JL: So, let’s talk about the rally action in stocks. Last week the Dow gained more than 3%, the S&P was up more than 4%, and the Nasdaq picked up almost 5%. And all that came in the context of weak economic news, the worst employment number in years, and a newly slumping dollar. I’ve got my own take on this, but I know you see the world a little differently. Thoughts?

CASH: My friend, we both know that bear markets can be notorious for mauling investors. We also know that some of the strongest and sharpest rallies take place in bear markets, as you and I have both pointed out. So the way I see it, there’s nothing wrong with trading these rallies as long as you keep a clear head. You just have to be careful not to get juked out and to remember the primary trend.

JL: Right. As the bard once sang, “You don’t need a weatherman to know which way the wind blows.” Though it helps to be paying attention. Speaking of getting “juked,” how’s that fancy footwork holding up? Has it been a good week in the trenches for Cash Mcdash?

CASH: Well I must say, despite my modest nature --

JL: <COUGH> Ahem! <COUGH>

CASH: Need a lozenge there, pal? Maybe a bottle of water?

JL: Nah, I’m good.

CASH: Oh good. As I was saying… have to tell you that last week was my best so far this year. LongTop Financial (one of our recommended names) hit a new recovery high, and GFA (another one) was up 10%, finishing Friday on a great note with two times normal volume. The solar stocks we tipped for a comeback, JA Solar (JASO) and LDK Solar (LDK), were up 21% and 25%. And don’t forget my buddies over at Blackstone (BX). That one crossed $17 and finished the week 21% higher.

JL: Man, that’s not a bad week. Not too bad at all.

CASH: No kidding. In fact, you can call me butter ‘cause I’m on a ROLL!

JL: Alrighty then. Calm down there, Butter…

CASH: Hardy har har. You know I’m just messin’ around. But I do get pretty passionate about this. There’s nothing more satisfying than working hard, getting the trades on, and then seeing that hard work pay off. It just feels good to win.  

JL: Oh, no doubt. I’m with you all the way there. But tell me, do you think we’re going to see continued strength? Are you hanging onto your positions?

CASH: Actually, I think the easy money for the time being --

JL: Hold on, hold on, hold on. You think those gains were easy? In this market?

CASH: Sure! When you’ve got the patience to wait until the mood is incredibly sour, and you couple that with the discipline to buy quality names that have been beaten down, and then mix in the fortitude to hold them through a rally few believed would happen… then the game really does feel easy!

JL: And playing golf like Tiger Woods is easy, too, I take it. You just line up your club the right way, take a nice swing, hit the ball 400 yards…

CASH: Ha ha, point taken. Yes, I was oversimplifying things a bit there. Every trader has ups and downs. (The great Tiger Woods has ups and downs, too.) But markets have patterns. These newly issued names have highly measurable tendencies. And don’t forget, I’ve been doing this day in and day for out for many years. A longtime student of the market can gain a meaningful edge just by watching, understanding and absorbing the patterns. A wise man once said, “It’s amazing how much you can learn just by paying attention.”

JL: That wasn’t me was it?

CASH: I said a wise man, not a wise guy.

JL: True. Okay then, so what’s next? Are you going to be closing these positions? Getting liquid? Going short?

CASH: No, I still have a bullish bent to my trading; it’s just not as screaming obvious as it was a few weeks ago. I used Friday’s exceptional strength in the solar names to lighten up positions a bit, while still holding partial positions. I’m still constantly trolling for good long-term names that will give us months of good returns, while scaling out of short-term names that offered some nice quick pops.

JL: Sounds good, Butter.

CASH: Are you going to keep calling me that?

JL: Hey, it was your personal request! Are you saying that’s no longer your preferred name? You’re abandoning it already? I can’t believe it’s not butter.

CASH: Ouch! You should be fined for that one. In fact, you may need clinical help. Which reminds me…

JL: You’re reminded you need to go to the clinic?

CASH: No, wise guy. I want to tell you about the latest name on “the calendar.” Remember, the syndicate calendar we talked about last week?

JL: Ah, gotcha. A clinical IPO.

CASH: It’s actually a secondary offering. The name is Wuxi Pharmatech (WX on the NYSE).

JL: Wuxi Pharmatech, huh? That name just rolls right off the tongue.

CASH: And the company continues to roll out new services! Have you heard of contract research organizations, or CROs for short?

JL: I’m very hazy, but I’ll give it a shot. Those are the outfits that do busy work for pharmaceutical firms, right? Researching new drug compounds, recording clinical trial data, stuff like that?

CASH: Precisely. This kind of thing helps large drug companies keep their research costs down, especially when they can farm out the work to overseas locations with lower labor costs. Wuxi is a China-based CRO. and the company is serving some of the top drug manufacturers -- names that you and I would recognize.

JL: Can you tell us who some of Wuxi’s customers are?

CASH: Actually, that’s kind of a sensitive issue. Because the company competes for business with other CROs, it doesn’t want to reveal its customer base for competitive reasons. In its latest prospectus, however, the company did mention that its three largest clients were Pfizer, Merck and Vertex. With endorsements from majors like those, you can be sure Wuxi’s winning contracts from many smaller firms as well.

JL: Big pharma has been a tough place to make money in recent years. There aren’t too many blockbuster drugs in the pipeline, either. Does this worry you, since the CROs depend on big pharma to finance their growth?

CASH: Actually, this environment helps the CROs to some degree. Because the pharmaceutical companies are under extra pressure to make some breakthrough discoveries, they’re willing to pay up for CRO help more consistently in their search for the next big thing.

JL: And that’s good news for Wuxi Pharmatech.

CASH: Yes. Wuxi has been able to grow its revenues more than 50%, quarter after quarter for the last several years. The company has translated that to strong earnings growth every year since starting off as a private company in 2001.

JL: Sounds like a winner to me. So do you suggest a certain spot for our readers to buy the name?

CASH: Who said I’m buying? I’m actually short WX as of Friday.

JL: SHORT!? And you call me a wise guy? Oh, the industry’s great, the stock is great, the market is bullish, yada yada yada… you just looove those curveballs doncha.

CASH: Heh. You wouldn’t keep me around if I wasn’t interesting.

JL: It’s a sick fascination, I must say. So fill me in here. Why are you short?

CASH: The stock has been trading down the last few months, as investors have had a hard time justifying nosebleed multiples of 50-100, even though it’s a great growth company. So, as the multiple declines, people who bought at the height of the excitement are getting discouraged.

JL: That sounds awfully general.

CASH: True. But on Friday the general became specific. The company filed to offer 10 million-plus shares to the market, which will basically double the float. The additional shares coming to market should dilute current shareholders, and will likely drive down the price.

JL: Nice. So it looks like you’re basically front-running the company by short selling ahead of their deal.  

CASH: That’s right. It’s kind of like a brokerage house getting a big sell ticked trade from a client, and deciding to liquidate the firm’s personal position before depressing the stock with the client’s block trade. Except, of course, for the fact that my trade is 100% legal and above board. The company has to file a registration to sell this stock. I’m simply taking advantage of this public information.

JL: Nice. Any other tricks up your sleeve?

CASH: Well, now that you mention it… I do have a relationship with some of the underwriters on the Wuxi deal. So I will probably get some stock from them when the secondary goes through -- which I’ll then use to offset my short position. It’s a great way to turn a quick profit, just by paying attention.

JL: Like falling off a log. What could be easier, right? So okay, just to be clear. You’re definitely NOT suggesting readers own Wuxi Pharmatech here. But are you suggesting they SHORT it at this point?

CASH: Nah, this is a pretty sophisticated trade. The timing is very sensitive on an opportunity like this feel, and I wouldn’t feel comfortable recommending action to a general audience.

JL: Ah. So not like falling off a log.

CASH: No, not this one. This trade is more of an example of how the dynamics work, how opportunities arise as these filings occur. A few weeks from now, once the deal is done, we may actually want to own this name. But we can cross that bridge when we get there.

JL: Always shucking and jiving. That’s our Butter.

CASH: Hey, I thought we were done with that! But seriously, I do think maybe a select group of Taipan readers could benefit from real-time access to information like this. Maybe we can throw out some feelers to see what kind of interest there is. I could only communicate real-time info to a very small and select group. But I have to admit, it would be fun to dig a little deeper and share more detail on these trades.

JL: No doubt! The wheels are turning. Catch you next week.