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Raymond Chung's  Instablog

Currently seeking new opportunities, and keeping up with the markets by writing articles and trading more frequently around core long-term positions. Former Director of Research at Biondo Investment Advisors, and investment professional at Federated Investors and Sands Capital Management. Also... More
  • Winds of Change: Harbingers of Correction Emerging
    Give credit to the bulls.  For the last six months, most economic indicators and corporate earnings in aggregate have been in their favor.  Economic data has become less and less bad, and many companies have either beaten lowered earnings expectations or achieved trough earnings (at least in the near-term).  For example, the ISM Manufacturing Index has been in an uptrend since bottoming in 4Q 2008, and is now at 52.6.  As far as earnings, it really did not matter what companies reported or guided in 1Q 2009 or 2Q 2009; both positive and negative news were bought based on the widespread belief that the bottom was close.
     
    However, in the last couple weeks, chinks in the armor may be appearing.  Economic numbers are more frequently coming out less than expectations, and reactions to recent earnings and guidance have shown that investors are now willing to sell.  This increase in less than stellar data and investor reactions should be monitored.  If this pattern continues, a tipping point could be approaching.  As we all know, the market does not ring a bell at the top or bottom.  Ultimately, additional information and time will tell.  But for now, the latest observations do suggest that a pause in this tremendous bull move from the March lows could be forthcoming.
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    Tags: ADBE, BBY, BBBY, DRI, FDX, KR, RIMM, SPY, DIA, QQQQ, economy, stock market, earnings
    Oct 01 10:39 am | Link | Comment!
  • Onyx Pharmaceuticals: Nexavar, the Next Avastin or Better?
    Nexavar, approved for kidney and lung cancer, is already a success by most measures.  It should reach blockbuster status, surpassing $1 billion in worldwide annual sales by 2010.  Most companies would be quite pleased to have a drug deliver such results, and Nexavar’s owners, Onyx Pharmaceuticals (ONXX) and Bayer AG, probably feel the same.  However, at this stage in the drug’s life the important question for Onyx and Bayer is, “is Nexavar’s current progress is just the tip of the iceberg?”
     
    One needs only to look at the success of fellow anti-angiogenesis drug, Avastin, with $6 billion in worldwide sales and growing, to recognize Nexavar’s future possibilities.  As more clinical data continues to emerge, the effectiveness and similarities of the two drugs are becoming more apparent.  Some examples:
     
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    Tags: ONXX, Nexavar, Avastin, cancer, Bayer AG, biotech
    Sep 22 09:41 am | Link | Comment!
  • Plenty of Natural Gas: E&P Companies Keep Producing
    The EIA reported that U.S. gas storage on September 4, 2009 stood at 3.4 trillion cubic feet, approximately 17% higher than year-ago levels and 17% higher than the five-year average.  It looks like E&P companies are not doing much to change the excess inventory in natural gas and are continuing their production levels from Q2.  E&P companies are much more focused on delivering production growth to their shareholders and are not letting high storage levels get in the way of their business.  Below is a table of Q2 natural gas production results for some of the top U.S. producers.



    Companies Mentioned:  XTO, BP, APC, CHK, DVN, COP, ECA, CVX, XOM, EOG, SWN.


    This action by E&P companies as a whole could be shortsighted.  If production continues to increase without a proportionate increase in demand, gas E&P companies may be forced to curtail production.  Besides the threat of further price declines, which could render some exploration and production activities uneconomical, the biggest restraint could actually be diminished storage capacity (estimated at about 4.0 trillion cubic feet).  As EOG Resources CEO Mark Papa mentioned after the company reported Q2 earnings, “…if gas storage fills across the nation, pipeline pressure could go up, increasing pressure back at gas wells.  That could result in automated curtailment pretty much across the board…Then, production would just drop for everybody."

    While there have been rumors of increasing the storage capacity, that should hardly be the solution for a commodity that is severely oversupplied.  The U.S. should not be encouraging more production by adding more storage.  Furthermore, one could argue that these storage levels are not a true reflection of available inventory, as they do not take into account the gas located in the immeasurable number of shut-in wells ready to be opened with any sign of inventory reduction.  For the sake of E&P companies, let’s hope that the winter is cold and that industrial production picks up significantly.  Otherwise, shareholders might be disappointed with lower future production growth.


    Disclosure:  In the next few days, may buy puts on a company mentioned above.
    Tags: XTO, BP, APC, CHK, DVN, COP, ECA, CVX, XOM, EOG, SWN, natural gas, exploration and production
    Sep 10 02:47 pm | Link | Comment!
  • Onyx Pharmaceuticals Has Good Reasons For Raising Capital, Investors Overly Concerned
    Last Wednesday Onyx Pharmaceuticals (ONXX) announced that it was going to raise additional financing by selling as much as 4.6 million shares and $230mm in convertible notes.  The euphoria from the company’s recent successful Phase 2 breast cancer results were quickly forgotten, as the stock plunged more than 20 percent in two days.  Investors were taken aback as why a company with more than $450 million in cash would need an additional $370 million.  Visions of a buyout by Bayer AG, its 50/50 Nexavar (approved for kidney and liver cancer) collaborator were replaced with images of a potentially large and dilutive acquisition.  It didn’t matter that earnings were much better than expected, especially since previous investor criticism has focused on the company not dropping enough sales down to the bottom line.

    Instead of condemning Onyx about how nothing good can possibly happen from having more cash one should think about the future challenges Onyx may face.  In fact, it could be argued that managing the success of Nexavar could be Onyx’s largest quandary.  Understandably, investors want to ride the growth of Nexavar for as long as they can, but management cannot do that.  Biotech and pharmaceutical companies need to think longer term than shareholders, given that the average drug development timeline is 10 years.  Such companies also probably prefer steady growth rather than quick short-term upward spurts.  If cynical investors took the view of management they might understand why Onyx’s recent capital raise is warranted.  Here are a few possible reasons:
    Bayer is an Unreliable Partner

    In contrast to Onyx, Nexavar contributes very little to Bayer’s financials.  Nexavar sales represent less than 2 percent of overall Bayer sales.  Given the congruent 50/50 split in profits Bayer is probably even less motivated to put in the 110 percent effort necessary to bring Nexavar to international stardom in a timely fashion.  For the last few quarters Onyx has attributed slow international uptake of Nexavar for liver cancer due to commercialization, marketing and reimbursement issues.  While part of this may be true given any new treatment, much of the international responsibilities actually lie with Bayer.  Let’s also benchmark Bayer’s progress with the fact that liver cancer is more predominant overseas.  Moreover, most liver patients are identified in the advanced stages, thus these patients have few therapeutic choices and typically live less than a year.  It's hard to believe that demand for Nexavar would not be high.  However, Bayer rather than taking full advantage of having the wind at their backs would rather swim against the tide.  Bayer actually seems more interested in developing a competing compound to Nexavar (Sorafenib).  On May 15, 2009 Onyx filed a suit against Bayer for trying to bypass its collaboration agreement and seize for itself a compound discovered jointly, Fluoro- Sorafenib.  As the suit states and illustrates:
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    Tags: ONXX, GILD, PFE, Bayer ag, Nexavar, liver cancer, Genentech, Avastin, kidney cancer
    Aug 12 06:29 pm | Link | Comment!
  • Housing Inventory Still High – Are There Enough Buyers and Savers?
    In order to tackle the excess housing situation in America the “incremental buyer” must be able to afford a home.  Who is the incremental buyer?  It is the person who currently does not own a house, as a current homeowner who simply sells his/her home to buy another does not remove inventory.  He/she is not a net buyer, and neither adds nor decreases the housing inventory.  Therefore, the important question to ask is, “Who is the likely incremental buyer (outside of second home buyers/investors since banks are currently averse to multiple mortgages)?”
     
    In the US 75.6 million (June 2009 U.S. Census) house owners out of the 113.6 million total households (U.S. Census 2009 estimate) own at least one home.  According to the IRS, the 2008 median gross income is $61,500, and of the 113.6 million total households, the 56.8 millionth one possesses this median income.  If we assume that most households above the median income own a home, then the majority of incremental buyers lie in the lower half of household income.  Now that the potential incremental buyer has been identified, it must be determined whether this buyer/group can afford to buy a home.
     
    Lower interest rates are not enough and only represent one factor in housing affordability. Mortgage applications have been dominated by refinancings.  Where are the buyers?  Does the U.S. have enough qualified buyers to meet current, supposedly strict lending requirements, such as 20 percent down?  This leads us to the debate on whether a high savings rate, such as 10 percent, might be reached.  And if it is reached, is it sustainable?  Will the average American consumer quickly go back to its most recent spending pattern, or will a new savings culture emerge?  However, for those wishing to make a large purchase (for many, that’s a house), these households may not have a choice.
     
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    Tags: XHB, SPY, DIA, housing inventory, new and existing home sales, housing affordability, savings rate, consumer
    Aug 04 10:59 am | Link | Comment!
  • It’s Too Early to Worry about Inflation

    Besides the price action in products available for hedging/investment/speculation purposes (Ex: oil has oil futures), there are very few signs that inflation should be our main concern. Why bother with the CPI, GDP Deflator or PPI?  The daily life of an average American could not be a better indicator.  Every few weeks Wal-Mart (WMT) has more “Rollbacks”.  If I don’t get to my local Rite Aid (RAD) a few days after the weekly circular, the core staple items on sale are usually sold out.

    Deflation is alive and well.  Given the significant loss of wealth for most households, this makes sense.  Some examples experienced/observed over the last several months are listed below.  Feel free to add your own in the comments section.

    Consumer Discretionary/Staples

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    Tags: WMT, RAD, MCD, TJX, DLTR, COH, JWN, SKS, SBUX, WYNN, MGM, TM, HMC, PCLN, XOM, HD, AAPL, GRMN, SNE, DELL, RIMM, inflation, deflation, consumer
    Jul 13 01:44 pm | Link | Comment!
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