Navarro's Big Economic Picture
Money Manager Mania Redux

Last week, I wrote: ” All this adds up to a volatile week. No one indicator stands out as a market mover but coupled with the aforementioned pressure on the dollar, this week would feature a distribution day or two.”  That was a pretty decent call as we had down days on Monday and Friday that would data driven. It also looks like pretty good advice for the coming week.

This Fall rally seems to have finally entered its winter of discontent, particularly with a further weakening of the dollar and an oil price surge. The Dow has dropped for the second straight week. The Nasdaq took a slight drop and the S&P 500 was close to flat.

Market timers may want to risk calling a top and going short. Otherwise, cash is king.

Last take: The WSJ had a front page story about how Wall Street bears are finally buying into the rally and the spin was that the rally would have legs through the end of the year. When you see a story like that, head in the opposite direction – fast!

This Week's Market Movers

Factory orders on Tuesday and the jobs report on Friday are likely to be the big market movers of the week.   Risk to reward favors the bearish side. Consumer sentiment on Friday is the wild card while keeping an eye on any tea leaves regarding the strength of the holiday buying season would be most prudent.

Portfolio Shorts and Longs

As noted last week, cash is king for the risk averse. If you want to try to pick a top, short the Spiders (SPY).  As likewise noted last week, follow Andrew Vaino for specific biotech stock picks at this point. He’s knocking the cover off the ball and biotech is a good space to be in at this juncture in that it is less susceptible to the business cycle.

Vaino's Biotech Corner
Test Day

I’ve been writing about biotech stocks since March.  So, given I just gave a test to evaluate the performance of my sophomore organic chemistry students, I thought this might be an opportune time to look back on how these stock picks performed.  Note, this is in no way procrastinating from marking 90 plus exams.

In retrospect I see that a major shortcoming has been not mentioning when I felt stocks should be sold. I’m certain everyone reading this Newsletter recognizes that selling is as important as buying in making money from stocks.

In all I’ve recommended about 40 stocks. In a couple of cases I’ve suggested stocks more than once. For example, Diversa (DVSA) has been a very nice stock, opening at $8.55 the Monday after I recommended it, and going as high as $11.60 two months later. I recommended DVSA again at $9.11 the week of August 20^th, and DVSA is now nicely above $11. To be fair, the stock dipped as low as $6.50 in September.

Some of my initial picks didn’t perform too well. In fact, of the first six stocks I recommended (ELN, TRCA, INSM, VRX, DVSA, and SPEX) four lost money within the next two weeks, two of them more than 10%!  I’m not one to keep poorly performing stocks around. I think IBD’s advice about selling stocks after a loss of 8% is a pretty good suggestion.

Finally, beginning in July things started to look good. I’m sure some of this is luck and some of this is my having learned a bit about more technical analysis. Of the 15 stocks I’ve recommended in the newsletter since the first week of July (pick was CRME, up 60% two months after my recommendation) all but four are in the black (I’ve dumped EXEL, now down 16%, but am holding my short position on ENCY, off 3%, my short on IMCL, and will keep NPSP a bit longer, even though it’s down almost 10%).

Of the remaining eleven picks (note, conditional picks or picks involving options were disregarded) three afforded profits of greater than 50% (CRME, INSM, and AVNR short), three afforded profits of greater than 25% (MBRX short, SRA, and NVD), and five (AXCA, DVSA, HTI, HEPH short, and CRDN) provided profits of greater than 10%. Average return for these positions since July is 19%. If any hedge funds are looking for a biotech analyst, please contact me.  Now that’s pretty shameless!

My short positions in MBRX, AVNR, and HEPH have all been covered. I have also taken profits from AXCA, CRDN, CRME, DVSA, and SRA.  I’m holding my IMCL short (@ $28.38, but may reconsider if the stock doesn’t begin to drop soon) and my ENCY short (though this will be gone one way or the other next week). On the long side I’m holding INSM (I have a stop order in at $1.50), NVD, HTI, NPSP (for now), and ELN.

In the next week I’ll be looking at two of my favorite stocks, Amylin (AMLN) and Celgene (CELG). Amylin’s been taking a beating lately but the fundamental value of their diabetes treatment, I believe, will see it turn around soon. Celgene has been flying like Icarus, but, I think, the stock may just have gotten too high, and may consider a short position in CELG (note, this will be Market dependent). Don’t get me wrong, I think Celgene is a fantastic company, but they’re really going to have to keep posting some unbelievable numbers to justify a P/E ratio of 400, P/S of 25, and P/B of 23—Benjamin Graham would be apoplectic!

“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
Email  |  Website

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.