Dear New World Investor:
Today the S&P 500 broke out of its month-long consolidation, broke above 1420 and closed at a four-year high. Try as it might, the bull was not able to throw us off, while the “sell in May and go away” crowd is praying for a chance to buy back in. Powerful as it may be, prayer is not an investment strategy.
Going into this morning’s European Central Bank decision on interest rates and ECB President Mario Draghi’s news conference, markets were expecting a 25-basis point cut in rates to 0.50%, and a plan to purchase about €200 billion of bonds with maturities of three years or less from countries that formally asked the ECB for help and had a credible austerity plan. The ECB was expected to waive its senior creditor status on bonds it purchased, and be treated equally with private creditors in case of default. (Otherwise, private investors would not step up to the plate.) The ECB again would broaden the kinds of securities banks could pledge as collateral, presumably to include junkier paper.
These purchases would be “sterilized” by sales of other bonds. In the U.S., in Bernanke-speak, “sterilized” means selling short-term Treasury notes from the Fed’s portfolio to buy long-term Treasury notes and bonds. But in Draghi-speak, “sterilized” means selling German notes to buy Spanish and Italian notes. Big difference, although on the surface it addresses German concerns that the ECB is printing money.
There was a lot of noise before this morning about size limits on the program, a formal cap on yields for Spanish and Italian paper, a formal target for yield spreads versus German notes, whether Spain would ask for help (as if they had a choice), and what the Bundesbank would do – they don’t have a veto, though. As it turned out, Draghi surprised the market by not cutting rates (yet), and then making the bond-buying program unlimited.
Every country voted for the program except Germany, and Angela Merkel said it is important that the Outright Monetary Tranactions program not impede the need for closer political and economic integration. Draghi upstaged her by saying the same thing in his press conference. (You can read his statement HERE. The technical features of the OMT program are HERE. The changes to the collateral rules are HERE.)
Before the announcement, yields on Spain’s two-year notes dropped to 2.99% from 7.15% on July 25. Italy’s two-year yields dropped almost three percentage points over the same period. This morning, Spain was able to sell $4.4 billion of 2016 bonds, the maximum amount it was trying to raise. The average yield fell from 5.971% on August 2nd to 4.603% today.
In the U.S., the big number is tomorrow morning’s August jobs report, with expectations for 125,000 additional non-farm jobs created, down from July’s 163,000. Any shortfall almost certainly means Bernanke will announce something in his press conference next Thursday, after the Federal Reserve Open Market Committee meeting. He expressed “grave concern” over the stagnation in the jobs market in his Jackson Hole speech last Friday.
The preliminary numbers so far have been mixed. The ADP private payroll report this morning showed 201,000 jobs added in August, the biggest gain in five month, but that’s the private sector only. Government, especially at the state level, is shrinking jobs at a remarkable rate and dragging down the overall jobs number. Last Tuesday, the Institute for Supply Management said the manufacturing sector is contracting at its fastest rate in more than three years, with a 49.6 reading in August. But this morning they said the services sector grew in August to 53.7, up from July’s 52.6 instead of down to the consensus expectation of 52.5. It’s a very mixed picture.
So tomorrow’s number is a big deal, but any number under 150,000 will still be read as weak, by both the markets and Bernanke. Our situation is not as bad as Europe, where unemployment in the 17-nation Eurozone was 11.3% in July, and undoubtedly worsened in August.
Market Outlook
Coming into today, the daily Bollinger Bands, calculated as two standard deviations around the trailing 20-day average on the S&P 500, were the narrowest they’ve been all year. This sort of quiet consolidation usually precedes a big move. The fractal dimension on the daily chart was up to 60.15, which was very fully consolidated. Most consolidations end with a resumption of the trend in the direction it was going when the consolidation started. But some consolidations end with a change in direction. So it very welcome to see the S&P close at 1432, up 29 points.
After a bit more of a run, we can expect a retracement that may even test 1420 from above. What Bernanke does or doesn’t say next Thursday should determine the timing of a retracement, but the good news is that we have a strong line in the sand at 1420 with an even stronger one at 1400.
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. What’s up with Wednesday?
Friday, September 7
ARNA – Arena Pharmaceuticals – 10:30am – Newsmakers in the Biotech Industry
Monday, September 10
ARNA – Arena Pharmaceuticals – Unspec. Panel presentation – Rodman and Renshaw Global Investment Conference
Tuesday, September 11
DNDN – Dendreon – 12:05pm – Rodman & Renshaw Global Investment Conference
Wednesday, September 12
ARNA – Arena Pharmaceuticals – 3:55am – Merrill Lynch Global Healthcare Conference, London
German Constitutional Court rules on Euro bailout plans – 6:00am
SQNM – Sequenom – 9:10am – Morgan Stanley Global Healthcare Conference
TWER – Towerstream – 9:45am – ThinkEquity Growth Conference
AAPL – Apple Computer – 1:00pm – Apple introduces iPhone 5 (see Sprint, below)
DNDN – Dendreon – 1:35pm – Morgan Stanley Global Healthcare Conference
DNDN – Dendreon – 2:00pm – ThinkEquity Growth Conference
S – Sprint – 3:00pm – Merrill Lynch Media, Communications & Entertainment Conference
HLIT – Harmonic – 4:30pm – ThinkEquity Growth Conference
Thursday, September 13
Fed Meeting Ends – 12:30pm – Fed statement
Fed Meeting Ends – 2:15pm – Bernanke press conference
The Recovery Trade Sequence: Gold & Silver
Paramount Gold & Silver (PZG) announced their updated 43-101 resource estimate for San Miguel, five days after their previous August deadline. The new estimate reports 639,000 ounces of gold and 53.6 million ounces of silver in the indicated category. Using a gold-to-silver price ratio of 60:1, San Miguel holds 1.53 million indicated gold equivalent ounces. This is the key metric to value the property.
Most acquirers pay less for inferred metal – as long as it is there, it will take more drilling and economic work to evaluate what it is worth. San Miguel had another 830,000 ounces of inferred gold and 46.2 million ounces of silver. That equates to 1.60 million inferred gold equivalent ounces.
The total of indicated and inferred gold-equivalent ounces is 3.13 million ounces. In my original writeup on PZG, I said I thought Mexico held five million ounces of gold. The company then had 2.65 million ounces, all inferred. At the then-current price of gold of $945 an ounce and using the multiple Cour d’Alene paid for the adjacent Palmarejo property, PZG was worth $8.87 a share. But the company’s goal was to prove up five to ten million ounces, which would make the property worth $15 to $30 a share on the 108 million shares then outstanding.
What’s changed since then? Gold is at $1700, and probably will never trade below $1500 again. Companies don’t pay half the value of the gold in the ground anymore, mostly because extraction costs have increased. But they do pay 33% of the value. Finally, PZG now has 147 million shares outstanding, and they also own Sleeper.
So the math is pretty simple. 3.13 million ounces x $1500 x 0.33 = $1.55 billion / 147 million shares = $10.54 share. So PZG could sell San Miguel any day for $10+, give the cash to shareholders and still have Sleeper to develop. Or they could sell the whole company today for $15. Until the buyout, they’ll keep proving up more gold and silver. And the Preliminary Economic Assessment for San Miguel is still due at the end of the year, if Scott Wilson can hit his deadline for once.
When will Wall Street catch on? Probably never – the company will just sell out to the first $15 offer. I am looking for a strong run in the miners over the next several months, as they overcome a pretty brutal beating since February. PZG could catch on if just one analyst would write it up, but I’m not holding my breath. 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. I’ll comment on any changes here, and you can always click the link under Member Resources. This week I removed the San Miguel Resource Report because it is completed, and added the San Miguel PEA by the end of the year.
Biotech MegaShift
Dendreon (DNDN) fell when Medivation got early approval for Xtandi, its prostate cancer drug to be used after Taxotere. Johnson & Johnson’s Zytiga also is approved to be used after Taxotere, and will fade quickly because it requires co-administraiton with steroids. Xtandi does not.
Dendreon’s Provenge is approved to be used before Taxotere. The FDA may approve Zytiga to be used before Taxotere later this year, but that is not a sure thing. Even if they do, the best practice is to use Provenge first, followed by Zytiga. If Xtandi is ever approved for the pre-Taxotere patient, it can be given with Provenge.
While Zytiga and Xtandi have the same mechanism of action, lowering testosterone, Provenge has a completely different method of action, boosting the immune system. Dendreon’s competitive challenge is not technical, it is marketing. I think the company is addressing that.
There have been a suspicious number of SeekingAlpha articles recently on the theme of “Dendreon is Dead.” For example:
August 2 – Doomed Dendreon? Some Speculators Shocked By Sales Again
August 20 – Dendreon Provenge Sales Wobbling
September 4 – The Prostate Pipeline Revisited
September 5 – The Final Blow For Dendreon?
September 6 – Dark Horizons For Dendreon
Remarkably, the short interest increased from 40.9 million shares at the beginning of August to 43.4 million shares at the middle of August. After that, the stock went over $5 for a few days – perhaps that explains the recent articles. It will be interesting to see the end of August numbers.
At this point, what Dendreon needs to do is clear. Execute on the restructuring plan to get the breakeven point below $100 million a quarter. Execute on the marketing plan top grow revenues 20% to $100 million a quarter. Then build on a positive cash-flow to turn profitable. Find a partner to launch in Europe in mid-2013. Outlicense other areas, especially Asia and South America. It’s all very doable.
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) has another potnetial competitor that I missed in my recommendation write-up: Natera. They talk a good game, but after reviewing the clinical trials I don’t see them as a competitor anytime soon. My old friends at Sequoia Capital led the most recent round of venture financing, though, so I take them seriously. SQNM is a Trading Buy under $4 for my $8 target in 2013 and $12 in 2014.
Zalicus (ZLCS) started the first of the two planned Phase IIa studies of Z160 to treat chronic neuropathic pain associated with lumbosacral radiculopathy, caused by compression or irritation of the nerve roots exiting the lumbar region of the spine. There are no specific drug treatments approved to treat this common condition that affects 3% to 5% of the global population. The second study to treat pain from shingles will start in the fourth quarter.
This six-week trial will go a long way to answering the question of whether Zalicus has been able to overcome the efficacy issues that caused Merck to drop development of the drug. We should see data in the March quarter from the first trial, and the June quarter from the second. Based on the animal and Phase I data, I expect it to be a big success. ZLCS is a Long-Term Buy under $2 for my $7 target in mid-2013.
Content on Demand MegaShift
Infinera (INFN) won a major contract with Australian telecom carrier PIPE Networks for a submarine and terrestrial deployment of the new DTN-X 500 gigabits per second optical switches. This is the first 500 gigabit deployment in Asia Pacific, and INFN beat out several competitors to win the business. This will be an excellent reference for future sales in the region. INFN is a Hold.
Sprint (S) will benefit from the Apple iPhone introduction on September 12. Here’s the cover of the invitation:
Note the shadow. I expect Sprint to do very well with the iPhone 5 due to their unilimited data plan. Anything that causes someone to change to a new phone is an opportunity for Sprint to take a customer away from AT&T or Verizon. S is a Value Buy under $4 for my $8 target in 2012 – which I expect to raise.
Hyperinflation MegaShift
Primero Mining (PPP; P.TO in Canada) updated its resources and reserves estimate for San Dimas. Their probable mineral reserves increased to 584,000 ounces, up 79,000 ounces from December 31, even though they mined 47,000 ounces in the first half of 2012. They had 34.7 million ounces of silver in the probable category. The indicated and inferred reserves also increased.
These results are from only 18 veins of the more than 120 known veins on the property, and do not extend more than 100 meters below the current mining level. There’s a lot more gold there. The stock reacted strongly to this news, closing at $5.06 today. PPP is a Value Buy under $3 for a $10 target by the end of 2012.
New Energy Technology MegaShift
Ocean Power Technologies (OPTT) won a new Cooperative Research and Development Agreement award from the Department of Homeland Security to redeploy the Autonomous PowerBuoy off the coast of New Jersey. Last year’s work with the Navy showed strong results, as the buoy produced higher-than-predicted power while surviving 50-foot waves during Hurricane Irene.
There was a good story on the Oregon project in The New York Times. OPTT is a Hold.
The Geothermal Basket – Top Buy Long Term
I recommend putting 50% of your basket into ORA, with 25% each in the two smaller companies: AXY.TO and HTM.
US Geothermal (HTM) changed its fiscal yearend to December, and will report a nine-month stub year for 2012. In the annual letter to shareholders, management pointed out that all three domestic power plants operating in 2013 will produce 354,000 megawatt hours. By my calculations, this should produce about $22.6 million in revenues for HTM.
In addition, they own 100% of the El Ciebello project on 25,000 acres adjacent to Guatemala City. They’ll build a 25 megawatt steam power plat that will produce 208,000 megawatt hours a year starting around 2015. I am keeping the same target prices, but sliding them out a year. HTM is a Long-Term Buy under $1 for a $3 target in 2013 and $4 in 2014.
* * * * *
Action Items This Week
* * Buy SQNM
* * Buy QUIK
* * * * *
Bernanke may have to print money to set off a world-wide inflation that will save China, so they can keep buying our Treasury bonds.
The Macroeconomics of Chinese Kleptocracy
* * * * *
Your wondering who will buy my old farm next 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 parthership 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) – Sleeper preliminary economic report coming, and a 43-101 on San Miguel
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.
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