Chrysler files BK

Chrysler filed for Chapter 11, as more taxpayer funds were thrown down the rat hole once again. This bankruptcy should have occurred six months ago, but the government had to throw more dollars at it.

Obama spun Chrysler's demise like it was a desirable outcome. Necessary, but certainly not desirable...there is a huge difference. This is just a barometer for how far down American industry has declined.

Taking profits

And in these skittish markets, I'm not ashamed. Took some profits on TBT, up 50% due to rising 30-year T-bond rates (TBT is a double short ETF betting on rising bond yields and declining bond prices). It gapped up today and could break out, so I kept some on the table. But with a 50% profit, I had to take some off the table. If the Fed goes through with quantitative easing and monetizes that debt, they could temporarily drive bond prices up and yields down. Long-term, I'm still bearish Treasury bonds, so I will wait for another good entry point to buy TBT. But with volatile markets, you take your winners and cut your losers. Buy and hold won't work going forward (it didn't work in the last decade either).

Also, I cashed out partial positions in a uranium stock (up 25%), and of course DNDN this morning for a better than 300% pop. Notice I said "partial", as I am merely taking some profits, but letting the house money ride. Most professional traders average in their buys, and average out their sells, because no one can buy at the absolute bottom or sell at the absolute top. Don't blow your wad with one initial big trade. And don't get discouraged if the price drops a little as soon as you buy, or goes up a little when you sell. Knowing when to sell is as important as knowing when to buy.

The reflation play is still intact, and I will be looking to buy into dips on hard assets (commodities, precious metals, energy). We are in the throes of a bear market rally, but I certainly don't want to stand in the way of stampeding longs. When I hear talk of the beginning of a new bull market, I'll know this rally would have been a head fake, at which point I will buy some appropriate puts. If I miss the big decline--oh well. NOT losing money in this market is like a win.

I also want to get liquid and keep my powder dry, as another biotech opportunity is presenting itself. This may not be another DNDN blockbuster, but FDA approval seems imminent. Stay tuned.

In the "couda, wouda, shouda" department...

Most investors who stayed the course with DNDN yesterday, and did NOT put any stop market orders in place turned a profit, averting a total disaster by not having shares sold away to market makers looking to take out nervous retail investors.

But this was a "black swan" scenario that I did brainstorm--but did not carry out in practice, because I stupidly didn't think a bear raid of that magnitude would happen.

I could have purchased more shares cheaply by placing a good till canceled (GTC) limit buy order (usually good for 30 days) at $7.50, $10, $12.00 etc, or wherever I thought it might drop to. I actually brain stormed every scenario, even selling puts (buying at the strike price), but decided against it as I didn't think it would happen.

Another stupid non-decision on my part, because that's exactly what happened.

But to reiterate: always use limit orders, whether to buy, sell, or stop loss...always, especially in volatile markets. When implementing a stop loss order, do not tell your broker what your price is, and always use a stop limit order if you're going to put in a stop loss. A few readers of my blog have already told me this piece of advice has already saved them thousands of dollars.

Manipulation

In a sure sign that shares of DNDN were manipulated from $24 down to $12 before being halted in the afternoon, shares opened above $25 in after hours trading after the halt, after a great conference call. Shorts got a reprieve, cross trading with other funds, market makers took out the weak retail longs, and Wall Street was richer, even those that bet wrong. The losers were the longs who had stop-market orders filled.

There should be an investigation by the SEC, but my hopes are dim. NASDAQ did a quickie investigation for possible "erroneous trades" before declaring all trades stand. How does one make a 2 million share "erroneous trade"?

As for DNDN itself, I'm looking to take some profits off the table, and keeping a core holding for long-term growth. If folks held on with no stop loss orders, you're still green (up) today. I told you to expect fireworks today!

NASDAQ investigating

Share of DNDN dropped 45% before being halted--prior to their announcement of Provenge results at the AUA. NASDAQ allegedly launched an investigation, according to CNBC. This is an obvious case of stock price manipulation, and some parties will be prosecuted--probably short-sellers looking for an escape from losing positions.

Investors/traders with stop loss orders got taken out--at much lower prices than they planned, and will have legitimate complaints. Whether they can recoup their shares or money is yet to be determined, but this only validates what I have been reiterating all along: never, ever tell your broker what your stop loss limits are--you will be taken out of your position by unscrupulous market makers and large funds. Keep the stop loss in your head. There are numerous stop loss orders, including stop-limit and stop-market orders which you should be aware of, but I will never tell them to my broker, despite conventional wisdom claiming stop-loss orders are necessary for risk management. Often, stop loss orders are disastrous, as today's action in DNDN painfully illustrated.

Next pivotal event for DNDN

Tomorrow (April 28) at 12:20 pm Pacific time, Dendreon will present detailed results of Phase III clinical trials for Provenge, a prostate cancer immunotherapy.

Shares of DNDN tripled April 14, when CEO Mitchell Gold presented "unambiguous" top-line results that Provenge met its 22% primary endpoint survival benefit above the placebo control group.

Mike Huckman of CNBC is preparing several updates and interviews from Dr. Gold at the American Urological Association conference in Chicago. A "clear hit" as quoted by Dr. Gold two weeks ago, could cause shares of DNDN to soar even more. A disappointing result could cause shares to tank. Given his positive, upbeat announcement, while offering no metrics, I would be surprised if the survival benefit guideline was not surpassed by a wide margin, as that would invite shareholder lawsuits.

http://www.cnbc.com/id/30389525

Notice Huckman's comment on shares possibly being halted again. This could potentially be music to those long on the shares, as that occurred April 14 in pre-market trading, when the shorts got squeezed. Look for fireworks tomorrow.

This belongs in the "You're kidding!" bin

I really wasn't kidding about a crime wave due to this economic disaster. According to Matthew Collins, crime does pay:

As it appears that the rule of law may already be breaking down in the U.S.

Perilously underfunded, the District Attorney of Contra Costa County – not to be confused with Solano County…the home of Vallejo – made a tough decision when faced with a shortage of manpower…

They won’t be prosecuting misdemeanors like assaults, burglaries, and minor drug possession. So if you’ve been caught for any of those crimes in Contra Costa…you might actually be off the hook.

Now, to be sure, the cops are still hard at work. They made a point of insisting to the media that you can still get arrested for things like blowing through stop signs or getting into a street fight. But when they wrap your case up and forward it to the DA, it may or not end up being prosecuted…depending on the DA’s cash flow situation.

Now again, this situation in Contra Costa is not to be confused with the highly publicized bankruptcy of Vallejo, in Solano County. I’ve even personally made that mistake in the past…making the naïve assumption that there was only one nightmarish breakdown of law and order in the state of California. But apparently it was more of a trend…and indeed, something stinks about California – the world’s sixth-largest economy.

Contra Costa fell victim to the same “who coulda seen that comin’?” virus that racked Vallejo. Home to just over a million mostly mild-mannered folks, Contra Costa’s government minimized its costs back in the '70’s and '80’s by promising lavish health and retirement benefits…so that city workers would accept lower wages at the moment.

No actuarial tables…no real planning…and no real concern for what they could actually afford, Contra Costa’s government threw good money after more good money at their employees. But all pipers demand payment, and this one was no different. Turns out Contra Costa’s government had to keep all those promises when their employees went to retire.

And then there was an entirely different set of promises they had to keep when the housing bubble fell apart. Promises of unemployment benefits, social services, etc. WHAMMY! As the sportscaster says…and suddenly the tiny municipality is out of money.

China has been furtively buying gold since 2003

There's a rule of thumb investors should consider: when a country's central bank or sovereign fund managers publicly state their intentions, bet on them doing the exact opposite. A few months ago, the Chinese Finance Minister was questioned on what their plans were for their surplus reserves. He basically said they were going to continue purchasing dollar-denominated assets, namely US Treasury bills and bonds. His mock rhetorical question: "What else are we going to buy--gold?"

Well, it's been now confirmed by this Reuter's article that is exactly what they have been doing--on the sly.

http://www.reuters.com/article/ousivMolt/idUSTRE53N18T20090424

Note the last portion of the article on the second page:

"The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.

"It's not a matter of a few hundred, or 1,000 tons. China should hold more because of its new international status, and because of the financial crisis," he said.

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

The European Central Bank recommends its member banks hold 15 percent of their reserves in gold, but among Asian nations the percentage is far smaller, said Albert Cheng, World Gold Council managing director for the far east.

My comment: if the Euro central bank is recommending their member banks hold 15% of their reserves in gold, would it not be prudent for individuals also? And if China continues to buy gold in lieu of US Treasury bonds, what are the implications?

My long position on gold and silver just got more bullish, as did TBT, a double short on 30-year Treasury bonds (a wager bond prices will drop accompanied by a rise in bond yields). Again, believe what they do, not what they say.

The Communist Manifesto

Here are ten conditions for transition to communism in the Communist Manifesto, penned by Karl Marx and Friedrich Engels:

1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all right of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
6. Centralisation of the means of communication and transport in the hands of the State.
7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
8. Equal liability of all to labour. Establishment of industrial armies,
especially for agriculture.
9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equal distribution of the population over the country.
10. Free education for all children in public schools. Abolition of children's factory labour in its present form. Combination of education with industrial production.

This looks eerily similar to policies from our nation's capitol.

Former Federal Reserve comments

Bill Poole, former head of the St. Louis Fed, said: "We are very vulnerable to an inflation explosion."

And Paul Volcker, former Fed Chairman, warned: "The [Bernanke] Fed is telling people... they're going to be losing half their purchasing power."

Profitable bulemia

The scenario of banks downgrading each other's balance sheets due to opaque accounting of toxic assets is understandable--they are competitors after all. If misery loves company, one could argue perhaps they should be cheering each other on in their attempts to restore their balance sheets to solvency.

But there's an interesting twist in this game of mutual cannibalism: not only are they throwing stones at each other's glass houses, they are also betting on their own demise. Let me repeat: banks are profiting from bets against their own solvency.

Here's an excerpt from The Daily Reckoning:

But something magic happened in the fixed income trading group for Citi. This is pure gold if you like arcane financial statements packed with fictional earnings. If you dig into the quarterly report, you'll learn than fixed income trading revenues were boosted by a "net $2.5 billion positive CVA on derivative positions, excluding monoclines, mainly due to the widening of Citi's CDS spread.

That takes some sorting out. A CVA is a "credit value adjustment." As you can learn here, it's the credit risk premium of a derivative contract. Once you sort it out, you learn that Citi "made" $2.5 billion on a derivatives position designed to profit when the companies own credit default swaps spreads widen.

Or, in plain English, Citi profited because it made a bet that the cost of insuring itself against a default would go up. The credit default swap market is the place where you can bet on the credit worthiness of a firm, or, essentially, the chance that a firm might default on its bonds. Citi appears to have reported a $2.5 billion trading gain in the fourth quarter precisely because the market thought the company stood a good chance of failing (hence the widening CDS spread).

As far as we can tell, if you use this kind of perverted logic, the closer Citi gets to bankruptcy, the more money it would "make" on its derivatives. That shows you how bogus the quarterly number was. The company reported declining revenues in its core banking and lending activities. But thanks to fixed income and this handy $2.5 billion CVA, the company was able to report $1.5 billion in net income.

The financial bazaar has truly turned bizarre.

Michael Murphy's take on Dendreon

Murphy is a well-respected investor newsletter writer. His claim to fame was making the right call on biotech behemoths Amgen, Biogen, and Genentech (recently bought out by Roche).


http://seekingalpha.com/instablog/128006-michael-murphy/1133-dendreon-a-360-stock-or-is-that-too-low

He's obviously bullish on DNDN, but a peak into his newsletter reveals he's also bullish on MELA and ARNA.

Do your due diligence and good luck.

Disclosure: I am long DNDN and ARNA.

The FDA drug approval process

Clarity and purpose are very important to me: it is tough to make money in manipulated markets, and I try my best to teach people how money works.

That's why I divorce myself from politics: what the government is doing is more important to me than what our elected officials claim they are doing.

A stock like Dendreon was trading at $3 for a reason--market makers, hedge funds, analysts, and even big pharma companies manipulate the share price down via short selling--one would think they would want a higher price per share. For reasons I've gone to at length, they use the media to rig the markets into suppressing the share price. One analyst--the night before Phase III clinical trial results announcement, reiterated a $1 price target, when it had closed at $7.30 the day before. The next morning, in pre-market trading, it spiked up to $26. The shorts got wiped out and are scrambling to cover in a short squeeze.

A buy out offer just got that much more expensive for any big pharma suitors. In fact, the company is going to go at it alone, manufacturing and marketing the drug themselves in the US, and partnering with another company to penetrate Europe. Valuations from analysts now range between $40 to $300, as this immunotherapy for prostate cancer could potentially extend to cancers of the breast, kidney, colecteral, lung, head and neck, etc. Chemotheraphy companies had a stake in suppressing this technology as well, as they will be wiped out when this treatment gains traction. Couple that with a corrupt FDA with members on the advisory panel with admittedly conflicting interests, and it is no wonder 80% of drugs are rejected by the FDA.

Once in a while, a blockbuster drug comes along. In other words, just because a stock is $3 doesn't mean it stays there, despite darker forces at work. The key is to uncover value when you see it, against a sea of skepticism. Most of the time, the skepticism is warranted. But when it's not, it's a gold mine. I researched DNDN in February, before pulling the trigger just days before their pivotal announcement last week. No textbook or classroom is going to teach me that. The Street (Wall Street and Main Street) is still mulling over an imminent GM bankruptcy, toxic bank assets, bailouts, stimulus bills, yada yada yada. These were discounted into the markets 9 months ago. The funny part is just as the market is getting complacent about real estate foreclosures, a 2nd wave is about to hit more neighborhoods. In order to succeed in investing, look ahead and anticipate what the markets will do. Don't invest based on current events alone--that is looking in the rearview mirror.

Drought in California

Despite heavy rains so far in 2009, California has experienced a devastating 3-year drought. Many farmers from the central valley have let crops die, or chose to irrigate with water costing $600/acre vs. the normal $30/acre.

From Fiona Ma, San Francisco City Councilwoman on her Facebook profile:

At the San Luis Dam with a ton of folks. We need water reform. Farms are drying up, we r losing jobs & economic $. Awaiting the Governor.

My translation: buy agriculture (crops, fertilizer), and water companies--equipment (pumps, filters) and technology (desalinization).

Why I like natural gas

The reason why I believe natural gas prices have reached bottom: because no one else does. That's it--that's my investment thesis. I own some natural gas pipelines for their high dividends, but I bought a natural gas mutual fund in my Fidelity account several weeks ago as a sector rotation play in my IRA.

Most people thought I was crazy, which was reaffirming. But the reason why I dove in? Last month, in an interview with Jim Cramer's Mad Money show on CNBC, the CEO of a natural gas company CEO was so bearish that he could not call a bottom on natural gas prices. I commend him for being an honest CEO (a rare commodity these days), but the fact that someone who should be the biggest cheerleader for his industry was so glum about his company's prospects triggered a buy alert inside of me. He went on and on about demand destruction due to the weakening worldwide economy, exploding inventories, yada yada yada.

But in between the gloom and doom, he also mentioned his company and his peers were closing down wells at record amounts, because gas prices were so low that they were bleeding cash with each drilling. In other words, due to depressed prices, there are now 50% fewer natural gas wells in production. That tells me the supply side of the equation will fix itself eventually, which means prices have to stabilize, if not rise even if demand does not return to previous levels. And if the economy does recover even slightly, prices have to rise more.

I was a couple days early from the exact bottom, but I'll take that any day of the week and twice on Sunday. I actually did the same thing by buying gold stocks in the November lows. NO investor can catch the exact bottom or top of an asset price, but if you are close, you can still capture the majority of the major trend move.

Retail Shopping Mall Giant Files for Bankruptcy

As we predicted, General Growth Properties filed for bankruptcy, the largest commercial real estate REIT to collapse in US history. GGR holds some of the most prime location properties, but couldn't make payments on their $27 billion debt.

I expect more retail shopping mall REITs to go under, crushed by mounting debt. Banks will take another hit with bad loans on commercial real estate, just as residential mortgage foreclosures appear to stabilize.

Dendreon interview on CNBC

http://www.youtube.com/watch?v=wm4o1fYtCTQ

Another promising biotech awaiting FDA approval

With Arena Pharmaceuticals still waiting for recognition of their medicinal and market value, and Dendreon gaining said recognition market cap-wise, we're looking to up our batting average once again with a company seeking FDA approval--after several failed attempts.

Discovery Laboratories, a biotech company, develops proprietary surfactant technology as Surfactant Replacement Therapies (SRT) for respiratory disorders and diseases. Surfactants are produced naturally in the lungs and are essential for breathing. Its products include Surfaxin (lucinactant), which is used for the prevention of respiratory distress syndrome in premature infants, as well as for the prevention of bronchopulmonary dysplasia in premature infants; and Aerosurf, which is used for the prevention and treatment of respiratory failure in infants. The company also provides its products for the treatment of acute respiratory failure, cystic fibrosis, acute lung injury, acute respiratory distress syndrome, chronic obstructive pulmonary disorder, asthma, and other debilitating respiratory conditions.

It addresses a huge market worldwide, and has met FDA guidelines for safety and efficacy, but has had issues of impurity tolerances and producibility. Due to improved technology, we'll see this Friday whether they have cleared those hurdles.

FDA--Friend or Foe?

From the CaretoLive website. Activism is alive and well.

Provenge went before the FDA for approval over 2 years ago. A panel of experts was convened, who voted it 17-0 safe, and 13-4 substantial evidence of efficacy. Two “doctors”, namely Howard I Scher, and Maha Hussain, from the chemotherapy industry put on the panel by Richard Pazdur aka “the cancer czar”, both had severe conflicts of interest, and had to sign waivers although they conveniently left out many of their conflicts. They were both very vocal at the panel, that they needed more proof. Provenge has already been through over 10 years of Phase I, II and III testing.

The “doctors” lobbied the FDA to delay approval. Letters were leaked to the same inside non peer reviewed source that published the imclone erbitux non approval, sending Sam Waksal, CEO of Imclone, and Martha Stewart to jail. We believe that Richard Pazdur of the FDA was the “leaker”. Richard Pazdur of the Chemotherapy, Radiation side of the FDA, ran roughshod over the approval process, (passing notes to one of the conflicted doctors etc), even though Provenge is a biologic agent and did not reside in his division. Imclone’s Erbitux was subsequently approved for colon cancer, unfortunately not in time to help those who died waiting. A congressional hearing was called over Imclone.

We had several Congressmen call for a hearing over the Provenge debacle, but John Dingell of Michigan refused to hold it. His wife is tied to the cancer industry. Congressman John Dingell (Michigan) and Frank Pallone (New Jersey) decided against a Congressional hearing for all the wrong reasons. You can read their response to those calling for hearings. 2/13/08
micha001.pdf
Three Congressmen, Mike Michaud (D) of Maine, Dan Burton (R) of Indiana, and Tim Ryan (D) of Ohio called for a congressional hearing into the conflicts of interest and what went wrong at the FDA causing the delay of Provenge. (click this link) Read the Congressional Letter calling for a Hearing 12/13/07.

Besides, Congress is too busy holding hearings on steroid usage in baseball players, which nobody has died from. Who cares about 30,000 sick old American men. In reality, men are dying from prostate cancer in their 30’s and 40’s as well.

The really sick people are those running the FDA. They oversee a corrupt, dysfunctional bureacracy, with little care for the lives and health of the citizens of the United States. They are more concerned with power and lining their own pocketbooks.

Billions of dollars paid out to pharmaceutical companies, hospitals, stock holders, and Wall Street titans, will be lost, if the entrenched Oncology treatments are replaced by immunotherapies. This is an uphill battle, but one we need to fight, for all of our sakes.

Dendreon has immunotherapies for breast cancer, colon cancer, etc, on the back burner, due to the delay in Provenge approval, causing a depletion of their research and trial money. This is the way wall street plays the game and influences the FDA decisions. Delay and destroy. If not for Care To Live Provenge would have been long gone, possibly even being bought out by a larger company, whose goal would be to throw it in the trash heap, to ensure nothing interfere with their profits from the current toxic, debilitating treatments and the billions spent managing their horrible side effects.

The common protocols when you are diagnosed with prostate cancer is usually either removing your prostate gland, or some type of radiotherapy such as implanting radioactive seeds in your scrotum, which kill the cancer cells. Unfortunately they kill they healthy parts of your immune system too, and radiate your vital organs. You may also opt for watchful waiting now called active surveillance. Most men are encouraged to be treated. If your cancer progresses, they will give you hormone therapy, which is really female hormones, to try to supress your testosterone. All men who go on hormone therapy, will eventually fail, unless they go on to die from something else.

Provenge has show survival in 20% of the sickest men, those in late stage, who have already had either their prostate gland removed, or been radiated, and also had hormone therapy which is no longer working. These are men whose cancer has already metastacized to their bones and organs. Imagine what it might do, were it given to men earlier in their diagnosis. Once an immunotherapy is approved, it will be a paradigm shift in the way cancer is treated.

Michael Milken, runs the world’s largest prostate cancer charity in the world. He has been silent during this entire fiasco. The Provenge interim results of another Phase III trial were recently released, showing 20% survival. Not a word from him or his Prostate Cancer Foundation. It is apalling but not surprising. Milken, is a convicted felon who sent time in jail for stock manipulation, and has investments in Provenge competitors. His “faster cures” nonsense, rings hollow with us. He helped fund the Proquest Investment fund. He is busy shaking his can everywhere, asking for more funding to begin research 10 years away from approval, but has nothing to say about Provenge, which is ready, willing and able to be used RIGHT NOW! It is an abomination.

Regulation--or lack thereof

Interesting excerpt from cnbc.

Madoff Whistleblower Markopolos at the Congressional Hearing on the 50 billion dollar ponzi scheme.

Congressman Alan Grayson: Are you familiar with the concept of capture when you are talking about regulation? What is that? Do you know that concept?

Harry Markopolos: Yes. It’s basically when the regulator is in bed with the industry they purport to regulate and do not regulate the industry. In fact, they consider the industry the client, not the public citizens.

Congressman Alan Grayson: And have you seen that in action.

Harry Markopolos: Yes. At the Food and Drug Administration and at the SEC.

DNDN conference call

As I and other investors hoped for, Dendreon CEO Mitch Gold revealed "unambiguous" top-line results that Provenge met the pre-defined primary endpoint for increased survival benefit for late-stage prostate cancer victims in the IMPACT Phase III clinical trial. Shares jumped up over 200% in pre-market open trading. This was a victory for investors and all cancer victims and their families, as other treatments for breast, colorectal, and kidney cancer are also in Dendrean's pipeline. Their cancer immunotherapy platform is a game-changer, and a much better solution than traditional chemotherapy treatments, which carry toxic and adverse side effects.

This paves the way for a New Drug Application (NDA) by the end of 2009, and FDA approval in Q2 2010.

Shares of DNDN halted in after hours trading

Dendreon, a Seattle-based biotech specializing in cancer immunotheraphy, will be announcing top-line results of a phase III clinical trial for Provenge tomorrow. The pivotal metric is whether patients with prostate cancer will have a 22% survival benefit from Provenge vs. the place control group.

An advisory panel gave a recommendation to the FDA of approval in 2007 based on a positive safety profile and promising interim survival benefits. But in a controversial move (especially for life-threatening oncology treatments), the FDA did not approve Provenge, seeking more results for this IMPACT clinical trial.

The results will be announced tomorrow in a conference call at 6 am PT. If Provenge meets its 22% survival benefit benchmark, the share price for DNDN will explode. If they miss their target, the share price could collapse to almost zero. Such is the life of a biotech microcap company.

If IMPACT proves effective, it could open the doors for immunotheraphy of other cancers, and could be a game-changer for oncological treatment. For investors and patients, let's hope this one is a winner.

Short Squeeze vs. Selling Panic

When Apollo Group announced explosive earnings growth earlier in the week after market close, the share price plummeted in after hours, and continued its torrid selling pressure through most of the trading session, ending up the day as one of the worst-performing stocks in the exchanges.

After market close today, Research in Motion (Blackberry manufacturer) mildly beat earnings expectations, and the share price immediately rocketed up after hours, and will open tomorrow up almost 30%.

Why the difference in outcomes? No one knows for sure, but I'll speculate APOL's future guidance by management during the earnings announcement was poor, despite the past quarter of explosive earnings growth and increased enrollment at the University of Phoenix. Allegations and a history of lawsuits and fines by the Department of Education regarding business practices and high default rates on student loans has clouded this company for months. The counter-cyclicality of for-profit education companies has taken their share prices to lofty valuations. Despite great earnings--which are backward-looking, future guidance--or more correctly, lack thereof, doomed this stock. Markets don't like uncertainty, and Wall St. is a forward-looking mechanism.

With RIMM, earnings beat expectations, and margins came in at 43-44%, both above Street projections. But more importantly, despite looming bad economic horizons, RIMM rewarded investors confident in holding market share and profit margins going forward.

Two similar earnings projections, two totally different outcomes.

My put options on APOL paid off handsomely earlier in the week, and the share price is in the process of consolidating and recovering from the bloodbath. I will not make any recommendations for regulatory purposes and also because I am neutral on APOL, having closed out my puts for a nice profit. I still have a small long-term put in place that I have mostly closed out and taken profits on.

Disclosure: I own January 2010 APOL put options, and neutral to slightly bearish.

What is money?

According to Dr. Steve Sjuggerud, this is the guarantee on a $20 bill from the 1920s:

"This certifies that there have been deposited in the Treasury Twenty Dollars in gold coin payable to the bearer on demand."

Today, our $20 bill says:

"This note is legal tender for all debts public and private."

What exactly does that mean? According to the Treasury Department's explanation:

"Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything... The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy."

Steve goes on to quote Burt Blumert:

"In plain English, dollar bills have no value," Burt explained. "Yet most Americans hold most of their wealth in them... Think about that."

For-profit educators getting pummeled

Making money on the short side is certainly easier in a bear market. Apollo Group (think University of Phoenix) shares tanked overnight DESPITE beating earnings estimates and enrollment increases by a long shot. My May, August and January put options soared as a result. I closed out my May puts due to expiration next month, but I kept my August and January puts in case this stock drops further. After some due diligence, there are way too many lawsuits and scrutiny into their sales practices and accounting of student loan revenue. The new Obama administration won't take kindly to any accounting irregularities. As I don't want any scrutiny, please Google "Apollo Group Citron".

What's Gone Wrong

I'm looking at live video of the restless masses forming in London to greet the G-20 members and I'm thinking this is a microcosm of what's going on worldwide--not just apathy against globalization and banking, but outright anger against capitalism. This is a bad omen on equities and risk capital, in general. We officially now have blood on the streets for the world to see. This is only the beginning, in my opinion.

Buyers of Arena Pharmaceuticals shares took a bath, despite good results in the phase III clinical trials. Lorcaserin, the obesity drug with huge potential, met all FDA end point guidelines regarding efficacy and safety, yet the market punished its stoct because apparently, it wasn't enough to satisfy analysts with poor understanding of the biochemistry behind it. Two years ago, when risking capital was in vogue, the share price of this drug soars from $4.50 to $25 on this good news. Instead, it dropped to $3.

With investing, one has to be grounded with reality--intellectual honesty is fine, but one has to play the cards one is dealt. The price is what it is--no time to play coulda shoulda woulda. Lorcaserin should be approved and this should drive its share price up, whether it's via a co-marketing agreement or an outright buy out offer by a big pharmaceutical company looking to bolster its depleting drug pipeline, as more and more blockbusters go off-patent, impacting profit margins.

So here I am, sitting on losses of 25% to 50%, depending on my entry points. What to do? Two things I plan on doing:

1) Sell covered calls - for each 100 shares owned of ARNA, sell 1 covered call option at a strike price of $5 and as far out in expiration as I can stand to hold on to the stock. The further out expiration month I sell, the more premium I collect. This should completely or partially offset any losses from this trade. This strategy will allow me to collect the premium upfront, irrespective of the direction of ARNA shares. And if ARNA stays at or below $5 during this expiration period, I keep the premium no matter what, and the call option I sold expires worthless--good for me, bad for the option buyer. If ARNA soars above 5, my call will be exercised, meaning I sell my shares at $5, and I still kept my premium. This limits my upside, but that also means I made a 67% profit from selling my shares at $5, PLUS I still kept my premium. This gives me a profitable exit strategy as well as a great hedging opportunity. The only way I lose is if the stock goes down further, but again, I still kept the premium, so it reduces my losses. Covered calls are a way to increase my income while reducing my downside. Just remember to stay covered: I will not write (sell) more call options than I have actual underlying shares. 1 call option contract= 100 shares of underlying stock. In other words, if I own 1000 shares of ARNA, I will sell 10 call option contracts, as each options contract obligates me the right to sell 100 shares at that strike price.

2) To further reduce my downside, I can also buy put options, betting on a further decline in ARNA share prices. But now I have to pay the premium to the put option seller, and now I can lose that premium if the stock doesn't decline. In other words, now I am the casino player--instead of the casino as I was in a covered call. But it protects my position, in case ARNA runs out of cash and drops to $1 or zero, for instance. The value of the put option increases as the share price decreases, so I can profit from the put in the case of the decline in share price. This strategy requires cash outlay, but it gives me leverage and protects me from catastrophe.

As a shareholder, the covered call strategy really has no downside, and only limits my upside. The put options have some downside, because the options can expire worthless whether ARNA stays constant or increases in price (which is a good thing as my underlying stock value rises). A put option is insurance, albeit carries a premium. By contrast, selling a call option makes me the insurer, as I collect the premium. So definitely sell a covered call, and possibly buy put options. Both buying and selling options requires an upgrade one's account, so one has to apply or contact the broker. One needs the ability to write covered calls, and to buy call and put options.

ARNA could have a nice run, and the profits will come in long-term as big pharma should see value in Lorcaserin. But this market is so skittish that if no offer for a buy out or partnership agreement comes through, we as shareholders need to protect ourselves. And if the stock price does rise, we can also participate on the upside. The covered call is a sure way to hedge, while the put option COULD be a great hedge, but also costly--I could lose 100% of my premium upon expiration. As a minimum, one should utilize covered calls. Depending on how pessimistic I am with ARNA, I may or may not buy put options. I could also do both, as the premiums I collect on the covered call can offset the premiums I pay for the put option.

Disclosure: I own shares of ARNA. This is not a recommendation, and do your own diligence. While covered calls are a conservative strategy of increasing income, the downside is that the price of the underlying stock could decline. Put options are inherently risky because one can lose 100% of the premium on expiration.