Two days ago, I was contacted by my brokerage house with an offer to receive interest for lending the above biotech stocks to them from my account in return for varying rates of interest based on their market value. When asked why they wanted them, I was told they would be lent to another brokerage house to “cover” positions and that most of that interest would be given to me with a small amount of “vig” for my brokerage house. When asked if it was to be mainly used to cover “short sales” I was told it was, along with possibly “other things” (which I assumed meant that it was beyond my comprehension).
Now I am the first to admit that I am a dinosaur when it comes to investing, an old fashioned guy, who purchased one or two shares of AT&T and Phelps Dodge back in the mid 1950’s with money from cutting grass, delivering newspapers, etc, and was proud to “own a piece of great companies”. I know that this is not the contemporary approach to wealth building wherein one, through this time of instant internet information, may constantly attempt to determine if the company they have invested in, and depending on current market direction, should be held, or sold. I have never shorted a stock and suspect that I will go to my grave before I do. I believe that unless you know how to play that game, you might have a quick lesson, as my mother use to say, “in adult education”, sometimes a very expensive lesson, and thus have avoided this potentially profitable area. Like some individual investors, I generally invest in companies I believe in, companies that are “best of breed” and I generally am in for the long haul. In this time of instant trading to make a quick buck, or in the case of a short seller, who believes that a particular company is over priced due to their research or whatever, I say each “to their own”. In the later case, they may help investors keeping overpriced to realistic values.
I feel comfortable investing in the biotech sector due to my education and past research in the biochemistry/cancer research areas, but know it to fraught with sinkholes that can gobble up you money. The War Against Cancer had been going on long before I was a research assistant at the Sloan Kettering Institute for Cancer Research in Rye, NY, from 1968-1970, and also later after doing postdoctoral research at a cancer research unit for six years. After all these years, the fight is still ongoing and a long way to go before death from all cancers can be halted. In the future, hopefully, cancer may be a disease you are diagnosed with but do not die from.
Over the years, similar to most investors in the biotech area, I have invested in companies that according to their prospectus or on their web site, appear like they were working on realistic drugs or biologics to attack cancer, immunologically caused diseases, etc., but saw them “implode, crater, or their value approach “nada”. Some of these companies may have been less than honest with their research results, or inflated their realistic expectations regarding their experimental compounds or therapies. The majority likely failed, or stagnated, not because of any dishonesty on their part, but because the science behind what they were doing was “in the future” and they took their best shot but missed. Although I believe the probability for success in the biotech arena is currently ever increasing due to the ever increasing knowledge driving drug or therapy development, failure in this sector will likely still be part of investing in this area. In large part, this is most probably true, because treatment of a diverse human population, as opposed to laboratory grown cell cultures or rodents with the identical genetics and kept under identical circumstances, are greatly different in age, genetics and other factors.
I increased my investing in biotech sector and got rid of the mutual funds after the meltdown of the markets last fall and have recouped most of my 50% drop, due in large part to some huge gains in mainly biotech stocks. Maybe I am deluding myself into thinking that this increase is due to good stock picking, as opposed to “the rising tide floats all ships”. Most of us, except those who heeded warnings by a few prognosticators last summer, or were in safer investments other than common stocks, had a painful education that markets go down, as well as up. “It was beyond my sphere of knowledge”, to paraphrase the previous FED Chairman. Many, like myself, believe he should have seen the storm clouds building and warned the public as he routinely did during the tech bubble after 2000.
During those gut wrenching times last year, there was talk on the TV, or articles in the newsprint, that addressed the controversy of the short sellers “ganging up on” specific stocks and driving the price down further than they might have normally fallen due to natural market forces. There was talk of the SEC enforcing the “uptick rule”, and if I recall correctly, it was enforced ,or reinstated, for a brief period until the markets stabilized. In any event, there were discussions on how the “shorts” were manipulating certain stocks. No one likes to be “ganged up on”, physically or economically, especially when it causes your 401K, IRA or private account to crash, by collusion, even if it is “legal”. The mostly unsophisticated individual investor, like myself, relative to the pros, felt burned and abused by that possibility. I suspect that a number of common investors felt a great disappointment in not seeing the signs, clues, or underlying fundamentals of the economic tsunami that was about to devastate their accounts. I certainly did not. People were justifiably “ticked off” at the ad nauseam stream of accounts daily portrayed in the media of excessive greed by “privileged” CEOs and many in Wall Street, as well as inaction by the SEC, FED. Their own lack of investor sophistication likely resulted in guilt for having lost so much of their hard earned and saved money. Talk of the “shorts” manipulating the market just piled on their frustration.
I may be way off base now, but I suspect the above companies are to be targeted by the short sellers. I was offered 20% --->2.5% interest for loaning the above issues. The order of attack if it relates to the percentage of interest offered is: AGEN, CVM, ONTY, SQNM, NVAX, ONCY, XOMA.
All of these companies are small and depend on capital markets to fund their continued research, clinical trials, and their operation, or through issuance of additional stock. Concerted, “ganging up on”, by short sellers, or somehow manipulating the price of the stock to make it fall unnaturally, is at least to me, pretty slimy when considering that all of the above companies are attempting to alleviate some serious ills of patients. If these companies succeed in their quest to develop a drug, a valuable test, or treatment that can medically benefit millions of patients, save humteen dollars for our beleaguered healthcare system, why would you gang up on and target them (except that you can to make money). Why not play your greedy game on a larger target like XOM, CAT, IBM or some large company that can withstand your assault if you are so good with your research.
Maybe I am totally off base with my suspicions, and sincerely hope I am, since some of the above biotech stocks, in my opinion, have a very good chance to positively alter medicine and patients lives. For example, ONCY yesterday announced another Phase II clinical trial of treating metastatic melanoma, a devastating disease which has eluded sustained treatment. This open trial is based on their success of a smaller Phase I trial and findings of research that was additionally announced yesterday dealing with melanoma.
In conclusion, I am suspicious when a large brokerage house looks to borrow fully paid stock at a high monthly rate of interest from it’s clients. Again, I hope that I am wrong, but something seem “fishy” to me, even if it is “legal” For those who own the above mentioned biotechs, you might consider this supposition if these stocks suddenly start to crater or become very volatile
I have been LONG on the above biotech stocks.