Sunday, March 29, 2009

ARNA Press Release tomorrow at 5:30 am Pacific time

Now that the press release is issued, I can mention the name of the company I've been raving about. I didn't want to invite scrutiny from regulators about pumping and dumping. Some of my friends and family have known about this speculative play for several weeks and months. I'm glad to say a few acted upon it. It was entirely their decision and they performed their own due diligence.

The timing of the conference call, 5:30 am Pacific time, is significant. It is pre-market opening, which suggests good results from their Phase III clinical trials. A positive announcement post-market close, leaves market manipulators plenty of time that evening and the next morning to manipulate the stock price, punishing shareholders in after hours training. Regarding the timing of announcements of pivotal trials: negative announcements are usually scheduled after market close, while positive announcements usually occur before market opening.

In fact, market manipulation is why this stock stayed at $4 for many days in March. The shorts drove the share prices down, making a profit on the share price decline. Shorting also benefited institutions betting on the share price rising, as they get to buy shares at a lower price. That's why it's common to see analysts downgrade stocks before an important announcement, which is exactly what happened with Arena. Market manipulation is nefarious and illegal, and these individuals and institutions should be bird-dogged and reported to the SEC. However, as an individual investor, and as one who acknowledge sometimes the system is rigged, one should adjust one's investment strategies accordingly. In my case, it allowed me multiple entry points to accumulate shares, because investor sentiment was negative, and I had conviction that Arena was on to something big--I had confidence that Lorcaserin is a game-changer.

Friday's close was $4.50. After positive results, I expect the market to gap up before tomorrow's market opening in the teens, with high volatility throughout the week, amid price spikes for the next few days. I will avoid trading as orders will be difficult to fill--I will just monitor it and watch the shorts scramble, while the share price soars.

Investing is risky and investing in biotech stocks even riskier. Do your own due diligence and consult your financial advisor, altho 99% of them are behind the learning curve. Proceed with caution, and good luck to all.

Disclosure: I own shares in ARNA underlying shares and ARNA call options.

SAN DIEGO, March 29 /PRNewswire-FirstCall/ -- Arena Pharmaceuticals, Inc. (Nasdaq: ARNA - News) today announced it will hold a conference call and webcast on Monday, March 30, 2009 at 8:30 a.m. Eastern Time (5:30 a.m. Pacific Time) to discuss top-line results from BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management), the first of two pivotal trials evaluating the safety and efficacy of lorcaserin for weight management. Jack Lief, President and Chief Executive Officer, Dominic P. Behan, Ph.D., Senior Vice President and Chief Scientific Officer, William R. Shanahan, M.D., Vice President and Chief Medical Officer, and Christen M. Anderson, M.D., Ph.D., Vice President, Clinical Development, will host the conference call.

The conference call may be accessed by dialing 877.874.1565 for domestic callers and 719.325.4758 for international callers. Please specify to the operator that you would like to join the "Lorcaserin BLOOM Trial Results" conference call. The conference call will be webcast live under the investor relations section of Arena's website at, and will be archived there for 30 days following the call. Please connect to Arena's website several minutes prior to the start of the broadcast to ensure adequate time for any software download that may be necessary.

About Arena Pharmaceuticals

Arena is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs in four major therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. Arena's most advanced drug candidate, lorcaserin, is being investigated in a Phase 3 clinical trial program for weight management. Arena's broad pipeline of novel compounds target G protein-coupled receptors, an important class of validated drug targets, and includes compounds being evaluated independently and with partners, including Merck & Co., Inc., and Ortho-McNeil-Janssen Pharmaceuticals, Inc.

Friday, March 27, 2009

Short Squeeze

It looks like the short squeeze is on for shares of the biotech firm I invested in. The price gapped up over 15% within the first hour of trading and is holding, despite the overall market being down (the Dow Jones was down over 100 points). Rumor has it they will announce results of a Phase III clinical trial Monday or Tuesday, and the longs are being joined by the shorts looking to cover their short bets.

Short interest is high, which could potentially intensify the short squeeze next week if results are positive. Call option volume is also high, indicating available shares are scarce, so shorts are turning to calls to hedge their short bets. Other factors that attracted me to this stock was high institutional ownership, relatively few floatable shares, and NONEXISTENT INSIDER SALES. In other words, executives believe in their products and their own company, instead of cashing out early for personal gain. Their interests are aligned with shareholders like myself. They are looking to build large enterprise value, instead of looking to cash out for their own immediate financial gain.

If results are negative, the shorties will overwhelm the longs, driving the price down by more than 75%. If results are positive, we could have a triple from here. Longer-term, with forthcoming Phase III trials also positive, a new drug application, an announcement of a co-marketing partner, and finally FDA approval, this company may attract a bidding war among big pharma companies to buy out the company. Big Pharma has been on an acquisition binge lately, as they aim to replenish their drug pipelines, as many of their drugs are about to go off-patent, destroying their profit margins in the process to generic manufacturers. Good for consumers, bad for Big Pharma. In any case, this tiny biotech company is on the radar of several potential acquirers, as they have shown promising results for a class of drugs that the Big Pharmas have failed to get FDA-approved.

If the company can secure enough capital to address cash flow concerns until FDA approval, the return to shareholders will be even larger, as the market potential for this drug is huge. Based on its risk/reward profile, this speculative play worth it, in my humble opinion.

Increasing shareholder value is contingent on execution by company executives and employees. But the absolutely essential ingredient is the golden goose. The drug needs to be effective and safe--everything else is noise. We should find out soon enough whether we have a mega-blockbuster on our hands, or a dud.

Rogue's Gallery

The photo op outside the White House of big bank CEO's who have received TARP funds looked eerily like a lineup of criminals--only in $3,000 suits.

Wednesday, March 25, 2009

Oh oh...looks like quantitative easing won't work after all

As I've ranted on endlessly, quantitative easing (QE), a method of monetizing debt where the central bank purchases it's own government bonds, has a poor track record. QE, which the Bank of England initiated two weeks ago, and the Fed is implementing this week, has the aim of reducing long-term interest rates, in order to facilitate an economic recovery. When homeowners can obtain low-interest mortgages (which are tied to bond yields), it is stimulative to the economy. It works great in theory, but in practice, it is disastrous long-term, as QE induces unintended inflation down the road. You can't print money and not expect inflation, once it flows into the economy. So the net effect is opposite to the desired effect long-term, even if its desired positive effect (lower interest rates) is temporary.

As someone who is betting on higher rates (and lower bond prices), I figured we had at least several quarters before 10- and 30-year yields would increase again--there would be a time lag before the stimulative effects took hold. But something more insidious is in play, and something I've also warned against frequently. This reversal of long-term interest rates rising again is already happening this week.

The Chinese sovereign fund has been the largest purchaser of said US Treasury bonds for their reserves, historically. Due to their distrust of our central bank's print-and-spend policies, they are unwilling to step up their buying anymore. This reduced demand from the Chinese and other foreign central banks result in lack of participation at these bond auctions. QE is inflationary, and no one wants to hold our debt for 30 years, betting there will be no inflation in that span of 30 years. Remember: inflation is a bond killer, as it eats into the income bond yields promise. Hence, this bubble will burst also. And when it does, yields will spike up, raising our country's borrowing costs (higher rates = lower bond prices). This will make it more difficult for the US Government, the borrower of last resort, to repay their IOU's. In this scenario, a default is imminent, ushering in not the Dark Age, but squarely into the Stone Age. This is my biggest fear, and why I was totally against QE--hence, my comments about the Fed selling its soul to the devil. There is no turning back now, because if rates keep climbing up, and our borrowing costs keep increasing (along with our debt), the Fed will keep buying more US Treasuries in a vicious spiral. I also mentioned the bond vigilantes resurfacing, the small group of big bond investors who keep irresponsible central banks in check. When this irresponsibility pops up, the vigilantes drive down bond prices, driving up interest rates simultaneously. This is bad for not only bonds, but it also very bad for stocks. Equities don't like high interest rates, because it makes the low yields on stocks unattractive (remember: investors buy stocks by betting on asset appreciation, not necessarily for income. They theoretically take on more risk in exchange for reaping greater rewards on rising equity prices).

The UK had a bond auction that actually failed, as there were NO buyers. So it's not just our bonds sovereign funds worldwide are shunning; there just isn't any demand for our debt as other countries hunker down and try to repair their economies.

Bottom line: there's just too much supply of debt out there, and not enough demand from untrusting foreign bond buyers. This will lead to long-term interest rates, no matter how much intervention central banks attempt. Using QE, these central banks are just distorting interest rates short-term, but harming the long-term economic health of our economy.

Why I bought natural gas yesterday

Most raw material producers and mines have either gone out of business, or have shut down capacity, due to an overshoot on pricing to the low side--they were losing money with every production dollar they were spending. Mines and drills are expensive to shut down, and even more expensive to start back up--plus they take time.

In other words, due to cash concerns, these raw material producers are shutting down capacity when they should precisely be increasing capacity when prices are low. Because when the recovery occurs, there will be a time lag for them to start up production. This lag creates pricing bubbles, as too many dollars chase too few goods.

Natural gas prices bottomed out last week, so I bought into a natural gas mutual fund yesterday. If natural gas prices double by next year (winter season), this will triple or quadruple. I purchased some natural gas pipelines for the dividend income last quarter, but I just didn't have time to research individual companies in the sector, so I used an IRA account which specifically caters to no-load mutual funds.

Anyway, since natural gas prices are so low, more fleet vehicles are being converted. We'll have rallies and declines along the way, and I'm not trying to time the moves, but at these levels, I found the trade attractive. As our economy attempts to transition away from oil and coal toward renewable energy, the movement is real, but this weaning process may take years and even decades. Meanwhile, natural gas is a stopgap solution, as it is not renewable, but it is the least offensive to our environment.

But the overriding reason why I targeted natural gas last week is because natural gas CEO's were even more bearish than many investors. Think about it: these guys are supposed to be the biggest cheerleaders for their industry and their respective companies, yet they were joining the doom and gloom crowd. My contrarian antenna was triggered. So I waited for a confirmation move up and jumped in yesterday. I could be early, but if you look at the charts, I'm buying near the bottom--no one can time a bottom or top perfectly. But if you buy right, you can still capture the majority of the move.

So I really am pulling for Obama, cheering for a recovery, even if it is muted and inconsistent, as a high debt load and high taxes dampen any chance of a meaningful economic recovery. At the end of the day, we're all dead anyway.

Sunday, March 22, 2009

What to do about Toxic Assets

I've never professed to be an economist, and I know little about politics and economic policy. I do try to apply common sense, sprinkled in with morsels of demand/supply dynamics and market timing. I've never proffered up solutions to our global financial crisis due to its depth and severity, but it's gotten to the point where I feel the need to throw my hat into the wring. So here goes:

Credit default swaps (cds), which basically insured the collaterized mortgage obligations (cmo), were transacted between private parties (banks, sovereign funds, pension funds, hedge funds, private equity funds, AIG), outside of exchanges. The quants used algorithms (specifically, Gaussian copula) to price these mortgage-backed securities and swaps, and the software models blew up when real estate values plummeted and defaults skyrocketed. We've covered this topic ad nauseum.

For equities, we have the NYSE, NASDAQ, and other stock exchanges around the world. For fixed-income (bonds), derivatives (options, futures), and commodities, we have the CBOE and COMEX exchanges, for instance.

How about the buyers of these swaps open up their kimonos, and expose these assets? If they don't like the mark to market pricing, put them all onto an exchange, where all parties can see the composition of assets, and then let the markets decide how much they are really worth. If that means they are only worth 20 cents on the dollar, so be it--let them take a bath on them. That's better than burying it in their portfolio, pretending they aren't there. And once exposed, perhaps they are worth more than current panic levels....maybe they would get 60 cents on the dollar. Mark to market accounting prices these assets at liquidation levels, so they would be lucky to get 10 cents on the dollar. The underlying environment is that over 90% of mortgages are not delinquent--yet mark to market valuation prices in a 30% default rate.

Banks have what consumers are experiencing: 401K syndrome. Individuals aren't even opening up their mail because they are scared to see how much their 401K statements have declined.

During the Savings and Loan (FSLIC) crisis, the RTC was formed to consolidate these bad loans, write them down, price them, and sell them off. Granted, today's financial crisis is orders of magnitude greater, but the concept should be the same. Put a Bill Seidman in charge of disposing the assets.

To just sit on the these toxic assets--hoping home balance sheets will magically improve, and defaults will magically decrease--is lunacy if unemployment keeps rising.

In other words, because these transactions were synthetic, outside the auspices of an exchange and subject to mispricing, wouldn't it make sense to put them all into an exchange, and have markets price them in a transparent environment?

For instance, on a micro level, when a borrower defaults, no one knows how much that house is worth anymore. Other homes in the neighborhood are affected, and the more foreclosures, the more distorted the pricing. But put them up into an auction in a foreclosure sale, and the market determines the value of that house--and other homes in the neighborhood.

It seems logical, but I'm not sure the government will figure it out. They're just going to throw more good money at bad money, bailing out special interest groups, and distorting market pricing even more, prolonging any chance of a bottoming out process.

Having said that, the government doing the exact wrong thing makes it easier for investors. Just keep playing the reflation thesis.

Saturday, March 21, 2009


I watched a news segment last night on First Lady Mrs. Obama leading a group of kids in starting a garden on the White House compounds. The White House chef staff recommended they garden so they can grow their own vegetables.

It was a good Kodak moment, capturing a bunch of kids turning green and helping the First Family become nutritionally self-sufficient.

But the underlying message was crystal clear. Mr. Obama is not stupid. He knows these trillion dollar spending bills and bailouts, and pumping the economy with even more trillions can only lead to inflation. Food prices will soar within the next several years, if not sooner. More people will turn to gardening for emotional, environmental, and financial reasons. The Obamas are only giving us some subliminal propaganda. Grow your own food, because the prices you pay at the checkout register will be exorbitant.

President Obama and Congress know they are backed into a corner. In order to service our huge national debt, they have two options: inflate or die. They are choosing the inflation option. Families should be wise to protect their declining purchasing power.

Friday, March 20, 2009


Without getting ideaological (okay, I'm lying, let's get ideaological), enclosed is an interesting note from well-respected Dennis Gartman:

Speaking at the People’s Congress in Beijing recently, Premier Wen Jiabo made it quite clear that China intends fully to achieve 8% growth in GDP this year. Not next year; not two years hence, but this year...’09; the year of the Ox... this year.

Interestingly, Mr. Wen made it clear that not only was the government intent upon force feeding liquidity into the nation’s banks, but was also prepared to make material cuts in income taxes, across the board to sponsor such growth.

Wen made it clear that the only way he can see Chinese economic growth returning to the not-so-long-ago-lost halcyon days of 9% growth almost relentlessly shall require more than simple reserve injections.

Mr. Wen said that it is his intention to turn China from an export driven society to a consumer driven one instead. He know that liquidity alone will not suffice to do what Beijing needs the economy to do; hence Mr. Wen will begin this new era of growing consumer demand by cutting corporate and personal income taxes. According to The China Daily, Mr. Wen said, in the simplest of terms, that it is Beijing’s intention to spur the economy forward by “boosting domestic demand through residential tax cuts, in addition to the levy reduction for companies.”

The latter has already been put into effect; the former is coming. Mr. Wen’s proposed “residential” tax cuts include tax cuts on securities transactions; tax cuts on property sales; smaller taxes on exports and an end to a number of “administrative charges” on various goods and services. At a time when American law makers on the Left are debating the possibilities of taxing stock transactions, the Chinese are moving to end them!

Further, China is moving swiftly ahead with very real “infrastructure” spending. The new term here in the US is “shovel ready.” Our stimulus program is manifestly un-shovel ready; in China, the shovels are already at hand and the programs are being put into effect, with workers being hired and ground being broken.

Mr. Wen has the calendar working for him too, for this year marks the 60th anniversary of the founding of the People’s Republic. As is always the case, China will have myriad numbers of building programs in place to commemorate that event. Too... and this is hard for us to believe, for time passes so quickly... this is the 20th anniversary of the Tiananmen Square Uprising. Mr. Wen and Mr. Hu will want to make certain that things are on the economic mend in order to keep dissidents wrong-footed throughout the years.

This is a strange era in which we live then. We live at a time when ex-Communists are taking the more free market route toward a consumer led society. We are living in an era when Beijing reads Atlas Shrugged and Washington reads The Manchester Guardian. We are living in an era when tax cuts of all sorts are effected by Beijing, while Washington talks about and effects tax increases of all sorts. We live in an era when Beijing gets out of the way of entrepreneurs, and Washington throws rocks and rubble in their way instead.

As was said in Ecclesiastes, “To everything, turn, turn, turn...”

Good Luck and Good Trading,

Dennis Gartman

Wednesday, March 18, 2009

Seminal Event today

The equities and bond markets celebrated today, as they rallied when the Federal Reserve Bank announced they were going to purchase over $500 billion of mortgaged-back bonds and $300 billion of 10- and 30-year US Treasury bonds. Bond prices spiked up, as yields plummeted, in tandem with equities leaping forward. Main Street celebrated also, as mortgage rates, tied to interest rates, dropped to 4%.

However, this is premature celebration, because this will negatively impact our economy and financial systems long-term. What? Has Greg gone crazy?

No, I am not crazy--I am a student of financial history. This so-called "quantitative easing", or "monetizing the debt", is fancy-speak for "creating dollars out of thin air". This is a desperate attempt by the Fed to artificially suppress interest rates to aid in the economic recovery. The short-term result is that we will have a mild recovery as credit is loosened and liquidity is injected into the economy. But just like the real estate bubble, this will be false prosperity, as it is debt-financed. In other words, it is what got us into trouble in the first place, and this Fed action only exacerbates the problem, and prolongs this recession.

It satiates the general population because it provides a floor for our 401K's and the value of our home prices, but it is an artificial floor, and will delay the bottoming out process.

But let's look at the other side of the ledger--our nation's liabilities. This increases our nation's debt by at least another trillion dollars. This will obviously dampen future gross domestic product growth. But the most insidious unintended consequence is hyperinflation. We will now have too many dollars chasing too few resources. The proof is that the price of gold shot up $50 in a matter of minutes within the Fed's announcement.

Our parents taught us that there is no free lunch, and that we had to work for everything we received. We will all learn this lesson going forward. You can't just create dollars out of thin air and not pay the price.

My prognosis? Expect markets to rally on the short-term news. But expect future economic growth to be choked off for years. Expect inflation to soar--think the 1970's decade, when we had stagflation--stagnant growth, high unemployment, an anemic economy made worse by high inflation (and decreased consumer purchasing power). Investors lost money in equities and bonds, as inflation soared as did interest rates. Savers, investors, and retirees living on a fixed income will get crushed by inflation. Perversely enough, debtors will be rewarded, and 30-year mortgage borrowers will benefit due to deflated dollars servicing that debt. Of course, the United States is the largest debtor nation in the world, so there is one silver lining with inflation. But sovereign funds holding US Treasuries in their reserves won't be too happy left holding the bag on a declining asset.

As much as I disagree with our government's fiscal and monetary policies, I have prepared for this day for several months. I am long gold, silver, oil, commodities, and will short 30-year Treasury bonds again. Equities will rally short-term, but will decline again. That's why I am only long one biotech company that I believe will explode later this month. Otherwise, I will avoid stocks until I see blood in the streets, which I expect sometime in the future. Long-term (2-5 years out), expect rising inflation, and a bull market in hard and soft commodities.

This will put the Fed in a pickle, as they will have to raise short-term interest rates to stifle inflation. But the political will to do so will be absent, as raising rates will inhibit economic growth before it can even have a chance to recover. My prediction is that they will have to let inflation soar to aid growth and reduce the burden of our huge national debt (inflation lessens that debt level because it is paid back in the future with deflated dollars). High interest rates make that debt harder to service. Inflation becomes the lesser of two evils at that point, as inflation becomes a hidden tax on unknowing consumers. Some of you wiser (i.e. older) folks probably remember gas lines and soaring inflation in the 70's. That is a best-case scenario for us today, unfortunately.

Eventually 30-year Treasury bonds will plummet in value in the biggest bubble, as long-term interest rates soar. The Fed influences short-term interest rates with policy, but the long-end of the curve cannot be manipulated long-term. Bond markets anticipate inflation--or lack thereof. If a bond investor anticipates higher inflation, he/she will demand a higher yield to offset that inflation. Higher yields mean a lower price for that bond. That is exactly what the Chinese sovereign funds are worried about, as they hold almost a $1 trillion of our IOU's.

The effects of Fed intervention like we saw today are temporary. The short-term effects of the Fed buying US Treasuries is stimulative, but long-term, it ironically achieves the exact opposite, stoking inflation and forcing those same interest rates higher.

One can profit from this populist, but wrong-headed move by the Fed, but I will not celebrate it. Our elected government officials have doomed our economy for several years, if not for a decade.

Our government really only has two options: Inflate, or die. Obviously, they have chosen to inflate. But this option has unintended consequences down the road. Be like the Boy Scouts. Be prepared.

Monday, March 16, 2009


A few readers of this blog have asked me why I haven't been more specific in my posts, regarding investment picks. It's a regulatory issue--it is a slippery slope to offer specific stock recommendations in an open forum, even when properly licensed by the SEC. This prevents the notorious "pump and dump" schemes, where hucksters attract the vulnerable into questional stock schemes, only to pull the rug from under them, leaving them holding the bag, as the stock crashes. It's hard enough trying to make money without the added pressure of snake oil salesmen.

And sometimes the regulation is obsolete. For instance, the SEC forbids licensed financial planners from implementing home equity management strategies, deeming them risky apparently. Quite the contrary: home equity management can be the most conservative strategy for wealth-building, assuming a mortgage is preferred debt (deductible) and investments compound in a tax-free positive arbitrage scenario. A white paper by the Chicago Federal Reserve Bank explicitly addresses this, theorizing most Americans are building equity inefficiently by making extra principal payments on their mortgage.

I will offer some insight on what I have purchased or sold, and my investment theses, but with disclosures and disclaimers for readers to consult with their financial advisors.

I would further caution readers to look beyond qualifications and professional accreditations in sizing up financial professionals. After all, most professional advisors lost money for their clients in the last decade--in some cases, huge losses, despite the latest hedging techniques and portfolio theories.

If you're not comfortable with them, or if you don't understand what services they offer, move on and find someone you are comfortable with. Make sure your expectations are aligned on the criteria for YOUR success. Many people lost millions trusting their money with Bernie Madoff, because they didn't perform due diligence and blindly trusted someone who turned out to be a crook.

The best way to prevent becoming a victim of fraud or of the markets is to raise your financial IQ. Personally, I would never invest in something unless I knew everything there was to know about it. I would apply the same caution before considering marriage. But I understand most people don't have the inclination or capability of understanding investment concepts. These people need to find advisors they can trust. Getting referrals, and doing some cursory investigation is a pre-requisite, but understand that even that won't always prevent embezzlement (see Madoff as a glaring example), negligence, or just asset bubbles bursting. As in life, there is no free lunch--you must do your homework. How much is up to the individual.

Tuesday, March 10, 2009

Are You Sure You Want a Tax Hike?

These are the taxes we are already subjected to:

* Accounts Receivable Tax
* Building Permit Tax
* CDL License Tax
* Cigarette Tax
* Corporate Income Tax
* Dog License Tax
* Excise Tax
* Federal Income Tax
* Federal Unemployment Tax (FUTA)
* Fishing License Tax
* Food License Tax
* Fuel Permit Tax
* Gasoline Tax
* Gross Receipts Tax
* Hunting License Tax
* Inheritance Tax
* Inventory Tax
* IRS Interest /IRS Penalties
* Liquor Tax
* Luxury Taxes
* Marriage License Tax
* Medicare Tax
* Personal Property Tax
* Property Tax
* Real Estate Tax
* Service Charge Tax
* Social Security Tax
* Road Usage Tax
* Sales Tax
* Recreational Vehicle Tax
* School Tax
* State Income Tax
* State Unemployment Tax (SUTA)
* Telephone Federal Excise Tax
* Utility Taxes
* Vehicle Sales Tax
* Watercraft Registration Tax
* Well Permit Tax
* Telephone State and Local Tax
* Telephone Usage Charge Tax
* Vehicle License Registration Tax
* Workers Compensation Tax.
* Telephone Federal Universal Service Fee Tax
* Telephone Federal, State and Local Surcharge Taxes
* Telephone Minimum Usage Surcharge Tax
* Telephone Recurring and Non-recurring Charges Tax

I hope I haven't missed any.

Alan Greenspan quote

Former Federal Reserve Chairman has a curious quote:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

-Alan Greenspan – 1966

Sounds like he has done a complete 180 degree turn over the years.

Monday, March 9, 2009

Due Diligence

In this environment, there's not much to be excited about in the stock market. I'm hearing many aren't even opening up their 401k statements, knowing they're down over 50% from their 2007 peak levels, and knowing they've been declining for months on end.

I believe we haven't reached a secular low in this bear market yet, but I do believe when we do reach it, it will be the buying opportunity of a lifetime. In between, we may even experience violent bear market rallies, but the trend is still down.

It just doesn't feel like a bottom, because so many are trying to find it. Stock market bottoms usually aren't reached until the last bull has thrown in the towel. I don't think we're there yet.

Yes, some stocks are cheap, but they could get cheaper. Investors with a very long-term horizon (10+ years) will probably do well buying at current levels, and if the fear is missing the train, perhaps nibbling at solid companies with cash flow, dominant market share, and low debt levels may be tempting. But this falling sword isn't done falling yet.

Meanwhile, aside from precious metals, the only promising sector I see is biotech, as they look increasingly enticing as acquisition targets. Big pharma companies face daunting challenges going forward, as their pipelines are depleted and at risk of being decimated due to patent expiration. Pfizer will acquire Wyeth, and Merck is paying over $41 billion for Schering-Plough. Genentech is mulling over Roche's higher bid of $95 per share. Expect to see more mergers and acquisitions activity.

I've placed bets on a biopharmaceutical company that will announce results of Phase III clinical trails by the end of this month. It's a calculated speculation--if results are negative--either due to lack of efficacy or safety, it'll drop by 50%. However, if results are positive, it will triple. If a partnership agreement is offered to co-market the drug, it should double again. And if an outright buyout offer is made, it'll double again. I like that reward/risk profile.

I performed heavy due diligence on the company: no insider selling, phase I and II trials results, manufacturing facilities, preliminary feedback, competitive analysis, marketing partners, history, fundamental analysis, subjective analysis and technical analysis. All indicators look good, but with biotech, the odds are indeed against success. Volatility is high. In other words, biotech investing is not for the faint of heart. It can be disastrous, but it can also be extremely rewarding--both for investors and health patients. Good luck to all longs.

Friday, March 6, 2009

Educators Cratering

My put options on a for-profit education company gapped up big on Tuesday, as concerns about fraud and business practices surfaced. My investment thesis about these educators remain intact: students are better off attending junior colleges as they avoid the $70,000 student loan debt they incur by attending these for-profit schools. If they are going to shell out that type of tuition dollars, they are better off attending accredited universities. While I won't go so far as to declare these for-profit schools scams, I will say job prospects for graduates are sketchy at best. Factor in a tough job market, and you can imagine their ability to repay these massive student loans is minimal.

These company stocks have had a long, explosive two-year run up, against the backdrop of a declining stock market. The conventional wisdom is that these schools thrive as unemployed individuals go back to school, seeking to upgrade job skills. This prevailing investment thesis has worked, but the run is over, as graduates face a rising probability of defaulting on these student loans.

I normally don't short shares, as your losses can theoretically be unlimited if stock prices keep climbing, but I have used put options to limit my losses. Even if the time value of options decreases, puts and calls allow investors to realize much bigger profits. Having said that, the put options have been immensely profitable, because the price declines have been swift, as the price action has broken support levels.

I would posit that put options on the market overall have been very profitable. I chose to short this educational segment due to:

1) overall market weakness: if a rising tide lifts all boats, a receding tide sinks most boats.
2) this for-profit educational sector has had a terrific run up the last 2 years
3) this sector looks especially vulnerable fundamentally due to lack of government subsidies going forward, questionable sales practices, poor value proposition education-wise
4) poor price action and volume technical indicators
5) and most damning, heavy selling by company insiders.

When the company's biggest supporters and executives are selling their own shares at high prices, the average investor should sit up and take notice.

Monday, March 2, 2009

Spare Change

"Brother, can you spare a dime--or two? Actually, can you spare another $30 billion?" - AIG.

Wow, AIG announced a loss of $61.7 Billion last quarter, for a total loss of almost $100 Billion last year, both record highs in American financial history.

The market is so numb to bad news, it "only" dropped a couple percentage points overseas. While I've always believed the market is headed below 6,000--and it is opening below 7,000 this morning after the bad news, it has fallen so sharply in the last 3 weeks that market conditions are extremely oversold. A snapback rally here wouldn't surprise me (I know some of you think I'm REALLY crazy now), but alas, any rallies for the next several YEARS will be violent but short-lived, as we have not reached our secular low water level yet.

Remember: as a contrarian, you want to do the exact OPPOSITE of what everyone else is doing. However, as an investor, bear market forces are too strong to jump back in. Stay on the sidelines for a couple years--do nothing until we have confirmation of a bottom. As a swing trader, this temporary oversold condition may look tempting, but be careful--no need to catch a falling knife--it could cut you. In other words, even though technical analysis suggests an oversold equities market, sometimes fundamentals out-trump technicals. You can try to play the bounce, but conditions are still extremely perilous. Some high-quality stocks may seem cheap, but they could get cheaper. And many stocks may just get trashed due to lack of liquidity and credit.