***The following is excerpted from the December issue (12/12/14) of Nate’s Notes that was published for subscribers last weekend (all prices, etc. as of that date)***

Time is the friend of the wonderful business, the enemy of the mediocre…

                           – Warren Buffet

PERFORMANCE

	since last issue	year to date	since inception (10/31/97)
Model	+2.8%	+40.2%	+1,359.1%
Aggressive	+1.7%	+76.1%	+4,191.7%
DJIA	-2.0%	+4.2%	+132.3%
Nasdaq	-0.7%	+11.4%	+192.0%

 

A Wee Bit Of Seasonal Contrarianism

Thanks to a combination of plunging oil prices (which are causing concerns about a global economic slowdown to spring to the forefront of investors’ minds), political and economic uncertainty in the eurozone, ongoing tensions around the world, the need for some profit-taking after the great bounce we have seen over the past couple of months, and good old-fashioned tax-loss selling, the markets have been extremely volatile lately.

However, as you can see in the performance table above (and as is confirmed in the “Eyebrow Levels” table below), the bull market is still intact at this point in time, and thus our job is to remain as fully invested as we can comfortably be while still sleeping easily at night.

In addition, though I have learned over the years that it is usually best to avoid stocks that are not acting well, given the manner in which certain stocks have been trading lately, I want to draw your attention to the fact that a number of our buy orders this month are for stocks (or ETFs) that I believe have gotten extremely oversold as a result of tax-loss selling (and thus we are taking advantage of the situation to do a bit of averaging-in to them).

Another MannKind Update

After intentionally not talking about MannKind in the most recent Inter-Issue Commentary, I was quickly reminded by a number of you that until the stock finally kicks into gear for us, you would appreciate updates and pep-talks as frequently as possible… and though I can’t promise I will write about it every month, the current situation certainly represents a good time to step back and look at the big picture to make sure everyone understands the possible outcomes from here (based on your emails, I worry that some of you may have forgotten that there is still some risk in owning the stock).

Starting with the optimistic side of things (before heading to pessimism and back to optimism again), it is my belief (and it is a point that I think gets overlooked far too often in discussions about “inhalable insulin”) that Afrezza is quite a bit more than just a clever repackaging of the existing insulins that are on the market, and while “no needles” is a benefit in and of itself, the fact of the matter is that what really sets Afrezza apart from the competition is the that it represents a significant step forward in the goal to develop “ideal” insulin (i.e. insulin that behaves as if it were produced naturally in the body).

This is a big deal because it allows patients to more easily monitor and control their blood sugar levels, and this, in turn, should lead to better patient outcomes… and, while each of them has a different motivation for achieving that goal, what patients, doctors, and insurance companies are all looking for is patient well-being.

Since I often get asked “why would insurance companies care if a patient is happy – all they want is money, right?,” I wanted to take a moment to point out to those of you who may not have thought about it before that whereas the cost of providing insulin to a patient pool can be estimated with a very high degree of accuracy, the costs associated with treating the complications of poorly-managed diabetes are a) much harder to predict, and b) much more expensive than simply providing insulin and hoping it gets used correctly.

If I am right about Afrezza, I believe it has the potential to become the mealtime insulin of choice over the next several years… and if it manages to do so, the product would likely be considered a “blockbuster” by even the most reluctant of skeptics.

Of course, there is a chance that I am wrong and Afrezza will end up struggling to gain traction in the highly competitive world of diabetes drugs (please read that sentence again, and keep re-reading until you really believe it… then you may proceed).

Working against the company are:

• the fact that its partner for the product, Sanofi (SNY – $45.16), is currently struggling with personnel and PR issues;

• the last inhalable insulin that was introduced to the market (Exubera) flopped big-time;

• there is a very significant short interest in the stock that a) is keeping a lid on the share price (which, in turn, makes it more difficult for the company to raise capital on favorable terms if/when it needs to), and b) may turn out to be right (though, ironically, when all of those shorts start to cover, it may end up causing a higher floor to be put under the stock than many of them are counting on – i.e. their upside may not be as big as they think it is);

• while the company has expressed confidence that it will be able to meet all of its cash flow needs going forward, there are still a lot of variables in play that might make this a challenge;

• as it stands, the labeling for Afrezza is less favorable than the company would like (though this variable can change over time as more studies are done);

• and, finally, while there have not been any flags raised based on the studies that have been done so far, the possibility of Afrezza being a lung cancer risk still gets a lot of airtime and may cause a number of potential users to hold off trying Afrezza (and, of course, there is a chance that lung cancer might actually be identified as a risk after more studies are done).

All of that being said, if you had told me in January that the stock was going to finish the year basically right where it started after having the uncertainty regarding both approval and a partnership removed from the equation, I would not have believed you… however, that’s exactly what we’re looking at today.

Given the nature of the products being developed, the biotech sector is notorious for having “market inefficiencies” in which stocks become radically mis-priced based on what turns out to be a misinterpretation of the data that is available to investors… and in my 26 years of following the sector, I believe this may represent one of the most inefficient markets I have ever seen for a stock.

While I do not claim to know for sure what has been going through their minds (and I freely acknowledge that a portion of the large short position may simply be a hedge put on by folks who own MannKind’s convertible debt), the initial batch of short sales were put in place based on the idea that Afrezza was going to fail its clinical trials.

When that investment thesis didn’t work out, it appeared that instead taking a step back and wondering if perhaps they were wrong, many of those shorts simply doubled-down on their position and changed their mantra to “despite passing clinical trials, it will never be approved… and I’ll cash in when that event occurs.”

Given human nature, it should come as no surprise that this same group of people did the same thing again after the product was, in fact, approved, and they started pinning their hopes on the idea that “they’ll never find a partner.”

Of course, not only did MannKind find a partner, they found a great partner (assuming Sanofi can weather the PR storm that erupted a few months after they signed up with MannKind)… and they got a great deal to boot.

To be sure, the shorts may still prevail if Afrezza fails to sell (I will be the first to admit that the old adage “Q. What do you call a man who is right for all the wrong reasons?  A. Right.” could come into play here), but the situation sure looks to me like a case in which a group of investors have fallen in love with an idea (“MannKind is going to $0 because _____”), and they’ve stuck with it despite the fact that MannKind has – on a number of occasions now – managed to clear the hurdles they were planning on seeing the company stumble over.

Please note that MannKind is still just a moderately-sized position in the Model Portfolio (and thus it should be around that size too in your own portfolio if you are more risk-averse), but is definitely one of our largest positions in the aptly named Aggressive Portfolio.  This is on purpose, but I want you to notice that our MannKind position (my favorite speculative stock) is being matched by an equally large position in Apple (one of my favorite conservative ideas), and if you are also “going big” on MannKind with me, you are encouraged to make sure a sizable chunk of your other money is parked in some of the less risky stocks as well.

Some Recognition… and An Opportunity!

As some of you may have noticed, Nate’s Notes and yours truly were lucky enough to be written up in an article Forbes magazine put together featuring insights from some of the best long-term performers on the Marketocracy.com website.

If you are not familiar with the site, it was set up by its CEO, Ken Kam, as a way for him and his team to find great investors via a very novel approach – namely, they gave everyone who signed up on their site a $1 million hypothetical trading account… and then sat back and waited for the top-performers to emerge from the very large pool of investors who had signed up.

As time has gone by, Marketocracy has put together a team made up of some of the most successful traders in the program (known as “Masters”), and it taps into this talent pool to manage money for its clients by essentially mirroring the trades being made by the Masters in their hypothetical accounts.

What does this have to do with you, you might be wondering?

To make a long story short, the account I created in 2002 has generated almost exactly the same returns we have seen in the newsletter since then (roughly 17.6% annualized, according to the Forbes article), and, according to Ken Kam, this means that my Marketocracy account is one of just a handful that have managed to outperform both Warren Buffett and the top-performing U.S. mutual fund manager over the past 10 years.

Consequently, I am very pleased to report that I recently signed an agreement with Marketocracy to become one of their “Masters” so that they can start offering “my” portfolio as an investment option to clients in their separately managed account program (which is open to U.S. residents with a $100,000 minimum).

Those of you who think you might qualify for and have an interest in participating in Marketocracy’s managed account program are encouraged to visit www.marketocracy.com and/or email Ken Kam directly at ken.kam@marketocracy.com to learn more about the program.

Important note:  while I am very optimistic that my relationship with Marketocracy is likely to be a long and fruitful one, in order to help you keep your options open to invest money directly with me should I ever start my own money management firm, it is very important that you let me know ahead of time if you sign up with Marketocracy so that we can make sure your name is on a list of clients that will be exempt from a 2-year “no poaching” clause that is part of our agreement.

Finally, I want to personally wish you and your loved ones a wonderful holiday season and a very prosperous and healthy new year!  Cheers!

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:

Celgene (CELG) – though it is currently trading above its buy limit, the stock has been on fire lately (and strength often begets strength).

Electronic Arts (EA) – great relative strength going on here too, with the potential for a nice holiday quarter to materialize as well.

Skyworks Solutions (SWKS) – yep, this stock has been on fire too, and it probably has the most attractive looking chart among all of our chip stocks this month (albeit by just hair over TriQuint).

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 450 (2,200) Cubist and purchase (500) Electronic Arts, (500) First Solar, 1,000 (30,000) MannKind, 400 (2,000) PowerShares DB Ag., 800 (3,500) PowerShares DB Cmdties., and (800) Skyworks Solutions.  We will use the closing prices on Monday, December 15th, for all transactions.

	current	one eyebrow	two eyebrows
DJIA	17,281	16,250	15,400
Nasdaq	4,654	4,200	3,900
S&P500	2,002	1,875	1,740
BTK	3,421	2,900	2,600
SOX	671	600	550

*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 (if you see eyebrow levels being broken, start looking for a “Special Alert” from me in your email box).

**************************

MannKind

As discussed above, while I feel good about my analysis of Afrezza and MannKind (which includes the Technosphere platform, in case you had forgotten), I will be the first to admit that the stock is not acting the way I would have expected it to… and that is always a circumstance worth reflecting on.  However, with $2-$4 to be lost on the downside if I am wrong (admittedly a huge percentage change from current prices) but $20-$40 (or more) of upside potential if I am right, I know which side of the trade I want to be on (especially when the other side of the trade has been forced to change its investment thesis three times over the past eighteen months).  MNKD is now a strong buy under $6 and a buy under $9.