9:45pm (EST)

1. Market Summary

2. Baidu Continues To Set New Highs

3. Arena Pharmaceuticals On Deck

4. Gold Back Over $1,200    

5. Week Ahead

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1. Market Summary

The bears were looking for a big payday on Friday after the market got the latest unemployment data.  As far as the specifics, July non-farm payrolls fell 131,000, versus estimates of a dip to 70,000.  Private payrolls also came in light as they increased by 71,000, compared with expectations of 100,000.  The unemployment rate came in unchanged at 9.5%.  The good news was the average hourly earnings increased by 0.2% and the average work week was 34.2 hours versus a forecast of 34.1 hours.

The news led to a nasty open as the market plunged 1% right off the bat.  However, the bulls held down the fort and immediately started defending the attack while nearly pushing the bears back to breakeven within the next half hour.  It didn’t end there.  The bears pushed even harder and took the market to new lows over the next hour and the bulls spent the rest of the session getting back on their feet. 

They did a pretty good job as the market basically ended flat for the day.  We mentioned last Thursday that the unemployment numbers could end up being a non-event as far as where the market closes on Friday but the volatility was intense both ways. 

The Dow ended Friday with a loss of 21 points and finished at 10,653 after being over 150 points down at one point.  The index traded to a low of 10,515 for the day but ended the week with a gain of 187 points, or 1.8%.  Resistance remains at 10,800 for the Dow and the high was 10,738 last week.  Short-term support will come in at 10,400-10,200. 

The S&P 500 slipped 4 points and finished at 1,121 after touching a low of 1,107.  For the week, the index added 20 points, or 1.8%, and reached a high of 1,128.  The S&P continues to battle the 1,125 level and there is still a chance 1,150 comes into play.  Support is at 1,100, then 1,070.  

The Nasdaq finished Friday with a 5 point loss to settle at 2,288 but tested it 200-day moving average when it kissed a low of 2,253.  Tech lagged as far as the weekly gain compared to the other indexes but still managed to tack on 34 points, or 1.5%.  Resistance remains 2,300 with an outside shot at 2,350 while support is at 2,250.

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2.  Baidu Continues To Set New Highs

Baidu (BIDU, $86.53, up $.96) has been roll recently and in a choppy market its performance hasn’t gone unnoticed.  The company is the leading Chinese search engine and its growth has been breathtaking to say the least.

The company recently projected 2010 revenues of $1.1 billion and in their most recently reported quarter they came in at $0.35 a share, compared with estimates for $0.31, on average.  Profit more than doubled from $56 million last year to over $123 million this year while revenue jumped from $161 million to $282 million. 

The 52-week range on the stock (split adjusted 10-1) is $31.65-$86.91 so times that by 10 to get a better picture.  The stock is up 110% so far this year and is trading at 63 times this year’s earnings and 40 times next year’s projected earnings.

The incredible performance of this stock has made it a favorite playground for the bulls and bears.  The bears hang their hat on a lofty P/E ratio and overvaluation while the bulls’ case revolves around a few key facts.

Google (GOOG, $500.22, down $7.88) is slowly being forced out of the largest potential internet market in the world as they try to “stare down” the Chinese government over censorship.  This has meant a huge opportunity for Baidu to solidify its dominance.

At the beginning of August, Google’s search had a global market share of 85% while Yahoo (YHOO, $14.34, up $0.18) is currently second at 6%.  Baidu and Microsoft’s (MSFT, $25.55, up $0.18) Bing are a little under 4% each. 

In the U.S., Google gets about 64% of the searches while Yahoo controls 18% and Microsoft 12%.  As you can see, Goog’s is still the dominate leader but Baidu’s share of Chinese search jumped to 70% last quarter while Google’s fell nearly 25%.  It’s something to keep an eye on going forward.

If we further compare the two companies, Baidu has a market cap of $30 billion.  Google’s is $160 billion but has hit an all-time high market cap of $185 billion.  Bulls use the argument that if you believe Baidu can be just half as valuable as Google is now, the stock doubles.

Bulls also point to the P/E ratio of 40 times next year’s earnings as not being all that unreasonable when the company is increasing revenues at a projected 55% rate (a PEG ratio of less than 1).  The past growth rate has been higher at 70%.

Analysts were caught off base when earnings came out and there have been a slew of upgrades.  Goldman Sachs (GS, $155.18, down $0.74) admitted they were wrong on Baidu’s earnings and raised their price target from $76 to $90.  Other analysts have piled on as well and the stock is rapidly approaching many of their price targets already.  As they are hit, we could easily see another round of upgrades or price target hikes if shares continue higher.

Although we are leery of Baidu’s lofty share price, we will go on record and say that shares have a shot at $100 if the Nasdaq sets new highs this year.

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3.  Arena Pharmaceuticals On Deck  

Arena Pharmaceuticals (ARNA, $7.16, up $.11) has been a volatile stock in the biotech space with a 52-week range of $2.70-$8.00.  The company has a lot riding on its obesity drug, Lorcaserin, and will look for it to capture real growth going forward. 

In its most recent quarter, the company reported a loss $29 million, or $0.28 a share, versus a loss of $38 million, or $0.48 a share, in the year ago period.  Through the first six months of 2010, the company is showing a loss of $60 million, or $0.60 a share.  They just sold $60 million worth of stock to Deerfield Management to shore up the balance sheet.

Arena faces a key decision on this drug on September 16, 2010 as a FDA Advisory Committee will vote on whether to approve Lorcaserin or not.

Vivus (VVUS, $5.30, up $.04) is the one stock we have followed closely when it comes to obesity drugs and the recent news for its Qnexa obesity drug was a huge disappointment.  Here is our excerpt from mid-July after the company got an unfavorable ruling (quotes from that day):

“Turning to Biotech, Vivus (VVUS, $12.11, flat) was halted all of yesterday as it awaited word on a panel’s recommendation concerning its drug Qnexa.  The news wasn’t good. The FDA’s advisory panel board voted 10-6 to reject the company’s obesity drug on safety concerns.  This was a bit of a shock to most experts because the drug does work.  However, the risks of depression, memory-loss and potential birth defects outweighed the rewards of getting people down to size.

This was tough for us to watch because we sat this one out although we are glad we did.  We brought you coverage on this stock at the beginning of 2009 when shares were around $5 and we have slowly watched them double for 18 months now.  We have also played call options on Vivus in the past but we decided to hang on the sidelines for this event due to the expensive nature of the options.

The news concerning Qnexa isn’t an official slam-dunk “no” because the FDA will still decide the drug’s fate sometime in October.  Vivus also said it expects to have more data from a longer study that could help its case for getting Qnexa approved but they are now probably losing the weight-loss race as two other companies also have obesity drugs waiting approval.

The talk was that Qnexa would gain approval but that there would be some negative votes.  In fact, one FDA official said he was surprised by the outcome.  Either way, shares are getting walloped as they are down $6.76, or 56%, to $5.35, in early action.” (END)

Shares of Vivus had climbed precipitously before the panel made its decision and were trading near $13 before the review.  Arena’s stock has done the same, rising from a recent low of $4 to a high of $8.  Analysts and investors believe Lorcaserin will have better luck than Qnexa because it has been shown to have a far better safety profile.

The reason these stocks are so volatile is the huge potential of a drug to combat obesity.  With 34% of Americans being classified as obese, and obesity related diseases such as diabetes on the rise, the market potential is huge.  We hate to say it, but lazy Americans don’t want to exercise, they want to take a pill and lose weight, and the company that gives them that opportunity is going to reap a huge reward.

We will keep you updated on the developments but it is looking like a strangle option trade might be in this works as we get closer to September.

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4.  Gold Back Over $1,200

Gold is a commodity metal that also serves as a store of value as it has few industrial uses. Over the last ten years gold has moved from $250 an ounce to a high of $1,257 in mid-June with the current price being $1,205 an ounce.  This represents roughly a 380% return over that time frame which has greatly outperformed all of the major U.S. equity indexes.  However, the inflation adjusted high for gold was actually $2,175 in 1980 when inflation was rampant.  What this means in theory is that if we return to a high inflation environment, gold has a lot more room to run.  Demand for gold comes in two forms basically, retail demand and investor demand, so let’s take a look at them.

Retail demand is really about jewelry and decorative uses, and the emerging middle classes in India and China have contributed to the rise in demand for gold over the last ten years.  This trend seems unlikely to abate as both of these economies continue to bring more people into the middle class and they choose to spend their affluence on gold items.

Investor demand is driven by how countries and banks view gold as a store of value and their views on inflation.  It is interesting to note that for the majority of the last ten years, as gold has risen in price, central banks have been net sellers of gold yet the price continued to climb.  This validates the rising retail demand we mentioned above.  However, this trend has reversed recently as currency instability, notably in the Euro, has caused central banks to begin buying gold.

This is important because banks typically would be buying gold if they felt that we were headed for serious inflation, yet, right now inflation is non-existent in the mature economies.  This means they are buying it as a currency hedge or replacement, which is a trend that bears watching.  If the Chinese or Saudis decide that they are less inclined to hold their foreign reserves in Euros or the dollar, the only other real viable alternative is gold at this point, and that seems to be where they are headed.

You can see why the combination of all these trends have many people believing a super spike in gold could happen within the next few years, particularly since the price is denominated in dollars.  With increasing retail demand, increasing investor demand, and an eventual fall in the dollar seemingly inevitable, they may be right.  As we noted above, we are well off the inflation adjusted high in gold, which only strengthens this argument.

The counter argument is that gold really has no value other than what we place on it since it really isn’t used in anything, and inflation is nowhere to be found.  Once this fear of financial instability recedes, investors will start selling gold and the price will go down but for now, the trend is still up.

The biggest holders of gold are believed to control about 20% of the gold supply, and these are central banks, international entities, and governments. The U.S. is far and away number one, with 8,965 tons in reserve.  The next five in order are Germany (3,754 tons), the International Monetary Fund (3,311 tons), Italy (2,701 tons), France (2,683 tons), and China (1,161 tons).  You can see why many people feel China will continue to add gold to its reserves since it represents such a small portion of their investments compared to other countries.

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5. Week Ahead

Second-quarter earnings reports will take center stage once again this week but the bulk of companies announcing are mostly done.  All of last week’s market gains came on Monday when the Dow surged over 200 points.  The indexes backpedaled for the remainder of the week but the bulls have been relentless on testing major resistance levels.

As earnings trickle in over the next few weeks, there are sure to be some surprises and disappointments but keep an eye on the weekly chain-store reports going forward.  These retail sales numbers will give clear signals about the health of the back-to-school season and the price wars have already begun.  This is the second busiest time of the year for retailers, besides Christmas, and they are counting on the consumer to spend as much as they can.

Another big event to watch for early in the week will be the Federal Reserve meeting.  The Fed meets Tuesday on interest-rate policy and there are reports that it is considering additional ways to pump cash into the financial system.

Another ”stimulus package” could be around the corner but Americans will use it to pay bills or buy necessities.  The U.S. is just not creating jobs fast enough and we feel unemployment will get worse before it gets better.

Expect another busy, volatile week and we will be back in the morning at with a look at the companies reporting earnings and a fresh update on all of our current trades.