Archive for April, 2009

What’s up with Dendreon?

Wednesday, April 15th, 2009

I have a few moments to spare from my website duties and just wanted to alert you to the recent action in biotech Dendreon (Nasdaq: DNDN). Yesterday the company reported success in extending the survival rate in men with advanced prostate cancer with their immunotherapy drug Provenge. When I first glanced at the stock chart I thought this was another acquisition in the pharma sector since the share price almost tripled on the open to $21.50, up from $7.30 at Monday’s close.

The news stunned the seven analysts following the company. None of them had a buy rating on the stock but it’s tough to blame them as no cancer vaccine before this has ever had success in late stage testing. After the results were announced, many analysts refused to raise their rating mainly because important details such as how long the drug extended life, if there were any serious side effects, and how statistically significant were the data weren’t included and won’t be revealed until the company presents its results at a medical conference on April 28th, although in a conference call Dendreon’s CEO said that the results were statistically significant in extending patients lives by an average of four months.

If the drug proves to be successful, it is hoped that it can help some of the estimated 29,000 patients who die as a result of the disease each year. The bad news is that the hefty price tag, estimated at $50,000 per treatment, could be beyond the means of many individuals and insurance companies. Also, the treatment is labor intensive and probably wouldn’t be advised for the very old or very frail, as one doctor quoted in Forbes noted. Still, even if Provenge is prescribed to a third of the patients (say 10,000), that represents an annual sales figure of a half a billion dollars.

Is that enough to justify the recent price jump? One analyst quoted in a Thomson-Reuters article feels that if there are no flaws in the company’s data, there could be an immediate 50 percent upside on April 28th. And if the results are that positive, the company maybe targeted as an acquisition which is what drew me to its chart in the first place. Could other people have the same idea..?

Channeling Stocks Update
For those of you following the Channeling Stocks portfolio, today I added previous long winner SOHU to the short list with a $40 target. I also covered LRY at the closing price of $23.24. If the market continues up, I’ll be exiting a lot of positions soon and it won’t be pretty.

Blog Update

Tuesday, April 14th, 2009

The is Dr. Kris’ website developer, Igor, talking. I mean business, so listen up. She’s shackled in my dungeon and won’t be set free until she’s made some significant progress in supplying her soon-to-be-unveiled website. Igor can’t do everything himself–grrrr!

Consequently, expect blogging to be on the light side for a little while just until the site is completed. In the meantime, she slipped me a note saying that she did manage to make some additions and subtractions to the Channeling Stocks portfolio behind my back:

ACL, DNB, and RBC were added as shorts. Short holding LAZ violated upper resistance and the position was covered and closed. All trades are made at the closing price.

Channeling Stocks Update

Monday, April 13th, 2009

The portfolio is updated to reflect typo corrections and new stop losses based on channel levels.

Portfolio returns: Compound vs Average Returns

Monday, April 13th, 2009

In last Tuesday’s blog we addressed the issue of what actually goes into calculating portfolio returns. We began by looking at how variations in input parameters can affect the calculation. But that’s only one half of the story. Today we’ll address the other half: how return values vary depending on the calculation method.

Compound versus average returns
There are two basic methods of calculating the returns in a portfolio–by averaging or compounding– and understanding the difference between them is crucial to your investment approach and also in comparing fund returns. Contrary to what you might think, you can only spend compound returns, not average returns, but it’s the average return that is typically given in fund prospectuses. To understand why this is true, we’ll have to look at both methods of portfolio calculation.

Average returns
The average return is nothing more than the arithmetic average of individual returns. This is a simple calculation: average return = sum of all returns/number of returns. For example, if a portfolio returns 10% in each of three consecutive years, the average return is 10% ((10%+10%+10%)/3). The same return can also be achieved by the following portfolio returns: 15%, 25% , and -10%. However, their compounded returns are not the same which we’ll see in a minute.

Compound returns
The compound return is a geometric mean that takes into account the cumulative effect of a series of returns. It describes an asset that is reinvested at the same time interval (typically on an annual basis) along with its earnings (or losses). This is what mutual funds do. I won’t confuse you with the mathematical formula for compounding, but you can try if for yourself using this handy compounding calculator.

Let’s look at a real example of the difference between these two methods of calculation. Suppose you had invested $1 in the Dow way back in 1900. The average annual return of the Dow from 1900 to 2005 was 7.3%. So, by compounding your 7.3% gains annually from 1900 to the end of 2005 you’d expect to have realized $1,752, right? Wrong! If you look at a chart of the Dow, you’ll see that it began at 66 in 1900 and ended 2005 at 10717.

Doing the reverse calculation, you’ll find that the effective compound interest rate on the gain was really only 4.92% instead of 7.3%. Using the 4.92% as the compounding basis, your 1900 buck would now only be worth $163 by the end of 2005. That’s 90% less than using the average Dow value of 7.3%!

What’s going on? Why is there such a huge discrepancy in returns? There are two reasons to account for this: dispersion of returns and negative returns.

Dispersion of returns
In finance, dispersion can be thought of as how far the real returns are from the average return. For you statistical wonks, dispersion is related to the standard deviation (the volatility). Thus, the more volatile the portfolio, the greater the dispersion.

The following chart below dramatically illustrates the effect of dispersion on several portfolios with the same $10,000 starting value and the same average return of 10%.

What this table means to you, the investor, is that the compound returns of more volatile portfolios can be significantly lower than the stated average return.

Negative returns
Negative returns is the other factor that can have a major impact on returns. Particularly important to investors is how much their portfolios will have to gain after a downturn. Let’s look at the following table:

You can see that the amount that a portfolio has to increase just to get back to break-even magnifies as the amount of loss increases. A portfolio loss of even 30% can take many years to finally recover, and that’s not including the time-loss of money—ouch!

Steps you can take to avoid these problems
First of all, it pays to keep an eye on your portfolio. The strategy of buy-and-hold is essentially dead unless you’re a teenager and can wait 40-50 years for your portfolio to recover. In bull markets, buying strong stocks in strong sectors (“best of breed” as Cramer would call them) is a popular strategy. In bear markets, going into cash or cash-type of investments (treasuries, high-grade bonds) will spare your portfolio the effect of a large negative return. If you own stocks, set stop losses, and stick to them. If you don’t like shorting in bear markets, you can still participate by buying put options or inverse ETFs; however, there’s nothing wrong with preserving cash. Unless you have a high net worth or a lot of disposable income, it’s best for average investors to avoid placing a large portion of their portfolios into riskier assets such as speculative stocks. This reduces the effect of dispersion, but it can also reduce overall returns, too.

I hope you’ve found this article useful. The important thing to remember is that the average return is no indication of how well your money will do in a particular fund. The size of negative returns plus the dispersion of returns are the two factors that will impact your money the most and it’s the compound return that tells the real story.

In upcoming articles I’ll look at ways the investor can use market timing and portfolio optimization techniques to minimize the effects of negative returns and dispersion.

Channeling Stock Portfolio Update
Long pick SOHU hit its price target and sold for $50.03. An updated chart will be displayed later. There were a couple of typos in the weekend chart which are corrected. Also, the stop loss values are changed to reflect the higher channel value if the stock entry was a short and the lower channel value of the entry was a long as opposed to using the average true range. I feel this gives the trade more time to develop. Time will tell if this is a better stop loss criterion.

Blog Portfolio Weekend Update Tables

Friday, April 10th, 2009

There is no new additions or subtractions to the MANDA portfolio.

Here’s the updated holdings in the Channeling Stock Portfolio.

Click on table to enlarge.

Bear market rally or the beginning of a bull?

Thursday, April 9th, 2009

That’s the $64,000 question. Today’s market rally, ignited by Wells Fargo announcing much better than expected earnings, did much to calm investors along with positive statements made recently by other major banks. (Um…now why did they need TARP money?) Wall Street is beginning to get a handle on where the situation stands (at least for now) in terms of predicting future earnings. This decrease in uncertainly is reflected in the fall of the VIX, the market volatility index, which gapped down over 4% on today’s open and closed at 36.5. A trade below 36 will close last September’s gap, adding further fuel to the rally.

Technical bullish signs
Bullish indications are starting to appear, but some of them contain mixed messages. Here are a few of the more notable signals:

1. Rising from historic lows (0.02!), the buy/sell ratio (BSR) finally turned bullish on April Fool’s Day. A BSR greater than 1 indicates more buyers than sellers and is a bullish sign; a BSR less than 1 is a bearish sign indicating more sellers than buyers. (Actually, the BSR is a pretty decent timing signal all by itself and an investor could do quite well using it in that way.)

2. The number of new yearly highs is increasing. From just one or two stocks (other than ETFs) hitting the daily highs list a couple of months ago to nearly 30 today—that’s a pretty decent jump!

3. Many of the major markets are breaking out or are on the verge of it. Before I toss my cape into the bull ring, however, I’d like to see the Dow Transports close above 300 (it closed a hair under it today). The Transports are considered to be a leading indicator of market direction. If that index can close above 300 and if the VIX drops below 35, then I’ll start sliding into long positions.

4. The financials are in an uptrend. Not surprisingly, the banks did especially well today. The Regional Bank Holders, the RKH, and the Financial SPDR, the SKF, both made convincing break-outs (up 22% and 15% respectively) albeit on normal volume. The lack of volume conviction raises some skepticism about the health of this rally, although the relatively light volume could be due to people taking off early for the Easter weekend.

In summary, optimism seems to be growing but the mixed technical messages suggest that the Street is not quite convinced that this rally has long-term legs. A lot of uncertainty has been removed, to be sure, but that doesn’t mean there aren’t more skeletons in the closet waiting to be rattled. Furthermore, I’m not sure anyone can accurately predict how continued high unemployment, rising credit card defaults, and increasing real-estate foreclosures will affect the economy.

An update on the VIX: I was wrong
In an earlier blog, I stated that I didn’t think the market would reach its bottom until the VIX reached another top. In retrospect, that was probably an erroneous assertion. When the VIX was hitting its previous two tops last autumn, the market was in chaos and nobody knew anything. The credit tsunami hit everyone by surprise and even Wall Street wonks were mystified by credit default swaps and credit default obligations. If nobody understood them, how could anyone accurately predict what the fall-out of the blow-up would be? And what would be the fate of the financial institutions who held them? At that time, confusion and fear reigned supreme.

Today, the situation is different. The mortgage meltdown is beginning to solidify. The government has kept its word and has poured substantial equity into the financial system. The Street is beginning to get a sense of where things stand. All of these factors are allaying investor fear which in turn is causing the VIX to drop and the market to rise.

The March bottom could well be the bottom after all. Most likely stocks were greatly oversold and the recent rally could be nothing more than a return to more normal valuations–not the beginning of another bull market. I’m not sure anyone can tell the difference except for maybe Larry Kudlow.

In short, I’ll take my lumps and admit my analysis was wrong. I looked at things purely from a technical standpoint and didn’t take into account the sea change in investor perspective. Hey, if I were always 100% accurate I’d be playing yacht tag right now with Larry Ellison.

Channeling Stocks Update
For those of you who are still following the Channeling Stocks Portfolio, today was another bad day for most of it. Three short positions were closed: AMG, AMTD, and NBL. One long position, OSIP, was added. An updated table will be posted this weekend. Tomorrow I’ll finish up Tuesday’s article on calculating portfolio returns.

Portfolio returns: Are you comparing apples to oranges?

Tuesday, April 7th, 2009

Computing the returns on my two portfolios—the Channeling Stocks and MANDA—got me thinking about how fund managers calculate their returns and what those returns reflect. Most folks probably have no idea how portfolio returns are calculated nor what exactly goes into them and I’m not sure that it’s even spelled out in fund prospectuses. I thought an article or two investigating this subject might be instructive especially as an aid when it comes to comparing similar types of funds. Readers can also incorporate some of these points into their own portfolio management.

Return calculations can vary greatly according to the input parameters and the administration method which determines how returns are calculated. In this article we’ll be looking how returns vary according to input factors. Tomorrow, we’ll see how portfolio administration techniques affect yields.

Cash allocations and hedging techniques
There are two major inputs that can affect overall returns:

1. The amount of the portfolio allocated to cash. Fund managers need to have a certain percentage of assets in cash to honor redemptions. Generally speaking, the more the fund is traded, the higher the percentage of the portfolio will be allocated to cash. The amount in cash represents the percentage of the portfolio that is not invested, meaning that in favorable markets, returns will be reduced according to increases in the cash position. On the other hand, in unfavorable markets a larger cash position will help to mitigate losses. The table below illustrates the cash effect.

2. The types of hedging techniques used. Many fund managers earmark a portion of fund’s holdings for hedging purposes to guard against currency and interest rate fluctuations. Options and futures are common hedging instruments. Proper hedging techniques can reduce portfolio risk but at the expense of reducing yields. The amount of the reduction depends on the type of hedging instrument and the size of the fund’s resources allocated to it.

Fund prospectuses generally give hedging guidelines. Although I’ve never seen the impact that hedging has had on performance, it doesn’t mean that it can’t be found somewhere in the fine print.

Tomorrow we’ll see how returns are affected by management methods.

Channeling Stock Portfolio Update
Because of the market sell-off in the past two days, I’ve added more short positions to the portfolio. I just hope they don’t bite me in the butt if the market resumes its upward movement which it could do shortly. Although the market moved lower today, so did the VIX which is contrarian sign. Also, the Trin is moving into heady territory, closing the day at 2.29—another bullish sign.

The point of this fund is to learn and have some fun, so here’s a list of today’s shorts: AMG, LRY, MHP, PANL, PAS, PCAR, and our old friend ROP which I exited a couple of days ago. Yesterday, I also shorted BGG. All prices are closing prices.

The portfolio table will be updated on Friday.

Channeling Stocks Portfolio Update

Monday, April 6th, 2009

Below is the current holdings in the Channeling Stocks portfolio. This reflects the past week’s additions and subtractions. I did forget to mention that on 4/2 the Ultrashort Financial ETF, the SKF, violated its lower channel forcing a sell. My apologies.

As I mentioned in the MANDA update, please note that the realized return is based on a total portfolio value equal to exactly that of the current holdings (where each holding is of equal dollar value). If a static portfolio value is assumed, the realized return will be a different number (either more or less). There’s no one correct way to calculate the theoretical total return. I prefer the former method for a couple of reasons: it’s easier to calculate and easier to demonstrate, i.e., the reader can see exactly how each trade performed.

I decided in this portfolio to compare the dynamic realized return to a “static” return. To calculate the static return, I began with a portfolio of $500,000 with each position set at $10,000. ($10 commissions and 4.5% margin interest computed monthly are also assumed.) You can see that the difference between these two returns is quite dramatic: -11.5% for the dynamic portfolio versus only -2.4% for the static one. Obviously, this is because there’s a lot of cash in the latter portfolio as opposed to none in the former which cushions the drawdown.

Click on table to enlarge.

MANDA Weekend Update

Monday, April 6th, 2009

A little late getting this out, but here it is.

Exar Corporation (Nasdaq: EXAR) successfully completed its acquistion of hi/fn, Inc. (Nasdaq: HIFN) at $4 per share as of midnight April 2nd. This transaction is reflected in the latest MANDA portfolio holdings shown below.

Note that in the MANDA portfolio as well as in the Channeling Stocks portfolio, the realized return is based on a total portfolio value equal to exactly that of the current holdings (where each holding is of equal dollar value). If a static portfolio value is assumed (say a $100,000), the realized return will be a different number (either more or less). There’s no one correct way to calculate the theoretical total return. I prefer the former method for a couple of reasons: it’s easier to calculate and easier to demonstrate, i.e., the reader can see exactly how each trade performed.

Click on table to enlarge.

The OLED screen revolution

Friday, April 3rd, 2009

Yesterday I wrote about a revolutionary new technology that is going to make a dinosaur out of Edison’s light bulb. That technology is called OLED, short for organic light-emitting diode. Not only will it change the way we light up our lives but also the way we watch TV and interface with our computers. Today I’d like to conclude our discussion of this marvelous new technology by looking at how OLEDs will revolutionize screen technology and the companies that working to make this so.

What’s so exciting about OLED screens?
Computer and TV screens based on OLED technology offer many advantages over today’s flat-panel LCD (liquid crystal display) and plasma technologies, including the following:

1. Lower power consumption, making them a better choice in portable devices where energy efficiency is at a premium. Also, many countries and a few states including California either have or are considering banning large plasma screen TVs because they’re such power hogs.

2. Faster refresh rate and higher picture contrast.

3. Greater brightness and a wider viewing angle.

4. Greater durability with the ability to operate over a broader temperature range.

5. Thin, light weight, flexible and even transparent which will make for exciting new displays. (The Sony flex-screen prototype is shown in the photo at the top.)

It’s the last feature that’s generating the most buzz. Imagine a widescreen TV that you can roll up, tuck under your arm, and unfurl anywhere—how cool is that? This is why there’s so many entities interested in developing this technology as quickly as possible.

Of course, there are obstacles that must be resolved first. As I mentioned yesterday OLED technology is already being used in small-screen devices such as cell phones, digital cameras, and PDAs. Problems arise in translating the technology to larger screens. One of the main challenges is display lifetime especially with the color blue, but with the number of players all racing to develop this technology, industry experts feel that these problems will be conquered within a few of years.

The major OLED players
Governments, universities, and industry have come together around the world to fund joint research ventures into this promising and potentially vastly lucrative technology. In yesterday’s article, I mentioned GE being at the forefront of developing OLED-based lighting. Also in that field is Energy Conversion (Nasdaq: ENER) and Universal Display (Nasdaq: PANL). (I forgot to mention Philips. See below for more info.)*

The major industry players in OLED screen development are the usual suspects: Sony (NYSE: SNE), Panasonic (NYSE: PC), LG Display (NYSE: LPL), Samsung, and Toshiba (these last two trade as bulletin board stocks in the US). Sony was the first company to bring a larger screen TV to market, the 11” XEL-1. The super-thin TV (shown above) was introduced late in 2007 at a price of $2500. A 27” model is in the works with plans to be introduced sometime in 2009, according to Sony CEO Howard Stringer.

Samsung has sent out mixed messages regarding its release of wide screen OLED TVs. First the company said February that they are committed to OLED technology giving a 2009 release date for OLED TVs and laptops and a 2010 time frame for the release of flexible OLEDs. Yet, a month later the VP in charge of Flat Panel Development said that the public shouldn’t expect any OLED TVs from them anytime soon. Nobody is sure what happened—whether the company is getting its wires crossed or that it’s reconsidering its commitment to OLED TVs. There’s a good case for the latter scenario as advances in LCD technology has significantly lowered power consumption and they’re much cheaper to make.

Toshiba has also put development of large-screen OLED TVs on hold citing high manufacturing costs. On the flip side, LG unveiled a 15” OLED TV at the 2009 Consumer Electronics Show in January. They’re hoping to get it to market sometime this summer. No pricing structure has been set as yet.

A brief glance at the charts
The non-bulletin board stocks–Sony, Panasonic, and LG–are all trading off multi-year lows. LG’s chart is the most compelling. It’s trading near $12, double the price of its November low. Volume has been heavier than normal and yesterday it broke out of its base.

There seems to be an exciting and profitable future in store for OLED-base technologies, especially in lighting. Right now there are a lot of technological and cost impediments to widespread production of OLED computers and TVs, but I do believe that day will come. And I hope it’s soon because I sure hate lugging my heavy laptop everywhere!

*One company I neglected to mention yesterday (because I just discovered it today) is Philips Electronics (NYSE: PHG) which is also racing to develop its own line of OLED lighting panels under the Lumiblade name. It plans to offer architects and lighting designers OLED starter kits to introduce them to this technology. Sounds like an excellent marketing plan. Philips stock has been stuck in the $15 – $20 range, trading well off its recent high of $45. A convincing break above $20 would be a good entry point.