Gene Inger's Daily Briefing 10/19/7

Gene Inger's Daily Briefing. . . . for Friday, October 19, 2007:

Good evening;

Roller-coaster struggles . . . alternate with 'pure' stamina by the Averages, which might defy logic, or simply reflect excessive number of shorts out there at this time; who may actually be correct about the risk of the U.S. sliding into troubles. Certainly, some of the big financials, pharmas, and retailers, are experiencing everything we've warned about; while Oils are still strong (also expected), and techs getting sell-on-the good news responses; again, inline with projections. Even when calling preceding lift behavior, we have felt rallies were unsustainable, with the market's evading realism.

Internally, risk-offloading continues, as the markets work lower overall. We thought as an example, that Morgan Stanley's sale of their large position in the New York Times, reflects reappraisal of their viewpoints, or possibly (speculation for members only). It has been a suspicion that institutional liquidity's more ephemeral than perceived by the Goldilocks crowd. Conceptual contractions of foreign capital or investments from abroad, suggest similar prospects, though where growth does exist (almost purely away from a majority of big-cap multinationals), it becomes attractive.

To summarize what we've been saying: credit quality isn't improving. Forecasters of early housing bottoms were nuts; as we argued for awhile, based on common sense and statistical realities as ingerletter.com shared in these missives for months. That hasn't changed as debate raged about early troughs or foreseeable lows (Treasury Sec'y. Paulson finally concurs with us as regards risks on this). And few economists tend to realistic candor as relates to overbuilding, excess inventories, or the absence of up-price speculation far into the future. Analysts even say there's no reason to be a bear about all of this, while the reality is layoffs are here, but won't be realized until after-the-fact. Some think sub-prime or inventory levels aren't big deals. But they are.

Remember, most of the porridge-slurping crowd disputed our argument for a big drop in 2000; the bottoming in 2002 (they thought it was a bear-market rally, which by the way it sort of is for everything outside of the multinational stocks which are in trouble); so now they're bullish. It makes no sense; as the market is hanging-on by its fingers. ('Exemption letters' continue issued by the Fed; mostly recently to 2 English banks.)

Besides the reality that it is; I hasten to note that even if you stabilized housing (as is virtually impossible given at least for now, the reality loan servicer's are often not the originators of paper, as abusers offloaded most through secondary mortgage markets just as fast as feasible).. but even if you'd stabilized it, you would have an absence of bidders, or renewal of construction related growth levels at any approaching time. We wish it would be otherwise, but conditions are what they are. May take years to settle.

Investors (or the holders of their assets; increasingly difficult to retrieve for some) are being held-in by every method conceivable; and that includes the Treasury Dept. now acknowledging what the rest of us already knew for months, but still failing to make a linkage to what's involved with 'off-balance sheet' paper, which resembles Enron if it must be said. And, 'reforms' to prevent just that easily preceded this accumulation of paper by institutions, which might be why one state's AG suggests criminality in this. I can't or won't comment on that, other than to say we can grasp structural similarities.

I will say that the Beige Book and similar reports are further affirmation of what we've said as relates to ownership structure; difficulty in taking markets down; and maybe a propensity for holding investors in funds irrespective of extremely excessive PE ratios for many if not most financial and big-cap stocks. Eventually these huge issues come to respond to the pure realities as dominate our economy for several quarters ahead.

Also; if these structured funds proposed by banks (assisted by Treasury) experience a modicum of problems, they'll commence drawing on big credit lines, at participating banks. The general economic community is short-changed under that circumstance it would appear, as lending volumes would restrict the capacity of fulfilling other needs.

If so it becomes an off-balance-sheet fiasco that runs 'risk' of a National debacle that, of course is a risk anyway, but would be accelerated if only the big banks obfuscation of their 'collateralized debt obligations' (mortgage or otherwise) are thus brought onto the banks balance sheets, or compromised in some other (shades of Enron) way..

That large chunks of the financial industry portrays this simply as 'restoring liquidity' .. or for asset-based CP (Commercial Paper) markets, is purely disingenuous. It's just a conduit that Treasury has gotten involved with, probably because this is dangerous; as that's something (just by virtue of the public discussion) which is increasingly now being grasped by investors in general, and even permabulls in particular, who should find it hard to embrace..if they truly believe in free markets with little gov'ment activity.

We've argued all year that housing's forecast slide would become the greatest risk to the American economy. Now top officials finally start to comprehend it or at least they become 'transparent'. However there's less that can be done besides the 'bully pulpit' to persuade lenders (where feasible) to refinance or work with many 'upside-down' (it means they owe more than what it's worth) homeowners. That might limit downside impact but by no means does 'compassion' eliminate confronting this. Remember our warning; too many think myopically: the lower the Fed takes rates, the higher it goes in real worlds; staving-off Dollar assaults. A price of outsourcing financial sovereignty.

Again; all of these issues are contributing to 'why' we're bearish; why short-sellers are having a tough (but slowly profitable) time of it; and why with lots of shorts it takes the time to get something going on the downside. Combine structure of ownership, so as to understand how hard it is for managers conditioned to 'always be invested' style of management to be swayed (partially 'cya' job preservation) and you'll see why we've suggested a 'Chinese Water Torture' characteristic to describe how this all evolves. (That's a salami decline; money carved by the slice; but in time they get the weenie.)

In the final analysis; no real fundamental reason for optimism here, so clearly it is (in our view) not time to worry about 'multiple expansion' silliness, but rather worry about 'multiple contractions' to catch-down with where next year's reality is going to take us. Maybe the world will hold-up until China's Olympics; but if that occurs it won't be from higher plateaus, but from lower levels over time. In this investing 'conduit' for months, we've correlated this repeatedly with one of history's more significant market events: 'the Panic of 1907', and JP Morgan's actions then.

Financial journals only are now mirroring our perspective or embracing what I'd been concerned about all year. That's why, despite calling most rallies, including a forecast of early Summer's unsustainable move, I felt there was no further bullish alternative on our move orchestrated in '02, and that (especially with only partial retracement by tech for several years now) that a corrective time made sense along with the 2-year ago call for housing to top-out. Of course there will eventually be a new turn up; but it is not here in our view, as essentially cannot be given multiple contractions likely too. (Or put differently the multiples at current prices will rise, because earnings will fade.)

As to getting through the evolving economic situation; it won't be most of the builders doing selling at the bottom; getting this 'over'. It will be bankruptcy holders or lenders, such as banks that provided construction or bridge loans to the many condo builders. If this occurs, it won't be because we're selling off pieces to China, Dubai or anyone else. It's a normal manner of reluctantly caving-into reality, into a deepening ongoing recession. Yes, I know why global markets have been strong superficially (not broad, on light volume). It's fairly clear Americans won't be told of recession, 'til near its end.

Daily action . . . remains an accident occurring essentially in 'slow motion'. That's not a surprise given the ownership (or better said managerial) structure of markets today; a reason why it's tough for individuals to impact the situation shy of a redemption run; but at the same time 'net capital inflows' suggest a reticence to commit more money.

Every now or then it crosses my old mind (minted before CNBC, though I pioneered the original, and was honored to be one of their early 'market mavens') that the call post 'crash of 1987' mantra was 'get the money off the Street', and take immediate control from investors; something the Street learned exceedingly too well (a modern portfolios theory manager is sort of brainwashed with full-time always-invested style).

Now we're finally getting a refreshing dose of unintentional 'transparency', partially because it's too late to conceal what's going on from American people. By the time they acknowledge it will be too late; but we'll be closer to a catharsis, which implodes to the extent it can in this environment. That would be healthier than trying to prop-up stock markets, and hence allow equities to 'fold' to a more realistic multiple levels. It is likely they will overrun (panic) once it occurs, and that's the same with house prices too. Builders or bankers will take x-cents on the dollar to get it behind, so that's why it won't simply sag until a low. They will ring a bell; it will be a gong (maybe Asian one). Ponder whether the 'net capital' inflows are a hint of evolving transitions we've noted.

Bottom line: signs as we interpret them, included the following bullet points:

· China ordered increased bank reserves; this was not generally reported;
· Net capital inflows constricted considerably; denies foreign buying concepts;
· Nomura Securities acknowledges subprime exposure; lays-off 20% US staff;
· Cambridge Investors limits fund 'redemptions' until next Summer (harbinger?);
· Turkey / Iraq crisis and Oil prices; gets attention; not the only related issue;
· Overseas, not domestic, demand is impacting Oil prices rather than the above;
· Russia / Iran alliance would be a major folly by Putin, and genuine challenge;
· Moral hazard of SIV fund situation smacks of Enron; must be monitored;
· Sec'y. Paulson finally stopped saying everything's fine, and was candid;
· Transparency may sober market's further break; but reality will be confronted;
· Earnings reports are mixed; we view good news selling as signs of faltering;
· Market coming-off repeated bearish reversals; new highs were unconfirmed;
· Murky financial structures have less liquidity than 'advertised'; limited cushion;
· Most major banks have far more derivative holdings than generally realized;
· Fed action stopped systemic freezing; wasn't expected to solve credit crunch;
· Beige Book affirms virtually everything we've addressed; few want to admit it;
· British banks are the latest asking for exceptions from the Fed (about capital);
· All rallies will be false and abortive for now; as the market should work lower.

MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks interpret structural factors exhausting on trench-warfare swings; and have avoided a debate on whether the House of Cards has now become the House of Paulson (ahh; but we did tackle that in the past for lack of transparency; as in the past). In tonight's audio I'll reflect a bit on that little stock that tripled for us over the past year, in terms of price movements and technical prospects; basics noted in text as follows.

Our positional attitude in trading most recently dates from last Thursday's Dec. S&P 1585 level short-sale; where we thought some bold players would embrace positions intended to protect against a decline from that point, rolling-forward past Expiration.

Summary: I reiterate, the market still misses something: consumption as a percent of GDP already is lower. I noted interbank rates suggested precisely this for weeks as was ignored by virtually all analysts at least in public. Angst is visible; even the Fed's.

As we say every day: 'consumer discretionary spending is weak and will get weaker'. 'Housing is soft and is going softer'. The proportion of housing as percentage of GDP is not so irrelevant as bulls contend; nor is their impact on credit-based consumption. Investments in China and India are huge opportunities but corporate success should be measured so as to not overwhelm real benefits to the American people for periods of time between now and the next phase of (sensible) international growth, later-on.

Key credit or derivative issues are not ameliorated, as projected Fed actions were, though 'structuring' does move toward improvement, essentially 'pushing on a string'. That's a different issue then just stemming a tide. The Fed is treading carefully, and doing the right thing. We are hardly yet out of the woods with respect to housing; or debt or war issues. Important: a Fed 'staying ahead of a situation', isn't preventing it.

Consider: this isn't Goldilocks; domestic demand's faltering; much more to come; it is also a scenario where if the Fed doesn't cut rates again, markets will be disappointed but if the Fed does cut rates, markets will ponder whether things are really far riskier.

Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection.

Rarely we will comment about stocks in text. Typically remarks are via audio-video. I suspect you know which stocks are exciting here (basically one); and which are not in the manner they sell-off on 'good news', generally as per the preceding warning sign.

Because we're going to paraphrase Tommy Thompson (the former Minn. Governor, Sec'y. of Health & Human Services under the Clinton Administration, and Presidential candidate until recently, as well as member of Pure's Board), we'll put this in writing:

PURE Bioscience's (PURE)...EPA registered silver-based hard surface disinfectant is ideal for closed populations where resistant bacteria are becoming increasingly problematic, such as hospitals, prisons and schools (gyms, locker rooms, etc). In addition to antiviral and antifungal claims, the 30-parts per million silver dihydrogen citrate (SDC) disinfectants carry a 30 second kill against Staphylococcus aureus, Pseudomonas aeruginosa, Salmonella choleraesuis and Listeria monocytogenes.

The first new disinfectant active to be registered by the EPA in more than 30 years, Pure's SDC-based product also provides 24-hour residual protection against standard indicator bacteria, plus a 2-minute kill claim on MRSA (Methicillin-resistant Staphylococcus aureus) and VRE (Vancomycin resistant Enterococcus faecium), which was the situation causing the tragic recent teenager's death in Virginia from a 'super-bug' variation of an MRSA staph infection (he didn't respond to Vancomycin; and that is particularly disturbing, as if an otherwise healthy teenager doesn't respond, it's a real issue to contend with). We (inger) think that's why a number of Virginia and Maryland schools were closed.

You may have noted on ABC News, where a 'drying solution' was shown. The employee dong so was not using SDC, because gloves were used and protective gowns. That's unnecessary with Pure's SDC because it is the least-toxic of all preventative applications we know of with residual efficacy if needed.
Moreover SDC-based disinfectants pose little if any health hazard because they're odorless, colorless, non-corrosive, non-flammable, and are also compatible with other disinfecting cleaning chemicals. (I'm suspecting that would even include Lysol or bleach.) The SDC-based disinfectant clearly carries EPA-registered claims against Methicillin-resistant Staphylococcus aureus (MRSA) and Vancomycin resistant Enterococcus faecium (VRE), while maintaining a Category IV lowest-toxicity EPA rating.

How does it work? Silver dihydrogen citrate (SDC), is an electrolytically generated source of stabilized ionic silver. Our ingerletter.com members know this because since first writing it up about a year and a half ago (at around 1.85), we noted the nature of the product, and the targets it persistently addresses.
In one of the mechanisms of action, the bacteria views the problem molecules as a 'food source;, and once the organism consumes it, SDC destroys the bacteria by disabling proteins and halting its metabolic and reproductive functions. That's key; as unlike existing anti-microbials, the bacteria is believed incapable of building a resistance to the SDC novel approach to terminating the bug's life.

Summary: as a platform technology, SDC is distinguished from competitors now in the marketplace, because of its superior efficacy, reduced toxicity and the inability of bacteria to form a resistance to it.
Share price movement and assessments continue as outlined in our audio-video and original projections for the near and long-term. In our April of 2007 write-up, I updated the original 1.85 or so buy; then sub-2 and just over, to 'buy' with a goal of 4-6 this year. That has now been reached and exceeded. We believe shares (redacted here).

Their products are named cleverly: like 'Cruise Control'; 'Staph Attack' or a private label product called 'Germ Control 24' (available now at Home Depot stores). Plus additional products particularly for hospitals may be on-tap too. None of this includes a basket of (FDA-approval required) treatments of which the first (hand-cleaning) was approved in the course of this year for 'testing in man' by the FDA (the first for a silver based substance since the advent of antibiotics, that we're aware of anyway).

We are formally aware that structured protocols for this longer-term aspect are as of now underway, under the auspices of Therapeutics Inc. These trials may involve at this point hand washing/cleaning additives (human contact, vs. the already EPA approved hard surfaces uses), and eventually other areas like mouthwash, antifungal uses, and even vaginal and acne crèmes. At this time virtually everything we address relates to domestic applications, and does not include potential benefits from venture or venture agreements with other distributors in Brazil, Singapore, China or Europe. It has been (since we first wrote about it under 2) noted that CIBA Specialty Chemicals had the worldwide (non-private-label brand) rights, within their agreed framework.

We'll adjust our target (as noted to members) with higher levels next year. However, given that the company operates on a fiscal year that just ended, the next report may show (assessment reserved for ingerletter.com members). If so, we look for any such dips as presumed inline with their goals, and thereafter anticipate higher prices, on a presumption that the company moves towards listing and executes their game plan. At this point we do believe time is of the essence, given growing National recognition.
Nevertheless, until and unless particulars evolve (reserved). We'll continue long from under 2; gradually having nibbled further, periodically on dips, when or as available. That's what was outlined to new ingerletter.com members for consideration on twin dips to around the 2 area and then briefly under 3, during the course of the past year.

We caution PURE shares had consecutive breakouts and are now near parabolic. Of course we dread chasing price; but, though we don't advise any are still disinclined to take gains, because suspect any pullbacks will be within harmony of overall uptrends from a more-macro perspective; given the products unique efficacy and potential in a segment that's barely understood, or even remotely penetrated, much less saturated.
If one or more of the primary target markets is well-penetrated, the demand for what's developed by PURE could remain unsatiated for some years to come. Basically this is still on the ground floor as a business, but the price is starting to elevate rapidly in this market, possibly prior to a desired potential listing on NASDAQ (and other areas that are impacting the shares as discussed). With presumption the company reaches the right public or institutional markets (reserved), it's hard to say what's a high price. Mutual funds and brokers typically won't show interest until it becomes a listed stock.

It might be (a potential price target) later next year, if things fall-in-line, assuming the company doesn't drop the ball at all, in focusing on distribution or recognition. I have repeatedly been asked if 'price' could go beyond that, 2-3 years-out, and (reserved). We are well aware that there's long-term speculative potential, with this market not addressed adequately; as existing products (for MRSA too) as generally more toxic.
Homerun potential (already triple+; but could it do it again?) is why we felt honored to be (they told us we were) the first analysts to discover and write about them, or even visit their facilities in el Cajon, which was back in the Summer of 2006. We hold long.

Simply put: (syopsis reserved for members). MRSA TV reports generally incorrectly state there's no ready solution aside old toxic stuff to mitigate the current epidemics, causing illness and death due to resistant Staph infections, or for that matter a lower mortality from Norovirus on cruise ships. Mostly they tell the public that just 'washing hands' is all that can be done. The reality is that costs to clean and maintain, residual defenses against MRSA or Norovirus, is considerably lower than treating the illness.

Responsible media (as noted). This is a win-win: spreading the word helps stops the spread of disease; grows sales, not bugs. We encourage investors, citizens, and the company, to enlighten the world. And we remind investors, that if the company clearly executes on their game plan; holding a winner and scaling-in (for new ingerletter.com members on dips) might be a lot bolder, but also smarter, than scaling-out into rallies. Investor decisions, as always, are entirely on their own recognizance; this is tripled at this point; though it's interesting as basically only a small crowd seem aware of it yet.

The pattern action reminds us of the early days in Amgen, near our California offices; gains were excellent but a lot was taken off the table by selling too soon (it doubled in time; then doubled again after a split, etc). Not tending to be greedy of course, but as basically it's still unknown in the investment realm, I tend to think the story on PURE hasn't unfolded yet. Yes we were early under 2, and no I don't know that it's going to do an early Amgen; but suspect potential's there. We buy dips rather than sell rallies.

As we continue to hold (redacted). PURE has been a small-cap speculative favorite for some time; it will likely remain so going forward. Once it's listed etc., we suspect it has much potential remaining. In a sense, we were drawn to the 'interim' attraction of surface cleaning products, with a realization that these were not low-hanging fruit, but profit-centers in themselves, with the drug or FDA-approval applications a potential bonus later-on up-the-line. That for us was a deciding factor in speculating, versus biotechs that take years to migrate to a point of positive cash flow. Pure's President Mike Krall calls 2008 the breakout year; so particularly if his products are embraced as we've outlined, we'd not be surprised.

--

Slow growth will likely descend into recession; of course that fear too prompted what the Fed did, inline with expectations (and a tad more), albeit with a bigger reaction to it. Our 2007 view has been that we're in an ill-defined recession; likely recognized if at all, only later. As to whether it descends into something like post-railroad debacles of the 1880's; well in-part it's what the Fed worries about. Regression to the mean and traditional affordability 'rules' will be hallmarks of lending guidelines for a while.

McClellan Oscillator finds NYSE 'Mac' (as outlined). Issues continue including oil, terror; China, Pakistan (possibly the key to survival for a number of aspects of the 'war on Terror'); certainly all the Middle East, Korea, and yes, a hangover of funny money NY economics. Includes international dependency on foreign capital funding.

Tomorrow could be down-up-down, while again likely a struggle. Always tough in a nominal Expiration week finale; but we stick to our guns as best able; successfully so.
What we think we're looking at are folks wanting to lighten-up on any available rallies.

Enjoy the evening,

Gene

Gene Inger,
Publisher

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