Portfolio review of the week March 27th 2010

The bulls seem unstoppable at the moment with solid gains around the world's stock markets for another week. The Dow Jones Industrial Average, ended up 9 points at 10,850 after being as high as 68 points higher. The index was up 1% for the week.  The Dow Industrials, S&P 500 and Nasdaq Composite all ended with a fourth week of  gains, the longest positive run for all three indexes since the summer of 2009. The FTSE 100 finished down 24 points at 5,703. The index was up 53 points, or nearly 1% for the week.

The market responded positively to the  news that the Euro zone countries had agreed a plan to bail out Greece together with the International Monetary Fund, driving the euro to a 10 month high against the dollar. On Friday afternoon, debt rating agency, Standard & Poor, confirmed it's rating on Greece.

Gw Pharma (GWP -  After last week's strong gains in GW Pharma on a positive regulatory update on Saticex and good trials results for the future U.S. application in cancer pain, the share price has dropped strongly from it's highs close to 130p to finish the week at 113p. This fall came despite Prudential increasing their holding from 10% to 12%. After selling down 3/4 of my holding close to the highs,  Contrarian Investor UK bought back at lower levels. News on the completion of the national phase of the UK and Spanish applications should be available around the time of the May interims so it's a case of sitting tight for now and waiting for further news flow.  Licensing deals in territories outside North America and Europe should also be announced in Q2.

Falkland Island Oil Explorers (Desire Petroleum, Falklands Oil and Gas, Borders and Southern Petroleum, Rockhopper Exploration) - As discussed on a previous post, I have sold my Desire Petroleum (DES) holding and moved into RockHopper Exploration (RKH) and increased my holding in Falkland Oil and Gas (FOGL) in order to be able to use IG Markets CFD guaranteed stops in case things don't go quite to plan next week. Protected trades, limiting any loss to 12.5%, were not possible on Desire for some time. News from the South Atlantic should be due Wednesday onwards on drilling of Desire's Liz field (but perhaps earlier but all conjecture). But it now seems plausible that Desire are testing the well because as a reminder the addendum to the Environmental Impact Statement (EIS) issued in December 2009 stated (http://www.desireplc.co.uk/pdfs/DesireFalklands_EIS_Adndm.pdf), "It is anticipated that the Ocean Guardian semi-submersible rig will be on location for between 18 and 30 days for each we and an additional 7-10 days if the well is tested. The earliest spud date for the first well is 1 February 2010. It is currently proposed to test the wells if hydrocarbons are found. During the well test up to up to 8,000stb/d of oil or 25MMscf/d of gas will be flared dependent on the reservoir fluids encountered and if the reservoir is found to be capable of delivering these rates...". Given it will be 35 days since the Liz prospect "spudded" on Monday (spud was 22nd February 2010), it is possible that Desire are testing the well and they would not be testing if there was nothing substantial in terms of an oil/gas find. On the other hand, drilling to target depth might have been delayed by unforeseen events, which of course is always possible in offshore drilling campaigns. Should be an exciting week either way - keeping my fingers crossed it's not a "duster". 

ITV (ITV) - After a near 10% move upwards this week from 55p to 60p, I took the opportunity to sell off the position. There has been a significant shift upwards from the 50p level in february as Crozier/Norman have taken charge and the advertising market continues to improve.

Coal of Africa (CZA) - A steady move up in CZA to finish the week at 146p as main market listing in the UK is due in the next few weeks. After a wobble, where the share price dropped as much as 7p on rumours that the Vele mine project approval might be compromised by enviromental protestors, the stock recovered to finish broadly flat. Contrarian Investor UK is expecting a move up closer to 200p during Q2. 

ARM (ARM) - Chip designer ARM holdings continued to move up to a 52 week high as tech stocks stay in demand which has squeezed the short. However, the 5% stop loss on the sell has not yet been triggered and on anticipation of a market correction this position may come back in my favour. Holding for now.

SSL International (SSL) - After a positive trading update yesterday (see previous post), SSL moved over the £8 level and triggered a stop loss on the short. This illustrates the problem with shorting shares in this short of market where momentum investors are piling in. With this sort of market, fundamental analysis of a company's value can be for nothing. 

Genzyme (GENZ) -  Pharmaceutical company Genzyme  dropped over 14% in 2 days on concerns over an FDA sanction of a key plans. An initial position was stopped out but I bought back on Thursday night as the stock hit $51. This buy was rewarded with a bounce back on Friday as brokers started saying the FDA related fall had been overdone. Shareholder activist, Carl Icahn remains key to a rejuvenation of this company.

Genzyme position reinitiated

After falling another 7% yesterday, a position was reinitiated at the close at just over $51 in Genzyme (GENZ).  A broker upgrade today following the heavy falls, has sent the stock up 3.5% to just shy of $53.

Shorts continue to be bad bet - SSL International position closed

SSL International (SSL) issued a relatively upbeat trading statement this morning. Total reported sales for the period are expected to be in the region of GBP795 million over 22% up on the same period last year. This increase includes the impact of the acquisitions in Russia and Ukraine of Beleggingsmaatschappij Lemore BV, which was consolidated from 1st June 2009, and Gainbridge Investments (Cyprus) Ltd, which was consolidated from 1st October 2009. Both acquisitions continue to perform well and sales consolidated in this year are expected to be in the region of GBP120 million. Excluding the impact of acquisitions, SSL's branded consumer sales are expected to be approximately GBP630 million. After adjusting for favourable foreign currency movements, this represents underlying growth of around 4%, driven by both Durex and Scholl. Chief Executive, Garry Watts said ""Our geographic footprint has been significantly expanded by our acquisitions of the Russian and Ukrainian businesses. Good sales growth and an ongoing focus on cost control enable us both to invest in the business and expand margins. Our balance sheet remains strong and we continue to be confident in our 50% EPS growth target over the three years to March 2012." 

A short position initiated at 782p was closed this morning at 800p. Swimming against the tide on SSL with the overall strength of the market proved to be a losing trade. My other short, ARM holdings has also performed poorly with the rise in the U.S. market over the last week continuing unabated.

Genzyme falls through stop loss

A tight stop loss on Genzyme (GENZ) at 5% was triggered at the open as the company suffered broker down grades on yesterday's FDA news. The stock is currently down 6.5% at $51.7. 

Another strong day on Wall Street with jobless data

Dow Futures were recently up 59 points as the U.S. Labour Department reported that Americans filing for unemployment benefits fell 14,000 last week to 442,000 against expectations of 450,000 or so.  The FTSE 100 is currently up 48 points to 4,722.

New position in Genzyme on FDA problems

Contrarian Investor UK started a new position in biotech company, Genzyme Corp. (GENZ) after a 6% decline yesterday. The stock fell back after the U.S. FDA (Food and Drug Administration) took action at its Allston production plant to make sure products are made within the required specification, following a series of manufacturing problems dating back to 2008. The FDA will issue a consent decree, which means additional plant testing at extra cost until further notice and will affect its top two selling drugs, Gaucher's disease treatment Cerezyme and Fabry disease drug Fabrazyme. A consent decree may take several years to resolve. Genzyme said the likely consent decree would have a third party inspect and review the plant's operations for "an extended period" to ensure compliance but sales of products made there would not be interrupted. The move would require Genzyme to "make payments to the government and could incur other costs."

But the reason for the purchase is simple. In February, activist Carl Icahn, announced he had nominated four directors to Genzyme's board, including himself, for election at a May 20 shareholder meeting. Icahn Capital LP more than doubled its Genzyme stake to 4.8 million shares from 1.5 million shares during the fourth quarter of 2009. The FDA action may help Icahn gain control of the board and push for a sale of the business.

At $55 (52 week range $47-63), GENZ has market cap of close to $15 billion and a high historical p/e of 35. Analysts were expecting earnings of $2.88 for 2010 but this is certain to be revised down. Assuming earnings of $2.5 per share, this puts the company on a forward p/e of 22 which is not outrageous given Icahn's action to oust the board. Options traders were buying the June calls at $60 heavily last night, indicating that some investors are confident of a bounce back to over $60 in the next few weeks. Though competition is increasing for Genzyme's key drugs, it may be a good takeover candidate for a larger pharmaceutical company looking to establish a presence in the specialist medicine sector. Though the company may fall further, the downside from the FDA action should not be more or less priced in and therefore from a contrarian point of view this stock ticks the right boxes.

Reconfiguration of Falkland Islands oil holdings

With the rise back above £1 for Desire Petroleum (DES) I took the opportunity to de-risk the Falklands Islands portfolio. Unfortunately IG are not accepting controlled risk Contracts for Difference (CFD) trades on Desire which makes a "duster" on the Liz prospect risky for the portfolio. However, there are still accepting controlled risk trades on the other Falklands Oil drillers and therefore I have closed the Desire position and opened a new long positions in Falkland Oil and gas (FOGL) and Rockhopper (RKH) since the downside is protected to a 12.5% loss whilst allowing me unlimited upside "hanging on the coat tails" of a Desire positive update, should it occur. The gains in the other Falkland Islands drillers may be less marked than Desire but an unprotected trade feels foolhardy given the risks.

The RNS from Desire on the results of the Liz field drilling should be due very soon since we are nearly 30 days into drilling.

Prudential ups stake in GW Pharma

Prudential have increased their stake in GW Pharma (GWP) from around 10% to just over 12% in the last few days which adds reassurance to the buys put in place yesterday. It now looks increasingly likely that the steep drop yesterday was market maker manipulation, triggering stop losses for private investors to fill the large Pru order.  Certainly looking at the pattern of trades there was no evidence of large sells and the price was forced down to 113p at one point yesterday morning. GWP is now trading up 0.5p at 119p to buy.

U.S. market turns down on Euro fears

Although the FTSE 100 finished in marginally positive territory after the budget, the DOW Jones Industrials dropped 53 points to finish at 10, 836 as the Euro continued to fall heavily against the dollar.

The Euro was hurt by Fitch, the credit rating agency, which downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in its economy. German Chancellor, Angela Merkel, continues to resist pressure to offer economic aid to Greece as unsurprisngly a bail out would be politically unpopular. Germany is holding out against any deal until the Greek governnment has exhausted its options to borrow on the bond markets, or from the IMF (International Monetary Fund) and allow it to roll over its debt. The Eurozone continues to look a mess as there is no mechanism to devalue which would have been Greece's preferred option under the Drachma.

It was interesting to watch Jim Cramer's Mad Money TV show (CNBC) the night before last where he said the market was going much higher and the bears had been turned into cuddly koala bears.  Yet with all thus exuberance many risks exist for the global economy.  The first quarter earnings season in the U.S. is due to kick off in 3 weeks time and earnings will probably do well as firms continue to drive bottom line profits through cost cutting. However,  top line sales growth will be needed to continue the momentum in the second half of 2010. 

8% fall in GW Pharma is buy back opportunity

I have just bought back the GW Pharma position sold on Monday given the current 10p drop in the share price, presumably on a market maker "tree shake" prior to the AGM.

GW Pharma falls ahead of AGM

GW Pharmaceuticals (GWP) Annual General Meeting is being held today at 11am. The shares are currently down 4p to 119p to sell after slipping significanly in the final hours of trading yesterday. I have been selling down some of my holding over the last 2 days following the news on Sativex UK/Spain registration and the Phase IIb cancer study,  meaning my position has been reduced by around two-thirds. I am continuing to hold a core position and may look to top up on any weakness but given the interim results are not due until May when further may be forthcoming on the Sativex approval process in Europe, these shares may drift a little unless a major new institution comes on board. A buy back point below 120 p looks enticing.

U.K. budget today at 12.30pm and political rant

So Alistair Darling gets on his feet for the U.K. budget at 12.30 GMT, the last budget before the General Election in May or June this year. It is not expected to offer much in addition to the pre-budget statement from November but politically Darling will attempt to give the message that Labour is managing the British economy out of recession in a sustainable way, whilst the Conservatives are being too aggressive in focusing on deficit reduction too early (the U.K. deficit is around 12% of spend) . In the last few weeks, this difference between the political parties has been exploited to paint David Cameron's Conservatives as a party of cutting. Prime Minister, Gordon Brown's, message seems to be working as the latest opinion poll puts the Conservatives on only a 5 point lead over Labour which would lead to a Hung parliament at the election. Many votes don't want to hear the message of austerity - "let them cut something as long as it doesn't affect me!". This worries economists because it may mean that lack of full control in Parliament may mean that deficit reduction plans are not agreed putting the U.K.'s Triple A credit rating at threat.  On the other hand, it could be argued that if a pact is made between one of the major parties and the Liberal Democrats, fiscal deficit reduction could be even more aggressive as the Lib Dems are stated that they too are aligned to cutting the deficit.


Any moves by Darling on a new tax on the banking system will be keenly watched but he has already stated that he will not move with international cooperation. In contrast, the Conservatives seem to be focused on introducing the tax with or without this international agreement. Sweden have already introduced such a tax. It would be a popular move to adopt such as tax and a vote winner.


Both major political parties in the U.K. have not strayed from the message that they will not cut front line services. But the difficulty is there to see, a large budget deficit and growing debt that needs to be dealt with. Taxing the banks and high earners is a popular move but likely to lead to a "brain drain" to more welcoming taxation environments such as Switzerland. Increasing taxation is only likely to stifle wealth creation in the longer term. Cuts in big spending departments such as social security and health seem to be the logical solution, but for both the Labour and Conservative governments this is politically unpalatable even though both leaders know it is necessary. Whether Brown and Cameron say once thing during the election and act differently once they are in No.10 Downing Street is a possibility since any risk to the AAA credit rating would be political suicide. It would be refreshing if politicians acknowledged that there is no magic bullet.  The U.K. must get the budget under control without putting the economy back into the recession. Rather than increasing taxes, cuts in big ticket departments such as Health must be on the agenda. U.K. voters have to understand they can't have it both ways i.e. strong public services and low taxes. I am not aligned to either of the major parties, but I am increasingly frustrated that the  reality of the situation is unwilling to be accepted by the electorate. 

FTSE 100 closes at 21 month high

The FTSE 100 ended at a 21 month high of 5,673, up 29 points. The market was boosted by a strong update from Legal and General and that the inflation rate fell sharply to 3% last month giving reassurance that the Bank of England will keep interest rates at low levels for the foreseeable future. The DOW Jones Industrials are currently up 103, to 10,889 as the markets continued to react positively to Obama's Victory in the House of Representatives on healthcare reform.

Desire Petroleum finally moves up

After several days of small, but steady falls, Desire Petroleum (DES) finally looks to be moving in the right direction with the shares currently up around 5.5%. Bulletin boards like iii.co.uk have been buzzing with around 1000 posts a day and the rumour mill surrounding the potential testing of core samples have been doing the rounds.  The results from Desire's Liz field are due any day which is increasing the volatility of this stock. Desire is not a stock "for widows or orphans" but the fact that it is so speculative makes the potential rewards so exciting. I have continued to hold as the share price has slipped over the last week and given the seismic data from the Desire field I am more than hopeful that the company's management will have chosen the Liz prospect for good reason i.e. that oil/gas shows are present.  The Falkland Islands drillers are at the high stress end of the spectrum and this week the adrenaline will be at maximum power as it could be the make or break for the stocks even though there are other drilling prospects for Ocean Guardian to drill.

GW Pharma announces positive clinical trial data in cancer pain

GW Pharma (GWP) announced today preliminary results of a Phase IIb dose-ranging trial evaluating the efficacy and safety of Sativex in the treatment of pain in patients with advanced cancer, who experience inadequate pain control during optimized chronic opioid therapy. 

This trial was performed in conjunction with GW's licensing partner for Sativex in the United States, Otsuka Pharmaceutical Co. Ltd..  In the US, cancer pain represents the initial target indication for Sativex. Key Points: - Study meets key objectives of providing data to support entry into Phase III - Sativex shows statistically significant differences from placebo in pain scores, according to both the continuous response analysis and change from baseline analysis in NRS average pain - GW and Otsuka now planning End of Phase II meeting with the FDA to gain endorsement of the proposed Phase III program