精华 苦辣酸甜难书尽，成败得失笑谈中

[加京游子]

Also your leaders hunting is in direct conflict of your "Buffett" approach

In his earlier years, Buffect bought undervalued companies that appear to go belly up, then changed management. And you know very well that a company is undervalued for a reason. The undervalue can only be reversed if the reason can be corrected.

Under your leader definition, you will very unlikely find anything undervalued. For example, you mentioned earlier AAPL in the 10's or RIM in the 50's pre split. Then, Ipod was not even conceived and Blackberry was in its infantry amid legal battles. Both companies appeared to be in great difficulty, far away from their current leadership positions. You can easily find current leaders but they are hardly undervalued. And you can easily find undervalues but they are hardly current leaders. Throughout the entire banking space, I can only spot BAC fitting the "undervalued" and "leader" bill. There is a perception discount (BAC received 45B TARP --- so, it is in C's league). There is also a Lewis discount --- he bought CFC and Merrill and as such, is thought to be a weak leader and manager. I beg to differ. In my view, the US and the world at the time could not afford another large-scale blowup in Merrill. I think his buying Merrill helped in a large part save the US and world financial systems. Why would otherwise Paulson and Benanke stronghanded him to complete the acquisition, going as far as threatening his job and that of his managemnt team. I can't wait for BAC to retire TARP and get the US off its back.

You also mentioned Walmart. Yes, it has been very successful from a business point of view, possibly one of the best business models. But the sweet payoffs to earlier investors are long gone now. It is THE retail leader but it doesn't have much room to grow. Personally, I would view Walmart as a very weak stock to own.

I don't mean to rain on your parade but let me repeat. Your vision is grand and admirable. At my age, though, I think I know myself very well and I don't see myself as a material to be part of your grand pursuit, as simply as that. I am not that material, period.

Best of lucks!

 

[lazycatcat]

Thanks for the phone number. We can probably talk or meet once we find or work towards a common target. I didn't follow BAC as closely as WFC and JPM. Maybe you can share some more details like:

- Earning sources and expenses.
- Pre-tax and pre-provision profit versus average loans
- Derivative book changes, especially credit derivatives
- Off-balance sheet exposure (maximum loss) and capital requirement for binging QSPE back to book.
- Allowance ratio over loan totals. Type of debt securities (for sale) on its book.
- Funding costs.

BAC is going to survive for sure. How long it will return to normalized earnings, I am not sure. There are a lot of stuff, mainly from MER, on their plate.

MER has a very different culture from BAC's other operations. I was completely amazed how John Thain could become such a person...

I am actually quite sympathetic to AIG's former CEO. If it was not for that stupid New York lawyer, AIG shouldn't go through such collapse....

 

[加京游子]

I understand your points of using options to bet on bio and I thought about it before. However, there is a big disadvantage for us here.

For the short-term option trading to succeed, the key element is surprise. This means either we have unique information advantage or no one has information advantage.

I am focusing on situations where no one has substantial information advantage. The area I am focusing on is quarterly earning report. Each quarter, there are always earning surprises, either up or down. This is the event driven option operation I am focusing on (Kamikatze operation).

The consensus analyst estimate is available and is more or less reflected in the stock price. Option is normally cheap at around 1 week towards expiry for about $0.10 for strike above 10% of current price. So, if earning surprises show up, you profit from the momentum generated by the surprise. Plus, the downside is much smaller since $500 can buy one 100 calls.

This operation requires understanding of target companies ...

Market reactions to ER are so unpredictable, especially in one day or two. I ask you to take a look at immediate market reactions to BAC's 1QER and 2QER and what happened a few days afterwards. ER is actually the most difficult event to play, in my view. Don't forget to factor in manipulation. I am sorry but I would have to call you crazy if you buy options within 5 days of expiration unless you have insider info or to throw your money away! Have you heard of pre-earnings runups? Anticipation may drive the stock up and up prior to ER and when ER actually is released, selling on the news tanks the stock. I have seen too many of these happenings. BAC 1QER and 2QER beat the street by wide margins, but the stock sold off and only to recover later. Buying options within 5 days of expiration amounts to pure gambling under any circumstances in my book --- again, unless one has insider info and I don't!

 

[加京游子]

Thanks for the phone number. We can probably talk or meet once we find or work towards a common target. I didn't follow BAC as closely as WFC and JPM. Maybe you can share some more details like:

- Earning sources and expenses.
- Pre-tax and pre-provision profit versus average loans
- Derivative book changes, especially credit derivatives
- Off-balance sheet exposure (maximum loss) and capital requirement for binging QSPE back to book.
- Allowance ratio over loan totals. Type of debt securities (for sale) on its book.
- Funding costs.

BAC is going to survive for sure. How long it will return to normalized earnings, I am not sure. There are a lot of stuff, mainly from MER, on their plate.

MER has a very different culture from BAC's other operations. I was completely amazed how John Thain could become such a person...

I am actually quite sympathetic to AIG's former CEO. If it was not for that stupid New York lawyer, AIG shouldn't go through such collapse....

I don't go through BAC's book to have answers to your questions. It is an empire. I have broken down the major segments for you! Stock investing is an art, not an exact rocket science, my friend. Of course, IMO.

You are getting quite personal about these cases now. They did things their way at their time. It is all water under the bridge. In case of AIG's demise, the single force was GS, selling CDS, MBS and CDO to AIG. Knowing AIG has bought these derivatives at hugely inflated prices, GS shorted AIG commons like there was no tomorrow. These shortings amounted to nothing shy of insider transactions. But GS got away, time and again. AIG was doubly played by GS.

 

[加京游子]

I understand your points of using options to bet on bio and I thought about it before. However, there is a big disadvantage for us here.

For the short-term option trading to succeed, the key element is surprise. This means either we have unique information advantage or no one has information advantage. ...

I am sorry, your lack of understanding towards biotech is showing. Let me refer you to DNDN, HGSI, OXGI, JAZZ and SVA before you make comments as above. One doesn't need unique information advantage to profit tremendously from options. Good results are, however, needed, which can be analyzed diligently. In DNDN's case, I did not hold calls. I held some stocks and sold puts because like I have stated, at that time my capital was tiny and I could not afford to take a blowup. For HGSI, OXGI, JAZZ and SVA, I did not own them because I did not understand them well enough to take a position except SVA, which I did not trust. SVA is the first-in-class now with the H1N1 vaccine and the actual contracts have removed my suspicions. The Hep A vaccine seems to sell too. I think the swine flu threat is real and that market can be tremendous. I will attempt to build a long position there in the next little while when my hands can get around.

In the biotech space, a good trial result can send a stock up by 100%, 200% or even 300% in a single day. The gains to rightly-striked options are simply unthinkable to most people. No surprise is needed, just good results! I am still in my hunting and fishing efforts! ARNA is the first to come this month.

 

[加京游子]

Lazycatcat: I have shared with you everything I know

I will record my future transactions here with my DD. For now, I am waiting for BLOSSOM results to be reported. That is a single significant operation, either way.

I wish you the very best of lucks in your grand pursuit. I wish I could join you but can't. I am simply not that material. Besides, I truly believe actual operations are very different from theoretial explorations. One simply has to have a stake to win the game (or lose it for that matter). Please do share with me your further DD and thank you in advance.

 

[加京游子]

Fun reading for the weekend, I may treat the story as a hint

The Fundamental View: CHINA AND THE BUZZ OF A PENDING BANK DEFAULT

I would be extra happy if the rumoured story will come true and bring down GS to its knees --- a well justified payback to GS! Not recommending to anyone, I may buy some GS puts. Since the US cannot do anything to GS, it would be great if China can flex some muscles and punish GS it rightly deserves. China did it to Geroge Soros in the late 1990's in HK and I really hope it can do it again to GS this time around, sticking it all way up GS' rear!

 

[lazycatcat]

I don't have any grand schemes. Just to study different industries and companies one by one. In the process, there might be chances to make a profit.

I must admit I don't understand the bio companies. I appreciate you are sharing your knowledge so that I can follow closely.

The China story is a good find and it is difficult to evaluate its results. Collective breaking of binding contracts may be equivalent to default by a nation. Any nation can do that but the consequence will be very detrimental. Plus, a hit in the scale $15 B to GS or JPM is manageable. Not sure about UBS though.

My primary goal of option operation is to limit amount of loss to a few hundreds. Then target for potential gains of over 5 times. In the mean time, I sell puts or covered calls for companies I know well like WFC or USB etc.

Selling puts is equivalent to construct junk bonds....

One thing we have in common is we are spending time and effort on stocks. Disagreement is the key to critical thinking and I do appreciate your comments, positive or negative alike.

 

[lazycatcat]

You may have some misunderstanding on Buffett's early operations. The climate has changed and such operation is difficult to find nowadays.

The companies he invested in were mostly profitable and was selling far below their cash holdings. For instance, a company may have $80 dollar worth of cash/bonds but was selling at $40. Plus, the operational part of the company was profitable or break-even.

Such companies may not exist anymore although I came across National Prestel a few years ago. By the way, this is a really interesting company. It was mentioned in 1934 Ben's book and is still operating. The other day, I saw its products in Costco - the portable electrical heaters.

We are all moving to companies whose values depend on their future earning powers. However, Buffett's basic formula of estimating future cash flow and discount them back to today's value is still as meaningful as before.

Different people have different estimates. Regardless of the values of estimates, that is the foundation of today's stock price.

 

[lazycatcat]

Fairfax

Fairfax operates under a very simple model. With $1 dollar of equity, it writes $1 dollar or $2 dollar of insurance premiums. Due to time difference etc of loss payment, it can accumulate about $4 worth of investable funds (called floats).

Thus, a 5% return on the $4 is equivalent to 20% return on the $1.00.

The keys to realize above model are two: 1). Insurance must break-even in its operation. In other words, the combined ration (premium received over loss and expenses) should be below 100%. 2). Conservative investment of $4 with above average returns.

For growth, Fairfax must be able to find similar new opportunities with the retained earnings.

From historical point of view, Fairfax is doing OK in keeping combined ratio around 100% but average is above that I believe. This means the float is not for free and they have to compensate from investment.

Fairfax did an excellent job in doing 2) purely in the market. It is so conservative that it is willing to give up 50 to 100 basis point to buy insurance from Berkshire Hathaway on its portfolio of muni bonds in 2008. Plus, it has been good at spotting asset bubbles and market trend since its inception.

In comparison to Berkshire Hathaway, Fairfax's insurance opeations are not as good as those of brka. Plus, Fairfax is very limited in using its retained earnings to buy good operating businesses.

On the plus side, Fairfax is still small and Prem Watsa is young at 59.

Currently, Fairfax is selling at its book value and thus it is fair valued. Because of the simple formula specified above, Fairfax should always be sold at around its book value. So, its stock price is nothing to be exciting about. However, it is not a bad starting point to be associated with great people at this point.

 

[lazycatcat]

ARNA

The financing deals of ARNA are quite interesting:

- As of June 30 of 2009, ARNA has 80 M common shares outstanding, $40 M cash and $90 M long-term liabilities. ARNA has quarterly loss of ~$35 M.

- In July of 2009, summary of financing deals are as follows:
- Deerfield Management: $100 M secured debt at 7.5% with 28M warrants at $5.42 per share. Addtional $20 M optional secured debt with same conditions and 280K warrants at $5.42 per share for each addtional $1M debt exercised.

- Azimuth equity deal of total $50 M. $14.7 M collected for issuance of 5.7M shares. Not sure about exact details of the deal but presume same condition as above.

- Issuance of 12.5 M shares for total proceeds of $49.7 M.

- Total share oustanding assuming fully exercised options by above investors: 80M + 12.5M + 28M + 5.6M + 5.7M + 13.5M = 145 M shares. Total debt on book would be around $200 M. If ARNA rises to $10 per share, total valuation of the company is $1.65 B.

- Deefield deal is interesting. It can be interpreted as having strong confidence in ARNA and ARNA's patents etc are worth at least $100 M. From a more darker side, this deal may provide hedging opportunities for Deerfield to construct cheaper option bettings on ARNA.

- Option pricing of ARNA is also interesting. October call is the steepest and then premium is quite flat towards April 2010.

Something interesting should happen to ARNA in Sept/Oct....

 

[lazycatcat]

ARNA

Just for fun of opening up some thinkings on ARNA DeerField deal - no other intentions.

On July 17th, Deerfield provided $100 M secured debt at discount of 2.25% to ARNA along with additional $20M secured debt at the OPTION of Deerfield in the next two years. Let me play evil and Deerfield could make an immediate profit as follows:

- Short 28M ARNA shares at say $5.00 per share on July 10th and gets $140 M immediately.

- If BLOSSOM doesn't hit and ARNA tanks to $2.50 per share (God forbids), Deerfield will get back $70 M principal back and essentially has less than $30 M at risk. I don't know how long a short position can keep as I have no experience here.

- If BLOSSOM hits and ARNA shots past $5.42 per share, Deerfield makes $40 M - $11.74 = $28 M. Plus the option to force ARNA to borrow $20 M and thus excise 5.6M option at $5.42 per share.

Overall, I think the deal is structured for an upward surprise of ARNA but with downside protection.

 

[加京游子]

Just for fun of opening up some thinkings on ARNA DeerField deal - no other intentions.

On July 17th, Deerfield provided $100 M secured debt at discount of 2.25% to ARNA along with additional $20M secured debt at the OPTION of Deerfield in the next two years. Let me play evil and Deerfield could make an immediate profit as follows:

- Short 28M ARNA shares at say $5.00 per share on July 10th and gets $140 M immediately.

- If BLOSSOM doesn't hit and ARNA tanks to $2.50 per share (God forbids), Deerfield will get back $70 M principal back and essentially has less than $30 M at risk. I don't know how long a short position can keep as I have no experience here.

- If BLOSSOM hits and ARNA shots past $5.42 per share, Deerfield makes $40 M - $11.74 = $28 M. Plus the option to force ARNA to borrow $20 M and thus excise 5.6M option at $5.42 per share.

Overall, I think the deal is structured for an upward surprise of ARNA but with downside protection.

You are pretty good at independent research, and I like that a lot!

ARNA was heavily shorted prior to the financing deals. Rumours have it that Deerfield was short and the warrants they got are the hedge. Others speculate that Deerfield started to short after the deal. A few days ago, there was one buy of 50,000 Oct. puts at the 4 strike at 1.05 (a puts buy of this magnitude has to be pre-arranged by the buyer and the MM). The next day the stock nosedived. Speculation has it that those puts were bought by a short hedge fund to manipulate the pps by taking advantage of the “Madoff" exemption on naked shorting. With the MM shorting 5M shares to balance their book, the short hedge fund bought those shares again to cap the pps. Last Tuesday, there was another buy of 20,000 Oct. puts at the 2 strike. Witnessing what happened to DNDN prior to April, I truly believe in this rumour but there is no way to verify it. The market is not a fair place for all participants. Big boys manipulate it frequently at will, especially, developmental-stage biotechs. Howere, they got burned badly occasionally. The rocheting up of DNDN in April has badly hit the wallets of quite a few hedge fund shorts. Should BLOSSOM hit, the wallets of quite a few hedge fund shorts will be badly hit again. I can not wait to see that.

The reason why Oct. options are so actively traded is that it is known BLOSSOM results will be released in September but the company did not hint the exact timing, before or after OE. Whatever happens to the pps prior to BLOSSOM is not that much meaningful unless there is leak.

Something big is definitely going to happen to ARNA, good or bad, dude! BLOSSOM is a single binary event for ARNA, do or die. Both sides have started to battle for positions and the battles are going to increasingly heat up as the day goes by. In the biotech space, there are 2 significant binary events --- release of pivotal trial results and FDA PDUFA action (AC committee meeting is included but DNDN was the first exception in history whereby the FDA did not approve Provenge despite the AC＇s 17-0 safety and 13-4 efficacy voting results back in May 2007. This corrupted decision destroyed many lives and dreams and changed my own lifestyle forever. There is a book just recently released by Deep Capture in investigating how evils orchestrated to derail the approval of Provenge). My bet was already waged for a positive BLOSSOM result. Wish it is reported as early as possible as and good for I have another bus to catch --- I want to load more DNDN before September 24, the earlier the better.

You are pretty good on the financing side. Another side of the biotech space is market potentials for approval (if the data are bad, forget it). As developmental-stage biotechs are pre-earnings, traditional valuation models do not work. Any attempt at valuation has to be done by estimating sales post approval with a multiplier (that depends on growth). Without Provenge pricing, I cannot come up with a rough valuation model at all. The company has made it clear in the ER conference call that Provenge pricing will be talked about, among other things, at the Analyst Day. In the case of DNDN, off-label use is a wild card in any valuation model. Yet, again, how to value the pipeline is another huge challenge to anybody.

As a side, why do you not spend some time on DNDN？It is presenting at 4 biotech conferences before the Analyst Day on September 24. I do not expect a company to go for 5 ＂dog and pony＂shows if it does not have anything new to say. But one never knows. Strangers things have happened before.

 

[lazycatcat]

What do you expect ARNA and DNDN's stock price to rise to ?

 

[加京游子]

What do you expect ARNA and DNDN's stock price to rise to ?

DNDN: 9902b (IMPACT) has met／exceeded all endpoints per the SPA and Provenge is widely perceived to gain approval this time around. Some important timelines: aBLA is filed 4th Quarter (December 31, let me be the most conservative here with time estimates) and the filing is rolling; FDA approval by the end of June next year (Provenge is on priority review, which carries the maximum of 6 months since filing. Some say it will be approved by Xmas, others believe a maximum of 3 months. I always take the most conservative view). It is expected that the bottleneck DNDN is facing is that production capacity will not be able to produce enough supply to meet demand, and a rationing will have to be in place in the first few months after approval. I do not have any valuation model at the moment. But I am very confident DNDN will be in 3-digit pps 2 years after going to market. Then Nuevenge will go on trials; then PrtR8 will go on trials; then P-11 results should be available (for label expansion to all prostate cancer). Give DNDN 5-8 years when the pipeline is in full fruition, I am very confident of a 4-digit pps before splits. This is truly the next DNA／AMGN in the making, my friend. See my earlier posts.

ARNA: it all depends on BLOSSOM. Suppose a clear hit, some expect it to surge to 10, 12 immediately, others say 15, 17, 20, 25, all over the map. I will not attach any specific expectations except to expect a hit, especially the 20mg dose. I will take whatever the market has to offer. Do not forget the short squeeze. I have posted the estimated important timelines earlier. I do expect to make a boatload if BLOSSOM hits. But if BLOSSOM misses, I am sure my calls will expire worthless. I am fully prepared for the worst-case scenario.