The InvestMentor

November 10, 1997

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Bad mouthing U.S. stocks’ prospects for the next three to five years has made me unpopular, all year long. That’s O.K. Being diversified in other global markets has been, to this point, unrewarding. That’s O.K. also. Why? Because while early, this philosophy will start to catch on with the overly-optimistic U.S. stockholder, and soon. The warning is, and continues to be, that investors will not be rewarded in our market the way they’ve become accustomed. My point is supported by a few hard facts:

The U.S. market has been earning double its average rate of return for the last seven years. Since all aspects of economics and markets are ultimately tied to a cycle, our market is more likely to see negative or single-digit returns over the next seven years, than a repeat of the last seven.

Stocks are propped up by the three-legged bar stool: foreign money; 401(k) money; and performance-chasers. As stocks disappoint, each leg will get kicked out from underneath.

Lots of folks talking about "New Paradigms" and how, "this time it’s different."

The New Paradigmers believe that the unique economic and technological environment that we are enjoying will somehow be responsible for a new, permanently higher level of productivity, growth, and stock market returns for eternity. Every time I hear this argument I check to make sure my wallet’s still in my pants. Also, there have been a number of surveys recently that have shown that the average American expects the U.S. market to return 25% per year over the next 10 years. That gives me a full body shiver when I hear it. I fully acknowledge the scope and beauty of our economy. But so has the market. Stocks are as close to all-knowing as it gets, and they fully reflect even the rosiest of scenarios for America. Absent the simultaneous death of Hussein/Khadafy/Castro, patching of the Ozone layer, a cure for low back pain, and breeding cows to produce beer, it’s hard to see what can fuel the next surge upward in stocks prices.

But let’s get back to the tumultuous, volatile markets of today. When you’re feeling sea sick, the best way to avoid up-chucking is to focus on the horizon. This is supposed to give you a sense of stability as the waves toss you to and fro. What a great remedy for the nausea that stock investors have felt lately. For the time being, you’re best served by holding on and focusing on the future, off in the distance. Things will improve, I assure you. The worst thing you can do is to allow the market to change your investment policy, or sell stocks that are down, but not out. If you don’t have several years to ride out the storm, you shouldn’t be in stocks to begin with. Previously, we’ve gone over buffers I use. These including REITs, bonds, cash, global stocks and gold stocks. They all still apply and always have a place in your portfolio. It’s still not a buyers’ market, in any country. Of the two warnings I gave regarding Asia, one’s OK, the other isn’t. The Hong Kong dollar is holding its peg to the U.S. dollar, but the Japanese market is getting the stuffing beat out of it. Too much more deterioration is a bad, bad sign. As I’ve said, new things to watch include deflationary pressure, strong U.S. bonds, and sliding global stock markets. In the meantime, don’t expect too much comfort in the short term, and be ready to pass the sickness bag to the New Paradigmers.

Stock of the Week : BioChem Pharma (Canada)

"If you buy a stock just off this letter, God help you. Don’t mistake ideas for instructions."

Poor Canada. Our quasi-socialist neighbor to the north can’t get out from under the shadow of their largest trading partner. Nor do they ever get the credit they deserve (more on that in a minute). Financially and economically speaking, they are smaller than California. They are roughly 1/10th of the size of the U.S. Their GDP is 1/10th of ours and their stock market total capitalization is 1/10th of ours. Most folks don’t think of Canada when they think about diversifying with foreign stocks—but they should. While it’s true that the Canadian market tends to trade closely with ours, there are times of divergence. In fact their correlation is only .46 ("stat heads" know what this means). But when you look at Canadian stocks, you’ll be disappointed with the depth of opportunities.

In spite of representing thousands of companies, Canadian equities tend to be concentrated around just a few sectors. Canada occupies a giant geographical turf and thus the county is very natural resource-abundant. In particular, there are a huge number of oil, gas, timber and mineral companies. They also have quite a financial industry, but it’s very bank-heavy. The final part of the know-your-Canada lesson is that you should view the Quebec province as very unique from the rest of Canada. In addition to a heavy French influence that dates back 300+ years, they have a provincial pride that can border on isolationist. Remember when they voted on succession from Canada a couple years ago? It was a close call, but I’m glad there still a part of the country. One reason is that BioChem Pharma is based in Quebec.

When asked, "what’s Canada done for the world?", most people would likely name "Jim Carrey," or "Molson Golden," before "help to stem off the AIDS virus." That’s right. If you don’t know these pharmaceuticals by name, you should: Retrovir, Crixivan, and Epivir. They make up the "AIDS cocktail" that you’ve heard about. Retrovir is a Glaxo drug that used to be known as AZT. Crixivan is a Merck product. Epivir is a drug clinically referred to as lamivudine (lam-IV-yoo-deen) that’s also known as 3TC. (Starting to make sense now?). Lamivudine was discovered by BioChem Pharma. It’s marketed in the U.S. by Glaxo as Epivir. But BioChem does more that just 3TC (also effective in the treatment of hepatitis B). As Canada’s largest biopharmaceutical, they specialize in: therapeutics (3TC), vaccines and diagnostics (Detect-HIV test kits). They earn great net margins (50%), have a solid revenue base ($109 million) and global partnerships. The stock is available on NASDAQ trading around $25 under the symbol BCHE. " Check it out, eh!" (<< Sorry, had to do it).