Macro Tsimmis

intelligently hedged investment

Archive for the ‘B.1 Spec Recs’ Category

BUY and SELL recommendations for the Intelledgement Speculative Opportunity Portfolio (ISOP). For ROI tracking purposes, we use the closing price on the day the rec is posted unless the market is closed (or the rec is posted in the last hour of the trading day), in which case we use the opening price on the next trading day.

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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BUY TO COVER Best Buy (BBY), Mastercard (MA), & Wal-Mart (WMT)

Posted by intelledgement on Thu, 02 Apr 09

We detailed the reasons why we think it is prudent to cover our retailing sector short positions earlier today in our IMSIP post recommending selling inverse consumer goods and services ETFsbby. Accordingly, in the ISOP, we are buying to cover our short positions in retailing giant Wal-Mart (WMT), specialty retailer Best Buy (BBY), and consumer credit card vendor Mastercard (MA). While we do not believe that the bailout has enabled the USA economy to recover—or, more specifically, that the consumer will resume spending as in the past—the market apparently disagrees with us…or at least believes that we have pulled back from the brink of disaster. Perhaps we have; in any event, the perception that we have—in view of the violent volatility we are experiencing—increases the risk of an upside panic. So we are stepping aside here with the expectation that we can reenter these short positions at substantially higher prices down the road a bit.

Previous retailing short-related posts:

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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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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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BUY Dendreon (DNDN) puts and calls—straddle play (again)

Posted by intelledgement on Thu, 29 Jan 09

Yep, we implemented this same trade two years ago prior to the FDA advisory committee meeting that endorsed Provenge, pushing DNDN stock from $4 to $25…a month before it was—shockingly—not approved by the FDA itself, crashing the stock back down to $5—and it was our best speculative play so far, with a 307% ROI in 21 days. The time horizon here is a bit longer, but the principle is the same: there is a binary event approaching on a predictable time frame that is highly likely to materially effect the stock price of Dendreon (DNDN), the biotech developer of Provenge, a vaccine for prostate cancer.

OK, first we suggest you check out this Minionville article which summarizes what is at stake for Dendreon and their prostate cancer product, Provenge and frames the eventualities. Essentially, if the data from the IMPACT Phase III study meet the 22% threshold (with respect to improved survival for the Provenge arm as compared with the placebo arm), then FDA approval is all-but assured and DNDN stock, currently around $3.50, is likely to double or triple at least on the expectation that Dendreon will get revenues starting this year and be profitable by 2011 or even late 2010.

If the data don’t pass muster, the company will probably have to put themselves up for sale, as they lack the funds for another costly Phase III trial—to say nothing of another two-to-three years of paying the electric bill—and are not likely to be able to raise them for what would at that point be a two-time loser vaccine. (They have other candidate drugs in their pipeline, but they are all “active cellular immunotherapies” based on the same process as Provenge, so if Provenge doesn’t work….) Whether any other company would be willing to pay anything for the privilege of sinking more money into funding another study of a two-time loser drug is unknowable, but at that point, DNDN shareholders would be begging, not choosing…and in this event, the stock is likely to plunge 80% or more.

So, we are going with an options straddle play: looking to buy eight Aug $5 calls (UKOHA) for $1.25 or better and six Aug $5 puts (UKOTA) for $3.35 or better. There is healthy open interest for both options. Remember that option prices are quoted in “per share” terms, but each option covers 100 shares; thus one UKOHA August $5 call will give us the right to purchase 100 shares of DNDN for $5/share between whenever we buy it and the day the option expires (21 Aug 09 in this case). Thus the total investment (not counting transaction costs) should be around $1,000 for the eight calls plus $2,010 for the six puts for a total of $3,010.

If the data fail to meet the 22% survivability advantage for Provenge and the stock tanks the expected 80% to 70 cents or so, then the calls will expire worthless but the puts will be worth $430 each for a total of $2,580, or a net loss of (coincidentally) $430. If the stock goes down below ten cents, we will just about break even.

If the data are good and the stock goes up to $14—we don’t think $25 is likely this time until there is actual FDA approval, investors having been burned once—then the puts expire worthless and the calls will be worth $900 each for a total of $7,200, or a net profit of $4,190. If the stock reachs $18, then the calls are worth $1,300 each for a total of $10,400 (net profit of $7,390).

Of course, the risk is that there will be some sort of grey result that only modestly boosts or hurts the stock. For example, there might be a delay in the release of the data, or the results might be fractionally below 22% such that the company elects to apply for approval again anyway based on these results, thus delaying a resolution. Worst case is the stock going up from the current $3.50 to $5, in which case both the puts and calls expire worthless.

Our bet, however, is that even if delayed, the data will be available by mid-August and that any result other than an unequivocal 22% survival edge for the Provenge arm will tank the stock. (And, of course, good results will send it soaring.)

This is a relatively unusual situation where the timing of an event that is likely to have a huge effect on the stock price is known about beforehand: you don’t get better straddle opportunities than this. The way we see it, we are buying a 50%(?) chance to make four-to-seven thousand dollars at a probable risk of $400…pretty attractive odds.

Previous DNDN-related posts:

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BUY Activision Blizzard (ATVI)—games people play

Posted by intelledgement on Fri, 02 Jan 09

The merger of Activision and Vivendi (former corporate home of Blizzard and Sierra) last July has created a game publisher powerhouse. Between them, the Activision Blizzard (ATVI) combine have leading franchise-level products in the online, computer, and console markets including first-person shooter, sports action, role-playing, and strategy games. Among their leading products are Cabela’s line of hunting games (yes, they are allied with CAB, another ISOP pick), Call of Duty (first-person shooter), Guitar Hero (music role-playing), Spiderman, Starcraft (strategy), Tony Hawk (sports action), Transformers, X-Men Origins, and World of Warcraft (fantasy role-playing).

Revenues and operating profits and net profits had all been growing strongly leading into the merger. While growing, net profits were only around 10% of revenues due to significant R&D investments. (As with movies, game publishing requires significant up front development and marketing investments.) Of course, the merger means that it will be hard to derive much utility from quarter-over-quarter comparables for the next year or so. But a spate of significant releases in 2009—including significant additions to the Call of Duty and Guitar Hero franchises, the years-in-the-making Starcraft II release, and licensed product games Ice Age and Madagascar—should not only boost revenues but improve the ratio of net profits to revenues.

In their most recently reported quarter (3Q08), the company had revenues of $711 million, up on a y-o-y basis for the 19th consecutive quarter. They recorded a net loss of $108 million—breaking a string of profitable quarters—which loss was mostly attributable to one-time merger costs, which turned what would otherwise have been a seven cents/share profit into an eight cents/share loss. Their debt is negligible and they have $2.4 billion of cash on hand. And some of that cash is being used for an ongoing $1B share buyback program.

The $711 million of 3Q08 revenues was mostly from massively multiplayer online role-playing game (MMORPG) subscriptions (38%; most of this is World of Warcraft) and console game sales (38%; Guitar Hero and Call of Duty are the two leaders here). Handhelds game sales account for 11% of sales, and PC game sales—the only segment that is declining in absolute dollars year-over-year—account for 4%. Distribution of third-party interactive entertainment hardware and software products—mostly in Europe—accounts for 8% of revenues. Regionally, revenues were: Americas 41%, Europe 41%, Asia 9%, and distribution (which for some reason is not broken down regionally) 8%. $6 million of revenues generated from discontinued Blizzard operations accounts for the last 1% in both the regional and product breakdowns.

While we anticipate tough times ahead for the economy, traditionally the entertainment sector has done well under those conditions. Movies famously were very profitable during the Depression. And purely from a consumer value perspective, computer games are a superior entertainment value. An $8 ticket to a first-run movie buys you two hours of entertainment; $60 for Diablo gets you at least 30 hours—if all you do is play through the AI vs. player set scenarios that come with the game—but more likely hundreds of hours if you play other players over the web on Activision Blizzard’s free-to-Diablo-owners Battle.net servers. A W0W subscription is $15/month (less if you pay upfront for multiple months) and on average, players are online for about 22 hours a week, so that is a similar entertainment bargain. (And with the WoW subscriber base now in excess of 11.5 million, that’s a nice revenue stream for the company.)

Be that as it may, the market’s overall view of ATVI is not very rosy just now. During 2008, it fell from a split adjusted $14.85 to $8.64,  a decline of 42%. The NASDAQ was down 41% in that same timeframe, but we believe that ATVI should be significantly outperforming the market, and is relatively undervalued here.

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BUY Sohu.com (SOHU)

Posted by intelledgement on Thu, 18 Dec 08

Sohu.com (SOHU) is China’s leading internet portal, and as such, it fills a hole in our portfolio which, heretofore, has lacked a China growth play. Sohu.com is one of the premier Internet media companies in China, providing millions of Chinese consumers with information, entertainment and communication services—and advertisers with the opportunity to make their pitch to these consumers. The company has a family of websites, some developed internally and many adopted via acquistion:

  • sohu.com—internet portal and online media destination
  • sogou.com—interactive proprietary search engine
  • chinaren.com—online alumni club (acquired October 2000)
  • 17173.com—gaming site (acquired November 2003)
  • focus.cn—real estate site (also acquired November 2003)
  • goodfeel.com.cn—wireless value-added services provider (acquired May 2004)
  • go2map.com—online mapping service providers (acquired May 2005)

Sohu.com derives revenue from consumers and from advertisers. Consumer services include online games, wireless, and a panoply of value-added services such as news, information, music, ringtone and picture content delivered to cell phones. (More Chinese internet consumers access the web via cell phones than computers.) Corporate services consist of brand advertising on their matrix of websites as well as paid listing and bid listing on their search engine.

The company operates two massively multi-player online role-playing games (or MMORPG games)—Tian Long Ba Bu (or TLBB) and Blade Online (or BO)—plus a casual game platform. The pricing model for the MMORPG games is different from the standard USA model in that you can play for free…but to progress satisfactorily, you need to acquire virtual objects, which are available for sale from Sohu.com. This is a much more flexible—not to mention, insidious—arrangement than the model that is typical with USA gaming companies, where you need to pay an upfront licensing fee—for downloadable software which you need to install on your computer—and then a monthly subscription fee to afford you access to the game server.

Gaming is huge, accounting for 45% of revenues in Sohu.com’s latest quarter (3Q08) as compared to 41% for brand advertising, 14% for wireless services, and 1% for search ads (a weak point). The ash and trash (ringtone downloads and the like) accounts for the other 1%.

We are buying Sohu.com because of the growth potential, and growth is most definitely their calling card; check out their revenues:

And, it isn’t just unmanaged growth. The company turned profitable in 2002, and while the growth in profits lagged the growth in revenues—in the sense that the ratio of profits to revenues was stagnant to down from 2004 to 2007—they have strung together 28 consecutive profitable quarters and appear to be back on a healthy growth track now:

The company had an IPO on the NASDAQ in July 2000, raising $52 million. Since then, their growth has been pretty much self-funded. The $25 million loss blip in 3Q01 was due to a adjustment of the valuation of goodwill and “identifiable intangibles” in connection with the Chinaren acquisition from the prior year, not any sort of problem with ongoing operations…in other words, a one-time paper loss. They did issue $90 million of notes in 2003, but by the end of 2007, those had all been paid back and the company has no long-term debt and—as of 30 Sep 08—$279 million of cash ($7/share!).

Speaking of share price, the best time to buy Sohu.com was probably September 2002…they turned profitable that quarter for the first time, and the shares were going for $2 each. Of course Intelledgement was not around then. But when we launched in January 2007—and purchased the China equities ETF FXI for the IMSIP—we could (and should) have bought SOHU shares for the ISOP for $20 each.

Yesterday the shares closed at $45.50. <sigh>

Still, that is down from a high of $91/share in June. And taking into account the $7/share of cash (and no debt), the P/E is around 13, and that is dirt cheap for a company that has increased quarterly revs from $39 million to $120 million in the space of five quarters, and whose y-o-y quarterly earnings growth for those five quarters has been 45%-148%-383%-604%-316%, respectively! Plus, the company is shareholder friendly—excellent and timely reporting (in fact, they just won an award for it!) and minimal dilution. (Since their IPO in 2000, the share count is up from 30.4 million to 39.3 million, which amounts to a modest 3% annual increase.)

The one remaining question is…why Sohu.com instead of (BIDU)? If Sohu.com is akin to Yahoo! (YHOO) in China, then Baidu—with the leading search engine—is akin to Google (GOOG)…and we all know how that has played out. While we haven’t looked that closely at Baidu, we expect that it is a perfectly legitimate way to play the China growth story, and in the long run, may be an even better choice than Sohu.com. But the latter is not just another Yahoo! Sohu.com derives nearly half their revenue from their online games. Think about a combination of Yahoo! and Activision Blizzard (ATVI), the publisher of the World of Warcraft online gaming franchise. As the number of internet users ramps up in China, the pie is plenty big enough for Sohu.com to prosper, even if Baidu ultimately wins the search engine war decisively.

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BUY A-Power Energy Generation Systems, Ltd. (APWR)

Posted by intelledgement on Thu, 18 Dec 08

A-Power Energy Generation Systems (APWR) is a Chinese company focused on the distributed power generation market. As fast as China’s economy is growing, there are serious “disturbances in the force” with respect to the reliability—and in some cases, even the availability—or electricity. APWR’s core business is working with companies and local governments to design and build cogeneration and distributed generation facilities. Their systems typically capture waste heat that a factory is already generating and convert it into electricity that the factory can use directly, or which can be sold back into the power grid. This affords the customer electricity that is both reliably available and typically cheaper than power purchased from the grid.

China’s demand for energy is ramping up rapidly. The International Energy Agency (IEA) estimates that China’s primary energy demand will increase 3.2% annually from 1,742 million tons of oil equivalent (MTOE) in 2005 to 3,819 MTOE in 2030. Near-term demand is projected to be even higher: 5.1% annual increases through 2015. To meet this demand, the IEA estimates China needs to add more than 1,300 GW to its electricity-generating capacity (more than the total current installed capacity in the USA). In their bid to service this market, APWR come to the table as the only private company currently authorized to contract and build cogeneration and distributed generation projects in China. (There are numerous state-run competitors, but these are generally comparatively expensive and slow-to-deliver.) While this is not an insurmountable moat, while it lasts it does afford APWR an outstanding opportunity to grow quickly and establish themselves in this huge market.

And, not surprizingly, APWR has experienced impressive growth. Last month, the company reported 3Q08 results and their first nine months of revenues ($85.4 million) were up 120% from the first nine months of 2007. And there is more on the horizon, including a significant opportunity outside China. According to CEO Jinxiang Lu, “In the third quarter of 2008, we secured a new distributed generation contract in China’s Jilin province worth approximately $195 million. We also signed a binding MOU [memo of understanding] with National Power Supply Company, a subsidiary of Advance Agro Pacific, for what is expected to become our largest distributed power generation contract to date—a $300 million contract to develop a 600 MW distributed power system in Thailand’s Chachoengsao province. We remain confident this MOU will be converted into a contract shortly as we are currently in final discussions with the customer and we are working together with the customer to obtain the necessary approvals in Thailand. We feel this opportunity, combined with the $150 million Thai contract signed earlier this year, represent a strong foundation for us in the international market.”

And, the company is profitable, and has been for several years. They produced $18.5 million of black ink in the first nine months of 2008, up 56% from the $11.8 million of profits for the first nine months of 2007. They anticipate a big fourth quarter and are guiding for $35 million or higher in profits for the year, and are not expecting that the current financial crisis is likely to dampen demand for electricity in China. That may or may not turn out to be true, but for sure yesterday’s close of $5.09 is already calamitously down from six months ago, when the stock was north of $30/share. With a P/E of around 18 here, the stock may not be breathtakingly cheap, but as a profitable company with superb growth prospects, it looks like a reasonable bargain.

But wait…there’s more. Last year, the company decided to enter the wind power market and announced the construction of a wind turbine factory in Shenyang. This facility will include two production lines with an output capacity of 300 units/year of 2.7MW wind turbines and 420 units of 750kW wind turbines, totaling over 1.1GW in annual output. They plan to use components the company has secured from Fuhrlander AG and other European wind power component suppliers, and their European suppliers are helping them set up the factory.

And APWR hit the ground running in the wind power market. In 1Q08, they announced letters of intent with various potential customers amounting to over 300 turbine units. In 2Q08, they executed their first contracted sale, of five 2.7MW units to the China National Automation Control System Corp. (CACS). Then in October, they announced a followup sale of 50 more 2.7MW units to CACS (which sale was not from among their 300+ LOI units). According to Shenghang Wang, CACS General Manager, “We look forward to our expanded relationship with A-Power. Their 2.7MW wind turbine has already been market tested by Fuhrlander in Europe and is currently the largest land-based wind turbine that is commercially available to us in China. These large turbines will help us achieve a greater amount of wind energy output in each of our new wind farms in Gansu and Inner Mongolia.” The first turbine units are expected to be delivered in July 2009.

APWR is listed on NASDAQ as of earlier this year—Lu rang the opening bell on 16 April—and is included in the Russell Global Index. The company has no debt, and a strong cash position. There are fewer than 34 million shares outstanding of which management own about 13 million.

Unlike our “big brother” IMSIP portfolio—which is long FXI—the ISOP has been lacking direct exposure to the Chinese buildout. Our purchase of APWR today (along with SOHU) corrects that imbalance.

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BUY TO COVER Beazer Homes (BZH)

Posted by intelledgement on Tue, 16 Dec 08

As we stated in our IMSIP post announcing we are selling off the financials and real estate reverse ETFs, we still think the odds favor a long and deep recession and a secular decline here. But for now, we can’t fight city hall. The Fed and the Treasury are firing all the guns at once here, and the combination of today’s shock and awe decision to reduce the discount rate to 0%—free money for the banks!—and purchase mortgage-backed securities combined with the promise of a massive stimulus package to be named later by the incoming Obama administration has broken the gloom-and-doom psychology of the market. We will go up here so long as folks believe Obama can plug the holes in the dyke.

He can’t and he shouldn’t be trying, but he is and it could take a while for everyone to realize that resistance to the laws of economics is futile. Sooner or later, that will happen and when it does, we likely be looking to short something in the real estate-related sector again.

Previous BZH-related posts:

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BUY TO COVER Bank of America (BAC), Goldman Sachs (GS), HSBC (HBC) & Wells Fargo (WFC)

Posted by intelledgement on Tue, 16 Dec 08

OK, as we stated in our IMSIP post announcing we are selling off the financials and real estate reverse ETFs, we still think the odds favor a long and deep recession and a secular decline here. But for now, we can’t fight city hall. The Fed and the Treasury are firing all the guns at once here, and the combination of today’s shock and awe decision to reduce the discount rate to 0%—free money for the banks!—and purchase mortgage-backed securities combined with the promise of a massive stimulus package to be named later by the incoming Obama administration has broken the gloom-and-doom psychology of the market. We will go up here so long as folks believe Obama can plug the holes in the dyke.

He can’t and he shouldn’t be trying, but he is and it could take a while for everyone to realize that resistance to the laws of economics is futile. Sooner or later, that will happen and when it does, we will go short again.

Previous banking company short-related posts:

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