Macro Tsimmis

intelligently hedged investment

Archive for April, 2009

Dendreon (DNDN, again) update #3

Posted by intelledgement on Tue, 28 Apr 09

Our biotech speculative play Dendreon (DNDN) today revealed the details of the results of their IMPACT Phase 3 trial of Provenge at the American Urological Association’s annual meeting in Chicago and…they look great!

Provenge reduced the risk of death from prostate cancer by 22.5%—comparing the Provenge arm of the trial with the placebo arm—which beat the 22% bogey which had been set by the FDA in order to prove that the survival advantage was real. Provenge also extended median survival by 4.1 months compared to the placebo (25.8 months versus 21.7 months) and improved three-year survival by 38% compared to the placebo (31.7% versus 23.0%).

The results were revealed at 2pm EDT; the stock was halted at 1:27pm (the timestamps in the table below reflect CDT) after trading became disorderly, with the price of the stock dropping from $24 to $7.60 in the space of 74 seconds on huge volume. About 20% of the outstanding shares are sold short, so an attack by shorts to drive down the share price prior to the news release might have been the cause. Here is a transcript of trades of 5000 shares or higher for that time span (welcome to the thrills of speculation in individual stocks):

Date               Time         Price     Bid        Ask       Volume
04/28/09    12:25:32    24.00    24.00    24.00    23241
04/28/09    12:25:33    23.9009    23.90    23.91    34558
04/28/09    12:25:34    23.87    23.85    23.86    16939
04/28/09    12:25:35    23.8201    23.82    23.83    10160
04/28/09    12:25:36    23.79    23.79    23.80    19824
04/28/09    12:25:37    23.74    23.74    23.75    17934
04/28/09    12:25:38    23.69    23.69    23.70    14608
04/28/09    12:25:38    23.50    23.54    23.52    22705
04/28/09    12:25:39    23.48    23.49    23.49    45632
04/28/09    12:25:40    23.39    23.36    23.36    13547
04/28/09    12:25:41    23.26    23.28    23.28    6713
04/28/09    12:25:42    23.16    23.18    23.16    41351
04/28/09    12:25:43    23.10    23.10    23.11    8625
04/28/09    12:25:44    23.06    23.07    23.03    7340
04/28/09    12:25:45    22.94    22.95    22.95    23119
04/28/09    12:25:45    22.88    22.88    22.88    18915
04/28/09    12:25:46    22.80    22.80    22.81    32609
04/28/09    12:25:47    22.70    22.73    22.74    56962
04/28/09    12:25:48    22.65    22.65    22.65    10025
04/28/09    12:25:49    22.60    22.60    22.61    49777
04/28/09    12:25:50    22.48    22.50    22.49    22448
04/28/09    12:25:51    22.27    22.26    22.26    8835
04/28/09    12:25:52    22.20    22.21    22.22    16603
04/28/09    12:25:53    22.17    22.14    22.14    12542
04/28/09    12:25:54    22.04    22.02    22.03    20680
04/28/09    12:25:55    21.91    21.90    21.89    24770
04/28/09    12:25:55    21.75    21.78    21.76    12600
04/28/09    12:25:56    21.67    21.67    21.67    18270
04/28/09    12:25:57    21.57    21.55    21.57    20541
04/28/09    12:25:58    21.57    21.55    21.56    27660
04/28/09    12:25:59    21.51    21.51    21.50    27494
04/28/09    12:26:00    21.47    21.45    21.46    24030
04/28/09    12:26:01    21.40    21.38    21.40    30947
04/28/09    12:26:02    21.31    21.31    21.32    15008
04/28/09    12:26:03    21.12    21.14    21.16    21697
04/28/09    12:26:03    21.02    21.01    21.02    10050
04/28/09    12:26:04    20.95    20.96    20.96    18694
04/28/09    12:26:06    20.70    20.73    20.71    8772
04/28/09    12:26:07    20.45    20.47    20.45    12111
04/28/09    12:26:09    20.15    20.25    20.24    21126
04/28/09    12:26:09    20.00    20.00    20.00    35143
04/28/09    12:26:09    19.88    19.83    19.82    11400
04/28/09    12:26:10    19.66    19.69    19.61    6941
04/28/09    12:26:11    19.51    19.51    19.51    11095
04/28/09    12:26:12    19.28    19.26    19.30    11767
04/28/09    12:26:12    18.95    18.92    18.93    24888
04/28/09    12:26:14    18.48    18.50    18.45    22455
04/28/09    12:26:14    18.31    18.05    18.20    13100
04/28/09    12:26:15    17.69    17.90    17.77    32711
04/28/09    12:26:16    17.42    17.44    17.43    8612
04/28/09    12:26:18    16.92    16.92    16.91    56096
04/28/09    12:26:18    16.50    16.59    16.58    25823
04/28/09    12:26:19    16.33    16.31    16.31    30658
04/28/09    12:26:20    15.93    15.92    15.93    73598
04/28/09    12:26:21    15.80    15.79    15.84    29116
04/28/09    12:26:22    15.30    15.30    15.30    42013
04/28/09    12:26:23    15.02    15.01    15.02    14536
04/28/09    12:26:23    14.92    15.00    14.95    26936
04/28/09    12:26:24    14.76    14.73    14.76    11981
04/28/09    12:26:25    14.28    14.56    14.27    11931
04/28/09    12:26:25    13.95    14.00    13.96    20961
04/28/09    12:26:26    13.51    13.30    13.39    19480
04/28/09    12:26:27    13.02    13.01    13.06    17296
04/28/09    12:26:27    12.62    12.82    12.60    46168
04/28/09    12:26:28    12.16    12.44    12.16    20999
04/28/09    12:26:29    11.95    11.94    11.94    18971
04/28/09    12:26:29    11.77    11.79    11.78    16200
04/28/09    12:26:30    11.41    11.49    11.49    8142
04/28/09    12:26:31    11.16    11.15    11.16    17261
04/28/09    12:26:31    11.03    11.02    11.03    29270
04/28/09    12:26:32    10.90    10.88    10.69    15902
04/28/09    12:26:33    10.31    10.31    10.31    35576
04/28/09    12:26:34    10.08    10.07    10.07    8750
04/28/09    12:26:34    10.03    10.03    10.03    12385
04/28/09    12:26:35    9.99    9.99    10.00    50073
04/28/09    12:26:36    9.69    9.70    9.71    84899
04/28/09    12:26:37    9.48    9.46    9.68    43556
04/28/09    12:26:38    9.46    9.47    9.66    33019
04/28/09    12:26:38    9.43    9.43    9.50    19150
04/28/09    12:26:39    9.50    9.48    9.48    21582
04/28/09    12:26:40    9.42    9.42    9.51    13484
04/28/09    12:26:40    9.47    9.30    9.64    31351
04/28/09    12:26:41    9.36    9.28    9.37    61854
04/28/09    12:26:42    9.10    9.11    9.31    93575
04/28/09    12:26:42    8.98    9.00    9.00    36403
04/28/09    12:26:43    8.30    8.26    8.38    16609
04/28/09    12:26:44    8.15    8.15    8.20    16119
04/28/09    12:26:45    8.20    8.01    8.19    30193
04/28/09    12:26:45    8.01    8.00    8.01    23407
04/28/09    12:26:46    7.60    7.60    7.81    39797
04/28/09    12:26:47    8.51    8.02    8.29    82362
04/28/09    12:26:48    8.27    8.21    8.28    36652
04/28/09    12:26:48    8.87    8.56    8.79    73551
04/28/09    12:26:49    9.31    9.31    9.03    43732
04/28/09    12:26:50    9.61    9.63    9.87    23041
04/28/09    12:26:51    9.79    9.78    9.93    24426
04/28/09    12:26:51    10.00    10.07    10.34    23907
04/28/09    12:26:52    11.79    11.40    10.93    17420
04/28/09    12:26:53    11.45    11.38    11.74    12500
04/28/09    12:26:53    11.39    11.37    11.39    17057
04/28/09    12:26:54    11.18    11.17    11.23    21089
04/28/09    12:26:55    11.25    11.25    11.26    12900
04/28/09    12:26:56    11.37    11.35    11.45    28234
04/28/09    12:26:56    11.92    11.75    12.00    23090
04/28/09    12:26:57    11.79    11.78    11.80    18751
04/28/09    12:26:58    11.76    11.76    12.25    18768
04/28/09    12:26:58    11.77    11.77    12.32    9855
04/28/09    12:26:59    12.28    12.01    12.31    17050
04/28/09    12:27:00    12.37    12.37    12.43    17831
04/28/09    12:27:01    12.43    12.75    12.99    20971
04/28/09    12:27:02    12.36    12.28    12.00    32756
04/28/09    12:27:02    11.841    11.841    11.841    10900
04/28/09    12:27:04    11.81    11.81    11.81    100

If the stock opens again today—it is still halted pending the completion of the Dendreon presentation at the AUA meeing—it will be interesting to see where it settles. The company has scheduled a conference call to discuss the results at 1730 EDT today. If there is anything interesting to report, we will add a comment to this post.

Previous DNDN-related posts:

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Dendreon (DNDN, again) update #2

Posted by intelledgement on Sun, 19 Apr 09

Another feather floated onto the camel’s back earlier today when Dendreon released an unusual Sunday press release announcing that data from an earlier Phase 3 Provenge study (not the just-completed IMPACT study) suggest “that PROVENGE® (sipuleucel-T) induces long-term memory immune responses that are durable and can be maintained following boosting.”

The data were presented this morning at the annual meeting of the Association for Cancer Research in Denver (hence the timing of the press release, which as of this evening was still not posted on Dendreon’s website…unlike we investors, the marketing staff must take weekends off). The study measured the immune response in 176 patients—half of whom were treated with Provenge and half with a placebo—with non-metastatic androgen-dependent (hormone sensitive) prostate cancer who have had a prostate-specific antigen (PSA) recurrence following surgical removal of the prostate.

The press release quoted David Urdal, the company’s chief science officer, as stating, “We are encouraged to see that CD54 upregulation in APCs is maintained after boosting in men with androgen-dependent prostate cancer. This pattern of CD54 upregulation suggests that the first dose ‘primes’ the immune system for subsequent ‘memory’ responses and is consistent with that observed in our studies of men with androgen-independent disease where the cumulative CD54 upregulation dose correlated with survival. We also are encouraged by these data which suggest that the immune response generated by PROVENGE is durable for a year or more after initial treatment and that it can be maintained following boosting.”

Previous DNDN-related posts:

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Activision Blizzard update #3—Blizzard fires The9 in China

Posted by intelledgement on Thu, 16 Apr 09

It has been rumored for weeks that Blizzard would not be renewing their five-year World of Warcraft (WoW) contract with Chinese online gaming company The9 (NCTY) when it expires in June. Now it is official: ATVI management announced today that Netease (NTES), the company awarded a contract for Warcraft III and Starcraft II in China last summer will also be taking over the WoW license for at least the next three years.

WoW reached over a million concurrent users in China in February under The9’s aegis, but Blizzard was said to be unhappy with the pace of WoW growth in general in China and a series of delays of the release of their “Wrath of the Lich King” module in particular, as well as looking for more control over server groups…and more money. Plus, The9 appeared to be on shaky ground financially, and was having difficulty managing the governmental approval process for WoW releases. Indeed, there are reports that some mainland WoW players have defected to Taiwanese servers, because “Wrath of the Lich King” is available there.

The Warcraft III/Starcraft II agreement with Netease reached in August 2008 also runs for three years, but the clock does not start ticking on it until Starcraft II is released commercially in China, and as yet there is not even a release date for the US for that game. So that one is a way’s off from going into operation. Netease presumably paid some money up front in 2008 for those rights…and a lot more now for the rights to WoW per the agreement announced today. So all parties (with the notable exception of The9) presumably have strong incentives to get to work effecting this new WoW contract as soon as possible.

Note: Warcraft III and its predecessors—Warcraft II and Warcraft—are strategy games wherein the player(s) control an army.  Warcraft III is typically played by a couple of players at a time (or a player versus an AI computer opponent), although it is possible for as many as eight players to play in a game simultaneously. Those games all preceded the World of Warcraft (WoW) massively multiplayer online role-playing game, which is based on the prior games in the sense of being set in the same fictional world. A WoW player typically controls an individual character and interacts with a theoretically unlimited number of other players, each of whom control their own character.

In a separate press release also issued today, ATVI management announced that 1Q09 revenues and profits are running ahead of the guidance they provided in February. “Global consumer response to the Call of Duty and Guitar Hero franchises and Blizzard Entertainment’s World of Warcraft remains strong despite the challenging economic environment,” said Activision Blizzard CEO Robert Kotick. “We exceeded our quarterly financial goals as the video game market continues to grow and our franchises continue to perform. This bodes well for our upcoming spring titles Transformers: Revenge of the Fallen, X-Men Origins: Wolverine and Ice Age: Dawn of the Dinosaurs, which are inspired by theatrical feature films releases, Prototype, a new intellectual property, and the release of Guitar Hero Smash Hits as well as continued sales of our recently released Guitar Hero Metallica game.” No revised numbers were provided.

Citing the counterbalancing effect of the Chinese WoW transition costs, Kotick said that guidance for the full fiscal year was unchanged.

Previous ATVI-related posts:

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Vertex (VRTX) update #26

Posted by intelledgement on Thu, 16 Apr 09

Our development-stage biotech company, Vertex Pharmaceutical (VRTX), announced their 1Q09 results today: the company lost $161.5 million, or $1.04 per share compared to a net loss for 1Q08 of $96.2 million, or $0.72 per share. According to the press release, the increased red ink “was principally attributable to a decrease in collaborative revenues and an increase in total operating expenses to support telaprevir’s global Phase 3 registration program and commercialization, and preparation for advancement of VX-770 [the anti-cystic fibrosis drug that is due to start a Phase 3 trial later this quarter] into a registration program.”

The company ended the quarter with $869.2 million in cash, so at least we have something to show for all the dilution we have endured. The money will come in handy as management now project a loss of $500-to-$535 million for all of 2009. And we still have to get through 2010—Phase 3 trial results for telaprevir are expected mid-2010—and probably into 2011 before an FDA approval could occur and serious revenue (and black ink) starts to flow…so more dilution in 2010 is likely.

In addition to the ongoing Phase 3 trials, management expect completion of a Phase 2 study examining the effectiveness of telaprevir with a two-dose-per-day regimen by the end of 2009. The Phase 3 trials utilize three-doses-day, and it would obviously be better if patients could achieve comparable results on a two-dose regimen.

Previous VRTX-related posts:

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Dendreon (DNDN, again) update

Posted by intelledgement on Wed, 15 Apr 09

An article posted earlier today on the Financial Times website suggests “that FDA almost always requires multiple Phase III trials, making rare exceptions for drugs that are already on the market for different indications…. [A]s a bureaucracy, the agency would choose caution over risk, following rules and regulations as closely as possible with very few exceptions, and that in the case of a new chemical entity, it is expected that extra care would be taken to ensure that the proper decision is made.”

While technically, the just-completed 500-patient IMPACT study is the third Phase 3 trial Dendreon have conducted for Provenge, the first two were small studies and both failed to meet their primary endpoint, which—inappropriately, we would say—was time-to-progression for tumors. While retrospectively pooling the data from those two studies uncovered an apparent survivor benefit, that did not suffice to persuade the FDA to approve Provenge in 2007. And, the article cited one anonymous industry executive as opining, “the initial Phase III studies that pooled data from two studies together to form a larger trial is a point of concern, and would not be considered a second Phase III trial. The only Phase III trial that has [overall survival] as an endpoint is the IMPACT trial, and nothing will settle the question of whether the results can be reproduced, unless another well controlled Phase III trial is conducted.”

We’d like to dismiss this out of hand as totally contrary to what Dendreon were told in 2007…however, the FDA has already proven to be shaky at best in dealing with an innovative mode of treatment such as Provenge. Plus—yeah, we know it’s just a sleep remedy, not a therapy for a life-threatening illness—we still get tremors when we consider the Indiplon fiasco, where the FDA kept moving the goal posts after Neurocrine (NBIX) scored each touchdown until finally management realized they were throwing good money after bad…and no matter what hurdles they successfully cleared, the FDA were never going to approve. Pregnant animal studies for a drug not indicated for pregnant humans in a drug class not indicated for pregnant humans where none of the dozens of previously approved drugs in that class had been so burdened! There’s a message there for biotech investors, folks.

Even if this is needless worry, even if everything is copacetic, even if Provenge approval by June 2010 is in the bag, then we still believe the takeaway from 9 May 07 remains that we need to pay more attention to the incapability of the FDA to deal with innovation.

Dendreite conspiracy theorists maintain an elaborate fantasy construct of an epic plot to suppress Provenge hatched by shortsellers and big pharma drug companies and incorporating journalists who publish “bad” articles, advisory committee members who voted “no” on efficacy (one or two of whom do appear to have at least potential conflicts of interest, not that that necessarily proves their opinions insincere or their analysis tainted), analysts who issue negative opinions, and most critically, FDA staffers working at the behest of these evildoers. But we seriously doubt anyone in the FDA gives a hoot about the fate of chemotherapy. We believe the problem is simply that dedicated and well-meaning agency personnel have too much incentive to be cautious, and are conditioned to be so zealous at rejecting dirt that they can’t see the babies for the bathwater.

That condition is a threat not only to prostate cancer victims and Dendreon investors, but to the viability of a US-based biotech industry.

In the meantime, we believe that the immunotherapeutic mechanism Dendreon are employing works at some level with Provenge, and that whether or not the FDA ultimately require another Phase 3 trial, the IMPACT results will prove sufficient for them to approve at least a limited label use of Provenge for advanced prostate cancer patients who have no other options by next June. And we believe there is a significant likelihood that Dendreon’s immunotherapeutic mechanism will prove to have wide utility in fighting various and sundry cancers—breast, cervical, kidney, colon, et al—and that ultimately prophylactic treatments with successor immunotherapies might become standard for everyone.

If those eventualities pan out, it won’t make much difference if you bought DNDN stock at $4, $16, or $28, because it is headed way, way higher.

Previous DNDN-related posts:

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BUY Dendreon (DNDN)—potential cure for cancer (again)

Posted by intelledgement on Tue, 14 Apr 09

Yep, we are once again dipping into the Dendreon well. If you were not around in 2007, please read our original pitch for buying DNDN stock, as we do not propose to rehash all the basic reasoning, most of which remains valid.

What happened in 2007 is that the FDA granted the company fast track status to review their application for approval based on two relatively underpowered Phase 3 studies for Provenge, Dendreon’s anti-prostate cancer immunotherapy, despite the fact that both studies failed to meet their primary endpoint, which was time-to-progression for tumors. This unusual step was taken because [a] there was compelling evidence that the men who had been treated with Provenge were significantly outliving the men in the placebo arms in both studies and [b] there is not good alternative for patients with advanced prostate cancer, which kills 30,000 men a year in the USA.

In March 2007, an advisory committee (“AC”) assembled by the FDA to consider Provenge concluded 13-4 that it is efficacious and 17-0 that is safe. Expectations had been low as approval of a drug that fails the primary endpoint of two Phase 3 studies is not common, and as is di riguer with development stage biotech companies, the stock was heavily shorted and the shorts had spent considerable energy debunking/trashing Provenge. However, it was virtually unheard of for the FDA to go against the recommendation of their own AC, and so the stock promptly soared from $4 to the mid-teens, with spikes as high as $25.

Then in May, the FDA did go against their AC and required that Dendreon successfully complete the third, larger Phase 3 trial—which was already enrolling patients and has survival as the primary endpoint—in order for them to approve Provenge. The stock instantly tanked back to  the $3-to-$7 range.

Today, the company announced that this third trial—which recently concluded earlier than anticipated—“resulted in the study successfully achieving the pre-specified level of statistical significance defined by the study’s design,” according to a press release issued prior to the market open.

This new information substantively changes the nature of game here. Yesterday, a purchase of DNDN stock was a bet on a two-time loser drug and a company with no other cards to play (in that all the other potential products were immunotherapies based on the same science, so if Provenge failed…). Today, it is still a speculative venture—the company has no revenue and limited cash, a novel and complex production process (they need dendritic cells from each patient to process customized dosages of Provenge), no sales force in the USA or partner in Europe, and still only one product within sight of commercialization—but if management’s conclusion that the FDA requirement for approval has been met, that product is a blockbuster with $1B+ potential in the USA and again in Europe (presumably split 50-50 with a partner-to-be-named-later). Furthermore, this is the first immunotherapy to successfully complete Phase 3 trials and—by this time next year—would be the first to be approved. It is a whole new approach to fighting cancer, focusing on marshaling the body’s own defenses to fight the disease, with potential applicability to breast cancer, kidney cancer, colon cancer, etcetera. And their complex production/delivery process is patented and potentially licensable for use with other immunotherapeutic products.

In short, we have a $1.8B company that could easily be worth $9B five years down the road, a company doing important, ground-breaking biotech work that is worth watching, and rooting for.

Not to mention we are so far ahead on our two DNDN option straddle plays that even if we lose 100% here, we’ll still be ahead overall.

Previous DNDN-related posts:

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SELL Dendreon options (part UKOHA & all UKOTA)

Posted by intelledgement on Tue, 14 Apr 09

Dendreon announced before the market opened today that the results of the Phase 3 IMPACT study of their anti-prostate cancer immunotherapy, Provenge, “met its primary endpoint of improving overall survival compared to a placebo control.” The stock opened up nearly 200% and on very heavy volume has gyrated between +100% and +200% through the day so far.

Management did not reveal any details of the results, which are scheduled to be disseminated at a urology convention in Chicago in two weeks. They did say that it would take them several months to prepare an amended application for approval, and they anticipate filing it with the FDA in 4Q09. The FDA can take up to six months to review the amended application, so if that all tracks as expected, a likely window for an approval decision would be in 12-to-15 months.

Our straddle position consists of seven Aug $5 calls (UKOHA) purchased for $1.50 each and six Aug $5 puts (UKOTA) purchased for $3.29, all back on 29 Jan 09, so our event horizon extends out only four months with respect to this play. We are declaring victory and disposing of all the greatly dissipated puts and three of the seven sharply appreciated calls today. That should get us back our $3100 investment with a modest profit and leaves us with an opportunity to do much better with the four remaining calls should the 28 April data live up to the advance billing or the summer analyst call on sales and production plans for Provenge inspire enthusiasm (or random Brownian motion propel DNDN share values significantly higher in the next month).

We are putting in a GTC order to sell those last four calls at $19.25 (today’s high for the stock so far was $22.10 and for the Aug $5 call option $17). The last time DNDN stock surged—between the March 2007 advisory committee meeting and the May 2007 FDA decision not to approve Provenge—it hit an intraday high of $25.25. If the market concludes that the requirements the FDA laid out for approval have been met—as management evidently have—by mid-May, we should see similar levels, at least fleetingly.

Previous DNDN-related posts:

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Dendreon options (UKOHA & UKOTA) straddle play update #4

Posted by intelledgement on Mon, 13 Apr 09

Dendreon announced earlier tonite that they are holding an investor conference call tomorrow at 0900 EDT to discuss final results of the Provenge IMPACT phase 3 study:

Time:         9:00 AM ET/6:00 AM PT

Date:          14 April 2009

Dial-in:        1-877-419-6594 (within the USA) or +1-719-325-4855 (from outside the USA)

Think 22+%!!

Previous DNDN-related posts:

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1Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 13 Apr 09

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Mar 2009:

Position   Bought   Shares Paid Cost Now Value Change YTD     ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 28.53 7,289.13 -1.83% -1.83% -19.33% -9.09%
GLD 03-Jan-07 142 63.21 8,983.82 90.28 12,819.76 4.35% 4.35% 42.70% 17.09%
IFN 03-Jan-07 196 45.90 9,004.40 16.93 6,185.76 -4.16% -4.16% -31.30% -15.35%
SLV 03-Jan-07 700 12.86 9,012.80 12.79 8,953.00 14.20% 14.20% -0.66% -0.30%
DBA 13-Mar-08 235 42.50 9,995.50 24.49 5,755.15 -6.46% -6.46% -42.42% -40.93%
SCC 16-Sep-08 112 86.23 9,665.76 85.80 13,437.11 0.86% 0.86% 39.02% 84.76%
SZK 16-Sep-08 145 68.25 9,904.25 87.20 15,417.18 14.17% 14.17% 55.66% 128.11%
TBT 21-Jan-09 233 42.84 9,989.72 43.64 10,168.12 n/a 15.66 1.79% 9.82%
cash 24,408.30 33,282.42
Overall 31-Dec-06 100,000.00 113,307.62 7.20% 7.20% 13.31% 5.73%
Macro HF 31-Dec-06 100,000.00 107,769.25 0.46% 0.46% 7.77% 3.38%
S&P 500 31-Dec-06 1,418.30 797.87 -11.67% -11.67% -43.74% -22.58%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (blank for positions new since last report)
YTD = on a percentage basis, change since the previous year-end price
ROI (Return on Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (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 2008 inclusively) provides a CAGR of around 14.3%. For comparison’s sake, we also show the S&P 500 index, which historically provides a CAGR of around 10.5% (although only +6.37% since 1988). 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 1% rate of interest on the listed cash balance.

Transactions: Three purchases and three sales—two of which canceled each other out:

Performance Review: An excellent quarter for us, as we were up 7%, beat the macro hedgies—who were flat—handily, and buried the S&P 500—who lost 12%.

Tactically, it was a quarter of gyrations. In mid-February, as the initial “obtimism” that the new administration would solve all our problems dissipated, we manuevered the portfolio sharply to the short side, with a peak of six out of our 11 total equities—SCC, SZK, SDS, TBT, PSQ, and DOG—positioned to rise as the market headed south. But barely a month later, the risk of another sharp bear-market rally—like the one that raged last Nov-Dec—waxed notably, and we cashed in half of the inverse ETF positions, booking a healthy short-term profit.

Overall, we are now 57 points ahead of the market: +13% for us and -44% for the S&P 500 in the 27 months since the inception of the model at the end of 2006. We are also beating the GAI Global Macro Hedge Fund Index over the same time span, +13% to +8%.

Analysis: As we discussed last quarter, the watchword continues to be volatility.

Our strategy is to look for long term investment opportunities congruent with macro trends, such as the rise of the Chinese, Indian, and Brazilian economies while tactically hedging against risks such as the collapse of fiat money in general and the dollar in particular with commodity plays. However, the systemic risk we have experienced over the last nine months has engendered extraordinary volatility—both down and up—as the market has struggled to process and integrate extreme eventualities into valuations. The intrusion of politics into economic decision-making has exacerbated this volatility. Consider: under normal circumstances—let’s say, from March 1950 through June 2007—the average daily change in the value of the S&P 500 index is 0.57% (up or down)…but since then, here are the number of days in each quarter categorized by the daily move up or down rounded to the nearest percentage, and the overall average:

Year 0% Days 1% Days 2% Days 3% Days 4% Days 5% Days 6% Days 7-9% Days 10%+ Days Average Daily Change
3Q07 27 23 10 3 0 0 0 0 0 0.83%
4Q07 23 27 8 6 0 0 0 0 0 0.97%
1Q08 10 33 13 4 2 0 0 0 0 1.27%
2Q08 33 18 10 2 1 0 0 0 0 0.75%
3Q08 17 21 15 4 3 3 0 1 0 1.53%
4Q08 4 19 6 9 9 5 5 5 2 3.27%
1Q09 11 17 14 9 4 4 1 1 0 2.00%

Thankfully, in 1Q09 we backed off of the surreal level of volatility experienced in 4Q08…which is to say, instead of nearly 6x normal volatility, we “only” had 3.5x normal. But the point is, when we are experiencing single days when the market moves as much as it normally moves in an entire year, one’s perspective as to what constitutes a “long term investment” is subject to being telescoped.

There’s trouble, right here in River City. In living beyond our means, we’ve been digging our own grave for years, and the new U.S. administration’s main plan to fix the problem seems to be borrowing (more) money to afford everyone the latest and greatest new shovels. As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. Any “solution” that involves lowering interest rates, increasing our debt levels, and easing credit/issuing more money is, essentially, attempting to put out a fire by dousing it with gasoline. The government does not have the resources to “rescue” all the zombie banks whose obligations exceed their assets, not to mention all the homeowners whose mortgage obligations now exceed the value of their properties, not to mention all the industrial companies whose profligate and short-sighted management have left them vulnerable to the economic tsunami we are experiencing…etcetera, etcetera. Yet it appears this is to be our plan of action…along with providing universal health care, switching to more expensive energy, building highspeed rail systems…etcetera, etcetera…all with (more) borrowed funds.

And we don’t believe the economy has bottomed out. The negative feedback loop of less demand-more unemployment-less demand is still intact. There are many more residential foreclosures looming, which will continue to devalue housing prices, which also inhibits demand (as consumers are less wealthy). And more credit card defaults, which dry up credit, which also inhibits demand. We’ve barely begun to scratch the surface of commercial real estate foreclosures, and the concomitant bad loans, and the ramifications for the lenders.

So we believe things are headed south. And yet, in March we sold half our short ETFs (that go up when the market declines). Why? Because this market is so volatile, that we felt it was risky to stay short in the face of “obtimism” that the new administration would somehow work a miracle. We held our short positions last November in the teeth of a post-election rally…and saw the value of the portfolio decline 29% in six weeks. Once burned, twice cautious. But, unfortunately, we do expect to be going short again, this quarter or next.

Conclusion: Things will almost certainly get worse; the real question is, how much worse? As of 1 April, we retained three inverse ETFs in the portfolio…covering the consumer goods (SZK) and services (SCC) sectors as well as long-term Treasury bonds (TBT), which we expect to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. We still expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade the dollar’s value, and consequently remain long our commodity plays (GLD, SLV, and DBA). And finally as a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds (FXI and IFN)—as we expect those economies to lead the recovery. If the rally that ensued in March persists, we may further lighten up on the shorts and temporarily go long energy or Brazil.

But batten down the hatches. Upgrade your vegetable patch, make sure your emergency supplies of batteries, dried food, and water are current, check the ammo for your shotgun, and touch base with the neighbors to encourage them to be prepared, too. The odds still favor things not getting that bad…but those odds are not as good as they were three months ago.

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Dendreon options (UKOHA & UKOTA) straddle play update #3

Posted by intelledgement on Fri, 03 Apr 09

Dendreon (DNDN) shares shot up dramatically today—finishing +38% on 11x normal volume—for no particularly discernible reason. According to CNBC’s pharma guy, Mike Huckman, the buying may have been kicked off by a report that the American Urological Association has slotted the company for a “late breaker” presentation slot at their conference at the end of April, presumably to enable Dendreon to announce their phase 3 Provenge IMPACT study results.

Our straddle play depends on these results either establishing that Provenge provides a significant survival benefit for prostate cancer patients—in which case we should profit on our $5 Aug calls (UKOHA) as the stock will surge well north of $5—or failing to so establish any benefit—in which case our $5 Aug puts (UKOTA) will be worth more than we paid for them as the stock will sink to less than $1 in value.

At the close today, our calls were valued at $2.99, up 99% from the $1.50 we paid for them, while our puts closed at $2.90, off 12% from the $3.29 they cost us. Overall, we are up 30% in five weeks…so far, so good.

Previous DNDN-related posts:

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