Stocktake

SAC, Elan and a $276m tip off:One of Wall Street's biggest hedge funds is alleged to have benefited from the most lucrative inside tip of all time: on Elan's Alzheimer's drug, bapineuzumab.

Mathew Martoma, formerly a portfolio manager at a unit of $14 billion hedge fund SAC, had been bullish on “bapi” up to July 2008, when a doctor involved in clinical trials for the drug allegedly told him of serious side effects.

Martoma emailed SAC chief executive Steve Cohen, and a 20-minute phone call followed. SAC sold its entire

Elan holding – 10.5 million shares – and then shorted the stock, which tanked when trial results became public.

The bapi bets realised $276 million in illegal profits or avoided losses, say prosecutors. Cohen, worth $9 billion, has netted annual returns of about 30 per cent over the past two decades. He has not been charged or accused, but the US government has now linked six Cohen employees to insider trading.

Wall St's best day in months

Wall Street recently enjoyed its best day in two months, prompting investors to wonder if an intermediate-term bottom has been put in.

High-profile bear David Rosenberg warns that the Vix, or fear index, has averaged readings of 33 during the eight corrections recorded since the bull market began, in 2009. It did not exceed 18 during the recent downturn, indicating further selling. Since 1993, there has been only one other occasion where the Vix was so low amid such a sell-off.

Others are worried by the fact technology has been leading the market lower, but not Birinyi Associates. Since 1982, it says, tech stocks have had 39 double-digit declines. The SP 500 has experienced a 10 per cent correction in only eight of those times.

Merrill Lynch notes that 90 per cent of stocks rose during the SP 500’s November 19th rally. Stocks typically enjoy strong 20-, 30-, and 65-day returns following such 90 per cent days.

Additionally, Rob Hanna ( quantifiableedges.blogspot.ie) details 19 instances since 1996 where his capitulation indicator recorded similar readings. On each occasion, stocks were higher 20 days later. Insiders, too, are enthused, buying four times as many company shares as they were two months ago, and more than on all but one occasion since March 2009.

 High-quality US stocks tipped

US stock returns will not exceed inflation over the next seven years while international government bonds are set to record declines of 1.2 and 1.5 per cent annually over the same period.

That’s according to money management firm GMO, run by British investor Jeremy Grantham, who correctly predicted a lost decade for equities in 2000, as well as the global financial bust in 2007.

Last Thursday’s seven-year forecast said investors should prioritise high-quality US stocks – stocks with little debt and high cash flow – which will deliver inflation-adjusted returns of 4.8 per cent, as will large international companies.

Emerging markets should advance by 6.5 per cent annually, GMO said.

Hewlett-Packard can't say it wasn't warned

Hewlett-Packard is taking an $8.8 billion (€6.8 billion) write-down on last year’s $11 billion takeover of Autonomy, the IT company run by Tipperary-born Mike Lynch, after allegedly discovering “serious accounting irregularities”.

HP can’t say it wasn’t warned. Between 2001 and 2010, research firm CFRA wrote 14 reports and four notes where questions regarding Autonomy’s accounting practices were raised.

Renowned short-seller Jim Chanos, who exposed Enron, bet against Autonomy in 2011, and his firm wrote a detailed report explaining why.

“I could tell the accounts were not kosher from an office in Sydney,” said hedge-fund manager and blogger John Hempton, citing “basic applied accounting”.

FT Alphaville repeatedly questioned Autonomy’s practices over the years, while Autonomy’s bad-tempered battles with bearish analysts were well-publicised.

Nevertheless, HP coughed up $11 billion for the firm – 11 times yearly sales, and a 59 per cent premium to Autonomy’s November 2011 share price.

Legal high for Medbox shares

Shares in Medbox, a tiny US stock which makes medical-marijuana dispensing machines, went sky high after being mentioned in a MarketWatch column by Irish journalist Quentin
Fottrell.

Marijuana usage for medical purposes is now legal in 18 states and the article, headlined
"How to invest in legalized marijuana", suggested Medbox could benefit.

Within days, shares had soared from $4 to $215, giving the thinly traded company, which expects to install 40 units this quarter, a market capitalisation of $2.4 billion.

Medbox founder Vincent Mehdizadeh promptly warned that an “appropriate” trading range is between $5 and $10.

Shares fell, although they remain elevated, at $60. Medbox’s 52-week low is just $0.03. “Alas, the market will do what it will do,” said Mehdizadeh.