Macro Tsimmis

intelligently hedged investment

Archive for July, 2008

Neurocrine Biosciences (NBIX) update #8

Posted by intelledgement on Thu, 31 Jul 08

Another quarter, another non-eventful $20MM loss (well, actually $21MM)…still no word on a GnRH Antagonist partnership—it wasn’t even mentioned in the conference call—and while the long-delayed post mortem meeting with the FDA staff on indiplon finally did happen in July, it amounted (as expected) to an anticlimax. Here is what CMO Chris O’Brien had to say on that subject: “We did get our chance to sit down with the neurology division in July earlier this month, and the meetings were cordial…. We are waiting for the official meeting minutes…. Typically, the agency provides their official minutes 30 to 60 days after this end of review meeting. So obviously we’ll give an update once that’s available.” In other words, “no news is no news”—the indiplon program is brain dead; the body is being maintained on life support.

For more details, refer to yesterday’s 2Q08 result press release.

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SELL Élan (ELN)—AAB-001 graded an “F”

Posted by intelledgement on Tue, 29 Jul 08

ELN researches presented their full Phase 2 findings at the International Conference on Alzheimer’s Disease in Chicago today, and while there were no surprizes—basically, the drug appears to help patients who are not carriers of the ApoE4 gene, which means it doesn’t help those most at risk of developing AD—researchers at the conference were unexpectedly negative on the ramifications of the results. In essence, the entire theory the drug is based on—that counteracting amyloid plaques in the brains of Alzheimer’s patients should ameliorate symptoms because these plaques are causing the disease—is now being called into question, as detailed in this report on the conference published by Forbes.

Obviously if eliminating the plaques is not efficacious, then AAB-001 is a blind alley.

ELN is down 20% in post-market trading today (this information was not available until after 4pm) to around $27/share. Given our analysis that without AAB-001 the stock should be worth around $15 or so, we are going to cash in our profits here (that is, at the open tomorrow), as obviously the conservative thing to do is to discount the value of AAB-001 pending further data.

If the market overreacts and drives the price down below $15, we may well jump back in. We still expect the stock should be worth $16-to-$18 by the end of the year, strictly on tysabri.

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Élan (ELN) update #13

Posted by intelledgement on Fri, 25 Jul 08

Élan (ELN), our biotech company of tysabri fame, announced 2Q08 financial results today which showed continued top line and bottom line improvement. Y-O-Y sales increased from $183MM to $242MM—and up sequentially from $207MM last quarter—including $133MM of tysabri sales, up from $47MM a year ago. Total tysabri sales—including Biogen Idec’s (BIIB) share of non-USA sales—were $200MM, up from $72MM in 2Q07. ELN EBITA improved from a 2Q07 loss of $111MM to a loss of $36MM this quarter.

The number of patients using tysabri continues to increase. During the second quarter 2008, 50% more patients (5700) started taking the drug than in 2Q07 (14% more than were added in 1Q08). Approximately 31,800 patients were on therapy worldwide as of 30 Jun 08, an increase of 22% over the 26,100 patients who were on therapy at the end of March 2008, and of 127% over the 14,000 patients who were on therapy this time last year. Management anticipate making the $75MM payment to BIIB this quarter that is required for ELN to maintain a 50% share of non-USA sales of the drug in excess of $700MM, and they project total usage to reach 100,000 patients by the end of 2010. (We think that number is likely to be closer to 120,000, barring any significant additional flareups of progressive multifocal leukoencephalopathy.)

While all is cool on the tysabri front, we are looking forward anxiously to the imminent International Conference on Alzheimer’s Disease in Chicago which begins on 26 July. ELN plan to present the full Phase 2 data on their Alzheimer’s disease prospective drug bapineuzumab (AAB-001) next Tuesday. The preliminary results discussed here last month have left some analysts cold, as detailed in this entry in Mike Huckman’s blog. Normally we don’t pay much mind to analysts, but Jonathan Aschoff is notorious as one of the leaders of the Dendreon (DNDN) shortsellers prior to the FDA decision sidelining provenge back in May 2007, so when he pooh-poohs a drug, we listen.

We estimate that based on PML-free tysabri sales, ELN stock “should” be worth around $16-18/share by the end of 2008…and it closed today at $32.34. This implies pretty high expectations for AAB-001; hence our nervousness with respect to the results to be announced Tuesday. Stay tuned.

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Wachovia Corporation (WB) update #4

Posted by intelledgement on Wed, 23 Jul 08

Some big shoes thudded to earth yesterday as Wachovia (WB), our finance sector short play, announced their 2Q08 results and the extent of the disaster that has essentially sunk this company began to come into view. WB management owned up to a loss of $8.9B, “including a $6.1 billion noncash goodwill impairment charge in commercial-related subsegments reflecting declining market valuations and asset values,” according to the press release.

The loss amounted to a staggering $4.20 of red ink per share. Excluding the $6.1B goodwill impairment and net A.G. Edwards merger-related and restructuring expenses of $128 million, the loss was “only” $2.7 billion, or $1.27 per share. The loss was in line with the preannouncement made 9 July—prior to that, analysts had been expected losses to run around 78 cents a share—but never-the-less, initially the stock sank 12% to levels not seen since the 1990s (low for the day of $11.65).

However, management announced a spate of actions in addition to the write-down—cutting the dividend for the second time in three months, this time 87% to five cents, exiting the wholesale mortgage business, layoffs of over 6,000 employees—and new CEO (as of 9 July) Robert Steel handled himself well in the conference call. Analysts generally seemed satisfied and in the wake of several positive comments, on extremely heavy volume of over 239 million shares, the stock rallied dramatically to finish the day +27% at $16.79. And today, it was up another 5% to $17.65.

Sorry to say, we are very confident this is not the end of the story. We don’t know what the analysts who like the stock here are smoking but there is no way they can know that the measures taken by management—or any additional moves they can make, short of recapitalizing the company with tens of billions of dollars (which would virtually wipe out current shareholders’ equity)—will suffice to rescue Wachovia from the Golden West black hole, let alone return them to profitability. Probably no one outside of Wachovia knows the true extent of the damage—and possibly not even anyone at Wachovia knows for sure—but there are only two chances that this write-down contains the damage: slim and none.

If you are not yet short Wachovia, if you can sell it here at $17.65 or better, you are likely to do well in the next quarter or two.

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Jun 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Sat, 12 Jul 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 0.63 189.00 40.00% -68.02% -81.06% -67.28%
ELN 04-Apr-07 129 13.90 1,801.10 35.55 4,585.95 41.97% 61.74% 154.62% 112.45%
VRTX 18-Apr-07 57 31.65 1,812.05 33.47 1,907.79 16.91% 44.08% 5.28% 4.38%
NBIX 22-May-07 158 11.33 1,798.14 4.19 662.02 -15.01% -7.71% -63.18% -59.39%
BQI 13-Jul-07 565 3.35 1,900.75 6.50 3,672.50 42.23% 59.31% 93.21% 97.68%
GSS 19-Jul-07 451 4.19 1,897.69 2.69 1,213.19 -9.12% -14.87% -36.07% -37.56%
GSS 24-Aug-07 613 3.08 1,896.04 2.69 1,648.97 -9.12% -14.87% -13.03% -15.12%
SLT 5-Oct-07 111 19.75 2,200.25 15.90 1,764.90 -28.18% -39.01% -19.79% -25.87%
BZP 19-Nov-07 245 9.77 2,401.65 29.40 7,203.00 29.29% 162.97% 199.92% 499.51%
BZP 30-Jan-08 186 11.27 2,104.22 29.40 5,468.40 29.29% 162.97% 159.88% 892.37%
WB 1-Feb-08 -57 39.99 -2,271.43 15.53 -921.69 34.75% 59.16% 59.42% 211.32%
BZH 24-Mar-08 -214 10.99 -2,343.86 5.57 -1,191.98 19.86% 25.03% 49.14% 343.65%
cash -4,194.60 7,672.15
ISOP 03-Jan-07 10,000.00 33,886.98 18.75% 55.12% 238.87% 126.92%
Global HF 03-Jan-07 10,000.00 11,033.81 -1.03% -0.71% 10.34% 6.83%
NASDAQ 03-Jan-07 2,415.29 2,292.98 -9.10% -13.55% -5.06% -3.43%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. 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 2% rate of interest on the listed cash balance.

Transactions: None.



WOW! Our best month of the year: +19%. In fact, aside from our freaky Dendreon bonanza (up 78% in March 2007), this is our best month ever. We again beat both the NASDAQ (-9%) and the Global Hedge Fund Index (-1%); overall after 18 months of operations, the ISOP is now a record high +239% compared with +10% for the hedgies and -5% for the NASDAQ.

Folks, it really isn’t this easy…or more precisely, the vaguaries of speculation being what they are, while it is feasible to be up big in a short period of time, it is just also easy to be down big. Case in point, TMY, which was up 40% this month on the buyout bid from Hong Kong—but overall is still down 68% for us. Or our biotech spec play NBIX, down another 15% this month and -60% overall in the wake of last year’s surprise recjection by the FDA of their insomnia remedy. Or GSS, our gold miner with the lingering production cost issues, down another 9% this month.

Of course, on balance, the good outweighed the bad this month. On the strength of nearly doubled reserve estimates, BQI was up 42% to lead the port, along with ELN which despite mixed results on their Alzheimer’s drug was also up 42%. The big picture for banking and housing continued to decline in June, and our short positions were strong again: WB up 35% and BZH up 20%. BZP was up 29% on the news that they were finally shipping crude and VRTX was up 17% despite somewhat disappointing news on the design of the phase 3 trials for telaprevir. SLT dropped 28% on concern they may end up overpaying for Asarco.

While there is a temptation to sell off everything and just sit on the funds for the next six months—we are up 55% YTD and it’s hard to imagine the hedgies or market catching us by December—we still think the market holds it together through the Olympics at least and the USA election most probably, and so we are holding pat here. Should we get a decline, then we will have to review the energy plays and possibly the mining and biotech plays, and we could be looking for more shorting opportunities.

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Sterlite Industries India Ltd. (SLT) update #8

Posted by intelledgement on Sat, 12 Jul 08

Our Indian-based mining/refining company, Sterlite Industries (SLT), announced an agreement earlier this week with the union representing the workers of bankrupt US copper miner Asarco, which SLT have bid to acquire the assets of. The $2.6B bid, which has been accepted by the Asarco board, is on hold pending the bankruptcy court’s review of a rival bid from Grupo Mexico (GMBXF.PK).

SLT’s CEO, Anil Agarwal, stated, “We look forward to working with the unions and Asarco’s highly-skilled employees.” The new collective bargaining agreement fully retains all existing worker benefits. Sterlite has also committed to invest in Asarco’s operations will be improved and made more competitive. The new agreement runs through 2013; it would replace the existing agreement that expires in 2010.

Of course, the new agreement only becomes effective if the SLT acquisition is consummated. But the existence of the agreement can’t hurt Sterlite’s standing with the bankruptcy court when it considers the competing bids.

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Oilsands Quest (BQI) update #11

Posted by intelledgement on Wed, 09 Jul 08

Our tar sands baby, Oilsands Quest (BQI), today released more data supporting the viability of the company’s proposed bitumen mining/processing operations in Saskatchewan. Analysis by an independent testing lab obtained “linear coreflood recovery factors as high as approximately 90 percent” which, BQI’s press release stated, ”are indicative of the potential to achieve relatively high recovery factors in the field.” Additional work by other analysts addressed methodological factors; BQI are planning to run field tests later this summer which will be informed by these analyses.

According to CEO Christopher Hopkins, “These new results combined with earlier reports confirm McDaniel & Associates assessment that this is a remarkable reservoir, with permeabilities as high as any other in the industry.” So long as long-term oil prices remain north of $60/BBLS—we are guessing breakeven here could be as low as $35-$40/BBLS, depending on the cost of natural gas—this is looking more and more like a can’t-miss. We look forward to the test results.

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2Q08 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 09 Jul 08

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 Jun 2008:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWZ 03-Jan-07 192 46.85 9,003.20 89.29 17,374.66 14.27% 92.98% 55.49%
FXI 03-Jan-07 81 111.45 9,035.45 130.84 10,812.83 -2.72% 19.67% 12.81%
GLD 03-Jan-07 142 63.21 8,983.82 91.40 12,586.02 -4.79% 44.47% 28.02%
IFN 03-Jan-07 196 45.90 9,004.40 35.38 8,537.76 -10.99% -5.18% -3.51%
IXC 03-Jan-07 81 111.47 9,037.07 152.60 12,618.53   17.73% 39.63% 25.12%
PHO 03-Jan-07 489 18.41 9,010.49 20.71 10,187.34 13.33% 13.06% 8.59%
SLV 03-Jan-07 70 128.64 9,012.80 172.63 12,084.10 -11.53% 34.08% 21.76%
SRS 31-Aug-07 92 97.84 9,009.28 105.00 9,805.98 -15.05% 8.84% 10.72%
DBA 13-Mar-08 235 42.50 9,995.50 40.68 9,559.80 11.60% -4.36% -13.87%
cash       17,907.99   27,395.04      
Overall 03-Jan-07     100,000.00   131,354.82 3.70% 31.35%   20.10%
Macro HF 03-Jan-07     100,000.00   115,477.35 2.38% 15.48% 10.14%
S&P 500 03-Jan-07     1,418.30   1,280.00 -3.23% -9.75% -6.66%

Position = security the portfolio owns
Bought = date position acquired
Purchase Price = price per share
Shares = number of shares the portfolio owns
Cost = what portfolio paid (including commission)
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 2007 inclusively) provides a CAGR of around 15.3%. For comparison’s sake, we also show the S&P 500 index, 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 and there is a 2% rate of interest on the listed cash balance.

Transactions: Nothing doing this quarter other than booking some dividends:

  • 20 Jun – PHO dividend of $0.019/shr
  • 23 Jun – FXI dividend of $0.56167/shr
  • 23 Jun – IXC dividend of $0.40133/shr
  • 24 Jun – SRS dividend of $0.44/shr

Performance Review: A good quarter, much better than 1Q08. We thrashed the S&P 500—which which suffered a third consecutive losing quarter and is down 16% since 30 Sep 07—and gained back some of the ground we lost last quarter to the Macro Hedge Fund index—which, while eating our dust overall, has gained ground in every quarter since we started tracking our performance (we have been in the black five out of six).

Our Asian holdings (FXI and IFN) were down this month as were precious metals (GLD and SLV) and our one remaining inverse fund (SRS real estate). However, Brazil (EWZ) and the other commodities (the IXC energy fund, the PHO water fund—and check out this Business Week article on the subject—and the DBA agriculture fund) were all up more than enough to compensate.

YTD, the Macro Hedge Fund index is up 3% while we are down 4% and the S&P 500 index is down 13%(!). But even with the 2008 losses we’ve incurred, we are in a great place overall, with a compounded annual growth rate after 18 months of operation of 20% compared to 10% for the average macro hedge fund and -7% for the market overall.

Analysis: We continue to monitor the course of events in the expectation that the dollar is going to collapse and the US economy has a long way to go to adjust to the new reality that we are no longer king of the value-add hill in either manufacturing or services. While we still don’t think that is all likely to happen before the election, the risk of a major market meltdown continues to increase. June all by itself was a minor meltdown: the worst month for the DOW since 1930.

The underlying strategic problem is that we have been living beyond our means both as individuals and as a nation and borrowing money to fund our addiction to conspicuous consumption…and our credit rating is headed south thanks to the bad real estate loans we foisted on everyone during the housing bubble. The tactical problems revolve around the insolvency of our financial institutions saddled with varying quantities of mortgage-backed securities and corporate paper of unknowable (but certainly reduced) value. The Fed and the ECB can and apparently fully intend to delay the inevitable day of reckoning with various credit offerings, loans, and brokered “rescue” deals to address the tactical issues, whilst pretty much ignoring (and probably exacerbating) the strategic problem.

At least through August, they will have China on board as Beijing will not want any serious financial crisis disrupting the Olympics. Actually, China depends on the USA and Europe to buy their exports and thus fuel their double-digit growth…plus we owe them tons of money…so they are likely to cooperate in whatever dubious attempts to maintain confidence in the broken system the Fed deems appropriate.

The presidential election campaign has—unsurprisingly—been a disappointment. With such deep problems abounding, it is dispiriting to say the least to see both major party candidates putting forth manifestly unrealistic promises and, mostly, failing to address the main points. One almost hopes there will be a crisis prior to November, which at the least should have the effect of raising the level of debate on the issues.

Conclusion: Not much has changed in the last three months. Machinations by the Fed and the ECB still appear to be holding the line for the most part, although the dollar is noticably wobbly in the wake of all the credit injections (which increase the supply of dollars). Thus we still anticipate it is most likely the markets will muddle through the Olympics/USA election without a major collapse, although we remain focused on the US consumer and the US dollar as our “canaries in the coalmine.” Should either begin to degrade rapidly, then we stand ready to sell off the emerging market ETFs (EWZ, IFN, FXI) and possibly the energy and commodity ETFs (IFC, DBA) in favor of additional sector/index “reverse” ETFs (such as SRS already in the portfolio).

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Sterlite Industries India Ltd. (SLT) update #7

Posted by intelledgement on Sat, 05 Jul 08

Our Indian buildout play, miner/metals refiner Sterlite Industries (SLT), got more bad news earlier this week concerning their $2.6B buyout of the copper assets of bankrupt copper miner Asarco. Asarco’s former owner, Grupo Mexico (GMBXF.PK), received permission from the US bankruptcy court to present their reorganization plan, which apparently involves reacquiring all of Asarco (including the liabilities).

Grupo Mexico have apparently put as much as $4.1B on the table, although as they are proposing the reacquire all of Asarco, the offer is not directly comparable to SLT’s. It’s likely to take some time for the court to sort through the relative plusses and minuses of the competing offers, and thus the consummation of SLT’s acqusition will be delayed accordingly, at minimum. Speaking of plusses, the court has approved a $52 million breakup fee negotiated by Sterlite and the Asarco board; should the board back out of the deal, Sterlite will be due the fee.

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Transmeridian (TMY) update #23

Posted by intelledgement on Thu, 03 Jul 08

Our ailing E&P with the Kazakhstani oil they can’t figure out how to access announced today the acquisition of additional problematic oil fields in Russia. Transmeridian Exploration (TMY) management stated that the company has take a 50% interest in both a second field and an undrilled anticline in trend with its Gasha Field in the Dagestan region of Russia. According to the press release, TMY have “concluded negotiations with its partners in DNK…on the joint operations of its properties in the region and signed a joint operating agreement. The agreement calls for an initial work program which includes a 200 square km 3D seismic program as well as re-entry of four wells and drilling of two new evaluation wells.” 

These properties were developed and eventually abandoned by the Soviets after 20 years in the mid-70s due to the “complexity and difficult drilling conditions presented by the geological formations encountered in the area,” according to the press release. During those 20 years, the wells did produce three million BBLS and 4.4 BCF of natural gas, and the Russians estimate there are 25.6 million additional BBLS of recoverable oil. Again according to the press release, “results of the company’s evaluation of the resource potential of both fields with the use of more refined reservoir parameters and additional information gained from recent well test lead us to believe there could be at least a fivefold increase over the currently reported resource potential.” 

Given TMY’s history of subpar results when attempting to develop challenging properties—not to mention their current financial challenges—we will temper our enthusiasm here.

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