Chartology

Look at the one and two year charts that are chosen as examples of companies that at first appear to have similar charts but that are truly different, wherein the longer-term chart shows which company is doing well and which is merely snapping back after a multi-year decline (not shown). Ignore the moving averages lines. Not so different, correct?

Consider the same charts on a 2-year basis, and you will see where money has been attracted. I suspect that this trend is your friend.

The market likes TJX, which has rising sales and earnings in this difficult economic time. The market does not like Pfizer (PFE), which is seeing declining earnings estimates, cut the dividend it pumped up a few years earlier and needed a large acquisition of Wyeth to keep earnings as high as they are (by stripping massive operating costs from the WYE operations).

PFE was down last week. TJX was up. Even the politics favors TJX. Tax and transfer payment policy in the US favors its value-conscious customer. Pfizer got in bed with Team Obama re healthcare reform, but does anyone think brand drug companies are going to be beloved by the powers that be for long?

When looking at stocks, look at charts of various duration. Reasonably valued companies with strong chart patterns make sense most of the time. After massive trending moves as occurred by late 2008/early 2009, whipsaws do occur. Most of the time, bodies in motion tend to stay in motion in the same direction.

Copyright (C) Long Lake LLC 2010

Biotech, Stimulus, and Socializing the Gains

In the first half of the 1990s, I was the physician for a Democratic Congressman. As he was preparing to leave rehab after suffering a stroke, he held a dinner at a local eatery for the head of the hospital and me. In town and invited to join was Charles Rangel, Democrat of New York and a good friend of my patient. Mr. Rangel arrived a bit late for the dinner. Knowing full well the occupations of the other guests, he said hello and while still standing said something like:

"There's going to be socialized medicine- it's just a question of when we can find the $300 b illion or so needed to pay for it."

How quaint that pronouncement seems now that hundreds of billions of expenditures just sort of occur without funding, and trillions of dollars of Fed credit and Federal guarantees just sort of appear! Those were the days when a new president actually raised taxes in 1993 to pay for his prospective 1994 health care legislation.

The above said, from a medical perspective, IMO the current stimulus plan misses an important boat: it should focus more on biotech and related advanced therapeutic technologies.

Medical practice and development of truly important medicines provide the following:

• Benefits for all of us
• Global leadership in high-margined products
• "Green" technology
• Non-cyclical field

In addition, the National Institutes of Health, FDA, and CDC have global respect that remains unsullied by the mess created by the Citis and Lehmans of the world. In particular, NIH is well-suited to drug development that the public can finance and benefit from.

Unfortunately, the history of the Government and medical research provide a number of examples where the gains are privatized unfairly. Skipping over such history as allowing Bristol-Myers Squibb to reap many billions of dollars of profits from the old molecule metformin, profits that should have accrued largely to the Federal Government, let us consider the current debate over biotech drugs.

A little background: A biotech drug is generally a protein, which is how the term will be used for the rest of this discussion. What we think of as high-tech, modern biotech drugs are the protein-based products of sophisticated cell culture techniques. A seemingly minor variation in manufacturing techniques may produce a seemingly identical protein but have major differences. This was shown several years ago when a J&J version of Amgen's Epogen (erythropoietin) for anemia was marketed in Europe as Eprex and led to a number of cases of aplastic anemia.

Thus, there is no such thing as an exact, reliable "generic" copy of a biotech drug. Now if you or I get cancer, we do not want an approximation of the drug that treats the cancer. However, that approximation has been given a term, "biosimilar", and the following appears to be happening.

The generic companies, which now include Pfizer, want to horn in on the biotech industry. They can't stand it that patent expiration isn't enough to let them in on the riches. In the normal course of events, I believe thatwe are likely to end up with most people being placed on biosimilar biotech drugs to treat critically important medical problems, under the guise of saving money. (One suspects that Congress will grant itself a healthcare plan that provides substantially full coverage for the real deal rather than the biosimilar.)

As a further background, the pharmaceutical business is somewhat special. Successful brands in foods and sneakers, such as Coke and Nike, are typically developed not based on patent protection but on perceived quality, and then can go on and on and keep market share. To do this, they need to be fair on their margins. Brand name drugs have a different model. They typically have gross margins that literally can approach 100%. Even if they lose 95% of their market share when they go generic, they still may generate greater profit than all the generics put together (because the brand company ceases all marketing expense). The biotech industry has much greater cost of goods, greater infrastructure needs, and riskier product development than the traditional drug industry. Of course, biotech companies do know how to charge very, very high prices for their products.

A better policy would be for the biotech industry to be protected from biosimilar competition, for pricing of the brand to be regulated. One can make an estimate of cost savings that biosimilars will generate and work it out so that at no greater net cost to society, we can all enjoy the real product, not the similar one, and at no net increase in cost, or perhaps even at a net saving.

Incidentally, it can also be mandated that all manufacturing and almost all R&D related to the biotech industry occur in the U.S. and its territories. This is technically challenging work, and quality must be maintained 24x7.

Bill Clinton clamped down hard on the over-payments to HMOs that the Republicans favored. Under President Obama, the health of the public can be optimally protected by devising a fair solution to the issues of high biotech costs and biosimilars. Let's socialize the gains for a change.

Copyright (C) Long Lake LLC 2009

Market Update

First, the good news. At Calculated Risk, CR summarizes the Credit Crisis Indicators this evening. The short-term financials are getting better.

The bad news is that all this was the run-up to and of course one of the causations of a vicious global economic downturn. While every recession is scary, the current one is setting various records. Simply scour CR's posts this week, and you will find records ranging from the known housing issues to obscure ones such as trucking tonnage and air cargo volumes. And of course the world is experiencing the lowest short-term rates in multiple countries at least in the past 300+ years. Lots of major bear markets have not had much credit crisis. But we'll take any improvement where we can get it.

That said, the markets are at a most interesting juncture. Here's a summary of the 3 major markets covered here.

1. Treasuries. Currently they are in a correction. The 10-year yield bottomed near 2%. This was a historic breakout in price of the continuous bond. In the last cycle, the 10-year bottomed intra-day around 3.1%. It is now around 2.8%. If it hits 3.1%, that would represent a 50% increase in rates from the bottom. That's about as much as a short-term jump as one ever sees and could represent an attractive purchase, especially considering that this is a seasonally weak time of years for Treasuries and the talk is of an oversupply of Treasuries.

In the meantime, TIPS continue to price in deflation, there is excess capacity everywhere except in gold mining and the only real hiring anywhere is for people to handle unemployment claims.

Long Treasury yields did not bottom until about 19 years after the Crash of 1929.

Treasuries are in a primary bull market. There is near-universal belief that rates are way, way too low. Thus there is every possibility that the correct approach for at least a while longer is to buy a 5-10 year Treasury, make a real return against deflation or minimal inflation, and sell the bond in a year or two at a profit; or at the worst hold till maturity. Unlike the NASDAQ that paid no interest and considering the opportunity cost, is down much more than the raw numbers (from 5100 to 1500), Treasuries really do pay one to own them (remember, it's a bond!). So, all the talk of a bond bubble strikes me as incongruous. Overpriced, perhaps; a bubble: not quite.

2. Gold. The most intriguing market of them all. The gold bull Jesse of Jesse's Cafe Americain links to a Times online article titled "Gold price could treble if China divests dollars, warns mining boss". The article quotes Barrick Gold's chairman as scaring us that "there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble." It seems that every time that chestnut is trotted out, a peak in the gold price is nigh.

The article goes on to point out that:

"Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply."

"Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices."

Technically, gold is fairly strong, but its 200 day moving average is pointing down and has not crossed yet but an up-sloping 50 day ma. Gold has had an interesting correlation with the stock market during this bear: it has peaked out of phase with the stock market but made important bottoms with it (gold stayed up in October 2008 but crashed as the stock market made its November bottom). This pattern will continue until one day it will not.

So with the short-to-intermediate technicals inconclusive, the take here is that there is too much optimism in the gold price to suit us. Its outperformance vs. essentially all other physical commodities is breathtaking. India is in or near a recession, as is China, and these locales are huge buyers of gold, and are very price-sensitive. Most gold use remains for jewelry, and no one anywhere on the face of the earth is buying gold jewelry anymore (well, that's a slight exaggeration, but you get the point). So the most likely fundamental direction for the price of gold is to go straight down. Numerous nervous people have already placed their orders; the worst timer of the gold price, Barrick, is a raging bull; and its chairman, who should be in the background quietly accumulating gold or his company's stock, is out in public touting his wares.

Caveat emptor on Au. Adventurous sorts could look at purchasing puts, as this market could fall fast. However, gold is in a long-term bull market, so it's most interesting and most people should be on the sidelines unless they want to own physical gold as a true hedge.

3. Stocks. The single worst-looking of the three major markets remains general stocks. Stocks remain in a major bear market, with aggressive supply meeting every jump in prices. Wednesday's move up looks like one of many panicky short-covering rallies, with no follow-through, and with financial stocks continuing to erode. Most depressing is the action of McDonald's, the Dow leader and the only Dow stock to be at a higher price than 1 year ago. It recently "beat" the Street, which however was unimpressed. The technicals are deteriorating. There have been a series of lower highs since the early August high, though as well there have been higher lows. McDonald's almost has to lead a break-out of the general stock market higher. 14 months into a recession, even meeting expectations should ordinarily let a strong company with a high dividend yield squeeze the shorts and pop higher, but instead the stock acts a bit too "heavy" despite the "beat". If MCD goes the way of Wal-Mart and collapses, this would be very, very bad for the market as a whole. Traders and investors should watch MCD carefully.

There is no leadership anywhere. ConocoPhillips wiped out 2 years of earnings with a "one-time" charge of about 32 billion dollars (real money even for a bank), and happily its otherwise OK quarter was not rewarded, and the stock collapsed today.

GlaxoSmithKline, one of the original roll-ups in the pharmaceutical arena, is back to 1997 stock prices. In the last boom, its stock price never got near its 1999 high. Worse, it is trading as if it were a growth company at 12X tangible book value. Pfizer is being taken apart for its multiple sins of halving the dividend and perhaps going to the well one time too many with its emulation of GSK by becoming another roll-up (see Econblog Review's take on the merger, Pfizer Buys Wyeth: Layoffs Financed by You and Me).

Other medical stocks are providing little leadership, even on good news.

The education stocks that the unemployed go to in a recession are, too predictably to suit us here, strong; the quality of the rally off the November low has been poor.

"Defensive" consumer stocks such as Procter & Gamble have cyclically high operating and net profit margins, which have nowhere to go but down, as well as multi-year low tax rates, which can hardly go lower and therefore should have nowhere to go but up in a world where governments have higher priorities than some marginal extra profits accruing to sellers of staples.

The real geniuses such as Drs. Roubini and Taleb remain bearish, along with most others who "got it right".

And while stocks and headlines can move in quite opposite ways, the stock market is made up of companies which are, for the most part, quietly or not-so-quietly withering on the vine.

Under the earnings/price momentum Value Line-type system that has served this blogger so well over 3 decades of investing, if the stock market were a stock, it would be a 5 (lowest on a 1-5 scale) for "Timeliness". If the bottom has been seen, that would be great news. There's no need to risk your money on that hope.

Where does that leave an individual with new money to put to work?

Consult your financial advisor . . .

Copyright (C) Long Lake LLC 2009

Pfizer Buys Wyeth: Layoffs Financed by You and Me

I have spent the last two decades working in and around the pharmaceutical industry. Having now spent the last year focusing on the worsening financial and economic conditions in the U.S. and globally, it is fascinating to see the latest useless combination of one tired pharmaceutical giant with another dovetail unexpectedly with the financial crisis.

To wit, the leaks the last few days were correct: Pfizer has agreed to purchase the former American Home Products, now called Wyeth, which got smart years ago and saw that better living through chemistry would make its shareholders richer than pots and pans could. And so it came to pass. After all, purchasing products for the kitchen lacked a direct subsidy, but drug benefits provided by employers - now there's an opportunity to jack up profit margins. This mid-course corporate life change was brilliant and has now been definitely rewarded. While matters are less clear from Pfizer's standpoint, what appears likely is that the U.S. taxpayer is indirectly subsidizing future massive layoffs in one of the "green" knowledge-based industries that we need to encourage, having just subsidized the preservation of jobs in the U.S. auto industry that has fought greenness in every way it can.

Please see the press release, "PFIZER TO ACQUIRE WYETH, CREATING THE WORLD'S PREMIER BIOPHARMACEUTICAL COMPANY" for Pfizer's take on things.

Here's my take. I'll get to the tie-in to the financial mess and TARP in points 3, 4 and especially 5.

1. Buried in the press release is the fact that Pfizer is cutting its dividend in half.

2. It is well-known in the pharmaceutical industry that Pfizer functions like the military- with unbelievable rigidity; but without the operational flexibility that battlefield commanders in the military have; and with the same creativity of the French military in preparing for WW II; and without the capacity to learn from its mistakes. That said, Pfizer has the gall to trumpet the concept that this already-stultified company will become flexible- think pre-pubescent Chinese gymnasts:

"Unique and Flexible Business Model Features Focus and Agility of Smaller Enterprises Backed by Resources and Scale of Global Company".

Excuse me. I'm going to take a 5 minute break and decide whether to have a good belly laugh or vomit.

3. (I'm back. I'll keep you in suspense as to what I did.) The press release again:

"Combination Strengthens Platform for Improved, Consistent, and Stable Earnings Growth and Sustainable Shareholder Value"

However, here's Bloomberg's take on how Pfizer can struggle to keep earnings from declining, forget about growing earnings:

"The Wyeth transaction . . . could keep Pfizer’s earnings unchanged at $2.69 a share from 2010 to 2015, when patents expire on some of Pfizer’s biggest products, Anderson (a Sanford C. Bernstein analyst) said in his report. That compares to a 68 percent drop without the acquisition, to $1.40 in 2015."

"To achieve that, Pfizer would need to cut 70 percent of Wyeth’s research, marketing and administrative costs, Anderson said."

So Pfizer is going to put most of Wyeth out of business. Heck, Wyeth could have done that today on its own and basically become a free cash flow machine.

(My non-cynical take is that Big Pharma should cancel 100% of its research into new chemical entities. It should outsource all of it to those that really know how to do it, such as small companies; academia; and, surprisingly, government, which has a major public policy interest in success. Let Big Pharma stick to what it is good at, which is convincing doctors to prescribe expensive new drugs to patients, whether or not those new drugs have any advantage over others that are available for much less cost in generic form; and doing clinical trials of a drug that has already been discovered.)

4. Bloomberg again:

"Pfizer also will halve its quarterly dividend to 16 cents a share, fire 10 percent of the pre-merged workforce, or about 8,000 people, and close five factories."

In other words, Pfizer is shrinking along with cutting its dividend. Note the term "pre-merged" (I can't call it a word, as I can't find it in an on-line dictionary). The press release also ignores the fact that Pfizer has sunk so far in its own estimation of its own industry's growth prospects that has let it be known that it is now also a full-fledged generic drugs company.

5. Bloomberg once more:

"Among the banks advising Pfizer and arranging a loan package to finance part of the purchase price are Bank of America Corp., Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co., said people with knowledge of those banks’ roles."

So here's the bottom line. The taxpayer has kept BofA, Citigroup, Goldman Sachs and JP Morgan alive with TARP money and other goodies. Now these same firms are going ahead and "arranging a loan package" that will keep Pfizer's earnings up (maybe) with mass layoffs in a transaction so large that it will of necessity be anti-competitive even if OK with Justice (which it will be).

These companies have no shame.

They will finance a mammoth deal such as this takeover that will destroy lots of jobs so that Pfizer can perhaps one day boast about raising its dividend (ignoring that it has been halved), but they won't get serious about keeping people who purchased toxic mortgage products from them or their brethren stay in the homes they never could afford.

These financial institutions deserve the death sentence if they can't support themselves absent government largesse.

Copyright (C) Long Lake LLC 2009