...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