QE, QE QE!

Quantitative easing, or the vast expansion of the money supply by central banks, has been the hallmark of this decade as troubled governments sought to heal sickly economies.

And so far, it has worked. There is no doubt that the implementation of QE, first by the US, and then by Europe, Japan, and China, staved off another Great Depression.

Assets everywhere loved it!

QE was able to bridge the demographic gap created by the retirement of 80 million baby boomers, which started in 2006 and won?t end until 2022.

The last two times a bulge generation retired, the 1930?s and the 1970s, QE hadn?t been invented yet and the economy and the stock market fell to pieces.

QE is now in its seventh year in some form or another.

The hot button topic discussed among government planners, economists, and investors these days has rapidly become, ?What will happen when QE fails.?

What tools will central banks have when we go into the next recession with interest rates already at zero, or negative? Will the Fed run out of bullets and be powerless to help us out of our misery?

Will stock markets crash?

It turns out that there are quite a few things the government can still do.

Here is how the government can return us to prosperity in the next economic downturn:

1) More QE

Yes you heard me right. If at first you don?t succeed, try, try again. Since the Fed can?t lower interest rates from zero, it will resort to some new tricks.

Most US QE has so far been focused on buying US Treasury notes, bills, and bonds, thus expanding the Fed balance sheet to an unprecedented $3.5 trillion.

During the height of the financial crisis, the Fed expanded its buying to include bank commercial paper and mortgage backed securities, then trading at enormous discounts.

Future QE cycles could include government buying of stocks, corporate bonds, junk bonds, and even commercial real estate in depressed city centers (Detroit).

This is already being done in Japan, where almost the entire outstanding float of government bonds has already been purchased by the Bank of Japan.

Hong Kong did this during the Asian financial crisis, soaking up stock after a precipitous 50% dive, and then reselling it through convertible bonds at a 5% premium. It made a fortune in the process.

Asset prices would soar?. again.

2) Raise the Minimum Wage

The present federal minimum wage is $7.25 an hour, or about $14,500 a year. It is the wage for 4.3% of US workers, and is paid primarily to fast food and other low end service workers. It has not been raised since 2009.

Increasing it from $8 to $13 would have an immediate inflationary effect, something the Fed has been attempting to achieve for years. It would also put money in the pockets of a class of workers who spend 100% of their income, another plus for the economy.

This has already been implemented on the West Coast, in San Francisco, Seattle, and Los Angeles. Sure you may have to pay an extra quarter for a hamburger. But if you?re like me, you probably need one of those like a hole in the head.

3) Increase Government Spending

One of the unique aspects of this recovery is that it has taken place almost devoid of any increases in government spending. Analyze the monthly jobs statistics, as I do, and you find seven years of falling government employment in the face of rising private hiring.

After the initial 2009 $787 billion stimulus package (which got me a fourth bore to the Caldecott Tunnel, thank you very much), there has been virtually nothing. You can lay this at the feet of a gridlocked congress.

However, there is widespread bipartisan support for an infrastructure bank which would rebuild the nation's aging roads and bridges. The need is undisputed.

The American Society of Civil Engineers has found that one of nine bridges is structurally unsound. Water mains burst daily here in drought stricken California.

Another study I saw said that potholes cost $700 in damage per car per year. I am over budget here, as San Francisco Bay Area freeways have eaten two front wheels from my Tesla Model S-1.

The great thing about this approach is that it focuses spending on hiring where structural unemployment is the highest. Conditions might include funding only American made steel used in the projects.

An iteration of this idea is to fund it by permitting the $2 trillion in US corporate profits held overseas to be brought home tax exempt if it were invested in ?infrastructure bonds.?

4) Retire Government Debt

You know that $3.5 trillion in government bonds held by the Fed? What if, instead of holding them to maturity as it plans to do, it gave them back to the government?

This would have the effect of reducing the national debt from $18 trillion to $15.5 trillion, thus freeing up trillions for the above-mentioned spending. Sure, it?s never been done, but so what? Just doing some ?out of the box? thinking here.

The bottom line here is that governments never run out of bullets and always have one more thing they can do to bail out the economy.

And all of the above would be positive for asset prices of every stripe.

Just thought you?d like to know.

What? No More Bullets?

There is not a trader alive who wouldn?t fall down on his knees and thank the Heavens he didn?t get involved in commodities last year.

I AM ONE OF THOSE TRADERS!

It?s not that we were without opportunities. With every downside swoon, we were barraged with claims from brokers, producers, and the Internet that THIS WAS THE BOTTOM AND IT IS TIME TO BUY!

It wasn?t.

So many fingers were chopped off by falling knives that there were enough to man several symphony orchestras, if not armies.

If you want to know who last year?s commodity bulls were they?re easy to find. Their resumes are all over Craig?s List, Linked In, and other head hunting services.

However, the price action last week is making me wonder whether we finally HAVE seen the bottom in commodities.

THIS TIME IT MAY BE DIFFERENT!

Look no further than my February 9 Trade Alert Buy the United States Oil Fund (USO) May, 2016 $8 calls at $1.12 or best. Today, they traded at $1.60, up a blistering 42.86% in just 9 trading days.

I put out this Trade Alert because I believed that oil would bounce hard off of a $26 double bottom. It did. Texas Tea is now trading just short of $32, a nice 23% pop.

Now I am a pretty good trader. But I am not THAT good. The only way to get this kind of instant result is to suddenly pickup a tailwind from a new market or economic force.

That may have been just what happened.

BUT WAIT! THERE?S MORE!

Guess what the top performing sectors in the market are this year?

Energy and commodities, as I predicted in my ?2016 Annual Asset Class Review? (click here).

Single stocks have gone ballistic since the mid-January lows, like Freeport McMoran (FCX) (+129%) and Occidental Petroleum (OXY) (+22%).

Indeed, oil stocks have made it back to their September levels, when oil was trading at $46. Which is underpriced now, oil or energy stocks?

You can see identical action across the commodities space. Railroads (CSX), (UNP), whose primary business is the moving of bulk commodities like oil and coal, are up 19% so far this year.

The foreign exchange market has been confirming these trends. The commodity heavy Loonie (FXC) has picked up 7.35% in 2016, while the Aussie (FXA) has roared up by 6.15%.

Those are humongous one-month moves for currencies.

Even the dreaded PowerShares DB Multi Sector Commodity Trust ETF (DBC) has eked out a 2.6% increase, which has been trading like death for years.

The amazing thing about the entire commodities space is that they are now showing identical fundamentals and price action, possibly for the first time in history.

This is because they all have several things in common.

ALL are now selling for less than the cost of production. That is a guarantee that new production won?t come on line. Bankers for these giant projects won?t finance a negative cash flow deal.

I can almost hear the clock ticking for the next supply shortage. Some long-term thinkers believe we could even see 2011 style upside price spikes by 2021.

There was also a lot of ?reversion to the mean? buying kicking in at the beginning of 2016. Think of this as ?dogs of the Dow? with a turbocharger.

To add Alpha, or outperformance, big institutions are forced to unload last year?s best performing asset classes (technology and biotech stocks) and load up on the worst performing asset ones (oil, commodities).

This year especially, the influence was exacerbated by structurally poor liquidity and high frequency traders. This is where your new volatility is coming from.

Virtually at the hour that all of these things bottomed, a reader called me and asked if this was the final capitulation.

I responded ?I don?t know if this is the final bottom, but this is certainly what final bottom?s look like.?

Adjust you portfolio accordingly.

What? I?m Supposed to BUY it?

Long-term readers of this letter prospered mightily from my addiction to biotech stocks, one of the top performing sectors in the stock market during the first half of last year.

Readers made three round trips in hepatitis C drug developer Gilead Sciences (GILD) in the past four months, adding 5.77% to the value of their portfolios. I believe the company?s blockbuster drug will become the most profitable in history. So do a lot of others.

Longer-term investors bought the Biotech iShares ETF (IBB) on my advice, which gained an impressive 45% last year.

They certainly were getting downright frothy by June.

No less a figure than Federal Reserve governor Janet Yellen has indicated then that she thought valuations in the biotech sector were getting ?substantially stretched.? The Fed doesn?t single out stocks for commentary very often.

?Sell in May and go away,? turned out to be a brilliant strategy in 2015 because it got out of these stocks at all time highs with huge profits.

It was after that when the rot began.

It started when presidential candidate, Hillary Clinton, sent out the Tweet that sank biotech, warning that price controls and international drug competitions would be a high priority in her administration.

Then the bad boy antics of Martin Shkreli were exposed, who raised the price of an AIDS drug, Daraprim overnight by 55 fold. Nothing like focusing a spotlight on a big open sore. Shkreli is now under Federal indictment for operating a Ponzi scheme.

Then Valient (VRX), a target of activist Bill Ackamn, imploded.

The industry has barely had an up day since then.

My favorite, Gilead Sciences suffered a 33% nosedive, while the Biotech IShares ETF (IBB) sank by a gut churning 40%. Favorite Celgene (CELG) gave back 34%.

Is biotech gone for good? Is this once loved sector headed for the dustbin of history to join coal and 3-D printing?

I don?t think so. Far from the truth.

Big institutional investors and hedge funds that had the wisdom to raise cash at the end of 2015 are starting to circle in on this faded beauty, making lists, and taking names. And (GILD), the (IBB), and (CELG) are at the top of those lists. (VRX) isn?t.

Biotech has always been a hedge fund favorite.

That means hot money regularly flows in and out, giving the sector more than double the volatility of the main market. A 10% correction in any other stock is worth at least 25% in biotech. Now is one of the ?out? times.

This also makes biotech stocks great ones to buy on a dip. My last foray into (GILD) occurred after cautious guidance took the shares down a heart stopping 10% in a single day.

This is a great example of how unusually sensitive biotech stocks are to headline risk. I?ve ridden stocks to tremendous heights, watching them pour billions into a single treatment, only to see them crash and burn on failed stage three trials.

That is just the nature of their business. It?s all about ?all or nothing bets.?

Biotech is a high-risk sector that should only be held within a well diversified portfolio. You may notice that in the Mad Hedge Fund Trader?s model trading portfolio I never have more than 10% in biotech at any given time. I figure I could handle a total blow up and lose the whole 10% and still stay in business.

When I speak at conferences, strategy luncheons, and on TV, I tell listeners of my lazy man?s guide to long-term investment. Only follow three sectors, technology, biotech, and cyber security, and ignore the other 97. You?ll save yourself a lot of time reading pointless research.

Biotech currently accounts for a mere 1% of US GDP. It is on its way to 20%, about where big technology is today. That means that a disproportionately large share of earnings growth will spring from biotech over the coming decades.

One way to protect yourself is to stick with the big caps, which are undervalued relative to the sector as a while, and are expected to haul in 20% earnings growth this year.

Many smaller companies are at prices assuming a total certainty of the success of a single drug. The reality is that this only happens about half the time.

If you do go with small caps, I would take a venture capital approach. Buy a dozen with the expectation that many will go under, a coupled do OK, and one goes through the roof. Never put all your eggs in one basket. Or just buy the (IBB) which does this neat trick for you.

It also helps that you have someone with a scientific background making your picks, like myself.

Because drug companies promise such amazing results, like curing cancer, the sector has always been prone to hype and over promotion. I never met a biotech CEO who didn?t believe his company was about to deliver the next panacea, taking his shares up 100-fold, and delivering him a Nobel Prize.

One plus for biotech is that it has unusually strong patent protection, which usually extends out 20 years for new products. There are not a lot of Chinese companies that can imitate their drugs.

That means earnings can be predicted far into the future, and are largely immune from the economic cycle. If you?re sick, you want to get cured, regardless of whether the GDP is growing or shrinking, or whether interest rates are low or high.

And much of this cost is borne by the US government, through Obamacare and Medicare.

Make sure that your investments have plenty of new developments in the pipeline. Expiring patents on past winners with no replacements can spell certain death for a stock price.

I tell my kids that they will never suffer my medical maladies, as everything important will be cured within 20 years.

A century from now, historians will look back on our era and think ?Those poor people. They were so ignorant and helpless. They new nothing about medicine.? Our most modern treatments will appear to them like the application of leaches.

Publicly listed drug companies are now venturing into research fields that were only science fiction when I was in the lab 45 years go. ?Gene editing,? whereby genes can be repaired, edited, and then turned on and off at will, is now becoming a burgeoning new science.

It promises to cure the whole range of human maladies, including heart disease, cancer, obesity, and a whole range of degenerative diseases (including some of mine).

Expect to hear a lot more about TALENs (transcription activator-like effector nucleases) and CRISPR (clustered regular interspaced short palindromic repeats). You heard it here first.

What is truly fascinating is that hybrid computer science/biochemical scientists are now taking algorithms developed by the National Security Agency hackers and using them to decode human DNA. (I hope I?m not speaking too much out of school here).

Gene editing is the natural outcome of the discovery of recombinant DNA technology developed during the 1970?s by Paul Berg, Herbert Boyer, and Stanley Cohen, all early heroes of mine.

Since none were the equity participants of private companies, the initial rewards for the breakthrough were minimal. I remember that one received a new surfboard for his efforts.

Berg went on to found Genentech (GENE) in 1977 and got rich. If I hadn?t gone into the stock market, that is almost certainly where I would have ended up.

How things have changed.

The short answer here is that biotech does have further to run. A lot further.

The rate of innovation of biotechnology is accelerating so fast that it will continue to spew out fantastic investment opportunities for the rest of our lives.

So expect to receive many more Trade Alerts
in this area in the years to come.

But it is definitely an ?E? ticket ride. So fasten your seatbelt on your path to riches.

As for me, I am thrilled that I got to live so long to see his stuff happen. At times, it was a close run race.

This One Looks Like a Winner