest economy is expanding despite the recent disappointing non-farm payrolls data for the previous month.

The Federal Reserve’s decision to trim its monthly asset purchases further slightly strengthened the greenback.

The Australian dollar weakened by 30 pips to $0.8730 following the Fed’s decision, while the downbeat Chinese PMI dragged the aussie 20 pips lower to $0.8709.

China Purchasing Managers’ Index (PMI)

The final PMI for January weakened, standing at 49.5, dropping from the previous reading of 49.6 seen last week. Any reading above 50 indicated the rise in manufacturing activity, while any reading below 50 points a contraction.

Australia’s Housing Prices

Australia Housing Industry Association posted a rise of 14.4% in home sales last year, indicating an expansion for the first time since 2008. Month-on-month sales declined 0.4% in December, dropping from the previous rise of 7.5% seen in the previous month.

Fed-Tapering Decision

The Federal Open Market Committee (FOMC) concluded its two-day meeting by deciding to reduce the central bank’s monthly purchases of treasuries and mortgage-backed securities (MBS) by an additional $5 billion.

“Growth in economic activity picked up in recent quarters,” The statement from the Federal Reserve stated. “Household spending and business fixed investment advanced more quickly in recent months.”

Fed members concluded to reduce the monthly asset purchases despite the weak employment report which came in below analyst forecast. The unemployment rate dropped to 6.7% in December, the lowest since October 2008.


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