Dear New World Investor:
First, these guys and gals came through:
[1]
Then these guys and gals came through:
[2]
And – bang – the world was saved….
The Bundesverfassungsgericht (German Constitutional Court), led by President Andreas Vosskuhle, the handsome 48-year-old dude in the center of the top picture, said Wednesday that Germany could go ahead and ratify the €700 billion European Stability Mechanism (ESM) rescue fund, as long as German liability is limited to the €190 billion euros currently stated in the treaty creating it. Any future increase would have to be approved by the lower house of parliament, the Bundestag. The 37,000 plaintiffs who had asked for an injunction against ratification lost, although they may be happy with the “any future increase” clause.
Then the Board of Governors of the Federal Reserve System, led by Chairman Ben Bernanke (the handsome dude seated in the center of the second picture) said today that the Fed would continue Operation Twist through the end of this year at least – he will reassess then. The Fed also will continue to reinvest the interest and principal payments on their mortgage-backed securities (MBS) portfolio in more MBS. He said that accounts for $45 billion a month. Then they are starting a new, open-ended Quantitative Easing program to buy $40 billion in MBS a month until either the labor markets improve or inflation takes off. Finally, they now expect to keep the Fed funds rate low until mid-2015, an extra year from the previous guidance.
So 22 men and women in funny robes and monkey suits have solved the world’s economic problems, and the stock rally can continue. For at least another week.
Actually, with trillions of dollars on the sidelines, hedge funds underinvested and underperforming year-to-date, and individuals out of stocks (now rising) and into bonds (now falling), we should rally through the end of the year. The Fiscal Cliff bogeyman will be settled, probably by Obama caving in to the Republicans again and extending the Bush tax cuts another year until the economy gets better. If Romney wins, there’s no doubt the tax cuts will be extended. The latest poll results suggest Obama will win, but the Republicans have a chance to take the Senate. Of course, anything can change in the eight weeks remaining before the election.
Market Outlook
The markets have reached their highest levels in almost five years. The daily fractal dimension was up to almost 60 seven days ago, on Day #65. It then started a new uptrend that should carry through at least Day #76, next Wednesday, and maybe through Day #86 on October 3. Today’s sharp move will use up a lot of the 150-minute short-term energy, so afteer a follow-through day tomorrow, early next week should bring a pause before the rally resumes, probably on Wednesday.
The Dollar
Sentiment towards the dollar is overwhelmingly bearish, which means a counter-move is coming soon. Although a move up in the dollar may stall the advance in the stock market and precious metals, I think it is likely to fail quickly. But I’m watching this carefully, because this might be not only a daily cycle low but also an intermediate cycle low. That could happen if the euro starts to fall apart again.
Coming Events
All times below are ET, and most of the presentations and slides are archived on the companies’ websites so you can listen to them.
Friday, Month 14
OPTT – Ocean Power Technologies – 10:00am – Earnings conference call
Tuesday, Month 18
SQNM – Sequenom – Unspec. – Lazard Capital Markets Corporate Access Day, Boston
Wednesday, Month 19
S – Sprint – 1:15pm – Goldman Sachs Communicopia Conference
Thursday, Month 20
RTK – Rentech – 9:20am – Imperial Capital Global Opportunities Conference
SQNM – Sequenom – 1:50pm – Credit Suisse Small and Mid-Cap Conference
RTK – Rentech – 3:50pm – Credit Suisse Small and Mid-Cap Conference
The Recovery Trade Sequence: Tech, Biotech & Energy
Arena Pharmaceuticals (ARNA) should see the DEA’s proposed schedule in the Federal Register soon, and the answers to the European Medicines Agency 120-day questions filed as early as October. Time is running out for the shorts to play their games. ARNA is a Core Holding and a Trading Buy under $10 for the European/ROW partnership announcement and Belviq rollout, with a $22+ target in 2012.
The Recovery Trade Sequence: Gold & Silver
Paramount Gold & Silver (PZG) filed their 10-K annual report with no surprises. Instead of a 50-50 budget for exploration in Mexico and Nevada, they plan to spend more in Mexico in the coming year – $7.8 million, versus $6.2 million at Sleeper in Nevada.
At June 30 they had $20 million in cash. They expect to spend $1.3 million a month for the next six months on operations, and $1.6 million in option payments in the September quarter for previously purchased mineral concessions.
In addition to the cash, they have 7.7 million outstanding warrants held by Albert Friedberg that will expire in March 2013. They will bring in another $7.9 million when he exercises them. They also have a $1.5 million account receivable of value added tax due from the Mexican government.
The company filed the Preliminary Economic Assessment with SEDAR in Canada (the EDGAR equivalent), and their consultant raised his estimate of their resource. They now see 428,000 ounces or 14% more gold measured and indicated, and 592,000 ounces or 42% more inferred. Measured and indicated silver resources in the restatement rose nearly 25% and the inferred silver resources rose nearly 66%.
The company pointed out that: “The average grade of the Sleeper mineral resources is relatively low, which dictates a different mining approach than previously employed in exploitation of the high grade mineralization at the Sleeper Mine during the 1980s. These low grades, which are now being mined successfully elsewhere in Nevada, appear to be economically viable in combination with the current high gold price environment and low operating costs that could result from large surface mining throughputs….The total cost of equivalent gold production (including cash operating costs and total capital and contingency costs over the life of the mine) is estimated at US$996 per ounce….At US$1618 gold (the spot price on July 3, 2012), the total pre-tax net cash flow increases by 160% over the base case to US$1.9 billion, the net present value at a 5% discount rate almost doubles to US$1.2 billion and the internal rate of return improves to a robust 40%.”
The net present value of $1.2 billion equals aobut $8 per PZG share. This press release did not get on Yahoo yet, but only as a squib on Briefing.com. I’m sure the company will re-release it tonight or tomorrow. PZG is a Core Holding and a Trading Buy under $4 for my $15 target when the company is acquired, possibly in 2012. There is a lot of good news coming.
Major News Coming to Drive Our Stocks
This list has its own page [3]. I’ll comment on any changes here, and you can always click the link under Member Resources. There are no changes this week.
Biotech MegaShift
BioCryst Pharmaceuticals (BCRX) may get another bump from the H3N2v swine flu variant noted in the Week 35 issue of the CDC’s FluView. The CDC said: “From July 12 through September 6, 2012, a total of 296 infections with influenza A (H3N2) variant (H3N2v) viruses have been reported from ten states. This is an increase of 8 over last week’s report. Cumulative totals by state since July 15 are: Hawaii [1], Illinois [4], Indiana [138], Maryland [12], Michigan [5], Minnesota [2], Ohio [102], Pennsylvania [11], West Virginia [3], and Wisconsin [18]. Sixteen H3N2v-associated hospitalizations and one H3N2v-associated death have been reported. The vast majority of cases have occurred after prolonged swine exposure, though instances of likely human-to-human transmission have been identified. At this time no ongoing human-to-human transmission has been identified….As a result of enhanced surveillance activities for H3N2v, three infections with influenza A (H1N2) variant (H1N2v) virus have been detected in Minnesota in patients who became ill after contact with swine. One patient was hospitalized, but all have recovered from their illness.”
H3N2 has not been seen in a flu epidemic since the late ’90s. A document published yesterday on State Fair Preparing for New Strain of Swine Flu said: “In August 2011, two cases of swine-origin influenza A (H3N2) virus infection were identified in two children under five years old in different states, and both had been given seasonal influenza vaccine in 2010 (which contained the pandemic H1N1 swine flu virus strain) and had had recent contact with pigs before they got sick. They used those viruses to infect a number of ferrets in a laboratory. They then found that one of the viruses not only spread between the ferrets, but also killed them within 10 days.”
I no longer expect Health & Human Services or the FDA to actually educate doctors about the effectiveness and availability of peramivir to fight this flu, but just concern about it could give BCRX another run. The Data Safety Monitoring Board decision on continuing or expanding the Phase III trial will have more impact on the future use of peramivir, and partnering the gout drug will have more impact on the stock. BCRX is a Core Holding with a $4 buy limit for a $6 target in 2012, a $30 target after more orders are announced, and $50 after peramivir becomes the only approved intravenous antiviral in 2012-2013.
Dendreon (DNDN) was the subject of a hit piece on SeekingAlpha so bad it was funny. The writer kept referring to “prostrate cancer.” I guess any cancer that keeps you in bed is a “prostrate” cancer.
I expect DNDN to slash their operaitng costs by the end of the year and breakeven at a $100 million quarterly revenue rate in the March or June quarter. DNDN is a Core Holding and a Trading Buy that I would buy up to $7 short-term, with a $12 target after a European partner is announced. Longer term, I would buy all the way up to $28, with a $50 target as Provenge revenues accelerate and they file for approval in Europe.
Sequenom (SQNM) priced their $110 million convertible five-year notes offering yesterday before the open. The stock closed Tuesday at $3.63, and the notes have a 5% coupon and a $4.63 conversion price.
My quick rule of thumb on converts is that the premium of the conversion price to the current price should be at least 3x the coupon. In this case, the premium equals $4.63 / $3.63 = 27.5%. Dividing that by the 5% coupon gives you 27.5% / 5% = 5.5x. This was a well-placed deal, and SQNM jumped 28 cents yesterday and nine cents today to close right at my $4 buy limit.
As I said in Monday’s Flash Alert: “We don’t know the interest rate and conversion price yet, but I expect it to be quite favorable in this capital markets environment.” It certainly was.
SQNM was a new buy at GMT Capital, the hedge fund manager with $3.6 billion in assets and a top track record. SQNM is a Trading Buy under $4 for my $8 target in 2013 and $12 in 2014.
Zalicus (ZLCS) has been downgraded by most of Wall Street, including a well-balanced report from Zachs. He cut his rating to Neutral and his price target from $3 to $1.50.
Synavive’s Phase IIa data showed statistically significant efficacy in measurements of disease activity and the change over time in such activity scores. Although several of us thought the Synavive trial would be successful, we were wrong. I think holding on or averaging down on a stock in the Valley of Death is a mistake, because you don’t know what the capital markets will look like when they need to raise the next round of funding. Assuming we get the recession I’m expecting, the outlook seems to me too bleak to stick with Zalicus. I’ll revisit them when the ion channel drugs are in Phase III. Sell ZLCS.
Content on Demand MegaShift
DragonWave (DRWI) should report a revenue jump in the November quarter from Sprint’s accelerating Network Vision buildout – see S, below. The bottom line will be hit by the restructuring charges I mentioned in Monday’s Flash Alert, but Wall Street will adjust for that. DRWI is a Core Holding and Trading Buy under $6 for a $20 target in 2013.
QuickLogic (QUIK) was written up on SeekingAlpha by our own Mr. Joseph, a New World Investor subscriber who was very active in Arena’s Belviq approval process. The company announced a reference design that supports Texas Instruments’ Siatra processor in various industrial-type applications like portable data terminals, mobile point-of-sale terminals, handheld scanners and industrial tablets.
As usual, the customers will have a lengthy process of modifying the reference design, quality assurance testing, gearing up for production and, finally, product introduction. But once QUIK’s chips are designed in, they are there producing revenues for a long time. QUIK is a Core Holding and a Trading Buy up to $5 buy limit for my $12 target in 2012.
Sprint (S) announced their advanced 4G LTE network will be available in more than 100 additional cities in the coming months. This was timed to coincide with the Apple iPhone 5 announcement yesterday. As the only major mobile carrier to offer unlimited data without throttling, Sprint stands to gain share from the coming upgrade to the iPhone 5. Surveys show it will be the fastest, widest-spread iPhone upgrade yet.
Verizon and AT&T are promoting shared data plans as an alternative to Sprint’s unlimited data plan. According to market researchers Parks & Associates, a recent study showed 40% of mobile phone users would actually rather switch mobile carriers than use a shared mobile data plan. The study found that 31% of AT&T subscribers and 30% of Verizon users prefer unlimited data plans, even if they cost more. Sprint costs less. I think the company is on the cusp of major market share gains. S is a Value Buy under $4 for my $8 target in 2012 – which I expect to raise.
Hyperinflation MegaShift
Gold and silver are direct beneficiaries of QE∞, but sentiment towards them has gotten out of hand:
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Courtesy SentimenTrader.com Click for larger graphic
The dollar is showing the opposite pattern. These sentiment extremes usually reverse, as you can see.
But the background is that physical gold and silver are exiting the COMEX and, especially, the London exchange as investors take delivery. The Russians and Chinese are absorbing a lot of physical gold right now. They can sell their Treasuries in the secondary market to the big buyer – Bernanke – and then buy gold and take delivery. The physical short squeeze in silver against the bullion banks is especially strong. We have to keep an eye on sentiment, but with the stockpiling of physical metals around the world, these are uncharted waters.
New Energy Technology MegaShift
Infinity Energy Resources (IFNY) has been trading around 20,000 shares a day, but traded 44,400 last Thursday, 48,500 on Friday, 19,300 on Monday, 53,600 on Tuesday, 15,000 yesterday and 37,000 today. CEO Stan Ross is talking to any potential partners, and it is awfully easy to have a leak in a situation like this. The SEC will never notice. We are overdue for a partner announcement, and this volume could be the tip-off that one is coming soon. IFNY is a Trading Buy under $2 for my $7 first target after they complete the 3D seismic.
Ocean Power Technologies (OPTT) reports results tomorrow morning. The one analyst publishing on the stock is looking for $2 million in revenues and a 32 cent per share loss, but those numbers don’t matter. The company will do its usual project-by-project update, and I want to hear how secure their funding is in case of a global recession. OPTT is a Hold.
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The 60-Year Interest Rate Cycle
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The Baby Boomers are loaded up with bonds for retirement, right at the top of a 30+-year upswing in bond prices and downturn in bond yields. Bulls and bears make money and, yes, pigs get slaughtered. But so do sheep.
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Your actually resolving to avoid crutch words at the end of the day, for what it’s worth [6] Editor,
Michael Murphy, CFA
Founding Editor, New World Investor
The Core Holdings
Arena Pharmaceuticals (ARNA)
Antares Pharma (ATRS)
BioCryst Pharmaceuticals (BCRX)
Dendreon (DNDN)
Rochester Medical (ROCM)
DragonWave (DRWI)
QuickLogic (QUIK)
Towerstream (TWER)
A Short-Sale or REO House
A Bag of Junk Silver
Market Vectors Gold Miners Exchange-Traded Fund (GDX)
Market Vectors Junior Gold Miners Exchange-Traded Fund (GDXJ)
Paramount Gold & Silver (PZG)
Sprott Resource Lending (SILU)
Axion Power (AXPW.OB)
The Long-Term Buys
Aastrom Biosciences (ASTM)
Energold (EGD.V; EGDFF.PK on the pink sheets)
Golden Predator (GPD.TO; GPRXF.PK on the pink sheets)
Otis Gold (OOO.V; OGLDF.PK on the pink sheets)
Infinity Energy Resources (IFNY.PK)
Alterra Power (AXY.TO; MGMXF.PK on the pink sheets)
Ormat Technologies (ORA)
US Geothermal (HTM)
The Value Buys
Sprint (S)
Primero Mining (PPP; P.TO in Canada)
Exide (XIDE)
The Trading Buys
Arena Pharmaceuticals (ARNA) – for the European and ROW partnerships, and launch of Belviq
BioCryst Pharmaceuticals (BCRX) – for the BCX4208 gout drug partnership announcement
Dendreon (DNDN) – Continued roll-out of Provenge; possible takeover bid from Roche
Sequenom (SQNMN) – Continued roll-out of MaterniT21 PLUS Down’s Syndrome test
Zalicus (ZLCS) – Synavive trial results in September or October
DragonWave (DRWI) – IP microwave backhaul taking off; big contract wins coming; Nokia Siemens microwave business acquisition
QuickLogic – Consumer demand for tablets and smartphones with VEE & DPO chips
Towerstream (TWER) – Leading supplier of wireless business telecom services hits cash flow breakeven next; more WiFi offload announcements coming shortly
Market Vectors Gold Miners Exchange-Traded Fund (GDX) – the big miners
Market Vectors Junior Gold Miners Exchange-Traded Fund (GDXJ) – the smaller miners
Paramount Gold & Silver (PZG) – San Miguel preliminary economic report coming
Infinity Energy Resources (IFNY) – partner news and 3D seismic program
Rentech (RTK) – high corn prices and low natural gas prices for another year
Holds
Connacher Oil & Gas (CLL.TO; CLLZF.PK on the pink sheets)
Harmonic (HLIT)
Harris & Harris (TINY)
Infinera (INFN)
Ocean Power Technologies (OPTT)
© Copyright – Next Paradigm Press – 2012. New World Investor does not act as a personal investment adviser or advocate the purchase or sale of any security or investment for any specific individual. The recommendations and analysis presented to members is for the exclusive use of members. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time. Nothing in this presentation should be considered personalized investment advice. No communication to you by Michael Murphy or any of our employees or contractors should be deemed as personalized investment advice.