***The following is excerpted from the November issue (11/14/14) of Nate’s Notes that was published for subscribers last weekend***

“Take Two And Call Me In The Morning…”

What a crazy past several weeks, eh?!

If you recall, the market as a whole was starting to look especially weak as last month’s issue was going to press, and to make things even more interesting, for the first time in ages, one of the five major indices we use to gauge the health of the overall market (see Eyebrow Levels table below) had actually fallen below its one eyebrow level that very day.

Not only had the SOX semiconductor index taken a dramatic turn for the worse that Friday (with some of our chip stocks down 8% or more in that trading session alone!), the other three non-biotech indices were also perilously close to flashing bearish signals for us… and consequently, in order to help everyone sleep more easily at night (along with the fact that I intentionally only make trades once a month based on what is going on at publishing time), I decided that we would “take two for flinching” by selling off roughly 20% of all of our chip positions even though our Eyebrow Levels table had not actually called for such action just yet.

In hindsight (and as you can see in the performance table above), we obviously should have trusted our system 100% and left all our chips on the table (pun intended) rather than moving some cash to the sidelines after all!

That being said, however, though we did receive the anticipated penalty of “two for flinching” (i.e. we let go of roughly 20% of each of our semiconductor positions at what essentially turned out to be “the bottom” of the sell-off), the good news is that a) the sales gave me (and hopefully you) some peace of mind that made it easier to ride out those nail-biting couple of days that took place right after the issue was published, and b) we still own 80% of those positions… and many of the stocks are already starting to hit new multi-year highs again.

In addition, if you recall, as part of our game plan to “hedge” against the possibility that our decision to take two for flinching was premature, we also made the conscious decision to add to our positions in two of our favorite stocks, namely Apple and MannKind… and both of those stocks have been performing very well since then (in fact, it appears that our purchase of MannKind may turn out to have been made on THE low closing price for the downtrend).

Now that the market is once again heading the right direction (and we have had a round of solid profit-taking to help shake out weak holders), you are encouraged to become as aggressive as you can comfortably be while still sleeping at night when it comes to putting your capital back to work (while also keeping in mind that the sorts of monthly returns that were just generated in the Aggressive Portfolio, for example, are not sustainable, and thus you should not get used to them!).

Along these lines (and, as always, with the caveat that you should never own more of a stock than you would feel comfortable losing in its entirety), given how the stock has been acting lately (and how strongly I believe that you should own at least a small position in the stock ahead of the launch of Afrezza), I want to draw your attention to the MannKind story yet again ahead of what may prove to be one of the most important days yet for us as long-term investors.

Another MannKind Card About To Be Flipped Over

In case you were not aware, MannKind’s partner Sanofi (SNY – $46.68) will be holding a “New Medicines Day” seminar that will be webcast live for investors starting at 8:30am Eastern on Thursday, November 20^th.

Afrezza is definitely included on the list of new products in its pipeline that Sanofi plans on discussing in more detail, and I believe that what is said (or not said) about the product will finally shed some light for us on the question about how Sanofi is actually viewing the partnership.

If it turns out that Afrezza only gets a small mention and/or the presenters seem to be going out of their way to avoid saying much about the product, I am afraid the stock price will likely suffer a bit (perhaps back into the mid-$4s if the silence is deafening?).

However, if Afrezza gets a fair amount of “airtime” in the course of discussion, I believe the stock will likely continue trade sideways or slightly higher while we wait for Afrezza sales to actually start early next year…

And if it turns out that Sanofi does, in fact, plan on making the rapid-acting nature of Afrezza a key selling point when it comes to pitching its line-up of complementary diabetes drugs to doctors, insurance companies, and patients, I believe there is an above-average chance that at least a handful of short sellers will finally see the handwriting on the wall, throw in the towel, and start to cover some of the 80+ million shares that are currently sold short (and this, in turn, ought to add fuel to the fire that I likewise believe will be lit for new investors as they start to get their heads around the possibility that Afrezza may, in fact, represent a significant paradigm shift in the treatment of diabetes after all).

As it stands, I believe there are a great many folks on Wall Street who have been (and still are) looking at Afrezza as nothing more than Exubera 2.0, and, consequently, a very “inefficient market” has been created for the stock.  In fact, if it turns out that Sanofi does give Afrezza a reasonably-sized spotlight in the center ring next week, I will go so far as to say that it may represent the most inefficient market I have seen develop around a story in the sector since I first started following biotech stocks a little over 25 years ago!  With downside risk of $3-$4 if I am wrong, but upside potential of $30-$40 (or more!) if I am right, I really like the risk-reward ratio from current prices (and I hope you do too)!

A Couple of Frequently Asked Questions

Aside from questions about specific stocks, two of the other questions that I have been asked most often lately are “do you ever sell stocks?” and “do you ever recommend new stocks?”

Both are great questions, and to help answer them for everyone else who is fairly new to the newsletter and may be wondering the same thing but hadn’t gotten around to asking yet, I thought I’d offer the following set of thoughts to help shed some light on the situation.

In a nutshell, “yes” to both questions… however, since I take such a long-term view to investing in stocks (and have intentionally set up Nate’s Notes in a publishing format that reinforces this approach), the frequency of such events in the newsletter is probably significantly lower than it is for most investors (especially if they enjoy trading on a daily or weekly basis).

And, while it is true that the approach we take in the newsletter can seem dull at times, I believe the newsletter’s track record speaks for itself*… and it also lends a great deal of credence to old adage “When is the best time to sell a great growth stock? Never!”

Though I am quite pleased with the performance that has been generated by a sensible weighting of the basket of stocks we have been working with for the past several years (and especially the past 18 months), I will also be the first to admit that it might not be a bad idea to do a bit of spring cleaning in the months ahead… and this, in turn, will free up some space in the newsletter to make some new recommendations as well.

That being said, you are encouraged to stick to the game plan that I try to cover to one degree or another each month, namely, to be working on averaging-in to positions over time, with an eye towards those stocks that a) seem most interesting to you, b) are showing decent relative strength, and c) are still trading below their buy limits.

In addition, I want to remind newer subscribers that your job will be even easier if you always start with the much smaller list of stocks that are delineated as “first buys” in the table on page 1 of the “pretty version” of the newsletter (or in the downloadable spreadsheet of data available on the same page of the website)… and, of course, be sure to read the “how to get started” material that was published in the May 2013 issue of the Nate’s Notes (see the “New To The Newsletter?” section of either online version of this month’s issue for a link to that issue).

*in case you were not aware, Nate’s Notes is currently ranked #1 for 10-year performance by The Hulbert Financial Digest (HFD)… and I am looking forward to seeing where the newsletter ranks when it finally becomes eligible for ranking on the list for 15-year returns in early 2015 (HFD did not start covering Nate’s Notes until early 2000).

“Eyebrow Levels”

(used to help us gauge the overall health of the market*)

	current	one eyebrow	two eyebrows
DJIA	17,391	16,250	15,400
Nasdaq	4,631	4,200	3,900
S&P500	2,018	1,875	1,740
BTK	3,354	2,575	2,175
SOX	641	580	540

*As long as all five indices are trading above their “one eyebrow” levels, it is a sign that the current uptrend is still intact; however, if the indices start to dip below those levels, it will cause me to raise an eyebrow and wonder if the trend my be coming to an end… and if both eyebrows go up, it will mean that things are deteriorating in a hurry (and you should start looking for a “Special Alert” from me in your email box).

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Electronic Arts (EA) – the stock appears to be breaking out to the upside, and if history is any guide, the odds are in our favor when it comes to seeing further gains as part of the run.

MannKind (MNKD) – IF Afrezza is given a fairly large spotlight at Sanofi’s upcoming “New Medicines Day,” the revelation could help propel the stock back above $7 in a hurry.

Perry Ellis (PERY) – the stock continues to perform well for us, and as one our favorite mantras goes, “trends often go on for far longer than seems reasonable.”

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase 100 (1,000) Electronic Arts, 100 (1,000) Luminex, 1,000 (25,000) MannKind, and 100 (1,000) Perry Ellis.  We will use the closing prices on Monday, November 17^th, for all transactions.

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