Macro Tsimmis

intelligently hedged investment

Archive for July, 2007

Élan (ELN) update #3

Posted by intelledgement on Tue, 31 Jul 07

An FDA advisory committee voted 12-3 today to recommend approval of the use of Tysabri for Crohn’s disease patients in the USA. The FDA is not required to follow the advice of their advisory committees, but generally does. A decision by the agency is expected by 15 October.

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Transmeridian (TMY) update #7

Posted by intelledgement on Sun, 29 Jul 07

In another of their after-the-close-Friday announcements, Transmeridian Exploration management delivered the latest bad news with respect to their dispute with the Kazakhstani goverment over gas flaring at South Alibek field oil wells. The agreement management thought they had to resume production and continue gas flaring until 1 November has been revoked and while there is some chance that decision could be reversed again, management are focusing on getting the facilities in place to divert the NG to a local manufacturing facility ASAP (but it won’t happen before 1 November). So the production shutdown continues into a second month, with up to two more months to follow.

In light of their weak cash position, management have instituted cost-reduction measures. In the meantime, they continue to pursue buyout opportunities; presentation meetings are scheduled with interested parties in Europe next week. The sooner, the better.

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SELL MSCI Hong Kong Index (EWH)/BUY UltraShort Financials (SKF)

Posted by intelledgement on Thu, 26 Jul 07

LOL being an economist is tough; not only are you expected to get the vector right, but the timing, too. We investing folks know that the former is a lot easier to perceive than the latter (which is not to say picking the vector is easy, either).

“Sales of new homes dropped more than expected in June, while orders for long-lasting U.S.-made goods were weaker than analysts thought, according to reports on Thursday that raised fresh concerns about economy,” according to a Reuters report today. And the markets are down across the board.

We have been expressing deep concern about the world economic outlook in general and the USA in particular for some time here, but as to the timing of the way things play out…it could be just as surprising to us as to anyone. We still think the big storm is most likely to hold off until at least late 2008 and quite possibly longer…but the risk of serious problems arising sooner has just increased…as we expect it will continue to do so, given that the situation is steadily deteriorating.

Accordingly, we have decided to take some money off the table on the long side and redeploy it on the short side. EWH is up for us overall this year, but it lags our other emerging market ETF positions performance-wise, which puts it at greater risk of turning sour. We are trading it in for for another ETF that is inversely tied to the Dow Jones U.S. Financials Index. We anticipate that even if the the USA consumer continues to spend and the Chinese continue to support the dollar, the developing credit crunch and weakening real estate markets ensure conditions for the financial sector will be worse than average. On the other hand, if the deterioration in market conditions should dramatically gain momentum sooner than we expect—this year or next—then this investment is likely to perform better than most of the others currently in the IMSF (although in that circumstance, you can expect further changes in the lineup). We considered the alternatives of increasing our GLD position or going long a currency ETF in anticipation of a weaker dollar but currently folks are still selling gold to increase liquidity and the targeted financials short play seems more likely to provide superior performance than a long play on another fiat currency.

The UltraShort Financials ETF utilizes leverage technique—futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments—to mimic the inverse of twice the daily performance of the Dow Jones US Financials Index. That is, if the fund managers meet attain their objective, on a day the DJ average goes down 1%, this fund should go up 2%…and vice versa. This DJ index represents banks (about two-thirds) and general financial groups (one-third), and the positions of the ETF reflect that distribution.

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Vertex (VRTX) update

Posted by intelledgement on Wed, 25 Jul 07

Vertex (VRTX) announced their 2Q07 results today and as expected, they continued to spend money a lot faster than it is coming in, a condition expected to persist until 2010 at least (by which time we hope telaprevir will be approved by the FDA and Vertex can start paying their own electric bills).

But the big news was an update on the PROVE 1 phase 2 results for telaprevir. A followup test for a group of patients who completed a 12-week course of telaprevir-interferon-ribavirin followed by a 12-week course of interferon-ribavirin—a total course of treatment of 24 weeks compared with the current standard of care (SOC) treatment of 48 weeks of interferon-ribavirin—to check their viral levels. “Among the patients who completed 24 weeks of therapy and had undetectable HCV RNA (less than 10 IU/mL) at the end of treatment, fewer than 10 percent had relapsed by the end of 12 weeks post-treatment follow-up,” according to the press release.

Obviously this is not conclusive—just preliminary data and additional followups will be required to confirm these results—but it does suggest that telaprevir has the potential of dramatically shortening the current (debilitating) SOC course of treatment, with potentially superior results.

Anyway, The Street liked the report with VRTX up 11% today on triple the normal volume. 🙂

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Élan (ELN) update #2

Posted by intelledgement on Thu, 19 Jul 07

The European Medicines Agency (EMEA) today rejected an application from Élan (ELN) and their partner Biogen Idec (BIIB) to allow the use of  Tysabri as a treatment for Crohn’s disease (CD). Regulators stated that there was “insufficient evidence” of Tysabri’s effectiveness in treating the chronic gastrointestinal inflammatory disease. They cited the risk of dangerous side effects, particularly PML  (progressive multifocal leukoencephalopathy), and concluded that the benefits of Tysabri for CD didn’t outweigh the risks.

ELN and BIIB stated that they would appeal the decision; a verdict on said appeal would be expected in the first quarter of 2008.

Meanwhile, the FDA are still considering ELN’s proposal to offer Tysabri for CD in the USA; an advisory committee meeting is scheduled for 31 July and a final decision is expected by 15 October.

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BUY Golden Star Resources (GSS)—Ghanian gold

Posted by intelledgement on Thu, 19 Jul 07

Golden Star Resources (GSS) is another Transmeridian…that is, a company that has had to overcome myriad problems to access and develop what appear to be world-class natural resource properties. Instead of oil in Kazakhstan, however, this time we are talking gold in Ghana…lots of gold. Indeed, the rich Ashanti Gold Belt has attracted several mining companies (AngloGold Ashanti (AU), GoldFields (GV), and Newmont Mining (NEM) all operate in Ghana). But actually getting the gold out of the ground and to the market has been a challenge.

Admittedly, some of Golden Star’s woes have been self-inflicted. In 2003, GSS stock had a great run from $2 in January to $8+ in December. But then management announced the first in what would become a long string of production delays associated with the company’s new Wassa mine…and then in the spring of 2004, seeking to capitalize on their inflated stock, GSS management launched a poorly planned hostile takeover bid for IAMGold (IAG), which fizzled.

Amidst a plague of logistical problems, some of which were not under management’s control—such as a pernicious drought that led to rationing of hydropower-generated electricity in Ghana—and some that were, or should have been, management then proceeded to miss production targets and cost targets quarter after quarter, for the better part of three years. The stock sank back into the doldrums, as low as $2.10 in 2005 and hovering around $3 in 2006.

Strategically, the major problems the company has to deal with are [a] while plentiful, the quality of the ore they mine is low and requires relatively expensive processing to retrieve the gold and [b] getting things done in Ghana is a challenge. Progress has been fitful, but there has been progress. As gold yields using the standard cyanidation process were low with GSS ores, in 2005, the company began construction of a bio-oxidation (BIOX®) plant at Bogoso to pre-process their ore. The gold in this ore is encapsulated in sulphide minerals such as pyrite, arsenopyrite and pyrrhotite, thus preventing the standard cyanide leaching process from accessing it. The BIOX® process destroys the sulphide minerals and exposes the gold for subsequent cyanidation, thereby increasing the overall gold recovery that can be achieved. (Don’t be trying all this at home in your kitchen sink.) The contractor, Gold Fields, have commissioned nine previous BIOX® plants worldwide, the largest of which is already in Ghana, run by AU. The plan was to start production in mid-2006, but—typically—there have been delays. However, last week the company announced that the sulfide processing plant at Bogoso had finally begun commercial production at the end of the second quarter. By the end of the year, production should be up and costs down.

Furthermore, the company has taken another strategic step to improve their logistical situation in Ghana. In conjunction with the other mining companies operating in the country, they are building their own power plant which should come online sometime this quarter. The company has been running expensive diesel generators to maintain operations during government power rationing, so this will help cut production costs.

If GSS can cut per-ounce production costs from the current $500+ to close to $400, and if they can up production from last year’s 200M ounces to (in 2008) well north of 400M, we will be looking at a highly profitable operation, with considerable upside with respect to their reported 4.1MM ounces of reserves. We believe it is extremely likely that these eventualities will come to pass, and that The Street is undervaluing GSS here at $4+/share.

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2Q07 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 18 Jul 07

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 29 Jun 2007:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWA 03-Jan-07 383 23.50 9,008.50 28.47 10,904.01 9.71% 21.04% 48.30%
EWH 03-Jan-07 562 16.00 9,000.00 17.02 9,565.24 5.98% 6.28% 13.39%
EWM 03-Jan-07 988 9.10 8,998.80 11.80 11,658.40 8.96% 29.56% 70.63%
EWZ 03-Jan-07 192 46.85 9,003.20 61.42 11,792.64 24.79% 30.98% 74.53%
FXI 03-Jan-07 81 111.45 9,035.45 128.85 10,436.85 25.79% 15.51% 34.65%
GLD 03-Jan-07 142 63.21 8,983.82 64.27 9,126.34 -2.24% 1.59% 3.30%
IFN 03-Jan-07 196 45.90 9,004.40 43.65 8,555.40 14.45% -4.99% -10.02%
IXC 03-Jan-07 81 111.47 9,037.07 129.33 10,475.73 16.04% 15.92% 35.64%
PHO 03-Jan-07 489 18.41 9,010.49 20.92 10,256.78 12.26% 13.83% 30.65%
SLV 03-Jan-07 70 128.64 9,012.80 123.50 8,645.00 -7.50% -4.08% -8.24%
USO 03-Jan-07 174 51.60 8,986.40 53.00 9,222.00 -0.66% 2.62% 5.49%
cash 919.07 928.28
Overall 03-Jan-07 100,000.00 111,566.67 9.44% 11.57%   25.34%
Macro HF 03-Jan-07 100,000.00 105,150.39 3.80% 5.15% 10.92%
SPY 03-Jan-07 141.62 151.64 6.37% 7.07% 14.70%

Position = symbol of the security the portfolio owns
Purchase = date when the security was acquired
Shares = number of shares the portfolio owns
Paid = price per share at time of purchase
Cost = total portfolio paid (including commission)
Now = price per share at time of statement
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.5%. For comparison’s sake, we also show the SPDR S&P 500 ETF, which historically provides a CAGR of around 10.5%. Note that dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission (except for the SPY) and there is a 2% rate of interest on the listed cash balance.

Transactions: There were no sales or purchases this quarter. We booked a dividend of $0.031/share for PHO on 15 Jun.

Review: Excellent quarter. Right now, conditions are perfect for the emerging market economies, with the US consumer still piling on debt to fund a continuing import frenzy, and energy prices moderating for the time being. Besides silver (SLV -8%), only our Indian fund (IFN) is still in the red for the year, and even there we were up 14% in the quarter. The Chinese (FXI +26%) and Brazilian (EWZ +25%) ETFs had spectacular performances. Aside from our Water Resources ETF (PHO +12%) and the aforementioned silver ETF, our commodity plays were flat. But while oil (USO -1%) was marking time, energy industry valuations continued to move smartly northwards (IXC +16%).

Another factor working in our favor (for now) is the weakness of the dollar. The appreciation of the Malaysian ringgit (EWM +9%) and Brazilian real contributed materially to the increase in the dollar-denominated value of those respective market index-linked ETFs this quarter. If the yuan were allowed to move freely, it would also be worth much more relative to the dollar.

Bottom line, the strategy worked well this past quarter, as despite a first-rate quarter for the SPY (+6%) we easily outstripped the market (+9%), while our benchmark Macro Hedge Fund Index actually underperformed (+4%). Year-to-date, we are +12% as compared to +7% for the SPY and +5% for the Macro Hedge Fund benchmark.

Analysis: What we have now is a Goldilocks scenario, in that the dollar is falling gradually enough so as not to panic the markets or kill off the US consumer market – which is just the way the powers that be in the USA and China like it, and thus will do their utmost to keep it that way, at least through next year’s macro events (Olympics in China and presidential election in USA). US political leaders get no points for telling the voters tough times are ahead, so their incentive is to paper over the cracks and hope the cosmetics last until the next guy has to deal with the problems. And aside from the fact that so long as the US consumers keeps buying it helps Chinese companies expand, China’s coffers contain trillions of dollars they should prefer to convert into real property before the charade ends…so in the meantime, it is in their interest to prop up the greenback.

Ideally, spirit gum and baling wire can keep the US dollar flying – and the US consumer in buy mode – until the Asian middle class cavalry arrives to take up the slack (probably five to ten years away). But there are huge structural weaknesses inherent in the value of the dollar and USA consumer spending is a house of credit cards…and these situations are not improving. Accordingly, the margin of error shrinks, and there is a rising danger that an unanticipated random event could trigger an avalanche here beyond the ability of the bankers to control. If the US economy stalls and takes a sudden dive before the rising Asian middle class is ready to take over the burden of living large, there will be a world-wide economic slowdown, potentially severe. In that event, we would shift out of the emerging markets ETFs and energy into a defensive posture (short the market indices and possibly long non-dollar currencies).

And of course if the global warming folks are right, then all bets are off…but likely the final vote there won’t be in in time to much influence how this situation plays out.

Conclusion: We know the direction we are headed, and recognize that there are alternative paths forward…including middle-ground scenarios where the dollar continues to decline short of a collapse and markets overall continue to rise, albeit more slowly…as well as the extreme scenarios where intelligent folks get elected in the USA and change our course by addressing all the problems in time to avert a steep decline (pretty farfetched) or there is a hard landing sooner or later (not so farfetched). We need to be prepared for all eventualities.

To that end, for now we are sticking with our mix of emerging market and commodity ETFs; if we perceive increased risk of a dollar or US credit collapse, our first step would be to consider cashing in the slowest of the emerging market ETFs (right now it would be EWH) and buy some insurance in the form of a Euro or Sterling ETF, or possibly increase our GLD position.

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Transmeridian (TMY) update #6

Posted by intelledgement on Mon, 16 Jul 07

More bad news for Transmeridian Exploration (TMY) announced after the close today: two weeks of production curtailment have become at least four weeks, but apparently management have worked out a deal with Kazakhstani authorities to resume operations without any penalty for gas flaring until 1 November. They expect final approvals on the deal by 27 July at which point production could resume. If the plan to deliver the NG to a local manufacturing concern is not in place by 1 Nov, then the company would be subject to fines for any flaring.

Losing a month of production this quarter is already very bad from a cash flow perspective. Obviously operations have been cut back, which reduce variable costs, but fixed costs and debt service cannot be avoided. Presumably we will have to see what the cash situation is like in October; more dilution may be necessary to raise cash to keep the doors open.

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The Provenge ad in the Washington Post

Posted by intelledgement on Sun, 15 Jul 07

It’s tilting at windmills, but what is interesting about this ad in today’s Sunday Washington Post (p. 24 of the first section) is that it was composed and paid for largely by activist shareholders—organized via the Investor Village DNDN message board—and prostate cancer organizations.untitled1aj3.jpg

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Jun 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Fri, 13 Jul 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 1.76 528.00 -23.48% -47.09% -73.12%
PTR 23-Jan-07 8 127.17 1,025.36 148.68 1,205.45   15.04%   17.56% 45.71%
IFN 13-Feb-07 24 41.76 1,010.24 43.65 1047.60 0.83% 3.70% 10.24%
FXI 27-Feb-07 10 95.00 958.00 128.85 1,288.50 14.69% 34.50% 142.87%
FDG 20-Mar-07 44 22.68 1,005.92 32.74 1,491.95 12.78% 48.32% 315.99%
ELN 04-Apr-07 129 13.90 1,801.10 21.93 2,828.97  11.21%  57.07% 580.48%
VRTX 18-Apr-07 57 31.65 1,812.05 28.56 1,627.92 -4.48% -10.16% -41.93%
NBIX 22-May-07 158 11.33 1,798.14 11.23 1,774.34 -3.36% -1.32% -12.02%
cash       -408.81   7244.78      
Overall 03-Jan-07     10,000.00   19,037.51 2.41% 90.38% 277.57%
Global HF 03-Jan-07     10,000.00   10,768.76.53 0.93% 7.69% 16.51%
NASDAQ 03-Jan-07     2,415.29   2,603.23 -0.05% 7.78% 16.72%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 3% rate of interest on the listed cash balance.

Transactions: One sale this month as the bidding war ended for Lionore and we cashed out with an 88% profit (748% CAGR!).

• 16 Jun – Sold 73 LMGGF for $25.70/shr

Comments: Back to black ink, with a 2% gain for the month; modest but good enough to beat the hedgies (+1%) and the NASDAQ (even). Overall we are up 90% so far this year compared to +8% for both the NASDAQ and Greenwich Alternative Investment’s hedge fund index.

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