You can rest easy today… the financial crisis is over.

CIT Group, the new epicenter of systemic financial risk, got thrown a lifeline this week from its bondholders. As we reported Friday, the company needed $3 billion — fast — in order to stay afloat. It was rightfully denied a government bailout, but was able to strike a last-minute deal with holders of its debt. Of course, the market rejoiced… the S&P 500 rose 1.1% yesterday largely on the news.
But again, we’re calling the market’s bluff. Anybody read the fine print of this deal? The loan was secured by “substantially all unencumbered assets.” That lawyer talk means CIT will have no collateral left over for a similar deal in the future. What’s more, the company will have to pay 13% annually on the $3 billion loan… no small order.

But most importantly, the whole deal is an ugly microcosm of 2008-2009. No problem has actually been fixed at CIT. The business still finances loans to tens of thousands of small businesses by borrowing from the credit market. CIT’s business model is still broken. They are still massively in debt. All they’ve done is create another liability.

(Just as we were about to publish today, CIT filed a warning with the SEC, saying that their bondholder rescue might not keep them out of bankruptcy. Wouldn’t you know it – they’ve got more bills coming due! On August 17th they’ll have to cough up another $1 billion. And so the madness continues.…)
Nevertheless, coupled with the recent earnings surprises from JP Morgan, Goldman Sachs and Citi, “investors were encouraged to see that the financial sector can take care of itself, without government bailout funds,” as CNN put it. Heh… right.
“Anyone who takes this as evidence of a recovering economy should work for the government,” sneers Bill Bonner. “Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: Whom were they trading against?

“The banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back — out of earnings. If the borrower is counting on higher house prices… or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

“The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

“There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.”
The stock market rally has been tempered today. Ben Bernanke is testifying on the Hill — as good a reason as any for traders to sell a few shares. As we write, the S&P 500 is down 0.5%.
“Here’s a way to take some risk out of biotech investing,” says our small-cap adviser Greg Geunthner. “Check out the clinical testing sector. Companies in this industry oversee and review tests performed by the big pharmaceutical corporations, as well as biotechs. Usually, these firms offer full regulatory compliance, as well as laboratory services for a variety of clinical tests.

“Thanks to a regulatory environment that’s becoming increasingly difficult to navigate, drug companies large and small are outsourcing research and development spending more often. In fact, R&D outsourcing is increasing 17% per year. This puts clinical testing firms in prime position for tremendous growth.

“That’s why we’re looking at a virtually unknown clinical testing industry leader right now. It’s been in business for two decades, and it’s about to kick its business into high gear. It’s taking its newfound cash flow and investing it back in its business. Management has also laid out an aggressive plan, which includes the company completely paying off its long- and short-term debt by the end of the fiscal year, as well as growing its biomarker services division to meet growing needs in the industry.”

Want the ticker? Check out Greg’s Penny Stock Fortunes.
The California budget crisis has come to and end, but it looks like the whole mess is really just beginning. State lawmakers closed their $26 billion budget gap last night in a manner that will likely irritate every single special interest group in California and send shivers down the spines of the other states still facing similar crises.

So how’d the Governator and his brood pull it off? $15 billion in budget cuts, including mob-inducing measures like cutting health care benefits for underprivileged kids and cuts for welfare, education and municipal governments. Almost $4 billion will come from “new revenues,” aka higher taxes. $2.1 billion will be borrowed and the remainder will be “fixed” with good old-fashioned accounting fraud… no kidding. For example, the government will shift the last state payday of the current fiscal year into the next. Save that little problem for 2011!
No surprise, California’s faux budget fix failed to inspire a dollar rally. The dollar index found a new six-week low early this morning at 78.6.
When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation — or hyperinflation — begins?

The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.

(We apologize to Rob if we hacked up his much more eloquently phrased explanation. Regardless, the first meeting of the Richebacher Society was a notable success. If you’d like to be around for the second, look here.)
Gold is holding steady after yesterday’s rally. The spot price hit $950 yesterday and has stayed put since.
“Around the world, miners are finding out that a mine is only worth something if you can keep it,” warns Chris Mayer. “And mining companies are finding it tougher to keep them as governments seize them or rewrite deals.

“Rio Tinto, for example, was knee-deep in a $6 billion iron ore project in Guinea. The government just stripped it of 50% of the mine. Guinea said Rio Tinto was moving too slowly.

“The problem is that as commodity prices have crashed, companies have cut back and slowed down new projects. But governments in these developing countries, which granted the rights to mine in their countries, were banking on getting all kinds of royalties and taxes. Plus, governments don’t want to see job losses, which in a lot of these countries could be seeds for unrest.

“China, for instance, is threatening to revoke a coal license from ArcelorMittal after the company warned it would cut jobs. In South Africa, the largest trade union wants the government to nationalize all the mines. In Zimbabwe, in Zambia and other countries, miners face all kinds of political threats.

“In short, political risks are on the rise. It’s fallout from the economic bust. Times are tight everywhere, but only governments don’t cut back. They just figure out new ways to grab money. So for now, focus on valuable resource companies in safer jurisdictions.”
Last today, a (little bit creepy) sign of the times: The depression has caused a revival of the DIY home burial.According to The New York Times, there are now at least 45 organizations around the country that help families bury their loved ones in their backyards, compared to just two in 2002. The rag says the average American traditional funeral costs about $6,000 and, naturally, families and the soon-to-be departed are looking for ways to save. The family the paper interviewed spent just $250 on their father’s burial.

Our favorite bit from the story was a fellow named Chuck Lakin. The humble old carpenter specializes in multipurpose coffins for home burial. After all, if you’re going to shell out a couple hundred bucks for a pine box to rot in, might as well have a place to store some of your favorite books while you wait for the hereafter.

How morbidly convenient!

“We’ve been looking around in Florida at foreclosures/short sales,” writes a reader, “and talking to people and have come to realize that the housing stats y’all get grossly underestimate the direness of the situation. We came across an approximately 300-unit condo project in Panama City Beach that purportedly cost the builder (bank) $66,000,000. These units were being pushed by a realtor for less than $200K each (159-199K). This realtor led me to believe that there are very few of these available (as in these are being ‘released by the developer’). Another realtor told me they are a bunch of short sales. I later learned that 15 are owned by individuals (sold in the past year), 20 are owned by some company in New York and the rest are owned by the apparent developer in Texas. It was like a beautiful ghost town. These condos do not show up as foreclosures or anything close.

“Talking to another realtor in Orlando, he had stories of people living in their homes for at least 18 months without making a payment and not receiving foreclosure notices. These also do not show up in the distressed numbers. The banks are using very creative ways of keeping from flooding the market and propping up prices as much as they can just to get whatever they can. We’re going to rent and figure the whole nasty thing out. Buyer beware.”

The 5: Thanks for your note. You are likely the first person to ever accuse us of grossly underestimating the housing bust. Considering vintage promotions like this, we don’t know how we could have rang the bell much louder.

Source: Banks on the Mend? Biotech Safe Haven, CA’s Budget Crisis, DIY Funerals and More!

I’m not a biotech guy, but my fellow analyst Marc Lichtenfeld is, and he writes about them regularly.

Now that Investment U and our sister publication – Smart Profits – are combining forces, you’ll be hearing about the biotech sector from Marc on a regular basis. Nevertheless, there is something that I do know about the healthcare and biotech sector.

All biotech companies – regardless of whether or not they turn out to be a good investment – need laboratory services and equipment. Therefore, it stands to reason that any boom in the biotech sector would drag along these companies for the ride.

Becton Dickson and Company (NYSE: BDX) – a large-cap medical technology company – is one that stands to benefit from the biotech boom.

The company sells an extensive range of medical supplies and devices. It also has an extensive array of laboratory equipment and diagnostic products used by life science researchers (biotechs), healthcare institutions (hospitals and doctor’s offices), clinical laboratories and the public.

Let’s take a quick look at each division:

The BD Medical division manufactures a complete line of medical devices and other items used in just about every facet of the typical healthcare setting. Needles, catheters, syringes, scalpels and home healthcare products are just a few of the thousands of products offered by BD Medical.

The BD Diagnostics division is similarly broad.

It provides for the safe transport and collection of specimens and instruments associated with a wide range of infectious diseases. The next time you are in your doctor’s office, take notice of the “sharps” collection device mounted on the wall. Chances are it’s a BD box put there and serviced by BD Diagnostics.

The division services microbiology laboratories, physician’s offices, home patients, laboratories and clinics, biotech labs, and hospitals.

BD BioSciences manufactures tools focused squarely on the research and clinical segments of biotechnology. Its tools enable the study of cells and their components. Its products also include state-of-the-art cell imaging systems, cell culture media, reagent systems for life sciences research and other diagnostic tools.

BD Biosciences’ tools directly impacts drug discovery and development.

Moreover, any increases in biotech R&D bode well for Beckman. And as the government strives to drive down the cost of healthcare, diagnostic tests that take the place of expensive MRIs and CT Scans are on the increase.

Investors that want some exposure to the biotech space, would do well to consider a company that will do well regardless of the success or failure of any given biotech company.

Source: Becton Dickson and Company (NYSE: BDX): Stock of the Day

After closing at $1.08 per share last night, the stock opened at $9.99 this morning on news that the company’s schizophrenia drug, Fanapt, was FDA-approved.

Even for a biotech veteran like me, a one-day percentage move like this is unprecedented.

But that’s the thing about FDA approvals for small-cap biotech companies. They’re huge catalysts for the stock in question. Unfortunately, separating the contenders from the pretenders is a tricky job. And even when you reel in a big winner, you need to know when to dash off with the money. Here are some tips…

Popping the Champagne on Small-Cap Biotechs

No doubt some VNDA investors are popping champagne corks today, following the small-cap biotech’s liftoff. It’s probably made their year.

Others, however, are still trying to recoup their losses from the stock – even after today’s monumental surge. That’s because two years ago, VNDA was trading around $25.

As the resident biotech expert here, I wouldn’t be surprised to receive e-mails asking why I didn’t recommend VNDA.

• When I first looked at the company three years ago, I thought the story was interesting. But the risk was just too high.
• My pessimism was right, as shares plummeted.
• And despite today’s news, it was only last summer that the FDA rejected Fanapt, saying that it was too similar to other drugs on the market. The stock dropped below $1.

Things got so bad that the stock was trading below its cash value and activists were demanding that the company be liquidated and cash returned to shareholders.

The bottom line is this…

Small-Cap Biotech Investing – The Risk-Reward Ratio Is Critical

Small-cap biotech investing is risky. I want to lower that risk whenever possible. That doesn’t mean I’ll avoid risk all together – on the contrary.

But what it does mean is that any position that I enter will have significant upside potential to offset that risk. The more risk… the more profit potential I need to recommend the stock.

As I mentioned, FDA approvals are obviously major catalysts for small biotech companies. Sometimes, good news is already priced into a stock. In this case, it clearly wasn’t. The reason why VNDA shares were so explosive today is because virtually no one expected Fanapt to get the green light.

There’s another big reason for paying more attention to the risk-reward ratio with biotech. And a profitable one, too…

Small-Cap Biotechs: 3 Benefits of Locking In Profits

I’m a big proponent of taking partial profits on a winning position when appropriate. If a small-cap biotech stock is up significantly, locking in some gains serves three purposes:

• Returns Investment Capital: While remaining in the position, I now have capital to put into other opportunities.
• Helps Weather The Downside: If I still believe in the company and the investment, taking partial profits allows me to give the stock more room to fluctuate, as I’m no longer concerned with losing my original investment.
• Participate In Upside: Having secured my original investment, I can now allow my winners to run. That’s where truly large gains happen.

Recently, when I recommended that subscribers take partial profits in a top-performing stock, I received a ton of email asking why… particularly when I expect the stock to go significantly higher.

I emphasized the reasons above – that taking some profits lowers our level of risk, while still allowing us to go for the home run.

I’ll give you another specific example…

In my small-cap healthcare service, Access, we took 65% gains in half our position in SIGA Technologies (Nasdaq: SIGA). That’s allowed us to let the stock run to current levels, which are now 158% above our entry price.

So while VNDA blasted its way higher today, remember that it’s a perfect example of how volatile the market can be – and how things don’t always happen the way you expect.

One of the best ways to make sure that volatility doesn’t negatively impact your portfolio is to play with the house’s money whenever possible.

Source:  Small-Cap Biotechs: How to Separate The Contenders From The Pretenders

When I was in my early 20s, I had one friend who was always on the prowl for Mrs. Right (or at least Mrs. Right Now) whenever we went out.

The evening would kick off with him boasting about how he would end up with the most beautiful girl in the bar. As the night wore on, though, he gradually lowered his standards. By the end of the evening, fueled by desperation (and perhaps a little alcohol), he was willing to leave with any woman who had a pulse.

The health care M&A picture right now reminds me of that situation – with one exception. Some Big Pharma companies have become even more desperate than my buddy. And that means big profits for biotech stock investors.

With patents expiring and pipelines empty, the biggest biotechs need to add some in-house research and development, stat. That’s why you’re seeing firms like Glaxo pay premiums of 80% to acquire their object of affection.

Even that sky-high amount wasn’t the highest. Last week, Intercell paid a whopping 126% premium to acquire Iomai. With small firms able to garner such high prices, it puts virtually every small-cap biotech in play.

Biotech Stocks Shrug Off the Market Woes

As top-quality biotech stocks plunged to bargain-basement levels for much of the first quarter of 2009, the biotech sector did little more than shrug.

It’s not that biotech stocks weren’t immune to the pain. But the biggest players had large piles of cash and consistent income coming in from drugs produced over the last decade.

Then the news broke that Pfizer would shell out $68 billion to buy Wyeth. It triggered a trio of big buyouts in the sector, and more importantly, it gave investors a clue to just how much money these pharmaceutical behemoths had. They had financing, and they were ready to spend.

Over the past couple of weeks, we’ve seen:

• Merck announce that it will acquire Schering-Plough for $48 billion.
• While Roche finally concluded protracted negotiations to buy the biotech superpower Genentech for $47 billion.

Total value of done deals: $163 billion. It goes to show you that in a market where access to capital has supposedly dried up, money is clearly available for the right deals.

• In order to finance its acquisition of Genentech, Roche issued nearly $33 billion in notes.
• Pfizer received over $22 billion in loan commitments from various banks to complete its transaction.
• And similarly, JP Morgan slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

And this has all happened during one of the most fear and panic-ridden periods in stock market history. My point is that it’s not necessarily all doom-and-gloom (as some would like you to believe). In fact, things are looking up in the biotech sector.

And those deals are just the start. I think more biotech acquisitions are imminent…

The Beginning of the Biotech Stock Boom

I think we are at the very beginning of a wave of consolidation and a biotech stock boom. That’s because small-cap biotech names are so cheap right now. It will be tough for Big Pharma to resist these low valuations and “cheap” product pipelines.

To bring a drug to market today takes years, and companies must keep a consistent pipeline of new drugs in developement. A company’s “pipeline” represents all of the products they have in various stages of testing and FDA approval.

A company may have literally hundreds of versions or compounds of a drug to find one that works well enough to be tested. Many drugs will fall short of their goals and be pulled from development. This process is time consuming and expensive. But it only takes one blockbuster drug to pay for the development of hundreds.

It’s also why it’s much easier to purchase a company with a credible pipeline. And that means consolidation is something that companies of every size do in the biotech field.

So while Pfizer, Merck and Roche have plugged some holes in their businesses and created massive biopharma companies with their acquisitions, there are just as many mid-sized pharmaceutical companies that desperately need to upgrade their product pipelines.

The Biggest Biotech Stocks & Merger Possibilities

The largest biotech company after Genentech is Amgen which boasts a market cap of $48 billion. Then we have Gilead Sciences, which just announced a $1.4 billion takeover of CV Therapeutics at $40 billion. But the field is packed with mid-sized biotechs, as well as merger possibilities.

Of the biotech companies remaining, only three companies have market caps over $10 billion. Then we have 11 other companies with market caps of $1 billion or more. That’s a lot of potential deals.

For example, Merck could buy Biogen and Genzyme for less than it cost the firm to buy Schering-Plough.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin or Medivation – and many others like them.

The point is: Even though the biotech sector has outperformed the S&P 500 during our current bear market, many biotech stocks are still incredibly cheap.

And we may see a rush by other big pharma firms, eager to fill their pipelines with products from inexpensive biotech companies. This could lead to rapid increases in prices, and a frenzy of activity as companies rush to grab anything they can.

There are a number of companies that have “targets” painted on them for their size, their relative ease of acquiring and promising pipelines. Stick with these traits when you look for your next 126% gain. It could be closer than you think.

Source: Biotech Stocks: The One Sector Outperforming The S&P 500

But on July 1, 2002, the FDA issued told Alkermes it wasn’t ready to approve the drug. The agency wanted some data reanalyzed and repackaged. Investors panicked. Alkermes stock dropped from $16.01 to $5.15 in one day. Shareholders assumed the drug would face a three- to four-year delay.

Wrong.

On April 29, 2003, J&J submitted additional data, and the FDA approved the drug about a year and half later (the drug became a blockbuster in 2007, with more than $1 billion in sales). Alkermes shares soared from roughly $4 to $14 – a 200% gain for investors who bought at the bottom.

The biotech sector sees dozens of similar stories every year…

The stock market is mostly efficient, but occasionally it gets things wrong… and creates a few super-lucrative windows of opportunity. We’ve discovered a way to take advantage of such rare occurrences with biotech companies, specifically in their dealings with the FDA.

Last year, the FDA approved only 19 new-drug applications, down 10% from 2006. The remaining decisions were “negative responses,” which the investing world absolutely hates. In the ensuing frenzy, the market drops stocks 25% on average… without ever bothering to figure out whether they still offer value.

Bottom line is, when the FDA speaks, biotech stocks move, often violently. And I’ve learned that when stock prices react to such announcements, they create enormous opportunities for folks who know what they’re doing…

Here are three ways you can make a fortune from an FDA setback:

1. The “Oops” Factor. Not all drug rejections are created equal. And profits can be made when the market realizes, “Oops, I shouldn’t have unloaded the stock without reading the press release first.”

For example, in June 2006, the FDA told Pozen that it wasn’t ready to approve its migraine drug, Trexima. The stock traded down from $14 to $6 per share. The market wrote off the drug without bothering to find out Pozen’s Big Pharma partner, GlaxoSmithKline, had anticipated the setback and was running additional clinical trials to satisfy the agency’s concerns.

After six months, the market realized its mistake and sent Pozen back to $18 per share – a quick 200% gain.

2. Pipeline Boost. Positive news from a company’s other developmental drugs can get a damaged stock back on the right track. The best example comes from a company called Amylin…

Byetta, the diabetes wonder drug from Amylin, was progressing through early clinical trials when the company received an FDA setback on its lead drug, Symlin. The market was so focused on Symlin’s delay that Byetta was forgotten. But as positive news about Byetta’s progress through clinical trials trickled out in the next 12 months, Amylin shares made 200%-300% gains.

Today, Symlin generates measly sales around $100 million per year… while Byetta is poised to crack $1 billion.

3. Big Pharma Buyout. Faced with dwindling pipelines, expiring patents, and a fickle FDA, desperate Big Pharma companies simply can’t say no to a good, cheap biotech buyout.

At the end of 2006, MGI Pharma received an FDA setback on Saforis, a drug to treat mouth ulcers from chemotherapy. Add on concerns about the stalling growth of its top-selling drug Aloxi at the time, and MGI’s stock was hovering near multiyear lows of three times sales. (Similar companies typically trade at seven to nine times sales.)

In December 2007, Eisai, a Japanese pharmaceutical company, offered to buy MGI Pharma for $41 per share cash, about $3.9 billion. That represented an easy double for traders who got in after the initial setback about one year earlier…

As you can see, investing in biotech is much like investing in the precious metals sector.

It is not for the uninformed… and much of an investor’s success here depends on contacts and sifting through data. (Click here for one resource I use to track what the FDA is doing in the market.)

The hard work can be well worth your time. Many biotechs have the potential to gain not hundreds, but thousands of percent.

Good investing,

George Huang

P.S. I’ve developed a four-pronged strategy to trade on these FDA events. Using this system, you can pinpoint potentially lucrative trades – months in advance. Right now, I’m monitoring a trade I think could generate a minimum of 75% gains in the next year. Click here to find out more.