Vertex stock in free fall again...

Wow, VRTX stock getting pummeled AGAIN. This time because trials of another drug (unrelated to telaprevir) it's co-developing with Merck (VX-680) have been discontinued. It's lost nearly 4 bucks in as many days (as I write this). This is either a great buying opportunity, or the beginning of a shareholder death march: you decide.

[Andiamo1]

There are so many hedge fund managers sitting on the buy/sell buttons that it is difficult to differentiate between a traders move and changes in the investment outlook.

I think this FDA suspension was over one patient getting sick and is pending an investigation that might reverse the decision. Vertex bet the company on Telaprevir and a delay in FDA approval of the phase 3 trial would scare me more than today’s action.
Eric

[Proactive]

I'd be looking for support somewhere around 22.95 (todays low), looks like 22.92 was hit in early Nov.
Below that, the lower Bollinger band should lend support around 21
http://stockcharts.com/h-sc/ui

[Proactive]

Maybe this link will work better..we'll try it (g)
http://stockcharts.com/c-sc/sc?s=VRTX&p=D&b=5&g=0&i=t33186380380&r=3806

[mikesimon]

I sold mine at 25 and change last week or the week before. I hate to get financially involved in something I am already so emotionally invested in so I will steer clear of VRTX from now on. I owned it for about 4 days and that was long enough and I made a little profit too. Mike

[Proactive]

Congrats on your profit mike...I managed to skim $4/sh off C also...No time to be a hero (g)
PS: felt good to trade a few stocks, been awhile for me....I did buy a couple 1 year cd's from Countrywide @ 5.65%.....glad they're federally insured (lol!)

[desrt]

Possibly related to good news on Albuferon? Few sides and good response for prior nullresponders.

[mikesimon]

I got killed back in the dot com bubble and I have never gotten back my nerve - or my money. My transplant surgeon asked me way back whether I bought Vertex and I told him what I wrote about financial/emotional. He was quite high on the stock and had I moved I could have made some real money but I couldn't invest aggressively in anything liver related so I sat and watched. I didn't have any self recriminations because I understood and accepted my reasons for staying out of it. I only bought a few hundred shares when I saw all the negativity surrounding the stock - I am a contrarian not just here but in other ways as well. The profit I made was minuscule but any profit is good with me. I now own ASEI which makes the backscatter Xray machine which is being used in airport and cargo examination. I am down in it but I love that stock. Good luck in the stocks and in the really important stuff as well. Mike

[frijole]

Not me, I'm a dumb sh**.  Bought Vertex at the all time high  of $35 and still holding.

Then bought Intermune and it subsequently sold an additional 3,000,000 shares, diluting the portfolio.  So much for my stock savy!

"InterMune (ITMN - Cramer's Take - Stockpickr - Rating) has almost no presence at this year's liver meeting, but that hasn't stopped the company's fortunes from fading sharply in the minds of many investors here.
The problem is that InterMune's protease inhibitor, dubbed ITMN-191, is dosed three times a day. That's a non-starter for a second-generation hepatitis drug in this class. Roche paid a lot of money to InterMune to tie up ITMN-191 in a partnership.
After this weekend, it appears that Roche overpaid. "

Oh well, frijole

[mikesimon]

I think that InterMune may have a shot. I don't recall why I liked it but I did and I watch it daily. 3 times a day dosing certainly wouldn't alienate my affection if it really worked. Isn't that what this is all about? Convenience or ease of dosing is rather tangential to my my way of thinking. Mike

[FlGuy]

Maybe it's because vrtx ran into a rough 2B situation with it's leukemia med  (VX 680) with Merck.  Suspended enrollment due to a heart issue.  Enough to give a company's stock angina.

[frijole]

Mike, yes, there was something I liked about ITMN too (besides it being under $20).  And, really, selling more stock just gives them more research money, so that isn't all bad.  I am just "cultivating" my little hep C portfolio!

FL - right, Vertex did just drop one of their projects.  I didn't know which one.  I am still holding my breath for it, but have to admit, the thought of an interferon resistence isn't a comforting thought.

Frijole

[mikesimon]

But Vertex’s hopes of being one of the first out the gate with a blockbuster Aurora-kinase inhibitor dimmed with yesterday’s news: Partner Merck has suspended enrollment in clinical of trials of MK-0457. The company is examining safety data because one patient showed signs of potentially dangerous heart-related side effects. This may sound like extreme caution, but this type of heart problem (called QTc prolongation) has led to many drugs being abandoned, and we are in an era of what some pharma types believe is hypersensitivity to drug-safety problems. If MK-0457 doesn’t get back on track, Vertex and Merck could be left far behind their competitors in this field. Then again, those competitors will now have to examine their data as well, to see if this problem heralds a trend.

This is the second time this month Vertex has gotten potentially bad news about a key program. Earlier, the company found itself unexpectedly sharing the limelight with a possible new competitor (Romark Labs’ Alinia) to its highly-anticipated hepatitis C drug telaprevir.

[fishdoc]

yall need to get bold...want to buy stock in my frogs?  I'm thinking of going public...did hear about a new drug based on gila monster saliva- produced synthetically for heparin like activity....I mean seriously, what good is stock?  Does it eat flies?  Does it look at you with black bottomless pits of complete disregard for your personal problems...oh yeah, it probably does!!  how yall doin, anyway?

[Proactive]

I'm always up for a long shot, how far can those frogs jump?
Happy Thanksgiving!!!..;^)Pro
PS: I'm going to ask you again, can you please post a link to "fishdocs consult" Thank you

[mikesimon]

Early this month, a release of competitors' data caused Vertex Pharmaceuticals' (Nasdaq: VRTX) stock to plummet. Today, it was news about a collaborator's clinical trial that caused the Rule Breakers stock to fall.

Yesterday evening, Vertex and Merck (NYSE: MRK) announced that they were suspending enrollment in their phase 2 clinical trial for testing the leukemia treatment MK-0457. One patient was observed with a QTc prolongation, a heart condition that results in irregular heartbeat and could result in a heart attack. It's not clear that the drug caused the condition, and patients enrolled in the trial will continue to be dosed, so the drug is far from dead.

Vertex clearly has a lot more riding on this compound than Merck does. Merck is set to pay up to $350 million in milestones if MK-0457 makes it through trials and receives an FDA approval -- not to mention the royalties once the drug is on the market.

MK-0457 is part of Vertex's and Merck's collaboration to target Aurora kinase, a protein that's required for cells to grow and therefore a perfect target for anti-cancer compounds. One compound in the collaboration has been dropped because of a lack of efficacy, but the duo plans to start another, VX-689, in a phase 1 trial early next year.

Vertex's shares have been in steady decline since competitors like Schering-Plough (NYSE: SGP) released data on compounds that will compete with Vertex's hepatitis C virus (HCV) drug telaprevir to become the next HCV blockbuster.

As my Foolish colleague Brian Lawler pointed out, there's still plenty of space in the HVC marketplace for multiple drugs. Combine the two partially unjustified drops in stock price, and you've got a drug developer with a serious markdown just in time for Christmas.

More Foolishness on tumors:

[Proactive]

Happy Thanksgiving to ya...The Motley brothers should have stuck to writing books, instead of pumping stocks (g)...I actually have a copy of their investment guide from 10 years back..Decided I liked Tom Dorsey's P & F charting book, as well as other technical charting books better...all the pump,promise,disappointment,success,emotions are all there in a pretty little picture...Doesn't matter if the company makes widgets, or what if's...it's simply supply and demand for the stock that counts (g) I do enjoy the research aspect though, perfer to start with the filings and work down to the reporters who think they are analysts. The Fools have pumped this one from $45/sh all the way down to 23, if they had any balls, they appologise to investors..Time to haul in some wood, temps will be dropping tonight........;^) Pro

[Proactive]

Sorry, didn't mean to sound snippy...I just always have to laugh and wonder where these guys were when the stock was getting toppy at $40/sh...Why didn't they suggest to investors, hey the stock has done better than we expected, so we recommend you take a third of your profits now, if it goes higher, take another third, goes lower sell a third etc....Apparently these reporters don't have to be right twice like ordinary investors.........;^)

[Willy50]

Ya have to wonder if that's what they (the motley dudes) did.  

Generally, by the time you read about such freefalls in stock value it is too late to sell.  Generally, the stock also almost inevitably rebounds (at least somewhat) since the fainthearted sell and those bullish end up buying on the weakness of the stock price.

Overall....the bloom is fading on the stocks initial promise.  What things would signal an increase in Vertex stock price?  Strong data on Prove 3 results, weak data on Scherring-Plough responses that should be due about the same time, and weak data or discontinuations in other promising compounds in development.  I look at some possibilities in the Vertex Phase 3 trial design may also signal a bull or bear market for Vertex stock.  It would seem to me that the Prove 3 trials may soon start...could be along the same period of time for those other results I spoke of.

The market share for HCV treatments is going to be huge.  I don't know when the VX-500 Phase 1 drug trial may start but this could also cause a resurgence in stock price.  IF the drug is only a little better it would still make for a great improvement.  We are approaching a point that only small groups will become non-responders.  The vast majority of people with HCV are treatment naive so the resistance issue will be less of an issue for them.  Stock price or not...... the promise for us heppers is looking better each quarter.

best,
willy

[JRenquist]

I own vertex stock and really believe and hope it's going to be very profitable.  But as long as it falls because something better comes along - that's fine, too.  I'll be poor but healthy.  It seems like Schering-Plough is a couple of years behind, and I think the (non-responding )  people like me are going to jump at the first chance of something better than SOC.  I am.  It seems to me that the Prove 3 results are going to cause MAJOR changes one way or the other



This is from Businessweek :

Vertex Pharma falls on halted trial

NEW YORK

Shares of biotechnology company Vertex Pharmaceuticals Inc. fell sharply Wednesday after safety concerns prompted its partner Merck & Co. to suspend enrollment in a cancer trial, but analysts mostly shrugged off the news.

Vertex's stock fell $1.03, or 4.2 percent, to $23.54 Wednesday. Over the past year, the stock has ranged between $22.92 and $45.38. Merck's stock declined only slightly.

Late Tuesday, Vertex said Merck halted enrollment in the midstage study of a potential leukemia treatment due to a change in the electrical signal of one person's heart.

Vertex and Merck plan a full analysis of all data on safety and effective for the treatment, MK-0457 or VX-680, which is the lead investigational Aurora kinase inhibitor in their collaboration.

Aurora kinases refer to certain enzymes involved in cell division. The inhibitors are designed to kill these cancer cells.

Vertex also said the companies discontinued development of another Aurora kinase inhibitor, MK-6592 (VX-667), after the compound did not meet certain objectives in a Phase 1 clinical study.

In a note to investors, Susquehanna Financial Group analyst Jason Kolbert, who rates the stock "Neutral," said positive developments for Vertex's other cancer drug candidate, VX-689, helped offset the negative news on VX-680.

Vertex said Merck plans to enter early-stage clinical trials in early 2008 for VX-689 in patients with certain types of tumors.

"Our revenue projections for VX-680 were not significant, and this news does not fundamentally alter our views on Vertex," Kolbert said.

The analyst went on to say the most significant issue for Vertex now is the development of the competitive landscape in hepatitis C and the start of a late-stage program, which will affect its oral drug candidate telaprevir, or VX-950.

BMO Capital Markets analyst Jason Zhang said in a note to clients he planned to adjust his models for VX-680 and VX-667.

He noted, however, that the combined value of both programs accounted for only 30 cents per share in the sum of the model. By comparison, he values telaprevir to be worth $32.10 per share.

"As such, yesterday's news is immaterial to Vertex's story and to our Outperform thesis," Zhang said.

Shares of Merck fell $1.40, or 2.4 percent, to close at $56.52 Wednesday.

[Proactive]

Thanks for the post and best of luck...I see it as pretty much dead money for awhile, 10% up with resistance around $26.50 or 10% down with support at $21.00. It's sitting at $23.50 now. In this market where appetite for risk and speculation is waning (as seen by the Rut 2000's performance), major market moving averages being cracked, I don't see a good risk/reward profile at the moment...That's not to say things aren't do for a bounce as a result of seasonal factors and short term oversold levels, but I'm walking on rice paper myself (g) Let's just say I'll wait to see the white in VRTX's eyes before I pull the trigger....;^) Pro
Anyone out there a Dow theorist?
PS: I'll drop the stock talk, probably boring people to death, besides my brain gets foggy just talking about it (lol)...only 896 riba to go and I am Thankful for that.....

[mikesimon]

I didn't think you were snippy. You should read some of my posts as examples of "snippy". I think I basically agree with you. They've had some huge winners and Vertex was one of them if they'd only taken the money down. But, they've had their share of losers too. I look at their recommendations and then look primarily at what the product or service is and what the fundamentals look like. Then I go from there. The one stock I like despite being down is that ASEI that I mentioned earlier. I like the product so much that I am willing to hang with the company through thick and thin. I'm not trying to get rich on it, though that wouldn't be a bad thing. Be well and happy and....prosperous too. Mike

[Proactive]

I'll take a look at ASEI after dinner, always on the lookout for something new...I guess there is no harm in talking stocks if we use this one thread for that purpose, hey we are on the right side of the tracks (g)...I took on a bit of risk myself today, bought PAL @ 6.21, should be pretty good support here in the low 6's..The strong Canadian $ has hit them hard, but I think the Loonie is about topped out for awhile....;^)

[mikesimon]

I am going to take a look at PAL. It's a break from always looking at HCV studies and it may be profitable too and that would be very nice. Mike

[Proactive]

I quickly looked at ASEI, looks like a sound stock..with a tiny divy to boot...and has held up well in the downturn...PAL is a trader for me, could definitely go lower though...But below 6.10 I see support at 5.70 (lower B band) and resistance at 8.00..so here at 6.40 in my mind chances of reward are higher than risk....of course one has to consider, the Can. $, the price of palladium and other base metals etc. 50% of palladium sales go to the auto industry as well (just ask Bill Ford, F took a billion $ hit in '01 on a bad palladium bet(g)).....If I was a pumper, I'd be pumping future hydrogen fuel cells and hydrogen production due to palladiums ability to store hydrogen.......but I'm not (lol) buyer beware.....;^)

[Proactive]

This actually looks like a nice entry point for ASEI should be very good support in here (going back to mid '06)...I think I may have seen a show on the Discovery channel which featured some of their equipment at a shipping port....Interesting pick, certainly less risky than PAL, ...;^) I'm not much of a buy and holder, unless I'm trading around a core position.....
and I agree, anything to get mentally away from HCV info saturation,,,is a good thing and needed ..
Have to run, time to bring more wood in, a never ending battle until April (g) was 11 degrees here this am....Growing up, my Mother always said, "it's time to get out my winter nightie!!" (lol)

[mremeet]

"If I was a pumper, I'd be pumping future hydrogen fuel cells and hydrogen production due to palladiums ability to store hydrogen"

During the go-go 90's tech boom someone was trying to get me to buy up a bunch of PLUG stock, and I was thinking about doing it. Plug Power is a company that's developing (or attempting to develop) fuel cell technology that can be used for distributed power generation instead of traditional centralized power production and distribution. Supposedly everyone would have a box that resembled a central air conditioning unit outside of their house and it would provide the electricity instead of hooking up to the grid (with water as a waste product). This was especially beneficial to people around the world who live way out in the sticks. Anyway, I never went for it, but it did sound enticing at the time and I really liked the idea of fuel cell technology being used this way. And I do believe fuel cell tech will eventually deliver for both the auto industry (for electric cars) and possibly even for home electric generation/supplementation. But fuel cell technology has been around for over a century now and it has still not been developed into a truly practical and affordable power source (Space Shuttle excluded). Until it does, investing in stocks that are involved with its development will often look like this:

http://finance.yahoo.com/q/bc?s=PLUG&t=my

[Proactive]

(lol) yep, I've traded PLUG in the past, as well as FCEL, AVA (a ultility company which was installing home based fuel cells) as well as a canadian company(forget the name now) who was developing hydrogen storage tanks for auto use...I'm a strong believer in fuel cell technology, but not powered with hydrogen from natural gas...makes no sense to me...Solar to water to hydrogen is the ticket....but storing that hydrogen for transportable use and safely as in a car is certainly a barrier...I like the wind mills as well, but short of GE here in the states it's tough to buy stock in a pure play, for instance Vestas or NEG Micon....but I've been out of touch since my dx 2 years ago..to think what solar stocks have done in the past 2 years,,,,shesh, missed that one (G)

[mikesimon]

I am thinking that if you did buy ASEI least week and if you're a trader this might be a time to sell. It's up $2.80. I wish I had bought a bunch to trade because I would be out of that position by now. Oh well, I lost my nerve so I won't lose much and I won't make much, in the short term anyway. Mike

[Proactive]

yes Mike very nice move for ASEI bouncing off support...I culled out PAL for now, no harm, no foul...back to wait and see
Medhelps speed seems to be creeping today

[mikesimon]

I looked at PAL but I couldn't get a grip on what to expect from it or at when to get in or....really anything at all. I need to spend some real time on it and I will. Mike

[troubleshooter1]

Hi, The new investigational drug, called the SCH503034, works differently than standard therapy. This drug is (THE) Cure for the future. This new drug is for the responders and none responders. This new drug SCH503034 is in a class of drugs called protease inhibitors, which means that it interferes with the release of newactive viral particles into the bloodstream. The SCH503034 is a Miracle working drug! If you want to put an End to that Chronic Hepatitis C, genotype 1 or 1a, ask your doctor to put you on the trail III or Phase 3 that is coming soon in 2008. Don't play around with your life. Start this Phase 3 study as soon as it becomes available to you. My viral load was 24 Million, very high virus! Now it's < 30 in just 28 Weeks, Arm 3, still Undetctable. My ALT is 16. The Schering Plough Research Institute Company I think have the cure for the HCV but it's kept under a Tight lid. May God Bless You All. bye!

[Robin_Fla]

OMG, I bought PLUG! I can't even sell it and take the loss bc stupid brokerage bought it in my IRA account instead of my cash account...so now I just have to sit there and look at it on my statement every month. Aaagh. At least it wasn't that much $. My friend that bought it and convinced me to made a killing, but I got in late. Live and learn.

My hubbie is suffering over VRTX at the moment, but, hey, I warned him! He's buying some SP also to balance the biotech pie (go figure). ;-)

I bought Mattel when they fired the CEO for the Learning Co debacle years ago...I'm still up double even with the lead paint losses. Maybe I'll stick to toy companies or candy makers. At least they make fun stuff. That and low flow toilet manufacturers...they're booming down here in GA with drought!

Later gators, send more stock tips...

Robin_Fla

[Andiamo1]

I have been trading SKF, an ETF that shorts the financial stocks.  I started in July, buying on the FED rate cuts and selling 4 weeks later.  I might do it again this month.  The market is already up on the rate cut talks.

It usually takes about three weeks from the rate cut for the market to figure out the cut hasn't done anything.

[mremeet]

Looks like Boger unloaded 17,500 shares. Guess he wants to make sure his parachute's at least a silk blend instead of something a little heavier. I think the stock probably still has a bright future, maybe Boger just wants to take enough off the table to guarantee a sizeable nest egg no matter what happens. We shall see...

http://biz.yahoo.com/ap/071206/vertex_pharmaceuticals_insider_transactions.html?.v=1

[susan400]

I wouldn't put a lot of 'stock' in it.... as far as these Vertex up and downs go....   The economy in general is doing poorly right now, so it may not be that must of a good indicator of what the future stock reports show on Vertex.  But, what do I know??  I'm not a stock expert or anything, that's just my observation.

Susan

[Andiamo1]

Boger owns 1,095,842 shares, so this is an insignificant sale on a percentage basis..

[Proactive]

Good morning all, Off topic question to ponder-looking for ideas...What single stock,etf, similar, or whatever will benefit from this packaged mortgage mess? Surely someone is going to benefit buying up some of this stuff with value on the cheap?(someone besides the cash flush middle east, or maybe Joe Kennedy and his buddy Hugo(g))...I do suspect in the long run the big money center banks will have a wash on a lot of this sh#t -supplied nicely in a covert way by the Fed (the frickin tinkering market pandering fed, I'll add)..the average taxpayer will never know it..
Eric I've just started to take the opposite side of SKF, nibbling on XLF as a longer term hold, and hopefully down the road trading financials around it....
So, let's see some ideas (I did see we had a bond trader post here awhile back-I'll except all ideas!)

[Andiamo1]

The real problem with housing is the delta between wages and prices is too high.  The difference was filled in with excessive lending and now that has failed.  Injecting liquidity into a market that has insolvency problems will not fix the problem.  Only a decrease in house prices back to an affordable level will fix the housing problem.  The credit problems have already spread to the rest of the world and it is affecting all industries now, not just housing.

This morning, the ECB injected 500 BILLION into the banking system.  If that isn't a wake up call, I don't know what is.

I trade skf; I don't hold it for the long term.  I am up 65% since the beginning of October.  We are now seeing the first world wide credit contraction since the great depression.  I am not saying that we will have another depression, but I do think we are closer to the top than we are to the bottom.

When the next shoe falls, the real fireworks will start: the first major bond default will establish the fact that  credit default swaps are worthless.  Once that happens the real fun will start!  The problems that surface yesterday with commercial real estate might very well be the trigger.

There are plenty of companies with lots of cash waiting for the commercial builders to start going under.  I have a friend that is a hedge fund manager that plans to buy entire condominium buildings for 40 cents on the dollar.  ZTheir minimum investment requirements are out of my league, so I am just watching.

Be careful long on financials. There is plenty more to go here.  I think some of them are probably good buys, but the index scares me.  

Their

[Proactive]

Eric, I agree prices have to come down and over supply has to be absorbed...a major repricing after the easy Al era, although bernie appears to be well invested in the financial markets, willing to pander what is left of the Fed's reputation to wall st. As we here especially know, eventually one has to takes their medicine (g)....
But there will be those that make a killing in the process....question is who has the cash and the contraian balls to do it?  You sure have to take your hat off to those fellas(3 or 4 I believe) at GS who stepped up to the plate..got to luv gs, on one hand packaging and pumping the **** out to investors, on the other hand shorting the index of the ****....he, he...

I'm just an egg, not even a small frye, so I have to find something in my affordable league to invest in to take advantage of what could be a good situation for some...
Financials have appeared to be bottoming..but we'll see...as seen with PAL, once the last line of defense support gets cracked it can be a wicked decline (lol)...C has tested 29-30 a few times, AIG 54-55, BAC 38 or so...I figured with XLF, at least the volatility should be a bit mellower (g)

Off to do some more snow cleanup...;^(
I suspect some hedge funds will be where some cash will be made...

[mremeet]

Hey what do you think of what's been going on with VRTX lately? Still slipping, down under $24 again. I'm thinking the announcement of the commencement of the phase 3 trial should get a little pop out of it. And long term I still think it'll pull out decently. It DOES work (as you and me both personally know), it WILL almost certainly get its FDA approval (IMO), and it WILL in all likelihood be the first PI to market. And even if alinia pans out, VRTX will still have a fairly exclusive slice of the pie for at least a few years before the rest of the herd moves in. I keep eying it up like hungry wolf now that it's so battered, but I'm still leery because of the credit debacle you described above. I hope we're not headed for a mega-recession or perhaps even a depression. That would suck, but looking on the bright side it would be nice if people could actually afford homes again.

[Andiamo1]

I certainly agree with you about Vertex.  They are signing up centers for the phase 3 trial as we speak.

On the banking issue, I am very bearish.  I bought SKF 10 seconds after teh fed announcement at 87.  It's 103 today.

A Little Acid Test for Fed "Liquidity"
By John P. Hussman, Ph.D.  


The stock market retreated from its overbought position last week, as typically happens when overbought conditions occur in unfavorable Market Climates. Given that last week's decline cleared that overbought condition, I'm back to the more typical position of having no specific short-term views. That said, there is one particular scenario that would be ominous in my view. That would be if we see a relatively uninterrupted series of declines that breaks cleanly through the August and November lows, followed by a one-day advance of 200-400 Dow points. That's a script that markets tend to follow pre-crash. Though it's not a strong expectation or forecast, it's something worth monitoring, because we've started to see the pattern of abrupt jumps and declines at 10-minute intervals that is often a hallmark of nervous markets.

Last week's quarter-point move by the Fed gave the dollar an opportunity to rebound from its own oversold condition. A move to about 115 yen/dollar would be about where that condition would "clear," and given still weak economic conditions and inflation pressures, that's about where the buck may again be vulnerable to fresh downward pressure.

With the November CPI figures released last week, the year-over-year headline CPI inflation rate is now 4.3%. That's not a surprise. As I noted way back in my July 30 market comment, "If you look carefully at the CPI figures (and tinker with the monthly numbers), you'll also discover that even if the figures average a 2% annual rate in the months ahead, the year-over-year headline CPI inflation rate will be pushing 4% by November. This is already "baked in the cake." Since Bernanke is clearly concerned with the inflation expectations of the public, as well as the Fed's credibility, that headline CPI figure may create some complications for cutting rates in the months ahead, unless resource utilization falls out of bed."

[Andiamo1]

As usual, that's not to say that Fed actions provide more than psychological effects and a sort of "square dance call" for short-term rates anyway (which market rates often ignore, or precede). Still, inflation and dollar risk does complicate things a bit for the Fed, which is now forced to finance its predictable repos with great fanfare, as if they actually matter.

Case in point is the ridiculously over-hyped "term auction facility" announced last week. According to that announcement, the Fed plans to auction about $40 billion of "liquidity" this week: $20 billion on Monday December 17th, which will be a 28-day repo, and another $20 billion on December 20th.

If you've been following my weekly comments about Fed repos at all in recent weeks, you can figure out that there are currently $53 billion of repos outstanding (as of Friday), fully $39 billion that mature this week. And wouldn't you know it, the Fed is going to be "injecting" $40 billion this week too.

Acid Test
So here's a little acid-test of whether the Fed will actually be providing new "liquidity," or whether it's just trying to brew up a tempest with what's already in that little teapot. Watch the NY Fed's listings of open market operations:

http://www.ny.frb.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE

If the Fed is actually adding liquidity, you'll see not only the two $20 billion repos on the 17th and 20th, but additional repos to replace the $39 billion that are coming due this week ($5 billion mature on Tuesday the 18th, and fully $34 billion are set to mature on Thursday the 20th). If the Fed does nothing but those two $20 billion longer-dated repos, all it will have done is to change the maturity of its outstanding repos, without changing the amount.

Now, that's not to say I believe that even if the Fed does temporarily buy $40 billion of government securities for 28 days, before selling them back out, it will do much for the solvency of the $12.7 trillion U.S. banking system, much less exotic CDOs and mortgage-backed securities. As I've emphasized in recent weeks, if you track all those daily and weekly rollovers and figure out the total quantity of Fed repos outstanding at any given time, you'll find that the Fed has only injected $18 billion in "liquidity" since March.


If investors think the Fed buying up a few billion of Treasury and agency debt means a hill of beans, they might do well to remember that the U.S. government is running up annual deficits in the hundreds of billions. In fact, the U.S. Treasury will float tens of billions of new debt in December alone (most of which will be sopped up by foreigners, who have increased their holdings of Treasuries by well over $200 billion in the past year). This will be mixed in with refinancings.

Last week, for example, the Treasury auctioned $21 billion in 3-month bills and $20 billion in 6-month bills. In doing so, the Treasury offset every bit of the Federal Reserve's actions this week, even if it turns out that the $40 billion "term auction facility" represents new liquidity and not just rollovers. Why aren't investors just as interested in that? When the Fed does open market operations, all it's doing is buying up (temporarily or permanently) a tiny fraction of U.S. Treasury debt and replacing it with currency and bank reserves. But every time the Federal government issues more debt to finance its deficits, the new issuance cancels out any beneficial increase in liquidity the Fed could possibly provide.

So it's difficult to understand why investors would get all excited about the Fed temporarily buying up a few billion in government securities, when we've got a Federal government that's simultaneously and permanently issuing and then constantly rolling over many, many times that amount. It's an escape into dreamland to believe that Fed actions have any chance at all of providing more "liquidity" when the Federal government's deficits suck up in a matter of weeks every bit of liquidity that the Fed has provided in a year. These Fed actions are nothing but marginal tinkering around the edges of the global financial system, and investors are starting to catch on.

Still, it's fun to watch when you understand what's going on. In fact, there will be all kinds of interesting things we'll get to watch this week. For instance, the Fed does its first $20 billion auction on Monday, but there's a timing disparity - only about $5 billion of expiring repos come on Tuesday, and the other $34 billion come due on Thursday. So between Monday and Thursday, we'll observe at least a temporary jump of $15-20 billion in Fed repos outstanding. There's a good chance that during that 3-day overlap, the actual Fed Funds rate will creep below the current target of 4.25% (watch the chart here: http://www.ny.frb.org/markets/openmarket.html). If that happens, you can bet that some analysts will incorrectly conclude that the Fed is doing some sort of "stealth easing." But it will be nothing more than a 3-day timing overlap between maturing and new repos.

More interesting is to watch what happens on Thursday. That's when we get $34 billion of repos coming due. If the Fed does little more than $20 billion through its "term auction facility," that will put the total for the week at $40 billion, versus $39 billion expiring, and it will be clear that this whole maneuver is simply a way for the Fed to temporarily refinance its expiring repos using a slightly longer 28-day maturity, rather than any effort to actually increase the amount of reserves.

In any event, banking conditions aren't likely to change even if $40 billion in additional 28-day repos actually materialize. Indeed, a Bloomberg report noted "A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash." Should be interesting.

Finally, it's worth repeating that the total amount of outstanding repos has increased by only $18 billion since March, nearly all of which has been drawn out as currency in circulation. Most likely, the Fed will enter a "permanent" open market operation on the order of $10-20 billion at some point in the coming weeks to formalize that increase in outstanding currency. That move will probably be met by ridiculously over-hyped reporting as well. But it's entirely predictable.

In short, Wall Street analysts aren't paying attention to the data if they believe that the Fed is "pumping" hundreds of billions into the economy to provide some kind of "safety net" for the banking system or the mortgage market. Is it really too much to ask that they make some attempt to understand the subject about which they opine incessantly?

As for the Fed itself, it's a great gift to offer people hope, but a great disservice to offer people false hope, and I think that's what the Fed is doing. What's going on in the mortgage market is not a crisis of confidence that we can talk ourselves out of - it's a problem of structural insolvency, where many borrowers literally don't have the means to service their debt over the long-term, because many of them were counting on rising home prices over the short-term. By acting as if a few billion in repos will substantially change this equation, the Fed is raising hopes, and setting the markets and the economy up for disappointment that will be far worse as a result. Bernanke would be better off admitting that the Fed has no chance of providing meaningful "liquidity" when the Federal government is issuing Treasuries at ten times the rate the Fed can absorb them. At that point, Americans would see better that the resources we need to invest, compete and become a financially sound nation are being hoarded by the Federal government and sent up in flames.