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Biotech Roundup: Goldman Short Selling, Biotech Short Interest, Supply Down Prices Up, Amgen's Break


More money chasing fewer goods. The classic Econ 101 recipe for price increases. Am I talking about gold? Silver? Oil? Corn? Copper? Nope. Stocks.


Goldman Slapped for Short Selling

Goldman Sachs (GS) coughs up $2 mln in fines to NYSE regulators because it allowed customers to short stocks going into PIPEs and other sales of stocks. What Goldman did was to allow customers to mark their trades as "sell to close" when they did not in fact own any shares. This was a convenient way around the requirement to have to locate shares first before they shorted.

I've written before that if the SEC really wants to go after this aspect of the market, and they could convince Congress to let them keep the money from the fines they levy, the SEC could issue enough fines to fund their operation into the next century. It is impossible to overstate how common this illegal practice was (is) in the market. Whether it is using insider information of a coming deal to short or shorting without first locating, it happens every day.

The most humorous (sad?) part of this is that for two years of violations, Goldman got a $2 million fine. A rounding error compared to the money it made on these trades.

Biotech Short Interest Climbs

I know this is late, but things have been a little busy around here. Biotech short interest (as measured by short interest of companies in the NASDAQ Biotech Index) was up almost 10% in the Feb-March period, the largest month-over-month gain since I started tracking it in February of 2004. The average NBI stock has 5.9 million shares short compared to the average NASDAQ stock, which has 2.4 million short. Overall, short interest in the stocks in the NBI represents 12.63% of overall NASDAQ short interest despite representing only about 4-6% of the overall market cap.

We will get another peek at short interest next week and it will be interesting to see if the events of the last month made any difference.

Supply Down, Prices Up

More money chasing fewer goods. The classic Econ 101 recipe for price increases. Am I talking about gold? Silver? Oil? Corn? Copper?

Nope. Stocks.

I was struck by data released by the Federal Reserve this month showing $548 billion dollars in stock was taken off the market in 2006. That compares to the old record of $295B in 2005.

I've been reading about how there are parallels between this period and the "bubble" in 2000. I think any smart market watcher can find parallels in any period they choose. But one thing that is vastly different in 2007 from 2000 is the amount of stock taken off the table. In 2000, was going public with an S-1 photocopied from a McDonald's (MCD) napkin. Supply was everywhere. Back then I was writing about that, but never fully appreciated the problem it was creating in terms of simple Econ 101 (oversupply leads to price declines).

Now we have the opposite situation. Sure, it's funded by huge debt levels but you can't get around the fact less stock is out there. John Succo Buzzed recently, criticizing earnings quality because EPS gains are increasingly coming not from better business conditions but because of lower number of outstanding shares. He's exactly right, but with a market of participants schooled to focus on EPS and other metrics based upon "something per share" it doesn't matter (well, until it matters of course). If a company was worth $10 bln with 1 bln shares outstanding yesterday, and it buys back half of those shares, the company is still worth $10 bln so the stock price goes up.

The bears are fighting an uphill battle in this kind of an environment. The problems at General Motors (GM) didn't crack the exceptionally strong corporate bond market. Neither did the problems at Fannie Mae (FNM). Neither did the sub-prime lending fiasco.

Absent some exogenous shock (a serious shooting war, for example), it seems the most likely path forward is for this environment to continue. No G-8 government can afford to have the markets crack. I keep remembering Tony Dwyer's classic line from MIM-2, "The sun will burn out eventually, but that's still a bad trade today."

Good call, Tony. That was 250 points ago in the S&P-500, 350 points ago on the NASDAQ, and 2,300 points ago on the Dow.

Amgen Gets a Break

Data on Amgen's (AMGN) anemia drug Aranesp showed no increase in the death rate in a lung cancer trial. This is a huge break for Amgen, potentially affecting the outcome when this class of drugs goes in front of the FDA's ODAC panel on May 10.

That said, I'm not certain Amgen is out of the woods yet. These drugs are expensive, and insurers will make any excuse to cut back their usage. The lung cancer data also showed there was no survival difference between people who took Aranesp and people who took a placebo. While Aranesp is used to treat side effects, the anemia caused by chemotherapy is treated not only because it is a nuisance to patients (fatigue, fainting, cardiac issues) but because it was thought to make it easier for patients to stay on chemotherapy. The longer they are on chemotherapy, the theory goes, the longer they are likely to survive.

It will be interesting to see if the ODAC panel picks up on this. I've written before that I think this ODAC panel will be particularly aggressive one, and anyone having an investment related to the meeting should be careful to account for this fact in their risk/benefit decisions.

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