February 4, 2021
By Steve Blumenthal
Pause the story of hope for just a minute as I do my best to set the stage. Jeremy Grantham is calling our current state a “Super Bubble.” If you missed it, last week’s On My Radar was titled “Three Sigma – Three Events in the Last 100 Years (Until Now).” It’s a statistical term that means something that rarely ever happens. Maybe once or twice in a person’s lifetime. Grantham puts it this way, “With two sigma events, you can have some reasonably standard bubbles. They give you a certain amount of pain in the minus 30, 40 to 50% area. Super bubbles can pretty much wipe you out like 1929. And that’s where we are now.”
With wine in hand, Susan and I talked about last week’s letter. She wanted to better understand the implications of “Three Sigma,” particularly the “wipe you out” part that grabbed her attention. It was a really good conversation for us to have. I said there are ways to navigate the challenges Grantham presents and said we are going to be just fine. Susan is great at asking probing questions. Our conversation deepened. I thought I’d detour from valuations, leverage, and debt this week and share with you my reflection on our conversation.
We Are All Stewards of Capital
We talked about Adam Smith’s invisible hand. A metaphor for the unseen forces that move the free market economy. The idea is that through individual self-interest and freedom of production and choice in consumption, the best interest of society, as a whole, is fulfilled. What exists is a constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade. Adam Smith introduced the “invisible hand” concept in his 1759 book The Theory of Moral Sentiments and later in his 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations. (Source: Investopedia.)
There are other systems in play in different countries around the world. Some are better than others, none are perfect and the best systems, in my view, are the economic systems that enable the individual the freedom to think and create. Cut off the head of freedom and innovation dies. In all economic systems, capital is needed and in the best systems, capital flows most freely.
We talked about how the “free market” is not perfect. Economies expand and contract and markets rise and correct. These corrections provide an important filter, a reset of sorts that holds the overall system in check. Stupid behavior is penalized and smart behavior is rewarded. A hard loss might drive you to improve. And just like in a competitive game of soccer (or football, basketball, baseball, lacrosse… pick your favorite sport), a referee is mandatory. Regulatory bodies and judicial systems are in place to hold the players to high standards. Not everyone is impeccable with their word.
All of this encourages confidence and competition within a system. The blood that flows through the veins of the system is money. It nourishes and feeds the system. When you think about your family’s wealth, know that you are an important “Steward of Capital” that makes the entire system work. I told Susan, and the same applies to all of us, our allocations of capital helps people turn thoughts into things. I’m not sure many people think of money this way when they are looking at their 401k statement.
A Story of Hope
I then told Susan some great news. Because there is no current funding going on and recent trial results finalized and made public, I can tell you about one of the investments we personally own. I could be wrong, I’m emotionally attached as you’ll soon learn. Risks remain and we and the other families we have encouraged to invest could lose all of our money. But if I am right, the return profile is so skewed to the upside that it is a potential game-changer to our wealth. If I’m wrong, we have sized in a way that the sting is small. What follows is a story about Parkinson’s disease and the hope I believe is coming our way.
I lost my father to prostate cancer a number of years ago. But it was Parkinson’s disease that stole his life from him. The body tremors come late in the disease as did the challenges with sleep, hallucinations, and dementia. Our last day together was spent in his hospital room, laying with him in his bed watching the 2011 Masters Tournament. It was a great day. Dad drifted in and out. Mostly out and not fully aware. In the early afternoon, I swore it was an extra-hot Starbucks latte that brought him back to us and he remained lights on for the rest of the day. Am I allowed to have some he asked? After a few sips, he looked at TV, noticed the Masters Tournament was on, and he smiled. Dad loved to golf and he never missed the Masters.
We spent the afternoon watching South African Charl Schwartzel win by two strokes over Jason Day and Adam Scott. Tiger finished in fourth place. Dad was alert and engaged all day. He graduated a few days later.
Enterin
In 2019, Susan and I invested in a venture capital fund run by good friends Mark Finn, Rory Riggs, and their venture capital team. The idea with venture capital investing is to invest in early-stage companies that show promise. One of the investments in that fund is a Philadelphia-based company called Enterin. They are a biopharmaceutical company focused on Parkinson’s disease, diabetes, obesity, and aging. The journey to success for such companies is long and very risky. Young companies need capital and while the successful outcomes are rewarding and in hindsight look easy, the truth is the journey is challenging. The capital needed to fund research, pay talent, fund drug trials, commercialize the products is always on the minds of the principals. Money is the blood that flows within the capital markets system.
Enterin has several compounds in various stages of development. One is a hormone that comes from the liver of an Icelandic Dogfish shark that lives 450 years. What we know about Parkinson’s is the bad actor is a protein called alpha-synuclein our bodies produce to protect the neurons against infection. We all produce this protein and it is normal and important for us to do so. However, Parkinson’s patients have an over-accumulation of alpha-synuclein. In short, they gum up the gut and interfere with the proper signaling within the Enteric Nervous system (the nervous system in the gut) and the signaling from the Enteric Nervous System to the Central Nervous system. The problem begins in the gut and advances over time to the brain. ENT-01, a synthetic version of the hormone from the liver of the Dogfish shark displaces the alpha-synuclein clearing the gut allowing the nervous system to function more normally.
Enterin has finished a Phase IIb trial and the results are, in layman’s terms, excellent. You can find out more information here.
I’m not sure what the next steps for the company will be in terms of funding but I can guarantee that more capital is needed. If you have a family member or friend with Parkinson’s disease, my message is there is a reason for hope. We’ll be keeping in touch with the company. Enterin is planning to enter into two more trials. One is for Parkinson’s hallucinations and the other is for Parkinson’s dementia. To get into a trial, one of the conditions must be met. If the trials go well, there is a chance for faster FDA approval because there is a large unmet need and a large number of people with Parkinson’s in the U.S. I’m often asked and I have no idea of knowing, but my best guess is if all goes well commercialization of the drug is a few years away. Of course, no guarantees.
There remains a great risk in investments such as Enterin and the company has a lot more risky terrain to navigate. Please note: this is not a recommendation for you to buy or sell any security or an offer to buy or sell any security.
We are all stewards of capital. You may not often think you play an important role but you do. With a certain portion of our family’s wealth, we believe we can afford to go big-time risk-on. We look for companies with an edge seeking to disrupt very large markets. And we have a particular focus on the ideas that may make the world a better place. Doing well by doing good.
I’m excited and really optimistic about our future and hope you are too.
Trade Signals – Dr. Copper Turns Negative on the Global Economy
February 2, 2022
Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, investor sentiment, fixed income, economic, recession, and gold market indicators.
For new readers – Trade Signals is organized into three sections:
- Market Commentary
- Trade Signals — Dashboard of Indicators
- Charts with Explanations
Market Commentary
Notable this week:
Dr. Copper turned negative on the global economy this week. “Dr. Copper” is insider lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of the economy. When copper prices decline, it may indicate sluggish demand and an imminent economic slowdown.
The following chart does not signal often but it did this last week. Red arrows reflect global economic downturn signals, green arrows signal expansion.
Adding to the economic contraction picture, one of my favorite global economic indicators is the Ned Davis Research (NDR) Global Recession Probability Model. It looks at a composite of leading indicators across 35 countries. Weighing a number of economic indicators, such as money supply, yield curve, building permits, consumer and business sentiment, share prices, and manufacturing production. The model uses a logistic regression method incorporating both the overall composite of leading indicators level and trend data of all 35 countries to predict the likelihood of a global recession. A score above 70 indicates high recession risks while a score below 30 means low risks.
Take a look at the number of times the model has crossed above the upper dotted black line in the next chart (into the “High Recession Risk” zone). The grey shaded areas mark periods of a global recession. Global recessions occurred 89.6% of the time when readings were above 70 (the upper dotted line).
I continue to believe the markets face a challenging first half of 2022. The fixed income signals remain bearish (signaling rising interest rates). The equity market signals are weakening. Gold remains in a buy signal.
Risk remains high, valuations are excessive, leverage remains extreme. Hedge your equity exposure and remain patient on fixed income.
Click HERE to see the Dashboard of Indicators in Wednesday’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon, and risk tolerances.
Personal Note – Turning Thoughts into Things
I just love the idea of turning thoughts into things. It sure makes the journey of life fun. And speaking of turning thoughts into things, tomorrow I drive to Penn State to watch my son Kyle direct his first show. Kyle’s a senior theater major and he has been writing the play over the past few years. It’s called “GRAFF” and it will be streamed live over Facebook at 7:30 pm ET tonight. I’ll be watching tonight from home and attending the show tomorrow and Sunday. Stepson Conner, nephew Michael, and niece Ashely are joining me.
Susan is teaching a US Soccer licensing course this weekend in Virginia. The pay is bad. Sometimes she looks at me and asks, “What am I doing?” I see her frustration, but mostly I see her passion and the joy she gains from teaching. The real pay is in a different form. A call some years from now from a former player to his favorite coach.,”Hi Coach! I am thinking about you and want you to know just how much you have meant to me… ” That day is coming and it will be a really good day.
Call an old teacher, call an old coach and let them know how you feel about them. The payment will mean more to your coach than you will ever know. And you’ll feel it too.
With kind regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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