Interesting Articles for Those on a Financial Learning Curve:

1. O.C. Register, MarketPlace, Sunday November 9, 2008 on 'Mutual funds face a vicious cycle. Need to raise cash limits ability to capitalize on market bargains. By Gail Marks Jarvis'. "At its worst case, depending on the liquidity of holdings in the protfolio, redemptions can trigger a vicious cycle that can really drive down a fund's value," Dolan said.
2. The Wall Street Journal Opinion Journal linked to this blog site on November 12, 2008 on 'Is Now the Time to buy Stocks? Here is what the historical evidence suggests. By John H. Cochrane'. "The standard portfolio rule says that your stock percentage should rise with the expected return (stocks and bonds) divided by squared return volatility." "Many sophisticated investors and hedge funds who use this standard formula are getting out, waiting for at least a return of lower volatility before getting back in."

Friedman on GM

Thomas L. Friedman offers his prescription for what's ailing General Motors, and it's not just a bunch of bailout money to let them continue their awful "business as usual" business model. Foreign automakers have been eating GM's lunch for years. In terms of design and performance, its offerings have lagged. The popularity of its SUVs kept it alive in the late-1990s and early-2000s, but only fortified its key weaknesses. Terrible fuel economy didn't matter as long as gas prices stayed affordable and/or incomes remained high. But then 2008 brought the perfect storm of unprecedented gas prices, collapsing consumer confidence, the deflation of real estate values, and a spike in unemployment, putting a fine point on the long blade of stagnating real wages since the 1980s.

The words "socialist" and "socialism" got thrown around a lot in this year's presidential campaign, but I didn't hear anyone bothering to define it (look it up: you'll see "state control of the instruments of production" is the defining element, not the redistribution of wealth). Theoretically socialism can be done well. Capitalism, I might point out, also works best in theory. Our problem currently is a political class in both parties that is free-market capitalist on the way up and knee-jerk socialist on the way down: habitually enabling a number of abuses on the front end, and sticking the taxpaying public with the bill after the party's over.

GM represents the worst kind of capitalism (where a decaying producer's shortsighted profits and political influence shield it from market consequences) and a potentially disastrous form of socialism (where government funds underwrite its continued underperformance). Freidman argues persuasively that any bailout money supplied to GM should come with conditions to force this behemoth mired in the last century's business-thinking to catch up with the times. If we're going to engage in socialism, I'd like to see the state make an effort to do it well. That is, when it writes a check, attaching conditions to protect its investment, like any savvy businessman would do.

MIV Therapeutics: Buy, Hold, or Sell?

Given the current toxic environment, one wonders if it makes sense to own stock in any biotech or medical device company. In 2005, I invested US$1000 in MIV Therapeutics at $0.60 per share. My decision to invest was motivated by their intellectual property, novel products in development, and the fact that the coronary stent market generally looked good in 2005. They are traded over-the-counter (OTC). The company focuses on the development of experimental coronary stents coated with hydroxyapatite, a naturally occurring substance that is present in human bone and teeth. The general idea is to develop coronary stents that cause less arterial inflammation due to greater biocompatibility. At one point in late 2005 the stock was worth $1.60 per share.

But I've gotten ahead of myself. First, some background. A stent is a device or tube used to prop open vessels in the human body. This is done to counteract constrictions or prevent them from occurring. Coronary stents are used to prop open coronary arteries and are used as an alternative to bypass surgery. They may either be bare metal or coated with drugs designed to reduce inflammation and (hopefully) the need for additional surgeries. Coated stents are sometimes referred to as "drug eluting". Coronary "re-stenosis" is the process by which arteries close off, again, after angioplasty is performed to insert a stent. The best stents are the ones that do the best job of preventing re-stenosis.

The US$4 billion-per-year coronary stent market is dominated by Medtronic (MDT, NYSE), Boston Scientific (BSX, NYSE), Johnson & Johnson (JNJ, NYSE), and Abbott Laboratories (ABT, NYSE). The global market is approximately US$5 billion. For the last several years, each of these companies has been involved in high-stakes patent lawsuits designed to prevent the others from introducing new stents and to force competitors to pay royalties on existing stents. As of May 2008, Boston Scientific alone was involved in 15 separate patent lawsuits. The legal wrangling will likely take several more years to sort out. Just last month (October 2008) Boston Scientific announced that a US federal court had awarded Johnson & Johnson US$703 million in a patent infringement lawsuit.

And the market is likely shrinking. Recently Keith Winstein (WSJ reporter) reported on several studies on interest involving coronary stents ("Heart Surgery Bests Stents, Study Shows" - 9/2/2008; "Fewer Stents May Be Better for Patients" - 10/15/2008). In one of the studies, presented in Munich, Boston Scientific pitted their leading Taxus drug-eluting stent against the most modern forms of bypass surgery. The Taxus stent is the most popular stent in the world, accounting for US$1.8 billion in sales, nearly half of the entire stent market. This study showed that while the Taxus stent and bypass surgery offered similar safety profiles, significantly more recipients of the Taxus stents experienced re-stenosis and needed additional surgery within one year of initial stenting. Analysts at Wachovia are predicting that these negative results will result in a US$458 million reduction in the overall stent market, an approximate 11.5% shrinkage.

The other study -- known as the "FAME" study -- was sponsored by Sweden's Radi Medical Systems AB. Radi Medical Systems AB manufactures medical imaging and diagnostic equipment. FAME was presented at the Transcatheter Cardiovascular Therapeutics meeting and showed that doctors who only use an angiogram to decide whether or not an artery is clogged often perform unnecessary surgeries. It is more accurate for doctors to request a treadmill stress test, but this step is often skipped. In the study, subjects given only angiograms received an average of 2.7 stents. Subjects given treadmill stress tests (as measured by the Radi equipment) received an average of 1.9 stents. In other words, doctors using the treadmill test performed 30% fewer stenting procedures.

Taken together, it appears likely that the US$4 billion coronary stent market will shrink to something like US$2.5 billion, in today's dollars, given the information currently available, assuming that the results of these studies translate directly to sales. The global market will likely shrink to approximately US$2.93 billion under the same set of assumptions.

After application of this information to MIV Therapeutics, it should not be surprising that their stock is now in the cellar, notwithstanding the current toxic Wall Street environment. My initial US$1000 investment is now worth approximately $33.33, after taking into account a reverse 1-for-10 split earlier this year. The $1.60 per share was a high water mark not just for MIV Therapeutics, but also for the entire stent manufacturing sector, +/- 6 months. BSX was trading for approximately $25 per share in late 2005, down from a high of approximately $45 per share in 2004 -- but much higher than the current $7.01 per share. JNJ was trading (at its high point) for approximately $70 per share in early 2005, a value that was only recently matched in September 2008 (they now trade at approximately $58 per share).

Over the past 5 years, JNJ has tracked fairly closely with the Dow Jones Medical Equipment Index (DJMEI). They are currently +15% against this sector index, largely due to their diversity and reputation as a safe haven -- in 2Q 2008, JNJ reported operating revenues of US$16.45 billion with net profits of US$3.33 billion; they have 119,200 employees worldwide. On October 28, the Wall Street Journal (WSJ) reported that JNJ acquired HealthMedia Inc., a provider of web-based services designed to improve the health-related behavior of their customers (diet, exercise, &etc.). This is in line with the historical JNJ philosophy of diversification. In the same article WSJ reported that only 40% of JNJ revenue derives from pharmaceuticals. The other 60% derives from medical devices, diagnostics, consumer-health products.

BSX, on the other hand, tracked closely to the DJMEI only in early-to-mid 2004. Since late 2004, BSX has steadily declined against DJMEI and is now approximately -75% against this index. BSX is also much less diversified. They have 24,500 employees and reported operating revenues of US$2.02 billion in 2Q 2008, with net profits of US$98 million. However, in 3Q, they reported a net loss of US$-62 million.

But at least BSX has approved products and generates revenues... In comparison to BSX (which is worse off than JNJ), MIV Therapeutics is an even smaller biotech company with no US-approved products. Biotechs of all stripes are finding it difficult to raise money and have begun to hoard their cash and lay off employees. MIV Therapeutics has posted net losses of anywhere from US$3 million to US$3.5 million in each quarter of this year and there is no reason to suspect that this trend won't continue. Their ability to raise capital to continue pursuing ongoing clinical trials is being threatened by the current liquidity crisis and deepening recession.

My now-US$33.33 "investment" compares favorably to a similar US$1000 invested in AIG last October. It is only slightly better than a similar investment in Fannie Mae or Lehman Brothers last year. And it is definitely worse than my recommendation from an earlier post -- I should have just bought $1000 of beer and drank it, collecting $66 in recycled aluminum afterwards.

Given the current stent market, it makes no sense to expect that MIV Therapeutics is going to recover any time soon. The market is shrinking, venture capital is disappearing, and the competition for the remaining US$2.5 billion stent market is fierce. I'm going to sell and take the $33.33. At least I'll get a tax write-off.

Google Stock Price: Analysts Way Off

This just in: analysts can get stock prices wrong. CNET shows how ridiculous $1000 target prices for Google look in light of it's current closing price. Anyone want to bring back stock picking monkeys?

Ben Stein's Money

We study history to gain wisdom from the past. Ben Stein, the affable economist of some Hollywood fame ("Bueller? Bueller?..."), offers these concrete lessons from the experience of the economic meltdown this fall, for those investors who haven't already taken a header from the 44th floor and plan to continue risking their capital by investing.

Is the SUV going the way of the dinosaur?

CNET's Executive Editor, Charles Cooper, celebrated the high cost of gasoline because it has caused us to rethink our Hummer loving ways. There's some truth to his argument, as recent surges in gas prices have coincided with plunging SUV sales. Americans have substantially changed their car choices and driving habits, arguably for the better.

Crude oil and gasoline have been dropping as the economy slows. As US automakers introduce drastic discounts on their SUV's, will America return to her heavy metal ways? Time will tell.

Let's hope the public continues to demand more fuel efficient vehicles, and automakers start listening. As more people now look at the MPG before the horsepower, I think that the trend towards smaller cars will continue for the balance of this decade.

But if recent history is an indication, this current recession will eventually end with job growth, rising incomes, larger families, and cheap gasoline. All of these ingredients could lead to the return of minivans and SUVs, as it did in the Reagan and Clinton years.

Debt Trap at NYTimes

The New York Times has assembled a fascinating interactive tableau analyzing American household debt trends. The graph under "Lifetime of Repayment"was particularly astounding, calling into question what the meaning of prosperity is.