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December 19, 2006

Goldilocks Redux?

By Peter Navarro and Andrew Vaino,

Navarro’s Big Economic
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I hate to end the year by being dead wrong, but that’s what I was in calling a end to the rally a few weeks ago. Still, I don’t regret moving into cash as one must trust one’s analysis.

Here’s what I think I missed – and the market was doing a better job of parsing. It does look more and more like the U.S. is getting back into a sweet spot Goldilocks economy. In the last few months, it has looked like the economy would slow WAY down on weakness in both the housing and auto sectors and that inflation was high enough to make the Fed nervous.

Now, the data strongly suggests that inflation is moderating. Plus, the auto sector, and particularly the housing sector, are getting some bounce from the continued softness in the long end of the yield curve. A rate of growth of 2.5%, which is close to full employment is possible – particularly if Europe and countries like Brazil in Latin America continue growing.

As for the false signals, traditionalists see the current flat to inverted yield curve as a sign of economic slowdown but it is becoming more and more apparent that the signal is a mixed one, what with China and much of the rest of Asia recycling their export dollars back into the U.S. bond market — bidding up U.S. bond prices and driving down yields. I’m sure some brilliant academic will do a study that sorts out the two effects – investor expectations of a recession (bearish) versus large purchases of U.S. bonds by foreigners (mercantilist but bullish).

As for the China conference, what a farce and a fiasco. The U.S. team got NOTHING, NADA, the DOUGHNUT HOLE. Now the stage shifts to the U.S. Congress which is hell bent on protectionist tariffs.

This Week’s Market Movers 

There are a lot of reports this week but few are likely to offer any surprises. My pick for market mover is the Producer Price Index on Tuesday. Look for some volatility if the PPI data conflicts with last week’s very benign CPI.

Navarro’s Portfolio Shorts and Longs 

I’ve cashed out for the year. Watch AV for hot stuff…

Vaino’s Biotech Corner: Indevus, A Festivus Miracle?

Indevus Pharmaceuticals (IDEV) just announced it was purchasing Valera Pharmaceuticals (VLRX). News of the $120M acquisition sent IDEV down 7%, and pushed VLRX up 60%. VLRX is a much smaller company, with a float of only 4.8M shares.

Indevus’ business model focuses on acquiring and marketing products from other companies, in particular urology products. In essence, this is the model Pfizer and other so-called big-pharma companies are adopting to an increasing extent.

Indevus receives royalties from Lilly for Sarafem, prescribed to treat symptoms associated with pre-mentrual syndrome, and copromotes (with Espirit) Sanctura to treat overactive bladder. In addition, on December 13 they filed a New Drug Application (NDA) for an extended release form of Sanctura. They expect to file early in 2007 a NDA for Nebido to treat male hypogonadism, and have a Phase 2/3 study underway for an agent to prevent STDs, including HIV.

Valera is working on a cool polymer based drug delivery system called Hydron. Basically, Hydron is a flexible polymer that is implanted directly into the body and allows the drug to diffuse out. In theory, it’s possible to design such a device to continuously deliver a drug for years.

Valera also sells Vantas, a 30 X 3.5 mm polymer cylinder that slowly leaches Histrelin acetate, a luteinizing hormone releasing hormone (LHRH), as a treatment for prostrate cancer. The implant is put in non-surgically, and can stay in for up to a year. In July 2006 they submitted a NDA for Supprelin to treat precocious puberty based on the same technology. They also have clinical programs underway to treat drug dependence. Like Indevus, Valera has sales but not profit.

Now, urology doesn’t have the same cachet as does treating cancer or heart disease, but it is medically important. While this may not afford them as much visibility as the Amgen’s of the world, I really like Valera’s drug delivery technology, and think both Valera’s and Indevus’ earnings are set to grow over the next couple of years as more products come online.

On a portfolio note, I’m still holding companies as last mentioned two weeks ago except NPSP. NPSP has now gone down 13% so I sold and took the loss. I picked up AMLN Jan 08 40 calls (@$6.80) as I think this stock has gone down too far.

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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 author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

ISSUE | December 19, 2006