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*** The following is excerpted from Issue #264 of Nate’s Notes, which was published for subscribers on January 20, 2017, and reflects our opinions of the market, MannKind, and all other stocks mentioned as of that date. ***

The world doesn’t make sense,
so why should I paint pictures that do?

– Pablo Picasso

Still Too Early To Say Much…

First off, I want to acknowledge that the bulk of this month’s issue is once again devoted to discussing MannKind; however, I also want you to know that it is being done on purpose because a) I believe we are at a point in the MannKind story where the tide is either going to turn or it’s not (and so it is worth “pounding the table” sooner rather than later), and b) to be honest, until we see what Trump actually plans to do as President (versus talk about doing as President-elect), I believe it is far more useful to spend time discussing a situation that is at least somewhat “knowable” than to spend a great deal of time reflecting on what a Trump presidency might mean for the stock market as a whole (though rest assured that the topic is also on my mind daily, and it will be discussed in future issues as more information becomes available!).

That being said, as you will notice when you look at the charts of our recommended stocks in this month’s issue, The Trump Rally appears to be alive and well, especially when it comes to our chip stocks, and though it is still too early to know which way the market is going to go once it finally breaks out from the “flatline” pattern it has been tracing out heading into Inauguration day, if it happens to go higher, you are strongly encouraged to look at the move as a reason to add to your positions rather than take profits (beyond the ones that you may need to take in order to allow yourself to sleep more easily at night if certain positions have grown “too large”).

On the flip side, however, as you will see in the Eyebrow Levels table below, the BTK biotech index is continuing to lag the market, and at least a portion of the reason for this is that Trump has spent some time talking about going after the pharmaceutical industry… and so we will need to watch this index especially closely to see how investors end up responding to whatever moves Trump ends up making (or perhaps not making?) as his term gets underway.

Again, my apologies for not spending more time playing “what if” with regards to Trump – for all of the reasons cited below, rest assured that this will likely be the last time I will choose make MannKind the focus on an entire issue… and I hope the fact that virtually all the rest of our positions are “acting well” helps to make up for the fact that I am going out of my way to lay out the case for MannKind one last time before the next chapter of the story gets underway!  Cheers!

“All-in” on MannKind

After surging close to 30% in a single day shortly after last month’s issue went to press, MannKind’s stock has pulled back a bit and has spent the past couple of weeks consolidating nicely in the $0.60-$0.70 range… and, while it is true that we would all like to see the stock return to a more reasonable valuation as quickly as possible, a “two steps forward, one step back” chart pattern is not only the more likely path to higher prices (barring a piece of catalytic news, of course), but it is also the sort of price action I would actually prefer to see, as history suggests it will help to set the stage for a longer, more sustained rally as it picks up steam.

Of course, the question is whether it can/will pick up steam… and though we will only know the answer to that question in hindsight, I hope the following set of thoughts gives you some optimism that the tide may finally be turning for us.

First off, with recognition that one of our favorite mantras in the newsletter is “trends often go on for longer than seems reasonable” (so I can’t claim to be all that surprised), the downtrend in MannKind’s stock has gone on for far longer than I ever thought possible (especially given the sorts of results patients are reporting once they’ve learned how to dose Afrezza).

Not only have shareholders suffered through what turned out to be “a lost year (and then some)” thanks to Sanofi’s lack of effort to promote the product, but short sellers have been relentless with their selling… and, as mentioned before, I firmly believe that absent the “extra” 100 million or so shares that have been dumped on the market over the years, the stock probably never would have fallen below $3 or $4.

Of course, at some point (and unless they can force the company into bankruptcy), these short sellers will need to buy back those shares in order to close out their positions, and though they are clearly not doing so in droves just yet, I believe the price action we saw right after last month’s issue went to press may have been a preview of what’s to come.  As mentioned before, honest-to-goodness short squeezes are far more rare on Wall Street than folks like to think they are, but when they do happen, they can be spectacular to watch (and, ideally, benefit from!).

And, while I am no way guaranteeing that one will develop around the MannKind situation, based on what I am seeing in the marketplace – along with the emails I have received from subscribers over the past several months – I do believe believe very strongly that virtually all of “the float” (all of the outstanding shares that are not held by management or other insiders, i.e. all of shares that “float” back and forth between regular old investors who buy and sell them on the open market) is now held by investors who are planning to hold their shares “to the bitter end, no matter which way it goes,” as everyone else who didn’t have the stomach for the story has already given up and sold their shares.

While this “ultra-thin float” doesn’t mean much as long as volume remains low and a small number of buyers can get their orders filled by the sellers on the other side of the trade (and vice-versa) without moving the stock much, as we saw a little over a month ago, as soon as a buyer of any size attempts to establish a position, they quickly discover that there isn’t really much stock available for sale unless they are willing to become more aggressive with their bidding.

No, MannKind is hardly a “darling of Wall Street” at this point in time; however, given how the story is unfolding, I believe the odds are improving every day that this “unloved dog of a stock” is on the verge of getting a second look from investors, and given just how large the disconnect has gotten between “current value” and “true value” of company… along with the very large short position… and a sizable cadre of biotech analysts who only have one direction they can go with the stock (from “sell” back to either “hold” or “buy”)… and the aforementioned ultra-thin float (especially when measured against the size of the short position)… it may only take one or two big buyers to finally set the gasoline drenched stack of wood on fire.

Naturally, I’m sure many of you are wondering at this point why I seem to be more optimistic today than I have been in awhile, and the answer is that in addition to the price action itself, I am also very pleased with a number of “news” events that have taken place over the past five weeks – in particular, Matt Pfeffer’s presentation at the JP Morgan Healthcare Conference (JPM) and the hiring of another “high profile” individual from Amgen (in this case, Stuart A. Tross, Ph.D. to head up Human Resources, Information Technology and West Coast Facilities for MannKind as it enters the next stage of its evolution).

Not only is the hiring of Dr. Tross interesting for the simple reason that he is also coming over from Amgen (which is where Mike Castagna came from as well), it provides us with indirect evidence that perhaps things aren’t as bad “behind the scenes” as they sometimes appear to those of us who are trying to figure out what’s going on from this side of the curtain (and, of course, though I am not predicting an Amgen buyout, his arrival has helped to fuel a buzz on social media that he and Mike are there to “get MannKind structured as an Amgen-like entity so that Amgen can hit the ground running once they take over”).

Moving on from such exciting speculation, however, I want to point out that along with the “obvious” factoids that were presented at JPM (see below), I was also struck by two things in particular while listening to Matt’s presentation – not only did he make the presentation with much more confidence and “presence” than he has in during past presentations, even more importantly (in my humble opinion), “the pitch” regarding Afrezza has undergone a significant transformation… and though I haven’t asked him about it yet, I am guessing that all of the “extra” talking points that were made are a direct consequence of the information that was gathered during the first round of having a salesforce on the ground in doctors’ offices figuring out what works and doesn’t work in terms of educating doctors and patients alike about the product (and if this hunch is correct, I believe it bodes well for the next round of the rollout, which is due to get underway early next month).

And, speaking of which, that is one of several items I want to mention from the JPM presentation, namely, we learned that, for a variety of possible reasons, the company is transitioning from using a contract sales force to hiring all of its own sales reps.  Not only will this allow the company to offer a more enticing incentive package (via stock options), the fact that they are making the move at all suggests, once again, that things are not as dire on the financial front as they appear on the surface.  An unfortunate (but minor and temporary!) consequence of this transition is that Matt hinted that we are once again in a period where there isn’t much going on in terms of sales people trying to generate new prescriptions while the in-house staff gets brought up to speed, and though I know many of you are concerned about “the woeful lack of scripts,” I want to remind you that despite the “dismal” numbers week after week, the stock is actually up over 50% from where it was a month ago… and this is yet another clue to me that anyone who wanted to sell the stock probably already has.

Along with this news about hiring an in-house salesforce, we also learned that MannKind is moving forward with the filings required to sell Afrezza in a number of regions that essentially only require “FDA approval and some paperwork,” namely, Brazil, Canada, Mexico, Australia, MENA (Middle East and North Africa), UAE (United Arab Emirates), and it is also evaluating what would be required to gain approval in “Europe and other regions.”  Of course, the company could simply be bluffing, but if they are not, this sort of language once again suggests that they feel much more confident that there will be money around to implement the plan than there might appear to be on first glance by an outsider (or in any one of a handful of persistently bearish blog articles you can read on a weekly basis!).

Not only does the company appear to be moving forward with plans to grow sales of Afrezza in both the U.S. and abroad, it seems to be moving forward with other applications of the Technosphere platform at a slightly more aggressive pace than it was forced to take prior to the settlement with Sanofi (a turn of events that I want to remind you not only changed the financial position of the company by quite a bit, but also made it significantly easier for the company to start talking with other potential partners who may have been reluctant to get involved while Sanofi still had a tentacle involved in the story).  Along with its efforts to develop inhalable ephinephrine (efforts that include what the company has called a “successful” meeting with the FDA back in December), the company is moving forward with projects to develop inhalable treprostinil and palonosetron, with an eye towards eventually partnering those products once they are further along in the clinic.

And, speaking of “the clinic,” I believe it is also worth noting that Matt also pointed out at JPM that MannKind is moving forward with plans to conduct pediatric, dosing, and time-in-range clinical trials with Afrezza.  In addition, once the commercial(s) have been approved by the FDA (expected in the April time-frame, if I remember correctly), MannKind is planning to rollout its first direct-to-consumer (DTC) TV ads (in very targeted markets at first, mind you).  As you might imagine, these clinical trials and TV ads will all require time, personnel, and, money to bring them to fruition… and, once again, these are all things that it would appear on a first glance that MannKind does not have at its disposal, but, reading between the lines, may have “lined up” after all, even if a partnership and/or buy-in (or perhaps even a wildly unexpected – by outsiders – ramp in Afrezza scripts?) that would provide additional capital hasn’t actually been announced/revealed yet.

Moving on to a topic that is less optimistic in nature, as you know, MannKind’s stock is in jeopardy of being “delisted” sometime in mid- to late February if it is not able to get back over $1 and stay there for 10-consecutive trading days; however, to help allay some of the fears that have been expressed to me via email over the past several weeks, I want to remind you of the following things…

First off, even if the stock has not managed to get back over $1 and stay there long enough in time to meet the criteria to avoid delisting, the company can file for another six-month extension (and such petitions are almost always granted), or, alternatively, the company could guarantee the stock price would be over $1 by simply convincing shareholders to approve a reverse split of the stock.

However, I think it is also extremely important to keep in mind that even if the stock does end up getting “delisted,” the only thing that actually changes is that rather being traded on THE Nasdaq trading system, the stock will instead be traded on a “lesser” platform… and while this will undoubtedly cause some investors to steer clear of the stock (and/or cause some institutions to sell their positions based on their by-laws that might require them to only invest in stocks traded on Nasdaq, for example), as mentioned above, I believe everyone who was interested in selling as a result of concern about delisting has already done so.

In addition, and perhaps most importantly, I want to make it clear that your shares would still represent exactly the same thing they represented before the delisting – they would simply be trading on a less prestigious (and, almost certainly, less liquid) “exchange”… and, ironically, I believe it is worth noting that if the stock stopped trading on the main Nasdaq system, it would, in theory, make it even more difficult for the shorts to find shares to cover with IF they ever decide to start covering their position… so, in some ways, it might be worth rooting for delisting; other than that, you will still be a shareholder with the same ownership position and voting rights that you had prior to the delisting (so please don’t let anyone on the interwebs convince you that your shares will instantly become worthless).

Finally, to wrap up what has become a much longer write-up than I was originally planning on putting together for you this month, I want to re-iterate what I said last month, namely, that I think we really are at a point in time where the stock is either going to make it, or it’s not… and, while it will take a bit longer before I would be willing to admit failure and start scaling-out of our position, I do think the odds are very good that IF the story is shaping up the way I think it is, we could see Wall Street returning to the story (i.e. starting to bid up the stock) any time between now and mid-March.

In response to all of the above (and because I believe so very strongly in the underlying value of Afrezza itself), I am making one final “all-in” bet and increasing our position size by 25% in both Portfolios this month… and, barring some bizarre twist, the next trades the newsletter will make in the stock will be sales, either  to take some well-deserved profits or to begin the process of scaling-out of our intentionally large positions.

As has been said a number of times, please do not invest more in the story than you a) can afford to lose, and b) can sleep with comfortably at night; however, provided you are still below your threshold on both fronts, I encourage you to step up to the plate and add a few more shares alongside me – “inefficient markets never last forever,” and I really am convinced this is one of the most extreme examples of “the mispricing of assets” I have seen in my 29 years of following the stock market.  Stay tuned!

MannKind

As mentioned above (and in last month’s issue as well), I believe we are at a critical juncture in terms of how Wall Street is going to handle the MannKind/Afrezza story going forward… and though I may turn out to be wrong, based on my very strong belief that the company is currently trading for a small fraction of what it is actually worth, I am comfortable pushing the rest of my chips into the pot at this stage of the game and waiting to see what happens.  And, along those lines, I will make the “bold” prediction that by the end of this year, we will either be mostly out of our position… or MannKind will have moved onto the list of “core stocks” that we intend to “hold forever.”  MNKD remains a very strong buy under $2 and a buy under $5.

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:

Cirrus Logic (CRUS) – Yep, it’s the same three stocks as Top Picks this month, and for all the same reasons – Cirrus’ stock is bumping right up against its all-time high, and this is always a “bullish” indicator for a stock (at least on a shorter-term basis).

MannKind (MNKD) – As mentioned elsewhere in the newsletter, we’re approaching the “do or die” point for the stock… and so if you have been waiting to buy some, it’s probably time to place your bet.

Skyworks Solutions (SWKS) – not only is the chip sector continuing to act well, it is hard to interpret the recent “gap up” in Skyworks’ stock as anything but “bullish.”

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 250 NVDA and purchase 50 (200) Apple, 100 (400) Celgene, 250 (900) First Solar, (300) Illumina, 20,000 (400,000) MannKind, 750 (2,000) PowerShares DB Ag., 700 (3,000) PowerShares DB Cmdties., 200 (500) Qorvo, 100 (500) Skyworks Solutions, and 50 (200) SPDR Gold Trust ETF.  We will use the closing prices on Monday, January 23rd, for all transactions.

*** The following is a complete reprint of Issue #260 of Nate’s Notes which was published for subscribers on September 16, 2016, and reflects our opinions of the market, MannKind, and all other stock mentioned as of that date. ***

Talk about your plenty, talk about your ills,
one man gathers what another man spills…

                                                         – from St. Stephen (Garcia, Lesh, and Hunter)

MannKind Redux (for hopefully the last time?)

Though there is plenty to talk about when it comes to what is going on in the world (interest rates, our election here in the U.S., geopolitical tensions around the globe, asset bubbles growing, etc.), given all that has been going on with MannKind’s stock lately… coupled with the fact that I have gotten so many of you into it and feel compelled to keep you up to date as best as I can while we weather the storm that has been raining down on us for years now… along with the fact that most of the rest of our ideas are performing nicely (and thus do not require the same level of “hand holding”), I am choosing – for hopefully the last time it will be necessary – to forego any other commentary in this month’s issue and instead jump straight into discussing the myriad of questions and comments that have come my way lately.

Thoughts on MannKind as we head into “crunch time”

Potential Delisting – a number of you have pointed out that “MannKind’s stock has been under $1 for close to 30 consecutive days now, and doesn’t that mean it will be delisted soon?”

To help clarify things (and hopefully put your mind at ease), if the stock stays under $1 for 30 days, the company will, indeed, receive a notice from Nasdaq letting it know that it is in a state of non-compliance with listing rules… and the company will then have 180 days in which to become compliant (in this case, get the stock back over $1, either via price appreciation or a reverse split).  If, at the end of 180 days, the stock still is trading below $1, the company can then file for another 180-day extension… and so, for all practical purposes, “a little over a year from now” is the soonest the stock might actually be delisted (barring a bankruptcy filing or a buyout between now and then, of course).

The Recent Decline – yes, I did say in last month’s issue that I thought the outlook for MannKind would be much rosier by the time this month’s issue went to press… and though the stock proceeded to tumble 30% almost immediately after the issue came out, I hope the following helps add some perspective for you.

First off, as discussed previously, the decline took place on extremely light volume… and though “down is down” regardless of how heavy the volume is, my experiences suggest that what we saw was a classic case of “big fish” on the long side of the trade simply pulling their bids in an effort to get downtrodden retail investors to cough up another few million shares of stock at bargain basement prices.

Not only have I seen this sort of thing happen dozens of times before at the end of downtrends for biotech stocks that have “fallen completely out of favor with Wall Street,” I can tell you that I have received a number of emails over the past couple of weeks from long-time subscribers who were letting me know they “just couldn’t take it anymore and were selling some (or all) of their position” (so the ploy seems to have been successful, eh?).

While I can’t promise the stock will hold at the 52-week low, I can tell you that there seems to be some solid support for the stock at current prices (as evidenced by the very large bids that have been appearing lately), and perhaps even more importantly, the action in the option arena is very heavily skewed towards call buying, especially the further out one looks on the calendar (in addition, it should be noted that there is virtually no action in the short-dated puts, something you would expect to see if it really was known “behind the scenes” that the company was on the verge of filing for bankruptcy).

Second (and getting back to the claim that was made in last month’s issue), there have been a couple of twists to the story that suggest to me the outlook is, in fact, getting rosier despite the tumble we have seen in the stock over the past four weeks.

Insider Purchases – The first of these twists is the fact that not only was it disclosed shortly after last month’s issue went to press that CEO Matt Pfeffer and CCO Mike Castagna had both purchased 25,000 shares apiece in the open market (the first time this has happened in ages, mind you – though there have also been a number of possible reasons why they couldn’t undertake such actions until just recently), but after this initial disclosure, Castagna went on to make three additional purchases of 25K, 15K and 17.5K shares, respectively, in a very short period of time.  Perhaps he is just a bold bluffer, but given that there is nobody on the planet with a better feel for how the rollout of Afrezza 2.0 is actually going, I am going to assume that he is not worried about what he is seeing.

Insurance Coverage – The second twist (which happens to complement the first quite nicely) is that I am extremely excited to share that a friend of mine’s son messaged me a few days ago that he “had just picked up his first box of Afrezza”… and the reason that this news is so exciting to me is that it a mere six or seven weeks ago that he had first contacted me to let me know that he had tried to get Afrezza from his doctor at Kaiser and had basically been told that “Kaiser didn’t carry it on their formulary… nor did they expect to anytime soon.”

We contacted Mike Castagna to see if he might have any tips or tricks we could try, and though his response at the time suggested that the nature of the Kaiser network made it a lower priority for him and his team, I can assure you that Kaiser didn’t go from “no coverage” a month-and-a-half ago to “covered with a $20 copay at the pharmacy” today without someone hustling their butt off somewhere.

My best guess is that Kaiser prescriptions will remain small while an initial round of “guinea pigs” (most of whom will need to ask for Afrezza rather than have it suggested to them) take the product for a test spin, but once they have been using the product for anywhere from one- to three months, I fully expect the prescriptions to ramp up nicely.  In addition, given that Kaiser happens to be in the business of acting as both “the insurer” and “the healthcare provider,” I believe they will be especially well-positioned to quickly start noticing the cost savings that should start to appear when they compare ER visits, etc. of their patients on Afrezza versus other insulins (and, though far less pertinent to the immediate outlook for the stock – but far more relevant on a longer-term basis – these same cost savings should also eventually show up when looking at “big ticket” items such as dialysis, amputations, and serious eye problems that diabetics often experience later in life).

No, Kaiser by itself (especially over the short-term) is not going to be the difference between life and death for MannKind… but I believe the fact that Castagna & Co. seem to have caused a major shift in thinking in such a short period of time with an organization known for not just jumping into things willy-nilly suggests that they will also be able to make significant inroads elsewhere as the weeks and months continue to roll by (and, in fact, stories are continuing to appear in social media of folks who previously couldn’t get Afrezza, but thanks to the efforts of MannKind and the various support teams that have been set up, are now starting to experience its benefits first hand).

Financing – Speaking of “the difference between life and death for MannKind,” many of you are rightly still concerned about the company’s odds of being around long enough to reap the rewards of having developed Afrezza in the first place… and though I can’t promise you that Pfeffer is going to be able to get the ball across the goal line after bringing it the other 99 yards down the field, I believe the following list of potential monies is more than deep enough to get us there.

First off, if push came to shove, MannKind could tap the “at the money” instrument that is currently in place and basically allows the company to immediately sell up to $50M worth of common stock into the market place (I say “immediate” because the broker/dealer who will handle the transaction(s) has already been identified and all of the paperwork with the SEC has already been completed – no additional filings/reviews would be required prior to the selling of the stock).  Though he would not commit to NOT tapping the ATM, during a conversation I had with Matt Pfeffer a little over two weeks ago, I learned that a) he has not tapped the ATM (as was reported by one of our “friends” on the short side in the underworld of financial blogs), and b) he fully recognizes that tapping the ATM at current prices would far and away be a last resort.

Next up in terms of easily identifiable sources of cash is the fact that the company is due to receive what we have been led to believe could be a “significant” milestone payment from Receptor Life Sciences sometime between now and the end of the year… and though we may or may not learn much more about them as part of the transaction, the payment will be a welcome one (and if achieving the milestone allows them to feel more comfortable disclosing what they have been working on, it will only be icing on the cake).

Along similar lines, though I do not think the company is actively pursuing any such deals (but might take one if a great one happened to walk through the door unsolicited), it is always possible that that the company could receive upfront payments as part of agreements signed with other companies for either international rights to Afrezza or for rights of some sort to any of the other products currently under development (more on one of these products below).

In addition to these “big money” tickets associated with licensing agreements, I think it is also important to keep in mind that not only is MannKind once again receiving 100% of any revenue it generates via the sale of Afrezza (admittedly small, but growing), the company also appears to be in line to receive roughly $3 million per month for quite awhile to come as part of the $50M “insulin put” clause in its agreement with Sanofi… and these two streams together will clearly help to offset some of the monthly expenses currently being incurred by the company.

And, speaking of Sanofi, though the company seems to be doing all it can to avoid talking about the situation and instead is trying to keep folks focused on what’s going on with Afrezza today, I continue to believe that there is at least a modest chance that, before all is said and done, there may be some sort of additional payment and/or forgiveness of debt from Sanofi – especially after reading a portion of the testimony of a former Sanofi employee that was called as part of a recently dismissed class action lawsuit against MannKind in which he/she seemed to suggest that Sanofi had, in fact, done very little to promote the product.

Again, I am not predicting (nor promising) that such a settlement is on the way (and so you should not count on it), but based on all that has transpired over the past couple of years, such a settlement could end up being quite sizable, indeed, especially if MannKind is able to significantly outpace Sanofi on the sales front over the next several months.

And, finally, if sales do start to pick up, there is a chance the stock price will also start to rebound as well (but you never know, given how things have gone for the past couple of years, eh?!)… and, provided the stock gets back above $1.50, I think it is important to keep in mind that there are warrants for 50M shares of stock at that price that will bring in a little over $70M if they are exercised.

Advertising – though most of the details were kept under wraps, I know it will please many of you to know that Matt Pfeffer recently disclosed that we will being see some sort of Afrezza direct-to-consumer advertising as part of the upcoming playoffs and World Series for Major League baseball… so be sure to tune in to the games!  That being said, before I move on from this topic, I want to point out to those of you who have written to me expressing your frustrations at “the lack of TV ads – everyone else has ‘em!” that there really is no point running “ads for the masses” until all the kinks (or at least as many as possible) have been ironed out of the system in terms of patients getting from “awareness” to “product in hand”… and, not surprisingly, there have been a few kinks along the way (with troubles associated with Medicare and Medicaid being the most recent).

CEO – This, in turn, brings us to a topic that I feel very strongly about, namely that while Matt Pfeffer has become the punching bag for longs and shorts alike on social media because he is a) CEO and b) “lacks charisma and energy – so it’s clearly all his fault the stock is at $0.70”… but the reality of the situation is that he and his team have done an incredible job transitioning this company from basically being nothing more than a manufacturing entity under the Sanofi agreement (admittedly with a small R&D arm to continue pursuing other Technosphere applications) into a full-fledged pharmaceutical company responsible for every facet of delivering the drug from the assembly line to the hands of the patient… and they did it in a fraction of the time usually required for “traditional” rollouts!

Whether you care for his personality or not (and with the caveat that I will be forced to eat some humble pie and reassess my opinion if he is unable to get the ball over the goal line after all), I think he deserves at least a “A-” for his efforts so far… with the possibility that this will turn into an “A+” between now and the end of the year depending how things play out (and, in turn, the team he has put in place to execute on the vision he vowed to carry through to fruition for Al Mann also deserve similarly high marks).

On a related note, I have also been asked by a number of you whether I think Duane DeSisto (who was forced to turn down the CEO job back in January when his former employer signed a co-development agreement with Eli Lilly for a special formulation of one of their rapid acting insulins) will be returning to the company next week now that his “non-compete agreement” will have expired… and though I could be wrong, I believe that Pfeffer is likely to remain in his roles of CEO and CFO until Afrezza has firmly established itself in the market place (at which point he might be willing to step aside on one front or the other).

Valuation – though “stock price” is what most people think of first when they’re pondering an investing, I think it is also important to keep in mind the concept of “valuation”… and while many of us are stuck holding shares that we bought in the $5-$10 range (or even higher!), there is nothing that prevents us from averaging down if we choose to (and, as you know, that is exactly what I have been doing)!  With the company currently selling for more than $50 million LESS than when it came public (despite that all of the risk associated with clinical trials and FDA reviews and approval have been removed from the equation), I continue to believe it represents the sort of opportunity that only comes along once or twice in most investors’ lifetimes… and whether you are getting ready to make your very first purchase or are still trying to get your cost basis down to “something better than $8,” you are strongly encouraged to step up to the plate at current prices!

Inhalable epinephrine – And, finally, to help put things into perspective for those of you who have been wondering about the feasibility of inhalable epinephrine (“how will that work if a patient can’t breathe?!”), I want to point out that while the inhalable product being worked on MannKind admittedly won’t be of much use if you find someone passed out from anaphylactic shock, it represents a fine (and probably preferable alternative) for patients who already carry epi pens because they aware they have a life-threatening allergy – despite what naysayers in social media would have you believe, there is actually a window of several minutes between when a patient starts to realize they might be having a reaction and when their airway will finally close up… and this idea that an inhalable product would be useless is pure rubbish (yep – another claim without merit from our friends on the short side).

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:

Cirrus Logic (CRUS) – Once again this month, Cirrus’ stock is exhibiting some of the best relative strength versus its peers in the newsletter (and such strength should almost always be bought!).

MannKind (MNKD) – Though you’d never guess it from the stock price, I believe all signs are continuing to point to “better days ahead” for the company… and especially if you’re just now finding out about the story, you owe it to yourself to pick up a few shares at today’s price!

NVIDIA (NVDA) – great relative strength (and a beautiful chart!) here as well.

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase 100 (250) Apple, 150 (300) Celgene, 150 (500) Cirrus Logic, 100 (300) Electronic Arts, 100 (250) Illumina, 200 (1,500) Luminex, 10,000 (150,000) MannKind, 200 (700) Qorvo, 100 (250) Skyworks Solutions, 50 (150) SPDR Gold Trust ETF, and 500 (1,000) Tekla Life Sciences Investors.  We will use the closing prices on Monday, September 19th, for all transactions.

	current	one eyebrow	two eyebrows
DJIA	18,124	16,750	16,250
Nasdaq	5,245	4,500	4,200
S&P500	2,139	1,950	1,800
BTK	3,358	3,200	2,700
SOX	802	630	580

*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).

Summary of Recommended Stocks

AdvisorShares Ranger Equity Bear ETF
Though it is not officially part of our “Eyebrow Levels” approach to gauging the market’s health, I believe the fact that this ETF is short the market (i.e. it should go up in value when the overall market declines) makes it a useful metric to look at as well… and looking at the chart to the right, I would need to see shares of this ETF trading back above $11 for me to feel confident that a new uptrend was in place (which, in turn, would imply a downtrend in the market as a whole).  After lightening up on our positions a bit in both Portfolios last month, I am content to just sit tight this month while we wait for additional evidence to come in regarding the direction of the market. HDGE is a strong buy under $9 and a buy under $11.

Apple
As you can see in the chart to the left, Apple’s stock sold off fairly quickly in response to the company’s recent “event” to unveil new phones and other products… but then did an about-face and jumped dramatically (and, in doing so, demonstrated yet again why it makes far more sense to invest for the long-term rather than try and trade in and out of stocks around specific news events!).  While the “wild west” days of mobile devices are probably coming to an end (i.e. growth and innovation will be tougher to come by going forward), I remain very comfortable with how Apple is positioning itself… and I am adding a few more shares to both Portfolios this month. AAPL is considered a strong buy under $110 and a buy under $120.

Celgene
As you know, it has been the glaring underperformance of the biotech sector that has kept me from returning to a more bullish stance on the market as a whole over the past several months, and while it is still too early to say for sure that the turn in Celgene’s stock at the end of June was the inflection point of the recent downtrend, I do believe that if the market as a whole continues to power higher, we will be able to grow more confident about the biotech sector as well.  Because we are somewhat underweighted in the sector (not counting our MannKind position in the Aggressive, of course!), you will notice I am being fairly aggressive about buying biotech this month.  CELG is a strong buy under $105 and a buy under $115.

Cirrus Logic
As you can see in the chart to the left (and not surprisingly, given the company’s tight connection with Apple), along with Apple’s, Cirrus’ stock has also whipsawed a lot of day traders from one side of the trade to the other over the past week-and-a-half as analysts began to chime-in with varying opinions about the path forward for Apple (and therefore, Cirrus and other chip providers).  That being said, not only is the stock on fire these days, but the entire chip sector (as measured by the SOX semiconductor index) is as well… and these are exactly the sorts of circumstances we like to see developing when it comes to positioning our Portfolios each month.  CRUS is now a strong buy under $52 and a buy under $58.

Electronic Arts
As you can see in the chart to the right, EA’s stock is continuing to power higher in exactly the manner we want to see as long-term investors – not only does this sort of slow-but-steady appreciation feel good all on its own, history suggests that the longer it goes on before the market as a whole enters the final frothy blow-off phase that often appears at the end of bull market, the more “parabolic” the final leg up will be for the stock as that stage of the market plays itself out.  EA is already the third largest position in both Portfolios, but because “strength often begets strength,” I am comfortable raising the buy limits and adding a few more shares to both Portfolios this month.  EA is a strong buy under $78 and a buy under $85.

First Solar
Yuck!  After giving us some hope in late 2015 and early 2016 that perhaps it was gearing up for a nice run back towards $100, I am afraid that First Solar’s stock has done nothing but disappoint us since then (as evidenced in the very ugly chart to the left… assuming you can even bear to look!).  That being said, I continue to believe that First Solar represents “best of breed” in the solar industry, and though I cannot tell you when the stock will finally turn around, I do feel comfortable predicting that the company’s odds of surviving and prospering make it a stock that we will continue to want to own for years to come (but, for now, “patience”  when it comes to new purchases).  FSLR is a strong buy under $30 and a buy under $36.

Illumina
Though it still too early to put too much confidence in the pattern being traced out in the chart to the right, I like the way the stock has been acting following its surge up to the $170 range… and if it can clear $190 on good volume in the weeks/months ahead, I will be in a position to more confidently classify it as a bullish piece of evidence when it comes to evaluating the health of both the stock and the sector as a whole.  That being said, because I believe the odds are already starting to tilt in favor of “higher highs” in the months ahead for the biotech sector, I am willing to step up and repurchase a few more of the shares we sold earlier in the year in both Portfolios.  ILMN remains a strong buy under $160 and a buy under $180.

Luminex
Yep – the chart to the left is another example of a biotech chart that is shaping up to potentially flash a very bullish signal… but hasn’t done so just yet.  In this case, I am hoping to see the stock clear $23 on good volume in the weeks ahead, and if it does so, you are encouraged to feel even more comfortable making purchases of both Luminex itself, as well as other stocks in the sector (provided they are still trading under their buy limits, of course).  In the meantime, because I am anxious to put some of our cash back to work in the Model Portfolio (as well as increase our exposure to the sector in the Aggressive), I am adding a few more shares to both this month.  LMNX is a strong buy under $20 and a buy under $25.

MannKind
As mentioned above, I take great heart in the fact that not only does Kaiser seem to be getting on board with Afrezza far sooner than expected, but Mike Castagna (the guy overseeing the rollout of Afrezza 2.0) has been putting his money where his mouth is in a big way over the past several weeks… and as part of our disciplined approach to scaling-in (and -out) of stocks over long periods of time rather than purchasing our entire position in one fell-swoop, I am adding just enough shares to both Portfolios this month to drop our average price down to “under $2.” Please do not invest more than you can afford to lose… but also be wary of folks anxious to see you sell your shares!  MNKD is a strong buy under $2 and a buy under $5.

NVIDIA
After dropping briefly as part of the swoon that hit the entire chip sector immediately after Apple’s event a few weeks ago, NVIDIA’s stock is once again pushing up against the top of its trading range… and if it happens to break through and push into new all-time high territory in the days/weeks ahead, you are encouraged to view it as a reason to buy (rather than sell) the sector as a whole.  The company recently unveiled its next generation of devices in several different application areas, and also announced that it is selling $1 billion worth of notes that will pay 2.2% and mature in 2021, along with another $1 billion worth of notes that will pay 3.2% and mature in 2026.   NVDA remains a strong buy under $58 and a buy under $65.

NXP Semiconductor
As you can see in the chart to the left, NXP’s stock appears to be stuck in the $80-$90 range, and though the strength of the rest of the semiconductor sector suggests that the next move is likely to be higher rather than lower, I would rather wait for that day to arrive and then pay a bit more for the stock than buy it today in hopes that is the direction it decides to go (especially with so many of our other stocks exhibiting good relative strength).  It is a very tough global market environment for chip companies (or any companies, for that matter!) to navigate these days, but NXP’s management team has demonstrated solid capabilities in the past, and I see no reason for this to change now.  NXPI is a strong buy under $78 and a buy under $85.

Perry Ellis
Though the gap down that can be seen in the chart to the right definitely took some wind out of the stock’s sails, I have to admit that the manner in which the stock has been steadily climbing since then suggests the drop may have been just what we needed in terms of helping to move a sizable chunk of stock out of weak hands and into stronger ones (which helps set the stage for larger advances down the road).  For the company’s second quarter, Perry Ellis reported revenues of $193.3 million and a net loss of $3.6 million, or $0.24 per share, as compared to revenues of $204.6 million and a net loss of $1.3 million, or $0.09 per share, last year.  PERY is now considered a strong buy under $18 and a buy under $22.

PowerShares DB Agriculture ETF
As you can see in the chart to the left, shares of this ETF have continued to slide over the past four weeks, and though they are now approaching a level that may provide some support,  there are a lot of crosscurrents in play right now when it comes to the supply-demand picture for commodities on a global basis… and, consequently, your guess is as good as mine as to where the downtrend will actually stop.  On a slightly brighter note, however, shares of DBC have been demonstrating slightly better relative strength than DBA, and, of course, the “useless” commodity (gold) has been acting very well for the past several months as well, so I remain (continued under “DBC” below) DBA is now a buy under $22.

PowerShares DB Commodities ETF
(continuing from “DBA” above) comfortable with my  thesis that the longer-term trend is still “up” for commodity prices, even if there are pullbacks along the way.  For now, I am holding off making new purchases of DBA and DBC even though they are among the smallest positions in both Portfolios, but I do plan on getting much more aggressive about buying them during their next move up; in addition, as you will see below, I am continuing to scale-in to our gold position with small purchases on a regular basis… and I hope that you will join me in this exercise, as I believe there are a number of forces at work that will drive gold prices higher before the same thing starts happening to other commodities.  DBC is now a buy under $16.

Qorvo
Though Qorvo’s stock has bounced back a bit from the “post-Apple event swoon” that hit the entire sector a few weeks ago, I’d really like to see it back above $60 to help convince me that the uptrend is still intact; however, since the sector as a whole is demonstrating great relative strength and I like what I see in Qovo’s longer-term chart, I am adding a few more shares to both Portfolios this month.  If you are newer to the newsletter, please make sure you own at least a few of the core stocks first (especially NVIDIA, if you are anxious to “be in chips”), but once you’ve checked that box, Qorvo also represents a great “first buy” for you this month as you start building your portfolio.  QRVO is a strong buy under $54 and a buy under $60.

Skyworks Solutions
While such rapid moves always make me nervous, when looked at in the context of what has been going on with the chip sector as a whole over the past couple of weeks, I am very pleased by the action we are seeing in Skyworks’ stock lately.  In addition, if the stock is able to clear $80 in the weeks ahead (and do so on reasonable volume), I believe we will be able to count it as another piece of bullish evidence for both the stock and the sector (and the market as a whole, for that matter!).  Given how things are playing out, I am raising the buy limits and adding a few more shares to both Portfolios again this month… and I hope you will consider joining me.  SWKS is considered a strong buy under $74 and a buy under $80.

SPDR Gold Trust ETF
As you can see in the chart to the left, gold has been moving up in exactly the sort of step-wise fashion that we like to see as folks who take a long-term view of our portfolios.  To be sure, the trend could reverse at any time; however, given the combination of uncertainties and tensions around the world at this point in time (along with the fact that central banks have collectively banked themselves into a corner with regards to interest rates), I really do believe that gold is still in the very early stages of what will likely become a multi-year bull market for the precious metal… and, consequently, you will notice that I am adding a few more shares to both Portfolios again this month.  With a long-term view, GLD remains a buy under $132.

Tekla Life Sciences Investors
While it remains to be seen whether or not shares of this closed-end fund will be able to get back above $20 between now and next month’s issue, if they are able to do so (and especially if they do it on above-average volume), I believe we will be able to count it as a fairly solid piece of evidence that the biotech sector may finally be ready to turn the corner after what has been a very disappointing past several quarters.  As mentioned many times before over the years, you can get more bang for your buck by owning individual biotech stocks; however, for those of you with a lower tolerance for volatility, HQL is a great way to participate in the sector.  HQL is considered a strong buy under $18 and a buy under $21.

Walt Disney Co.
As you can see in the chart to the left, Disney’s stock has been sliding in a most intriguing manner over the past five weeks, and though we will only know after the fact what has really been going on, it appears to me that there must be a handful of very large institutions that are trying to decrease the size of their position… but willing to be very patient about doing so.  If history is any guide, at some point, we should see them get close enough to being done that they will finally be willing to sell the rest “at market” to finally be done with it, and once the stock has dropped sharply to absorb that wave of selling, it will then rebound nicely and resume its uptrend.  With patience, DIS is a strong buy under $90 and a buy under $100.

*** The following commentary was published for subscribers of Nate’s Notes in Issue #258 on July 15, 2016, and reflects our opinions of both the market and MannKind as of  that date. ***

But what has it got in its pocketses, eh?

                                            – Gollum (The Hobbit, J.R.R. Tolkien)

Your Questions Answered…

As you can see in the performance numbers above, despite a pretty serious hiccup following the Brexit vote shortly after last month’s issue went to press, the markets and our Portfolios have all managed to post some nice returns over the past four weeks!

In addition, as a number of you have pointed out in emails you’ve sent over the past few days, both the Dow Industrials and the S&P 500 (two of the five major indices I use to gauge the health of the overall market – see “Eyebrow Levels” table below) are starting to hit all-time highs… “and doesn’t that mean it is time to be more aggressive with our buying, Nate?”

Given how many great questions have been asked in various forms over the past four weeks, I thought it might be fun to paraphrase the most frequently asked questions and use a Q&A format to share my thoughts in the commentary section of the newsletter this time around…

The first thing I want to do as part of answering the question above is to remind you that while the DJIA and S&P 500 are admittedly starting to push into new all-time high territory, they have only been at these levels for a few days now, and, consequently, I believe it is still to early to know for sure whether the moves represent a bona fide breakout… or merely a “fake out” that will end up sucking one more round of money off the table before the market collapses (an event many doom-and-gloomers are predicting will happen between now and the end of the year).

That being said, if these two indices can maintain their momentum, it will go a long ways towards convincing me that the market may, in fact, be gearing up to give us the final “frothy” blow-off phase of the bull market that, up until now, has been “missing” (which is a misnomer, since, as pointed out before, there is no requirement that a bull market end with this sort of action – it is merely what usually happens)… and, if this is the case, it means the next six months could be surprisingly good ones for the market!

Tempering my optimism, however, is the observation that, while also strong, the Nasdaq and the SOX semiconductor index are both having a much more difficult time making it into new all-time high territory… and, of course, as I have lamented on more than one occasion over the past several months, I remain especially concerned that the BTK biotech index is actually still trading under its one eyebrow level (which leads us to our next question)!

Q. It seems like you put too much weight on the importance of the BTK biotech index, Nate, especially considering how influenced it is by industry- and company-specific “problems”… why do you think it is so important?

A. I think it is important for two reasons.  First, though the proportion of biotech stocks in the newsletter is currently a bit lower than it has historically been thanks to the buyouts of both Cubist and Affymetrix over the past couple of years, it has historically been one of the most well-represented sectors in the newsletter (and will likely continue to be as time goes by), and, consequently, it is important for us to keep an eye on the performance of the sector as a whole since it provides a great “baseline” against which to measure how heavily invested we ought to be in individual stocks from the sector at any given point in time (as you know, “we try to own larger positions in the stocks we like during bull markets, and smaller positions during bear markets”).

Second, while there is no rule that says the rest of the market can only rally if the biotech sector is also rallying, given that there is probably no other sector that is more driven by the emotions of fear and greed than the biotech sector, it means (in my humble opinion) that it is an especially useful gauge of just how euphoric (or not euphoric) investors are feeling – after all, if investors aren’t in the right frame of mind to get excited about the prospects of new billion dollar biotech products, it is hard to imagine them getting too excited about any other sector (which, with a few possible exceptions, will almost certainly not have the same potential for growth as the biotech sector).

Q. I’m not as worried about the BTK as you are, Nate, and I’m concerned we’re going to miss a rally in all the other stocks… how will I know when to start putting money back to work?

A. First off, in the same way that I have encouraged folks to “sell down to their own sleeping point (the levels at which they won’t lose sleep at night worrying about their portfolios)” even if it means sitting on more cash than we are sitting on in the newsletter, if you are feeling more bullish and/or are simply anxious to put money back to work, you are by all means encouraged to invoke the corollary of this maxim and “buy up to the sleeping point!”

That being said, while the fact that BTK is underperforming by such a wide margin is keeping me from being more bullish about the market as a whole, another of our favorite mantras in the newsletter is that we always try to position our Portfolios “based on what the market is actually doing rather than what we think (or are worried) it might do,” and, because two of the five indices are hitting new all-time highs, as you will notice in the list of trades we are making this month, I am willing to take the first steps towards putting some money back to work and am using roughly 10% of our cash position in the Model Portfolio (and a bit more margin buying power in the Aggressive) to add to some of our positions where we are most underweighted and the stocks are showing decent relative strength.

Q. I think the world is falling apart, Nate – doesn’t this mean we should be selling everything and going to a 100% cash position (and/or maybe buying some more gold too)?

A. To be honest, especially in the week or so following the Brexit vote, this was far and away the question I got most often… and, while I completely agree with the idea that it sure looks like there are an awful lot of storm clouds on the horizon, I want to remind you that the market has a tendency to prove as many people wrong as possible… and, especially when it looks like the sky is falling, it has a tendency to “climb a wall of worry,” as the saying goes.

As discussed above, it is still too early to know for sure whether we are gearing up for one of these stealth bull markets or not; however, I think it is important to keep in mind that while it is true that the U.S. economy will not be immune to problems that may pop up in the Asian and/or European economies as a result of the Brexit vote, a slowdown in China, etc., our markets still represent “the cleanest dirty shirt in the hamper,” so to speak, and, consequently, money from around the world will likely flow to our markets as it flees those other markets… and thus, even though it feels like the global economy is on the verge of plunging into chaos (and as just discussed), it is far more important for us to remain vigilant about what the market is actually doing (and stick to our game plan) than it is for us to respond out of fear or panic.

So, to summarize all of the above regarding the market in general before I move on the semi-obligatory MannKind Q&A section of the newsletter, I want to re-iterate that, at least until we get a few more indices hitting new all-time highs (and, even more importantly, get the BTK back above its one eyebrow level!), I cannot help but maintain a slightly bearish stance based on the signals that we got from the Eyebrow Levels table back in January; however, we are significantly underweighted in some of our positions in which the stocks are showing good relative strength, and, consequently, in keeping with my philosophy of always scaling-in (or -out) of stocks in small pieces rather than doing it all in one fell swoop, we are putting a bit of money back to work this month.

In addition to buying these under-represented stocks, because I remain firmly convinced that gold is likely to be one of the big winners over the next several years as central banks around the world struggle to get the genie back in bottle (no easy task, especially since they’re all going to be chasing the same genie!), even though we already have sizable positions, I am adding a few more shares of GLD to both Portfolios this month.

And now on to some of the most frequently asked questions regarding MannKind…

Q. When do you think we’ll start to see in increase in prescriptions for Afrezza?

A. The rollout of Afrezza 2.0 is just now getting underway, and though it is true that educators and sales reps are already starting to visit doctors and clinics, I think it is important to keep in mind that the first call (or even two!) at each location will most likely be almost entirely for the purpose of introducing the product and leaving educational materials.  Once the doctors have become familiarized with the product (and, keep in mind, that MannKind is attempting to focus mainly on doctors who are already somewhat familiar with the product, so this shouldn’t be large of a hurdle), the next step will be for them to start patients on the trial (sample) packs that you’ve probably heard MannKind talking about, and, in most cases, these sample packs (which will not show up as “prescriptions”) will last roughly 30 days.  After this trial period has ended (and assuming the patient has decided to continue with Afrezza), then doctors will start to write actual prescriptions that will show up in the weekly reports… and so, putting all of this together, I think the earliest we can/should be expecting to see a meaningful uptick in prescriptions will be late August or early September (though I’ll bet you dollars to doughnuts that our friends on the short side will spend a great deal of time lamenting “the low prescription rate” every week that goes by between now and then!).

Q. What happens if Afrezza 2.0 doesn’t go as planned?

A. If MannKind is unable to generate some traction for Afrezza between now and the end of the year, it will almost certainly mean the end of the company as we know it – the question, of course, is whether Al Mann’s heirs (who control the foundations that, in turn, control roughly one-third of the stock) will be willing to sell the company at a steep discount to what they thought it would be worth… or if there will prove to be some advantage to allowing it to slip into bankruptcy.

That being said, while I remain optimistic about Afrezza’s chances for success (and have put not only the newsletter’s reputation but a significant portion of my own money on the line as well to back-up this viewpoint), based on some of the emails I have received, I feel compelled to put the following in bold and italics for you: If I am wrong about Afrezza, the stock will likely end up trading much lower than where it is now by the time all the dust settles… and, consequently, I really do mean it when I say “do not own more than you can a) comfortably sleep with at night, and b) afford to lose if it turns out I am wrong (which is always a possibility!).”

Yes, as stated before, given the way things have unfolded over the past 18 months (an apparent lack of effort by Sanofi, a concerted effort by short sellers to drive the price down, etc.), I believe the fact that the stock has traded down to $1 (and the company sports a market cap nearly identical to the one it had when it came public with an unproven product that still had not even passed clinical trials) means that investors are looking at the sort of investment opportunity that only comes along once or twice in most investors lifetimes… but we’re not out of the woods yet!

Q. Out of everything I read on the internet, you seem to be the only one who thinks Afrezza is going to amount to much – what makes you so optimistic, Nate?

A. Though my experiences do not guarantee that Afrezza will be a success, having grown up with a father who was both a Type-1 diabetic and a family practice doctor (now retired), as well as having a great-grandmother who was a diabetic, I can tell you with a high degree of confidence that the benefits that Afrezza provides absolutely represent a significant step forward in terms of helping diabetics manage their “illness”… especially when one realizes that the huge improvements that Afrezza brings on the insulin formulation side can be dramatically leveraged by pairing them with the technology that is being developed in the world of “continuous glucose monitors” these days (and, if history is any guide, is only going to get cheaper, less intrusive, and more reliable as time goes by).  No, Afrezza does not yet have a label that says “ultra-rapid acting” versus “rapid acting” (as is found on the majority of today’s mealtime insulins)… but the data and the anecdotal evidence is there to support the idea that “real-time blood sugar monitoring calls for real-time insulin (and Afrezza is the only insulin that fits this bill).”

In addition, regardless of whether it is on the label yet or not, the fact that Afrezza appears to leave the bloodstream faster than other insulins suggests that it will provide the added benefit of reducing the worry about “stacking” insulin in the body and having to worry about hypoglycemia (low blood sugar), which is a far more serious problem for (and therefore represents a “fear”) for diabetics than high blood sugar (which, at moderate levels, represents more of a long-term – but very real – health risk than hypoglycemia, which can be life threatening).

As I’ve stated before, history suggests that the shift to a “next generation” insulin will take longer than the optimists are hoping… but, at some point, critical mass will be reached, and, all of a sudden, everyone will switch to the new “technology” and start to wax poetics about “how we used to have to manage diabetes before ___ came along.”

Q. Why is Sanofi still involved with Afrezza?

A. To be honest, the entire manner in which Sanofi terminated its agreement with MannKind has been puzzling since it was first announced, and I can’t tell you what is going on behind the scenes.  As you know, I found it odd that Sanofi invoked not one, but two, clauses as part of its right to terminate the agreement, and though the first appears to have resulted in a clear change in the story line at the 90-day mark when all rights to Afrezza were returned to MannKind, there has not been any news at the 180-day mark (July 4th)… which leads us to the next question.

Q. What’s up with “the insulin put”… and will MannKind be getting any extra money from Sanofi as part of a final settlement?

As I mentioned awhile back, one of the clauses of the agreement with Sanofi allowed for MannKind to “put” (force Sanofi to buy) up to $50 million worth of insulin if Sanofi terminates the agreement, and, as many of you have pointed out, we have not heard anything from MannKind yet about how this turned out… which, in turn, has caused many of you to wonder whether there might be “bigger discussions” taking place.

To be honest, your guess is as good as mine – on the one hand, there are reasons to think MannKind will be lucky to “put” a few million dollars worth of insulin to Sanofi, but there are also reasons to believe MannKind might end up with a significantly larger “termination check” from Sanofi, especially if presumed negotiations drag out long enough for MannKind’s sales force to outsell Sanofi’s “right out of the gate.”  It might not happen until the next earnings call, but I am hopeful management will announce a final termination as soon as they are able to.

Q. Why did Mike Castagna present at the Cantor Fitzgerald conference this week when Matt Pfeffer was listed as the speaker?

A. Again, your guess is as good as mine, but between wrapping things up with Sanofi and possibly signing new international partners (which might be contingent on Mannkind “being done with Sanofi” first), I can think of a lot of reasons Pfeffer might have been elsewhere at the last minute… in my mind, the only people this was an issue for were people who want there to be “issues” for investors to be worried about.

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:

Cirrus Logic (CRUS – $40.16) – Cirrus’ stock continues to exhibit some of the best relative strength in the newsletter, and “strength often begets strength,” as the saying goes.

Electronic Arts (EA – 77.83) – great relative strength here as well, and with Pokemon Go getting off to such a great start for Nintendo, investor interest in “video games” may help to take this stock higher in the weeks and months ahead as well.

MannKind (MNKD – $1.01) – with the sales force now starting to call on doctors, we may start getting feedback about how the rollout of Afrezza 2.0 is coming along in the weeks ahead.

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase (2,500) AS Ranger Equity Bear, 300 (1,000) Cirrus Logic, 100 (400) Illumina, 500 (2,000) Perry Ellis, 250 (1,000) Qorvo, and 25 (200) SPDR Gold Trust ETF.  We will use the closing prices on Monday, July 18th, for all transactions.

	current	one eyebrow	two eyebrows
DJIA	18,517	16,750	16,250
Nasdaq	5,030	4,500	4,200
S&P500	2,162	1,950	1,800
BTK	3,164	3,200	2,700
SOX	724	630	580

*Now that the Eyebrow Levels have prompted us to take a more defensive stance in terms of positioning our Portfolios (i.e. we have already done a fair amount of selling), you are encouraged to use the above table as a tool to help you understand where we are at in the current market cycle. As discussed in the March issue, we are still waiting for confirmation that we’re actually in a new bear market, but if/when we get it, we will then start to use the table “in reverse” of how we have been using it for the past several years (namely, it will become a tool for identifying the end of the bear market in future issues).

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