Macro Tsimmis

intelligently hedged investment

Archive for March, 2009

Activision Blizzard (ATVI) update #2—“unleash your inner rock star”

Posted by intelledgement on Tue, 31 Mar 09

As promised, our gaming company Activision Blizzard (ATVI) released two games in the last week: Monsters vs. Aliens™, based on DreamWorks Animation’s (DWA’s) 3D movie of the same name—which itself hit the theaters last Friday—and Guitar Hero® Metallica®, the latest expansion of that blockbuster franchise. And in concert (if you will pardon the expression) with March Madness, here is one of the ads ATVI are using to promote the Metallica release:

LOL we saw Bobby Knight playing Guitar Hero at Metallica—his hair was perfect.

Also last week, Activision Blizzard announced the November release of Call of Duty® Modern Warfare® 2. This is a sequel to the best-selling first-person action game of all time, Call of Duty® 4: Modern Warfare™, which has sold more than 12 million copies worldwide, to date. The one disappointment is that with Modern Warfare 2 now set to come out so late in the year, it does not appear as if Activision Blizzard are expecting to release Starcraft II in 2009, afterall.

Previous ATVI-related posts:

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Time to get mad about the AIG bonus brouhaha

Posted by intelledgement on Fri, 27 Mar 09

The sanctimonious pillorying of the AIG employees who received bonuses earlier this month by our elected “leaders” looks more like a scene out of The Ox Bow Incident than Mr. Smith Goes to Washington. And it is wrong. It is stupid. And it is hurting us.

The basic rant goes, it is outrageous that tax dollars collected from hard-working Americans transferred to AIG have been used to pay bonuses to fat cat bankers who contributed not only to the downfall of the company but the systemic risk that threatened the whole system—and now being rewarded for their malfeasance.

However, the reality is, most of the bonus money went to folks who are manning the sinking ship on behalf of us (U.S. taxpayers who have an 80% interest in AIG), trying to unwind the mess and minimize the damage. Very few of them had anything to do with writing the credit default swap contracts that crippled AIG and threatened us all with systemic failure. They agreed to do this work—many with reduced salaries and some turning down offers from healthier companies—with the understanding that these bonuses were safe, and indeed they were agreed to under Bush and confirmed under Obama (the oft-discussed amendment Senator Chris Dodd added at the behest of Treasury).

Now that the bonuses have become a big tsimmis, the politicians are either running for cover or competing with each other to come up with ways to demonize and torture these folks, ranging from retroactive confiscatory taxes to threats to publish their names and addresses so their spouses and children can enjoy the fear and loathing.

Not only is this behavior unethical, mean-spirited, and a good example of poor leadership, but it is not in our own best interest. Check out this letter from an AIG employee published earlier this week in the NY Times. In driving folks with the expertise to ameliorate this crisis out of AIG, we are not only putting our $80B investment at risk, not only hurting our own company, but we are counteracting all we have done to avert systemic risk.

Our political leaders need to stop worrying about the $160 million and focus on the $80 billion. We expect leaders to help us make tough choices, to explain difficult circumstances to increase the odds good decisions will be made…in short, to lead, not to egg on a lynch mob. This political theatre is not just wrong, not just unseemly, but is actually deleterious to us all. What happens with our $80B will mean much more to all of us—and our children—than what happens to $160M in bonus money.

This effects you, and all of us. Your elected representatives are feeling the heat from know-nothing blowhards expressing their own fear and anger. Take the time to make sure your Congressman and Senators are not part of the problem here, and contact them to praise them if they have kept their cool, or give them what for if, in order to score some cheap shots, they are acting against yours—and everyone’s—best interests.

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SELL Neurocrine Biosciences (NBIX)

Posted by intelledgement on Wed, 25 Mar 09

Neurocrine Biosciences, our biotech play with the snakebit insomnia remedy—which the FDA rejected twice despite strong data showing efficacy and safety—announced top line results of a Phase 2 study of their Gonadotropin-Releasing Hormone (GnRH) receptor antagonist, elagolix, for treatment of endometriosis today after the close of the market. The results were mixed, but bottom line according to the press release: “Although the daily pain scores improved numerically over the course of treatment on the primary endpoint NRS, the change from baseline was not statistically significant compared to placebo.”

Now it so happens that NRS—“numeric rating system”—daily pain measurement is considered to be “experimental” according to management, because it had never been used before…and elagolix did show statistically significant superior results to the placebo when measured by several other monthly pain measurement methodologies which have been used in prior studies. “The decoupling of these exploratory daily scales from the established monthly validated scales will prompt us to seek input from regulatory authorities and our expert clinical consultants,” said Dr. Chris O’Brien, NBIX’s chief medical officer. Do tell; the NRS was the primary endpoint because it was proposed by the FDA. (Results also fell short on another novel measurement suggested by the National Institutes of Health, non-menstrual pelvic pain.)

It seems likely to us that elagolix is efficacious, and most definitely there are no safety concerns so far. However, given the company’s history of difficult relations with the FDA, we are disinclined to bet on management effectively explaining to the agency folks why they are wrong here. And, frankly, we are not disposed to continue to pay attention to this story for another two years minimum before the drug could be approved when we have more macro-relevant fish to fry. Accordingly, we are putting in a sell order to unload our shares at the market open tomorrow (which will most likely be down from today’s close at $3.97, down 65% for us).

Takeaways from this failed play: [a] betting on an FDA approval is risky (as if we didn’t already know this) and [b] when your Plan A investment thesis fails—as ours did here in December 2007 when the FDA did not approve indiplon—you should  probably admit defeat immediately and move on. Had we done that, we would’ve been out at $5.25 and onto greener pastures 15 months ago.

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Dendreon options (UKOHA & UKOTA) straddle play update #2

Posted by intelledgement on Wed, 25 Mar 09

Dendreon (DNDN) shares—and, by extension, our $5 Aug call options (UKOHA)—came under selling pressure in the wake of a Forbes article published earlier today asserting that the release by company management of data gleaned from the so-called “interim look” at the Provenge phase 3 IMPACT study may adversely affect the chances for approval of the product.

According to the article, “four top statisticians now say Dendreon may have compromised the integrity of the trial by putting out the release. They say it was unorthodox for Dendreon to even know such a detailed result, much less to publicize it. The danger: The company, patients or doctors might have changed what they were doing once they knew how the study was going. If the final outcome is only marginally statistically significant, it might be tossed, putting Dendreon and its drug back at square one.”

There are, indeed, four researchers quoted in the article as having problems with the release of the data last October…and such a release of interim data is unusual, precisely because of the danger it may affect the behavior of the doctors or patients partaking in the study.

However, given that the study consists of 500 patients, given that it started enrolling patients in June of 2003 and the last ones were enrolled in the Fall of 2007, given that the treatment consists of three injections spaced out over a month—so all treatments would have been completed at least 11 months and in some cases over four years before the release of the interim data—and given that about half the patients had to die before the interim look could occur, it is hard to see how learning that Provenge patients had a 20% survival advantage over placebo patients could materially affect the results. For starters, it seems safe to conclude the behavior of the 50% of study participants who were already dead could not be affected. Among those still surviving, all would long since have completed their treatment. So the theory that there could be a problem here seems a bit far-fetched.

Furthermore, according the to article, Dendreon management stated that they had approval from the FDA to release the data as part of the Special Protocol Assessment (SPA) that governed the interim look. So unless management are on drugs (not Provenge), it seems the FDA had no problem—indeed, management asserted, the agency even previewed the October 2008 press release.

Whatever, after tumbling as much as 5% early in the day, DNDN stock recovered to finish at $4.30, up three cents.

Previous DNDN-related posts:

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SELL Ultrashort Oil & Gas ETF

Posted by intelledgement on Wed, 25 Mar 09

Well, this has certainly been educational.

This ETF is designed to doubly inversely track changes in the price of oil and gas. That is, if the price of oil goes up 1%, you’d expect the price of this ETF to decline 2%, and vice versa.

We bought this ETF last September with the price of oil around $110 and clearly declining, while the economy looked to be in trouble and energy demand also under pressure. Now, with the market rallying, we are reacquiring some energy plays and unloading this bearish position. The price of oil did dip as low as $31/barrel a couple of months back, but even here it is just about $50/barrel. So it’s nice to have been right in expecting the price of oil to decline sharply, and really nice to be unloading this hedge play here with a cool 100% profit (50% decline in the price of oil x 2 = 100%)…WHOOPS! WHAT THE HECK?!? We are DOWN 28% here!?!

This is a great example of the perverse nature of leveraged inverse ETFs. Because the funds are repriced on a daily basis, over the long haul moves down are more significant mathematically than moves up. We wrote about this effect in some detail a couple of months back, but essentially the problem is that if you start with $100 and lose 10%, that gets you to $90. Then if you gain back 10%, you end up with $99. So you lost 10% and gained 10% and ended up worse off than you started. Works the same way in reverse order: start with $100 and gain 10%; it puts you at $110. Then lose 10%: now you’re at $99, worse than when you started.

The price of oil has been very volatile since last September, and even though overall it has declined from $100/barrel to $50/barrel (and natural gas is down from $8/mmbtu to $4), there have been enough days with sharp up moves (which drive the price of DUG down) to cause the ETF to grossly underperform our expectations over the full six months.

Morale: eschew leveraged ETFs other than for short-term speculative plays.

Previous DUG-related posts:

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Dendreon options (UKOHA & UKOTA) straddle play update

Posted by intelledgement on Thu, 12 Mar 09

Dendreon (DNDN) announced their 4Q08 and full 2008 financial results today, and due to cost-cutting measures, losses were reduced considerably for both the quarter and year. For long-term shareholders, of course, this is mixed news as while it conserves cash for now, it means that development of follow-on products after Provenge has slowed considerably. But for us short term options straddle spectulators, it doesn’t really matter one way or the other. What does matter is that the results of the IMPACT phase 3 study be revealed on time—or, at least, prior to the expiration of our options in mid-August—and the news there was good: “This is an exciting time for Dendreon as we await the completion of the final analysis of our IMPACT trial, expected by the end of April,” stated Mitchell Gold, president and CEO. ’Nuff said.

Previous DNDN-related posts:

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SELL ProShares UltraShort S&P500 (SDS), Short QQQ (PSQ), & Short Dow30 (DOG)

Posted by intelledgement on Tue, 10 Mar 09

In the face today’s big rally, with market indices pushing +5% here, we are cashing in our index shorts and taking our profit. We do not believe that the secular decline is over, but a sharp bear market rally as happened last November-December is a reasonable probability here. We rode that one out with our short positions intact and it cost us a 29% haircut between 20 Nov and 31 Dec.

Worst case, this rally turns out to be a one-day wonder and we sheepishly have to pay for a taxicab to hustle us to the next stop so we can get back on the short train. The preferable scenario would be that the train just sits here for awhile and we get an opportunity to regain our seats at a discount. Either way, we are avoiding the risk of another big setback.

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Vertex (VRTX) update #25

Posted by intelledgement on Tue, 03 Mar 09

Another month, another ten million shares of dilution. This time, however, shareholders are actually getting something tangible: two new drugs!

Our development stage biotech company, Vertex Pharmaceuticals (VRTX), today announced an agreement to acquire privately-held ViroChem Pharma Inc. in a stock and cash transaction: ViroChem shareholders will receive $100 million in cash and between 9.9 million and 11 million shares of VRTX, depending on the average share price prior to the close of the deal. Vertex gets worldwide rights to ViroChem’s HCV drug development portfolio, including VCH-222 and VCH-759, “which have demonstrated substantial reductions in plasma HCV RNA when dosed as single agents and have been well-tolerated in clinical studies to date,” according to today’s press release.

Vertex expects to begin testing combinations of their own HCV protease inhibitor, telaprevir, with the ViroChem drugs in the second half of 2009…some of these will be conducted in conjunction with the current standard of care (SOC) regimen—pegylated interferon and ribavirin—and some without, raising the prospect that Vertex may eventually be able to offer shorter, less odious Hepatitis C treatments that totally replace the current SOC, which debilitates most patients for a year and then only works for about half of them.

Previous VRTX-related posts:

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