Pink slips at the FDA will equate to red ink for biotech investors

Tweet Pink slips at the FDA will equate to red ink for biotech investors

David Miller

Andy von Eschenbach, FDA Commissioner, says he’ll have to issue 2,000 60-day pink slips at the FDA if Congress and the President don’t get the PDUFA IV bill passed by Friday. We think the chance that they will is good, but the early Presidential election season could very well create some unexpected events. There are more than a few folks who would like to hold this bill up for political gain.

If the pink slips go out, we doubt staffers will start running for the exits right away. The growing trend of the FDA asking for delays will increase immediately, however, as managers start changing existing review and especially meeting schedules.

One could argue some decisions might come early, but we think any such occurrences will be rare. The FDA already considers itself understaffed. Bureaucrats, in our experience, don’t work harder in the face of crises like this. They tend to want to punish those they regulate by delaying even more.

We’ll more than likely see additional delays. The silent delays will be in meetings, time to obtain SPAs, etc. The more public delays will be similar to what ZymoGenetics (ZGEN) recently experienced – 90 days here, a 2-month Class One response turning into a 6-month Class Two response there, etc.






As timelines slip, biotech valuations go down. Significant delays will start damaging biotech investor portfolios.

If the PDUFA IV legislation is tied up for quite some time – say towards Halloween no end in sight – then things will get frightening. The pharma, biotech, and financial communities will pirate the pink-slipped FDA staffers. Once Congress finally gets around to passing the legislation, Dr. von Eschenbach won’t have anyone to hire back. He’s already said the FDA is understaffed.

Even if he replaces people, the loss of institutional knowledge will be significant. Guidance to companies will shift as new people provide new opinions. Delays in regulatory decisions will abound as new review teams have to start from square one in reviewing the data.

Again, I don’t think we’ll get that far as Congress and the President know what’s at stake here. But keep it on your radar just the same.

HOTS Weekly Options Commentary

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Peter Stolcers

Let me start by welcoming many new subscribers this week. I live for set-ups like the week ahead and the opportunities are lining up. I’m glad to have you onboard!

This is the calm before the storm. Last week the market rallied on expectations that the Fed will lower rates. The debt market has priced in a 70% probability of a .25% rate cut and the 30% probability of a .50% rate cut. The dismal Unemployment Report dramatically increased rate cut forecasts.

The U.S. dollar hit new 30-year lows against the Canadian dollar and against the Euro this week. We have a huge trade imbalance and a weak dollar forces us to pay more for the goods we import. Translation: a weak dollar is inflationary. Oil has just hit an all-time high. Last week, TSN said that profit margins are being hurt by higher food costs. I've even heard that Italians are boycotting pasta because wheat prices have forced it up 25%. There are countless examples of inflation (tuition, health care, local taxes) that don’t show up in the Fed’s numbers. Tuesday, a “hot” PPI number could add to the excitement.

I believe the Fed will reluctantly lower interest rates by .25% next week. They will lace their rhetoric with inflationary comments to curb future rate cut expectations. The market will have an initial negative reaction.





The earnings releases by LEH, GS and BSC will be much more important. To a degree, the Fed’s actions are priced in. However, no one really knows the earnings impact from the sub-prime/credit crunch debacle. Historically, LEH has made a 2% move after releasing its earnings. The option implied volatilities are pricing in an 8% move in either direction. Lehman releases before the open Tuesday while Goldman Sachs and Bear Stearns will be releasing earnings Thursday, after the Fed's decision. FDX also announces this week and transportation activity measures economic strength. GIS and CAG will shed light on food costs.

Earnings and the Fed’s actions/statements will determine the market's direction for the next month. Quadruple witching will throw gasoline on the fire, accelerating the move. All you can do in these situations is to have your stocks lined up. We will trade relative strength and weakness in a balanced manner.

Timer Digest Market Commentary

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Fari Hamzei

Once you study our Timer and Vol Index Charts, two issues are worth noting:

First our Timer Chart shows (mentioned here last Friday) that we are short-term overbought and due for a pause -- which BLS delivered today with the first negative NFP data in 4 years (and a massive revision to July NFP data).


Secondly, our Vol Indices chart sets the volatility retest targets both in shape and intensity (when overlaid with Sigma Channels).



Given that the seasonality data calls for September being a negative month, dollar being at 15-year low and CFC announcing a 20% layoff after the close today, we hope you have been SHORT this market and getting ready to lower your buy stop.


Just remember: the second mouse gets the cheese !!

HOTS Weekly Options Commentary

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Peter Stolcers

I have been bullish on the economy and Friday's unemployment number tainted my bias. I did not expect the dramatic decline this month and I certainly didn’t expect the huge revisions for June and July. For the month of August, analysts were expecting 115,000 new jobs. The actual number showed a decrease of 4000 jobs. That is a whopping 119,000 miss. June and July numbers were reduced by about 81,000 in total.

High consumer debt levels (and I'm not just talking subprime mortgages) will threaten the strength of this economy if workers get laid off.

Last week, the Fed invited major homebuilders to share their perspective on the economy and I’m sure Chairman Bernanke got an earful. A rate cut is almost certain after this dismal employment report. Inflation is in check and now the Fed can ease rates without the appearance of a subprime bail out.

Next week the economic calendar is light with consumer credit, retail sales, industrial production and consumer sentiment on deck. These releases don't pack the same punch and I believe Friday’s Unemployment Report will induce selling pressure until the FOMC. Traders are scrambling to determine if the Fed will cut rates by a ¼ or a ½ point.

If the Fed reacts quickly and lowers the rate by a ¼ point before the FOMC, it might be viewed as a progressive move and that might be enough to satisfy the market. On the other hand, a ¼ point cut during the FOMC will not carry the same urgency. The market could view that as stingy, feeling that the data justifies a ½ point rate cut.




In this week’s chart you can see the long-term uptrend is still intact and the breakout from April has also held. If the SPY 145 level is violated my bias will turn bearish.

We have bullish positions and this week’s trade will hedge some of our risk.

Timer Digest Market Commentary

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Fari Hamzei

S&P-500 Cash Index 1480 is our line in the sand. Low volume market advance below this level is only noise to us. What matters most now is that we are extremely overbought on the short-term basis. Next week, a short-term pause is a given. Once the market reopens after the Labor Day Weekend, we shall look for robust market action combined with healthy volume to chart the proper course for our equity markets.

I have attached our updated Timer Chart here for your audience.

HOTS Weekly Options Commentary

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Peter Stolcers

When John Vogel, the founder of Vanguard Funds, says that in his 50 years of investment experience he can't recall this type of volatility, it means something. He is one of the industry’s innovators and you would think that he has seen it all. Huge day-to-day reversals have become the norm. From a trader's perspective it means one thing – uncertainty.

The bulls are very strong in their conviction and they believe that the current decline represents a fantastic buying opportunity. They point to the low unemployment rate, solid earnings growth, global expansion, and relatively low interest rates as signs of strength. Most quantitative models show that stocks are an attractive value.

The bears also have a long list of items to substantiate their bias. They point to increasing debt levels across the board (federal, state, municipal, personal) and they believe the credit squeeze is just beginning. From 2000 – 2005, almost 50% of the employment growth came from the housing sector. This number includes lenders, realtors, construction workers... everyone. They believe that the sub prime woes will continue to spread into other areas and the unemployment rate will rise. They also believe that hedge funds are highly leveraged and that the current credit crisis could force another round of liquidations. In a worst case scenario, they believe that some of the “fluff” will be taken out of the emerging market run up. Once profit taking sets in, that could have a cascading affect as investors run for cover.

Personally, I'm going to stay out of this fight. When a winner emerges I will know who to back. In the meantime, the implied volatilities are very high and option selling strategies make sense. This is a time to rely on stocks with relative strength/weakness and to keep your distance from the action.

Timer Digest Market Commentary

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Fari Hamzei

We have four charts for your review this evening: SPX, RUT, XLF & XLE.

Let us start by stating that market action today, unlike two weeks ago, was not marked by forced liquidation, but rather it was an act of deliberate selling by many players. SP-500 Index (SPX) in the last 30 minutes of trading touched its last week's lows while Russell 2000 Index (RUT) took out its last week's lows in the first hour of trading this morning.



The next major support levels for S&P-500 Index (SPX) are located at 1421 (MS1) and 1387 (MS2). The fact that our coveted CI Indicator crossed its signal line below the ZERO LINE is very ominous. Today SPX also crossed below 200 day and 20 day Moving Averages. Down Volume to Up Volume on NYSE was almost 26 to 1. This tells us that last week the big players bid the market up to get out of their troubled positions and now they are getting ready for a big push down. A top ranked technical analyst on the Street and a contributor to my book, Master Traders, on Monday August 20th, wrote us that his SPX target for the bounce from the August 16 low is 1480. Four trading sessions later, the bounce stopped 60 cents below his target last Friday !!




Another technical analyst for whom I hold tremendous respect for (yes, he works for a bulge bracket investment bank) told us two weeks ago that his SPX downside target is 1300. If you look that how Russell 2000 (RUT) has behaved in August (never crossed its 200 day Moving Average during eight sessions during each of which it had a chance to do so). Because RUT normally leads the SPX, the RUT price action today means, the 1370 retest on SPX is a given, and the 1300 target for SPX is more plausible now than ever. Worth noting is that the next major support for RUT is 745 (MS1) which on the way up last year was a key resistance level.

The next chart really drives it home. Financials are in trouble after MER downgraded them today and when 20% of SPX is in trouble, we all are in trouble. CFC problems are far from over and if our calculations are right, we have not seen the worst of XLF. The next support is its MS1 located at 31.56 which it bounced from on August 16.





Of course the Market won't sell off in a big way till the mightiest fall and that honor goes to Mega Oil. Here we present you with its ETF (XLE) which closed today at 66.88, pretty close to its MS1 at 66.5. Keep an eye on that 10% of SPX, with key support at 64 (MS2) and its 200 day MA at 63. Once these levels are broken, the free fall should begin in earnest.

Have a great Labor Day Weekend.........




Editors' Note: MS1 stands for Monthly Support 1