Taipan Online: Hotline

Hi, there – Martin Denholm with you again for the latest edition of the Taipan Hotline. Hope you’re enjoying the weekend so far. It’s “wellies time” here in Baltimore, as it’s been raining now for about 24 hours straight – pretty darn miserable, let me tell you. Reminds me of an English summer’s day!

Anyway, let’s get on with things:

I want to start off by reminding you about the sell alert we issued here the other day on the December 520 HGX Puts (HGX XD). This was the main component of our original “House Hedge” strategy – one that allows you to make money, regardless of whether the market goes up or down. It’s build around the movement of the HGX housing index – a basket of 21 of America’s top builder stocks.

To recap for you briefly:

We started with August 555 calls, which we cashed out for 45% gains (although some readers managed to grab more thanks to the fast-moving nature of the HGX).

September calls unfortunately didn't prove to be as successful.

But the December 520 puts remained the key part of the play, since our theory calls for short-term housing market gains but a longer-term slowdown. We recommended these puts at US$27.30 and cashed out at US$32 last Wednesday – a 17% gain. Not too shabby, considering it’s essentially an “insurance policy” and the puts had fluctuated between US$19 and US$33 over the lifetime of our recommendation.

And just to remind you, “House Hedge” creator Bryan Bottarelli also recommended two new plays right here in last week’s Hotline, available exclusively to Taipan members. While we’re down slightly on the December 600 Calls, the March 540 Puts are showing some blistering gains.

Get all the details here:

http://www.taipanonline.com/htmlcode/members/alerts/20050627.html

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USERNAME: taipanmember
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AS BIRD FLU THREAT GROWS, HOLD VACCINE-MAKER VICAL

This just in from my colleagues Ian Cooper and Erin Beale, who advise you to hold any shares you have in Vical (VICL:NASDAQ).

We first bought this back on June 29, 2004 at US$5.75 and although it closed Friday at US$4.88, we think it could grab some upward momentum from the avian bird flu epidemic.

As you might know, this is the next fear gripping the world, with scary estimates saying between five million and 150 million people could be at risk and killed by the pandemic, according to the United Nations.

According to reports, “Roughly 140 million birds worldwide carry the virus. It moves from wild to domestic birds, which then can infect people with whom they come in contact. So far, the virus has not “jumped” species, meaning that humans have only become infected through contact with a bird carrying the virus. However, if mutations occur that allows it to spread from person to person, it could become unstoppable. And because the virus originated in birds, humans have no immunity to it.”

Trouble is…the United States is “dangerously unprepared” to respond because the “public health infrastructure is weak and because advance planning has been needlessly delayed”, according to a letter sent to President Bush. In fact, he’s so concerned that he’s already given thought to military-enforced quarantines if the disease shows up in America. The government is set to spend billions to stockpile drugs to thwart the threat.

And Vical is one company currently working on a vaccine under a grant from the National Institutes of Health. Watch this space – that could bode very well for the stock.

* * * * * * * * * *

An exclusive patent issued by the US Department of Commerce has handed a tiny US$4 company a virtual 20-year monopoly on a new high-speed Internet technology. Giants like Comcast, Verizon and AOL are shaking in their boots at this news – but it could hand you 358% gains by December 21, 2005, as the stock roars to US$18.50.

Follow this link to get the full details:

http://www.agora-inc.com/reports/RTD/WRTDFA18/

* * * * * * * * * *

SERVICES SLUMP

The US service sector appears to be suffering a little in the wake of the recent hurricanes.

The Institute for Supply Management’s gauge of activity in September showed the index slumping from 65 points in August to 53.3 points – the lowest since April 2003 and well below estimates that called for a reading of 61 points.

Employment, new orders and export orders all showed a drop during the month – an unsurprising result of the external shocks that hit the economy. On a broader scale, this news does seem to hint that economic growth for the rest of 2005 is likely to drag a little – especially considering that the service sector accounts for about 80% of GDP growth.

On the bright side, the US manufacturing sector rose to a 13-month high in September.

MONETARY MUSINGS

Speaking of GDP growth, Atlanta Fed chief Jack Guynn said this week that the US economy is “most likely on a path that will keep us at or near potential growth,” despite the aftereffects of the recent hurricanes.

That said, the Fed apparently “still has a ways to go” with its interest rates hikes, 15 months on from its first upward move. This is arguably because the aftermath will trigger a bout of higher inflation that Guynn and the Fed are maintaining their course.

Specifically, Guynn is concerned that higher inflation in the energy sector will spill over to consumers and adversely affect spending. The evidence? Year-over-year consumer prices rose 3.6% in August.

As for when the Fed will stop hiking rates – who knows? The bankers don’t even know when the wording in the monetary policy statement will change, but it seems likely that 4.25% or 4.5% would represent the “neutral level” everyone is grasping for.

STEELING FOR MORE DEMAND

If you’re wondering which sectors are hot and which are not, here’s a quick tip for you.

The outlook for the steel industry remains strong. According to the International Iron and Steel Institute, global steel demand is expected to climb around 4% or 5% both this year and in 2006.

For the industry and investors alike, it’s good news that Chinese officials haven't had much success in slowing China’s rampant economy, because that’s what is driving the bulk of the steel industry’s growth. Demand there is projected to jump 10% this year and a similar amount the next.

So hold your steel positions!

FEELING CHIPPER

Looks like the semiconductor industry is back on track, too.

While sales remained flat in July, August’s results showed a 3.2% month-to-month improvement to US$18.6 billion. This was a 1.7% rise over August 2004, according to figures from the World Semiconductor Trade Statistics (WSTS) group.

Through the first eight months of 2005, industry growth reached 5.8% compared with the same period last year, putting it on pace to hit 6% for the full year. Economists at JP Morgan in London are even more optimistic, saying growth could yet zoom as high as 8%.

And on that note, I think I’ll sign off for now. Enjoy the rest of the weekend.

Martin Denholm

Executive Editor, Taipan

MMM

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