Navarro's Big Economic Picture
Is It 1994 or 2000?

This economy and market are just screaming at me “late stage expansion” sprinting towards the precipice – just like in 2000. On the other hand, the bulls are screaming that this is an early stage economic expansion just like we saw in 1994 that set the stage for the glorious bull run and tech bubble of the 1990s.

In my world, I see a sustained energy price shock and supply side inflation building as commodity prices reach for the moon. I see the Fed chasing its inflation-controlling tail as it ratchets up interest rates to 5% on its likely way to 5 ½%. I see a yield curve finally rising on the long end but still flatter than an IHOP short stack at only 25 basis points. I see a housing market rolling over like the Poseidon. I see Asian capital at some point deciding not to accommodate our budget and trade deficits and sending the long end soaring. I see employment rising as a purely lagging indicator and additional evidence that corporations often hire too late into an expansion at premium wages.

In the bull’s world, they see a belated rise in the long end of the yield curve as a signal of demand side inflation and prosperity rather than supply side troubles ahead. They believe that the Fed will be “one and done” and has not yet done enough to damage the economy. They think that the consumer will keep spending through thick and thin, regardless of whether personal income or wages rise and even if their housing equity goes negative or falls.

I don’t know who will be right in the end. I do, however, note this one crucial difference between 1994 and 2000 in the chart below. It tracks annual oil prices per barrel since 1988. Beginning in 1992, oil prices fell from $27 per barrel to as low as $14 per barrel in 1998. Then, the crude hit the fan as prices spiked up to $31 in 2000 – and helped trigger the recession. Now we have another spike – so I’m thinking its more like 2000 than 1994, at least in the oil world.

This Week's Market Movers - Good Friday?

It’s going to be a quiet week in both Lake Woebegone and on Wall Street. The first major report doesn’t hit the wires until Wednesday. That’s when we get our monthly whipping from the trade data. This can only mean more pressure on the dollar and interest rates so, barring a real export surge surprise, this certainly won’t be a bullish event.

Thursday, it’s a double dose of consumer agonistes with both retail sales and consumer sentiment hitting the fan. I don’t expect any trouble per se with sentiment but retail sales might put a damper on things.

Then, on Friday, the bond market is closed, which is no fun at all. The only amusement that day will be the industrial production and capacity utiliization numbers. I see more downside than upside risk here because capacity utilization has already reached the bottleneck point where inflation becomes a worry.

Portfolio Shorts and Longs - CBMX, XPEX, SUR, XOMA

I added quite a few penny plays to my portfolio this last week, my bearish views notwithstanding. Most were in the biotech space and therefore more sensitive to things like drug trials than cyclical movements. All stocks flashed decent technicals. These stocks included: Acacia Research (CBMX), which makes customizable chip arrays to identify the roles of genes, gene mutations, and proteins; Spherix (SPEX), which is featured in this week’s biotech corner with Andrew Vaino; Synergetics (SURG), a glaucoma microsurgery play; and Xoma (XOMA), which manufactures antibodies and other genetically-engineered protein products to treat immunological and inflammatory disorders, cancer, and infectious diseases.

I continue to hold AKSY, a hemodialysis play; DVSA, an ethanol play; IMAX, a stare at the big screen and wonder play; STAA, which makes medical devices for cataract and glaucoma surgery; SVA, my long standing and very misbehaving bird flu play, and XING, the China mobile telephone play.

I’m remain short QQQQ, I refused to be shook out early last week during the big upward spike, and I was amused to see the Nasdaq finish down by Friday by a point. I also continue to be short the financial sector ETF XLF.

Davio's Hedging Your Bets
Then and Now

April kicked off with a bang at this week. Markets drove up Monday through Wednesday as funds put new quarterly money to work. This was followed by a sell off and a flat end for the week. Pretty exciting stuff.

But let’s step back and take a look at the overall markets going back to the bubble highs of March 31, 2000. Sometimes it’s best to view the really big picture versus the daily bull vs. bear battles that we get jammed down our gullets from the mass media every day.

What I would like to do is just provide you with some gross numbers from March 31, 2000 versus April 7, 2006 prices and let you take the static out and decide where we are with this market.

Of the major indices, only the Dow is in positive territory since 2000 – and that’s only 30 stocks. 

As for the dollar, it has gotten positively squashed - down 15%. So your buck goes for far less than it did six years ago.

Meanwhile, oil is inflated by the tune of 160% and Gold is right there, up 112%. Commodities have also all skyrocketed to new highs.

The only good news here is that interest rates have been low. You can see how this has provided fat times for the Banking industry which was able via easy credit to loan to consumers at record paces, therefore driving up Real Estate.

I will leave the conclusions to draw from these numbers in the readers’ hands.

Vaino's Biotech Corner
Spherix (SPEX) - How Sweet (and Risky) It Is

I like any stock that shows good technicals and has compelling science to back it up so when Spherix (SPEX) came up last week on the radar screen as a recent Market Edge Long I thought I would take a look.

My first impression is that this is bit of a strange company. Their business encompasses both IT consulting and biotech. Well beyond that, SPEX was involved with the 1976 Viking mission to Mars. Here on Earth, SPEX’s biggest hope for the future lies in biotech.

Late last year SPEX announced completion of a Phase II study on the use of D-tagatose (marketed as Natrulose) for treatment of diabetes. A Phase III study is being planned.

Results of an early study in 1999 by Donner et al. demonstrated that tagatose, taken prior to eating, reduced blood glucose levels after sugar ingestion. The study also noted that there were some significant “gastric issues” at higher dosing levels. This is not surprising as digestively tagatose acts like fiber.

Aside from the gastric side effects (which all diabetes treatments are subject to in varying degree) there are compelling reasons why tagatose could be a viable treatment. For starters, apples are almost 0.5% D-tagatose, so the stuff’s pretty safe.

Second, tagatose can be administered orally, and this is a huge advantage for a diabetes treatment. Even better, it can be used as an artificial sweetener:

Third, D-tagatose is not only 92% as sweet as normal sugar. According to a 1996 study by Livesy and Brown in the Journal of Nutrition, it actually has a net negative caloric value. In other words, it takes more calories to digest it than it provides! Pretty cool, huh?

Now here’s the bigger demographic and macrowave picture. And do the math with me as we go along.

Diabetes takes 15-20 years to develop. According to the US Department of Agriculture, sugar consumption, which is a major risk factor for diabetes, started to increase dramatically around 1985 in the U.S. In addition, people are more likely to suffer from diabetes as they age. It should follow then that the combination of a greater sugar intake and more aging baby boomers is going to cause a large increase in the market for diabetes therapies. This has to be a big plus for a company like SPEX. That American waistlines are expanding also suggests a bigger market for new artificial sweeteners.

Two final remarks: I initially thought that since tagatose is naturally occurring, Spherix can’t possible have any patent protection. Not so. The trick here is obtaining the pure sugar in sufficient quantity; and Spherix has patented a method to convert readily available lactose to tagatose enzymatically. That’s the good news. The bad news is that the patent protection on the method of manufacture will last only until 2011 and their patent for its use as a diabetes treatment lasts only until 2014.

All this said, SPEX is a risky stock. It has a market capitalization of less than $32M, making it a nano cap. It’s not a very liquid stock, with a three month average daily volume of less than half a million, and a float that is less than ten million. Also, its balance sheet is less than overwhelming. Regardless, I like this stock and have bought it for my own portfolio. At less than $3 there’s a lot of upside and little downside.

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
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DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.