Navarro’s Big Economic Picture

Anybody who claims right now to know what the market’s likely direction will be necessarily must be lying through their teeth – or deluding themselves.  Right now, a bull run to the end of the year is a toss of the coin, with the odds 50-50.  That’s because for every bullish sign, there’s a bearish one.

Bullish: All three major indices turned bullish in August, and each of their ETFs is a technician’s buy.  Bearish: They all did it on relatively low volume, and September is typically the stock market’s cruelest month.

Bullish: Oil and gas prices are moderating.  Bearish: The housing market continues to deteriorate at an increasing rate, and the auto sector is sliding into the tank.

Bullish: Long term interest rates and mortgage rates are falling as the Fed stops raising interest rates.  Bearish: The yield curve remains flat to inverted which is typically a sign of a coming recession.

I love this kind of situation from an analytical perspective because it poses the most difficult of forecasting challenges.  On the other hand, I hate this kind of situation from an investing perspective because laying down your money is much more like gambling on a coin toss than speculating carefully in a poker game.

Let’s see what the post-Labor Day market brings us.  A nice run-up to December would help more than a few money managers get back on the winning side so the bias is bullish.  Just be patient now, and don’t overreach.

This Week’s Market Movers
Rarely are weeks so uneventful in the economic report arena.  My bet on the only major market mover of the week is also the only major report.  Productivity for 2006Q2 will be revised  on Wednesday – with up being bullish and down bearish.  Productivity is important because increased productivity is the best check on wage inflation.  My own view is that the go-go days of 3+% annual productivity growth are behind us for a while – and that’s hardly good news.

Portfolio Shorts and Longs 
I did my Attila the Hun impression on my portfolio this week, first closing the last of my EPIXD on some bad news from the FDA.   I have no doubt at this point that some insider trading occurred in the days prior to this bad news as the stock softened quickly in advance of the news.  Sure wish the Feds would clamp down on this crap.

I also closed my stem cell ASTM position and cut my position in STEM in half on some news that the latest “good news” about stem cells was likely overstated.   STEM remains technically strong.

I’m most bullish on my ABAX position.  ABAX is a portable blood analysis play and it reached the top 10 on the IBD 100.  Both fundamentals and technicals look good.   Meanwhile, HTI – the fertility macroplay -- is behaving nicely and AXCA – a small pharma -- waits bullishly in the wings.

Vaino’s Biotech Corner: Might as well go for a Serono!

For readers less familiar with obscure 1980s Canadian pop music, “Might as well go for a soda” was a big hit for Kim Mitchell in the late 80s in Southern Ontario (note, this is nowhere near LA’s third airport).

Serono (SRA) is decent sized Swiss biotech company, with a market cap of $12B and about the same size as Biogen-Idec or Celgene.  On speculation of an acquisition of Serona late last year the stock price was bid up to the low 20s.  When it became clear in January that no such deal was going to happen, the stock reconsolidated to its pre-hubris price range in the high teens.

Serono has over a dozen marketed products.  Its biggest products, Rebif with sales of $1.2B last year and Gonal-f ($500M in sales), are for the treatment of MS and infertility, respectively.  With the reintroduction of Elan’s Tysabri, Serono will face some competition on the MS front.  As I mentioned two weeks ago in discussing Halozyme, reproductive health is a growing and profitable field right now.

In addition to their marketed products Serono has a pretty good pipeline of drugs in development.  They recently presented positive results from a Phase 3 study for the treatment of HIV-associated Adipose Redistribution Syndrome (HARS).  HARS, which occurs in HIV patients taking the current HIV nucleoside therapy, causes abnormal fat accumulation and may be accompanied by other metabolic problems.  While the number of AIDS deaths has been decreasing in Europe and North America, it’s been because of this type of nucleoside cocktail and the number of patients living with HIV is still substantial.  There is no current treatment for HARS.  Serono has submitted a New Drug Application to the FDA.    In addition, they also have five other Phase 3 clinical trials ongoing, four Phase 2 studies, and a handful of Phase 1 studies.  All in all, this is a pretty impressive pipeline.

Fundamentally the stock is solid.  While SRA’s (price/earnings) X (price/sales) wouldn’t make any watch list of Benjamin Graham’s, of current biotech companies, SRA would be his favorite. Technically the stock is a buy, though stochastics indicate the stock is overbought.  Aside from the speculative bump in anticipation of a takeover noted above, SRA has been in a consolidation pattern since June of 2005.  With MACD and OBV looking bullish, some volume—perhaps catalyzed by some good news—could cause a break out when trading begins in earnest after Labor Day.  Just be careful – average daily volume is below 100,000 shares so liquidity is an issue.

Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.  Andrew Vaino is a Ph.D. chemist currently teaching at The University of Maine.

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.