NVAX shares continue steady advance

Shares of Novavax, a virus-like particle (VLP) vaccine manufacturer, continued its steady climb today amid continuing concerns about the mutation influenza strains. FDA approval is several years away, but NVAX's novel approach to manufacturing recombinant vaccines has given them contracts to work with the National Institute of Health (NIH) and commercial commitments in India (with parrtner Cadila) and Spain (with partner Rovi).

http://www.scienceprogress.org/2009/08/influenza-vaccine/

NVAX's VLP manufacturing platform accelerates vaccine production, reducing ramp up time from 6 - 8 months to 4 weeks. Facilities cost are also reduced by 90%. Yields are increased due to elimination of egg-based manufacturing process used by traditional vaccine makers. Most importantly, the VLP process could potentially enable the production of a "super vaccine", which provides immunogenicity for all mutated strains of influenza.

Disclosure: I am long NVAX shares.

Shares of SVA surge

Sinovac shares soared over 50% this morning, as the Chinese State Food and Drug Administration (SFDA) approved its swine flu vaccine.

http://finance.yahoo.com/news/Chinese-biotech-Sinovac-gets-apf-212124857.html?x=0&.v=1

My investment thesis a few weeks ago was that they would receive an order for several million doses from the city of Beijing alone, with more to come from other provinces. Since then, they have received a commitment for 10 million doses from Mexico, as well as distribution rights for the Philippines.

The Chinese domestic population alone provides a huge market, and since Sinovac has already run human clinical trials demonstrating safety and efficacy for their flu vacccines, more orders should arrive from other countries, especially in neighboring Asia.

Disclosure: I am long SVA shares, and took a profit of over 100% on 25% of my original holdings.

Antigenic shift

The two words "antigenic shift" strike fear in the minds of immunologists and epidemiologists. According to the National Institute of Health (NIH):

http://www3.niaid.nih.gov/topics/Flu/Research/basic/AntigenicShiftIllustration.htm
"The genetic change that enables a flu strain to jump from one animal species to another, including humans, is called antigenic shift."

When the mutation occurs, a more more lethal strain can develop. Today's article exposes this is already happening:

http://www.express.co.uk/posts/view/123818/New-swine-flu-mutation-far-more-deadly-

Let's hope the vaccines and anti-virals remain effective against mutated strains.

ARNA reaches another milestone

One of Arena Pharmaceuticals' compounds just passed another milestone, completing Phase I clinical trials for type 2 diabetes mellitus patients.


http://clinicaltrials.gov/ct2/show/NCT00871507

Johnson and Johnson is the big pharma partner completing the clinical trials. Arena will receive milestone payments as well as a royalty split upon commercialization of the drug compound.

This is more evidence that ARNA has a strong drug pipeline beyond just Lorcaserin.

Accumulation phase for ARNA over?

Shares of Arena Pharmaceuticals surged today, after consolidating below $4.50 for several weeks, as the shorts and market makers ran the stops. Nervous Nellies are out of the trade--only the strong hands remain, including large institutional holdings by Deerfield Capital, Federated Investors, and Wellington Management, all reknown for being savvy, long-term value holders. Recent investments by Barclays and Winslow Management boost an already strong roster of institutional ownership. Couple that with recent insider purchases by six of eight members of the Board of Directors, and it was just a matter of time before shares of ARNA spiked up in anticipation of announcement of Blossom results, the second of two pivotal Phase III clinical trials for Lorcaserin, the weight management drug with blockbuster potential.

ARNA CEO Jack Lief has indicated that Blossom top-line results will be announced by "the end of September". Short-term traders may want to accumulate tradeable shares in anticipation of the run-up as we approach said announcement, and sell before the news in a low-risk trade. Long-term investors like myself, however, have been slowly accumulating core holdings with an exit strategy post-pivotal events, including Blossom results in September, New Drug Application submission in December, and potential PDUFA in October, 2010. Because Lorcaserin's potential is enormous (some analysts forecast a $10 billion market annually), I will retain a long-term core holding.

This ameliorates the possibility of an announcement of a marketing partnership with a big pharmaceutical company, which would also cause the shares of ARNA to spike up. Traders in and out of ARNA may miss the train. A partnership seems likely, based on previous clinical trial data on Lorcaserin. Safety and efficacy point towards FDA approvability, as Lorcaserin selectively stimulates the 5-HT2C seratonin receptor, a G protein coupled receptor (GPCR) located in the hypothalamus. Stimulation of this GPCR is associated with feeding behavior and satiety.

Most importantly, Lorcaserin's specificity to the 5-HT2C receptor means it doesn't stimulate the other subtypes, 5-HT2A and 5-HT2B. These other subtypes are linked to cardiac valvulopathy, which caused the massive recall of phen-fen, for which Wyeth has paid out $21 billion in a class action lawsuit. Hence, Lorcaserin is both efficacious AND safe.

The weight management sector is wide open, littered with previous failures by big pharmaceutical companies, and a few marginally effective treatments with adverse side effects, some potentially serious. With the safest treatment in the market, and first-mover status relative to their two competitors: OREX's Contrave and VVUS' Qnexa--both generic compounds with a large exclusion criteria and label warnings, ARNA's Lorcaserin has the biggest commercialization potential.

Disclosure: Long ARNA shares.

Swine flu portfolio rally

Shares of BCRX, NVAX, SVA, HEB, and APT all increased double-digit percentages today. I keep expecting the overall market to roll over and have protective puts in place--hence, the hedges keep eroding in value. But I am not complaining, given triple digit gains on the aforementioned stocks.

Exit strategies for longs need to be in place. But after polling several experts in the field, the swine flu will be worse than general public expectations. Also, very few understand the five vaccines and the anti-virals available, either approved or under Emergency Use Authorization review. Unless, of course, they've been reading these blogs for a few months (pardon the temporary lapse in modesty).

The most recent update is that egg-based vaccines won't be available until October, due to lower than expected yields. With a 21-day duration between doses, and one more week thereafter before immunogenicity kicks in, most students and young adults won't be immunized until November at the earliest. As noted before, with schools already in session, the swine flu will peak in October, rendering many vaccines useless among the targeted population.

Anti-virals will have to step in, even though Tamiflu has tolerability as well as efficacy issues due to resistance. Inhaled Relenza has limitations, so intravenously administered Peramivir has BCRX longs excited about an imminent EUA stockpiling order.

Good luck to all longs, and good luck to those who will become infected with the novel H1N1 virus.

Disclosure: Long shares in BCRX, NVAX, SVA, HEB, and APT.

Consequences of deficit spending

Art Laffer, creator of the Laffer Curve, an economic theory which posits that increases in the rate of taxation do not necessarily increase tax revenue. He has been wrong on financial forecasts before, but this primer on the relationship of explosive government spending and subsequent rising inflation offers some valuable insight:


http://online.wsj.com/article/SB124458888993599879.html

NVAX and SVA swine flu vaccines are effective

Shares of NVAX and SVA rose approximately 10% this morning on positive results of their respective swine flu vaccines. NVAX's VLP vaccine immunized ferrets from the flu, while the SVA egg-based vaccine displayed immunogenicity among humans.

http://www.reuters.com/article/marketsNews/idINN1834168720090818?rpc=44

NVAX has multiple partnership agreements with India's Cadila and Spain's Rovi to manufacture the VLP vaccine for Asian, European, and Latin American countries. NVAX is also working with the NIH and FDA in clinical-stage trials in the US.

SVA has an order for a minimum of 10 million doses to cover Beijing, but will likely garner additional orders for domestic Chinese provinces as well as other Asian countries, including a distribution deal for the Philippines.

HSBC forecast on gold

In my previous blogs, I provide evidence that a couple large commercial banks collude with the US government to artificially suppress the prices of gold and silver at the COMEX exchange. JP Morgan and HSBC are the two culprits with the largest short positions--hence, the title "permanent" bears.

Here's an HSBC research report on gold:

http://www.reuters.com/article/hotStocksNews/idUSTRE5745S120090806

To their credit, HSBC raises their price projections for both gold and silver, for the same reasons we have outlined: central bank spending, US Treasury printing of dollars, and USDollar debasement. The price targets are curious though: they were upgraded, but to targets already below current spot prices.

They are hedging their opinions--an admission that the prices of precious metals will inevitably rise, but they use low price targets so as to attempt to suppress prices. The operative word is "attempt". Shorting gold and silver has been a disastrous trade for the last decade, as gold soared from $250 to $950.

These banks have had persistent large short positions all these years. So how come they aren't bankrupt? Here's a hint. Previous to their implosion in the spring of 2008, Bear Stearns was one of the perma bears. Credit default swaps, derivatives insuring collaterized mortgage obligations, tanked as home borrowers defaulted on their mortgages. I believe derivatives in the precious metals market alao led to Bear Stearns' demise.

How JP Morgan and HSBC continue to thrive while their money-losing short positions in gold and silver is beyond me. But I have a feeling that when "fail to delivers" come home to roost, we'll have another financial earthquake of epic proportion.

Black Swan author

http://www.businessinsider.com/henry-blodget-taleb-you-fools-dont-understand-that-were-doomed-2009-8

Nassim Taleb bashes our government finance officials. I can't say I disagree with him.

Ed.: Did anybody notice the silver shoots today after my blog yesterday? I may start taking myself more seriously. :-)

Silver

While gold may receive most of the attention as an alternative investment, silver may offer the better value than its more infamous cousin. The gold/silver ratio is approximately 70:1 (gold is $950 and silver $14.50 currently), which makes silver historically cheap relative to gold.

Gold has maintained its monetary store of value spanning centuries, and most of its inventory above ground exists in the form of bullion, coins or jewelry. Silver on the other hand, has many industrial and scientific uses, including in electronics, batteries, solar panels, disinfectants, and antibiotics, among others. Hence, 97% of the silver that has ever been mined has been consumed, never again to be recycled. A shortage of silver appears to be more imminent than gold, as individuals recycle gold jewelry for cash.

Because silver on the COMEX exchange is a smaller market than gold (which is already much smaller than equities, bonds, and foreign currencies), it is easily manipulated. Hence, price increases in silver often lead price appreciation in gold.

Now that individual ownership of silver is encouraged to 1.2 billion Chinese, a rally in silver becomes even more probable.

A quick primer on inflation

According to monetary theorists, inflation or deflation is created through the easing or tightening of our money supply, respectively. The Federal Reserve Bank controls our money supply, so its monetary policies ultimately determine the rate of inflation.

Here is the St. Louis Federal Reserve Bank's chart on monetary velocity:

http://research.stlouisfed.org/publications/mt/page12.pdf

The empirical formula is m x v = p x q, where
m = money supply
v = velocity of money
p = price level
q = level of economic activity

Looking at the two charts above, we can see money supply growth has been astronomical since 2008, while monetary velocity has remained moribund. The financial crisis has depressed economic activity due to lack of money velocity, i.e. banks aren't lending as they recapitalize their broken balance sheets. Velocity of money is the only fuse to stoke the fire of inflation. And when it does, look out. The other components are already in place for soaring prices.

Gold and Silver Price Suppression

If a recent Bank Participation Report (BPR) doesn't provide proof that large commercial banks are artificially suppressing the price of gold and silver on the COMEX exchange, nothing will.

http://www.cftc.gov/dea/bank/deaaug09f.htm

This data is readily available on the Commodity Futures Trading Commission (CFTC) website, an independent agency that is chartered to regulate the commodity futures and options markets. They serve a similar role as the Securities and Exchange Commission (SEC), which regulates equities exchanges (the stock market). You know--so fraudsters like Bernie Madoff can't run Ponzi schemes like he did for decades with impunity. Zing.

I've posited before that the CFTC may be even worse than the SEC at regulation and enforcement, if that's possible.

According to their website:

Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.

The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Lately, after numerous complaints on market manipulation, they have begun an investigation on the energy futures market, including crude oil and natural gas. Potential solutions include tightening of margin requirements, limits on naked short sales, including overall monitoring and enforcement against market manipulation.

Fine. So why don't they initiate a similar investigation and enforcement in the precious metals market, namely gold and silver?

Look closely at the long and short positions of gold and silver on the COMEX (sometimes dubbed CRIMEX by cynics) in the BPR. Two U.S. banks are long 15 silver contracts--and short 29,813 contracts, representing 30% of all open contracts. That's a lopsided ratio of long/short contracts. According to the Commitment of Traders (COT) data, these two banks--JP Morgan and HSBC--should have 149,065,000 ounces of silver in their vaults (each contract represents 5000 ounces for delivery). I'm calling BS on that.

With COMEX gold, 2 U.S banks are long 346 gold contracts, and short 106,272 contracts--or 27.1% of the open interest--again a huge discrepancy in long vs. short contracts. That equates to 10,627,200 ounces of gold (100 ounces per contract). Ladies and gentlemen, this is by definition manipulation, when a market has such huge concentrated positions by so few market participants. Similarly, the Hunt brothers were convicted of trying to corner the silver market in the 1970's when they built concentrated long positions.

So why doesn't anyone investigate JP Morgan and HSBC? Could it be they are mandated by our government finance officials to sell short the precious metals, suppressing the price of the two "fear indicators"? After all, when the prices of gold and silver soar, it means financial markets and investors are panicking that Armageddon is upon us.

Normally, gold and silver mining companies will short sell the metals contracts in order to lock in a sales price as a hedge against falling prices, much like a farmer will lock in a futures sales price for their specific crops. When it's time for settlement of the contracts, the farmer or gold miner delivers said respective commodity.

But commercial banks don't possess enough of the gold or silver in their vaults necessary for delivery--hence the "naked" sale. Instead, delivery is settled via cash--with no exchange of the physical bullion from seller to buyer.

The abuse comes in when a commercial bank can just indiscriminately and theoretically sell an infinite amount of gold or silver contracts--with no intention of delivery. Creating a huge surplus of naked short sales contracts places undue selling pressure on the commodity, causing it to decline precipitiously. Suppose every homeowner in your neighborhood put their homes up for sale, whether some of them really had the intention of selling their homes or not. You can imagine what that would do to the value of your own home--if every single home on your block had For Sale signs on their front lawn. In a worst-case scenario, a scam artist can accept payment for selling empty shells as homes with no intention of ever building the homes--the ultimate naked sell.

Similarly, when a few banks can flood the COMEX exchange with thousands of naked short sales contracts--with no intention of delivering the physical bullion, they can artificially and temporarily suppress the prices of gold and silver. Long-term, this distorts the supply/demand dynamics of the market, as miners stop drilling for new supplies, because the price of the commodity is too low to cost-justify exploration and drilling. When miners stop mining, this will ultimately undermine the suppression efforts, as a severe shortage occurs, causing prices of the commodities to soar. Suppression defers the pain of higher prices, but it also exacerbates the resulting bubble.

As both gold and silver are monetary stores of value with no counter party risk, exorbitant increases of money supply by central bankers will eventually induce price inflation across all hard assets. Investors will mistrust their respective currencies, while gold and silver will retain their monetary value. As a result, gold and silver prices will soar. It occurred in the 1970's when we had runaway inflation and budget deficits, because the US government turned on the printing presses. With today's trillion-dollar deficits, there is no telling how high the price of gold and silver will rise. We'll know by the whites of the eyes of government officials.

Ben Bernanke and his predictions

Why are we still listening to these clowns in Washington? Despite their academic pedigree, accolades, and experience, they continue to be consistently wrong.

Here's the problem. If one assumes the earth is flat (due to anecdotal evidence suggesting said false assumption), then all subsequent conclusions will be equally false.

The achilles heel of mainstream economists: they believe the solution to a debt crisis is creation of more debt--that somehow deficit spending is stimulative. It is clearly a false premise--yet, our government officials insist we should accelerate our spending. It has never worked--and it will never work, as huge debts cap economic growth. Yet, here we are, contemplating multi-trillion dollar deficits.

Government spending does not stimulate the economy. It is a reallocation of capital away from the private sector, through taxation. It diverts money away from worthwhile investments toward unwise political choices which the private sector would not choose. According to James Turk,

...the private sector would be investing much of that money for the benefit of future growth and productivity. In contrast, although the government may call it ‘investing in the future’, it is simply spending money on politically motivated objectives, focused on consumption rather than investment.

Adding to government payrolls does not create enterprise value. Two Google founders created billions of dollars of market capitalization, as well as trillions in productivity growth. Two government employees merely occupy two cubicles, rather inefficiently.

Federated Investors ups the ante on ARNA

According to this SEC filing, Federated Investors increased their holdings from 10,934,434 million shares to 16,203,127 shares, which enables them to establish a huge stake in the company, a 17.49% ownership position.

http://invest.arenapharm.com/secfiling.cfm?filingid=1318148-09-1092

I did a quick search of institutional buying and selling during ARNA's last pivotal event when they announced BLOOM results on weight loss. Shares took a major hit as Wall Street analysts misinterpreted positive data release, deeming average weight loss for Lorcaserin-active groups as underwhelming. Sellers on March 31 were knee-jerk sellers in other words, and downright wrong--in hindsight. In my search, I noticed the following buyers and sellers of ARNA after the pivotal event.

Sellers (over 100,000 shares): William Harris Investors, Tradelink, Columbia Wanger, Royce & Associates, Barclay's Global UK, Noonday Asset, Janus, DE Shaw, Vanguard, Merrill Lynch, Oppenheimer, Bank of America, I-shares Russell 2000.

Buyers (over 100,000 shares): Rock Point, Fortis, BbBiotech, RBC Capital, Wellington Management, Susquehanna, UBS, Jane Street, Knight Capital, Federated.

With the luxury of hindsight, at today's current price per share, clearly the buyers on March 31 were correct in buying the dip.

BCRX and NVAX receive positive news

Leerink Swann, an investment bank specializing in biotech and life science companies, upgraded their price target on BCRX from $5 to $10, on an estimated Emergency Use Authorization order of $394 million for US stockpiling of the anti-viral Peramivir. The report was curious in the exact amount of $394, as the specificity could be a telegraph that an order is imminent. In any case, longs have been anticipating EUA for weeks, so the waiting game continues, as longs and shorts battle for positioning.

NVAX received good news this morning, according to an article in Indian Times. Cadila, a NVAX partner for their vaccine-like particle (VLP) flu vaccine, announced they are the first pharma company to produce a vaccine for the novel H1N1 virus in India. NVAX, in addition to receiving milestone payments, will receive 20% royalties on sales of the vaccine in India, meaning revenue from the Cadila partnership will go directly to NVAX's bottom line, as Cadila picks up all clinical development costs. Approval is expected by the end of this year. See previous blogs for NVAX value proposition and our investment thesis, mainly higher vaccine yields, faster vaccine production, and lower in-border manufacturing costs. All of these benefits are due to not needing eggs to produce the VLP vaccine. Under- and un-developed countries will greatly benefit due to faster ramp and lower cost structure, as well as the ability to control domestic manufacturing capacity. They won't be held hostage to foreign healthcare resources.

In fact, in a bit of irony, with India fast-tracking NVAX's VLP vaccine, the US may be on the outside looking in if vaccine production falls short. That would be a travesty considering NVAX is a US supplier of vaccines. This is another shameful example of the FDA dragging their feet, partly due to insidious pressure from incumbent big pharmaceutical companies to impede progress of promising competitive solutions from innovative upstarts like NVAX.

The gold put option

The European Central Bank (ECB) extended the cap on gold sales, only this time limiting sales to 400 metric tons, instead of the current limit of 500 tons.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a5S1sSNJDGvc

This is bullish for the price of gold, as central banks cannot indiscriminately dump gold into the market, causing the price of gold to sink. By my own deduction, the first 5-year cap instituted 10 years ago catalyzed the impressive run up in the price of gold. In that time span, gold has almost quadrupled in price, while equities have languished in negative territory. Reality is setting in--central bankers can print currencies ad nauseum in an effort to stimulate their domestic economies, but they cannot print gold. Gold has to be mined, and it is only being added to existing world supplies by 0.5% per year. By contrast, central bankers are increasing the money supply by double digits.

This is a direct consequence of easy money policies enacted by central banks worldwide, including the Federal Reserve. With money supply increases come price inflation of real assets--including precious metals.

Using back-of-the-envelope calculations, we can establish a floor for the price of gold. Last year's panic selling of all liquid assets to honor hedge fund redemptions depressed pricing of all asset classes--including gold and gold ETF's, which are liquid. The 2008 bottom was $660/ounce. Factor in a 20% reduction in potential gold sales from ECB sales, and we arrive at an adjusted bottom of $825. Thus, that is an effective put option for the price of gold.

Should we experience another liquidity crisis when stock markets tank, and commodity prices also plummet, if the price of gold approaches $825 (gold currently hovers at $960), I would accumulate more gold-related assets. Gold is a prudent hedge against monetary inflation with no counter-party risk, as it has been accepted as a monetary store of value for centuries.

I don't believe gold will correct to that level--if anything, it will elevate its price, as the threat of selling pressure has largely been removed.

Another bullish indicator for gold is the increased interest in gold purchases by Chinese and Russian sovereign funds, as they diversify away from USDollar-denominated securities, mainly Treasuries. Monetary inflation debases the dollar, causing their holdings in reserve accounts to sink in value. Exporters no longer wish to be paid in devalued USDollars.

Despite rhetoric from Fed Chairman Bernanke and Treasury Secretary Geithner that the US advocates a strong dollar policy, their actions are contrary to their claims. Sovereign fund managers and foreign finance ministers already know that is a lie. Unfortunately, American consumers will be the last to figure it out, as their purchasing power and standard of living become progressively diminished.

Dead cat bounce?

Due to my increasing anxiety with every rally in equities, I gathered some charts of the S & P 500 Index. It recorded a low of 666 in early March 2009, down from the October 2007 high of 1565. This represents a decline of 57.5% from the peak. What came next has been this powerful 50% retracement to approximately the 1000 level. A Fibonacci 61.8% retracement yields a value of 1078 as an intermediate peak for the SP 500. I would be a net seller if and when we approach that level.

For comparison's sake, between the 1929 peak of the Dow Jones Industrials Average to the low in 1932 (see first chart above), the market had a handful of double-digit gains. But in that duration, the market declined by 90%! In other words, for every 1 step up, the market took 3 steps down.

From the 1932 low to the 1937 peak, the DJIA had 3 triple-digit gains, including one for almost 300%--almost a quadruple. But none of these powerful rallies prevented the Great Depression. And investors holding since 1929 weren't whole again until 1953.

The harder a market falls, the higher the market rebounds, but the more difficult it is to get back to even--despite multiple powerful rallies. With the 2007-2009 decline "only" measuring 57.5%, this retracement rally should not have been surprising.

To the trained eye of an electronics engineer, the SP 500 chart between 2007 and 2009 looks like a waveform transitioning between logic "1" to logic "0" (see second chart above). However, instead of being an ideal waveform with uniform horizontal and vertical lines, the signal is distorted with undershoot and high-frequency ringing.

In layman's terms, this market is a dead cat bounce. And gravity will eventually cause it to fall back down before finding a steady-state equilibrium. The hope is that the SP 500 secular low of 666 will not be revisited, and that the index will find a trading range of consolidation above that low until a recovery is well-established.

I still posit this is a bear market rally--and not the beginning of a secular bull market. The world economy is still undergoing a delevering process as corporations, individuals and governments are still awash in debt. Banks haven't honestly accounted for toxic assets on their balance sheets. With unemployment climbing, tight credit conditions, and the American consumer tapped out, any economic recovery will remain muted. Equities may still rise from here, but at some point (soon), the market will become over-extended.

More misleading government statistics

The Department of Commerce released Gross Domestic Product (GDP) growth statistics last week for the 2nd quarter ending June, and the numbers came in at "only" a 1% contraction, in contrast to the 1st quarter number which came in at a disastrous 6.4% decline. The contraction was smaller than what the Street expected, so markets rallied and the "green shoots" optimists came out celebrating that the recession had ended. The "getting less bad" argument was gaining traction. A couple thoughts gave me pause:

1) this GDP growth number is still negative. Sure, it's not AS negative but it still is negative. And since unemployment is a lagging indicator for economic growth, even if we are on our way to recovery, employment growth won't occur until 2010--at the earliest.

2) this aggregate number doesn't tell the full story. While overall GDP growth was only slightly negative, the private sector has experienced a much bigger decline. Why? Because all of the growth came from federal, state, and local government spending. The public sector is crowding out the private sector--the true engine of economic growth. More federal government employees were hired, while private industry was still laying off employees. That is not a long-term plan for success.

So while the GDP numbers were slightly encouraging (if still negative), I wouldn't start celebrating just yet. Meanwhile, I'm still long the market, but as soon as Congress returns from their summer recess later this month, I have a feeling Mr. Market will take away the punch bowl. Markets like it when Congress is not in session--they can't muck it up when they are idle.

APT announces record earnings

Alpha Pro Tech announced record earnings for the 2nd quarter, driven by sales for their infection control and building supply products.

http://finance.yahoo.com/news/Alpha-Pro-Tech-Ltd-Announces-bw-3964651527.html?x=0&.v=1

Shares soared 16% in after hours trading after the announcement. We're up big since opening up our positions 3 weeks ago, and could have been up more had I acted on my original due diligence 2 months ago. APT executives had been giving hints on a robust 2nd quarter and long lead times for deliveries since June. CEO's normally don't drop hints like that unless they know execution won't be an issue. In other words, this was telegraphed 2 months ago.

Lawsuits fly when CEO's dupe and mislead investors. Another lesson learned. Gotta trust my instincts more. That's okay, a 40% return in less than 3 weeks is a lesson I don't mind learning.

Disclosure: Long position in APT shares.

The case for owning gold...

Monetary inflationists from the Austrian School of Economics are in direct opposition to Keynesian economics largely accepted by our Administration, Congress, bankers, central bankers, academics, and mainstream economists.

Hence, the vast majority believe the only escape out of a financial meltdown is to flood the markets with liquidity. Essentially, they mistakenly believe solving a debt crisis with even more debt is the corrective action. It's analogous to offering greater amounts of booze to an alcoholic, and hoping that somehow cures him of his alcoholism. Our current and previous Fed Chairmen, Secretaries of Treasury, Presidents and Congressmen have all espoused these fiscal and monetary policies--some more than others.

So guess who wrote this in their essay back in the day--before he climbed several pay levels within our government:

But the opposition to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale… Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold…
The law of supply and demand is not to be conned. As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
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… 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’ tirade against gold. Deficit spending is simply a scheme for the ‘hidden’ 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.

Ready for the answer? It was former Fed Chairman Alan Greenspan, who is commonly roasted today for causing the real estate bubble by implementing easy-money policies earlier this decade. With hindsight, his critics point out that Greenspan caused the mortgage crisis by artificially creating a bubble in real assets, while our country amassed billions in deficit. What those same critics don't mention is that Bernanke, Geithner, Obama, and Congress are all colluding to construct those same deficits--only on a much larger scale. After all, deficits of a few trillion here or there are minor inconveniences, right?

Age and power seem to have corrupted the former Fed Chairman. Although his critics are quick to denounce his policies of the past, they are advocating the same strategy which they are criticizing. The difference this time is that the numbers are horrifically astronomical.

Lorcaserin clinical trial

Ed Susman, a medical doctor who participated as a patient in an obesity clinical trial, blogs about it on MedPage. He still doesn't know if he was part of the Lorcaserin group or the placebo control group--as it is a double-blinded study, but the extreme weight loss for the diabetic points toward the Lorcaserin active group.

Here's the video:

http://neurologicalcorrelates.com/wordpress/2009/02/20/weight-loss-trial-final-report-52-pounds-of-fat-melted-away/

Here's his personal account of it:

http://www.medpagetoday.com/PrimaryCare/Obesity/13506

The results of Bloom, the first of two pivotal Phase III clinical trials, were announced in March. Researchers were upbeat about Lorcaserin's FDA approvability, due to its safety and tolerability profile, as well as meeting one of the FDA weight loss efficacy guidances. Wall Street analysts were underwhelmed, causing the share price of Arena Pharmaceuticals to decline by 25% overnight. I later picked up some more shares when the price per share (pps) bottomed out around $2.50.

Results for Blossom, the second of two pivotal trials will be announced next month, and due to the statistical significance of Bloom's 3000+ patients, Blossom results for 4000+ patients should be similar to Bloom's.

Dr. Susman participated in the non-pivotal Bloom-DM Phase III clinical trial for diabetics. Anecdotally, diabetics find it more difficult to lose weight, so his weight loss of 52 points is especially significant.

Disclosure: Long ARNA shares.

Diminishing purchasing power of the USDollar

If a picture is worth a thousand words, this graph may be worth several trillion dollars. Guess when the Federal Reserve Bank was established? Look where the US Dollar falls off the cliff. 1913 would be the correct eyeball guess.

In 1933, Franklin Delano Roosevelt confiscated American citizens' private gold in exchange for $20.67/ounce, and then immediately reset the new price of gold at $35/oz. Americans who complied (non-compliance carried a $10,000 fine and 10 years in prison) immediately took a 40% loss in their cash holdings as a result. And thus, Ft. Knox was created.

Fast forward to 1971, when Richard Milhouse Nixon removed the USDollar from the gold standard completely, as the Treasury couldn't meet redemption demands, due to large deficits run up by the Vietnam war.

Hence, we have a nice trajectory for our graph--that is, if you like ski slopes.

Missed on ONTY

Shares of ONTY gapped up this morning on positive preliminary results for Stimuvax, a lung cancer immunotherapy.

http://www.tradingmarkets.com/.site/news/TOP%20STORY/2383852/

Based on this article reporting positive results on breast cancer clinical trials, I contemplated purchasing some ONTY shares over the weekend. However, it soared over 30% this morning before I could get my buy order filled. I will hope for a pullback, as ONTY has as much, if not more upside potential than DNDN, the prostate cancer immunotherapy company we profited from back in April.

DNDN's Provenge had a 22.5% overall survival benefit above advanced prostate cancer (PC) patients on placebo, and patients on Provenge lived 4.1 months longer on average, which is significant considering late-stage PC life expectancies are short. Once approved by the FDA, which now appears likely, Provenge will extend the lives of many PC patients, and labeling will be extended to early-stage PC patients, further increasing the 90% success rate for that segment.

In June, ONTY announced a 17.3 month median survival benefit for Stage IIIB non-small cell lung cancer patients above those on placebo. With multiple shots on goal with Stimuvax (lung, breast, prostate, and colorectal cancers), and a healthy pipeline of other oncology drugs, ONTY shares have some serious long-term upside potential.

This is not a recommendation.

Disclosure: I have no position in ONTY, and a long position in DNDN.

APT and SVA

I opened up a position in APT a week and a half ago, as they make a particularly effective N-95 protection mask against communicable diseases.

http://finance.yahoo.com/news/Swine-Flu-Masks-Prevention-or-indie-3995316474.html?x=0&.v=1

Based on the SARS scare, shares shot up for two quarters. This pandemic flu, while not having nearly the high death rates as SARS, is spreading much faster than other pandemics, hence triggering my buy order.

SVA is a Chinese vaccine and hepatitis drug manufacturer. It is already profitable, unlike its US counterparts still in the clinical stage. The Chinese domestic market is huge, and SVA should be able to secure a larger order than the projected one for 10 million doses (5 million people). Even at that conservative number, and estimate of $5 per dose, revenue projects to $50 million annually. This places a buy out offer price of $250 million, which yields a price per share of $6, based on 43 million outstanding shares. At a current price of $4.99, shareholders get the rest of the company (hepatitis drugs) for free. Add in the distribution deal for the Philippines, and other potential orders from other Asian countries, and SVA has some serious upside.

Disclosure: I have long positions in APT and SVA.