Happy New Year

Thanks to all who read this - I have not been good about keeping up posting, or even the Port 24. I shall strive to do better in the new year, as I want to bring my returns back up to the 24% level.

I am closing out the year with a few calls being sold in the Port. 24 Arena Feb $4s, 10 Electro-Optical Jan $10s, and 20 Progenics Feb $5s ... all with a monthly return of about 4%.
I will be ending 2009 with an annualized rate of return of about 13% - good, but far short of my target. I do take comfort in the fact that I ignored the Port for long stretches of time and would have made a few more percentage points on the calls I neglected to sell.

My worst move this year was to not sell ARNA on the spikes. That cost me around $20,000. Of course I would not have sold at exactly the high point, but I really should have lightened up. On the plus side, I did exactly that with BioCryst - buying low, selling high, and selling a lot of calls in the interim. Dendreon was the clear winner this year - going from around $5 to the current $26.

Next year should see Dendreon achieve FDA approval for Provenge, Electro-Optical gain approval for MelaFund, partnerships for Arena and Neurocrine, and significant appreciation for Elan, Amag, and Allos. I find myself hoping that GenVec starts trading options as I would love to have some GNVC in the Port.

May everyone have a fun and safe New Year!

Regards,
Trond

Biotech trees and investment forests

FezHenry has a very interesting comment about my last post (valuing biotechs). I like (and agree with) several of his points - I have taken the liberty of copying the majority of it below, as I want to highlight the parts I agree with, and show why I think differently on others.

>>Thank you for taking the time to post such an in-depth response. The reason why I asked initially is because all of those biotech stocks you've mentioned have had zero positive free cash flow over the past ten years. This rate of cash burn has always been a reason why I have never personally invested in bio-tech's, because in my opinion, the majority of them just end up as giant cash-sucking research machines in the long run.

Yes, that giant sucking sound was not just jobs moving to Mexico - it is also biotechs (and nearly all early corporations) siphoning cash out of investors and giving them back lottery tickets. And you know what typically happens with lotteries...

I like how you've analyzed these stocks in such great detail, and you've obviously done some interesting modeling as well, but I'm somewhat concerned that you may be missing the investment forest for the bio-tech tree. For a company to be a proper investment, it needs to be able to generate more than just positive earnings...it has to be able to generate free cash flow.

Free cash flow (FCF) - or ANY kind of cash flow - is an attribute of a good company. And I agree FCF is something a typical investor will be looking for. Let's explore WHY that is.
Once a company is making more than it spends, on a real earnings basis, there are typically four things they can do with it. They can (i) pay a dividend (ii) retain earnings and reinvest in the company (usually better equipment to manufacture more quickly or more cheaply), (iii) reinvest in R&D for new or better products) or (iv) acquire other companies, with which they hope to make more or better products than it costs to acquire them.

But please note something about these choices:
Option i is perhaps the best from the investor's point of view (I can certainly spend extra money better than my favorite company can!) but note that the company then does not grow.
Option ii is wonderful up to a point, but you can make only so many widgets at a lesser price that people are willing to buy at any price.
Options iii and iv act just like what the company did when they themselves were the ones raising capital, through issuing more shares or debt. The difference of course is that they can pay for it as a going concern, but a couple products that don't make it from the lab to the shelf, or bad acquisitions, and that money is still sucked away.
My point is NOT to slam products, or making money via them. It is that companies making these profits will eventually have to revisit risk and invention. They have a far firmer foothold than pre-earnings corporations, but still have to allocate their capital in an intelligent way.

I think you may need to pay more heed towards how these companies are financing their revenues, and the impact on their profitability in the long term, otherwise you are just gambling that one of them will discover the next big thing.

Ah, but here's the thing. Even the next big thing is not a guarantee of a great company that is a good investment.
As example #1, I will pick on Tivo. I had a roommate who literally was probably one of the first 100 people to buy one. And the next day, he went and bought another (the larger storage one) for a second room. He LOVED A-V equipment and was a technophile. And he was right - everyone loved it. The problem is that the company made some poor choices with marketing and has been a dog for several years. Someone who waited for the sales to begin, measured them for a few quarters, projected them into the future, and was finally confident enough to buy, was the person who finally capitulated several years later for a loss.
Example #2 will be your choice of the financials over 2006 and 2007. Maybe Bear Stearns? Profitability up the yin-yang, darling of Wall Street, sweet credit ratings, and at the height amazing earnings that were projected to increase at astronomical multiples. Even though they did not make widgets, making deals can be just as profitable. But we all know how that ended up.
I am NOT dissing a company making actual profits. Many companies make great marketing decisions, and do not go charging into bubbles, as these two examples show. But simply having real FCF is not the only answer either.

I hope you don't think that I'm trying to rain on your parade, so to speak. I know that you have superior analytical skills from working with you @ CNB all of those years, but I just think you need to maybe take more of a fundamental view on some of these companies so you can properly estimate your risk. From a fundamental perspective, I personally wouldn't invest in any of these companies until they can at the very least, generate positive free cash flow and be able to stand on their own without financing their operations via shareholder dilution, or excessive leveraging...

Pre-earnings biotechs, as a category, are far riskier, as FezHenry notes, because to raise the funds necessary to maintain operation, they have to leverage debt, or sell more shares.
Note that I do not worry too much about the dilutative nature of issuing more shares (to a point!) - I may own 1.05 millionth of a company instead of 1 millionth but those existing shares then have $0.00001 more cash per share. And if I trust management enough to use that cash, I do not care if they raised it in a secondary or by achieving FCF.

Now here is the real difference, I believe, in the investing styles. I view fundamentals as more than just the metrics of cash per share, earnings per share, current ratios, and debt/equity. To me the fundamentals are "is what the company is doing, advancing its potential?" and "do I trust the management?"

... but I follow Warren Buffett's first two rules of investing:
1. Never lose money.
2. Never forget rule #1.

I think FezHenry and I are actually closer to each other than apart. I am a huge Buffett fan (I just finished Alice Schroeder's Snowball: Warren Buffett and the Business of Life and it is a fantastic telling of Buffett's life) but what you actually get out of it is that Buffett the investor is inhuman. I do not have the investing resources nor the time horizon of Buffett the investor. He can buy entire companies which gives him pricing power. He can sit on Coca Cola for 30 years. I freely admit I cannot.
But - there are a couple things I like to emulate him on. You do your research (due diligence), you talk to people, you fanatically find out every scrap of information you can, and when you get your fat pitch, you buy. Buffet talks of a punch card where you only make 20 investing decisions over your whole life. If you use 1/20 of your lifetime buys on Sangamo, you will want to make sure it is a great opportunity.
The other quality I have learned from Buffett, through Ben Graham, is that Mr. Market truly is insane. You can buy the same company for $20 a share one day and for $19 a share the next day. It is NOT 95% as good a company the second day, it is simply a function of fear, greed, reaction, hope, and maybe a little bit of the weather in New York. So if after my research I am in a company and I am convinced it is overvalued for the moment, I can sell some of my position without freaking out that I am breaking "Buffett's rules". The key for me from this second point is that you enter a position into a company you like with a core position, and can also trade around that position.

Please check out this post for an idea of what I am speaking of: http://www.fwallstreet.com/blog/31.htm

Done! And a good example of what you are leery of. However, I will point out that as a company, it may not be making money, but some investors had an amazing ride. Investing is a zero sum game - every share that gets bought means someone else has sold. The company really isn't more or less valuable - it is simply the relative pressure of the fear versus the greed.

I hope I haven't gone down too many rabbit holes and you are still with me. To close, my argument really boils down to my biotechs simply haven't started selling products yet. Once they do, the metrics you want to use (fundamentals) will either bear out the story, or they won't. You have different information available to you with the Buffetesque companies you choose to follow - actual sales information. I have to model out the potential sales before they happen with the companies I choose to follow. I do have to make the leap of faith that I have the next best thing, but you are making the implicit leap of faith that your competitors won't come out with the next, next, best thing.

As always, thanks for the thought provoking comments.

Regards,
Trond

Valuing biotechs

FezHenry asks how I come up with the valuations for the biotechs I suggested. That is a fair question, and not an easy one to answer.

When you have companies that make products, have revenue, and (gasp) actual profits, then the task can be a bit easier. There are a number of metrics such as price-to-earnings (P/E), or price-to-sales, that you can use to compare a company against another within the industry and see which is a better deal. I am suspicious of these metrics, by the way, on the whole, because earnings are massaged quite a bit, and even sales can be "managed" from quarter to quarter. But at least there are real numbers to work with!

Biotechs that have no products available for sale yet are much trickier. Look at BioCryst (BCRX) which today announced its first order for the IV version of its swine flu drug peramivir. The pricing was MUCH more aggressive than the Street expected and the stock responded with a 15% gain on the day! At this point, forecasting more sales really depends on how much more the government will stockpile, whether doctors start prescribing it off its emergency-use label, if and when the other countries that have negotiated with the company (Israel, China, e.g.) start ordering, and perhaps most immediately important - whether Japan gives its emergency use authorization and they get an order for 500,00 to 1M doses. That would be a $1B order minimum, or $200M at its Shionogi royalty rate - one order alone that is half its market cap! Can you say hello $20s or $30s, from it's $11.39 today? (and yes, I have a little BCRX in my IRA - not a lot but I think this one, too, will do well in the next year)

Back to the actual question though.
Let's take Dendreon for an example, simply because I can do these numbers in my sleep. Provenge is not approved yet, so we have no real metrics. We don't even have a good price point on them - Dr. Gold has stated the one plant they have now, at full capacity, can produce $500M to $1B of sales. It however, is only 25% built out presently... and to complicate matters, they are planning two new plants, each of which will produce 3/4 of the NJ facility.
Now, you probably should also look at the number of patients a year who will get prostate cancer, at the phase at which this will be prescribed (post-androgen therapy) and make an estimate of the market penetration, and then figure the number of patients who actually get the drug multiplied by the cost per treatment. Suffice it to say I believe within 5 years, these three plants will all be at full capacity. (1+3/4+3/4) plants at $500M to $1B gives you a range of revenue of $1.25B to $2.5B ( you can usually also figure in modest price increases per year, but I'm ignoring that, for now). You can use the midpoint, but I like to assume the low point as a reality check. So $1.25B of sales is our first checkpoint.

Now you can apply some other metrics. Five-to-seven times sales is one rule of thumb for projected market cap. So using 5 * 1.25 gives us a $6.25B market cap, 5 years out. Our market cap now is about $3.2B so it's nearly a double - call it $55 from today's $27.78.
But wait!

We now need to discount back to the present, adjusting for risk. I have assumed approval and I have assumed revenues into the future (they will not be making $1.25B next year). At least I assumed the lower levels for the other choices! We can say there is a 10% risk that Provenge is not approved, or has a delay. There may be a 15% discount per year into the future revenue stream. All told that $55 in the future may only be worth $32 or so today. Still a nice 10 to 15% discount to today's price! And please note if I use the midpoints of revenue and times sales, we would arrive at a market cap of $11.25B - or a share price of $90 or so. Discounted that would be $60ish, compared to today's $27.78 - nice! I like to be conservative but I also like to see what might be in store.

You can also use the P/E ratio, once you estimate sales, to arrive at a price. At $1.25B (again, the low point in assumptions) in sales, the margins should be around 25% so there would be $312M in profit. I am going to assume they will issue more shares within 5 years and there will be 150M shares outstanding. That would be over $2 per share in earnings, and with an assumed x25 earnings multiple, we arrive at $50 per share - slightly less than my $55 from the times-sales estimate.

Note all these example all estimate ONLY United States revenue. Dendreon is actively seeking a rest-of-world partner - where they will collect a royalty on ex-US sales. These royalties will have an effect on the bottom line, perhaps as much as 20-25% of the US revenue.

They also have other immunotherapeutics in their pipeline that will follow Provenge, all based off the same method of action. They have learned HOW to construct trials for cancer vaccines, and their agents for breast, ovarian, kidney, colon, and lung cancers should move along more quickly through trials than Provenge did. This will become a growth stock once investors realize cancer may become a manageable disease through these immunotherapeutics.

Whew - lecture on Dendreon is now over. The take away from this lesson should be that there are a HUGE number of assumptions that go into any kind of estimate like this. Patient count, adoption rate, pricing, earnings, competition, production capacity - any of these could be off by factors of 50% or more! My usual method is to try to use the low points of most ranges to come up with a basement level price, and then start tweaking numbers, as not ALL categories will be at the lowest possible point. If the basement price looks attractive compared to today's price, though, you just may have a winner.

Too, the companies do not have to succeed in the end, for the stock to move in the next year or so. Each of these are "story stocks", where there is news coming out in a specific time frame. I actually think my 50-100% price rise will be accomplished BEFORE the actual news. I want to buy in to companies where there is some reason to believe the drugs work, let the pre-announcement excitement build, and then sell some-to-most of the position before the actual news. If GNVC hits $1.50 next spring, I will sell about half of my holdings and then let the rest ride into the interim results.

I have a lot more work to do on some of these models, but I will say that GNVC and SGMO look incredibly mispriced right now, based on potential sales. GNVC could be worth $30+, from today's $0.93 - but the trial itself still may go for 2 years, with a year plus from then for approval, and ramp up. Are you willing to buy $1,000 now, for $30,000 in seven years? SGMO could be a paradigm changer - where every company that wants to modify a single gene has to pay a royalty to Sangamo. In ten years, they may have 1,000 contracts for $10K to $50K each, as a yearly income stream along with their own drug sales from the trials they are running now.

Biotechs may be pie-in-the-sky, but several will pan out, into gold. There WILL be the next Amgen, the next Genentech... I think a couple of the names I've thrown out there may just be those companies.

Regards,
Trond

Watchlist

I desperately need to update my watchlist - I hope to have some time this weekend to do so.

I am very bullish on several stocks at this point - I'd have looked like a genius if I'd pointed out Sangamo yesterday ($6.30, up 16% today...) but there are a number of others too. SGMO, by the way, IS a watchlist stock and I will have an updated "buy under" price this weekend. I think it may give some back tomorrow, so I wouldn't just grab some today.

Allos (ALTH, $5.88 today) is one stock that I expect to be at or over $10 in the next 6 months or so. They have an approved drug, aggressive pricing, and a low number of shares outstanding (relatively). The worst case would be a buyout at a 10-20% premium.

Neurocrine (NBIX, $2.16 today) is another that SHOULD have news in the next 6 months that will propel it to at least a double and perhaps more. Several trials will yield news and a partnership awaits. I unfortunately have thought this for a few months now and have been buying steadily all the way down. Time will tell but this is rapidly becoming one of my larger stakes, just from the risk/reward.

GenVec (GNVC, $0.93 today) is the final one I will toss out - again, interim trial data expected within 6 months and the data should be really nice. Not good enough to file with the FDA immediately, but good enough to attract partners and/or suitors.

All of these (SGMO, ALTH, NBIX, and GNVC) should be 50% or higher in the next 6 months. I will make a note to revisit this post in May 2010 - I invite you to do some research on these companies and ask any questions you wish.

Regards,
Trond

Personal Finance - Credit

I'm taking a break from my stock market portfolio to talk about credit this morning.

The banks seem to be on a mission to raise credit card rates, close accounts, and generally, make as much money off folks as they can.

Now, I love the concept of capitalism so I do not argue against their right to do this. However, you need to protect yourself as you can, and in this day and age, that also means protecting your credit score. Let me give you an example.

My wife has had a Bank of America credit card for nearly 20 years now. Due to our particular circumstances, this card rarely was used - we considered it primarily an emergency card - a very temporary place to throw charges on in case of major car repairs or family news requiring travel, for example. We have not used it for over a year, and last week she tried putting a small charge on it, simply to have used it. Imagine her surprise when she was declined, and found out BoA had cancelled the card, without informing us.

The company would not reinstate the account, although of course they asked if she wanted to apply for a new card. This was hurtful to our credit for two reasons.
First, she has had this account for a very long time - longer than any of my accounts! Part of your score is determined by the duration of your credit relationships. Closing this account probably shaved 10 to 30 points off our score.
Second, closing the account lowered the amount of credit we have available by $18,000. Our ratio of debt to debt capacity got raised - which will also lower our score.

Recent signs have the economy improving in the short term, but there are still some issues in the banking system that need to be worked out. Lending standards may be tight for years in the future - and your credit score is solely responsible for if you can get a loan, and if so, how much, and at what rate that loan will be for. Here are a couple tips:

1. Use each of your cards at least once a year.
2. If you are going to close an account, all else being equal, first close the account that you have had for the shortest amount of time.
3. Make sure you pay your cards on time. One late payment on ONE card can kick off mandatory rate increases on ALL your cards.
4. Check your credit history at least once a year, for free, at http://www.annualcreditreport.com/. There are three credit bureaus, and you can check each once per year for free. Make sure you go to the site listed above, as others may charge you for accessing a credit report. Each of the three may have slightly different information, so it is worthwhile to check all three, but consider staggering them throughout the year, maybe one each four months. (for most people, checking all three may not be necessary - unless you have been informed any of your personal information has been stolen)
5. Open your "junk mail" - make sure it is not something from your existing accounts, changing your account terms. Many banks are raising interest rates (for an interesting video about BoA raising a lady's rate from 13 to 30%, and her reaction, see http://www.youtube.com/watch?v=jGC1mCS4OVo) and you do have an option. If you do not need the account, you have the right to close the account and keep the existing rate until you pay it off under the original terms. Be aware this may affect your credit score, however, as it will change your debt ratios...

If you have questions, please leave a comment. I'll do my best to reply to all.

Regards,
Trond

Port 24 update and real-world trades

Well I did not get a chance to post yesterday but I made some changes in the Port.

I sold the last 400 BCRX, bought 2000 PGNX and 1500 ALTH, and sold 10 MELA calls (Nov $10s, for $0.40).

BioCryst is close to either getting an Emergency Use Approval or not. I would miss the price spike, but I also will miss the cratering if it does not get it. This Port is not for extreme trading -- I will definitely focus on biotechs (simply because that is what I follow for the most part) but the covered call strategy works perfectly by buying into biotechs, selling calls against the premium generated by trial or approval hype, and then selling BEFORE the actual date.

In my real-world IRA, I have been buying NBIX ($2.74), PZG ($1.27) and MNKD ($5.13). All of these are, in my estimation, good for a double or more in the next 12 months.

The Port stands as follows:
2000 AOB
2000 NBIX
1600 ELN
400 DNDN
4900 ARNA
2500 SGMO
2000 MELA (10)
2000 PGNX
200 AMAG
1500 ALTH
Cash: $5,231.55

Regards,
Trond

Port 24 update

Options expiration was yesterday and I was only exercised on 600 Dendreon shares. Elan, Sangamo, American Oriental, Arena, and Electro-Optical calls all expired with the premium as 100% profit.

Dendreon was a little disappointing, as I hate to see any shares of this company go, even in a ficticious portfolio. I had sold the $35s at $0.84, and then bought them back at a profit ($0.20), and then sold the $28s. It closed at $29.51 and so they were called away from me; I now have only 400 shares left (just under 10% of the Port).

I have to say I am a little surprised at Dendreon's strength. The addition of two new Board members (one, Ian Clark, the upcoming CEO of Genentech North America) certainly fueled speculation about the Rest-Of-World partner for Provenge being Genentech.

For me, the only real news of interest coming up is the amended BLA scheduled for mid-November. And the aBLA itself really is not newsworthy as they announced it a month ago. But - the sensitivity analysis should be included and hopefully made public. This sensitivity analysis is important to me because it will show the continued strength of Provenge over time. In April, the final results of the IMPACT trial showed a statistically significant reduction of risk of death of 22.5% over the placebo group. This 8+ month (results were released in April but the results were based off data cut off in January) should show an improving hazard ratio over and above the 22.5% aleready seen. I would like to see 26%+.

Elan will be having their quarterly earnings call on 10/21, but will be upstaged slightly on the 20th when Biogen releases Tysabri numbers for Q3. I expect to see continuing, although not blowout, growth in the patient count. However, I also expect Elan to announce they will swing to profitability in either Q4 or Q1 2010. We should see real growth in revenue from the EDT branch, and unfortunately we probably will not hear any real news of the Alzheimers platform on this call.

In my real money IRA, I have been buying GenVec (GNVC) and MannKind (MKND) for the first time and more Elan (ELN) and Sangamo (SGMO). I am very excited for GNVC but the move started earlier than I thought it would: I started buying at $0.76 per share and it already touched $1 this last week.

I'll be adding a couple watchlist stocks, mentioning now only that Allos (ALTH), AMAG Pharma (AMAG), and MannKind (MKND) should deliver 50-100% returns in the next 12-24 months.

Regards,
Trond

Various stocks and two Port24 trades

One of the nice things about selling covered calls is that when a stock goes down, you can buy back the calls you sold, at a profit.

That is exactly what I did today for the Port; I had sold 6 Oct $35 DNDN contracts for $84 each and bought them back today for $20 each -- $350 profit after commissions.
Then I turned around and sold 6 Oct $28s for $100 each.

Do not get me wrong, Dendreon is still a stock I want to own. But I do not believe it will be above $28 in the middle of October. They announced yesterday that the amended BLA will not be filed until the middle of November, and so I just don't see any real gains through then. If we see a spike downwards, I very well may simply buy these back too...

I also bought (for the Port) 2000 AOB at $4.83 and sold the Oct $5s for $20 each. [disclosure: I also did this today in my real IRA with 1000 shares...]

I did well in selling ALTH - they did get approval, as I thought, but revenue and profits are going to be a few months away and so the market did not treat Allos very well today. As a 6 month stock, I think buying today would be a good thing, but it is not quite right for the Port today.

ARNA is also a screaming buy today. Note it could well drop some more in the next week but at $4.60 a share there is too much upside to ignore it. I have a sizeable stake in the Port already, so will not be buying, but it could make readers very happy one month (Obesity conference at the end of October) and one year (FDA approval) out.

Regards,
Trond

More Port24 calls...

Busy day at lunch.

I sold the remaining 800 ALTH shares at $8.50. The decision date is tomorrow and while I believe they will get approved, the Port wants a steady 2% a month return, not the uncertainty of FDA politics. This is up from the $7.99 purchase price (as well as the premiums on the September calls) so I am ahead of the game.

I also bought 1000 more MELA. The FDA date is 12/7, so the Oct and Nov calls are going to be free money while we wait.

I sold the following calls:
DNDN - 6 Oct $35s for $0.84 (2.8% return)
ELN - 10 Oct $8s for $0.15 (2%)
MELA - 10 Nov $10s for $1.20 (12%, or 6% monthly)
ARNA - 29 Oct $5s for $0.40 (7.5%)
SGMO - 15 Oct $10s for $0.25 (2.8%)

I think the MELA and ARNA calls are the best play of all right now. The stocks may go down slightly but you keep the premium and the stock should recover before the expiration. And of course, if the stock stays where it's at, the premium is pure profit. 6 and 7% a month is nothing to sneeze at!

The Port is now at $138,700 -- a 28.4% annualized return. I have $12,653 in cash and the following positions:

Stock (calls written)
2000 NBIX
1600 ELN (10)
1000 DNDN (6)
2500 SGMO (15)
400 BCRX
4900 ARNA (29)
200 AMAG
2000 MELA (10)

Regards,
Trond

ARNA and the Port24

ARNA had an exciting day. The BLOSSOM results were not quite as good as I hoped - but they will still file an NDA by the end of the year, and should get lorcaserin approval for weight loss.
I expect the shares will be volatile in the next couple months, but should creep upwards to ~$6 or $7 by this time next month.

The Port 24, after options expiration today, is on track.
I was exercised out of the ALTH $7.50 calls, but still have 800 shares that I had sold covered calls against at $10. The $7.50s were very good to me, as I bought the shares at $7.99 and sold the $7.5 strike for $1.65. That is a nice, 14% one month return!
ARNA $6 calls and MELA $10 calls expired, so I was able to keep the full premium (each at around 4%).

The Port is now worth $136,232.09, at a annualized return of 26.8%.

2000 NBIX
1600 ELN
1000 DNDN
2500 SGMO
400 BCRX
1000 MELA
4900 ARNA
200 AMAG
800 ALTH
Cash = $12,550

Dendreon and the Port24

Pete, selling is ALWAYS the hard thing to call.

One of the best things I think you can do is keep a trading journal, and when you buy something, write down what you expect and why you would sell.

I freely admit I have blinders on when it comes to Dendreon (and Elan). However, I have called DNDN the "safest one year stock" for a reason - within a year I see a fairly easy double. If I went into revenue projections and P/E or P/S ratios I could easily show how Dendreon could be worth $100 in 2 years, or way more than that beyond because of the pipeline. This is a retirement stock - akin to folks who bought Amgen two decades ago. (how's that for a pump!)

I have to say with today's volume and price, there may be news coming this weekend. At this point, if you would LIKE to have some Dendreon in your portfolio, I do not think I would sell.

---

I also want to mention that as of today, the Port 24 has a 34% return, or on an annualized basis, 25%. I have (finally) achieved the 24%+ returns I have been aiming for. In the coming months I will be much more aggressive on the covered calls and NOT simply waiting for price appreciation of the underlying shares.

Regards,
Trond

Dendreon target

Pete asked about a price target for Dendreon (DNDN).

I hate the concept of targets, because people will always have different time frames and objectives.
If Dendreon hits $32.17 intraday, but closes at $31.81, and I have a $32 target, is that a "hit"? If it does that tomorrow but my target is a end-of-year 2009 $33 and it never quite breaks $33, is that a miss?

Not picking on you, Pete - just need to know where you are coming from in terms of why you want a price target. Now let's say you bought a mess of shares a couple days ago when the stock price went up 15% and you want a short term trade that gets you out with some chance of profit and safely, protecting your principal. THAT is a legitimate reason, and answerable (although of course, only in my opinion).

So here we go!
First, realize there have been a bunch of biotech conferences recently, and Dendreon has scheduled an Analyst Day in NY on 9/24. So word is getting out about Provenge, and there is always the chance of a blockbuster partnership agreement, or further trial info. So it's not surprising it's been "frothy" lately.
The company has basically promised that they will be reviewing commercialization plans at the presentation. I hope they will give more color on pricing and production quantity per quarter. Armd with more information, the expectation is that the analysts will be blown away with the amount of revenue Dendreon may make even as quickly as next summer, and raise their price targets -- which may make more funds and institutions buy in.

I actually expected us to stay under $25 through this Friday (option expiration) and would not be surprised at all to see us dip down there again. But, we should stay between $24 and $28 up through the Analyst Day presentation.

IF the company announces by 10/1 that they have submitted the amended BLA to the FDA for Provenge, then I would think we'll stay at $25 as a floor, and we make hit the $30s through the fall.

But -- allow me to stop speculating on a monthly basis: by June 30, 2010 Provenge will be approved and we should have a Rest-of-World partnership agreement. Those two events should lift us safely out of the $30s - I expect in one year (9/16/2010) the share price will be around $45-50 - nearly a double from here. Note there could easily be spikes, bringing us much higher than that for a day or two.

I would hold on to any shares you have - if they are earmarked longer-term. If you bought some purely to make some short term profit - I'd lock in gains now. Analyst expectations are always hard to read -- you may leave $2 on the table but we could easily sink $2 for the next couple months also.

Regards,
Trond

Port24 update

Well, I had my AOB and MELA called away from me last Friday in the Port. I am sad at losing MELA as I expect it to gain quite a bit over the next couple months - it started Wednesday with a couple dollar spike. I ended up buying some back and selling the $10 strikes. Again, too early, as it is up over $10 today.

On Wednesday I sold 29 ARNA $6 Sept calls at $0.20. They have announced that the BLOSSOM trial results will come out in late September and I halfway expect these will be called away. If it is still under $6 in mid-Sept I will not be crying as I expect at least a 50% stock move on the results soon thereafter.

Yesterday I bought my MELA back at $9.50 and sold the Sept $10s for $0.45. The FDA will rule on MelaFind by December so these should be good for trading until the November series.

Finally, I also bought 1600 ALTH at $7.99... selling 8 Sept $7.50 calls and the other 8 Sept $10 calls. Allos has an advisory committee meeting on Sept 2 so the price should either be above $10 or back in the $6s.

So the Port now has the following holdings: (# calls sold against holding)
2000 NBIX
1600 ELN
1000 DNDN
2500 SGMO
400 BCRX
1000 MELA (10)
4900 ARNA (29)
200 AMAG
1600 ALTH (16)
Cash = $6,567...
... for a total worth of about $125,000. This is a 19.46 annualized return... still below my target of 24% but well above the market returns over a similar period (S&P and NASDAQ).
Note that I actually do not think either the S&P nor the NASDAQ is a correct index to compare the Port against, as I think of this as an absolute return fund. If I am not positive, I don't care if I beat the market by 100%.

Current favorites:
Look for ALTH to return ~30-50% in the next week.
ARNA is one of the best September covered call plays ever at the $5 strike. 10%+ return for less than a month with a large margin of safety.

Regards,
Trond

Karl Denninger

Market-Ticker.org is one of my daily stops.
One of yesterday's posts, rendered to its core, is that overdraft fees, especially levied AT the ATM -- where the bank can obviously simply compare the amount being taken out versus the account balance and not allow the transaction -- are an intentional and unconscienable outrage.

Today may be a little over the top theatrically, but the outrage is genuine. I strongly urge the 3 or 4 minutes it might take to read it.

http://market-ticker.org/archives/1317-DAMNIT,-STOP-THE-LOOTING-NOW!.html

Regards,
Trond

Marketocracy - top 100!

To those who don't know, Marketocracy com allows you to "manage" a mutual fund, having to follow strict diversification and cash management rules.

In the period ending June 30, 2009, I finally cracked the top 100 for the first time. In over two years, I have beaten the S&P 500 by 78%.

http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=CmOhHbFfEfOmLoNbMaKiAbDf

Yay me!

Regards,
Trond

Port 24, Sangamo, and Elan

Made one trade today in the Port -- sold 4 Aug $12.50 calls against my BioCryst. 4 BIUHV at $0.75.

With the MELA, BCRX, and SGMO spikes, the Port is now at an 18.3% annualized return. I'm getting close to my projected 24%!

Sangamo has had a surprising few days of strength. I think unless there is news it'll fall back somewhat -- anything under $5.10 ($5.76 today) would be a very good buy.

Elan will hear soon about palperidone palmitate -- JNJ's schizo drug that the EDT division re-formulated and which is now in front of the FDA. An approval here will mean some significant royalties in the future, and I expect a nice 2-5% bump on that news.

Regards,
Trond

More Port 24 updates

Did a bunch at lunch today.
Sold the 6000 JAV for a 1 month 43% profit. It very well may keep going but I'm taking it off the table.
Bought 1800 AOB at $5 and sold the Aug $5 calls for $0.25. Around a 4% profit if over $5 in a month...
Sold 4 Aug $24 Dendreon calls for $0.90.
Bought 200 AMAG. Have not sold calls yet as I think it will go up in a couple weeks.

This is the current Port:
1800 AOB (18)
2000 NBIX
1600 ELN
1000 DNDN (4)
4900 ARNA (29)
2500 SGMO
400 BCRX
2000 MELA (20)
200 AMAG
$1980.36 cash
ann. = 10.62%

In my real IRA I also bought some AMAG today. I'll have to update my Favorite stocks!

Regards,
Trond

...and two more call positions... Port 24

Sold 4 Jul $27s of Dendreon at $0.64 each and 6 Jul $9s of Elan at $0.15.

Note the Elan calls are selling at 2% and if exercised would yield 27%+. This is EXACTLY the risk I'm looking for - getting my 2% a month with huge upside. The $8 calls are $0.30 which is a 4% monthly return, and probably are a smarter play. I actually do NOT want to lose my Elan shares which is why I elected to only sell 6 calls at the $9 strike.

Regards,
Trond

New buys in the Port 24

Bought 2000 MELA at $7.26, sold 20 AUG $7.50s for $0.70.
Bought 2900 ARNA at $4.70, sold 29 AUG $6 for $0.40.

Cash = $1,208.86 and positions are:

1600 AOB (16) (=calls written against)
2000 NBIX ()
1600 ELN ()
1000 DNDN ()
2500 SGMO ()
400 BCRX ()
2000 MELA (20)
6000 JAV ()
4900 ARNA (29)

ARNA, by the way, may be the safest 3 month play ever.

Regards,
Trond

Port 24 update

Friday the 19th was June options expiration... and I lost 1000 Dendreon and 1000 BioCryst shares.

So the Port is now worth $109,753 (8.8% annualized return), with over $34,000 in cash. This is a good time to have loads of cash on hand, as I truly believe we will have another nasty market correction within a few months. My trick is now to find a couple SAFE places to invest this, earn a couple percent on covered calls, and be able to still have the principal ready when such correction occurs.

My first thought is oil -- I think we will see oil go to at least $90 a barrel by late July. So the exchange-traded fund USL is a possibility. It does not trade options, however, so if I want to get some covered calls I will need to go with USO (currently ~ $38/share). That works for me: selling the July $40s at about $0.90 (2%+) is probably the best play. We'll see what happens on Monday!

Regards,
Trond

Dendreon - title character at Deep Capture

"Then, on April 28, at 11:22 am — just hours before Dendreon’s triumph in Chicago – an anonymous message board author on Yahoo! Finance posted this message: “HIGH PROBABILITY OF MASSIVE BEAR RAID…DNDN [Dendreon] could easily drop 50% on a massive bear raid…its coming today@12:30 pm central.”
Just minutes before 12:30 pm central, Dendreon’s stock price began to fall. It didn’t just fall–it nosedived from $24 to under $8 … in 75 seconds. That’s correct, during a period of 75 seconds, more than 4,000 trades were placed, totaling 3 million shares, or about 50% of Dendreon’s (spectacularly high) average daily volume. Given that the message board poster knew what was coming, it is a safe bet that this was a coordinated, illegal naked short selling attack. And just in case you still didn’t get this – it caused Dendreon’s share price to lose more than 65% of its value – in just 75 seconds flat."
http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/

Wow is all I can say. I know almost all of this from following the stock in the last 2 1/2 years, but it is an amazing story.

Regards,
Trond

Dendreon: "Riskless"?

When Dendreon received the FDA's Complete Response Letter in May 2007, there were two things that were said to be the reason for the non-approval of Provenge.

One was that they needed more clinical trial data; and the at-the-time ongoing IMPACT trial was going to fulfill that need.
The second was a Form 483 from the CMC section. Basically, something in the manufacturing part wasn't up to snuff.

In April we learned that the IMPACT trial succeeded, and wildly so. Unfortunately, the company was never very forthright on exactly what caused the Form 483. They said it was something that could be corrected; but as investors in Discovery Labs (DSCO) know, that is cold comfort: DSCO has now received THREE 483s and is still not approved.

Yesterday Deutche Bank upgraded Dendreon, saying their research indicated the 483 was for two main reasons: barcoding and documentation issues. If this is true, then these truly are easily fixed things and there would be NO remaining regulatory risks for Dendreon.

Regards,
Trond

Deutche:
We believe CMC issues will likely not delay FDA approval. There is some concern remaining CMC issues related to Provenge could delay approval. One investor concern is that there is risk to the Provenge manufacturing process, which could translate into a delay in FDA approval. This concern stems from the FDA’s 2007 complete response letter, in which additional information with respect to the chemistry manufacturing and controls (CMC) section of the BLA was requested.
Management believes it has addressed the issues brought up in the 483. While Dendreon expects it will have another inspection, the company does believe it has addressed the issues raised in the original 483 issued following a PAI (pre-approval inspection) in 2007. It has stated that it has kept the manufacturing facility in Morris Plains, NJ “PAI validated”, meaning that the company has been running it at lower levels so that it remains a validated class 100 space and meets a number of specifications. The company has also stated that it has had preliminary discussions with the agency on most of the 483 issues. Key issues described in the 483 related to bar-coding samples & documenting rules In our view, the issues raised in the 483 from the inspection that took place from February 12 to February 17 appear very mild. We believe the most important comment on the 483 was related to the request for more data on the handling of multiple samples in the same room as well as quality control steps used for maintaining the identity of the samples (i.e. bar codes).
The rest of the issues relate primarily to Standard Operating Procedure (SOP) documents that
basically describe various rules for certain procedures (the inspectors believed certain additions needed to be made in the documents). We believe that the issues raised in the 483 were likely easily addressed by the company, as in various conversations with management it has discussed using a bar-code system. A detailed list of issues raised in the 483 is available in the figure on the next page. In our opinion, there is likely little risk to manufacturing process for BLA approval
The manufacturing process and control systems for Provenge have been in place for many years and have been utilized during the clinical trial (over 1000 patient samples have been made in clinical trials). We believe the company has likely addressed any outstanding issues the FDA had in the original 483 because it has had time to do so and because the issues seem relatively easy to fix. Dendreon has had the advantage of having the FDA review its CMC section before and has had two years to implement any issues raised. What else gives us confidence? Many steps of the process are not unique to Provenge. The FDA has had experience managing patient-specific products such as diagnostic tests that have quality control measures in place that are similar to those for Provenge. The leukapheresis process is also well known by the FDA and many centers conduct the process on a daily basis for other procedures. Diagnostic testing frequently uses bar coding and quality assurance procedures to keep samples from getting mixed up. Finally, the antigen activation steps that take place at the NJ facility are not that complex, in our view. We believe the greatest challenge will be scaling up the process in time for launch and getting more physicians set up with infusion ability (to be discussed in a later section) Given patient awareness and lack of other therapies, we believe many patients will want Provenge. In addition to the ~30,000 new patients with metastatic disease every year, there are approximately ~70,000 existing metastatic patients who may want therapy. We believe the current plant will only provide for ~10,000 patients at peak and may only be able to supply ~2500 patients in the first 6-9 months of launch.

Port 24 update

Well that was quick.

I am back in the black ... BioCryst is on a tear and just about made up my shortfall all by its lonesome. I sold 5 more DNDN Jun $24 calls this morning, as well as selling all 3000 shares of my ARQL. Still love the stock, but it was up nearly 100% and the price is just too low under $5 to get significant option premium.
I turned around and bought 1600 AOB (at 4.72), and sold 16 Jul $5 for $0.35 which is 7% for a month and a half.

The port is now at $100,286 and my positions are:

1600 AOB (16)
2000 NBIX ()
1600 ELN ()
2000 DNDN (10)
2000 ARNA ()
2500 SGMO ()
1400 BCRX (14)

Regards,
Trond

Port 24 and two picks

Sold 5 June $25 covered calls at $0.40 against Dendreon, and 4 June $5s at $0.25 against BioCryst.

I have two stock picks right now. One is safe, and one is for some bang.

Dendreon (I can't believe I am saying this!) is my safe pick. At $21 right now, it may go as low as $18 or so over the next couple months, but in terms of a one year time span, it will have a floor under it AND have significant upside. The chances of a partnership agreement, new trials, analyst day this summer, a Q4 filing of the Provenge BLA, and ultimately an approval next spring all will keep some excitement going and each of these should give the stock a boost.

Sangamo is the bang-for-the-buck stock. It has been drifting lower for a month now and is currently in the high $3s. They will be getting trial soon and are a constant threat to compile new partnership agreements at any time. Each of these may be for small dollar amounts (relatively) but at some point some analyst is going to say, "Wow, 20 or 30 $5-10M agreements really add up!" I want to be there for that lightening strike.

Regards,
Trond

Port 24 update

Well, it has been exactly one year since I started the Portfolio 24.

It is a model portfolio starting with $100,000.00. I had expectations of making 2% a month, utilizing a covered call strategy. For the year, I fell well short of that, with the Port being worth $89,560 with today's prices. That is an actual 10.5% loss, or 34.5% below my desired return.

While I could use the overall miserable performace of the market (for example, the Nasdaq was down 32 percent and the S&P500 was negative 35% for that one-year period) as an excuse, I prefer to view this as an absolute return portfolio, not a relative. In other words, I do not want to simply beat the market returns, I want to ALSO always make money.

Three things hampered me.

1) Elan absolutely killed me; I bought 800 shares right before the disastrous duo of the ICAD presentation/PML cases. That is a $21,000 mistake at this moment, which would put me at a 10% gain on the year if I had not done that one purchase.

2) I neglected the Portfolio all fall and through the spring. I would have made "some" option premium if I'd been paying attention and selling some out-of-the-money calls. In no way would I have clawed back to even, but I probably left a minimum of $4,000 on the table.

3) I went away from the original strategy somewhat by stocking up on Elan and Dendreon. It worked quite well in Dendreon's case and not so well in Elan's. And it wasn't even the fact I was adding those two names in bulk; I refused to sell calls against them because I didn't want to be called away from perceived large gains.

I bought 1400 shares of BioCryst Pharma today at $2.47, and sold 10 June $2.50 calls for $0.50 -- a nice 20% premium for one month! I also sold 20 $22.50 May calls against Dendreon -- they expire tomorrow and with the stock at $20.90 I think it free money. Granted, the contracts were only $8 each but it came to $130 after commissions.

So right now, the Port stands at $89,566, with the following holdings:

3000 ARQL, 2000 NBIX, 1600 ELN, 2000 DNDN, 2000 ARNA, 2500 SGMO, and 1400 BCRX; $614 in cash. I have 20 Dendreon May calls sold and 10 BioCryst June calls sold. Next week after options expiration I will be more active!

Regards,
Trond

Dendreon wins! SEC loses...

I cannot wait until I can retire with enough cash stored under my mattress.

But first! Dendreon presented the IMPACT data yesterday and it pretty much validated everything they said about Provenge. Longer survival. In a patient population where the average placebo life expectancy was 21.7 months, Provenge conferred an extra 4.1 months... nearly 20% longer life. And at the 3 year mark, 38% of Provenge patients were still alive versus only 21% of placebo.

In the 93 seconds before trading was halted before the data presentation, the share price was manipulated down from $25 to $7.50, closing before halt at $11 something! A lot of short-sellers managed to cover at a good price. Investing primarily in micro and small cap biotechs as I do, I wish I could say this was extra-ordinary but ... it isn't. The SEC needs to do it's job and stop this crap from happening.

It's a great day for prostate cancer patients. Congratulations to Dendreon!

Regards,
Trond

Inflation?

Thanks to Ming, who basically asked, "If the Fed is printing all this money and buying $300B of t-bonds, then why don't we see inflation?"

Also thanks to the John Mauldin blog, which I read religiously at http://www.2000wave.com/gateway.asp. He tackled this same idea a week or so again and I am going to use the equation MV = PQ, which he reminded me of, to explain the answer.

M is the supply of money
V is the velocity of money [the speed at which it moves through the economy]
P is the price level [this is what we consider inflation or deflation as it moves up or down]
Q is basically GDP, or gross domestic product -- the quantity of what we produce

All else being equal, an increase in M should either decrease V, or increase either P or Q. The increase in P is usually what we encounter, as Q is hard to change short term and V isn't necessarily something affected by Fed actions.

In our case however, all else is NOT equal. V has slowed down dramatically -- banks aren't lending as much, either retail or commercial. Q has also dropped significantly -- cars and houses aren't being built, suppliers are afraid to make too much, etc.

Therefore, the increase in M is being more than offset by decreases in V and Q. So much so, in fact, that we'd have quite a severe case of deflation if the Fed had not taken action -- Mauldin argues that he expects to see much MORE Fed action just to keep us where we're at.

Regards,
Trond

Volatility, Dendreon, and Elan

Well let's tackle the day.

On my QQQQ volatility play a couple posts ago, I had bought 2 April $30 calls for $310 total and sold 3 April $31 puts for $350. Yesterday the calls would have been sold for $660, while the puts were worthless, and held for today in case the market tanks (which does not look like it will happen). So this play was an exact net gain of zero, taking commissions into account.

A couple notes on this. The 2x3 nature is an odd play. If it doubles to the calls, it may or may not be profitable. If it doubled to the puts, I would have had an easy 25% or more return. I only gave myself two weeks on this one, and typically I'd go for the "month out" expiration rather than the upcoming one. Finally, playing the QQQQ is probably a mistake, as there is QID and QLD; exchange traded funds which double the percentage returns of the QQQQ. So utilizing options, a double is more easily found.

Dendreon:
They will be presenting the IMPACT Provenge results at the American Urological Association meeting on April 28th. The CEO has said the results are "robust" and "unambiguous", so I have no doubt they easily cleared the 22% HR needed for statistical significance.

Elan:
Biogen announced earnings last night and said Tysabri growth was in line with expectations -- neither bad nor great. They now have about 39,800 patients worldwide -- if they are going to hit 100K patients by the end of 2010 then we really need a kickstart in the next couple quarters -- but it probably will not happen. Who cares? Slow and steady growth is fine for me -- and we are past the "blockbuster" status of $1B in sales now. Bring on 75K patients!

Regards,
Trond

Dendreon passes with flying colors

Dendreon's IMPACT trial met "unambiguous" statistical significance.

That's enough for me... lots of details out there remain to be shown at the AUA meeting on 4/28, but they passed. They will resubmit the BLA in the fourth quarter - no other real news.

Congratulations to Dendreon, and to cancer patients. Bring on the pipeline!

Regards,
Trond

Updates - Dendreon and Elan

Well, I am going to cheat and basically cut & paste an email I just sent to a few folks:

Dendreon:

Here we go!! We’ll know the final results by the 28th at the latest. We’re at $6.30 now and it’ll be:
a repeat of 2007, going to $20 or so (on a statistically significant results)
bouncing around between $4 and $10 (if the results are very close to stat sig – they’ve indicated they will refile anyways, if this happens)
drop to $1 or so (if a large miss). I do not see this happening at all because 6 months ago the interim already showed a 20% reduction of risk of death from the drug – and they only need a 22% reduction at the final.

I personally think it’ll be a pretty good result. If we see $20+, you may want to sell half of what you have and let the rest stay for approval.


Elan:

Earnings call are coming up -- BIIB on the 16th and Elan on the 22nd. So we'll know Tysabri numbers. Last known is 37,100 worldwide at the end of 2008. I am actually unsure if this includes the 600 in trials or if it's only commercial? I suspect it is total, as all other reports show it that way.

IF we return to close to 200/week net adds, this would be about 2,400 new patients and put us just shy of 40K. So I view anything north of 40K as pretty spectacular. One thing to keep in mind is that the EU is pretty fragmented and each county has to approve Tysabri and the insurance costs individually. So uptake is slower but starts gathering steam a few quarters after each country finally approves it. We're close to snowballing territory, I think ... may be 1 or 2 more quarters though.

AAB-001 - probably no news. More details of how they are approaching the 2 mg dose of non-carriers that they dropped, but that is just noise. I don't expect anything until end of this year, IF they take an interim and it's good. Still remotely possible that they file a BLA at the end of the year based on the non-carrier phase II results and 6-9 months safety data from the III. I doubt this now, as the dropped 2 mg group was because of vascular edema. Too much safety noise and the 2.0 mg group taken out would be post-hoc. Bummer!

Sale of the company? Partial sale? I don't think they'd release that at an earnings call. I unfortunately still think we'll see a buyout before years end simply because the market cap is too attractive.

I bought more last week at $5.67. It may bounce around but I don’t think it’ll go lower than $4, and I think we’ll start seeing it go up again IF Tysabri numbers start increasing at an increasing rate again (which I view as likely).

Regards,
Trond

Dendreon on the Move

Yesterday was kind of fun.

Dendreon was plodding along in the morning... somewhere around $4.30 or so. I was wondering if THIS would be the day that it might move another 20 or 30 cents upwards. We're IN April, and we are expected to get the final results of the IMPACT trial for Provenge sometime in April...

A little blurb appears, saying that Dendreon has a slot at the American Urological Association annual seminar on April 28, under a late-breaking news application. No big deal, right? That's by the end of April... no biggie, they'd announce a PR about results and then present at a major conference.

Half an hour later WHAM. The stock jumps to $5.20 and starts climbing -- about another dollar in 2 minutes. Kind of fun to refresh the screen and see the stock going up a dime every time you refresh. It was like in 2007, the day after the FDA's Advisory Committee met and voted that Provenge was safe by a 17-0 and substantially effective by a 13-4 margin. I'd refresh the screen then, and we were up a dollar!

We closed at 5.99. Again ... will we keep the gains? Keep going? Drop back? I have no clue. But as we get closer to the end of the month, expect more volatility! Me? I'm keeping most of my shares.

Regards,
Trond

Elan and follow up to my volatility trade

Two things tonight:

Elan and Wyeth announced that they are dropping the 2 mg dose in the non-APOE4 gene carrier cohorts of the Alzheimer's Disease drug bapineuzimab (AAB-001), due to safey concerns relating to vasogenic edema. That was the minor brain swelling they encountered in the Phase II - more so in the carrier group than the non-carrier. They already had made the decision to not include that dosing group in the Phase III carrier group.

What this means is simply that those already dosed will continue in the trial and be randomized into the .5 or the 1 mg groups. This is not really news that should move the stock.

We had a pretty good move in the Nasdaq today ... it went from 30.77 to 31.76, or 3% That was enough to move the options as shown below (new prices are what you could sell the contracts for. If I closed out it would make some money, but not at my target, so it continues!

As an aside, I opened up a real time trade near the end of the day when the QQQQ was at $31.93 -- 3 each of the April $32 calls and puts. I will advise when I close out of this trade.

Strike Date . Strike Price . Type . Contract Price . Sell Price
April . . . . . $30 . . . . . . . . .Call . . . . . . . $150 . . . . . 238
April . . . . . .$31 . . . . . . . .. .Put . . . . . . .. $114 . . . .. 62
May . . . . . .$30 . .. . . . . . Call . . . .. . . .$216 . . . . 298
May . . . . . . .$31 . . . . . .. . . .Put . . . . .. . . $181 . . . . 131

IF I closed out of the April trades now, I would have gained 2*88 on the calls and lost 3*52 on the puts... with commissions it would be pretty much a wash. I really need a full doubling of the profit side to close out successfully. It is also obvious in retrospect that one should strive to made the two sides an equal number of calls vs. puts, as the calls need to gain a larger percentage to offset the 150% as many puts.
In the May series, there is a 2*82 gain and a 3*50 loss, again, nearly a wash. I will hold these.

Regards,
Trond

Making money off volatility

Markets go up, markets go down. What if there was a way to make some scratch simply off the movement, regardless of the direction?

I did a trade last week, that worked out fairly well, netting me about a 20% return in less than one week. The only danger in this strategy is that we have an extended "flatline" in the market. Given the issues the stock market has to face these days (will the FASB rescind mark-to-market? Will they nationalize banks? Are pension funds going to go belly up from private equity deals gone bad? Will the SEC restore the uptick rule? Is inflation coming? Will muni bonds get destroyed if cities follow Vallejo into bankruptancy? Are unemployment numbers going up?) I feel it is safe to say that one way or another, market will move up a fair amount OR down a fair amount. You need about a 3 or 4% index move within a month for this strategy to work -- I feel comfortable saying that will occur!

I will present my trade and then present another for consideration. In one month or less, I will revisit this trade and show its value -- positive or negative.

Lets review some facts about options.

Calls are an option type that when bought, allow you the opportunity to buy a certain number of shares at a certain price, by a certain date. (when sold, it obligates you to sell that certain number of shares at a certain price, by a certain date)

Puts are the reverse -- when bought, they allow you the opportunity to sell a certain number of shares at a certain price, by a certain date. And conversely, selling the same obligates you to buy those shares, etc. etc.

Very simple example -- my favorite stock of the moment is Dendreon, and it trades at about $4.20 a share right now. By the end of April, they will announce final IMPACT trial results for their prostate cancer vaccine Provenge, and the stock will VERY LIKELY be either much highr or much lower. If I buy a call option contract for the May 2009 $10 strike (ticker UKOEB), I would pay $112 (plus commission). That contract allows me to buy 100 shares of DNDN for $10 per share anytime on or before May 15. Why on earth would I PAY money to buy a stock at a higher price than I could pay right now? Because I don't actually have to spend the $420 right now to buy those 100 shares -- and I expect IMPACT to be successful and the share price to be much higher than $10 before May 15!
Let's take the worst case scenario first: IMPACT fails, and the stock craters (or more precisely, it does not go above $10). In that case, I have spent my $112 for naught.
In the great case, let's say IMPACT is a stunning success and the stock goes to $25. (it did precisely that 2 years ago, before the FDA said, finish this trial to see if you can replicate the results) Buying 100 shares would then cost $2500, but my option contract allows me to buy those 100 shares at $10 each, or for $1000. Really, it would be for $1112; the stock price plus what I paid for the option, plus commissions... but then I could turn around and sell those 100 shares for the $2500. So -- I would have made $2500 - 1112 = $1,388, all for my original $112.

One extra nice thing about options is that you don't actually have to exercise the option (trade it in for the stock) -- the option price for a $10 call for a stock trading at $25 would be slightly higher than $15. So I could simply sell the call (that I bought for $112) for around $1500. Of course, if the stock is only at $12, the option is only worth $200 and so the profit goes way down. It is simply leverage -- controlling 100 shares at a time.

So: buying calls indicates you want the stock to go up. Buying puts is the reverse -- you want the stock to go down. A relatively small move in the underlying stock can move the option a bit less, but with your leverage it works to your favor.

My trade from last week was against the Nasdaq 100 tracking stock, ticker QQQQ. It was at $29.56 and I did NOT know whether the Nasdaq was going up, or if it was going down. BUT -- with all the "stuff" happening in the world, I was pretty confident that it would go up OR down more than 3% within a month.
So I bought two April $29 calls AND two April $30 puts. The two calls cost about $290 and did the two puts cost about $320. Within 4 days, the Nasdaq had gone up to about $30.60 (less than a 4% move) and the two calls were worth $580. The puts, however, had gone down in value to about $165. I then sold BOTH my calls AND my puts... netting me, after all commissions, about $120. Having spent just over $600 on the entry, there is my 20% return.

The reason this is successful is because the successful side just about doubles, while the losing side only halves. Another trick would be if you can make 125% on the successful side (and sell it) and keep the other side open. If the market goes back the other way, you can then sell that back fora smaller loss (or wow -- maybe even a gain also!) -- but the trick here is that once you have a TOTAL gain of 20%+, you close it out and lock it in.

So here is the trade to follow for the next few weeks:

The QQQQ closed tonight (4/1/09) at $30.77. For this trade I'll still buy the April contracts, although I suppose we can also track the May amounts to see where that leads us. Ideally I'd like it to be at either an even dollar amount (say, $31 -- and then I'd buy the $30 calls and the $32 puts) or halfway in between ($30.50 - and I'd buy the $30 calls and the $31 puts) but I'll make it even on the sides by buying two calls and three puts. I've listed the data below:

Strike Date Strike Price Type Contract Price
April $30 Call $150
April $31 Put $114
May $30 Call $216
May $31 Put $181

So the April strike would cost 2*150+10 + 3*114+10 (I'm including a $10 commission here to make it more realistic). So total "in" costs $662. I'd be looking for 20% profit, or about $135.
The May strike would cost 2*216+10 + 3*181+10, or $995. Profit expected would be $200. In both cases, a 4% move should do the trick, if within a week. Please note that the May strike gives much more upside if you were looking for more than 20% profit, since we have 45 days instead of only 16 more days as in the April case. I expect several rather severe moves up AND down in the next couple months!

Regards,
Trond

Inflation?

For all the money the Fed is supposedly pouring into the banking system to "prime the pump", we are acting suspiciously like we're in a deflationary period right now. Commodity prices look like they are finally starting to go up again, however. And although I hear conflicting statements about the velocity of money, at the rate the Fed is going I will agree we will see inflation before long.

What is that going to mean? With the unemployment rate dismal and projected to get worse, housing continuing to fall, and taxes going up (I speak here about the next year, not the next few weeks) I don't think inflation will be anything to write home about. Hyperinflation smiply would not happen.
However, if we do see a recovery at the end of this year, then all bets may be off. We will have expended too much in terms of getting the economy going again to risk cooling it down, and we may see saving accounts yielding 10% again, as they did in the early 80s. You wouldn't even WANT to know what foodstuffs and energy prices would be like. Is there a middle ground? I don;t see how we can have cake and eat it too... there are simply too many sins in our past that we need to expiate before our economy can be considered normal again.

I wish I had a better forecast ... depression or severe inflation. It is still worth hedging into oil or gold -- but not yet. Once gold goes down to $825 or lower, I would consider it - GLD is a decent ETF there. Oil ETFs like USL or UOY are probably a buy here, and very much so if oil goes below $42 a barrel again. We will see the usual spike in oil prices over the summer and that may be the last real trading opportunity we see in anything that is based on normal circumstances. I would stay away from bonds ... especially state or municipal bonds as I fear more cities will follow Vallejo into bankruptancy to get out of their pension obligations. Lastly, if mark-to-market is rescinded and banks go nuts, buy puts against the general banking industry ETFs once the frenzy reaches it's heights. There is still a LOT of crap that needs to be written off.

My one note of happiness today is that Dendreon is now less than one month from disclosing final results for Provenge from the IMPACT trial. They have said "by the end of April" and seem to be in over-delivery mode lately. Definitely a buy at $4.30ish.

Regards,
Trond

Ben Bernanke, our savior?

I guess I am not terribly impressed with our Federal Reserve chairman. Here are several questions.

What has he been right on, so far? Every decision he's made in the last three years has not had the effect he has claimed. The sole mention I can find showing his prowess is that he predicted in 2006 the economy would be worse than Wall Street analysts had predicted.

He has written on the Great Depression and what the Fed did wrong. He claims, as had prior monetarists, that it lasted longer than it had to have, because the Fed contracted the money supply and his "new" point is about the private banking system, in that they let banks fail. So his answer to the current recession is to expand the money supply and to prop up the biggest institutions. However, there are a host of factors that are different in this day and age - and more importantly, just because something may not have worked before does NOT necessarily mean that the exact opposite WILL work.
There is evidence that some failures are necessary to allow the necessary pain (to employees, to shareholders, to would-be borrowers) to happen sooner rather than later. A protracted wind-down may not be in our best interest, if even after near continuous bailouts, some institutions still go under.

Here are questions that I would seriously like to have answered:

If the bailouts occur because some companies are "too big to fail", what exactly does that mean? Can the Fed and/or the administration give us a clear, layman's pitch on what they think would happen if they did fail?

If AIG or Citigroup failing would cause "systemic risk", why is the system that allows such risk worth saving?

What exactly are the weak points in this system and how can we adjust it so that systemic risk is no longer an issue?

Too bad there wasn't a White House email address that one could write a question to, that you'd get a reply back in one week with the answer. :-)

Regards,
Trond

Doom and Gloom

This is a bunch of doom and gloom.

I am usually pretty optimistic, but I have to call it the way I see it. (I am indebted to a number of posters on the InvestorVillage website for their views, which are reflected below and I have bought into) There are certain things occurring in the market, economy, and world that I propose are not being taken seriously enough by the pundits and commentators that most people seem to listen to.

In some ways, this is not their fault.

• From a psychological point of view, “the only thing we have to fear, is fear itself”. If a continuing litany of bad news is the only thing that we are fed, then of course we’ll see a self-fulfilling prophecy.
• Too, as I have mentioned previously, some of the media seems to be “captured” (inasmuch as they are spoon-fed articles of interest from major wire services or hedge funds who have agendas).
• Finally, they WANT to believe we are on the road to recovery. They see their own 401(k) balances headed south, and believe the mantra of cyclical bull and bear markets. After all, we’re in the 16th month of a recession and the average only lasts 11 (since WWII) months.

So why do I hang my head and join the bear crowd? (First, let me state that I do not believe in the Armageddon that some folks say is coming. There are always people who say one should buy canned goods, seed crop, and guns. We will get through this! But it will be months and possibly years longer than most people think)

The market is still overvalued. Everything occurs in cycles – we just finished with a massive bubble and need to see much more downside before we come close to an average. Based on earnings or dividend yield, you can make the argument that we will still see the indices go about 20% lower. Good times tend to be better than expected and downsides tend to be worse than expected.

Specifically within the markets, banks are nowhere near to finished in terms of writing off their bad loans. I have heard they've only written off half of the toxic junk still on their books. And this is the famous slippery slope – when more bad news about the banks and loans appear, downgrades will drive them even lower.

Consumer confidence is shot, and yet investors are not yet at the point of “capitulation” that truly marks the bottom of a market. Every article I read and every market-oriented conversation I have is centered around the question, “When are we going to hit the bottom so I can invest the cash I have ready?”
I have news for you – until we are at the point where the masses are truly ready to swear off stocks entirely, we have not hit bottom. Your grandparents, who lived through the Great Depression and only wanted CDs and savings accounts: that is the kind of capitulation I am talking about.

With stock markets in the tank – guess what the next big emergency is going to be? Pension Funds. They have been trundling along, using rosy projections about 10%+ returns, allowing them to underfund their liabilities. Now the piper is awfully close and we have nothing to pay him with. The Chicago Transit Authotity recently had to float $2 BILLION in bonds to cover their pension payouts, and now are underwater not only on the pension payments, but on the debt service as well. California had budget problems this last winter and when state and local public employees realize their pensions are at risk too, we will see some very angry public servants. We'll also see some very angry taxpayers when they are asked to make up these deficits!

We simply have too much debt still on the books – not only as a country but as individuals. The home is not the ATM it has been in the last few years, credit card companies are tightening requirements, raising rates, and lowering limits as we speak. The Fed recently said it will buy $300B of treasury bonds to get some more liquidity in the market: for one thing this will have to be an off-the-books move, as my last post shows – they only have equity of about $44B. The second impact this has is that again the piper will have to be paid at some point – drastic inflation and higher taxes will invariably follow.

Speaking of homes, not only will they not be useful as a method to pull equity from, but it looks like home prices will continue to fall. The historical average of home price to annual salary is 3:1 – we are still at about a 4:1 ratio now. That means home prices will have to fall by another 25% to get back to the historical average. And recall my point about cycles – to get back to an average, we need to go below the average to allow reversion to the mean. Does that mean home prices will fall another 50%?

Unemployment is perhaps the scariest of all the scenarios to talk about. The latest numbers show a rate of 8.1%. Unfortunately, the commonly used measure of unemployment is the U3 rate – which leaves out folks who are either underemployed or have ceded to despair and stopped looking for work. The “real” rate (known as the U6) now stands at 18%. Nearly one out of five people who want to work are unable to.
Here's a very strange and possible additional outcome: governments will decide to reduce prisoner counts to lessen their costs. Inmates are NOT counted in any measure of the unemployment rates. When released, they will start looking for work and thus will INCREASE the unemployment rates. It's estimated that 0.7% of our population is incarcerated – if 10% of those (the non-violent, victimless, and marijuana-related prisoners) are released we may see an extra 1% rise in the unemployment rate!

Chickens will be coming home to roost. The United States has affected the global economy already – commodity prices have dropped, credit markets worldwide have tightened, and worldwide stock markets have dropped. In turn, we will soon be affected by the world. China has been a large buyer of our treasury bonds; do you think they are going to be pleased about the extra $300B just floated? With all the decifit spending Obama is proposing, we are coming to the point where I fear for the world's faith in our currency. And Obama is just too damn honest about things – at some point he will be forced to admit that his ambitious plans (healthcare, energy, education, as well as the stimulus bill AND all the bailouts given under Bush's and now his administration – oh, and wait until he announces that he is all set to fix Medicare and Social Security!) will require additional taxes. Hmmm... do you feel like going back to the consumerist mentality with THAT hanging over your head?

One last note about the rest of the world – foreign banks are about to hear a certain horizontally-challenged lady singing. Western European banks have lent extraordinary sums (*our* banks aren't the only ones who can over-leverage themselves, you know) to Eastern European countries. Austria's national bank, for example, has lent 70% of its GDP to eastern-bloc countries. They may be bankrupt within a year.

Oil traditionally spikes during the summertime. Can you imagine the pain we are going to experience with the 1.3 million additional unemployed folks this coming summer and a return to $4+ gasoline? Food prices will again climb, as it costs more to transport all the raw and finished materials. People buying less of everything except foods and necessities mean that more retailers go out of business. So what follows that? Commercial real estate will start slipping away too. If you see $4 gas, start thinking about selling your commercial REITs that pay such a lovely dividend.

Bernie Madoff not only set a new record for thievery on a global scale, but may have ruined an entire generation of charitable trusts. Several well known and well endowed charities literally had ALL assets placed with dear ol' Bernie and are now defunct. Everything from soup kitchens to rehabilitation clinics have disppeared, overnight. That adds to not only the general misery of the least fortunate, but may increase the crime rate.

It is not a pretty picture. (Even with the foregoing, I personally think we will work our way through this within three to four years) But in this next few years, I urge you to proceed open-eyed. If two years ago (and I was in this camp myself) you did not think it possible to have the world in the situation we find ourselves in now, what are the chances that you are going to be right about what happens in the next two or three years?

• Take steps to protect the cash you have on hand now.
• Dollar-cost average your way into stock indices (if you have dispoable income AFTER assuring yourself an emergency fund).
• Possibly buy some oil ETFs over the next month to time the coming gasoline price spikes in summer.
• We most likely will have a “bear-market rally” in the next two to three months. I do not believe it will have legs.
• Personally I will take the opportunity to sell some of my individual stocks if they do bounce, and hold on to more cash than I am used to (30 - 40% or so).
• I never would have thought it, but I would even be tempted to buy into a gold ETF if gold drops below $800 per oz.
• Longer term? Short ETFs and SPY/QQQQ/DIA puts, IF they get a bounce by summertime. I do not think the market as a whole will recover for at least one more full year – late summer of 2009 is my prediction.

On an individual basis, I still like Dendreon for the next few months. We'll know in less than 40 days now about Provenge! I like the odds – if the final results are statistically significant, we will see an enormous jump – from $4 today to probably around $20. If not, there is still almost NO chance that the results will be worse than the interim 20% reduction in risk of death over placebo we saw at interim, and the company has signaled they will still refile their BLA with the trial as supportative.

Elan may not move for 4 to 6 months. Tysabri is not increasing with the vigor that I assumed, there will be no Alzheimers news for months, and the market is eying their debt nervously. I actually think it will fall a bit from here, and then recover in the fall. If it goes below $3 I'll be buying hand over fist.

Arena may be the quickest short term play. Results for their obesity drug are due at the end of March – I see the price as very volatile next week and from the present-day $4 I think we'll see $5+ -- a one week 20%+ move would be quite welcome right now!

Discovery Labs is a gamble but also should have some very short term volatility – buys anywhere near $1.10 and sells anywhere around $1.50 until mid-April.

Neurocrine Biosciences is just teasing now. Are they ever going to partner? I will sell when we get a partnership agreement and wait for it to settle with the rest of the market before buying back in.

Finally, Sangamo is very attractive now and perhaps the longest wait of all. I honestly think they'll be bought out within two years, probably at a very nice premium.

Regards,
Trond

Funny Money

Does it bother anyone but me that the Fed is buying $300B of treasury bills?

#1. The Federal Reserve has a net worth of about $44B (as-of 3/11/09). Let's see if these numbers change in a few weeks? (see http://en.wikipedia.org/wiki/Federal_reserve#Budget)

#2. This should simply be outrageous to any thinking person. The Treasury issues bonds which are sold to fund government spending. The Fed, an autonomous quasi-private interest, which nevertheless controls money supply, buys those bonds.
A) What money is being used to purchase the t-bonds?
B) The taxpayers then have to pay back principal and interest to pay the bonds back, to the Fed -- and yet we're supposed to believe the money supply will somehow contract later on to absorb the excesses of today's decisions?

Is your head spinning yet?

I am unfortunately seeing too many things that make me in the "bear" camp rather than the bull camp. Make wise decisions about your money, job, and house today, as you will have to live with them for a long time. I will post tomorrow about why bad times are coming.

Regards,
Trond

DRIPping into the market

How would you like to be able to buy stock for no commissions?
What if you could buy $25 worth of an $80 stock at a time?
Wouldn’t it be nice to arrange for that $25 to automatically happen monthly?
What if that stock paid a dividend? Wouldn’t it be outrageously cool if that dividend were automatically re-invested as partial shares? And then it would compound and you’d be paid dividends on those partial shares?

You’ve probably guessed that these are not just rhetorical questions. It’s called a Dividend Re-Investment Program, or DRIP, for short. Even some companies that do not pay a dividend offer similar plans called Direct Stock Purchase Plans.

They are usually exceedingly simple – you either purchase a set number of shares that qualify you for the Plan or agree to purchase a specified dollar amount for a specified number of months. You have to actually enroll in the Plan, and depending on your state and/or tax status may need to sign a form and send it in too.

And it really is as cool as my rhetorical questions make it sound. The transfer agent for the plan takes your specific dollar amounts that you send in, adds it in with all other Plan contributions for the period, makes the purchase, and credits your account with the dollars invested divided by the share price (there are commissions, but they are spread across potentially thousands on dollars of contributions – netting out to fractions of cents). So if you contribute $50 and the stock happened to be purchased at $40 per share, you’d be credited with 1.25 shares. If that stock paid a $0.40 dividend, then you would be credited with an extra .01 shares – so your new total would be 1.26 shares. There are minimum amounts that you can contribute … some Plans are as low as $10 a month.

Companies such as Exxon-Mobile, Intel, and Johnson & Johnson have DRIPs, but it’s not limited to large corporations. Mid-caps and small-caps are represented; smaller local utilities offer them too. I grew up in central Maine, and Bangor Hydro-Electric offers one.

I think they are an ideal way for children to learn about the stock market. They get to see compounding work in front of them, and the long term buy-and-hold strategy is an excellent lesson in saving, investing, and patience.

Really, the only downside is taxes and cost-basis tracking. Uncle Sam wants what’s his… and just because the dividends were re-invested, please know they are still taxable. But until you’ve built up enough shares so that you’re getting hundreds of dollars a year, the real effect of them is nothing more than an extra item to add on your tax return. When you do sell, you need to know the purchase price of all those monthly or quarterly optional buys, plus all your quarterly dividend purchases. But really, a simple spreadsheet suffices – enter the date, dollar amount, and share price when you get your statements and you’re good to go.

Finally, even the last two items are not an issue if you happen to pick a stock that allows the plan as an IRA. There are even a couple plans that pay YOU to invest – send in optional purchases and they will credit you 105% in shares, for example.

There is a service that will handle the whole registration process for you – www.temperofthetimes.com is one that I have used (I’ve had DRIPS in BankOne (now JP Morgan), Corning, Intel, and Pfizer). You can do it yourself, but for me the $20 fee was worth avoiding the hassle. You can search their DRIP database at www.directinvesting.com/advanced_drip_search.cfm?from=search. You can also contact the companies or transfer agents yourself to learn more. Look at computershare.com for examples of the companies that offer Plans and their details, at www-us.computershare.com/Investor/Plans/PlansList.asp?cc=US&lang=en&bhjs=1&fla=1&exp=true&theme=cpu.

Finally, I’d be remiss if I did not mention that newer brokerage services such as ShareBuilder.com and others basically offer the same service (at least for purchasing partial shares), all without having to register with each separate company.

Feel free to Comment or email me at Trond24@gmail.com if you have questions about specific companies, or would like more details about DRIPs.

Regards,
Trond

Info on Madoff hearings

If you are curious about the guy who testified today regarding his warnings to the SEC from 2000 through 2008 about Bernard Madoff, you can see his full prepared testimony at the link below...

http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf

Regards,
Trond

Great Expectations

First, a little background.
STOCK INVESTING IS NOT A GAME TO ME. I have a day job, two kids, and a wife who equates the stock market to a casino. Two years ago, I let myself accumulate just over 13,000 shares in a little biotech company called Dendreon. At a cost basis of about $4.50 a share, this $60K, spread between my IRA and brokerage account, was a SIGNIFICANT fraction of my assets – a much higher percentage than I, who pride myself on my personal finance knowledge, would ever recommend anyone investing in one risky stock.

Why did I do this? Lots of little reasons… but it boiled down to a couple reasons. I believed in the drug that was up for FDA approval, and it made me feel good to invest in something that has potential to save lives. (Provenge is an immunotherapeutic vaccine for prostate cancer)

Now, built into that “belief” was an enormous amount of due diligence. The final block of shares that I bought was after the FDA released the briefing docs that the Advisory Committee it had convened would be using to aid them in their discussion. Routinely negative and devoted to picking apart data, these briefing docs in Dendreon’s case were actually mildly approving in spots. My expectations were met when the AC voted at the end of the day 17-0 for safety and 13-4 for efficacy. The stock price went from $5ish to nearly $13 the next day, and over the next month hit $25.

And the drug was not even approved yet! The AC vote means nothing – it is simply advisory. But the FDA had never, in the case of a terminal illness with few options, overridden an AC recommendation with rejection. Given my research, the potential market indicated that future sales even discounted back to present value, should yield a share price of around $40 to $50 very soon. Imagine that! Dendreon, within my IRA, was already nearly a quarter of a million dollars. I was having visions of paying off my house within a year from my brokerage account.

My wife started asking, “So when are you going to sell some?” My answer: “After approval.”

The rude awakening came when the FDA did say no, in the form of a Complete Response (or “approvable”) Letter, where the answer was: “Complete the ongoing trial and show us MORE proof”. The stock tumbled back to $7, and then to $5, and has bounced around since then. Me? I mostly got out around $6, as that ongoing trial wasn’t going to end until 2010. My wife still says, “I told you so,” occasionally.

So why dredge this up now? Dendreon amended their agreement on that ongoing trial and final results are now expected by April of this year. I’ve been building my position back up, as I still believe in the drug. However, given the market’s performance in the last year, and my promise to my wife to never concentrate our holdings quite so much again, I don’t have as many shares now as I did then. And I am revisiting my reasons for holding, AND my projected reasons for selling.

I still believe in Provenge. At the “interim” look at the data, it showed a 20% reduction in risk of death compared to the placebo group. In the prior trials, it showed a similar benefit at a similar time point… and later on an increasing benefit over time. There are extremely few and mild side effects, especially compared to the chemo alternative. But recall my second reason for investing – it made me feel “good”. I CANNOT allow myself anymore to use that as a reason for investing – biotech investors in particular are advised to “never fall in love with a stock”. So now that we are getting close to potential approval again, I have to decide when I will sell what percentage of my stake, and at what prices. I need this decided BEFOREHAND, so there is no emotion involved at the time. Note: I am fine with the risks of non-approval with the amount that I hold now! This decision is only for if approved.

My decision? I will sell a quarter of my holdings at $30, and another quarter of what I have remaining at $40. After that, when the company releases pricing and manufacturing capability, I’ll have more data to use to decide where to go from there. But my limit orders to sell are set, and honestly? I slept much better last night.

Rebalancing

I got my year end 401(k) statement this last week. Hoo boy! Was that ever depressing to look at – most of the stock mutual funds were down anywhere from 30 to 40 percent for the year. One fund alone, in which I have nearly ten percent of my holdings, was down 48%. FORTY EIGHT PERCENT! Just about cut in half, in twelve short months.

And yet, this is the time of opportunity. It is truly amazing to me how one’s fear or greed about the market makes one act almost exactly contrary to what one should actually do. Let’s give a real world example: I am buying a pair of tennis shoes. Lo and behold – my favorite brand is having a sale; if I buy two pairs, I get the second at half price. Now, my feet aren’t exactly going to change sizes anymore and I have no problems with having an extra shoe box in a closet for a half year or so. The same thing goes for groceries. If there is something you buy regularly on sale, you buy more of it. THIS IS SMART ECONOMIC BEHAVIOR. No one has to tell you the correct thing to do.

So let’s go back to this smart shopper when they open up this year’s IRA or 401(k) statements (if they open them at all). A quick scan shows the 30%, 40%, nearly 50% drop in their stock funds, and the first reaction is I NEED TO TRANSFER FROM STOCK TO BONDS, OR EVEN TO CASH. I have the exact opposite reaction. Stock funds are on sale!

Now, I am probably the lone voice in the wilderness when it comes to asset allocation within your 401(k). And if you are very close to retirement, or have to take a distribution within the next couple years, the following may not apply to you. But if you still have at least five years until you are going to start taking any money out, this will likely boost your eventual gains by a percentage point or two.

My preferred allocation would be 100% into stock. My lone bond fund is 15% and the remainder is spread between various stock funds (concentrated in small or mid caps, and international. If there are multiple choices of the same general type, I will go with the one with lower fees unless the 10 year returns differ significantly). And my 15% concession to bonds is precisely for times like these.

It is time to rebalance. For me, I do not need a precise recalibration where I move $2,197.31 from small cap X to mid cap Y and $948.28 from international A to high yield bond B so I end up, for one glorious day, with EXACTLY 7%, 8%, 10%, 10%, 15%, 15%, 15%, and 20% within my carefully selected list of funds. Come on – one day later those percentages will be off again.
Instead, I will take about half of my bond fund holdings and move it, about 25% each, into my small, mid, large, and international stock funds. Done! In about 6 months, if the market is still underperforming, then I will do the same thing again, with about 2/3 of whatever is in the bond fund at that time.

I am not a big advocate of rebalancing on any particular kind of schedule. But when there is the overall general fear and loathing of the stock market that we are experiencing today, it is time to buy some stock funds on sale. (And when, in four or five years, your grocery bagger is giving you a stock tip because EVERYONE is excited about the market going up forever, you may want to move 5% of your stock holdings into bonds)