Macro Tsimmis

intelligently hedged investment

Archive for March, 2008

Vertex (VRTX) update #10

Posted by intelledgement on Mon, 31 Mar 08

It’s been a good few days for our biotech company, Vertex (VRTX), but today was particularly fine. VRTX’s share price moved up 28% to $23.89 today on volume of more than eight times normal after the company announced very encouraging preliminary results of an open label Phase 2 test of telaprevir, their anti-hepatitis C candidate drug. This trial focuses on patients who failed to respond to the current standard of care (SOC) treatment, which consists of 48 weeks of interferon plus ribaviron. After four weeks of treatment, 81% of the patients in the study exhibited no evidence of hepatitis C infection. Based on past experience, in the fullness of time, many of those patients can be expected to relapse, but nothing currently out there does better than curing 15% of patients who were not cured by the SOC (which are about half of those who take it). If telaprevir can cure even 30% of such patients, it is very likely to be approved by the FDA, possibly sooner than the completion of the Phase 3 trials for treatment naive patients in 2010.

It is this eventuality that drove the stock higher today.

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Transmeridian (TMY) update #17

Posted by intelledgement on Mon, 31 Mar 08

Our ailing Kazakhstan-based E&P, Transmeridian Exploration (TMY), made a bunch of news today and none of it was good.

First, the company nailed the coffin shut on the attempt by their CEO, Lorrie Olivier, to take the company private at $3/share. Apparently Mr. Olivier was not able to find investors willing to finance his further (mis)adventures, following a dismal track record of failing to get extract crude economically from Transmeridian’s South Alibek field over the past several years. In terminating the agreement following Mr. Olivier’s repeated failure to meet deadlines, the company does not incur any termination fee.

Apparently, discussions with a third party about acquiring Transmeridian have also ended unhappily. In previous press releases, management have mentioned that such discussions are ongoing, but this press release merely states: “Transmeridian will continue to seek proposals from other interested parties with respect to an acquisition of the company.” According to the press release, the company is also seeking financing.

And no wonder, as they also filed their 2007 10K with the SEC today and the picture is not a pretty one. Once again, the company fell far short of the 4000 BBLS/day of crude oil production that is the bare minimum needed to keep the doors open: Transmeridian produced an average of 2126 BBLS/day in 2007. As a consequence of this production shortfall, the company lost $74.1MM in 2007 (67 cents per share of red ink) as compared to a loss of $54.3MM in 2006 (58 cents per share). It would have been even worse had they not gotten a much better price: an average of $47.93/barrel in 2007, as compared with $34.54 in 2006.

The bottom line is that not only have they no money to spend on capital projects (i.e., drilling new wells), but it is not clear that they have the cash to continue their current operations, to say nothing of ramping up production from existing wells. Unsurprizingly, the company received a “going concern” note from their auditors. Most likely if they don’t strike a buyout deal soon, they will either have to sell more stock—if they even can find any buyers—or cease operations.

And speaking of prospective buyers, another negative development for any such to consider is that the company revised their reserves estimates downward from 67.2 MMBBLS as of the end of 2006 to 58.6 MMBBLS as of the end of 2007. No explanation as to how pumping 700,000 barrels of crude reduced the reserves by 9 MMBBLS.

This situation is looking more and more like a writeoff. The one positive consideration is that as the South Alibek field was shut in for the third quarter of the year due to a natural gas flaring dispute with the Kazakhstani government—not that that per se was positive—a more accurate estimate of their average daily production would be 2835 BBLS/day…still woefully short of the 4000 bar, although a significant improvement of the average 2038 BBLS/day they pumped in 2006, and not quite so large a gap to bridge…if a modest cash infusion enables them to improve production as much in 2008 as they did in 2007, they should be close to breakeven on operations. Where there’s life, there’s hope!

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Vertex (VRTX) update #9

Posted by intelledgement on Thu, 27 Mar 08

Hey, shares of Vertex (VRTX) were up today, and it had nothing to do with telaprevir or hepatitis C. The company announced preliminary results of a small Phase 2a trial of VX-770, an investigational CF potentiator. “The interim analysis showed that dosing of VX-770…as an oral agent for 14 days resulted in improved lung function and in improved function of the Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) protein as measured by changes in sweat chloride levels and changes in nasal potential difference (NPD),” according to the press release.

These are interim results based on only 20 patients, all of whom carry the G551D mutation in the gene that causes CF. This patient population amounts to only about 1200 people in the USA, although Vertex plan to expand testing to cover more diverse CF patients in future (there are an estimated 30,000 people with CF in the USA overall). Be that as it may, the results are pretty spectacular, with lung function improving 10% in patients who received the highest dosage. There is no approved CF treatment that actually improves lung functionality, in effect rolling back the progression of the disease.

VRTX closed at $19.23, up 8% on the day.

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Beazer Homes (BZH) update #6

Posted by intelledgement on Wed, 26 Mar 08

Our housing industry short, BZH, got tagged today with a credit rating downgrade. Moody’s cut Beazer’s commercial paper from B1 to B2 (that is from “junk” to “junkier”), and initiated a review process for a possible further downgrade. A statement issued by the credit ratings agency cited worsening housing industry conditions in general and concerns about Beazer’s ongoing legal travails in particular in explaining the downgrade.

BZH closed today at $8.75, down 14% on the day.

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SELL SHORT Beazer Homes (BZH)—again!

Posted by intelledgement on Mon, 24 Mar 08

Not long after we covered our Beazer Homes and Wachovia shorts back in January in the wake of the Fed’s surprize 75-basis point rate cut, we were sorely tempted to rush back in almost immediately (both stocks went up sharply the next day)…but we exercised discipline and instead contented ourselves with entering good-till-canceled (GTC) orders for each at around the prices we originally got when we sold them short last year ($10.99 for BZH and $39.99 for WB). Our GTC for Wachovia hit paydirt almost immediately, but the BZH order has been sitting there for weeks…until today, when it, too finally got executed.

We don’t really have too much to add to our prior series of posts as to why Beazer stock is outrageously overvalued here, even after having declined 68% in the last year. Suffice it to say that in addition to the terrible woes besetting the housing industry in general—real estate price declines, mortgage defaults, bloated inventory, rising construction costs, more difficult credit environment, weakening consumer, etcetera, etcetera—Beazer have their own special collection of crosses to bear, including:

  • Possible Federal criminal charges stemming from their lending practices
  • Possible SEC fines or criminal charges stemming from questionable transactions
  • Frozen financials pending the outcome of these and internal investigations
  • Payments to bondholders to allow waivers to avoid default because of the frozen financials
  • Dividend suspended
  • Workforce reductions
  • Series of writeoffs relating both to reductions to workforce and to value of land they plan to build on

While we take no delight in profiting when a company fails, Beazer was extremely aggressive in selling property to folks who really could not afford it in North Carolina, so there is more than the usual level of interest in their travails.

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SELL UltraShort Finance ETF (SKF)

Posted by intelledgement on Thu, 20 Mar 08

OK, we can’t fight the Fed here. Not when they have the world’s central banks helping support the dollar. The banks are borrowing 2% money from the Fed whether or not their balance sheets are strong enough to get it elsewhere and loaning it out for 6% mortgages. That covers a lot of sinful bad paper, and most of them should survive, assuming the Fed does not run out of money. (LOL j/k…whatever does us in here, it won’t be the Fed running out of money…they don’t even need to print more nowadays; they can just create it electronically.) The key to keeping the lid on here, however, is the support the other central banks are lending the dollar, thus allowing the Fed to keep loosening money to save the banks without breaking the currency. Why? Because partly because those central banks already have tons of dollars and they are loathe to see them zeroed out but mostly because the world still needs the USA consumer to be spending here, and for as long as possible. If the yuan and the yen and the euro get too expensive relative to the dollar, even that spendthrift growth engine for the rest of the world’s economy shuts down. Hardly anyone outside the USA—and apparently no one here aside from Ron Paul—wants to see that happen until the last dime has been milked.

We think this will work to prop up the banks and keep the system afloat for a while longer. We know this Rube Goldberg solution is doomed to fall apart in the fullness of time, however, and we fully expect to be back here. The key indicator to watch now is the dollar. With the thrust of the central banks behind it, the dollar is defying gravity today: increasing in value despite lower interest rates on treasuries and printing presses run amok at the Fed. That cannot last forever, and this is the last card in the bankers’ hands. It may be months away—after the election would be a good time to check back—but when the dollar starts to fall again, it’ll be katie-bar-the-door.

In the meantime, every additional greenback the Fed issues and every day that passes with diseconomically low interest rates, the weaker the dollar—and our economy—becomes…the harder will be our eventual fall…and the longer it will take us to recover.

As possum said, “We have met the enemy and he is us.”

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BPZ Energy (BZP) update #6

Posted by intelledgement on Wed, 19 Mar 08

BPZ Energy (BZP) is taking advantage of the strong market for their stock to raise $40MM of capital via the sale of 2MM shares of common stock. The sale was announced yesterday, and pricing was revealed today.

Dilution is a way of life for the speculator. Most promising companies with growing businesses that have the potential to deliver outsize ROI for shareholders are constantly in need of funds to capitalize their growth, and selling more shares—thus diluting the holdings of existing shareholders—is usually the most expedient mechanism. It avoids increasing the company’s debt levels and obviates the need for lengthy and sometimes prickly negotiations with lenders and the inconvenience of concomitant limitations on how the funds can be deployed.

With the sale of these new shares, the company will have about 76MM shares outstanding, which is about 40% more than the 54MM shares that were outstanding as of 30 Mar 07. Of course the PPS that day was $6 and today BZP closed at $20.36…so if you are speculating with the right growth stock, any dilution is apt to be perfectly palatable.

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Transmeridian (TMY) update #16

Posted by intelledgement on Wed, 19 Mar 08

The bell is tolling for Transmeridian (TMY) CEO Lorrie Olivier’s bid to take the company private at $3/share. His investment vehicle Trans Meridian International (TMI) missed the original deadline (31 January) to come up with the financing and then a second deadline (15 February). Today, the TMY board notified TMI that “if the financing condition contained in the definitive merger agreement between the company and TMI has not yet been satisfied by March 31, 2008, the company will terminate the definitive merger agreement with TMI.”

Transmeridian report that they are conducting “discussions with another interested party with respect to the potential acquisition of the company,” and also that they are conducting “preliminary discussions with interested parties regarding a substantial investment of capital into the company.” We are not holding our breath here. This is most probably a write-off, although we continue to hope that shareholders may yet squeeze some value out of the underlying asset (the rights to explore and develop Kazakhstan’s South Alibek field).

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Oilsands Quest (BQI) update #7

Posted by intelledgement on Tue, 18 Mar 08

Our aptly-named speculative Canadian oilsands play, Oilsands Quest (BQI) released an update of their winter field operations today. All told, they drilled 168 holes, including 143 in Saskatchewan and their first-evert 25 in Alberta. 18 of the exploratory holes drilled in Alberta “encountered meaningful intercepts of bitumen-bearing McMurray formation,” although precisely how meaningful we won’t know until the lab analysis results come in, probably this fall.

Two of a planned 18 holes at three test sites for this summer’s planned reservoir field test at Axe Lake have been drilled; drilling is scheduled to resume after the spring breakup. This program is intended to contribute to the data required to determine the optimal in-situ process or processes that may be used at Axe Lake. Initial steam injection into the reservoir is expected to commence this summer.

The company also conducted 3-D and 2-D seismic programs on its permit lands in Saskatchewan and Alberta this winter. They are using the seismic survey data to further define geological structure and reservoir characteristics within the Axe Lake Discovery area and to identify exploration targets.

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BUY PowerShares DB Agriculture Fund (DBA)

Posted by intelledgement on Thu, 13 Mar 08

This is a pure defensive play, and we are later than we should be in making it.

We are not going to rehash the many reasons we believe the dollar to be in peril here yet again, but in retrospect it would have been smart to move into this ETF last September, when the Fed first lowered interest rates. That was the confirmation of our expectation that the government is willing to sacrifice the dollar to keep the merry-go-round cranking for as long as possible. However, we did not anticipate that the credit crunch would develop so quickly; we calculated that things would remain more stable through the U.S. election, and thus preferred to keep more funds in the emerging market ETFs. Once it became apparent that consumer spending already was slowing early this year, the Fed has accelerated the printing press as well as continuing to lower interest rates, and the dollar’s decline has accelerated.

We really decided to buy DBA two months ago, and have been waiting—hoping—for a pullback to the $30 range. Well…it ain’t happening, and it makes no sense to keep assets in dollars sitting on the sideline here, losing value nearly every day.

Commodities in general are hot right now, with the emerging market growth/demand story still going strong. The DBA ETF tracks the Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return™ (Index)—a rules-based index composed of futures contracts on corn, wheat, soy beans and sugar. The agricultural sector in general has been strong of late, with more wealthy Chinese and Indian consumers looking to upgrade their diets combining with the pressure the irrational push for corn-based ethanol in the USA on corn prices in particular. This chart shows that since January 2007, the DBA has kept pace with gold and silver in outdistancing the market; only crude—which we mistakenly sold off two months ago—is significantly outperforming agriculture commodities in that time frame.

We do not necessarily expect agricultural commodities to continue to outperform at the same level; however we are sure we prefer having funds here than in dollars with the likely prospect of additional rate cuts and loose money forthcoming from the Fed.

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