Navarro's Big Economic Picture
Ben and Paul Do Beijing

Well, the Dow broke its two-week losing streak and finished up almost 1% for the week and the Nazz hit the 1% up exactly on the head. Reiterating of mine that this has been a very bad year for technicians, check out this quote from Market Edge:

Year-to-date, the Dow is up 14.8% while the NASDAQ has gained 10.5%. Trading the DJIA (DIA) using a buy/hold strategy has produced a gain of 1589 points (+14.8%) while utilizing the Market Edge long/short approach would have generated a loss of 982 points (-9.2%).

I continue with my cash call as I believe we will have a pullback before the 1^st of the New Year and that people will start pulling money off the table. In the meantime, this is a big week in the scheme of things as the U.S. is sending a delegation to Beijing to come up with some solutions to our massive trade imbalance. That imbalance is running close to 300 billion dollars a year and the Chinese share of the total U.S. trade deficit is close to 1/3^rd.

The U.S. delegation features the odd couple of Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. Click here for my oped in the International Herald Tribune for an analysis of this critical trade summit. Suffice it to say that absent progress on the trade issue, we can expect some volatility in both the bond and currency markets.

This Week's Market Movers

Besides the Beijing trade summit, the Fed will be meeting on Tuesday. Don’t look for it to do anything but hold pat for now so no big news there. The trade numbers also fly on Tuesday and they will be a good prelude to the Beijing summit on Dec 13 and 14. The only other big market mover may be retail sales on Wednesday, as we get a bit of a taste of how the XMAS shopping is going.

Portfolio Shorts and Longs

The King of Biotech, Andrew Vaino, is the one to draw for stock picking inspiration these days in this newsletter. I’m just sitting in cash until the New Year, partly because I’m bearish but partly because most of my time is now spent marketing my China book so I don’t have the proper time to devote to my portfolio. When you are in such circumstances, don’t be afraid to move to cash.

Vaino's Biotech Corner
Hedge for Halozyme

There’s pretty much no way I can top the performance of my pick Halozyme (HTI, up > 130% since first mention) last week, so I’ll just mention that I think the same magnitude jump will occur with Novadel (NVD, up ~30% since mention) within a year.

Anika Therapeutics (ANIK) is a company that sells the biopolymer hyaluronic acid. In some ways, it could be considered the opposite of Halozyme---whose main focus is enzymes to degrade hyaluronic acid. If the idea of hedging existed in chemistry, this would be it. Anika recently took a 25% flyer on news their application to sell a “treatment” for wrinkles had been given conditional approval by the FDA. Anika expects to have the product on the market by mid-2007. The product is pretty cool. It’s an injectable form of hyaluronic acid that essentially fills in the tissue underneath the wrinkle leading to a smoother appearance.

Now, this isn’t a Dexy’s Midnight Runners type of company, though I’m certain Dexy’s is set for a new hit any day now. Anika sells a variety of other forms of hyaluronic acid, for example, Othovisc for treatment of knee pain in osteoarthritis patients, and Hyvisc for treatment of joint dysfunction. They also sell ophthalmic products based on hyaluronic acid. Sales for these products aren’t stellar, but the company is profitable.

In a demographically aging society that worships youth, being able to actually “treat” wrinkles is a fantastic market. Once Anika starts selling their “wrinkle cure”, earnings, the stock price, will jump. Other possible applications include enhancing lip size.

One of the major competitors of Anika’s product will be botox. Recall, there were some recent toxicity problems in certain Botox products: it’s worth bearing in mind that the “tox” of botox stands for “toxin”. Chemically, hyaluronic acid is a carbohydrate polymer.  That is, it’s (literally!) sugar. I believe most people would rather inject sugar to get rid of their wrinkles than, well…poison!

Now, the day of the conditional approval announcement (November 28^th) the stock jumped from $11.62 to above $15. The stock is now trading at just under $13. Technical traders won’t like this stock at all. Right now the stock is stochastically oversold. Short term MACD is bullish, and a couple of days of price increase will turn long term MACD bullish. To be fair, neither, MFI, OBV, or RSI look appealing right now, and, given the disparity in the volume on the stock’s rise compared to its recent decline, there will be substantial resistance around $14.50--15; this still leaves some comfortable profit, however.

So, while I don’t think ANIK is necessarily a great buy right now, I would definitely keep an eye on the chart.

“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.