Wednesday, February 7, 2007

Market Timing

Market TimingSocialTwist Tell-a-Friend
Fari Hamzei
February 7, 2007

Techs continue to improve...thanks to CSCO and AKAM........Defense stocks are on a tear......thanks to $700B proposed DoD budget....we like NOC, RTN, BA and LMT here;


Video Part 1


Video Part 2


Video Part 3


But our Timer Chart says we are in for a small pause here. McClellan Oscillators don't lie !!

Video Part 4

BioMarin Pharmaceuticals (BMRN)

BioMarin Pharmaceuticals (BMRN)SocialTwist Tell-a-Friend
David Miller
February 7, 2007

At the end of this month, BioMarin Pharmaceuticals (BMRN) will report data from a pilot study on uncontrolled hypertension. BioMarin typically seeks to develop drugs for orphan indications, so this is their first shot at a blockbuster indication.

The drug is nicknamed BH4, and the so-called CONTROL study enrolled 116 patients whose hypertension (high blood pressure) was not controlled by other drugs. What is not commonly known is the CONTROL trial is a repeat of a successful smaller study. While not guaranteeing success, it does lead us to be hopeful about the outcome of the CONTROL trial.

BioMarin has big plans for BH4 in 2007. They will launch a proof of concept trial to treat sickle-cell anemia. A trial in pulmonary arterial hypertension should also be underway soon. Data from a 210-patient trial to treat peripheral arterial disease (PAD) should arrive in the first half of 2008. A win in that trial would be very important, because PAD is where good cardiac drugs go to die – it’s a damn tough indication to beat. A good drug there would easily sell over a billion per year in the US.

The company released data last year on a successful Phase III study of the orphan drug Phenoptin in people with the PKU enzymatic deficiency. Last month, they released positive data from a label expansion study in the same disease. This is an orphan indication, but if the drug is approved by the FDA with a preferential label Phenoptin could be bigger than most people expect. They’ll make the filing next quarter in the US and in Q3-2007 in the EU. They are partnered with Serono (Merck Serono KGaA) outside the US. BioMarin has 100% of US rights and will get $15M cash when they file in the EU and $30M more if Phenoptin is approved in the EU.

BioMarin markets the orphan drug Aldurazyme with Genzyme (GENZ) in a 50/50 joint venture. The company also markets Naglazyme for patients with the orphan disease MPS-IV. Alan Leong, who covers BioMarin for us, believes sales of Phenoptin (if approved), Aldurazyme, and Naglazyme could push the company to profitability in late 2008.

We’ve been covering BioMarin since 2004 and made them our top pick in our August 2006 Anniversary Issue. If you glance at the chart over that period, you’ll see it’s been a good performer for us. The stock ran into a headwind in January when the company cleaned up its remaining convertible debt by issuing 8 million shares. That supply seems to have worked its way through the markets, however.

Investing ahead of pivotal results is always “exciting” because of the prospect of big downside (40-60%) surprises. If the CONTROL trial is clearly positive, we doubt BioMarin will exit 2007 as an independent company. Good cardiovascular drugs are hard to find and the company’s orphan programs are profitable.

One or more members of BSR’s research team own shares of BioMarin. Check out the Disclosures pages of our website for more information.

Frank Barbera at Large (Part I of II)

Frank Barbera at Large (Part I of II)SocialTwist Tell-a-Friend
February 7, 2007

Fari: What are some of the key drivers shaping your view of the capital markets as we move ahead in the early months of 2007 ?

Frank: I believe the geo-political risk in the Middle East is definitely paramount in my view, as the situation in Iraq has deteriorated into a sectarian civil war, between Sunni’s and Shiites, and could potentially be threatening a larger regional conflict. In this vein, I would not be surprised to see the US and Israel lash out at Iran, or vice-versa, at some point in 2007. In my view, an expanded conflict with Iran would threaten the security of the worlds Oil supply through the very narrow Strait of Hormuz. This type of conflict may be highly problematic, in that the gulf region contains much of the world’s energy infrastructure, and Iran is well armed with ballistic missiles that are within striking reach of that infrastructure.


Fari: What evidence do you see that points you in this direction of heightened risk for expanding war?

Frank: Well, the US recently appointed an Admiral, Admiral William Fallon, as head of CENTCOM, the command center for the Middle East. It is a highly unusual move to appoint an Admiral to oversee direction of a war, that at present is defined by two land wars, Iraq and Afghanistan. Normally, a General from the Army would be in charge where ground wars are concerned, yet an Admiral was just appointed. Some believe that this hints Iran could be the next combatant and where Iran is concerned, a naval conflict would definitely be square one. For the US, in order to keep the troops in the Iraq re-supplied, control over the Persian Gulf is essential, and that is the domain of the Navy. The US has also sent minesweepers, Patriot Missile batteries (anti-missile – missiles) and more surface ships to the region which now host two carrier battlegroups and an anti-submarine attack helicopter carrier, the USS Boxer. These types of hardware hint at larger problems ahead, -- and I might add, I hope I am wrong, perhaps this is just a bluff to intimidate Iran, but the parts and pieces, are imposing.


Fari: So how would this affect the markets ?

Frank: Well, I think any further tension in the Persian Gulf could definitely force Oil prices higher, and at the very least set a floor in place between $55 and $60. In my view, that is bullish for Oil Stocks and Oil Service companies, most of which are really priced right now for $40 Oil. Yes, it is true that Energy Stocks are reporting sequentially lower earnings this year as a result of the rather savage sell off seen late last year. That said, I think Energy stocks are quite attractive, especially the drillers which have long term contracts locking in, in many cases, much higher day rates. Mind you, I would be careful over the next week or two with a lot of these stocks as we are smack in the middle of earnings announcement season, and in some cases, we could see some significant dips. But overall, I would be looking to be a buyer on weakness. I also think that near term, Crude Oil could pull back toward $55 from current levels near $60 and that could pressure individual names. In my view, where Schlumberger (SLB), or a TransOcean (RIG), or a Global Santa Fe (GSF) is involved, weakness in the near term would be a gift.


Editor's Note: Part II will be published on Friday.

Fed, Bonds and Gold

Fed, Bonds and GoldSocialTwist Tell-a-Friend
Sally Limantour
February 7, 2007

Treasury Bonds:

“Fed Ease Unlikely Until 2008,” said Richard Berner, from Morgan Stanley. So now we have gone from an expected easing in early 2007, to easing late in the year to a possible easing in 2008. The reason: “We think future inflation risks are slightly higher than a month ago.”
(www.morganstanley.com/views/gef/archive/2007/20070205-Mon.html#anchor4338)

The Fed speakers were out in force yesterday with San Francisco Fed President Janet Yellen saying “inflation is a little higher than I would like it to be; I would like inflation to come down.” The bond market had a short covering rally and stops above the 110 15/32 area were triggered. Strong demand for the 3 year and the “slowing” rate of growth predictions by a number of Wall Street economists contributed to this. Certainly $60 oil is also on everyone’s radar.

Bottom-line: Resistance above the 111-00 will keep the bears in control.

GOLD:

The media is focused on the gold rally inspired by the energy price inflation theme. I am more interested in the fact that gold sales by legacy central banks of Europe are low. In order to meet the Washington Agreement’s annual gold sales total they need to sell 9.6 tonnes each and every week. We are now in the 7th consecutive week that the legacy central banks have sold less than 3 tonnes of gold. This is bullish and an important item to monitor.

In other news:

Goldman sells top commodities index. GS has agreed to sell its GSCI commodity index to Standard & Poor’s for an undisclosed amount, according to the FT today. Note this: “the move will give the S&P a potentially powerful influence on commodity markets as any changes to the index composition can have wide ramifications for underlying commodity prices. The GSCI, the world’s leading commodity index, has about $60 bn tracking it. Most of these funds are managed by GS, which is the largest commodities trader among investment banks.”

Regarding the grain and soybean market there is much talk of expected planting and how much will be shifted to corn, given the high prices. While bullish on this sector, I have stepped to the sidelines as I am seeing a dis-connect between the futures and the cash market.

Tuesday, February 6, 2007

SP500, Grains, Cotton and Base Metals

SP500, Grains, Cotton and Base MetalsSocialTwist Tell-a-Friend
Sally Limantour
February 6, 2007

In stock land we have little data this week, but keep your eye on budget headlines coming from Washington. The bears are gun she and rightfully so. That said, as mentioned last Friday, my short-term proprietary model is signaling a sell for early this week. This does not mean a top, just a short tem correction and with that in mind, I will look to short ESH 1458-1460 with stops over 1464.

The grain markets and cotton, my two favorite sectors for 2007 continue to act well. We have corn (March) trading over $4.00 a bushel and new crop beans (November) trading over $7.75 a bushel. Corn did fill its gap from 1/12/07 and long positions were re-established last Friday in the $3.95 area. With the $4.00 level for new crop corn, farmers are going to plant more corn this spring which will take away acreage from soybeans. The new crop beans are outperforming due to this and with the bean to corn ratio at 2.1 this creates a huge incentive for the farmers to plant corn.

Cotton has been sleeping, but woke up yesterday to close up +1.32%. I am still holding long positions from December (52.50) and with talk of reduced acreage (13.2 vs. 15.2 year ago) we may see the fund buying especially if we start to see prices breakout above 56.00.

There were reports last Friday that the large hedge fund, Red Kite (a $1 bn metals-trading fund) had hit trouble and copper prices fell 4.8%. Nickel and zinc were also down in London and perhaps that could explain the $19.00 sell off in gold (from Thurs. high to Friday’s low). It was a buying opportunity in silver and gold and I continue to think the precious metals will outperform.

Red Kite has brought out some speculation concerning the base metals. One report put the London firm down as much as 20 per cent in the first 3 weeks of January, leading to forced liquidation of copper, zinc and other base metals. In an attempt to prevent a stampede for the door among their investors, the fund requested approval for an amendment to extend 45 days from 15 the notice required for investors to withdraw their money. As the FT reports, “that smacks of the proverbial horse having already bolted.”

This has prompted the question on the role of commodities funds in driving up prices – and how that picture might unravel. Questions from the Markets Risk blog are, “What happens when the hedge funds who bid up prices in global assets start to get investor redemptions because of poor performance? What happens when the leverage unwinds and managers with little experience managing systemic or core market risks are faced with “improbable” risks?”

Answer: massive liquidations. It is estimated that more than 500 hedge funds specializing in commodities have started in the last 2-3 years. These funds represent a large percentage of the trading volume of base metals financial derivatives and it makes you wonder just how much of the 146% rise in copper prices from late 2005 to May 2006 was due to physical demand (China?) and how much was due to leveraged hedge fund derivative speculation. Perhaps a bit of both.

Remember to use stops!

Monday, February 5, 2007

The Carry Trade

The Carry TradeSocialTwist Tell-a-Friend
Sally Limantour
February 4, 2007

The yen was in the spotlight last week and volatility increased as speculation about the currency’s fragility would be a topic of concern with the G7 meeting. Hank Paulsen, the US Treasury Secretary added fuel to the fire when he told the US Senate last Wednesday that he was watching the Japanese currency “very, very closely.” The yen rallied right after these remarks. On Thursday, he came out and said that he did not think the yen was at an artificial level or had been influenced by political pressures which caused the yen to sell off. Political volatility is a dangerous game.

Japanese interest rates are at rock bottom and while concerns of deflation are being talked down, there does not seem to be a compelling reason for the BOJ to raise rates. The perception that rates and the yen will stay low is fueling the carry trade where any hedge fund can borrow in yen, invest in something with a higher yield, apply some leverage and achieve returns of 20 per cent or more. How long this game can go on is an important question as the unwinding of this carry trade could affect many different markets when it occurs.

Different analysts try to estimate the total size of the carry trade, but it seems a daunting task. Some economists guess at about $35 billion, while pi Economics (www.pieconomics.com), in their research report, The Credit Bubble and the Yen, thinks it is more like $1,000 billion. The yen has thus been labeled the “ATM of the global credit world.”

It is not just hedge funds, but investment banks and other institutions that fund their deals with ultra cheap yen. Most of them do not seem worried as they are betting that Japan’s economic recovery will be slow, thereby keeping the yen weak and the carry trade alive and well. There are also too many interest groups that oppose a stronger yen.

Market volatility has been low making it cheap to use derivatives to insure against the risk of a rising yen. As a result, many hedge funds are buying protection against a stronger yen while playing the carry trade game. In a recent letter to the FT, Vineer Bhanasali, Executive Vice President of Pimco recently commented on this, “low volatility and high carry pairs -is due to “invisible hand” collusion between sellers of exchange rate volatility via options (everyone is selling options as a means to generate income in their portfolios, including many of the central banks) and the authorities, which are setting transparent, low inflation rate policies. The two continue to feed each other. Nothing short of a confidence can shake this fearful yet stable equilibrium. Waiting for that crisis, unfortunately is unprofitable and, given the cheapness of protection against the tail risks, not the course of action you should expect most profit-driven speculators to follow.”

For now, the general consensus is for the yen to stay weak as UBS, AG and RBC Capital Markets both reduced their estimates for the yen. There is, however, a dissenting voice from none other than our irreverent and insightful Marc Faber of the famed, Doom, Gloom and Boom report. In the recent Barron’s Round Table he shared a different take on it. Marc is betting on volatility this year and would play it this way:

“Consider the carry trade – investors buying in yen and investing in higher-yielding assets around the world. They’re not buying dividend-paying assets, but assets like the Indian stock market. The yen carry trade will unwind when, suddenly, these risky assets begin to perform badly relative to cash rates in Japan or the Japanese stock market. Then leverage will be reduced and people will reinvest in yen. When the reversal occurs, the yen will soar against, say, the dollar. My macro pick for 2007 is to buy the yen long or long-dated calls on yen. In the long run, it is a bad policy to borrow in a low-yielding currency and invest in a high-yielding currency. It works for one year, two years, three years, and suddenly it massively doesn’t work.”

As traders we have to understand both sides of the argument and, in addition, we must look at the charts, the Commitment of Traders report and consider the seasonal tendencies. Last week the yen took out the previous week’s high and low and closed higher for the week. In making that low the yen went below the lows going back to December of 2005, but quickly rejected it. I would consider this a critical area as we made a low last week of 82.38, taking out the 2005 low of 82.52. Back in 2003, we had a double bottom at 82.20 and then rallied sharply to 97.00 into 2004. So, this 82.20 - 82.50 area is critical support and taking it out could see prices break quickly to the 80.00 level.

The Commitment of Traders report (COT) reveals a market that is not overly short. On the CME the net short yen positions still represent only 38 per cent of all yen contracts. I would want to see the COT with a larger share of short positions to begin thinking about fading the short side. Also, the seasonal tendency for the yen is to sell off during this time of year. Over the last 10 years, the yen has consistently lost anywhere from 2.15% to 3.17% between February 3rd through April 12th. If we follow the seasonal pattern this year we could see the yen trade down and test the 80.00 level. Perhaps, then we could find some attractive long-dated calls on the yen.

We have to keep in mind that anything can happen and realize too that the Japanese investor’s appetite for overseas assets continues to be insatiable which adds to the yens weakness. Despite big outflows, 93 per cent of Japanese household wealth is still yen-denominated. All of this plays a role in the value of the yen, but as we all know trends do not continue forever and things can change rather quickly. Like Hank Paulsen, I will be watching this very, very closely both for direction and volatility - for volatility is the enemy of all carry strategies.

Sunday, February 4, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers
February 4, 2007

Overall, the economy seems likely to expand at a moderate pace over coming quarters… some tentative signs of stabilization have appeared in the housing market… readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time… however, the high level of resource utilization has the potential to sustain inflation pressures." These were the Fed’s comments. Last week, a 3.5% GDP growth rate was much stronger than the 2% recorded in the third quarter, and it handily beat the 3% expected by economists. The jobs number on Friday was in line and average hourly earnings increased by less than expected. These economic highlights pushed the Dow Industrial and Dow Transport averages to new historic highs. Monday, the ISM is released and it is the biggest number in a “light” week. On the earnings front, the news was good last week and cyclical stocks rallied on strong numbers. New earnings releases are starting to tail off and here are a few highlights for next week: HUM, ISE, DVN, AET, BRCM, WLT, and PNRA. From a technical standpoint, the SPY made a new multi-year high and it is grinding higher. Tech stocks are not participating, but that can change quickly. A strong economy and solid earnings will keep a bid to this market. It may not run higher, but at very least, it will maintain this level until something changes.



GO CHICAGO BEARS!

Crude Oil

Crude OilSocialTwist Tell-a-Friend
Sally Limantour
January 28, 2007

The energy markets had fresh news on all fronts with weekly prices closing higher for the first time since mid December. If you are trading energy you have to keep tabs on the weather, OPEC, MEND (Nigeria), Iraq, Iran, Venezuela, Mexico, stocks/usage and alternative energy news. It is a full time job!

President Bush’s State of the Union address last week called for, “twenty in ten” where he proposed cutting US gasoline demand by 20% in 10 years with plans to switch to alternative fuels by 15% and another 5% to be saved by increasing fuel-economy standards. He also announced a goal of using 35 billion gallons per year of alternative fuel by 2017. This is 7 times the current level and about 5 times the current Renewable Fuel Standard of 7.5 billion gallons by 2012. This is an extremely ambitious goal as there just isn’t enough US farmland in the US to produce that much corn.

The January reports from the US DOE/EIA and the monthly OPEC report showed demand growth forecasts were basically unchanged. There were, however, downward revisions in the non-OPEC supply forecast by the IEA which were cut by 300k/b in 2007. Talk of China building strategic oil reserves was an added bullish demand factor and it is now estimated that the US and China will account for over half of the world’s consumption growth in 2007.

This coupled with the colder weather patterns and violence in Nigeria all helped to prop up prices of crude oil after it briefly broke the $50.00 level. The sell off in crude oil from the highs of last August has occurred in two waves. The first wave occurred between August and late September as the market was working off the potential hurricane premium and it was exhibiting lower geopolitical premium. The second sell off happened during December through January and this was due to the warm weather and the rebalancing of the commodity index in January. What is next for crude oil? It seems that with speculation of a US military strike against Iran or a potential oil embargo in the air that perhaps crude oil has seen its low for now. The push to fill the Strategic Petroleum Reserve with initial purchases of 11 million barrels is also supportive. I am currently watching the crude oil from the long side. If we can hold above 52.50 and build support above $54 for a while the market could attempt a mildly bullish stance. Perhaps, at least this would silence those calling for $30 oil.

There is an interesting relationship with the CRB and energy. The crude oil sell off from the highs in August has caused the CRB to break important support levels. As a result many have claimed the commodity bull market is over. A closer look however shows that there has been a radical revision in the CRB index since July 2006 which has skewed the overall makeup of the index. This 10th revision now has oil making up 33% of the index and this has huge implications for those watching the CRB. I urge everyone to read the excellent piece by Adam Hamilton at (www.zealllc.com) titled, CRB Dominated by Oil, for a complete understanding of this change.

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan
January 30, 2007

The index markets continued to trade on a dollar flow rotational basis as large caps were weighed down for the second session in a row. Meanwhile, small caps continued to catch a strong bid that began around mid-session on Friday. The Russell 2000 --- notably the only index of the five I follow not to make a new trading high during the past several weeks --- found continued strength as players seem to be rotating money back into small caps.

The session was marked by light volume and moderate trading ranges as players anticipate what is in store for the remainder of the week. On that front, today will bring Consumer Confidence expected at 110. In addition, MSFT released Vista and INTC announced a new chip yesterday. Yet, the indices remain a bit sluggish ahead of the FOMC meeting and earnings from GOOG on Wednesday. Furthermore, the overhang of Friday’s employment report continues to leave the market with overhead supply in the near term.

I have enclosed a rather sobering look at the complete meltdown in volatility across the index board. The chart captures the Russell 2k, SPX, NDX, DJIA and Midcap 400 with their respective 22day standard deviation readings, the 200 day MA of that 22 day STDEV reading and the 10day standard deviation readings. It is interesting to note that only the NDX is trading near its 200 day MA of the 22 period reading, the other indices remain around the -50% level from their respective MA levels. Simply put, this is telling me that something is bound to change in terms of intraday trading ranges, the only question is when?



Market Sentiment Alerts

Market Sentiment AlertsSocialTwist Tell-a-Friend
Fari Hamzei

January 30th, 2007

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