Avoid a Bubble, Make Big Money

December 27, 2013

  • The b-word, applied to a sector that’s been on fire all year
  • The thinning of the biotech herd… and how to make the big money next year
  • A “cat-and-mouse game” that will become more intense — and profitable — in 2014
  • Imagine: County government broke, but residents are getting by
  • How to smuggle gold legally… burning wood to save money from coast to coast… The 5 accused of “propaganda” (gasp!)… and more!

  “The biotechnology sector is the equivalent of the dot-com sector in 1999,” declares one financial website. Eek.

“The sector has seen a bumper crop of initial public offerings this year,” Reuters informs us — “38 in the first 11 months of 2013 — the most since the bursting of the 1999-2000 biotech bubble, according to Credit Suisse.” Yikes.

Indeed, the possibility of a new “biotech bubble” is one of Credit Suisse’s “10 key themes” for 2014.

Rajiv Kaul, manager of the $7.4 billion Fidelity Select Biotechnology Portfolio, isn’t ready to say “bubble” yet, but he cautions, “After five years of great returns, it’s important not to lose touch with reality.”

You’d have done very well this year putting your money in Mr. Kaul’s fund. Or in a big biotech ETF like IBB. Both have destroyed the S&P 500 — which is about to notch its best year since 1997.

Bubble or no, it’s time for caution: “The biotech herd is about to be thinned, and it won’t be pretty,” says our own executive publisher and leader of the pack, Addison Wiggin.

In other words, you no longer have the luxury of throwing a dart at a list of biotech stocks and making money no matter where it lands. You’ll have to be selective.

  That, or you’ll have to make biotech money via the backdoor — using “milestone payouts.”

That’s our colloquial, working name for them. The official name, the sort only lawyers could dream up, is “contingent value rights.” Milestone payouts are one of the most lucrative ways to make big money quickly — not only in biotech, but among almost any investing endeavor you can imagine.

Take the recent example of a Big Pharma giant — Celgene. It has a number of promising drugs in the pipeline, including a cancer drug called Abraxane. Among recent Abraxane headlines…

  • Sept. 6: Abraxane wins FDA approval for treatment of late-stage pancreatic cancer
  • Oct. 17: The New England Journal of Medicine publishes positive research results about Abraxane
  • Nov. 22: European regulators gave Abraxane their tentative go-ahead.

Celgene is up 130% on the year. But if you wanted to make the really big money in a short amount of time, you wouldn’t have owned its shares on any of those three days.

Instead, you wanted “milestone payout” shares that jumped 90% between Friday, Nov. 8, and Monday, Nov. 11. Mind you, there was no Abraxane news during that window. Nor was there news about any other drug in Celgene’s pipeline. And Celgene’s ordinary shares rose 2.8% during that span — which is nice, but we’re sure you’d agree 90% is a lot nicer.

What’s more, the milestone payout shares could be had much more cheaply — for about $3 each. Which means you could buy a lot more shares than plain ol’ Celgene stock, which went at the time for $145.

But enough history: What’s in it for you now, you wonder.

We’ve been clued in to a similar pending milestone payout in the biotech sector. But maximizing the size of the payout hinges on the outcome of an FDA meeting taking place today.

We know. It’s not much time to act. We apologize; the opportunity came onto our radar only days ago. But the potential payout could be massive — turning a modest grubstake of $2,500 into $49,250 — nearly 20 times as large. Invest more and the percentage gains could be even bigger. And these payouts come in five fixed cash installments.

To learn how to get in on this highly unusual and even more lucrative opportunity, just follow this link. You won’t have to sit through a “long-winded presentation,” but you’ll be walked through all the whys and wherefores so you can decide whether this play is for you. Here’s where to go.

 Stocks are taking a breather after the major indexes notched new highs — again — yesterday.

Blue chips are holding up best, with the Dow off only 15 points, at 16,465. Small caps are feeling the biggest impact, with the Russell 2000 down about a quarter-percent, to 1,159.

  “Cybersecurity is going to get a lot more complicated in 2014,” warns the small-biz website Business News Daily.

Yowza. And that’s after “a watershed year for cybersecurity and digital secret-keeping,” as Karsten Strauss writes at Forbes.

“The pace of change expected in 2014,” says Bhavesh Bhagat of the global nonprofit IT association ISACA, “will put incredible pressure on technology professionals in the workplace, with a focus on keeping IT risk in check while at the same time delivering value to the business.”

Midsize firms are also at risk: “We’ve seen many a midsize company come close to extinction because a major attack happens,” says Eric Friedberg, co-founder of the security consulting firm Stroz-Friedberg. “After the fact, they put lots of security in, and you can be sure that in retrospect they wished they’d committed the budget that they didn’t think that they had before the attack.”

And at large firms? The security outfit Trend Micro projects “one major data breach will occur every month next year.” Muses PC Magazine columnist Fahmida Rashid, “I wonder if Trend Micro is underestimating this number.”

  “Hacking generally comes in four forms,” explains Forbes’ Strauss: “state-sponsored espionage, organized crime for financial gain, the insider threat and politically motivated hacktivists.”

We began chronicling the state-sponsored variety in February. Friedberg, the consultant, sees no letup during 2014. Russian and Eastern European organized crime will routinely penetrate banks and businesses. “It’s a cat-and-mouse game, and these attackers are very smart, savvy and creative.”

No doubt they’ll be a target in “Obama’s secret war” — the in-house name our researchers have given to a wide-ranging storm encompassing everything from NSA surveillance to Chinese covert action to a $9 billion shakeup in one of the cybersecurity sector’s major names.

We’re a little more than 72 hours away from the start of exclusive online briefing — an emergency summit — laying out the epic profit opportunity that will flow from Obama’s secret war. We’re bringing in two highly connected government insiders to bring you information you simply won’t find anywhere else. Participation in this event won’t cost a thing; we just ask that you do us the courtesy of signing up in advance so we don’t crash our servers! Just enter your email address at this page.

  “Who else is going to protect you when your government can’t?” asks Ken Selig.

Time for a 5 follow-up: More than six months ago, we documented the predicament of Josephine County, Ore. — where county government is so broke the sheriff’s office was reduced to a Monday-Friday, 9-5 operation.

Predictions abounded that life would quickly turn feral. Armed citizen volunteers took over most patrol duties. The sheriff helpfully advised residents to move elsewhere if they didn’t feel safe. The governor warned he might send in the National Guard.

Actually, the armed citizen patrols are turning out to be mighty effective — led by Selig, a lawman forced into retirement by budget cuts. “The move stands as a unique, some would say innovative, response to one of the country’s most severe local budget crunches,” according to an article posted yesterday at Fox News.

Selig and a friend formed North Valley Community Watch to respond to run-of-the-mill crime and grime. The group “meets once a month to discuss crime and teach its approximately 100 members about personal safety,” Fox reports. “The group also has a trained ‘response team,’ which consists of 12 people who will respond to the scene of a reported nonlife-threatening situation if called.”

“Selig,” the story goes on, “believes politics are behind the county government’s decision to not funnel what funds they do have toward law enforcement. He says the county government seems to be pressuring the citizens to pass an additional tax hike they cannot afford.”

Seems as if folks in Josephine County are getting along just fine anyway…

  No guarantees, but it appears gold is managing to hold the line on $1,200 — as it did in late June.

At last check, the big round number is a bit further in the rearview than it was yesterday, now $1,215. Silver has crested $20 again, now $20.07.

 From India, a lesson in how to “smuggle” gold legally.

All year, we’ve chronicled the Indian government’s steepening import duties on gold — now 15% — the better to prop up the rupee and keep the trade gap from spiraling out of control. But you can’t keep the “love trade” down, to borrow U.S. Global Investors chief Frank Holmes’ term for the cultural affinity many Asians have for the Midas metal.

More than once during the autumn, we spotted news items about gold bars abandoned in airplane toilets, inevitably on international flights inbound to India. Now comes word of a much safer way to bring gold into the country — use nonresident Indians (NRIs) as legal “mules.”

“Any NRI who has stayed abroad for more than six months is allowed to bring in 1 kg of gold,” the Times of India reports. That’s more than 32 troy ounces. Earlier this month, almost every passenger on a flight from Dubai to Calicut was carrying 1 kg of gold — a total of 80 kg. Meanwhile, at Chennai airport, 13 passengers brought in the maximum allowed quantity during a single week.

“It’s not illegal,” an anonymous official tells the paper. “But the 80 kg of gold that landed in Calicut surprised us. We soon got information that two smugglers in Dubai and their links in Calicut were behind this operation, offering free tickets to several passengers” — mostly Indian laborers in Dubai.

India’s Department of Revenue is now tracing the origin of the gold… just in case the people behind the legal operation have a hand in any illegal activity. Uh-oh…

  “I burned wood for years,” a reader writes from West Virginia — “my own or others’ trees given to me.”

We casually inquired yesterday whether many Americans are burning wood to save money, as people do in Greece, according to the news this week. We got a geographically diverse batch of replies…

“It would not be worth it,” our first correspondent goes on, “if I had to buy the wood, as it is now $100-120 per pickup truckload most places. Of course, when I had my own trees, I had a chainsaw, truck, fuel and time invested in the wood, but I had those things anyway (except for the minor fuel used). I probably saved about $1,000 a year on heat and another $1,000 in free exercise.”

  “Here in Oregon,” another reader writes, “many people have in the past and want to continue burning wood for home heat because of unusually cold weather. However, a stagnant air alert exists for the western part of Oregon in which backyard burning is not permitted and home heating with wood fire is discouraged.

“Two culprits: a high-pressure zone causing static air to hover over the area and the burgeoning population. Partial solution: high-efficiency stoves (a Cottage Grove, Ore., outfit called Aprovecho has designed such stoves mainly for third-world populations). Can’t do anything about climate change and a stubborn high-pressure zone, which seems to be drying Oregon out.”

  “My dad put an insert in his fireplace a long time ago,” writes a reader in the upper Midwest. “It allows for better burning, and has a holding area where he puts a wide pan of water. The thing has a fan, so as the fire burns, smoke-free heat comes out, humidified with water — makes for a nice cozy house.

“He has a log splitter and accepts any challenge from the neighbors if a tree falls down. He has a big backyard that can hold a lot of wood, and this summer, someone gave him the challenge to cut up a large tree – they didn’t think he would make it before the snow fell, but he did. He lives in Minnesota, where the temp can get to minus 20.

“Well, he now has enough wood to stay warm for a very long time, as long as the Minneapolis/St. Paul area doesn’t make it illegal. He is like 90 years old.”

  “Egads, are you people incapable of doing a Google search?” a reader writes with astonishment on the subject of rare earths. “Stop with the propaganda. It’s there, yes it is.”

The reader includes a link to a New Scientist article from April that informs us, “For the second time in two years, a Japanese team has announced vast deposits of rare earth elements on the floor of the Pacific Ocean.”

Evidently, the reader, like George W. Bush, “doesn’t do nuance.” No one’s denying the existence of rare earths on the seafloor off Japan. The question is how soon will it be before the minerals can be recovered profitably? We’re betting on the side of a long time.

  “Your explanation is wrong. Sorry,” writes a reader taking issue with Chris Mayer’s discussion that “banks do not lend out deposits. Loans create deposits.

“The bank doesn’t create deposits. It multiplies them. This is called a fractional reserve system. And in order to be able to pay back these loans (a deposit is a loan given to the bank by the depositor), the banks needs to keep part of it in cash (10%) and needs to meet some capital ratios (its own savings).”

The 5: Oy… This matter is rapidly approaching a point at which the vast majority of readers are tempted to gouge their eyes out.

If you’re not among them, Chris directs your attention to this explanation of how it all works. And if you prefer something that’s not from an academic paper — and rips Paul Krugman to shreds at the same time — here’s an article to peruse.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. What the heck is a “PDUFA date,” and how can it make you five times your money just for starters?

The answer is key to the “milestone payouts” described earlier in today’s episode. There’s no time to waste, seeing as an FDA meeting is underway — right now, today — that could set the payout stream into motion. One last time: You can find all the details of this uniquely lucrative investment opportunity right here.


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