Michael Shulman's Sell Short

I "made my bones" with a bullish and complicated call on Dendreon (DNDN) several years ago, predicting it would get a thumbs up from an FDA panel for its advanced prostate cancer treatment Provenge, Only one other biotech analyst with a public audience agreed with me - and the panel, sure enough, voted yes. The panel meeting itself was a mess and it was clear the FDA staff was going to fight like hell to make sure Provenge did not get an approval. I told my subscribers to get out - the stock had run from $4 and change to as high as $27 - and a few weeks later the FDA said no, we need more data.

Since that time, Dendreon has released data from a subsequent trial that shows it met its primary end point for the trial, giving bulls their way and driving the stock to $30 and change - it is now around $28. The company is expecting an FDA decision - and approval - on or near May 1. Analysts peg Provenge sales at around one billion by 2018. The puts the current market cap is $3.25 billion.

Shorts would love to cream this stock. Bulls would love to see a great big spike if and when the FDA grants an approval. What is more likely? Some thoughts.
• My original bullishness was based on the need for the FDA to approve some form of cancer immunotherapy in order to launch a new technology into the marketplace, the composition and biographies of members of the panel and the location of the regulatory process - inside the biologics group at the FDA, not CDER, the hard core cancer people who are more concerned, at times, with statistics than human life. The CDER people won the first round - but there is a new and respected FDA administrator and new trial results to consider.

• The problem with the trial data submitted for the initial panel meeting was size - very small trial - and structure - the company blended results to get their final data in a way not valid for FDA statisticians.

• The new trial results - different trial - published by Dendreon last year hit the endpoint by a seemingly health amount to some, a spit to others - and the question will be is this good enough and how did they construct the data to reach this endpoint? The trial was not well constructed - it was not poorly constructed either. I am more concerned about how the company constructed the results. The FDA is very unforgiving - -and they should be - with companies that obfuscate or overly manipulate data.

• Why the skepticism? Because DNDN management is outrageously aggressive and insensitive to the FDA and I am openly skeptical of how they constructed the data. And given what I know of the FDA, that agency will be even more skeptical given management's approach to the approval process. The dunderheads - that is a nicer word than moron - at DNDN are already putting out Provenge sales projections - not a smart move and something the FDA frowns on for drugs not yet approved. Roche/Genentech can get away with something similar when discussing Curis' (CRIS) new Hedgehog pathway drug because they are an understated company and they are providing dates for hitting the marketplace if approved, not sales numbers. Dendreon is not Roche and this can only serve to anger the FDA.

• Why any bullishness? The FDA really does need to approve a cancer immunotherapy, a treatment that uses the patient's immune system to attack the cancer cells and Dendreon is the nest bet right now. It is clear that the treatment works very well on a subset of patients and the challenge in the future is to determine how to identify the characteristics of this subset before treatment. If I were FDA commissioner I would send my statisticians to the back of the classroom and do everything I cold to get the drug passed this spring.

• There is a political component to this approval - there were serious protests and legal action by prostate cancer victims when the FDA overturned the panel decision. This will have an impact on FDA actions.

Bottom line: 65/35 for approval.

Some other things to consider about valuation:

• Provenge is not a lifesaver - it extends life a bit more than 4 months longer in patients receiving the current standard of care. And it is going to be horribly expensive given comments by DNDN management and the cost of preparing the treatment. Provenge is not a drug - a patient has blood drawn, it is sent to a factory, the blood is treated with Provenge and the treatment is sent back to the physician and injected into the patient. It is very capital in intensive and expensive to produce. It will be a while before reimbursement is set in the US and it is very possible it will not be approved for reimbursement in most European countries.

• Unlike many new cancer drugs on the market or in trial, such as Curis' Hedgehog pathway treatments, Provenge is not easily extensible to other tumor types. Moving Provenge to another patient set - such as breast cancer - requires new research and development work and wholly new trials and those will take many years.

• Based on history, DNDN management will over-sell the potential of the drug and disappoint investors.

Does that make the stock a buy or the options?

• For a day or two or maybe a month - but longer term the approval of Provenge and aggressive sales success are already priced into the stock. If Provenge gets approved and the stock moves like OSI did on the approval of Tarceva, it will settle in at five times sales. I focus on Tarceva because it is a very promising cancer treatment, is expensive and the core technology is not easily extensible. OSI now sells for five times sales - in part because of an ill-fated acquisition - but five times sales is a fair valuation for a cancer treatment company. That gives DNDN a five billion dollar market cap in 2018 - long time from now - and that translates into a $45 stock price. In 2018.

So, is DNDN a short or a buy?

• For a trader, and if the 65/35 potential for approval is correct, it is a potential winning trade for a few days - and options traders know this, premiums are high.

• For the investor, the current valuation has future success baked in and if the stock migrates to five times sales and those sales are a billion in 2018. You are looking at less than 6% appreciation per year. That number speaks for itself given the risk of the FDA saying no.

• For the short seller, you can get killed - or make a killing - and take a look at puts, despite their potential of expiring worthless, they do not generate margin calls the way a traditional short position does when things go wrong. One potential trade is a binary trade - a way out of the money call, a way out of the money put, each with a potential of more than

I usually write about stocks, market segments, the economy - today the mood of the nation got to me and I have spent the day positing - to myself, I work alone - various reasons we are the way we are, feel the way we feel, all vital to an understanding of why the economy will remain sluggish, at best and the markets will face headwinds. At best.

And I think I hit on an answer but in the true spirit of blogging wanted feedback from anyone and everyone. So I ask everyone who reads this to respond - and in a day or two I will follow up with answers to the questions below. Please, no scatological comments about Pelosi or Beck, no digital Hyde Park corner tirades. Think, and respond.

Here goes.

We are the wealthiest nation in the history of the planet. We enjoy the greatest supremacy in military power in the history of the planet. We are, arguably, the most politically free people in the history of the planet. More than two thirds of the people in the country think we are going in the wrong direction and ninety one percent think the economy is getting worse. Why?

We are borrowing money, collectively, as individuals and in the form of our government, more than any people in the history of the planet. Why?
Twenty five percent of our children eat because of food stamps. Why?

More than twenty percent of our citizens are out of the work they want - unemployed, dropped out of the work force, partly employed. Why?

One sixth of the population lacks health insurance. Why?

Interest rates available from the central bank are effectively zero yet most small and medium sized businesses without overly substantial collateral cannot get a loan. Why?
Our elections are by far the costliest the world has ever seen yet more than 90% of incumbents routinely get elected. Why?

The government has just spent in excess of one trillion dollars to stimulate the economy and the central bank has printed more than one trillion dollars in new money yet, in the real world, the job market continues to shrink and there is, essentially, no economic growth. Why?

One think tank believes without stimulus GDP would have fallen more than seven points rather than grow more than five points. Yet there is doubt about the ability of the Congress to pass another stimulus package, Why?

The military can plant a bomb inside someone's pocket from ten thousand feet and can deliver Pepsi - cold - to the mountains of Afghanistan. But it cannot subdue less than ten thousand illiterate tribesmen. Why?

We put a man on the moon forty years ago but cannot afford to do it again. Why?
We have an overabundance of domestic energy supplies - coal and natural gas - yet import more energy than any other nation uses. Why?

We claim to have a progressive tax rate but the average American household pays a higher percentage of their income in taxes - income, sales, property, other - than the average American millionaire. Why?

China abuses, strangles and executes its people, manipulates its currency to maintain exports, destroying tens of millions of jobs around the world, periodically threatens the world when Tibet or Taiwan become a headline, steals intellectual property as if it were Halloween candy and supports rogue regimes going nuclear in North Korea and Iran yet we call them a friend. Russia has made a great transformation from authoritarian dictatorship to quasi-free state, given up an empire peacefully, and is now willing to sign a treaty to radically reduce its nuclear arsenal yet we remain wary of them and they are not part of our economic universe. Why?

Adam Lambert was the best performance artist and had the best natural voice of any contestant ever on American Idol. His premier album was not as well received as his performances on American Idol. Why?

There is one answer to all of these Whys. What is it?

The jobs report came out today and it was far worse that economists' expectations. Roughly twenty thousand jobs were lost against a consensus forecast of a 10,000 gain; revisions showed 1.2 million jobs more jobs than previously reported were lost from April 2008 to March 2009; the number of discouraged workers and dropping out of the work force (so to speak) increased by roughly a quarter of a million. The unemployment rate was 9.7%.

Other data from the household jobs report - something a bit different announced at the same time - showed a gain of people in households working and the net result was confusing.

Ignore the unemployment rate - the issue is the number of people working for that generates national income, the heart of spending and GDP. The work force continues to shrink every month, skewing unemployment numbers - but this is the data point you need to watch. And that keeps falling - statisticians just loss another million point two jobs - and with the decline in the labor force participation rate comes a decline in national income.

So yes, it is time to short barring other issues such as foreign debt, the dollar trade and so on. The jobs report tells me the foundation of a double dip - in the real world - is in place, which means reduced corporate profits and are valuation of the market. So at a minimum there are no tailwinds supporting the market.

Where to start? Where the optimists live -- high end consumer discretionary spending and retailers -- who needs a boat (BC), a motorcycle (HOG), a jewel (TIF) - , who posted good yesterday that were misleading. More later.

Shorting is a state of mind - and I know someday there will be a crisis with the blood supply in the US, or in a developed nation, that rivals the problems of the 1980s and HIV contamination. How do you play this? Cerus (CERS).

Cerus makes something called the INTERCEPT System, a blood pathogen inactivation system that enables blood banks to essentially accept blood from anyone. Blood pathogen inactivation is the formal term for blood cleaning - cleaning of any pathogens, such as West Nile, H1N1, HIV and so on, that could be transmitted from donor to recipient. At present, the INTERCEPT System works only to produce blood platelets and is approved in many nations in Europe with Germany being the latest where Cerus is rolling out the product. In the US the company is negotiating with the FDA for a Phase III trial to obtain approval here.

Platelets are a big market but small beer compared to the $3.5 billion whole blood market - and yesterday Cerus announced its US, Phase I trial of the INTERCEPT System to treat whole blood was a success, hitting its primary endpoint, a critical first step for approval for the product. Most analysts did not think INTERCEPT would work when treating whole blood.

To quote the company press release, "The randomized, single-blind, controlled, multi-center Phase 1 clinical trial of the INTERCEPT red blood cell system included 27 healthy subjects at two clinical trial centers. Each subject received two transfusions of the subject's own red blood cells, one INTERCEPT-treated, and the other a control not treated for pathogen inactivation. The primary endpoint of the clinical trial, a mean INTERCEPT red blood cell recovery of greater than 75 percent at 24 hours post-transfusion, was met. The INTERCEPT red blood cells had a recovery of 88% compared to 90% for control red blood cells, and both INTERCEPT-treated and control red blood cells met the criteria for red blood cell recovery recommended by the U.S. Food and Drug Administration. The half-life of the red blood cells was also evaluated, and INTERCEPT-treated red cells were within the established reference range of 28 to 35 days. The half-life of INTERCEPT red blood cells was 33 days compared to 40 days for control red blood cells according to the preliminary analysis. The investigators plan to submit data from the study for presentation at an upcoming scientific congress."

At the same time the company announced a partnerhsip with France's blood transfusion agency, the Etablissement Francais du Sang (EFS). The two entities will jointly develop, with considerable cost sharing, INTERCEPT for whole red blood cells.

Cerus is light years ahead of potential competitors in platelets and whole blood - competitors who may also become potential acquirers. I can only assume the stock opened strong - I am writing this before the open - but this microcap, if it is able to follow the Phase I trial with successful follow up trials that lead to an approval - is grossly undervalued at $2 a share. Even without whole blood, current sales forecasts and the adoption of the technology to treat blood platelets make the $2 valuation ridiculous. I have followed the company and written about it in my service, ChangeWave Shorts, and like the way management has managed the company's progress, country by country, trial by trial. Take a look.

Disclosure: I am quite long Cerus.

I rarely plagiarize myself but the following was in part published in my service, ChangeWave Shorts,, my subscribers getting a greater level of specificity but I have had so many questions about the crisis I felt this was an opportunity to explain in plain English some of what is going on across the pond.

Is the growing crisis in the Eurozone a trading opportunity with an acceptable risk reward ratio given the total involvement of often unpredictable politicians? The current crisis, which is going to be not, then cold then hot again, has major short and long term implications for the dollar - the euro going down means the dollar going up - and the dollar going up means equity markets going down or on certain days, sideways. Current trading - and trading since late fall - has been driven by the "dollar carry trade" and this interest in equities is driven by a falling dollar.

The opportunity? Plays on a rising dollar, equity markets facing tailwinds, rising Treasury bond prices, a falling pound, falling euro and rising Treasury bills. Also, the continuing fall of the euro and rise of the dollar will have a material, negative impact on a American companies doing business in Europe, from Proctor & Gamble to Hewlett-Packard while having a positive impact on European companies deriving a majority of their revenue outside the eurozone. This translates into a variety of opportunities that may play out not just during a currency crisis but for several months.

The Macro Economic View

Over the past thirty months governments around the world have borrowed or printed money to replace the value lost as private sector debt failed or, due to the recession induced by the financial crisis, paid bills and transfer payments to an increasingly restive population. And now creditors are saying we may not want as many of your bonds in the future as we do now - and since others think like we do, you may have trouble rolling over existing debt, and that means you need to change the way you are spending money. And with that comes a crisis.

Credit Markets and the Current Crisis

The credit markets are voting in several ways - last week, they did not buy as many Portugese bonds as Portugal wanted to sell and the cost of credit default swaps - insurance on bonds - skyrocketed for certain countries with gigantic deficits and a need to roll over debt. The, when rumors of a bailout hit yesterday, they fell 19%.
That is the part of the crisis - the other part is the specific countries and their membership in the European Currency Union. I am talking about Greece, Portugal, Spain and Ireland - they all use the Euro, they all have huge debt and deficits - and the credit markets are uncertain what is going to happen next. The European currency union unites countries in a common currency - the euro - but does not force them to manage their economies and spending outside of guidelines including budget deficits no greater than 3%,that are, to date, poorly enforced if enforced at all. In the past, when a country had a recession and structural deficit it could make adjustments in its currency to solve at least part of the problem. Not anymore if you are using the euro.
And through its public face, the European Central Bank and its president, Jean Claude Trichet, the union is saying tough, the membership agreement says there will no bailouts of member nations when they do what Greece and other nations are doing. At the same time, no one wants the monetary union to fail, which it could if selective members are kicked out such as Greece.

Greece is the beginning of the current crisis - it recently told the world it had submitted false budget data and its budget deficit was not slightly above 3% but slightly above 12%. The country overspent on the Olympics and has a political system that doles out transfer payments and benefits to groups that strike, which is almost everyone from farmers to teachers. And to reduce the deficit by 2010 to 3%, massive cuts in these payments must occur - and the credit markets do not believe this will happen. But the end game is Spain.

Spain has been in a deep recession due to the collapse of a massive real estate bubble, by far the worst in Europe. The country has twenty percent unemployment and massive deficits that are growing daily. Greece has an economy the size of Mississippi and debts less than those of California; Spain is another story altogether. It is a big nation, not too long ago the fastest growing in Europe, alongside Ireland, not economies fueled by a near manic real estate and banking bubble. And the credit markets are looking forward to date in the not too distant future when Spain needs to sell more bonds and needs to cut its deficit and is voting, through the rising prices of credit default swaps, it is losing credit worthiness every day.

There is another important element to the credit markets and the crisis. Credit default swaps are totally unregulated and are, as Warren Buffet described all derivatives, "financial weapons of mass destruction." A trader, a hedge fund, a whatever can put up ten cents or twenty cents and control a derivative priced at a dollar; these in turn effect the value of a bond one to two hundred to maybe five hundred times greater in value than the derivative itself. You can do the math - someone playing with a dime can control the pricing of a thousand or maybe five thousand dollars worth of bonds. The same trader can put up a dime and control one hundred dollars worth of currency. Do the math - put up a dollar and ten cents and you can trade one thousand dollars worth of currency and control the value of at least a thousand dollars worth of bonds. You increase the cost of the derivatives - that in turn reduces the value of the bonds - and then you can make a super safe play on currency that moves as the bonds do. In this case, the euro. This is what happened to Bear, and Lehman and many other banks in 2007.

Governments are powerless to do anything - derivatives are unregulated and are not traded on an exchange -- you can thank former Republican Senator Phil Gramm and anti-government ideologues for this situation. And as they stand by and watch, the euro has fallen - five percent against the dollar in the past month.

The Role of the ECB

The ECB is now caught between a rock and a hard place. It cannot bail out Greece - and if it arranges a quasi-bailout, it will cause a run on the euro because everyone will think it will bail out any wayward spending nation. It cannot print more money to take care of upcoming problems because its charter does not allow it to directly buy government bonds or provide direct support to a country. It cannot kick Greece out because this would be the beginning of the end of the common currency. And it cannot let Greece default as that would undermine the whole notion of a currency "union" and it would encourage short sellers and others to make raids on other member nation bonds and short the euro. And it cannot go to the lender of last resort - the IMF - because this too would undercut the role of the ECB and since Greece is locked into the value of the euro, an IMF loan would require government cuts and other changes that would trigger a massive recession and political unrest.
Current speculation is swirling around banks, coerced by their governments and the ECB, guaranteeing in some bank to bank fashion the purchase of Greek sovereign debt. This would technically avoid being a bailout. One problem is how to rate the debt - Moodys went public today and said if Greece does not make the necessary and drastic adjustments to its budget and deficit, it debt would be downgraded several notches and this would hit any banks, Greek or foreign, holding that debt.
This past weekend life was made more complicated when the G-7 group of economic superpowers said they will keep spending and stimulating as needed to prevent a further economic downturn - in direct contradiction of the ECB's call for more fiscal restraint in the future. I was surprised the G-8 did not soften its language - then again, none of the four eurozone countries in trouble are members of the G-7 and all have much greater leeway, other than Britain, to provide stimulus to had off any deepening of the economic crisis. But I sensed some anger at the ECB and eurozone community for letting things, budget deficit wise, get out of hand. This attitude also limits Trichet's flexibility.

And, to highlight the political problems involved, a few days ago the Portugese central government gave permission for its regional governments to spend more money - the opposite of what is needed to reduce deficits. The government there has also said it does not need help from outsiders. Yeah, right. Sounds like Dick Fuld a few days or even minutes before Lehman blew up.

Prognosis

So what will happen? For Europe, and the euro, rumors of a bailout has created some stability but nothing truly sold or good. A meeting of EU foreign ministers tomorrow, long planned, will discuss the issue but German banks and other have said there is no immediate deal on the table and much depends on the actions of the Greek government.

At the national level, this is causing political unrest in all four countries and in Britain - recent activity in the bond market indicates Britain may devalue the pound in the coming months in order to better manage its debt and the residual cost of its own bank bailout - Bill Gross of PIMCO is in this camp. This is also causing problems in larger, more stable countries such as France and Germany because the fall of the euro in value increases the cost of imports and creates inflation for consumers - consumers who vote.

My own view is more of the same - headlines continuing promises, political paralysis and muddling through. Given the lead role of Goldman Sachs with the lead country, Greece, I can see sales of Greek bonds at very high real rates of interest to banks pushed and prodded by their own governments. Fifty three billion spread among banks in several countries is not a big deal - but after Greece, then what? If a deal is done for Greece, it will buy time and maybe head off more action in the derivatives market - and maybe not.

The Eurozone crisis has been brewing but has a ways to go before boiling over - which it will; The fundamental situation is not good - governments borrowed money to keep people working or getting transfer payments or to bail out banks and companies and transferred liabilities from the private sector to the public sector.; And now the public sector is being told you cannot borrow that much more.

The bottom line: As in the US, European lawmakers can change laws but they cannot change the laws of math. To bail out Greece - -on whatever form - and then bail out Portugal and Spain - in whatever form - will require more euros - the ECB crating them, banks using them, sovereign debt being purchased - and the euro will fall. As this happens, bond markets will continue to downgrade the value of the sovereign debt of Greece, Spain, Portugal and Ireland, driven by fears about the nations ability to service debt and by activity in the credit default swaps marketplace. And these nations will increasingly speak about deficit reduction plans and future plans to roll over and issue new debt. Goldman Sachs has agreed to sell Greek bonds - they hope and need to sell 53 billion in euro denominated bonds this year - but has yet to find a lead or principal buyer.

How to Short The Crisis

It is always high risk to trade with or against currencies and sovereign debt because of the risk of a political event or statement that drives headlines against you and ruins a position short term, making long term profits that much harder to achieve. That being said, the case against the euro is a strong one and the case saying US equities are being driven, in part, by the "dollar carry trade" which in turn is based on a falling dollar is equally strong.

From low risk to high risk, here are ways to "short" the crisis:

Look at trend lines and where we have made money before - and that means US treasuries. Treasuries rise in value as interest rates fall - and interest rates fall as when there is flight to the dollar. To play Treasuries the ETF is the TLT and calls are available.

To buy the dollar itself , the ETF is UUP. Yes, calls are available.

The obvious play - more volatile but the underlying driver of all of this - is the euro. To short the euro you can look at puts on an ETF, the FXE. The highest risk trade is the put position on the euro - it has also has the highest possible payoff if the run on the euro accelerates.

And remember, like Countrywide failing as a precursor to Bear, AIG, Lehman et al -- Greece is only the beginning.

Is a stock a good short candidate based drug patent expirations?

A one word answer - Ubet.

The real world experience of drugs coming off patent is one reason. Another is the response I got from a major investment banking analyst when I asked him, many moons ago, about how Schering Plough would respond to generic Claritin. He was an MD and an MBA - a truly lethal combination if you re looking for investment advice - and when I asked him the question privately, after a session at a conference, so as not to embarrass him, he waved his hand and said "They will figure it out." They sure did - -they broke the world record for losing market share in the shortest period of time.
Since that time little has changed - Big Pharma outfits, while rolling over recently, have traditionally command unreasonable loyalty among analysts who believe they will "figure it out." Well, they won't. This year is a big year for patent expirations, as is 2011. The biggies this year are Cozaar from Merck, Lipitor from Pfizer (they will debate if they really face generic competition until 2011).

Pfizer and Lipitor first. For purposes of disclosure, I have recommended to my subscribers they buy puts on Pfizer in my service ChangeWave Shorts.
Pfizer's Lipitor patent expires in November of this year. Pfizer cut a deal with Ranbaxy -- a generics firm - and in theory Ranbaxy will be offering generic Lipitor in November of 2011. Teva, the world's largest and best generics firm, filed an application for generic Lipitor in April of 2008. (I have recommended a long position to subscribers, part of a paired trade with a put on Amgen, more on that in another post). Pfizer sued and by law, Teva could not do anything for 30 months unless there was a judicial ruling, which there has not been to date. Theoretically, Teva could begin selling generic Lipitor in November of this year when the patent expires if they want to risk another lawsuit. Also, the Lipitor patent expires in Canada on July 19 of this year and Teva is good to go.

Pfizer has no answer to this problem -their planned replacement product, torcetrapib, failed in trial. They are still terribly dependent on Lipitor despite the purchase of Wyeth. How dependent? Lipitor will account for $10-$11 billion in sales this year, maybe, down a couple of billion since Zocor, a competitor, went generic. My publisher, ChangeWave, conducts terrific surveys, the kind that predicted the rapid demise of Claritin and ditto for branded Zocor. I expect the same for Lipitor. Bottom line: when a statin comes off patent the company that makes the proprietary version should see a sales loss of 80% or more - in a heartbeat. That is $8 billion or more in sales, maybe half that in profit. That is a lot of dough. And at 417 a change a share, Pfizer is way overvalued unless you believe "they will figure it out."

Next up, Merck.

Merck has been a well groomed dog - on, pardon my sophisticated language, the company just doesn't do it for me - with a stock that has held up due to new product approvals that did little to arrest the real long term stagnation of the company. Today a key patent expires on a key drug, Cozaar - and when another patent expires in April the drug will be subject to competition. In the third quarter of 2009, the drug generated $891 million in sales or almost 15% of revenue. Generic sales should take away 60%-80% of that revenue.

What can replace it? In the past couple of years the diabetes drug Januvia and vaccine Gardasil have boosted the stock. Januvia sales did rise to almost half a billion in Q3; but fierce competition, specifically from Byetta from Amylin. The current version was just approved as a stand alone diabetes treatment, competing head to head with Januvia. I expect late this year or early next the once a week version of Byetta will get approval - the whole world is expecting it to get approval - and that will stall Januvia sales. Gardasil sales plunged 22% in Q3 and show no signs of having a magic reversal of fortune.

Merck's big time drugs Zetia and Vytorin, a statin and a statin mixed with a blood pressure medication, are both losing share to generics - sales were down 4% and 7% respectively in Q3 - and just wait until Lipitor comes off patent and this will get worse when Lipitor comes off patent.

So, no real growth and a drug generating 15% of revenue coming off patent.
Summing up - Pfizer is going to lose roughly $8 billion or more in sales from the loss of one patent, or maybe 12% of revenue, perhaps 25%-30% of profits. Merck is going to lose $2.5 billion in revenues, maybe, or 10% of revenue and probably more than double that of profits. Both companies sport 4% dividends - how else do you keep shareholder happy with no growth, give them a bribe - and you have to wonder how these will hold up when profits head south.

So, time to think about shorting these companies. Now, before the guys on Wall Street get tongue tied and don't say "they will figure it out" anymore.

The dollar haters and gold bugs are totally wrong about the dollar. They seem to think a currency - any currency - has an inherent value. Or that gold has inherent value. They do not.

The value inherent in any currency used as money is the perception of the value of that currency. In and of themselves gold, greenbacks, the euro - they have no value. At a recent trade show for investors the gold bugs in the audience had no answer when I asked "What is the inherent value of gold?" A couple of brave ones tried and answered with the standard "gold as an inflation hedge" - which had nothing to do with answering the question. When asked of the inherent value of the euro, they say it is a hedge against a falling dollar.

A little history - gold became a currency because it was easily minted, hard to find and the purity of gold coins could be tested even in ancient times. And, in modern times, there has rarely been enough gold around to support economic growth. This shortage gave us the great financial panic at the beginning of the twentieth century and The Wizard of Oz. And William Jennings Bryan famous Cross of Gold speech. Winston Churchill putting Britain back on the gold standard in the middle of the Great Depression broke the pound, almost ruined him (again) and created even greater hardships for the British people.

Since the end of World War II, the supremacy and liquidity of the American dollar as a reserve currency has led to unprecedented prosperity around the world and the spread of democracy and the freedoms that go along with it. No one can corner the market on dollars; even when the Fed prints a trillion or more dollars, the dollar remains relatively stable. Tied to the gold standard until 1971, the dollar has been floating ever since, and, according to research conducted by Bloomberg, the dollar has appreciated against a basket of currencies from developed nations by 3%.
(http://www.bloomberg.com/apps/news?pid=20601087&sid=artyKe9WspQM&pos=3). Yes, folks, get out of your bomb shelters and read a little but about modern economics. The dollar is actually more valuable now than it was before the infernal government you all hate began running larger deficits and those conspirators at the Fed began printing more and more money.

Why? For the same reason I love the dollar and you should too - the value of the dollar is not absolute, the value is relative to the value of other currencies. And the value of other currencies is driven by the market's perception of those nations' economies, budgets, debts and so on.

And that is why the dollar will continue to appreciate for a while this year as eurozone issues escalate. And, longer term, it is an absolute slam dunk, long side play. Why? Some core issues - not simply how much money the Fed is printing now or the government is borrowing now, nut issues related to the power and growth of the United States as the nation backing up the currency. The value of the greenback is not based on just the mechanics of supply - it is about faith in the US as a nation, the government standing behind the currency and the national debt as well as broader political commitments to the world.

Demographics: The US is the only large developed nation with serious population growth due to our own fecund nature -- look it up, I never get to use fancy words (http://www.thefreedictionary.com/fecund) -- as well as immigration. France is a distant second. Great Britain is treading water, the Mediterranean countries are on the verge of shrinking and the northern Europeans are not far behind them. And demographics are destiny - a growing population not only serves as en engine of growth, it is an engine driving flexibility within the economy.

Economic Growth: The US is taking a hit - and will continue to do so until we get debt and deficits under control, which I believe we will - but the underlying foundation for growth, our ability to grow or import human capital, the foundation of growth, is well beyond that of other developed nations excepting the ex-colonies and the mother country - Great Britain, Canada, Australia and New Zealand. I have twin sons entering college next year, visited 15 schools in the US and two in Great Britain and they are several orders of magnitude a superior environment to grow human capital than any system on the planet. Yes, US high schools fail too many; but our higher university system, intertwined with the country's research engine, suffers not competitors and is the envy of the world. And to show you I am no bigot, one of my sons will attend college in Great Britain, in part to the major available at the school, in part because the drinking age is 18.

Debts and Deficits: The US government deficit and debt may be going up far too fast but still pale in comparison to that of most developed nations - and all the big ones. And while the US and state governments have made ridiculous promises to employees - on pensions and medical care - that will have to be broken, and made promises to citizens - Medicare - that will have to be broken - there is little chance of social unrest when someone finds the courage to do so. That is not true for many places in Europe and the eurozone.

Business Climate: Thanks to irresponsible, narcissistic bankers the support for business in the US by the general population is as negative as I have ever seen it - but is still quite strong compared to the class warfare seen in most countries. America is done with pioneers, cowboys and astronauts - entrepreneurs are the new American heroes along with the boys and girls in the Armed Forces sent overseas to do the world's dirty work. Just ask Warren Buffet - he just bet $26 billion on a 100% domestic operation, Burlington Northern railroad (see his interview with Charlie Rose, http://www.charlierose.com/view/interview/10711). Buffett is right - the US is still a terrific place to do business. Try starting a business in many other developed nations, get permission to use credit cards in France, get venture capital in Germany or a bank loan in Japan if you are not a member of the proper keiretsu. Ain't gonna happen.

Governance: America has seen a decline in the general quality of governance of late but this continues to be far better than most other places. Take a look at the dithering in the EU and the near ridiculous situation in Greece, which has made Germany look like the oversized weakling that it is as a political and economic power. The US system of governance - and this includes government plus political, special and economic systems - handled the financial crisis quite well, given the possibilities. Of course the same system created the crisis through lax government regulation and unregulated greed. More on that some other time.

Military and Political Power: Make no mistake, there is a direct intersection between the relative value of a currency and the ability of a nation to project military and political power. And at this moment the US is the most dominant military power the world has ever seen - Caesar got whopped the first time he crossed the English Channel - and with that comes political and economic power. including support for a currency. If and when there is the next Persian Gulf crisis, nervous investors are not going to rush out and buy the yuan - if they can - the ruble of even too many yen.
Bottom line: All the contributing factors that support the relative value of a currency are favoring the dollar long term in addition to the problems of the eurozone aiding the greenback in the next six months. Since currency trading is not a game for many, there is an ETF representing the dollar, the UUP, and it even has calls.

I never read business or financial books - I did not even read the one I wrote, Sell Short - I mean, I did write it after all? The financial crisis is different - I was on a TV set with Meredith Whitney the day she broke the banks stocks, I was on another TV set when Bear Stearns broke and I wrote an alert on my Blackberry to close the puts I had recommended in my service just before I went on the air. I took a great many phone calls from friends worried about another Great Depression and found myself bonding via telephone with a great many traders, fund managers and analysts as fear crept up on all of us.

So I have read many of the books related to the crisis and again am asking questions about what is best to read. My thoughts.

The Two Trillion Dollar Meltdown - By far the most powerful book on the crisis because it was written before the real meltdowns rushed to market. This book should be required reading for every man and woman on Capitol Hill and in the White House for current proposals on bank reform do nothing to stop the next trillion dollar meltdown - problems in the financial system very obvious but hidden fro most due to their ideological biases and optimism. The author, Charles Morris, is a successful, award winning financial writer and he outdid himself with a brief book that, among other things, de-mystifies derivatives and their impact on the financial system. This is the must read book about the underlying foundation of the crisis.

Too Big Too Fail - Almost too big too read, this will probably be viewed as the standard treatment of the crisis due to the clarity of the writing and the objective stance of the writer, New York Times reporter Andrew Ross Sorkin. Mr. Sorkin does a terrific job placing inside the board rooms and with the major players as the crisis unfolds - parts of it almost read like a novel but do not let this undermine the credibility of the author or the material, this is a fine overview of who did what and when to whom. If you have the patience, it is quite good - and if you read multiple books, read it last and you will be able to skip over some paragraphs here and there.

House of Cards - On one hand, the book is uneven, clearly written in two parts - a contemporary, blow by blow account of the failure of Bear Stearns and another, the history of the firm. This gives the book an uneven quality many readers did not like. So what? The book's mastery of the ten days leading up to the J.P. Morgan acquisition of Bear is all you need to read - it is more compelling than many novels I have read and depicts the behavior of senior executives beyond surreal - for example, during the last week before the fall, the Chairman refuses to come back to New York because he is playing in a bridge tournament. The book also peeks behind J.P. Morgan's curtain, and that of the New York Fed (Tim Geithner was head of that bank at the time) to show their view of the deal - and better than anything, shows, day to day, the impact of derivatives market on share prices and the ability of Bear to borrow money overnight and continues its operations. A wonderful read if too long.

Fools Gold - Gillian Tett is a brilliant columnist with the Financial Times and out together a great little piece of history with a book on the financial engineers who blew up the financial world with their invention, the CDO or credit derivative obligation and what we now call credit default swaps. This financial invention re-defined leverage and when applied to poorly rated RMBS - residential mortgage back securities - well, the world went boom. Her narrative goes back to the early 1990s and steps the reader through the evolution of the product - explaining their utility when invented and their decreasing relationship to anything understandable over time as they became more and more complex and fed the greed of all the players. A wonderful read that with a little help could be a novel or a movie.

In Fed We Trust - The second best or must read by a Wall Street Journal reporter, David Wessel, the focus is Bernanke and the Fed and how their role unfolded during the crisis. The book has been overlooked - maybe it came out too early - but t is the best treatment of how various agencies and individuals evolved their thinking and actions during the crisis. What I remember most from the book is the recurring mantra presented by the author about the actions of the Fed - "whatever it takes" - and if you accept the facts as presented, as I do, Ben Bernanke will someday be the first face on Mt. Rushmore Two.

On the Brink - Hank Paulson is what the nation now lacks - a hard nosed, savvy, center right Republican leader who views ideology as an impediment to getting things done. And when in office all one has a responsibility to getting things done, not working form a playbook. This is a great read - it was the last book I read and greatly changed my view of Paulson as a man, not as a Treasury Secretary - and if you want one historical treatment of the crisis on your bookshelf, this is it, sorry Mr. Sorkin. It simply is better at pushing day to day details of the crisis into perspective, juxtaposing them against government policy, attitudes on Wall Street and so on. And, since I believed what Mr. Paulson wrote, I find him a very appealing public figure, a leader unlike anyone else in the Bush cabinet and the right man in the right place at, well, the wrong time for all of us.

Chain of Blame - This was the most fun book - an inside look at the birth through death of the subprime mortgage industry. The authors, Paul Muolo and Mathew Padilla, do a great job showing how the mortgage industry ran out of customers so created subprime mortgages just as Wall Street needed new mortgages to bundle, slice dice and re-sell. This book brings the reader closest to how Main Street and Wall Street contributed to the crisis -- Main Street mortgage brokers prompting customers, creating customers to feed Wall Street's need for products and, alas, commission. An interesting twist in the book is the very positive treatment of industry poster boy Angelo Mozilo of Countrywide Mortgage (now Bank of America). He hated the thought of lending to subprime customers because of the lack of historical data to properly gauge risk - smart man - but hated giving up market share even worse. The rest is history.

A Colossal Failure of Common Sense - Authors Lawrence G. McDonald and Patrick Robinson due to a bang up job describing the almost surreal behavior of Lehman Brothers executives as the firm melted down. McDonald is a former Lehman vice president and he focuses on a small group of executives who pushed Lehman further and further, with leverage, into higher and higher risk positions to generate profits. The book has prompted some nasty responses - check out some customer reviews on Amazon.com - for it is forceful and pulls no punches on assigning blame, most it going to Dick Fuld, the CEO of Lehman who comes off poorly in virtually everything written about the crisis. The value of the book is its ability to portray the gambling mentality that dominated Lehman - a mentality that led to too much leverage everywhere and is he very center of the crisis. A very good read - but the book does not approach the crisis as a whole and is a secondary read of you are trying to get a handle on other things going on during the crisis away from Lehman.

I have been writing about the bubble and mess in housing since February of 2007 and continue to be amazed at the willful denial about the depth and length of the problem by Wall Street. Two reports hitting the Street this week may finally push some of the bulls into rationality. John Burns Real Estate Consulting and Standard & Poor's Financial Services are both telling the world loan modifications don't work and the foreclosure rate is going to be very high for a long time. If I felt like regressing I would just say "duh."

John Burns believes roughly five million homeowners - houses and condos - already delinquent in their mortgages are ultimately headed for foreclosure. Other analysts -notably Laurie Goodman of Amherst Securities - a little less well known but whom I respect - have created a different number -- closer to seven million -- once you put some more data into play. (http://www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg).

The first impact of these foreclosures is on prices - for almost a year jawboning, state moratoriums and programs have slowed many foreclosures that can no longer be avoided. John Burns, who runs the firm named after him, believes if the country does not see a recovery and interest rates rise, "that's going to cause prices to fall further." Sorry, John - we are already about to begin a double dip in the real world and interest rates are going to rise a bit this year and a bit more next as the Fed pulls back from the RMBS market. Again, I turn to Laurie Goodman who sees another drop in home prices coming. (http://www.youtube.com/watch?v=stVgR0SeiQo).

S&P says in its report study an "overhang" of foreclosed homes will lead to lower home prices. It, too, sees owners currently in default as headed towards foreclosure - 70% of them.

Maybe the Street will begin to listen due to the data and reputation of Burns and S&P. Maybe the logic of the real world, of Main Street, will finally break through. The logic flow is simple and irresistible and has been in front of the Street for a long time, but let me re-cap why I am so negative besides having passed math in the fourth grade.

• We have built too many houses - anybody disagree? Forty percent of new jobs created between 2000 and 2008 were in home construction leading to the building of 1.6 million new homes at the peak of the building bubble.
• We sold too many houses to too many people at too high a price with a funky mortgage they could not afford. The subprimers - and this is not about them.
• Their foreclosures - and the impact of the financial and housing crash on the economy caused the Great Recession.
• The Great Recession has caused 20% unemployment - unemployment, part timers, discouraged and totally dropped out of the work force. This has prompted many people - prime borrowers - to default.
• Default rates are at an all time high - rescue rates - the rate at which defaulting customers recover and begin paying their mortgage again - is at an all time low.
• One quarter of the people in the US with a mortgage now have a mortgage greater than the value of their home. And for this reason, for the first time every the people in default on their homes are paying credit card bills before paying mortgages.
• Mortgage lending standards are tighter than anyone can remember. There is no secondary mortgage market and only Fannie and Freddie are buying mortgages. But they are capped at how much they buy, could hit the cap next year and between this cap and the Fed withdrawing from buying mortgages rates will have to rise to bring other buyers of RMBS into the market - if they come back at all.
• Put this together - and the continuing slide in home prices - and you have another seven million foreclosures coming in the next 30 months and reduced demand for new and existing homes.

Bottom line: a major drag on the economy for several years.

What to do? Avoid or short the homebuilders, forget the analysts saying they have bottomed - they use to say this when were selling at a one million annual rate, we are now at half that. They have no hope of real growth for several years and many have lingering and serious sheet issues. If you are into shorting, look at the XHB - the ETF for homebuilders and their suppliers puts are available - and some homebuilders with nastier balance sheets like Hovnanian (HOV). I am also not a big fan of Pulte (PHM), Beazer (BZH) or KB Homes (KBH). Others at risk are suppliers such as Louisiana Pacific (LPX) and Universal Forest Products (UFPI).

Sometimes when a man bites a dog it is fun to watch. The Federal Home Loan Bank of Seattle - a federally "created" bank owned by thousands of banks in its region - is suing firms on Wall Street, specifically JPMorgan (JPM), asking the courts to order JPM to take back $719 million in mortgages that are not as good as promised when sold.

The promises were made by sales people of the now defunct Bear Stearns, bought by JPM during the crisis. The Home Loan Bank Board claims many mortgages had improper documentation, or no documentation at all, their quality was overstated by the banks as evidenced by the current foreclosure rate of 25%. The bank is also suing Morgan Stanley (MS) and Goldman Sachs (GS) for the same problems, the default rate on the junk, excuse me, mortgages they sold nearing 20%.

This suit is going to take a while - perhaps forever, a modern Jaryndyce versus Jaryndyce (look it up, part of the purpose here is to educate you) - and odds are against the good guys, excuse me, the Federal Home Loan Bank Board based on history. They have to prove fraud to win the case and historically sophisticated investors, even companies behaving like morons and who only appear to be sophisticated investors, lose out because they are supposed to be able to spot fraud in the sales process. That being said, if the case progresses every headline will out a shiver through the spine of the banks and their friends on Wall Street as the potential liabilities are very large - and would also set precedents for other entities to do the same.

For example, Freddie Mac (FRE) and Fannie Mae (FNM) are pushing banks hard to buy back defaulting or defaulted mortgages - and getting the banks to do so with some success wit Bank of America, among others, buying back a whole bunch, billions worth, last quarter - as they are directly owned by the government, and are large customers of the Wall Street guys, and the combination of the two gives them a lot of clout. In the first nine months of last year the big banks bought back $14 billion in busted mortgages - and with Freddie and Fannie holding $300 billion in these mortgages on their books this is likely to increase. The potential biggest losers are Bank of America (BAC), they bought Countrywide, Wells Fargo (WFC), they bought Wachovia and they bought Golden West -- be prepared for all sorts of fun and games are ahead as the victims of the bubble turn on Wall Street.

Shanghai, Prague, Mumbai - they are all a long way from Main Street but they have been places where Americans have been looking for higher returns than at home for the past year. The question to ask - when will this come to an end?

Soon, maybe right now - think right now. Very fresh data shows a disastrous turn in employment in Europe and that, combined with the government engineered slowdown in China, It will happen - while there is general agreement that emerging economies will grow faster than developed nations this should not be confused with fair valuations of markets. The Japanese Nikkei was 39,000 and change when I lived there in 1989 - it is now just above 10,000. But the economy is not down 75% in value. Simply put, frenzied foreign and domestic investors drove that market to unrealistic heights - and the same is true for many emerging markets today.

These markets are traders' delights - ride them up, get out or even ride them down. They look at charts - it is better to look at the underlying countries, and their economies and geopolitical situation - and then pile on. That being said, what countries or regions are good short candidates right now?

China: Anyone who reads me - or subscribes to my service, ChangeWave Shorts - knows I think China is one big economic bubble waiting to burst, taking companies and markets down when this does happen. The government, for the past two years or so, has poured fuel on the fire and prodded banks to lend even faster and looser than they normally do in China. Last year some estimate bank lending was up by almost two thirds compared to 2008; this year, lending got so out of hand the government not only raised capital requirements for banks they actually forced many to stop lending altogether near the end of January, at least for the rest of the month. Previous lending built too many buildings, too many homes, too many factories. Jack Rodman, a distressed property specialist, now counts 55 totally empty office buildings in Beijing, 12 more on the way. (http://www.bloomberg.com/apps/news?pid=20601109&sid=a6i2PSZD.Jr4&pos=11) The play for short side traders is a put position on the PGJ - the ETF that reflects the Chinese Domestic economy - or the FXI - the ETF that is more influenced by Hong King listed shares. They trade together, the FXI is more liquid and a bit more volatile.

Emerging Markets In General: Emerging markets, as represented by the MSCI Emerging Markets Index, have about doubled in the past year - and the ETF representing this index is the EEM. A Morgan Stanley analyst was recently quoted that growth is coming, the correction is over, and the index could be up 40% this year. The Street agrees and is bidding this ETF up a bit and people looking to short these markets may need to bide their time a bit. But as the real world US double dip recession takes hold, and world trade slows again, and China's slide finally knocks off the China bulls, companies in these markets will see their shares sell off as hot foreign money flows out. I also expect some sort of geopolitical event - a Greek crisis much worse than the current one, Iran doing something even more stupid than it is already doing and the Israelis or the US responding, another terrorist attack on the US - anything - and these markets will lose 20% of their value. The most obvious play here is puts on the EEM, they are liquid.

Eastern Europe: Recent data shows a good part of Europe headed for higher unemployment - led by Britain, bad numbers today - and a real world double dip recession that will spill over into the economies of eastern Europe, already struggling with the credit crisis. These nations are also seeing bond and equity markets hit due to the Greek/euro crisis. I believe, longer term, this is a pretty good place to stash your money - and when you visit your money, start in Prague, a great city with great beer and salami and real Coca-Cola made with sugar -- but for a year or two the eastern European nations are going to take a serious beating. They have way too much debt outside of Poland, their currencies and bonds are fragile, and, as with other emerging markets, one geopolitical crisis and their markets will take a savage hit. And what is Latvia, or Lithuania or Estonia default or come close? The play here is an ETF, the GUR - puts are available but they are not very liquid.

Health care reform is dead - but everyone is now on alert about the need for cost cutting, reducing the nation's exposure to runaway Medicare and Medicaid expenses and a system that spends twice per capita than other developed nations with worse outcomes. State regulators are refusing to allow health insurance companies to raise rates at will. When health care reform was alive, hospitals were up as more insured people would pay their bills, reducing bad debt. Big Pharma was up because they could push more pills, necessary and unnecessary; equipment makers were down because of a possible tax.

What is an investor to do in the new political landscape of "no health reform?" I would focus on products that save money for providers, save money for companies making products inside the industry and under tremendous cost pressure or save lives. There are three good ones - Curis (CRIS), Compugen (CGEN) and Cepheid (CPHD) investors should look at, for these companies will outperform their peers with or without reform. Here is a look at the first of the three Cs, Curis (CRIS).

Curis is a classic, non-revenue, cutting-edge science and technology biotech company focusing on a new approach to treating cancer. It has, to date, consumed hundreds of millions in capital and this is months away from paying off for current investors - yet still has a tiny market cap of $165 million market cap with.

What makes Curis different? A unique scientific approach to disturb signaling pathways vital to tumor growth.

Core Science, Core Beliefs

Signaling pathways are roads used for cells -- including cancer cells - to send messages to manage various functions. Human beings also signaling pathways to fight disease sending signals to manage the repair of damage and to regenerate tissues. This includes nerve tissue, perhaps the toughest area of the body for current medical practice to treat.

This ability to manage in some fashion different signaling pathways - and the use of this ability to fight disease - is based on a body of science that shows many diseases and disorders are linked, somehow, to components of these signaling pathways.
The company's most advanced work is on something called the Hedgehog Pathway but its core R&D efforts target a variety of signaling pathways with the end goals treatments based on small molecule "inhibitor compounds" designed to inhibit or otherwise impact activity along these pathways and to target specific types of cancer
This approach has three great strengths out of the box: the potential for low toxicity or side effects, straightforward development from the test tube to the trial, and extensibility - the core technology can be used to treat, in theory, a wide variety of cancer types.

About the Hedgehog Signaling Pathway

Curis, to the few who follow the company and to the many who try to follow emerging treatments for cancer, has made its first great steps working with the Hedgehog signaling pathway. What is this pathway and what does it do? To quote the company website, "the Hedgehog signaling pathway controls the development and growth of many kinds of tissues in the body by directly promoting cell division in specific cell types, and by activating other secondary signaling pathways that control the synthesis of growth factors and angiogenic (blood vessel-forming) factors." Translation - it can be used, somehow and maybe, to mess with cell and therefore tumor growth.

The Hedgehog signaling pathway does not become important to individual health - it is typically unused, dormant in healthy adults - but comes into play in cancer patients. The range of cancers in question is large -- basal cell carcinoma, colorectal, ovarian, pancreatic, small cell lung, medulloblastoma, breast, esophageal, prostrate cancers, and some others - and the Hedgehog pathway is integral to tumor growth. Curis' pre-clinical research indicates, according to the website, the "Hedgehog protein produced by tumor cells may signal adjacent stromal cells within the tumor environment to produce various growth and angiogenic factors that can enhance tumor maintenance and growth."

Curis has approach has been to develop small molecule inhibitors of this signaling and they are developing treatments that attack this fundamental mechanism involved in promoting the growth of tumors.

In the Clinic

• The Hedgehog development efforts, in collaboration with Genentech, have produced several treatments now in trial. The lead treatment is GDC-0449, currently in trial for advanced basal cell carcinoma, and, in combination with Avastin and chemotherapy, for colorectal cancer. The treatment is also in trial for ovarian cancer.
• The company is also in trial with CUDC-101, an inhibitor of several tumor types based on the activity of enzymes and proteins Her2, EGFR and HDAC.
• The company, in collaboration with Debiopharm, just received approval, in France, to initiate a clinical trial of Debio 0932, formerly, CUDC-305, a Hsp90 inhibitor.
GDC-0449

The Basal Cell Carcinoma Trial - The trial to watch - and is relatively easy to watch for Curis and Genentech - is a pivotal Phase II clinical trial of GDC-0449 for metastatic or locally advanced basal cell carcinoma. Genentech, a very conservative company with its development activities and how it presents them to the public, has said positive trial results will lead them to skip a Phase III trial and go to the FDA for approval, submitting an application (NDA) in 2011. Given the nature of basal cell carcinoma - it is visible to the naked eye - I can only assume this confidence is based on what they are seeing, literally, in the trial. There is also no approved standard of care for this advanced basal cell carcinoma - they have a fairly low bar to get an approval.

The Colorectal Cancer Trial - Curis and Genentech are now running a Phase II clinical trial of GDC-0449 in metastatic colorectal cancer. The trials arms include treatment alongside existing treatments FOLFOX or FOLFIRI in combination with Genentech's Avastin. Genentech believes trial data will be available in the second half of the year.

The Ovarian Cancer Trial - Curis and Genentech are running a Phase II trial of GDC-0449 for advanced ovarian cancer patients. The trial is testing the treatment as maintenance therapy. The goal of the trial is simple - progression-free survival. There are few if any options for most patients with recurring ovarian cancer and the bar for approval, should the treatment advance to and through Phase III. This is the very first molecule considered for maintenance therapy for ovarian cancer, a type of cancer that unfortunately has a fairly hig recurrence rate.

CUDC 101

Curis is in Phase I trials of CUDC-101, an inhibitor of up to three enzymes and proteins related to various cancer types - HDAC, EGFR and Her2. The underlying belief is one compound attacking all three receptor types reduces toxicity and could show greater efficacy that various cocktails of treatments. The treatment has also demonstrated synergy when used alongside some conventional chemotherapeutics.

Debio 0932

Debio 0932 (formerly CUDC-305) was recently approved for a Phase I clinical trial in France and, based on pre-clinical work, could be targeted against acute myelogenous leukemia (AML) as well as breast, non-small cell lung, gastric cancer and glioblastoma brain cancers. Debio 0932 has shown the ability to cross the blood brain barrier - a major plus. The clinical trials in France will be to test the safety and dosing levels in patients with advanced solid tumors or lymphoma.

Prognosis

I like Curis for it has all the components that make a speculative biotech worth some risk.

First, it has the best possible partner in the world - Genentech/Roche - to do its trials and to shepherd the treatments through the FDA approval process. Genentech itself is very bullish on the treatments in trial. Genentech does very sound trials and if the treatment makes it through the FDA to market, Curis would receive royalties that are estimated to be 7%. This is more than enough to launch the company to the next level of growth and also launch the stock.

Second, the technology is extensible across a wide range of cancer types.

Third, it has a novel approach that if approved has the potential for lower toxicity.

Fourth, they had a tremendous head of steam -- according to clinicaltrials,gov, there are 15 clinical trials using GDC 0449, a number not seen in any other biotech, now or in the past, of the same size.

Fifth, the company just raised money and has enough cash, forgetting any milestone payments it may receive (and it just received an $8 million one for approval for the French trial), until well into 2012.

Sixth, catalysts are coming -- trial data in the second half of this year the colorectal cancer trial - and data and a possible application to the FDA for the basal cell carcinoma as ealry as th first half of 2011.

Seventh -- and most important -- focus. Curis is developing core technology and molecules and letting others do the heavy lifting with trials and the FDA. Once revenue starts rolling in I assume they will do more of this work but for now it is a very intelligent approach.

Most biotech analysts shy away from Phase II trials, waiting for the FDA's reaction to these trial results and seeing how a company will proceed with the final or pivotal trial, which almost always occurs as a Phase III trial. And here is what makes Curis so intriguing, right now: Genentech has labeled one of the Phase II trials (for advanced basal cell carcinoma) as "pivotal" -- meaning it will take positive results to the FDA for a drug approval -- and has said it will be able to launch the first product based on Curis technology in 2011. This is radical for any biotech outfit, and for a company as conservative, well regarded and buttoned-up as Genentech, this is unprecedented.
There was some concern on Wall Street that the Roche acquisition of Genentech might slow or change these programs. I think it's unfounded. Before the acquisition, Roche acquired rights to Curis' technology in Europe, and Roche has a holding-company approach to managing acquisitions, meaning it will probably let Genentech do its own thing for many years.

Others support Roche's belief. The National Cancer Institute has signed on to provide support and funding for other indications for Curis' technology, via trials conducted by Genentech, the first target being brain tumors in children.

Three years ago, a biotech with this kind of pipeline and relationship with Genentech, and Genentech's overtly optimistic attitude toward treatments based on Curis technology, would have made Curis an $8-$12 stock. Six to seven years ago, $25. That being said, even today's market should not limit the upside should Genentech like the results from the pivotal Phase II trial and go for an FDA approval, not to mention what could happen to the stock with an FDA approval.

Disclosure: I do not own any shares.

I clearly ruffled some feathers with my write-up of Dendreo (DNDN), mostly those of Dendreon bulls, many of them traders who know little if anything about the company and accused me of everything from being a moron to a child molester because I said an approval for Provenge was not a slam dunk. So let me make myself very clear.

• I am not short or long the stock and it is not a short recommendation in my service, ChangeWave Shorts.
• I have followed the company for six years, was in attendance at the FDA panel when it first got a thumbs up from the FDA, having recommended the stock in my service at the time, ChangeWave Biotech Investor (no longer being published). I got subscribers out of the stock soon after the meeting as I sensed the FDA staff would, for the first time in memory, overturn the panel decision. They did.
• If it were not for the politics of Provenge and the need for the first immunotherapy to get on the market and jump start the industry, the FDA would not give Dendreon an approval. The trial data is too weak - the trials, in my opinion, too small.
• That being said, I am convinced Provenge works on a subset of the population of advanced prostate cancer patients and if approved, even a company as poorly managed as Dendreon will certainly perform new trials to further define the proper audience for the treatment and to use healthier patients in earlier stages of the disease in these trials. They better - the problem with many new cancer drugs in trial is because medical ethics required patients receive, at a minimum, the accepted standard of care, the trials often have the sickest patients who have already been shown to fail with the accepted standard of care.
• When I take shots at management, I am not alone - they were poorly prepared for the panel meeting, the trials are mediocre in construct, and the CEO sold stock after it rose the panel meeting, eliminating the ability of the company to issues more shares for a period of time that extended beyond the reversal of the decision by the FDA staff.
• I stick with my belief there is 2 to 1 possibility Provenge will be approved based on the trial data released to the public. Some people believe if because they have an agreement with the FDA on required end points this translates into an automatic approval if they hit those end points. The process does not work that way. The FDA promises nothing - it provides guidance it is always free to walk away from.
• If approved, market adoption will be slow for traditional reasons - insurance reimbursement issues and the ability of the company to meet demand. Given the projected costs of the treatment and its limited impact - life extension measured in months, not years - my guess is it will not be approved for use anywhere but the US and possibly Canada for the foreseeable future.
• I hope, for the sake of thousands of current and future prostate cancer victims Provenge gets approved.

If Provenge is approved, and the stock moves, the larger question for investors (other than options traders buying calls) is how high can it go? A double would be extreme, or if the market totally loses its mind, a triple - and it fails to get approval, a 90% haircut and if sales are not as robust as expected, at least a 50% haircut. That risk reward profile for a non-revenue producing biotech is distinctly unappealing. Check out my write up of Curis (http://blogs.investorplace.com/sellshort/ or http://seekingalpha.com/article/189470-7-reasons-curis-is-worth-the-risk if you want to read about a company with a much better risk reward profile - a potential ten to twenty bagger with Genentech as their primary partner and 15 trials underway.

I fond this past weekend a good time to blend the some advice with news and analyses - and given current market conditions, not to mention what I do for a living, the most important piece of advice is to start looking at the short side of things - of anything - of everything.

Why?

• I cannot see, and have not read about, potential upside catalysts for the stock market other than corporate earnings. And this is s problem for two reasons - first, I see serious stagnation in the real world and a potential double dip that will hit corporate profits in the second half of the year, led by the banks. Second, as the market prices in interest rate increases - I see them coming around the end of Q1 of next year - the earnings multiple on the SP 500 will have to rise to compensate for a commensurate fall in bond prices. The math is simple - as interest rates on Treasuries risk the risk adjusted value of a stock goes down unless earnings increase. And that ain't gonna happen.

• Potential downside catalysts - from 10% to 25% to the super bearish view (not mine) of a retracement to the previous lows - are numerous. A full fledged currency crisis in the EU; China blows up in measured ways but blows up nonetheless; Wall Street sees the double dip sooner than I think they will and sells off when bank earnings - and forecasts - in Q2 or Q3 disappoint; Iran and Israel get into; there is a terrorist attack on US soil; a big bank comes back to the Fed and Uncle Sam (if one does, and I am not saying this will happen, it will be Citigroup); a Republican victory in November, something provides a trading pop but then people are reminded of another two years of total gridlock. The number of potential downside catalysts - the cumulative amount of nervousness they inject into the market - is considerable and far outweighs potential upside catalysts.

• The market, in fits and starts, is now valuing companies and segments more on fundamentals than it did a year ago - and I see this move back to the future as increasing ach quarter. And there are many, many fundamentally flawed companies sporting stock prices reflective of a rally in the market, not in their business.

• Shorting can take many forms - from simple risk management to speculative plays on a company blowing up - and there are more and more investment instruments for investors to turn to, from inverse ETFs to options spreads, to play the downsize in a straightforward manner with acceptable levels of risk And, as I repeated a zillion times in my book Sell Short, individuals should never actually short a stock. Investors and traders can now "go short" a stock, a market segment or industry, a country, a commodity, a currency, real estate - almost anything - using ETFs and options.

So, what looks good right now and for rest of 2010?

My view the market and individual companies - as well as countries, market segments and the Washington Nationals baseball team - is based on fundamentals, and those are based on real world data, fourth grade math, and a totally agnostic approach when analyzing the data with your math skills. Nothing more. Using this approach - which has worked quite well for me in the pat and is summarized in my book Sell Short - this is some of what I seen happening for the rest of 2010 and with that view some ideas. I will talk about segments - and their ETFs - you can look at some names or tune in later when I write about some specific companies.

• The Double Dip: We will get GDO growth this year, tapering off in Q3 and Q4 and the bulls and pundits and blow-dried economists and politicians will all smile. In reality, we have stagnation now and in real world that ultimately drives corporate profits we will have a double dip recession in the second half, forget official statistics. The critical data point when making this kind of forecast are the drivers of economic activity - national income; household wealth; household and business credit; exports; consumer confidence; a fifth is small business confidence. Guess what folks? With the exception of exports, all are declining, right now. And exports are still well below where they were and are dependent on a troubled, stagnating Europe and a willfully slowing China and its new economic colonies, the rest of Asia.

The key headline data point is total employment - not unemployment of jobless claims or jobs lost. It is people working times hours per week times wages per hour. Total it up - and throw in government transfer payments - and you get what people have to spend - and that has been declining and there is no sign it will not continue to decline. And with no new stimulus in sight, declines in spending power by the American people will accelerate in the second half of the year.

With stagnant or shrinking spending power people buy what they need, occasionally what they want, not what they want and rarely what they desire. The ETF here is the XRT - there are puts available. As for names - think of products one does not need. Start there.

• The Banks: They are still broke and they will get broker in the second half of the year. By broke I mean the largest money center banks - that excludes Goldman and Morgan - are, as a group, insolvent if we go back to 2007 accounting rules and put their off balance sheet obligations on their balance sheet. Since they mow they are broke, they are not lending in anticipation of having to set aside more capital rather than raise it from investors. Or to provide their own liquidity - which is why banks have almost a trillion dollars is now on deposit at the Fed. And since they are not lending, there is no lubricant for the economy and even if other factors turned positive this lack of credit would strangle any modern economy - any old one too for that matter. One real world anecdote tells it all. A friend in the construction business for more than a generation, and a builder of box stores for major brand names, ha a contract pending to build another one. His long time bank, a super regional, has told him to get lost. This is a 100% no risk project - and he still got told to get lost. The play here is the XLF - puts are available - and there are double (SKF) and triple (FAZ) inverse ETFs but they do not always move with the Dow Jones Financial Index as well as they should.

• Homebuilders: Everyone is excited about the nascent recovery in the housing market. That is the same as getting excited that the Jamaican bobsled team lost by fewer seconds than the last Olympics. New home starts were roughly 1.6 million at the peak; used to be, on Wall Street, one million was the bottom, time to buy the homebuilders. We are at a run rate less than 600,000 and these stocks and hopes are holding up. Foreclosures are at an all time high and will being climbing again, based on mortgage default rates, in 2-3 months and a wave of resets hits in the second will set the stage for another spike early next year. These homes - 6-7 million over then next 30 months - complete with new home sales as many are sort of new. This sector has been kept afloat by not one but two pieces of legislation that no talks about and fewer know about - tax rebates for past profits in the billions. That largesse is over - and many homebuilder balance sheets are creaky. Who is going to refinance them? I could write a short book - and it would like a novel - as to why home prices will be stuck, nationally, until 2012, maybe 2013 and this means lower revenues per unit, and lower margins per unit sold by the homebuilders. The ETF here - and yes, it has puts - is the XHB. As for names -- start with the weakest balance sheets, sort of like finding the fattest sow among all the pigs.

• China: A bubble blowing up in slow motion, the air being let out by the Chinese government. I will write more on that another post - but the ETFS with puts are the PGJ, focusing on the domestic Chinese economy, and the FXI, dominated by Hong Kong listed stocks. And with China will go many emerging markets.

Stay tuned.

Goldman Sachs (GS) - the bad boy people love to hate - is again in the news as more details of its creation and selling of a Greek derivatives and bond deal come to light. GS has shown a spectacularly tin ear - in its operations - to possible political risk due to its work in sovereign debt markets. This lack of integration of political blowback into their overall risk management activities - the best on the planet by an order of magnitude, most of the time - is on the verge of biting them by reduced or eliminated profits from European sovereign debt activities.

The prima facie issue in front of the markets, GS management and European politicians and regulators is a derivatives deal that hid the real amount of money Greece was borrowing just before Greece sold some bonds, getting them a better price for those bonds. Lying to the European Commission, which will be a sport at he next Summer Olympics was no-no number one. Lying to investors was no-no number two - a much more serious no-no.

Most governments in the European Union are not within guidelines on budget deficits or debt - both related to GDP - and have used extreme accounting methods to hide debt and deficits. Goldman - and other banks - helped them in the process. Greece was just the first to get caught at it, not because they were sloppy but because they were arrogant and by accident the Greeks elected a politician wanting to do the right thing (let's see how long he lasts). Their lies were not small - remember, they are creators of the Trojan Horse - they were gratuitous and when found, enormous - saying your debt is 3% of GDP when it is 12% is not just a fib. And now everyone is scrutinizing recent and not so recent debt and derivatives deals - and this is where GS has a problem.

It is quite possible, actually, it is probable, EU regulators, long told to give almost complete freedom to member nations to send them financial data, may now actually be given the go ahead to force member nations to structure this data so it reads less as a Dickens novel and more as a spreadsheet. It is also possible that to make German voters happy they will punish GS by banning them from working on sovereign debt or derivatives deals. My guess is GS lobbyists are already hard at work making sure it is just a certain class of derivatives ort some smaller punishment if there is to be one at all.

A larger issue is how can investors trust GS bond sales. The answer, sadly, is they do not care and most buyers of sovereign debt and derivatives are incapable of analyzing serious data put before them should GS choose to do so. My guess is Goldman will be able to continue in its role in packaging and selling sovereign debt - assuming the EU does not ban it from doing so - by having a local investment house validate there is nothing kinky in the financial statements in the bond offering, for if there are the local investment house is in deep legal and political trouble. And the involvement of a local shop means less profit to GS.

The largest issue is the GS management and bonus structure going forward. The Greek deal was the product of the imagination of a woman of Greek descent with family ties to the country, educated at Oxford and the recipient, according to the Wall Street Journal, of up to $12 million in annual compensation. Great trading and investment firms like GS hire people they think can be great, give them guidelines, and let them do their thing. In the past, GS has used company wide risk management analytics to make sure "doing their thing" does not do the company in. Goldman management will now have to add to financial analytics a political calculus - my guess is they are doing it as we speak - so political risk is also factored into how they structure and offer deals. But it may be too late with regulators and politicians angry the Greeks lied and angry those dastardly investment bankers -- -born in Greece - helped them do it.

For investors, the risk is twofold. First, is GS going to take a profit hit due to containment or an outright ban on their participation in sovereign debt deals? Second, will new regulations and fallout from the Greek affair affect other investment banks also engaged in the sovereign debt and derivatives market? I believe for headline and political purposes now necessary for politicians to provide aid to Greece (and eventually several other countries) someone is going to be punished - either investment banks as a whole or that truly awful bad boy, that American investment bank, those terrible people at Goldman Sachs. Of course, the politicians, as they pound the table and then smile will conveniently overlook that most of employees of GS in Europe are European.

I have not discussed potential ramifications in the US because financial regulation is so tied up by lobbyists who will (probably, at last count) spend more than half a billion dollars since the reform debate began early last year GS has nothing to fear.
Bottom line: possible restrictions on profit making activity in Europe are not yet priced in to investment banking stocks with exposure to Europe. Buyer beware.

President Obama published his "new" health care plan today, an attempt at a) reconciling the Senate and House versions of the plan and b) an attempt to get a couple of Republican votes to get the plan passed and up and running. The ETF of health care - the XLV -- sold off with its publication. I am not sure why - the plan is dad on arrival barring the Democrats slipping the Republicans, en masse, mood altering drugs in the Senate cafeteria.

If you want details, good for you, they can be found at www.whitehouse.gov/health-care-meeting. But I am more concerned with the aftermath of the failed summit to be and where the industry ends up.

The XLV - the ETF for health care - sold off a little less than one percent due to proposed regulations on health insurers and proposed taxes on device makers among the many disparate parts of the plan. I am not sure why - it is hard to imagine any Republicans breaking ranks in the current, polarized climate in Washington - leadership might take their parking place away for breaking ranks. Seriously, given that Republican leadership has retreated into ideology and has never really attempted to negotiate any part of the bill in good faith I can only assume this plan is dead on arrival and the meeting this week will really be a contest about who can get more time on the network news. I think watching curling would be more fun, or the compulsory short program in ice dancing, or maybe the luge.

Details - the details are many but there are two salient features of the plan. First, insurers get hammered and are being turned into utilities - and, given the monopolistic nature of insurance companies in most states right now, that, if you are an economic purist, is not only a good thing but a necessary thing. Republicans will not like this - too much campaign money at stake even though more than 80% of the American people think health insurance companies are the number one problem in health care in the US. Second, there is a new tax on high-income earners that has a disproportionate impact on self-employed and people living or earning a lot of unearned income. These are seriously Republican people as well.

A Bipartisan Compulsory Tango - Given the details and the terrible leadership on the Hill in both parties, bi-partisanship ain't gonna happen. Republicans have no interest in governing, just making noise in advance of the election, and are using ideology as if being elected means all you do is to continue to campaign, putting them out of touch with the mainstream of the American people; Democrats are still trying to take revenge on George Bush for legally stealing the election in 2000 and handing them a busted budget and two wars he forgot to pay for, and that means they are way left and out of touch with the mainstream of the American people.

The Crash - The American people are going to be mad at someone when this plan crashes yet again, not just because they worry about their health care but because they wonder why time is being spent on the issue when 20% or more of their fellow citizens are unemployed, underemployed, discouraged or have flat out dropped out of the work force. And my guess is they will take it out on two groups - health insurers and incumbents.

The Aftermath: Assuming the plan is dead on arrival - or close to it - the next logical step will be a separate piece of legislation about reforming health insurance regulation. If theDems were listening to people that is that this draft of the plan would be about. It is not that health insurance companies are the bad guys -- it is more they are collectively one of the worst managed, if not the worst managed industry in American after domestic auto companies. They are risk managers and investment manages, not business people, and have a tin ear that has been petrified and turned to stone. And when the Obama plan fails, new legislation will be proposed and in 2010 or in 2011, despite lobbying, the insurers are going to get hit hard by new legislation.

I would avoid the XLV or individual health insurance companies - CI, UNH, AET, WLP - when the plan fails, they will probably pop up for a while - but long term, the insurers and even many providers are going to take a hit as new regulations and cost controls ooze into the industry via federal and state regulations. More on that later.

I have been waiting to write something like this for a long time - shorting willful ignorance and mindless hyperbole is something I could do all day long if it paid the bills. And if you think I am going to get left of center political, forget about it - stay tuned and in the not too distant future I will be writing how to short the Congressional Black Caucus or maybe Paul Krugman.

The Tea Party people ran amuck last week in Washington at a confab of conservative activists. Their level of rationality and the quality of their discourse was characterized by the remarks, intelligence and perspicacity of their closing speaker Glenn Beck - the same Glenn Beck the same man who let a Holocaust denier speak unquestioned for an hour on his show late in 2008 - showing he has much in common with the president of Iran. As with Ahmadinejad, the shrill screams of the Tea Party do attract attention and can have an impact - and this can make investors money.

• Tea Party guys are not typical Republicans nor are they typical independents. They are a bastion of the prototypical "angry white man" - even the African-American Tea Party activities fit this description - and in one voice shout down all government spending, in another congratulate their kid for grades attained at a publicly funded university. They claim their freedom is being impaired by Uncle Sam as they cash their government crop subsidy checks. They are old fashion populists - call them "angry without a cause" - and they will fade, as all populist movements in the US have for two centuries or more, but they will make a lot of noise and wreak some havoc before they go away. Just as the first president George -- the one who spoke English as his first language - he lost to Clinton because of the populists who voted for H. Ross Perot.

• Independents are increasingly deciding elections and they are in a serious anti-incumbent mood. They are driving John McCain nuts in Arizona - independents are allowed to vote and he is the incumbent. Put the anti-incumbent mood with the agenda of independents - comity in Washington that leads to real change, more transparency and responsiveness in government - and incumbents have a problems.

• Tea Party plus independents mean Republicans are going to have to drift right during primaries and then pay the price during the elections in November. I spoke with a Tea Party type - a candidate for a Congressional seat in a conservative district in Virginia -- a few weeks ago during inauguration weekend in Richmond for the new governor of Virginia. He is as mad at the mainstream Republican candidate endorsed by the party - a candidate already to the right if the rest of the Republican Party - as he is at Democrats. He is going to push the party's candidate to the right during the primary - and still lose - and every word uttered during the winner's move to the right is going to be repeated by his Democratic opponent during the general election. And that is going to make the election close - and in many, less conservative districts, push the election to the Democrat.

What does this all mean to investors? The November elections are going to create even more muddle than we have now.

• The election in November, now being priced into the market as a Republican rout that has a good chance of giving them the House and perhaps, maybe, a fighting chance at taking the Senate, is not going to go that way. Why?

• First, Republican candidates - including a few Tea Party guys who make it through their primary - are going too far to the right of center for most independents, people who typically do not vote a lot in mid-term elections but this year promises to be different.

• Second, Republican incumbents running against strong Democrats are going to feel the wrath of the anti-incumbent voting public as much as the Dems. Most of them pre-date and Obama meaning they helped double the national debt, fight two wars without paying for them, enact tax cuts without paying for them, and brought earmarks to a new level. Tea Party rhetoric is hitting these incumbents, right now.

• Second, the Dems are far better organized and will have more money than the Republicans who will be forced to spend a lot of money fending off Tea Party activists during the primaries.

• Bottom line: more Republicans in the House, more in the Senate, the Dems probably retaining control of both houses by a hair which gives more power to the left and right wing of each party.

And that means gridlock in the face of 20% unemployment - the unemployed, the underemployed, the discouraged and the workforce dropouts - $1.5 trillion in toxic assets still on bank balance sheets, a massive structural deficit, two wars plus Iran and a health care system that is a joke. Where are the opportunities for investors? On the short side.

• This kind of mess in DC will prolong the stagnation economy or exacerbate the double dip (I am a double dip guy). Less consumer spending, less business spending, little growth and lower corporate profits - especially given very rosy Wall Street expectations - in the second half of the year and in 2011, and that means lower stock prices for stocks driven by earnings.

• Believe it or not, some people on Wall Street confident of a Republican victory believe the Bush tax cuts will be extended. I find that so funny I want to develop a stand up routine for HBO. One Wall Street rocket scientist told me "the Dems won't have the votes to rescind those tax cuts, the Republicans will filibuster." I then reminded him the tax cuts expire and new ones have to voted on. He moved to the other end of the bar. The increase in taxes - especially capital gains taxes - will prompt some selling in the second half of the year and make Wall Street grumpy. More bad news for stocks.

• Gridlock means no solution for structural deficits and the increasing national debt and that means rising interest rates. As interest rates rise, bond prices fall. There are many ways to short bonds for individual investors, mainly through ETFs and puts on ETFs.
• With rising interest rates, banks margins will fall - they will be borrowing from the real world, not the Fed, to fund their operations - and their profits will fall. Add a slowing economy and the second half of the year and all of next year are going to be grim for the banks - and for bank stocks. Again, there are ETFs and ETFs with puts if you want to short the banks.

A note to economic bulls - please read. Twice.

Consumer confidence dropped like a rock this past month - the University of Michigan survey of consumer confidence survey dropped a full eleven points to 46 - a bad number on its own, the drop being dramatic and due to Wall Street's ongoing willful disdain of negative numbers, hitting stocks immediately.

The drop came an hour after Case Shiller home price numbers came in mixed to the bulls - home prices fell 0.2% in December and are now down 29% from their peak in 2006. This is despite a slowdown in bank listings of foreclosed properties and short sales to shore up their fourth quarter and annual profit based bonuses.

The drop came minutes after retailers, including Macys and Target, announced profit growth but little if any revenue growth -- and forecasts for essentially no growth, after inflation, for 2010. Bullish analysts were waxing poetic about 1%-2% growth - that is less than the rate of inflation - and were quickly sent home by CNBC when the consumer confidence numbers came out.

What more do people want to know about the economy? In the past month, jobless claims spiked; consumer confidence fell; home prices fell; small business credit contracted; consumer borrowing contracted; Washington came to s standstill. That means fewer people working and less national income and that means less consumer spending; lower home prices means less consumer wealth; small business credit contracting means stagnant job growth; consumer credit contracting means consumer spending stagnant or contracting; Washington coming to a standstill may make Tea Party oddballs happy - they also send their kids to public universities and drink clean water - and that means the brick and mortar for a full blown double dip recession are now firmly in place.

While the Street has shrugged off individual data and is now trading the market and not investing but these numbers do add up to something all investors - and even traders - need to take into account - the double dip recession that in turn will push corporate profits for many companies below expectations. What about Uncle Sam? There is political will for a big stimulus - the $15 billion plan passed out of committee in the Senate yesterday is a cynical joke, see my piece on the bill- and politicians are now so afraid of debt they will do nothing in an election year. Eighty six percent of people surveyed by CNN believe the government is broken - this too weighs on confidence and spending and economic growth.

What does this mean for investors? First, the market cannot continue to outperform the economy. Second, individual companies will be up against much more difficult comps in the second half of the year and be facing unexpectedly lower profits. And interest rates in the real world will be rising, squeezing margins or banks and many other companies, as the Fed pulls back on its liquidity measures. All add up to a potentially nasty second half for many stocks. Take a hard look at banks -- they are going to really get hit hard in the second half as they write down more assets than anticipated because they wrote down fewer assets than they should have in the second half of last year. Ah, manipulating profits to generate bonuses, again. And look at retailers -- well managed but caught between no growth and declining growth. A silver lining? The Fed will not raise rates and bonds are not going to get hit as hard as many think.

Dendreon was featured on CNBC this morning with bullish analysts and of course no bears or agnostics like me. The company's treatment, Provenge for advanced prostate cancer, has, according to the company, hit the end points required by the FDA after it got panel approval but failed to get staff approval a couple of years back. The issues facing investors are a) will it be approved and b) is the stock price already too high?
This is my third piece on DNDN in the past couple of weeks and I continue to be called an idiot and other less than polite names because I put the chance of approval at 65/35 and personally believe the trials are too small. Let me explain with some more detail on the 65/35 and then look at valuation.

There are several possible outcomes on May 1, when the FDA is supposedly going to make a decision.

• An outright approval
• An outright rejection
• A request for more data
• Sending the drug back to the same panel
• Sending the drug to another panel.

This is where FDA politics and my 65/35 scenario come into play. The cancer heavyweights within the FDA are in an organization called CDER and are far more into statistics than a fantasy baseball fanatic. The two bio-statisticians at the original panel meeting were CDER types, if not employees, and besides being unable to speak English (no kidding) thought the original trials were too small and the results unclear, hence the wait for this new trial data. Provenge has been shepherded through the FDA on the biologics side of their agency, which does few cancer drugs and is a political backwater at the agency. I am curious what tug of war is going on inside the agency over supervision of Provenge - and whether the CDER people will make a move to make sure future immunotherapy treatments - Provenge would be the first approved, -- end up on their side of the shop. To make this move they might require another panel meeting, this one stacked with CDER consultants. There were only two in the first panel meeting and they both voted against the drug.

Bottom line - there is a reasonable possibility the staff will send the treatment to a panel. This does not mean it will not get an approval - as I said, 65/35 it will get approval - but a move back to the panel will whack the stock and kill any call positions for a while.

One last note - the trial, from a scientific point of view, is too small. Five hundred and twelve patients are not enough to create discrete cohorts and then discrete subsets to determine where the treatment works well and where it does not work at all. The results from the first two trials scream out that Provenge works for a discrete subset of patients; the lack of proper markers, other than survival, in all the trials is going to cause gigantic problems marketing the treatment, which will be very expensive. And that is why I believe the stock may already be overvalued.

Provenge it and when approved, is not going to be a slam-dunk in the marketplace. Insurers are going to insist on the current standard of care first - it is much cheaper - and let patients receive Provenge treatment after other treatments, notably Taxotere, have been exhausted. This is wrong and will too late for many patients - but it will save the insurers a bunch of money. Remember, Provenge extends life a bit - several months on average - and this also means foreign markets will essentially be closed to Provenge. Bottom line: too many bullish analysts, not enough agnostics and a stock price that may be fair but out of line with the risk another panel meeting will be required or the treatment is rejected outright.

And that is wrong - because of the nature of clinical trials, Provenge could not be used in patients with earlier stage prostate cancer - just late stage - and these, on average, are very sick patients. Preliminary data shows the treatment works better the longer the patient lives - sounds strange, but it means the longer the treatment is in the immune system, the better chance it has of working. And it absolutely works on a subset of patients.

Bottom line redux: Still 65/35 for approval. And DNDN management better not mess up their future the way they almost destroyed their past - the lives of thousands are at stake - and they better be planning larger trials for earlier use of Provenge if they are not busy figuring out how much money their stock options are worth.

I am far too nice a guy to say I told you so - I will use a more professional expression and ask, "why are people surprised?" by today's terrible new homes sales data.

Housing is one of the most transparent of industries - all sorts of data from construction permits to foreclosures are publicly available. When bound together with an agnostic view of the world - no bullish tint, no bearish tint -this data tells any rational person the housing market will be a disaster in 2010, shockingly bad in 2011, bad in 2012 and may come to its feet in 2013 or 2014.

• Demand is very low due to unemployment and fears of unemployment, falling income, tight credit standards and the lack of mortgages other than those guaranteed by Fannie, Freddie or the FHA. The shadow banking system that bought trillions in RMBS is gone forever and banks are not yet returning to the mortgage business.

• Foreclosures are accelerating again and in the next 24-30 months, at least 6-7 million homes will be foreclosed based on 7.9 million homeowners behind on their mortgages in Q3 2009. You don't have to believe me - the best housing analyst around, Laurie Goodman of Amherst Securities, thinks so - I am stealing her estimates and even lowering them a bit -(http://www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg). There will also be a special chunk of defaults and foreclosures as many of Wells Fargo's Pick and Pay mortgages, also known as Option Arms, reset later this year.

• Foreclosures are being spurred not just by an inability of homeowners to pay but unwillingness to pay - a first ever - with about one quarter of all homeowners owing more than their home is worth. Most of these are "prime" borrowers - not sub-prime - and their mortgages are being held by many banks are solid assets yet to be written down.

• Mortgage modifications only postpone the inevitable with more than 70% of those being helped eventually defaulting on the new mortgage.

• Foreclosures add to inventory - reducing the value of homes to be re-sold and the price of new homes as many foreclosed homes are relatively new. Inventory increased to 9.1 months in the current report and home prices fell. High inventory will continue to depress new home construction and sales.

What is astounding is the surprise among analysts and other Wall Street rocket scientists. Using third grade math, any analyst can look at outstanding mortgages, when they were let and their terms, look at current number of late payers, rescue and default rates and see where the train is heading. Analysts can also discover the banks are sitting on a good many late payers not yet in default and a great many defaults yet to go to foreclosure. The banks are also sitting on what those in the industry cal the "pig in the python" a huge backlog of foreclosed homes not yet listed for sale, as many as 800,000 units.

This grim reality will only get worse in April, when the Fed withdraws from the RMBS market and the $8,000 tax credit/bribe for home buyers expires. There is little sentiment on Capitol Hill to extend it - it is very politically unpopular. And for the publicly held home builders, there will be no more IRS rebates of taxes paid in profitable years, billions paid out by Uncle Sam in the past three years.

Oh, near yearend, Fannie and Freddie will hit the caps on the amount of mortgages they can hold. It is highly unlikely they can get this cap raised in today's political climate.

Of course, when the news hit, the home builders did not move that much - some went up, short covering I assume - but there is a reality check coming and sometime in 2010, a major builder is going under - and with that, the entire sector will lose the support of the traders currently keeping their stocks afloat. Don't be surprised when this happens.