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Deflation at the Fed (and Check Out Commodities)

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Does the Fed prefer Inflation or Deflation? See the footnote below for proof that Deflation has been the Fed trend for decades.

On a more serious note regarding the Inflation/Deflation theme, many feel the Fed’s policies will lead to strong inflation. From a stock market perspective, inflation is taking place, as the Dow and S&P 500 are at/near all-time highs.

Another asset class can’t say the same thing.

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The Thompson Reuters Commodity Index a few months ago broke below a 13-year support line (left chart), then rallied to kiss old support as resistance and has fallen hard since.

On a shorter term basis (right chart) the index could be breaking support of this bearish descending triangle pattern.

I suspect that the Fed would rather fight excess inflation over deflation. In reality, no one has much control over inflation/deflation, other than we can make adjustments to our portfolios.

A further breakdown of support in the right chart would suggest that lower prices in commodities will be the trend. Understanding this trend could be important as Gold & Silver could be breaking 13-year support and Crude Oil is testing a 5-year support line.

Footnote: Deflation at the Fed:

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Philly Fed Business Outlook: Continued Growth

Courtesy of Doug Short.

Note from Doug: Having lived for two wonderful years in Paoli, PA, a suburb west of Philadelphia just south of Valley Forge, I have a special interest in this regional indicator. But, more importantly, it gives a generally reliable clue as to direction of the broader Chicago Fed’s National Activity Index.


The Philly Fed’s Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity came in at 22.5, a decrease from last month’s 28.0. The 3-month moving average came in at 24.8, up from 23.2 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today’s stunner: The six-month outlook at 56.0, off the 22-year high of 64.4 set last month.

Here is the introduction from the Business Outlook Survey released today:

Firms responding to the Manufacturing Business Outlook Survey indicated continued growth in the region’s manufacturing sector in September. Although the current activity index fell from its relatively high reading in August, the other broad indicators increased from their readings last month. The survey’s indicators for future manufacturing conditions reflect general optimism about growth in activity and employment over the next six months. (Full PDF Report)

Today’s 22.5 came in close to the 23.0 forecast at Investing.com.

The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012 and a shallower contraction in 2013. The indicator is now above its post-contraction peak in September of last year.

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In the next chart we see the complete series, which dates from May 1960. The average absolute monthly change across this data series is 7.4, which shows that the 5.5 point change from last month is in line with the usual monthly volatility.


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How Long to the Next Recession? iM’s Weekly Update

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The BCI at 178.4 is up from last week’s 177.8. The BCIg, the smoothed annualized growth of BCI, at 18.2 is also up from last week’s 18.1. However, BCI does not indicate a possible recession in the near future.

Figure 1 plots BCIp, BCI, BCIg and the S&P500 together with the thresholds (red lines) that need to be crossed to be able to call a recession. Figure 2 plots the history of BCI, BCIg, and the LOG(S&P500) since July 1967, i.e. the last 44 years which include seven recessions, each which the BCI managed to indicate timely.


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The off-peak indicator BCIp is at 100.0 and at this level the BCIw graphic with the tracks to recession is not applicable.

The BCI, BCIp and BCIw are described in article 1, article 2 and article 3 respectively. Historic values of BCI, BCIg and BCIp can be downloaded from the author’s website.

Apart from the weekly Business Cycle Index, updates of a number of weekly and monthly financial macro models are also available on the website.


Anton Vrba and Georg Vrba
iM imarketsignals.com

Anton Vrba is an electrical engineer. He pursued a career in R&D, manufacturing and construction project management. He developed the iMarketSignals’ proprietary Business Cycle Index (BCI) and the authors’ website. His other interests are mathematics and physics. He is a lateral thinker and has many ideas that challenge the established and accepted explanations.

Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial “experts.” He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, all published in Advisor Perspectives. The models are updated weekly at http://imarketsignals.com/.





New Jobless Claims at 280K, Well Below Expectations

Courtesy of Doug Short.

Here is the opening statement from the Department of Labor:

In the week ending September 13, the advance figure for seasonally adjusted initial claims was 280,000, a decrease of 36,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 315,000 to 316,000. The 4-week moving average was 299,500, a decrease of 4,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 304,000 to 304,250.

There were no special factors impacting this week’s initial claims. [See full report]

Today’s seasonally adjusted number at 280K was substantially above the Investing.com forecast of 305K. The 4-week moving average is now only 5,750 above its post-recession low set six weeks ago.

Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the volatility in recent months.

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As we can see, there’s a good bit of volatility in this indicator, which is why the 4-week moving average (the highlighted number) is a more useful number than the weekly data. Here is the complete data series.

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Occasionally I see articles critical of seasonal adjustment, especially when the non-adjusted number better suits the author’s bias. But a comparison of these two charts clearly shows extreme volatility of the non-adjusted data, and the 4-week MA gives an indication of the recurring pattern of seasonal change in the second chart (note, for example, those regular January spikes).

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Because of the extreme volatility of the non-adjusted weekly data, a 52-week moving average gives a better sense of the secular trends. I’ve added a linear regression through the data. We can see that this metric continued to fall below the long-term trend stretching back to 1968.


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Should You Buy Into the U.S. Dollar Rally?

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Since May, when it was near an all-time low, the U.S. dollar has rallied. Compared to other major currencies of the world, the greenback is up five percent since July, as the chart below illustrates.

The question: should investors get into this U.S. dollar rally?


Chart courtesy of www.StockCharts.com

Dear reader, the U.S. dollar is not moving higher because the fundamentals of the U.S. economy are getting better. It’s moving higher because other parts of the global economy are doing worse than the U.S.

The eurozone economy is so weak that the European Central Bank has lowered interest rates again, pushing the value of the euro lower. In the United Kingdom, Scotland is looking for independence. The crisis between Russia and Ukraine continues without resolution. New troubles are brewing in the Middle East. China reported yesterday it would start pumping money into its largest banks.

Right now, with the majority of major world central banks either printing more of their paper money or bringing interest rates even lower, the U.S. is the best of the worst.

But I believe the rally in the U.S. dollar will be short-lived.

Central banks are trying to move away from the U.S. dollar as their reserve currency. At one point, trade in the global economy was dominated by the U.S. dollar. This is changing, slowly but surely.

Consider just one of many recent examples; the Chinese and Argentinian central banks will be doing an $11.0-billion currency swap operation. This will allow Argentina to increase its reserves and pay for Chinese imports in yuan—the deal was signed in July. (Source: Reuters, September 7, 2014.)

Putting this into simple words: the dollar has been thrown out the window when it comes to trade between China and Argentina.

And ask yourself this question: if you were the one running China or Russia, wouldn’t you want to get out of U.S. dollars so trade is denominated in your currency? I don’t think the Chinese or Putin would want anything more.

Let’s face it. The U.S. stock market has become a bubble again—probably the world’s biggest bubble right now. When that bubble starts to deflate, it won’t be pretty for the U.S. dollar.

To protect wealth, I would do what many…
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S&P 500 Snapshot: A Small Gain After Some Typical Gaming of the FOMC Statement

Courtesy of Doug Short.

The S&P 500, not surprisingly, remained subdued in advance of the 2 PM Fed action, which included the FOMC statement and a separately released set of economic projections (PDF format). The trader gaming began about 15 minutes before the statement was released and continued through Chair Yellen’s 2:30 PM press conference. After the Fed inspired volatility, the index closed with a small gain of 0.13%.

The yield on the 10-year Note closed at 2.62%, up 2 bps from yesterday’s close. It is now 28 bps above its 2014 low.

Here is a 5-minute chart of that illustrates today’s fast trade gamesmanship.

Check out today’s volume in the SPY ETF.

For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recession.

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Economic Denial From Builders: The Sequel

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


On this date last year I shared a chart with CNBC’s Diana Olick, which indicated how far removed home builders were from economic reality. Titled appropriately “Economic Denial From Home Builders”. The chart and article can be read here:

http://loganmohtashami.com/2013/09/17/economic-denial-from-home-builders/

Now, one year later, the builders have raised confidence to yet a higher and ever more disconnected from reality level, by reporting confidence levels equal to the number recorded back in November of 2005. At that time, numbers of total starts were quite high compared to today’s numbers. Also, it is notable that November 2005 was in the middle of the housing bubble that being formed.

Below a chart, from Diana Olick on CNBC, illustrates the current disconnect. As can be seen, we are witnessing the summer sequel of economic denial by home builders.

An irony to this is that 2014 has been the most disappointing year from new home sales and starts that I can remember since I began tracking housing data. A year when 1) sales growth was expected to rise 20% or more and 2) starts were expected to show growth in single family starts is puttering to a point that we are now questioning if sales and single family starts are even going to be positive year over year. As for starts, those are led by multifamily expansion, which has been booming in this cycle for good reasons, but not reasons which bode well for single family housing.

One reason for these trends, I believe, is that new home buyers are more interested in the fresh existing inventory crop that is coming back to the market than in buying a new home. Why would this be?

Existing inventory provides two advantages to a buyer:

  1. Much cheaper
  2. Geographical advantage in any given city

At the beginning of the year, my conservative outlook was for 8% sales growth year over year due to the “low bar we had to beat” factor and the fact that the new home buyers are coming from more affluent class of Americans. But now, even 8% is looking doubtful.

As always housing is soft because we have both a DTI ( Debt to Income) and LTI (Liability to Income) problem. Here’s another great…
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The Dollar!!

A lesson in the relativity of money. Our dollar is not ahead in the race to zero, the Yen and Euro are taking the lead. Anyway, I do not believe the dollar is going to zero, for the record. 

THE DOLLAR!!

Courtesy of , Business Insider

Bam. The dollar is on a damn tear.

Here is a chart of the dollar surging against the Yen after that Fed announcement. Obviously, people believe that rate hikes are coming sooner than previously thought.

Screen Shot 2014 09 17 at 3.48.01 PMFinViz

This is a continuation of a recent trend, as the dollar has been on a tear for months, crushing naysayers who thought the dollar was finished and doomed.

Here's a longer-term chart of the dollar against a basekt of other currencies. On fire.

fredgraph (34)FRED

 





Daily Market Commentary: Semiconductors Advance

Courtesy of Declan.

It was a roller coaster day, but the Semiconductor Index was the one to finish with an edge to the bulls. It looks like a break of 652 will happen sooner rather than later, with the swing low at 631 a handy place to mark risk (for a stop).


For the Nasdaq 100, yesterday marked a positive test of convergence between the channel and 3,998. A breakout in the Semiconductor Index will help the Nasdaq 100 get to the top of the channel.

The Russell 2000 finished near the day’s low. However, it remains above the 200-day and 50-day MAs. While the index is caught inside a broader range, the narrower channel is offering some (weak) upside potential.

 The Nasdaq is holding to the ‘bear trap’. By week’s end, a challenge of 4,610 would not be unlikely.

While today was marked by indecision and wide range days, there is reasonable expectation to expect additional gains. Technicals are weakening, but there should be enough from yesterday’s swing low to generate interest for bulls.

Accepting KIVA gift certificates to help support the work on this blog. All certificates gifted are converted into loans for those who need the help more.





A Long-Term Look at Inflation

Courtesy of Doug Short.

The August Consumer Price Index for Urban Consumers (CPI-U) released this morning puts the August year-over-year inflation rate at 1.70%, off the May 19-month high of 2.13%. It is well below the 3.87% average since the end of the Second World War and 28 percent below its 10-year moving average.

For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature.

For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components.

For an even closer look at how the components are behaving, see this X-Ray View of the data for the past six months.

The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor (and Nobel laureate) Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

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Alternate Inflation Data

The chart below (click here for a larger version) includes an alternate look at inflation *without* the calculation modifications the 1980s and 1990s (Data from www.shadowstats.com).

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On a personal note, I believe the current BLS method of calculating inflation is reasonably sound. As a first-wave Boomer who raised a family during the double-digit inflation years of the 1970s and early 1980s, I see nothing today that is remotely like the inflation we endured at that time. Moreover, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I view the alternate inflation data as an interesting but ultimately useless statistical series.

That said, I…
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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!

 
 

All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Phil's Favorites

"Finest Worksong"

“Finest Worksong”

By John Mauldin, Outside the Box

“In theory there is no difference between theory and practice. In practice there is.” – Yogi Berra, as cited by Ben Hunt in today’s Outside the Box.

Or, to put it in macroeconomic terms, “Why is global growth so disappointing?” In the aftermath of the Great Recession, fearing a deflationary equilibrium (which, as Ben notes, is macroeconomic-speak for falling into a well, breaking your leg, at night, alone), the Fed bought trillions of dollars in assets … and saved the world. Sort of. If you don’t count the reckoning yet to come. The theory was that with all that monetary-policy injections, global growth would spring back to “normal.”

But what did practice...



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Chart School

Deflation at the Fed (and Check Out Commodities)

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Does the Fed prefer Inflation or Deflation? See the footnote below for proof that Deflation has been the Fed trend for decades.

On a more serious note regarding the Inflation/Deflation theme, many feel the Fed's policies will lead to strong inflation. From a stock market perspective, inflation is taking place, as the Dow and S&P 500 are at/near all-time highs.

Another asset class can't say the same thing.


Click for a larger image...



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Promotions

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Insider Scoop

Morgan Stanley Remains Positive On Stryker Corporation

Courtesy of Benzinga.

Related SYK Morgan Stanley Has Critical Questions For Stryker Corporation Going Into Investor Day Top 4 NYSE Stocks In The Medical Appliances & Equipment Industry With The Highest Revenue

In a report published Thursday, Morgan Stanley analyst David R. Lewis reiterated an Overweight rating and $91.00 price target on Stryker Corporation (NYSE: SYK).

In the report, Morgan Stanley noted,...



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Zero Hedge

Goldman's Yellen Press Conference Post-Mortem: "Few Surprises"

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Via Goldman Sachs' Jan Hatzius,

BOTTOM LINE: There were few surprises from Fed Chair Yellen's post-FOMC press conference.

MAIN POINTS:

1. Yellen made two slightly dovish remarks on labor market developments. First, she stated directly that she felt the slow increase in wages was indicative of labor market slack. Second, she said that her own personal view was that there was a "meaningful" cyclical shortfall in participation, when asked about a recent paper by some Fed authors indicating otherwise.

2. On the topic of "considerable time," Yellen declined to provide any specificity on what the phrase means ...



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Sabrient

Sector Detector: Bulls go down swinging, refusing to give up much ground

Courtesy of Sabrient Systems and Gradient Analytics

Although the stock market displayed weakness last week as I suggested it would, bulls aren’t going down easily. In fact, they’re going down swinging, absorbing most of the blows delivered by hesitant bears. Despite holding up admirably when weakness was both expected and warranted, and although I still see higher highs ahead, I am still not convinced that we have seen the ultimate lows for this pullback. A number of signs point to more weakness ahead.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-r...



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OpTrader

Swing trading portfolio - week of September 15th, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's the latest Stock World Weekly. Enjoy!

[Sign in with your PSW user name and password, or take a free trial here.]

Image courtesy of Business Insider, Jay Yarow's This Is The Best Description Of How Apple's Business Works Right Now.

 

...

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Option Review

Big Prints In VIX Calls

The CBOE Vix Index is in positive territory on Friday morning as shares in the S&P 500 Index move slightly lower. Currently the VIX is up roughly 2.75% on the session at 13.16 as of 11:35 am ET. Earlier in the session big prints in October expiry call options caught our attention as one large options market participants appears to have purchased roughly 106,000 of the Oct 22.0 strike calls for a premium of around $0.45 each. The VIX has not topped 22.0 since the end of 2012, but it would not take such a dramatic move in the spot index in order to lift premium on the contracts. The far out-of-the-money calls would likely increase in value in the event that S&P500 Index stocks slip in the near term. The VIX traded up to a 52-week high of 21.48 back in February. Next week’s release of the FOMC meeting minutes f...



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Digital Currencies

Making Sense of Bitcoin

Making Sense of Bitcoin

By James Black at International Man

Despite the various opinions on Bitcoin, there is no question as to its ultimate value: its ability to bypass government restrictions, including economic embargoes and capital controls, to transmit quasi-anonymous money to anyone anywhere.

Opinions differ as to what constitutes "money."

The English word "money" derives from the Latin word "moneta," which means to "mint." Historically, "money" was minted in the form of precious metals, most notably gold and silver. Minted metal was considered "money" because it possessed luster, was scarce, and had perceive...



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Market Shadows

Helen Davis Chaitman Reviews In Bed with Wall Street.

Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).

Helen Davis Chaitman Reviews In Bed with Wall Street. 

By Helen Davis Chaitman   

I confess: Larry D...



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Pharmboy

Biotechs & Bubbles

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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