Market Rally continues on Day 3 on Banking and Retail sectors

10 to 11% gains for the S&P, Nasdaq and Dow since the start of trading Tuesday as markets focused on positive news coming out of the banking and retail sectors. With the S&P up about 80 points (12%) since the 660s bottom, Traders must be wondering is it sustainable?

According to many in the banking community it just might be! Why? It's simple, profitability. After quarterly losses multiplying not contracting, increased write-downs and more government backed dollars, some of the biggest American banks by name have issued relatively strong operational statements. Citigroup (C) and Bank Of America (BAC), both of whom have seen share prices disintegrate before their very eyes over 15 months appear to have turned the tide of losses. Both companies have pre-announced profitability in the first two months of 2009 and both expect continued operations in the black.

What does that even mean? Well shares of both banks have rallied 70% and 90%, respectively, from most recent lows, and for taxpayers who now own a 36% stake in Citigroup, maybe there's a way out of that mess. But just a few days ago there was talk of Citigroup being replaced in the Dow Jones Index and its value as a "penny stock" weakening an already battered corporate reputation. Confidence in the banking sector, even the sliver that there is now, is crucial to returning people to the markets and jump-starting a cycle of economic expansion and price increases.

Can two months of operations at these banks be a real guiding light for the rest of year? It is of course premature to label the banks as stabilized and past their major losses, and in fact the market is full of Investors waiting for another shoe to drop, so market participants still need to exercise caution, for which quarterly results should provide additional clarity.

On the retail side, a sector that was labeled disastrous just weeks ago, has found itself well into newly renewed confidence after posting some surprising February numbers. Retail sales dropped 0.1% (up 0.7% excluding cars) over the month, which was better than the 0.4% expected by economists, assuring to some that some stabilization in this sector is occurring. This was on top of a revised January which saw an increase of 1.8% instead of the 1.0% estimate and following 5 months of Auto sales declines, January saw a slight uptick in that segment. Maybe its not as bad out there as every headline makes it out to be?

Who would think this market would be ripe for mergers and acquisitions? Roche (RHHBY) does, as it, after months of wheeling and dealing, finally found a friendly takeover number with Genentech (DNA) at $95 per share.

Markets, the economy and overall sentiment is still decidedly bearish which puts great scrutiny on any extended rally so expect some profit taking soon. At the very least, the S&P's ability to roar back past 700 is a psychological stabilizer for many traders, and given that there was talk very recently of the S&P earning multiples falling to the 5-8 range, in line with previous grave recessions, potentially pushing the index lower than 500, the 700 number is good to see. While there are no psychologists here, that is definitely reassuring.

Disclosure: Author owns C

Genentech rejects Roche Buyout, Shares keep climbing

The Pharmaceutical Industry is one that's complex and often difficult for Investors to understand. What with drugs, pipelines, trials, approvals, the FDA, and all the potential dangers, it is a business model built on spending massive amounts of money and taking even greater risks trying to develop medicine.

Drug development is one of the longest and most turbulent processes in capitalism and one doesn't have to look past a few pages in the paper, or a few web news articles these days, to see the problems and successes of drug makers first hand. The science behind medicine is fascinating but what makes this high stakes game of trial and error so lucrative is the fact that it is at its core, incredibly difficult.

So when the Amgen's (AMGN) or the Biogen's (BIIB) or the Genentech's (DNA) have something promising coming down the drug pipeline, doctors, patients and Investors take notice!

Genentech has one such success with Avastin, an FDA approved therapy that is designed to inhibit cancerous tumor growth by blocking the travel of nutrients through blood vessels to the tumor. Avastin is a big seller for Genentech and by accounts it will continue to be a blockbuster for the company. Sales of Avastin are already up to $1.3Billion in 2008, a sizable chunk of the $5.9Billion the company has done in total sales so far this year.

Roche Holdings (RHHBY) offer for Genentech of $89/share was eclipsed briskly in July by traders hoping Genentech would hold out for more. Shares were in the low 90s then and have continued climbing to stand at about $99/share today, the day Genentech officially rejected the buyout. Roche, based in Switzerland, already owns a majority stake in DNA (about 56%) but wants to own it outright, and for this it will have to put up plenty of cash.

The original offer of $43.7Billion for the remaining 44% of Genentech was sternly rejected as being too low, and Roche, it seems, would now have to pay north of triple digits per share to appease shareholders and management. At its current market cap, 44% of DNA works out to $45.7Billion.

To close the deal, I think Roche has to up their bid by as much as 10% from current levels, and that would give Genentech shareholders a lucrative reason to hold on to their shares. But this Investment, much like the Industry the companies find themselves in, is ever-changing and high-risk. For holders of DNA, the bottom's been set and rejected at $89/share, which should let you sleep a little easier, so continue to hold. Buyers beware as "buy high, sell higher" should work with this trade, but even so, the returns wont break open any portfolio.

Disclosure: Author holds no position in any of the mentioned companies

Stocks Rise to Start Week on Financial Optimism

Wall Street indices were headed higher to end the day Monday as bond insurers Ambac Financial (ABK) and MBIA (MBI) received affirmations of their ratings by Standard & Poor's. Having the credit crisis cripple bullish attitudes in the last few months today seemed like a sigh of relief more than anything. The next few weeks will be more telling if the major Financial firms can truly side step the lackluster "American Consumer"

MBIA rose almost 20%, while Ambac rose 15%. Other stocks making news today were Genentech (DNA) as it saw its Avastin breast cancer drug approved for further treatments by the FDA and Take Two Interactive (TTWO), makers of the Grand Theft Auto series of video games, which received a buyout offer of $2Billion by Electronic Arts (ERTS). Share of Take-Two jumped over 50% on the offer, which the company rejected based on future potential valuation.

Rally Wednesday for the Markets, Genentech sell-off on Avastin news Sparks Opportunity

Markets were propped up today as economic data came in on the positive end of the spectrum. Employment numbers showed that 189,000 jobs were added, thus giving hope that consumer spending will be stronger than forecast this holiday season. All major US indices were up about 1.5%, with the Nasdaq leading the charge. The Dow gained almost 200 points to end the session close to the 13,500 mark.

Technology, Energy and the Financials were strong in this rally day. Positive sentiment on consumer spending clearly is associated with gadget buying for Christmas and that propped up stocks of Apple (AAPL), Dell (DELL), Seagate Tech (STX), Intel (INTC) and Google (GOOG).

Suffering a setback was bio-tech power Genentech (DNA) as the FDA rejected the use of its oncology drug Avastin. Shares of the company were halted with a loss of 9% already registered. The drug in question was to be used in combination to treat certain forms of breast cancer but the FDA panel voted against approval of the drug for this purpose. Avastin currently bring Genentech sales of approximately $600Million in the first 9 months of the year as it is also being used to treat forms of lung cancer. The approval of the drug for other types of cancer treatment is seen as a major positive for the bio-tech and as such this setback has caused this temporary dip.

Goldman Sachs came out in support of Genentech after the news, as the major Investment Bank said that even without Avastin's approval they saw Genentech being able to sustain 20% Earnings/share growth going forward, and they held out the possibility that given further trials and more data the FDA could still in fact approve the drug for further cancer treatments.

At this valuation I think the selling as a bit overdone and Genentech looks attractive in the mid 60s. While DNA is a bit on the expensive side compared to its peers like Amgen (AMGN) or Teva Pharma (TEVA) the best in breed deserve a slight premium. Avastin's use is continuing to grow in lung cancer use as results for the first 9 months of the year are up 37% year over year.

Investors should take note when the brightest companies are on sale and this is definitely a sale. Genentech is the drug maker on own at these discounted levels. I believe it could be back in the $70-75 range soon but I agree that even without Avastin's approval for Breast Cancer enough growth should be present to propel the stock to its $93/share analyst target within 12 months. A hefty 35% all in premium opportunity on the upside and if Genentech would fall to be valued with its peers at a 20 P/E the downside is $66/share based on estimated earnings of $3.30 next year.

The chance is here and now for this steal!

Disclosure: Author does not own DNA

Earnings Week Preview Oct 15 - Oct 19

Busy crop of earnings lie ahead as Major Technology firms and the Financials are set to report quarterly numbers. Citigroup (C) is up first on Monday followed by Bank Of America (BAC) Thursday. The Internet giants lead Technology into the full earnings swing as Yahoo (YHOO), eBay (EBAY) and Google (GOOG) all report on consecutive days.

The Biggest mobile phone maker Nokia (NOK) will have investor eyes squarely on it Thursday and big Bio Techs Pfizer (PFE) and Genentech (DNA) also square off this week. The extended rally since the Fed rate cute has pushed investor confidence higher but it has also made for some weary trading as even slight earnings upside may not be enough to push stocks much higher past record levels.

As Technology has led the rally of late, all eyes seem to be on those uber-growth firms, and whether they can maintain their lofty valuations by trumping street expectations for yet another quarter.

Genentech (DNA) Earnings & Market Reaction

Genentech (DNA) announced earnings after the closing bell yesterday and it beat expectations ($0.78/share vs. consensus $0.72/share). The company also raised EPS guidance for the remainder of the year. [Earnings Release] *courtesy genengnews.com

How did the market respond? Currently shares of DNA are down $1.75 or almost 2.5%
My thoughts are that this selling is a blip and could prove a good entry point for longer term investment through the end of the calendar year. I look for DNA to come back this fall and move much higher by the end of the year.

Disclosure: Author long shares of DNA