Isis (ISIS), Ligand (LGND) and Vical (VICL) have been my core biotech holdings since the mid 1990s and I have been steadily adding to these positions each time the market has lost faith. They share common themes and some differences. Isis and Vical have maintained consistent management throughout the years, whereas Ligand radically changed direction a few years ago when Daniel Loeb’s Third Point hedge fund took a stake. Now all three are focused on drug discovery; leaving the marketing to others.

All three have many pharmaceutical partnerships and many shots on goal, so one failure would not be devastating. In order of platform strength and a protective moat around their technology; Isis is the strongest, followed by Vical, with Ligand pulling up the rear.

The popularity of foreign stocks ebbs and flows, but there’s always someone on TV touting them for either growth or diversity. I have owned a few large-cap foreign stock ADRs (American Depository Receipts) from time to time, but none presently. I would like to relate some of the nuances that I experienced. I never owned any foreign stock ETFs or mutual funds, but the discussion can easily be applied to them as well.

ADRs are issued by depository banks and trade on US exchanges in US dollars. The depository banks distribute the dividends from foreign stocks into US dollars, extracting a fee from the shareholders annually when not reimbursed by the foreign company. The fee shows up as debit on your brokerage statement at the same time the dividend is posted. Additionally, you will see a debit for foreign taxes related to the dividend, even if the ADR resides in a tax-free (Roth IRA) or tax-deferred (Traditional IRA) retirement account. Luckily the fees and taxes have never been greater than the dividends for me.

The Wall Street Journal’s “Wells Fargo Takes Chance With a Loan Exchange”, subtitled “Option ARMs Are Shifted to Interest-Only in a Recovery Bet”, suggests that the bank is playing “kick-the-can down the road” with its Pick-A-Pay mortgages. Wells Fargo (WFC) is holding $107B in legacy Wachovia ARMs that have accumulated both negative amortization and substantial housing price drops, leaving the homeowners in unrecoverable positions. The bank is hoping that time will heal the wounds.

Homeowners that either chose or could only afford payments that did not even cover interest were allowed to accumulate negative amortization usually up to between 110% and 125% of the original loan amount. After reaching the negative amortization cap, the homeowners then have to both start paying the full interest and start amortizing the principal over the remaining life of the loans. In most cases the loans become unaffordable.

Geithner’s Treasury and Congressional politicians are telling banks publicly to expand lending and boost the economy. At the same time Bernanke’s Federal Reserve is telling banks to increase liquidity as the banks see little loan demand from qualified borrowers.

Adequate capital and adequate liquidity are two completely separate concepts as Bear Stearns and Lehman found out the hard way. Capital is purely an accounting concept, generally consisting of common and certain preferred equity. Liquidity on the other hand is the cash either available or that can be generated to meet funding obligations in the event of deposit withdrawals or a freeze in short-term credit.

What do you have when the smartest guys in the room engineer a financial product so complex that it blows up? Even smarter guys that pick through the rubble and steal the diamonds. Genius creates alchemy and alchemy creates genius.

Bloomberg’s “Citigroup Aims to Stop TPG Fund From Stripping CDO” reports the tables have once again turned on Citigroup (C) under the law of unintended consequences. Citigroup has already written down roughly $118B in CDO losses according to Bloomberg’s calculations. Now TPG Credit, separate but associated with private equity firm TPG, has dived deep into the esoteric trust structures to cherry-pick some of the best CDO assets from the invalids.

Not to be outdone by Maslow, inflation has its own hierarchy of needs. Basic needs (physical survival) correlate to food and energy, safety (comfort) correlates to core inflation, and self-actualization correlates to asset inflation. The Federal Reserve admits that it has little influence on food and energy, believes that it can control core inflation, and says that it has no control over asset inflation.

I believe the Fed’s rhetoric is only partially truthful. I agree that the Fed has little control over the demand for survival needs. However, when it comes to core inflation (the safety teddy) General Electric (GE), Intel (INTC) and US Steel (X) have more influence on the overall price structure than the Fed.

The Washington Post’s “Hidden Costs of Medicare Advantage” reports that seniors should beware; Medicare Advantage not only costs the government more but might cost seniors more too. The challenge to healthcare reformers is whether to consider Medicare Advantage an entitlement or an extra cost option for seniors. The opponents of reform are curiously framing Medicare Advantage as an entitlement, while professing opposition to the expansion of entitlement spending.

Let’s examine the pragmatist opponents of reform arguments: 1. Medicare Advantage provides choice, 2. Medicare Advantage improves the quality of care, 3. Medicare Advantage lowers costs for low-income seniors, and 4. raising Medicare Advantage premiums through lower subsidies effectively removes an existing benefit. The opponents don’t discuss the danger seniors face in restrictive provider networks.

Short of Google (GOOG), IPOs don’t get any sexier than A123 Systems (AONE). No one disputes the potential of battery powered cars, massive storage of green energy from solar and wind, and having virtually every appliance from lawnmowers and vacuum cleaners to computers and entertainment cordless. But in the words of the internet, A123 is more eyeballs than monetization.

To be sure they have actual revenue, but they are running a negative gross margin on product sales. In essence the more they sell, the more they lose. And they predict the revenue from their largest customer Black and Decker (BDK) is expected to shrink considerably. No more revenue is expected from Mercedes-Benz (DAI) HighPerformanceEngines (Vodafone McLaren Mercedes Team). That leaves only BAE Systems (BAESY.PK) for growth.

The Washington Post’s “Discrimination by Insurers Likely Even With Reform, Experts Say” subtitled “Economic Pressure Could Give Rise to New Biases Against Prior Conditions” sites many distinguished academics warning of cherry picking continuing under health reform. The professors predict that private insurers will employ a series of creative carrots and sticks to achieve the most favorable risk pool composition within the umbrella of guaranteed issue and no exclusions for preexisting conditions. I will argue that these practices might actually benefit the astute consumer.

Insurers are currently paid between approximately $800 and $2000 per month for Medicare Advantage seniors according to discussions in the recent Senate Finance Committee healthcare markup. Insurers are reimbursed the most for chronically ill seniors, but they cannot turn any senior away. The insurers maintain profitability charging a premium seniors are willing to pay by maximizing reimbursements and minimizing their actuarial risk. Humana (HUM) said during its most recent earnings call that they have to do a better job of identifying seniors in their risk pools that qualify for higher government reimbursements.

The New York Times’ “G.E. Chief Sees India Helping Cut Costs of U.S. Health Care” reports that Jeffrey Immelt predicted that India’s role in reducing US healthcare costs will be significant. The comments were made by General Electric’s (GE) CEO during a news conference related to GE’s healthcare business restructuring in India. He predicted that India’s healthcare industry will grow to $75B by 2012.

Given that GE’s healthcare business is still way too dependent on the medical imaging “big-iron”, it is not surprising that Immelt’s comments focused on outsourcing the interpretation of these images. Creating a cheaper operating infrastructure to support the big-iron is favorable to selling more machines. Obviously, GE wants to do whatever possible to sell more machines and lowering someone else’s revenue will not affect GE’s profits.

Cracks in Canadian Healthcare Poster Child’s Story

Bloomberg’s “Canadian Health Care, Even With Queues, Bests U.S.” reports that “allegations [against the Canadian health insurance system] are wrong by almost every measure, according to research by the Organization for Economic Cooperation and Development and other independent studies published during the past five years.” Canadians live longer and have equal survival rates to the US in major diseases like heart attacks and cancer, at an insured cost per patient that is 47% less.

Liaquat Ahamed’s book “Lords of Finance: The Bankers Who Broke The World” unraveled every misconception I had over the gold standard and inflation. The book traces the central banks of the United States, the United Kingdom, France and Germany from before World War I until the close of World War II. So far I have read the book through the year 1928 and would like to share some thoughts.

The story is told primarily through the eyes of Benjamin Strong (Federal Reserve Bank of NY), Montagu Norman (Bank of England), Emile Moreau (Banque de France) and Hjalmar Schacht (Reichsbank). During the first half of the 20th century European countries had been on and off the gold standard several times and have had severe bouts of both inflation and deflation. Gold stockpiles have been maintained by central banks, government treasuries and large private banks. Currencies have been pegged to gold, other currencies, and even land.

The New York Times’ “Wall Street Pursues Profit in Bundles of Life Insurance” reports that Credit Suisse (CS) and Goldman Sachs (GS) are gearing up for wagers that would even make Sarah Palin’s “Death Panels” cringe. The new game in town is securitizing life settlements on a scale as massive as subprime mortgages to reap the same level of fat fees.

The $26T of life insurance policies is certainly tempting compared to a peak 2005 $941B of Wall Street mortgage securitizations. Mortgage securitizations dropped to $169B year to date and Morgan Stanley (MS) estimates the repackaging of old CDO (read credit challenged) tranches should exceed $30B. The trick once again is to fool or bribe the ratings agencies into granting triple-A status to the life settlement trusts. Moody’s (MCO) has not seen a portfolio that qualifies.

The Strong
The Wall Street Journal’s “Slump Spurs Grab for Markets” reports that strong companies like JP Morgan (JPM), Bed Bath and Beyond (BBBY), and New York Life have used the turbulent market to annihilate their competitors. JP Morgan is stealing cheap deposits from weaker banks, Bed Bath went in for the kill on invalid Linens‘n Things, and New York Life is out selling AIG (AIG), Hartford (HIG) and Lincoln National (LNC) in life insurance and annuities.

All three of the winners cited by the Journal were strong entering the crisis and deserve their outcomes. But do Bank of America (BAC) and Wells Fargo (WFC) now deserve to control nearly half of the mortgage origination market? And does Citicorp (C) still deserve to be the preeminent international transaction banker?

The Sun Sentinel’s “School employees protest possible insurance switch” reports that 150 of Palm Beach County (FL) School District’s 21,000 employees have grave concerns with the pending switch from UnitedHealthcare (UNH) to BlueCross BlueShield of Florida as the administrator for their self-insured plan, Superintendent Art Johnson, said the agreement with the union will save employees approximately $30 per year.

School districts in Florida are countywide, so they represent big business in the context of the state. The district pays 100% of the “premiums” for employees and 60% for an additional 14,000 receiving dependent coverage.

Whether you are a believer in the rational market theory or black swans, you could see that even former SEC Chairman Christopher Cox would have cause to blush at the healthcare marketplace. Cox was the champion non-interferer in charge of enforcing a level playing field for investors large and small.

So the question is can our current healthcare marketplace be modeled by rational market theory, black swans, or neither? Rational market theory is based on current security prices reflecting all available information. Perhaps the only more opaque marketplace than healthcare is derivatives. I’d call it a tie.

Whole Foods Attacks Its Base
Apparently Whole Foods (WFMI) CEO John Mackey has not learned the real political lesson from Karl Rove. Instead, Mackey chose to regurgitate Rove’s false rhetoric on healthcare reform in a long winded editorial in The Wall Street Journal “The Whole Foods Alternative to ObamaCare”. I won’t repeat the details here.

Mackey’s Darwinist vigor to destroy and swallow his competition has lead to Whole Foods' unquestionable success. Entrepreneurs become successful either by feeling invincible or being paranoid. Legend is that Intel (INTC) is the success of the paranoid. When Intel started becoming too fat and happy David (AMD) took a nice size slice out of Goliath. The last few years returned Intel to its roots.

The Wall Street Journal’s “Dealers Scramble to Find Fuel-Efficient Cars” reports potential shortages in the more popular higher mileage vehicles sought by the consumer stampede into the CARS (Car Allowance Rebate System) program. This super-hyped government program is the subject of endless advertisements by all of the domestic manufacturers. It is so hot that even the most demagogue conservative Republicans have had to put their ideology to rest.

The program’s popularity in the industry is rooted in its showroom traffic generation. Dealers can’t sell anything without customers, so any sense of excitement is welcome. And those that don’t qualify can be “bait and switched” with an alternate deal. All the news reels of clunkers being destroyed at the dealerships and contrived “worry” that the program will run out of cash increases consumer anxiety to act now.

Whole Foods (WFMI) emphasized that customers are beginning to recognize its value proposition during its recent Q3 earnings call. Customers that purchased the company’s “investments” in value items had larger baskets at checkout and visited their stores more frequently. At the same time management disagreed with analysts that the stores focused on a wealthier clientele.

Whole Foods claims they target the more highly educated, not necessarily the wealthiest customers. But along the way they ventured from being the basic organic grocer to the gourmet shop. The newer stores required ever higher capital expenditures and carried increasingly more expensive delicacies. Consciously or not, Whole Foods required an ever more high-margin (read wealthy) customer base to feed its growth.

The Wall Street Journal’s “What's Behind High-Frequency Trading” provides a pretty good Q&A on how Goldman Sachs (GS), Citadel and various smaller specialty firms take advantage of advanced peaks at orders, exchange rebates and flash orders that can be withdrawn in a split second. A political furor is starting to emerge from highly leveraged firms front running orders and teasing prices fractionally up at the expense of mutual funds and other large institutional investors.

With firms jockeying for the closest physical proximity to the exchanges data centers, NYSE Euronext (NYX) is building a huge data center in New Jersey to accommodate them. The exchange will be renting space in its own multi-football field size data center to house the computers of high-frequency traders. That’s how critical the speed of light along fiber optic cables is to this form of making money.