Rosemary's Baby

A follow up on "Sensible Risk"

I love a good chart.

Last week’s shrubstacks touched on XBI (Biotech ETF), the Russell and the UK 2061 guilty Gilt (basically my sensible way to punt on duration).

I argued that all three represented good risk / reward entry points (e.g. yields were at 5% and markets like round numbers). I then refered to the XBI as the unholy offspring of Cathie Wood and the TLT (the ultra-long bond ETF for those lucky enough not to know it).

The chart below captures this pretty well. The orange line is the TLT, the white line is the XBI and the blue line is the Nasdaq.

It doesn’t take a CFA accreditation to figure out that XBI is highly correlated to TLT ie “it was a rate play all along”.

Risk goes both ways.

If you are bearish bonds, XBI likely go down.

If you are bullish bonds, XBI likely go up.

Given that most of my audience likely suffers from ADHD, like yours truly, lets make it simple.

A caveat worth repeating: XBI is an equal-weighted basket of basket cases. It’s so badly designed I wish there was an ETF activist to sort it out.

But on the other hand, a record number of biotech stocks are trading at or near their cash balances so there is some downside protection (but lets be clear, these are notorious cash-burners. Even junior miners look sensible capital allocators compared to these biotech stocks).

And this added to my rationale on taking the bet last week. Yes, maybe it was a rate play all along but do you get some optionality of one of these ponzis .. er sorry, companies … actually helping out the world.

I wish I was smarter to look at individual biotech stocks, but frankly, I get dizzy whenever I delve into them, and people smarter than me have lost a lot of money playing that game (I own a couple, but I keep the sizing sensible. I am doing work on a few more. If you have any biotech ideas please ping me, happy to discuss so we can lose money together).

Disclaimer: As always, this isn’t investment advice. This was written by a Shrub Operator. Don’t Be Stupid.