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Medhanie
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Former finance consultant primarily in valuation (assets, equity, and options), M&A, and reporting. BA - SFSU, MBA - NYU Stern School. There is no value in linear thinking.
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  • Gold And The Death Cross!

    In my previous article on the future of Gold, I stated that future isn't too bright. I gave detailed reasons why I believe Gold is on its way down - not just from its all time highs but from where it was trading then, which was around $1,650. I believed then and still believe now that Gold, in particular Gold backed ETFs such as SPDR Gold Shares (GLD) are short opportunities - not long. However, Gold investors tend to not always be rational.

    My previous article was in response to Bill Gross' pronouncement that 2013 will be another year for Gold. On CNBC, he stated that in 2013 we will see a new all time high for the price of Gold. This seemed completely ludicrous to me because the fundamentals said otherwise. More importantly, he wasn't alone. Bill Gross was simply one of the megaphones for the large contingent of hedge fund mangers, analysts, journalists, and the purveyors of doomsday who continue to make this claim despite little reality based support for it. So, I tried to inform and provide a counter perspective, but the comment section was lit up with people insulting my mistaken use of the word "there" instead of "they're". But I'm not complaining, I like to be challenged. The question is, do Gold bulls like to be challenged? From the tantrums they often throw around, I will guess no.

    Shortly after I wrote the article of "Gold: Why Bill Gross is Wrong," something extraordinary happened: Gold's 200 and 50 day moving averages began trending steeply downward. More importantly the 50 day moving average dipped below the 200 day moving average as both averages were going down; this phenomenon is known as the Death Cross.

    In the investment world, the 200 day moving average is really important. It is thought to provide the mid to long term view on an individual asset or the market as a whole. In a bull market, it is considered an important support level. In a bear market, it is considered an important resistance level. So, everyone watches it. More importantly, many make decisions by it. In fact, many investors put in limit and stop order around this number. It's that important. The 50 day moving average is also important; it tells us what the immediate future will look like. So, when the 200 day moving average is going down while the short term indicator is also going down and below the 200 day moving average, you get the Death Cross. And generally, the words "Death Cross" are accepted as ominously as they sound.

    I said it before, and I'll say it again. I believe that the Gold party is over if not at least coming to an end. And since you can't short physical Gold, you can short silly ETFs that prey on investors fears and are the retail arm of the doomsday sellers. My contention was that there was very little fundamental support for the price of Gold to continue its appreciation. Traditional leading indicator for Gold were are either tame or indicated depreciation. Inflation was non-existent. In fact for a significant period in 2009, we witnessed deflation. The value of dollar was either stable or appreciated relative to other currencies. Yes, there was a lot of cries about Fed's easy money policy, but that policy appears to have had little effect on currency or commodities pricing. It appears like the Feds actually did a good job. So, what explained the meteoric rise of Gold? The answer is perception.

    After the collapse of the global financial system, we all believed the world was coming to an end. But it did not come to an end. It stabilized and recovered all its losses. But despite this fact, there remains a loud chorus of hedge fund managers, analysts, and pundit who continue to believe the end is near. As a result, they continue to push Gold as humanities saving grace. Unfortunately, the Death Cross may now finally silence the cynics.

    The Death Cross is telling us that the near and long term outlook for Gold isn't good, which in turn is good for equity and bond markets. It may be time to stop listening to the doom sellers and see reality for what it is. The global equity market is the engine of our global economy and the true source of wealth - Gold is a fetish. Over the last decade, Gold has served very little purpose other than to terrify skeptical retail investors and keep them on the sideline. It isn't just people like Glen Beck and other crazies on Fox News who have sold this idea to us. Institutional forces, which include Bill Gross and a huge chunk of financial advisory world who have pushed this false narrative.

    For me the Death Cross is a useful moment. It tells me that it may be time to short Gold, in particular Gold ETFs like the SPDR Gold Shares and iShares Gold Trust (IAU). With a market cap of $63 and $11 billion respectively, SPDR and iShares are the biggest of the bunch and highly sensitive to potential bad news. These ETF's value are tied directly to the spot price for an ounce of Gold. So if the price drops to say $1,300, which in my mind is more than plausible, a short position stands to gain an almost 20% return. That's not bad.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: IAU, GLD, short-ideas
    Mar 05 2:57 PM | Link | Comment!
  • The Republican Plan for Destroying America
              Despite the disaster and pain of September 11, 2001 for Osama Bin Laden success was not measured by body count. It was measured in deficits, in higher borrowing costs, and in investments we could not or did not make in our country’s future. In a 2004 video tape, Bin Laden said, "We are continuing this policy in bleeding America to the point of bankruptcy… We, alongside the Mujahedeen, bled Russia for ten years until it went bankrupt and was forced to withdraw in defeat." Bin Laden understood one very important thing that we as a country have failed to understand: superpowers cannot be defeated in the battlefield; they are defeated by their own arrogance. For ten years, Bin Laden and his cohorts forced the Soviets to fight an unwinnable war in Afghanistan. This helped “bleed” the Soviets of their resources until their fragile economy came crumbling down. We are reaching ten years since the September 11 attacks, and nearly three months after Bin Laden’s death, the Republicans are helping him finish the job.
              The debt ceiling debate involves two distinct groups of people. The first group includes those genuinely concerned about the future of the U.S. economy. These people also know that the full faith and credit of UnitedState’s government is crucial for our nation’s future. The faith that the world confers on the U.S. is what makes the global economy work. Keep in mind that despite all the rhetoric and exuberance about China, Brazil, Russia, India, or whatever other flavor of the day country, the U.S. economy still represents a third of global GDP. Furthermore, the U.S. dollar is the global currency. More importantly, all of this economic activity is almost exclusively predicated upon the world’s confidence in America. Take away the confidence and you take away the world as we know it and America’s place in it. This brings us to the second group of people. Simply put, these are the arrogant know-nothings who say things like “let the banks fail,” or “let the government shut down,” or worse yet, “let the government default.”
                I believed that the 2008 Presidential election was the most consequential election in my lifetime. Not only did we elect the first black president, but we also had the opportunity to change the direction of our country away from perpetual war and irresponsible fiscal policy. There was a great deal of excitement. I did not think that there would be another election that can match the magnitude of 2008. However, I was wrong. It turns out that the 2010 mid-terms may actually have more consequence and greater impact in the long run.
                The 2010 mid-terms brought the arrogant know-nothings to power. These are people who gleefully and unapologetically wallowed in their ignorance while living by principals that are rooted in paranoia and catch-phrases rather than logic. Their philosophy is “end government by any means necessary.” End the U.S. government by any means necessary? That statement should stir an uneasy feeling in your stomach. Think about who made it his life’s mission to destroy the U.S. and render it another failed superpower? That’s right – Osama Bin Laden. I know what you’re thinking: The Tea Partiers don’t want to destroy America; they just want to destroy government. However unless you’re an anarchist, that’s not an argument that makes sense.   If government is shut down, economic activity slows down. If government defaults, economic activity may effectively stop and we may plunge into a depression – ipso facto, the end of America as we know it.   This may sound like a hyperbole, but it is not. It is a real possibility. 
                Anyone who knows anything about finance knows one fundamental thing: the concept of the “risk-free rate.” It’s a simple concept whose definition is embedded in the concept itself – risk-free rate. It is the return on any investment that is wholly risk free. In other words, it is the one place where you, your grandma, pension fund, or foreign country can put your money, get a return and without fear of ever losing it. It is free of risk – no risk. Where is this magical place where I can fly without fear of ever falling? The answer is U.S. Treasuries. Why are U.S. Treasuries risks free? Because the United States government has always paid without delay or complaint. In fact, it is written into the U.S. Constitution that government debt “Shall not be questioned.” No other modern government or nation has demonstrated this capacity; hence why U.S. Treasuries are risk free. That is until now. 
                For the first time in American history, the United States is in real danger of default. For the first time in American history, the United States government may not meet all of its obligations and fail to meet its constitutional responsibility. So, aside from the obvious consequences, what does this mean? I don’t know. But we can make reasonable inductions.
                First, essentially the entire global equities and bond markets are valued using the risk free rate. If you know the cap-m model for deriving a stock price, you know how important the risk free rate is. So if suddenly the U.S. defaults or delays its payments to its bond holders, the risk free rate is no longer risk free. Does the market then continue to use U.S. Treasuries to value assets? If so, does the market use the downgraded and higher rate? And if the market chooses to move away from U.S. Treasuries as a basis for valuation, what will the new risk free rate be? How about GE’s corporate bond rating or a British or French government bond?  They’re both triple-A. However regardless of the option that the market uses, one thing is certain: the new risk-free rate will be a higher interest rate than what we are all used to with U.S. Treasuries. 
                Second, a higher risk-free rate means everything will cost more. Although your stock portfolio will likely be worth more in the short run, inflation will also be higher, at least offsetting your gains and likely decreasing the real value of your portfolio. The cost of borrowing for everyone will go up. Bond yields are also likely to go up as investors sell because they fear higher borrowing rates will cut into corporate profits and jeopardize a company’s ability to service its debts.   What about your mortgage? It will likely go up as well because your interest rate will go up too. Don’t forget that your mortgage interest is also based on the risk-free rate. That’s not all. Credit cards, car notes, student loans, and virtually every other kind of loan will see a rise in interest rates thus an increase in the loan payments. Once again, that’s not all. 
                Third, one of the least known markets is the commercial papers market. This is where giant corporations like GE float short term bonds to pay their bill, including payroll.   The commercial papers market is almost $2 trillion in value. The paper that is exchanged in this market is very short term, anywhere from one day to nine months. Companies with excellent credit float collateral-less bonds to raise capital so as to meet their daily operational needs. However if their costs of borrowing go up, they may simply decide to trim operations by letting some excess worker go. This would not be a medium or long term decision. Companies will likely start laying people off as soon as their borrowing costs go up. Keep in mind that an increase in interest rates would not only increase their cost of borrowing in the papers market but also their cost of servicing their other short and long-term debts. It likely would be a cost they simply cannot afford or had planned for.
                Right now you’re thinking, “all these calamities from not raising the debt ceiling?” My response is maybe. These are all logical and reasonable results, and what’s worse is that the reality may actually be far worse.   For the sake of perspective, think about your own credit. If you’re late on your credit card payment, the credit card company can raise the interest rate on that credit card and reports you to the credit bureaus. Once the bureaus have your late payment in their records, your credit score goes down. The other credit cards that you have see your new lower credit score and suddenly see you as riskier. Therefore, they all raise their interest rate on you as well. Suddenly, your minimum payments go up as well as the total amount that you owe. In addition to this, you want to buy a car and a house. However given your new lower credit score, the cost of buying those things are higher for you. More importantly, the net present value of all your personal assets suddenly decrease. If you take this scenario to its logical and extreme end, you end up broke, drunk and on the street. The same can be said about the U.S. and its fiscal problems.
                In no time in American history has the United States failed to meet its financial obligations. In fact after the revolutionary war when George Washington and Alexander Hamilton could have easily said we will not pay old debts because they are not ours, they paid them anyways. They understood that the perception of the country would be damaged should the government fail to meet its debt obligations. In an economy like ours, perception is everything. Right now, we are seriously considering default as an option. Although the U.S. is fully capable of paying its bills, the House Republicans are saying “screw it; we don’t want to pay.” By the way also keep in mind that raising the debt ceiling is not to pay for new programs and new government whimsies, it is to pay for things that we have already consumed like the wars in Iraq and Afghanistan, the Bush Tax Cuts, and the Medicare Drug Benefit. All of these were Republican initiatives and now the Republicans don’t want to pay for them. It’s like them going to a restaurant, eating everything on the menu, and trying to skip without paying the bill.
               Let’s have a balanced approach to saving our economy. No one is advocating for perpetual growth in government debt. We need to make cuts but we also need to raise taxes -dramatically. The new Republican Party is hell bent on destroying America. Their plan is simply default, shut down the government, and make sure America is not making any plans for its future. As cynical as this may sound, I can’t help but think that the Republicans learned everything they know from Osama Bin Laden.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: DJ, QQQX, ETF, Debt Ceiling
    Jul 27 4:16 AM | Link | 1 Comment
  • Amarin: Likelihood of Approval and Market Outlook

     

    There has been a great deal of chatter about Amarin Corp (AMRN).  The chatter has been mixed - some good and some bad.  The stock price’s volatility reflects these mixed feelings.  Prices have retreated about 12% over the past month and is down 22% from its 52-week high - this despite very positive results for its phase III clinical trials.  Moreover, the company recently completed an offering valued at about $105 million - 13.8 million shares at $7.60 per share.  And although there has been some institution selling including about 50,000 shares sold by the CEO, there seems to be substantially more positive than negative news.  Then what explains the jitters?

    After patiently hearing and reading all sides (and virtually every publication by the firm or otherwise, blogs, 10K, presentations, conference calls and other propaganda), I figure my two cents may actually be worth two cents.  Here is my bottom line on Amarin:  It is a very good buy.  AMR101, which is the company's flagship product, has the potential to be a blockbuster by exploiting a very big market that has very few and weak players.   

    Amr101 is a cholesterol drug that targets triglycerides. For those that don’t know (and don’t worry -I used to be one of you), triglycerides are one of the three fatty proteins found in the blood stream. The other two are LDL (bad cholesterol) and HDL (good cholesterol). Although triglycerides are not as sexy or receive the attention of LDL, they can be equally dangerous. In fact according to a recent CDC research as reported by CNNHealth, one third of American (about 100 million people) are either in the danger zone or have dangerously high triglycerides.  

     

    Although you do need some triglycerides for a healthy life, there are a number of lifestyle choices as well as some genetic factors that can lead to increased and dangerous levels. High triglycerides can raise your risk for heart disease, stroke and metabolic syndrome (combination of high blood sugar, high blood pressure, and obesity).

     

    According to WebMD, a simple blood test measures your triglycerides levels:

    • Normal is less than 150.
    • Borderline-high is 150 to 199.
    • High is 200 to 499.
    • Very high is 500 or higher.

    The causes for high triglycerides are usually as follows:

    • Obesity.
    • Poorly controlled diabetes.
    • An underactive thyroid (hypothyroidism).
    • Kidney disease.
    • High calorie and high fat diet.
    • Heavy consumption of alcohol.
    • In addition to the above, many common medications can also raise triglycerides.

    So, how big is the problem and market potential? Again according to CNNHealth and CDC research, 33.1 percent of Americans have triglyceride levels above 150 milligrams, including 17.9 percent with levels above 200 milligrams, 1.7 percent with levels of 500 to 1,000 milligrams, and 0.4 percent with levels higher than 1,000 milligrams. Roughly 100 million Americans are at the very least in the danger zone for high triglycerides. This is a big problem with very few good medical solutions.  Of course, those with high triglycerides can cut their risk by simple lifestyle changes such as exercising, eating healthy, quitting cigarette smoke, and cutting down the amount of alcohol they consume. But if we could do that, then Amarin Corp would probably not need to exist.   We’re American’s; we like our cake and eating it too.

     

    Currently, treatment for high triglycerides include Fibrates, Nicotinic acid, Statins, and Omega -3 fatty acids. However despite this number of treatment options, each comes with a heavy burden making all of them difficult choices. 

    Fibrates, can lower triglycerides by 25% to 50%, but increase HDL by 10% to 35%.  Nicotinic acid is the most successful of the bunch. It can lower LDL by 5% to 25%, increase HDL 15% to 35%, and lower triglycerides by 20% to 50%. However despite Nicotinic acid's success in reducing bad cholesterol and increasing good cholesterol, it frequently come with negative side effects such as liver problems (hepatotoxicity), high blood sugar (hyperglycemia), increased uric acid (hyperuricemia - gout), gastrointestinal problems, and irregular heartbeat.


    There are also Statins such as Lipitor. These are a class of drugs known to be effective in reducing the risk for heart attack, stroke, and death from heart disease. They do this by lowering LDL cholesterol and with few side effects. However according to the American Heart Association Statins have a “modest” effect on triglycerides.    They are primarily designed and prescribed to comeback LDL. Moreover while there are few side effects with Statins when taken alone, there could be life threatening consequences when they interact with other drugs.

     

    That leaves Omega -3 fatty acids. According to the National Institutes of Health, fish oil can reduce triglyceride levels by 20% to 50%.  However to get the full benefit of fish oil, the American Heart Association (AHA) recommends 2 to 4 grams of fish oil per day. That may seem small, but it’s not. For instance, to get just 1 gram of omega-3 fatty acids, you would need to eat one to two servings of salmon, four to seven servings of cod, or four servings of shrimp per day. What about fish oil supplements? The Center for Science in the Public Interest recommends that you “Stick with fish or fish oil for best heart-health benefits.” Supplements are an unregulated industry that just about all the time make unsubstantiated claims. Even if you were to believe what they claim, you would still need to take anywhere between two to fifteen big soft gels a day to meet the AHA’s recommended dose. That too is a lot.


    Bottom line is that this is a big and life-threatening problem that affects 100 million Americans. It also has very few good solutions that your doctor can prescribe. Therefore if a company were to develop a solution that is able to provide relief with few side effects, that company has the potential to be also big. That’s where Amarin Corp comes in. 

     

    According to Amarin Corp. Amr101 is able to effectively reduce triglycerides without the side effects of other treatment options. Amr101 has already cleared one phase III trial. Moreover, all of the company’s data suggest that Amr101 is on the fast track for FDA approval. It is highly effective with very few side affects. But most important of all is that Amr101 is not an original drug. There is a version of Amr101 that has been sold and consumed in Japan for many years. Its efficacy and tolerance has been proven both in the lab and in the real world.   With that said, I can’t find a credible reason for the FDA not to approve Amr101. 


    But wait - there is more.  Another reason I am confident of Amr101's likely approval is
    GlaxoSmithKline's (GSK) Lovazza. Lovazza, which like Amr101 is a purified form of fish-oil (although not as pure as Amr101), has already been approved by the FDA to lower triglycerides. It is a prescription medication that has demonstrated good efficacy and generates more than a $1 billion per year.
     

    At this point, the question for me is not whether Amr101 will get approval (I have already made that bet). The question is whether Amr101 will live up to the hype. How does Amr101 stack up against Lovazza, a proven product that the market likes very much? Can Amr101 carve its own niche or will it have to take marketshare from Lovazza? And if it does have to compete with Lovazza, what is its likelihood for success? The answer to those questions is the next blog entry.



    Disclosure: I am long AMRN.
    Feb 07 11:59 PM | Link | Comment!
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