Going de-CAF

Well, this has been an interesting exercise in some more active investing for me -- essentially trading in and out of the Morgan Stanley China A Shares closed end fund a couple times this year, which is much more active than I tend to be with most of my holdings.

If you've been following my transactions, you might have noted that I bought shares in CAF back in May at about $36, sold at about $55, then re-bought shares at about $61.

And this morning, as the news that PetroChina would be getting a Shanghai A share listing lifted the enthusiasm for US investors for all things China, I sold about two thirds of my position at $71.11.

Essentially, to recap a little, I like the medium term prospects of these shares -- I see many more reasons for the domestic Chinese market to outperform over the near term than to underperform. But I'm not entirely confident that they'll avoid a bursting bubble, or that the path up will be an even one.

Like many other investors, I can't help but notice that the A shares look very expensive compared to most other investments ... but then again, they dramatically UNDERperformed most of the world for several years, too, and there is so much money looking for a home in China that I think the bias of all investors should be for a rising market in everything domestic in China ... including publicly traded companies.

I have tried to be disciplined, however -- a significant part of my rationale for investing in this particular closed end fund has been the widely ranging discount to its net asset value, a discount that I think provides -- at its extreme, at least -- some downside protection.

Buying the shares at a 20% or 25% discount to net asset value was a significant bargain, I think. But when the discount tightens to less than 10%, as it did this morning, I think the risk increases. Even though I can make an argument that this closed end fund should trade at a premium, not a discount (largely because it's a fixed portfolio size investment in an otherwise closed and outperforming market), I can't make the rest of the market accept my argument in the short term.

Of course, the Net Asset Value is calculated after the close in China, so it doesn't include any news that might have moved the A share market since that close, like the PetroChina announcement.

But personally (and I'm going out on a limb here, I might be wrong), I don't see any reason why the A shares market in China should go up by 6% overnight tonight to close that discount gap -- I presume that for domestic investors in China the IPO of PetroChina will be an interesting opportunity to buy another big state-controlled company that was previously off limits, but I don't see any logical reason why it should lift the shares of any other unrelated company, or the holdings of CAF, immediately.

So I continue to hold some shares, but I'm taking profits with the majority of my CAF holdings here, at roughly a 16% return in one week. I am not a frequent trader, but trading around the discounts in an overall rising market seems to work pretty effectively for this holding, so I may revisit this again if the discount returns to appealing levels.

And as an aside related to this investment, I've also been thinking about my larger investment thesis regarding China, and about the conventional wisdom -- particularly as it pertains to domestic Chinese investors.

Most investing pundits, myself included, have speculated that domestic Chinese investors will eagerly invest overseas instead of in their domestic markets once they are given the freedom to do so, partly because the A shares market is "overvalued" and partly because many Chinese companies don't trade in Shanghai or Shenzen and they'll want to invest in them (this is part of my rationale for investing in Tencent in Hong Kong).

But consider the corollary of the late-90s US stock market -- all Americans had the freedom to invest overseas, and even to invest in ADRs of foreign companies quite easily, but the temptation to chase performance was much greater than the temptation to diversify internationally or to buy more "undervalued" companies. International investing for US investors has grown massively in popularity in recent years, but that's because overseas is where the recent performance has been. In 2000, everyone in the US wanted to invest in the Nasdaq, that's where the millions were being made. In 2007 and 2008, will the average Chinese investor want to invest outside China, presuming he's given that opportunity, and leave the hottest performing stock market in the world?

So, ignoring for a moment the argument about whether the A share market is indeed a bubble that will eventually burst, perhaps the real question is this: should we presume that most Chinese investors are more savvy and contrarian than US investors were during the inflation of the tech bubble, and that they'll voluntarily sell their Chinese holdings to invest in other stock markets that are doing less well? I'm just wondering.

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Clearing out More Positions

As we gird our loins for what appears to be an extremely unsteady market -- though whether it will go up or down, I have no idea -- I've taken the opportunity to simplify my investments a little bit.

What does that mean?

Well, in my case, it means selling some of the more vulnerable, long-shot, non-profitable or highly valued companies in my portfolio -- particularly the small positions that I never got the urge to fill out with more cash.

So I've sold a half dozen or so of my smaller holdings in the last few days, a few at more or less break even and most at significant gains (these are primarily stocks that I've held for more than a year, most cases significantly longer).

And as with some of my earlier sell decisions, many of these are more personal than stock-related. I do not have specific news or numbers that make me want to sell these, but they don't fit what I want with my portfolio right now.

So what have I sold?

Myriad Genetic (MYGN) -- I bought this one because of the high growth of the genetic testing business and the promise of their early-stage drugs, but the story has changed somewhat. This has more than doubled for me, almost entirely on the promise of their Alzheimer's drug, Flurizan, that I wasn't all that confident about. That makes me extremely nervous -- many nice news articles and analysts have touted Flurizan as the most promising Alzheimer's drug currently out there, which may be true, but that's kind of like being the best dressed guy at the tractor pull -- Alzheimer's drugs are extraordinarily costly to get through FDA approval, and so far almost none of them have worked at all. I'll take my profits here instead of bucking the odds -- I might be wrong, but this small position isn't worth chewing my fingernails over. If Flurizan takes a big hit and the shares fall hugely on the news, I might reconsider my initial investment thesis and get back in.

Blackboard (BBBB) -- It's lovely to have a monopoly, which is why these shares are up quite nicely for me ... but I wouldn't buy more here, and it's a small position. They have so far had some difficulty in turning their near-monopoly into real profits, though it hasn't been that long since they took out their competitor, and I'm a little bit worried about higher education budgets moving forward. Out they go.

Barrett Business Services (BBSI) -- This one has mostly treaded water for me. I bought it because they had an appealing regional-to-national story unfolding and because they had piles of cash on the books and had recently instituted a dividend. That story still holds, but the difficult undercurrent is that they are still primarily a California staffing business, and they are going to have some serious difficulty making up for all the construction business that's falling by the wayside out West. They may get through this fine, they may not, but I wasn't going to add more to this small position unless it got hit for no good reason ... and if it hits now, I'm afraid it will be for a good reason. I'll keep this one on the watchlist to maybe get back in if the economy really tumbles and puts them on sale.

Akamai (AKAM) -- Oh, how sad I was to see this one go. Again, mostly for personal reasons -- I'm not terribly comfortable holding any significant amount of margin in my accounts right now, and stocks that are richly valued are vulnerable. Akamai is the titan of their industry, but there are lots of little guys nipping at the heels and I'm not confident that their growth is guaranteeed ... or that they will be able to continue to charge relatively high prices. I could certainly be wrong, and I like the company very much, but I would prefer to book my 100%+ gains at this point (even though I missed the chance to sell it all at the top).

Universal Display (PANL) and Harris and Harris (TINY) -- these are both relatively small holdings that I've had in my portfolio for a long time. PANL gave me a nice profit, TINY I'm selling at about the same price I paid for it ages ago. Why? Neither one is going to show a profit for a very long time, so while they may be in an important business segment (Organic LED lighting and display, and nanotech venture capital, respectively) I have no particular confidence that they're going to weather a bad market or become profitable in the near future. Expensive and uncertain seem to me to be the wrong holdings to focus on right now, so I'll move along to shares that I'm more confident in.

So ... for the first time in a long time I'm using no margin and have some cash available. Hopefully, many of the companies I'm most interested in will go on sale soon, but at least I do feel more insulated from some of the shares in my portfolio that had been the most likely to falter on bad company or economic news. I remain significantly overweight foreign companies, now at more than 50%, and have also pared back my long options positions significantly.

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Closing some Asian positions

Just a quick note that I'm closing my positions in a couple of Asian funds -- I've liquidated my holdings in the Morgan Stanley China A Shares Fund (CAF), and in the South Korean iShares Index (EWY).

CAF I bought because the pessimism over the domestic China market was overwrought, and the discount was too steep. Since then, the shares have gone up about 45%, and the discount has closed to about 11-12% depending on the price you use. I'm willing to sell here, since this was intended to be a short term trade to take advantage of what seemed to me to be too much pessimism. I agree with most people who believe that the A shares market is bound to correct significantly at some point, though I expect it will be later than anyone thinks right now (I can't see the shares really correcting until Chinese residents get permission to invest elsewhere). Still, I wanted a short term gain and got it, so I've sold.

EWY I bought a long time ago, because at the time Korea was nearly on par with the developed world in terms of the sophistication of its best companies and the stability of its economy, but it was being priced at fire sale levels. It was an easy way to buy into Samsung, Posco, a few Korean banks and shipbuilders, and Hyundai, all companies I thought would do well.

Well, with the exception perhaps of Samsung in very recent times that has come true -- and Korea is not a bargain anymore. It's probably still a decent investment, especially as a way to play one of the stronger economies that's likely to benefit from Chinese consumption (I like Korea for that more than Japan), but I'm no longer quite as enamored of the huge Korean megacaps as I was a couple years ago. They've been recognized, they're not cheap anymore, and since this index is essentially a play on the top ten Korean companies I'm going to take my 100%+ gain on this one and go home.

I continue to have pretty heavy exposure to Asia in my portfolio -- Naspers, Swire Pacific, The China Fund, the India iShares ETN, and Keppel Corp., along with options on NetEase, Gigamedia, Huaneng Power, Home Inns, CDC, and Satyam. But in these two cases, I have seen returns that exceeded my expectations and I think the risk/reward ratio has shifted out of my favor. Time will tell if I'm right, but sometimes it's comforting to hold a little cash in hand.

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Taking Profits on one ... giving up on another

Just a quick note to post some changes in my portfolio -- after watching MEMC Electronic Materials grow into one of my larger holdings on the back of near-300% gains, I decided to give in to some of my misgivings about the company's valuation and take profits on about 40% of my holdings.

I'm still holding the balance of my WFR shares, and I do think that it's certainly possible that they will continue to climb -- but there is significantly more risk in the equation now that we're dealing with a trailing PE of 31.

The polysilicon shortage that helped to fuel WFR's rise, on the back of strong pricing, a huge ramping of demand from solar cell manufacturers, and continued strong demand from semiconductor companies, is now getting quite long in the tooth. It was part of my initial buy thesis in this stock when I bought it a little over two years ago. That means that MEMC and their competitors have had plenty of time to see the demand curve rising and put into place plans for dramatic increases in production -- which nearly all producers have done, with some increased production already online.

I'm not enough of an expert on this industry to know whether or not the "big four" polysilicon suppliers will overplay their hand and oversupply the market as their new supply continues to come online over the next year -- so given the boom and bust history of this sector, I'm hedging my bets, taking enough profit off the table to be comfortable holding the balance and watching the supply/demand dance play out. I sold 40% of my WFR position at $60.02, and will continue to hold the rest pending future developments.

And my other recent move, which was long overdue, was to clear the decks of my holdings in Cryo-Cell (CCEL.OB). I was impressed with this cord-blood banking operation when I first picked up shares back in November of 2005, and thought that they were on the cusp of a few good things: potential relisting on a major exchange, transition to a consistently profitable operation thanks to their ongoing relatively high-margin income from storage fees, and possibly increased public interest in their product as stem cell "miracles" come to light.

Well, how's 0 for 3? I should have listened to Yehuda Fruchter and sold my shares a while back when it began to be clear that management was either "competency challenged" or not aligned with common shareholders.

Instead of transitioning to a high-margin, solid growth company with good steady income from storage fees, Cryo-Cell has gone through a few different high risk product "near launches" that seem to have not gone well, notably for Plureon placental stem cells, an innovation that appears to still be in search of a market. They've also invested heavily in marketing, and in upgrading and/or fixing their facilities, which they had said before were already state of the art, and now appear to be trying to develop yet another higher margin (and higher risk) maternal stem cell product of some kind. Ballooning costs led to a bitter challenge for board seats that's still underway, but I don't see this ending well ... at least not in the near term ... so I'm clearing out my shares at about a 40% loss.

Thankfully this remained a relatively small investment for me (and a shrinking one, of course), but I'll take it as a lesson that what seem to be great business plans from microcap operators can quickly turn if management doesn't think the same way you do. I've had similar results so far from my other "microcap with a promising business plan," MMC Energy, but I'm willing to be a bit more patient with that one.

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Switching Commodity Plays (NTO, AMNZF.PK)

I'm taking advantage of the Yamana offer for Northern Orion that boosted prices by close to 10% at one point, and selling my NTO shares in order to open a position in a very different kind of commodity investment.

Northern Orion (NTO) has been good to me -- I bought shares a couple years ago at around $2.20, and sold them yesterday morning at $5.90. I do think that their reserves are worth more than that, but they will be also very expensive to produce and/or take a long time top come to market, so I'll take the short term payout here and not hold on to Yamana shares.

Instead, I've decided to open a position in an investment bank that largely focuses on commodities -- a relatively new firm, now called Ambrian Capital, that's listed in the UK (AMBR in London, AMNZF on the pink sheets). I first heard about this when I saw it teased as the "best investment of 2007" by a newsletter publisher in my work over at stockgumshoe.com, but of course that recommendation and some other heavy buying (by Rick Rule and others, particularly US investors) made the price spike up significantly in April. It has since fallen back to more reasonable levels, so I've picked up some shares here at an average cost of about US$1.36.

Ambrian is an investment bank, asset manager, and adviser that focuses primarily on resource industries -- including underwriting and advising of commodity companies and trading of actual commodities, among them metals, energy and carbon credits.

They also own large or controlling interest in several mining and energy companies, including Jubilee Platinum, Centamin Egypt, Uruguay Mineral Exploration, Inc, and Anglesey Mining among many others.

At today's price in London they're trading at a PE on last year's earnings of just about 8 (8.6 pence in earnings, 67p share price.) -- that's substantially below most investment banks, and I assume it reflects some general pessimism that we're at the peak of the commodities cycle. I don't personally believe that, but even if we are, for these prices I'm willing to take a small chance that this is the peak earnings in the near term. Their yield is about 2.5% and growing, not bad for a very new operation.

But I think what I find most compelling about this investment, aside from what looks to me like clear progress in building an effective and focused investment bank in this sector, with rapid earnings growth, is the valuation of the shares if you consider their outside holdings.

Their principal investments group, which invests the firm's own money, holds investments worth roughly 50 million pounds (including those mining companies noted above). It's certainly true that those investments could all fall precipitously if commodities collapse, and about 10% of that money is in unlisted companies so it's even more illiquid than the rest, but the current market cap of Ambrian Capital is only about 72 million pounds. That means, if you want to do the math, that the value of the bank itself today, aside from its outside investments, is 22 million pounds.

If you then take out the realized gains from the income numbers as a "what if" exercise (the income for last year was roughly 60% realized gains/40% investment banking), you get income on investment banking of about 8 million pounds from a valuation of 22 million pounds. So that means if we ignore their assets, and they sold them off today for roughly book value (which may not be possible), as I read the numbers you'd then be dealing with a fast-growing investment bank trading at a PE of under 3.

[belated note: sorry folks, just realized my error here. I still like the valuation, but it's not a 3 PE unless you screw up the exercise, as I did. This fails to assign the majority of the administrative expenses to the investment bank. Admin expenses for the group were about 8 million pounds, and investment banking operating profit was about 8 million pounds -- so I think we need to assign probably at least 75% of the admin costs to the bank, since merchant banking is much more people-intensive than investment management. Ambrian doesn't break them out, since they have no good way to do so as all overhead is shared across the group. I still like the shares as much, since the whole is more important than the parts at this point and I expect dramatic earnings growth to continue, but my error in the exercise made the valuation look sillier than it is -- sorry!]

The group's general intention appears to be to realize gains on many of their portfolio companies or to use them to seed investment funds for various sectors (they currently manage one investment fund, Golden Prospect Precious Metals), and they recognize the need to diversify as much as they can given the volatile nature of commodities. They're also planning to start a small private equity fund that they hope will both make profitable investments and help steer firms to the investment bank for advising and IPO underwriting in the future.

Like many folks, Ambrian is also looking to the East -- they recently sold a small stake in the bank (about 9%) to Sun Hung Kai of Hong Kong, and they intend for this to be a pathway into the Chinese markets, both to advise Far Eastern commodities companies, and to help invest the cash that is pouring through many of those markets.

So ... although this is certainly a risky investment and a tiny company, I like the risk-reward profile, and I think that this is the best play I can make on commodities right now -- if the commodity markets remain at all robust, Ambrian should be well positioned to continue rapid earnings growth, and they are not nearly as leveraged to any one commodity or one project as most other investments I would consider.

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Clearing out Small Positions (IMAX, LGF)

As time goes by I'm finding it harder to grasp -- and so I'm making a move to save a little bit of it. I've decided to clear some of the smaller positions out of my portfolio.

Essentially, any holding that makes up less than two percent of my portfolio has been put on notice -- if it's not something I'm actively looking to buy more shares of, I'm going to sell the few shares I do own.

To some extent this is a natural outcome of my hyper-diversified portfolio, and of my strategy of usually buying shares in fairly small clumps as I build a position. In most cases, I'll buy a few shares to open a position, then research the company more over the ensuing months and look for opportunities to fill out the position over time.

But sometimes, that first position I buy turns out to be either a mistake, or not as interesting as I thought it would be. In those cases, I'm usually very reluctant to sell these small positions because I want to wait for more information ... which means I get a huge number of small positions building up in my portfolio, all competing for my attention and demanding a certain amount of effort as I track the news and earnings information about these firms.

But life is growing more complicated and there are always interesting new purchase ideas in the back of my mind, so I'm going to focus on being a little quicker to make decisions about these companies that I've taken a small position in and then left to wither.

Two companies that I've actually bought and sold before meet this criteria today: They are small positions, each not much more than 1% of my portfolio, and I'm not interested in buying shares right now. So I'm selling Imax (IMAX) and Lionsgate (LGF).

I don't have strong negative feelings about either of these companies, but neither am I interested enough to buy more ... and there's no point in paying close attention to these in exchange for what is likely to be very limited upside (at least to me, since these are small positions).

Imax has been in a reasonably decent recovery over the last few months, though it has come down about 10% from the recent high near $5.50. I still think the shares are undervalued here, but I don't have enough conviction to buy more and make it worth my while. My primary concern is the company management, which has so far failed to meet reporting standards and mismanaged a "strategic partner" search process. It's quite possible that the big screen company will prosper -- they're certainly doing well with hit films so far this year -- but in order to really thrive they're going to have to expand their base significantly, which is likely to take quite a long time at this rate. They believed that they needed a partnership or a buyer who could push their growth, and I'm inclined to agree -- but with the lack of interest in theater companies right now, I don't know that they'll get it at a fair price. Even Cinemark (CNK), the big international cinema operator which came public just last month, has received a fairly tepid response in the market.

And Lionsgate is, though steadier and more profitable, also unlikely to make any big moves soon. While it's interesting to hold this one and watch to see which of their films are hits and which bomb, it's not interesting enough to make it worth my while. Carl Icahn is still holding shares in this one, though it doesn't appear that he has bought any in quite some time or made any activist overtures toward the company of late, so there's certainly ample reason to hold the shares here. My primary concern is that the shares are a little too expensive to buy, considering the growth rate they've shown over the past two years, and I simply no longer own enough shares to make it worth my while.

These decisions are very personal ones relating to my portfolio composition, so I wouldn't argue that anyone else should consider selling these companies -- I might look back and regret this, but for sanity's sake I need to focus my attention on my filling out positions that I feel more strongly positive about.

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Goodbye India Fund (IFN), Hello India Note (INP)

This morning I sold my shares of the India Fund (IFN) and purchased shares of the Barclay's India Index exchange traded note (INP).

I had bought shares of the India Fund, a closed-end fund run by Blackstone, early in 2005, largely because it seemed like the best way to track the Indian market (due to restrictions on foreign shareholders, there aren't any Index ETFs for India, and most Indian share ADRs are priced very differently from their domestic counterparts).

The shares were extraordinarily volatile, not only because the market itself has the tendency to move up and down rapidly, but because as a closed-end fund the shares usually trade at a widely variable premium or discount to the actual value of the shares (the value of the underlying stocks).

In many ways, the premium or discount (in recent years it's been a premium, though steep discounts have existed in the past) has been a good barometer for US investors feelings about the Indian market, which means the changes in that premium are likely to magnify dramatically the already wild swings of the underlying stocks.

I've lived with this because the fund seems to be more or less well managed, and has performed pretty well compared to their benchmarks -- but I didn't buy shares because I thought their stock picking would make them stand out from the pack of India mutual funds ... I bought shares because I wanted exposure to the Indian market.

And now there's a better way to get that exposure.

Barclay's, home of the ubiquitous iShare ETFs, has recently started a new product called iPath, a family of exchange-traded notes (ETNs). These in practice work much like ETFs, with daily trading volume on the NYSE and a close correlation to an underlying index. In reality, they're quite different -- they're not mutual funds as ETFs are, they are debt instruments that promise to return a value equal to the movement in the underlying index (including dividends, etc).

So while these products are new and this is the first equity-based one available from Barclays (the other three currently available are tied to commodity indexes), I'm buying in. I sold my India Fund shares at $44.08 (they had been purchased at $33.90) and bought INP shares at $51.32.

Here's how I see the difference between the IFN CEF and the INP ETN:

India Index Exchange Traded Note (INP):

• INP carries Barclays credit risk, since they're the ones promising the return.
• They do not carry any stock picking risk because they're mimicking the MSCI India Index, which tracks the biggest companies in India (though only 68 companies at this point, I'd compare this with the S&P 500 as a good representative of the country's market).
• INP will mimic the index nearly perfectly as it goes up or down, partly because Barclay's offers to redeem large blocks of shares at NAV.
• As a debt instrument, INP has a maturation date when the proceeds, whatever they are, will be automatically returned to you -- they're 30 year notes, so the date in this case is December 18, 2036. Of course, they can be bought or sold on the NYSE just like a stock, so there's no need to hold to "maturity" to get your money. There's no guaranteed return of principal at maturity.
• All return is capital return -- there are no dividends or distributions, the entire return is reflected in the share price when you sell.
• As essentially an unmanaged index product, the expense ratio is the lowest of any product that gives broad Indian market exposure: .89% right now (I'd like to see it a little lower since it's an index, but I'll take it).
  

The India Fund CEF (IFN):

• The India Fund carries stock picking risk, since they don't try to be an Index Fund (comparing the top ten holdings of IFN and of the Index shows you they have about five stocks in common).
• The India Fund will magnify the performance of the market, most likely (great performance of Indian stocks will likely bring in more investors, upping the premium ... a crash will likely send them to the exits, creating steep discounts).
• India Fund offers repurchase options to existing investors that you really must exercise if you don't want to lose money -- they're diluting your shares of the fund by selling existing investors shares at a discount to NAV, so if you don't buy in you're losing ground. While it's fun to exercise your rights and buy shares that immediately appreciate, it's no fun that you're essentially forced to do so (especially if you don't have the funds available).
• The India Fund has a dividend yield, so income investors are likely to be more interested in this one -- the dividend is highly variable, right now ETF Connect puts it at 7.5%.
  
• And finally, the IFN and one or two competitors have had this space essentially to themselves for years, which has led to some extremely high expense ratios. Right now the cost is not too bad at 1.5%, but that could change. And if the ETN product takes off and inspires competitors, the CEFs may suffer if they have to compete for investor dollars, possibly hurting current holders.

It might well be that the IFN will have higher returns -- but in my opinion, it also carries significantly more risk and comes at a higher cost. For what I want, index exposure to the broad Indian market, I think INP is a much stronger choice.

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Last Chance for a Tax Loss (CVTX)

At the end of every year, like many investors, I like to look through my portfolio to see if there are any losing positions that I want to sell in order to book a loss for tax reasons.

This year, unfortunately, fate has conspired against me to some degree -- I certainly have some losers in the portfolio, but they're generally in the wrong accounts or they're stocks I don't want to get rid of.

Almost all of my losing positions are in tax-advantaged accounts of one kind or another (401K or IRA), and while some of those may deserve to be sold there's no particular reason to sell them at the end of the calendar year. I have six stocks in the portfolio that are down more than 5% or so, including all three of my most speculative positions -- the bulletin board companies Cryo-Cell (CCEL), SpaceDev (SPDV), and MMC Energy (MMCN) -- as well as Chico's (CHS) and Imax (IMAX). Those five are all in IRAs.

But I do have one holding that I could sell for a tax loss this week -- CV Therapeutics (CVTX) is held in a taxable account, and it is certainly down (my position is in the red to the tune of about 34%). So should I sell it?

I haven't written much about CVTX lately, but I bought the shares on the promise of Ranexa (Ranolazine) as a potential new front-line angina treatment to compete with the sometimes ineffective beta blockers and such that have been in use for decades.

And here's where it gets interesting -- CVTX is down dramatically because they have not yet gotten approval for Ranexa as a front line treatment, and because sales of Ranexa for patients who have already tried other treatments started extremely slowly this year when the drug was approved for that much smaller market.

So that slow takeoff might mean that cardiologists just don't like the drug -- in which case, CVTX has a long slog ahead even if they do get an expanded label for the drug. Or it might mean that the doctors are waiting for the completion of CVTX's expanded MERLIN trial, which has been delayed a bit already, before they start prescribing Ranexa.

The MERLIN trial is underway now to examine the potential for Ranexa as a front-line treatment, and to use as an argument for the FDA for an expanded label to dramatically expand the sales potential for the drug. Essentially, an investment in CV Therapeutics is a bet that the MERLIN trial will back up CVTX's safety claims and give them a huge market to sell Ranexa into, because they don't have much in the way of other promising drugs intheir pipeline.

So I'm thinking that this one probably makes sense as a tax-loss sale, even though I do think Ranexa has some great potential (and is moving forward a little faster in Europe, which is promising). Why? Because it's going to be months before we hear important news from the MERLIN trial, so I have plenty of time to sell now and buy back after 30 days if I still have that inclination, with certainly no catalysts expected in the next month or so.

Of course, I could always be surprised -- news could leak, either good or bad, from the MERLIN trial, or a new drug could be discovered to have great potential in their very thin pipeline, or cardiologists could suddenly fall in love with Ranexa and spike prescriptions higher in the short term. Or someone big could buy the company. While those are certainly possibilities, I consider them all remote -- and especially remote in the next month, so I'll be taking a tax loss in CVTX and reconsidering at the end of January whether I want to re-open a position.

full disclosure: I sold my shares of CVTX at $14.01 this morning. As of this writing, I still hold all the other stocks mentioned here.

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Upside too Limited -- Selling Precision Drilling (PDS)

This afternoon I sold my shares in Precision Drilling (PDS), largely because of the changing dynamic for this company and its fellow income trusts following the Canadian government's decision to change the taxation status for trust distributions.

It wasn't long ago that I bought these shares -- a very poorly timed buy in mid-October, just a little while before the tax change was surprisingly announced -- and I hate to give up on the shares at this early stage.

But after spending some more time going over the company and my portfolio, and reconsidering how the tax changes would impact me in the future, my assessment has changed -- PDS may well still be a profitable company, but the reduced dividend potential is enough to make me want to sell.

I counseled patience (at least for myself) after the tax change was announced, and I'm glad I didn't sell immediately -- the shares have recovered somewhat from their initial shellacking. But now that I've taken my time to look it over, it doesn't make sense to wait for the ax to fall in a few years. I'll take my 15% loss now and move on.

PDS came with a fair amount of risk -- it's primarily an oil and gas driller after all, so faces commodity price risks that are not dissimilar to those of my largest holding, SeaDrill (even though the two companies are very different). Additional risk came from their concentration in a particular geographic area (even though that area, Western Canada, is one of the prime hydrocarbon-producing regions in the world), and in their exposure to natural gas.

That risk was nicely accounted for by the fact that the company was quite cheap, and by the fact that their trust structure provided a very strong dividend to prop up the price during any shorter term business slowdown that might occur.

But now, with the potential for that dividend to shrink over the next four years by roughly 30%, with all else being equal we might expect the share price to eventually fall by a similar amount (trusts are income-oriented investments, and I'd expect them to trade more on their dividend than anything else).

So far it has fallen by about 15%. I don't know how long it will take the market to discount the remainder, or if it will happen at all -- it might be that the cheapness of the company is enough to keep folks holding on, believing that oil services revenues are likely to grow enough to make this a worthwhile hold. It is, after all, even cheaper now, and nothing has changed in their operations or outlook.

For me, though, this was an add-on to my core energy holdings, and the one that I am least operationally comfortable with. As long as I have solid well-managed exposure to natural gas through my holdings in Chesapeake preferred shares, and heavy exposure to oil drilling in general through my investment in SeaDrill, which I think has a much higher return potential, my holdings in Precision Drilling became expendable as soon as the future dividend became questionable.

Full disclosure: My PDS shares were sold today at $24.97 (purchase price had been $28.90). I continue to hold shares in SeaDrill and Chesapeake Preferred (D series).

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