Bailout II and certain responses...

Ming asked in comments about the bailout, inflation, and about my proposed mortgage bailout.

I still think the bailout as originally posed was a bad idea. I have not had a chance to read the whole 110-odd pages of it, but there was not enough oversight -- it seemed to give SecTreas almost omnipotent powers and nothing to actually help the people who are in danger of foreclosure.
Do not get me wrong, I think we need something. The short form is (and thanks to a poster on the IV Dendreon message board for putting it so simply):
Widget-maker Mr. Factory needs a loan to add to his production capability. Bank X cannot make the loan because of bad mortgages forcing them writedowns due to the mark-to-market (mtm) rule. Bank Y cannot lend the money to Bank X, even though THEY have the capability due to better loan vetting. Bank Y can't do this because Bank X is high risk paper because of the disclosures forced from mtm. Thus, Mr. Factory cannot expand, and add jobs.
In a nutshell, stagnant production, even in the face of higher demand, and a credit freeze.
WAY OVERSIMPLIFIED. But hopefully you get the picture.

So -- yes, taxpayers get a raw deal, but I think we need an economic show of force -- the economy runs on faith (as does our currency) and the credit freeze has to end. The question is how to do this in a fashion that still gives the taxpayer a chance to not see the money invested as a total loss, and to get the economy stronger.

The inflation question ties right into this. A stronger dollar (gee, maybe even tying the dollar to something real again) would ease commodity price increases. Ending stock shorting and stringent controls on commodity trades would ease prices more, and get people feeling better about the stock market and their retirement accounts. Heating oil season is almost upon us, and while I have no answer specifically of how to moderate that -- I'm sure some bright minds can fnd a way to prevent that from being the next shock on the public.
I personally am a fan of nuclear energy. We need to improve the infrastructure of our energy grid -- we lose too much energy simply creating and transferring it. Solar power may not be feasible everywhere but here in southern California it is criminal NOT to have whatever tax breaks necessary to get people developing and using it.

Overall, I agree with Ming's comments on my mortage plan. My plan as proposed would need EXTENSIVE overhauls -- it was (*blush*) a little bit off the top of my head.
However, some tweaks might get it back in shape. The largest and most deserved criticism is that it rewards people who took equity $ out and raised their mortgage. So we need some sort of limitation on what amount over their original mortgage can be refinanced. Perhaps the higher of what they originally bought it for OR the current appraisal. Remember, the whole point of MY bailout is not to reward the companies who packaged and underwrote the CDOs, but to simply allow real homeowners a way to keep their home and avoid foreclosure. The amount over what is refinanced up to wht is owed would be eaten by the taxpayer -- but with some of those bad loans off the books, the credit freeze would thaw more quickly. It is not perfect, but no bailout CAN be perfect. I do see much pain ahead if there is not an answer to some of these issues soon.

On a totally different topic, Elan announced their earnings call will be in late October. We will get to see how the two PML cases afftected Tysabri sales and uptake. My conjecture, from hearing from several practicing neurologists, is that there was VERY LITTLE drop-outs and we will actually still see a new gain of patients. My present-value discounted share price of Elan, just from Tysabri sales projected through 2011, indicate a price of somewhere around $18 to $20 today. Seeing as we are at $10ish, I think it is a screaming buy.
Sometime in October we will also find out if Dendreon's Provenge passed the interim look successfully or not. As a reminder, the interim peek must meet an extremely high statistical significance barrier. This is a good thing -- you don't want companies able to halt trials and start marketing drugs until thoroughly vetted. But with Provenge, we already have two completed Phase III trials, one with startlingly significant results. Analysts seem to be pretty much disregarding any chance of an interim success -- but I think there are better than 60% odds of a successful interim. I say this because the company got the FDA to agree to amend the SPA for the trial, increasing the interim death events and lowering the final number. They admitted this lowered the power of the final, if it is needed. I don't think they would have pushed for something that lowered (even slightly) the chances of the final unless it truly has a decent chance at the interim.
Vexingly, that means there is a 40% chance of a failure at the interim and we may see sub $3 if that happens. I good tactic might be to buy the shares at $5.70 and sell the $10 or $15 May 2009 calls. You will make 20% or so for 8-9 months on the calls and by mid next year the stock should recover should the interim fail. If successful, you get the premium and get called away next May at the $10 or $15 mark -- doubling or tripling your money. A 2 or 3 bagger at best and hardly any downside risk at worst.
The other good news? Dendreon announced at a presentation that they intend to file an Investigational New Drug (IND) application for their TRP-P8 small-molecule by year end. It is intended to treat prostate, breast, ovarian cancers and melanoma. Totally different method of action from their active cellular immunotherapies such as Provenge, so they are not a "one-trick pony" anymore.

Regards,
Trond

Bailout and mark-to-market

Here’s the reason all these institutions are failing. Recent changes in the way that financial companies have to account for the loans on their books require them to value their debt at a “mark-to-market.”

This is a fancy way to say that whatever the market value of the debt is, that is what they have to say its worth. Now that the housing market is on the skids, a high risk, non-performing loan a bank made for $600,000 might only be sold for $400,000. Thus, that “loses” a third of its worth.
Remember that these are not really individual loans that we are talking here, but the CDOs that were packaged together and sold as asset-backed securities. But most people can more easily picture it in individual terms.

I do not support the government directly bailing out public companies. However, to prevent massive foreclosures and the resulting REAL pain from homeowners (yes, even silly ones who took on much more debt than they can repay), here’s an idea.

Until June 30, 2009, allow the government to refinance any home loan at today’s market value. The terms are really simple: 6% interest for ANY credit score, at 30 years, plus allowing up to 12 payments to be interest-only (pushing the loan out as many months).

We as taxpayers would eat a large chunk of change immediately; the loan mentioned above would cost $600,000 and we would only make P&I back slowly. But the taxpayers would recoup some costs over time and may even make money. With amount of bad debt of their backs, banks would not experience the credit freeze that they see now.

Part and parcel of this would be to change the mark-to-market rule. And hey, let’s throw in SEC rules to prevent ANY short selling while we’re at it.

Regards,
Trond

Byrne on the bailout

Patrick Byrne, President of Overstock and one of the first to publicly talk about the dangers of naked short selling (3+ years ago!!) commented last night about the proposed bailout. There is a link at the end to sign an e-petition if these are things you agree with.

Please take 1 minute to sign! You will get an email that you have to respond to, to confirm your signature. Thanks!

-Trond


SALT LAKE CITY, Sept. 24 /PRNewswire-FirstCall/ -- Overstock.com, Inc. (Nasdaq: OSTK) chairman and CEO Patrick M. Byrne comments on President Bush's September 24, 2008 speech outlining the President's market rescue plan.

Dr. Byrne commented: "This bailout is necessary to save the bacchanal that is our US financial system. However, at the core of the administration's plan is the assumption that Wall Street is worth saving. It is not. For years Wall Street has bossed Washington, DC around like they're hired flunkies, while preying on Main Street businesses and investors.

The federal government should use this opportunity to extract from Wall Street concessions that could never be extracted were Washington in its customary subordinate position. "If American taxpayers are to bailout the Power Elite, they should attach conditions. Taxpayers should share in any upside, and gaping flaws in the current system should be fixed. Towards that end, I believe that any bailout legislation should include at least the following protections:

1. Taxpayers need to share in the upside if the bailout works, to compensate them for the risk that the administration is forcing them to take. This could be accomplished through warrants on shares in the firms being bailed out, such as those Mr. Buffett extracted from Goldman Sachs.
2. The government should impose a tax on those that benefit most from bailout -- Wall Street itself. Perhaps a 0.25% transaction tax on all securities trades is in order? Such a tax would be insignificant to investors, while be largely borne by those that are merely speculators - including those that churn trades in an attempt to manipulate the markets.
3. Bailout or none, the government must fix underlying problems in our capital market. The fixes includes:
a. Reforming our stock settlement system so that trades actually settle promptly, precisely as Congress stipulated in 1934. This can be accomplished by putting in place a market-wide mandatory pre-borrow requirement (like the SEC did in the 30-day July 15, 2008 emergency order that protected the 19 financial institutions);
b. Creating the obligation that if a naked short seller fails to deliver a share, the broker-dealer must force a mandatory buy-in (as is done in civilized countries, such as Canada);
c. Tracking trades cradle-to-grave (rather than net blocks of trades against each other), so that it is obvious who the naked short sellers are and the total amounts they are stealing;
d. Providing regular, timely disclosure of when and how many shares have failed to deliver;
e. Enforcing the rules, including significant monetary penalties and jail time.

"Keynes said that an ocean of productivity can support a bubble of speculation, but an ocean of speculation cannot support a bubble of productivity. Washington has been captured by speculators at the expense of producers.

I have long been talking about systemic risk and potential financial crisis (see http://www.youtube.com/watch?v=SIHw7C73s3E for a three- minute video from as early as October 2005). I am proposing specific steps to fix the system. For those that agree with these fixes which protect Main Street Americans, I ask you to sign the electronic petition at http://mainstreetamericans.info."

Trond's World returns!

Hi there all,

Long time no post – I am swamped at work and a little weary of the overall market slump. When the overall market is against you and you are a perma-bull, then you do three things.

First, double check your stocks to ensure nothing has changed. If there are still the compelling reasons to own them as when you bought them in the first place, then you’re okay.
Now, IF you own them in a taxable account and you truly feel it may be quite some time before they come around, then you may want to sell some shares, take the tax loss, and wait 31 days to repurchase them. (31 days will maneuver you around the IRS “wash sale” rules)

Second, simply be patient. In my experience, it is nearly exactly when everyone gives up, that the market rebounds. You only have money in the stock market that is long term anyways, right? *grin*

Finally, when something you have your eyes on has dropped and dropped, and you still feel it is compelling enough, BUY. You can wait forever, trying to get the exact bottom and then when things do turn around, you put off buying because you perversely WANT it to go down again so you can buy near the low point.
Warren Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Fear runs rampant right now – so it may be time to cast around for bargains.

Note: I would still stay away from real estate, financials, and insurance stocks right now – I think there is still some pain left to come.

I’m glad the SEC has finally (sort of) cracked down on naked short selling today, but there is still some business to take care of. I’d like to see the uptick rule replaced – heck – I’d like to see ALL short selling disallowed. It creates artificial liquidity (= supply) which by nature dampens stock prices. But it’s a step in the right direction.

Finally, it has been too long since I’ve done anything with the Port24. Everything is depressed enough that I dislike selling calls – to get any premium, I risk getting called away at a price far below what I paid. I will hold what I have for a recovery, and actually engaged in my #3 point above – I bought some more today!

600 Elan at $10.32, 1500 Sangamo at $6.36, and 3000 ArQule at $2.91.
My cash is around $3470 and my portfolio is down a whopping 30% at this point.

I see a modest rebound for Elan, and shortly – there is an MS convention starting today and we should see some news on the recent PML cases from Europe. From everything I’ve heard and read, patients are NOT running away from Tysabri. Oct/Nov news of patient counts will probably come as a surprise to most analysts.

Regards,
Trond