Corrections Are Coming in 2015

I last used the headline “Beware Swinging Pendulums” 27 years ago (on the eve of the 1987 stock market crash). Now, I’m spotting a number of unsustainable extremes in the financial markets. Corrections are coming in the new year.

New Years CalendarOne of the more obvious bubbles right now is in the healthcare sector. Pharmaceutical, medical-device and other healthcare stocks have zoomed in 2014, with the iShares Dow Jones US Healthcare (ETF) (IYH) up 27.6% year to date (through Dec. 22).

Wall Street is rejoicing that Obamacare has proved less damaging than expected for the healthcare industry, but another threat is emerging for healthcare stocks: Old-fashioned capitalism. Cutthroat competition. Price cutting!

Monday, Gilead Sciences, Inc. (GILD) plummeted after Express Scripts Holding Company (ESRX), the nation’s largest pharmacy-benefit manager, said that starting Jan. 1, it won’t pay for Gilead Sciences’ costly (list price $84,000 in the U.S.) Harvoni/Sovaldi hepatitis medicine. Instead, ESRX will approve a competing, much cheaper drug produced by AbbVie Inc (ABBV). Word on the Street is that AbbVie is offering a 30% – 35% discount from its own list price.

This incident serves to remind us that stocks priced for perfection can collapse almost instantaneously if an unexpected event bursts investors’ dreamworld. The Gilead horror story may be just the first in a long line to come.

I’ll also sound a cautionary note on Treasury bonds (and high-grade municipals). Since mid-September, the “fear trade” has driven lemming investors to buy Treasuries at lower and lower yields. The recently, the longest-dated Treasury bond (30 years) fetched a yield of less than 2.7%.

Do you really want to lend your money to this profligate, inflation-prone government for the next generation at 2.7%? I certainly don’t.

I suspect this trade will come back to bite the unwary in 2015. If you own long Treasuries or munis, I advise you to bank at least half your profits now. You should be able to reinvest at higher yields in the new year.

On the positive side, longsuffering Mattel, Inc. (MAT) shareholders got a little good news last week. In an interview with The Wall Street Journal, CEO Bryan Stockton indicated that Mattel is beefing up its creative side and taking steps to eliminate a “conference room” culture. Mattel is also planning to cut between $250 million and $300 million in costs, including erasing some redundant layers of management, to free up money for developing new products and for marketing.

Assuming Stockton can deliver on this vision, MAT stock looks extremely cheap at a 5% dividend yield. However, I’m leaving my buy limit at $29 because of the uncertainty surrounding Mattel’s 2014 holiday sales.

A disappointing sales report in January could cause MAT shares to probe our limit again. By the same token, if you need a tax loss to offset a large gains bill this year, you might consider selling MAT stock now with an eye to buying back in late January (after the 30-day “wash sale” period expires).

Bear in mind, though, that there’s no guarantee MAT stock will come back down to our current buy prices. That’s a risk you take whenever you sell an investment to book a loss for tax purposes.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.

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