Market Roundup
Dow -48.50 to 17,168.61
S&P -11.83 to 2,018.94
NASDAQ -40.85 to 4,840.12
10-YR Yield -0.04 to 2.03%
Gold -$10.60 to $1,166.60
Oil -$1.05 to $45.24
It was a bio-bloodbath today, one sparked by an all-out massacre at hedge fund darling Valeant Pharmaceuticals International (VRX).

The biotechnology firm was already under political pressure due to its strategy of buying up competitors, then dramatically hiking prices for the drugs those firms sold. Federal and state prosecutors recently subpoenaed the company, looking for information on its drug distribution and pricing strategies.

Then today, Valeant shares plunged a whopping $28.13, or 19%, after a leading short-selling research firm questioned the firm’s sales practices. Specifically, Citron Research zeroed in on a relationship Valeant allegedly has with a specialty pharmacy.

Another shock to the biotech sector.

It said Valeant improperly boosted its own sales by dumping too much inventory on a company called Philidor RX Services. Citron also noted that the websites of several other pharmacies bear a striking similarity to Philidor’s, something it said could imply that Valeant has been stuffing inventory elsewhere.

Citron even went so far as to ask: “Is this Enron part deux?” That caused Valeant’s shares to plunge so far, they were ultimately halted.

The company then responded to the Citron allegations with a statement explaining its relationships with specialty pharmacies. But a huge amount of damage had already been done — both to Valeant and its fellow biotechnology stocks. The iShares Nasdaq Biotechnology ETF (IBB) finished down 0.5% on the day, extending its losses from the July peak to 24%.

I haven’t dug deeply enough into Valeant to judge whether Citron is on to something or not. But that’s not the main issue for the broader markets — or investors like you (assuming you don’t own VRX).

The issue is that the markets were already fragile heading into today. Several sectors and individual stocks have been badly lagging the broad averages during this post-September bounce. The last thing nervous investors need is a potential accounting scandal at a large, widely held stock like Valeant.

Take the highly visible hedge fund manager Bill Ackman, who appears on CNBC and in the print press all the time. He owned a whopping 19.47 million Valeant shares as of the end of June. That was 5.7% of the company. Another investment advisory firm called Ruanne, Cunniff & Goldfarb, which runs the $8.1 billion Sequoia Fund, owned 33.88 million shares. That was 9.9% of the float.

There’s no telling exactly how much financial pain they’re suffering. But if they still hold the same number of shares now that they owned as of June 30, they would’ve lost more than $2.5 BILLION TODAY. Wow!

“Markets were already fragile heading into today.”

Are they going to face margin calls? Are other hedge funds in the same boat? Will the broader pain in the biotech sector drag down the Nasdaq, which is chock full of these kinds of names?

Lastly, doesn’t it make more sense to follow this strategy: Avoid higher-risk dreck-like VRX … stick with the handful of companies out there that have decent fundamentals and attractive characteristics … and hedge against broad market risk by using inverse ETFs or holding elevated cash levels? Share your thoughts at the Money and Markets website.

Our Readers Speak

Several of you commented on the Canadian election this week, as well as the deterioration in markets we’re seeing behind the scenes. So let’s get right to those remarks.

Reader Eagle495 said: “Canada today turned back to a Liberal majority to bring the economy back to the average citizen with a strong voting presence of their youngest citizens. I’m betting America will follow them down that road next year with a strong voting presence of our younger citizens also.”

Reader Richard B. said: “Our neighbors to the north figured out that conservative policies don’t really work. Now if more people in the U.S. could figure out that it was the economic policies espoused by Uncle Ronnie and the Bushies that got us to where we are now, maybe we can escape from the nihilistic, self centered ‘party of no’.”

Finally, Reader Richard K. said: “As a Canadian, what I do not understand about the American political system is that the majority of Americans have extremely low opinions on their representatives to the House and Senate … yet 80% or 90% get re-elected to office. Democracy only works when the elected officials are held accountable by the voters who elected them.

“Fortunately for Canada, Canadians have no qualms in voting out their elected officials when they believe the officials and the government they represent no longer serve the best interest of the people, but only the best interest of their party and themselves.”

Stepping away from politics, Reader Chuck B. offered this take on the currency market: “Did you realize the U.S. dollar has been in a slow decline since May, and it just recently had a ‘Death Cross,’ where the 50-day line crossed below the 200-day line? That won’t mean an immediate rise in Inflation, but that could be coming if the trend continues for long.”

Reader Robert P. added that he has “noticed there have been a lot of ‘death crosses’ in a lot of different charts over the last couple of years. That may bear watching, but don’t get too excited before it’s time.”

Thanks for weighing in. You are right that we’ve seen quite a few markets show signs of rolling over, despite the early October bounce. Does that signal more trouble coming down the pike? I tend to think so, as I’ve noted here multiple times. We’ll see.

Anything else you’d like to add? Then don’t forget to use the website as your resource. Here’s the link.

Other Developments of the Day

● Today, everyone had the chance to buy a (share of) Ferrari (RACE). The Italian luxury sports car maker sold 17.2 million shares at $52 late yesterday, raising $894 million. The hot Initial Public Offering then began trading this morning, ultimately closing up 5.8% from its offering price.

● The earnings flood continued today. Boeing (BA) and General Motors (GM) looked good, but Coca Cola (KO) and Chipotle Mexican Grill (CMG) did not.

● Chipmakers are another group of companies whose business stinks. So several of them are throwing in the towel and selling themselves to competitors.

SanDisk (SNDK) said it would let Western Digital (WDC) take the reins as part of a $19 billion deal. Semiconductor equipment maker KLA-Tencor (KLAC) is also selling itself to Lam Research (LRCX) in a $10.6 billion transaction.

Have you made any money off these semiconductor deals? Or are the deal-inspired pops too little, too late given how much ground these stocks have given up in the past year? What do you think about the latest batch of corporate earnings, or the Ferrari IPO? Hit up the website and let me know.

Until next time,

Mike Larson