Crucial Developments

12/17/05 Crucial Developments

Pfizer's Lipitor is the largest selling drug in the U.S. Last year sales amounted to an amazing $10.9 billion in the U.S. and in more than 70 countries. Pfizer's two patents on Lipitor expire in 2010 and 2011. India's Ranbaxy sued to make its own version of Lipitor, and claimed Pfizer's patents did not cover the generic version Ranbaxy wanted to make and market. Delaware District Judge Joseph J. Farnan Jr. upheld Pfizer's patents. The ruling came out after the close of trading on the NYSE yesterday. This ruling should not have come as a surprise. Ranbaxy will appeal; however, I believe the appeal will be unsuccessful. In late trading, Pfizer rallied to $25+ or almost $5 higher than the low reached only a few days ago. The investors who have written off Pfizer must feel like real schmucks, and they should.

President Bush has personally authorized a secretive eavesdropping program in the United States more than three dozen times since October 2001, a senior intelligence official said Friday night. Maybe Bush believes the U.S. Constitution is meaningless. Meanwhile, our fighting men and women should fight for the Iraqi Constitution and lose their lives as well as get wounded and maimed. It's never to late to make a change.

Time Warner will sell a 5% stake in AOL to Google.

Doug Noland: "The third quarter's 9.1% rate of non-financial debt growth and the 14% pace of household mortgage Credit expansion garner virtually no attention from the economic or analytical community. And $200 billion quarterly Current Account Deficits are now promulgated as proof of our robust economy outpacing our feeble trading partners. The well-oiled and inspirited propaganda machine functions superbly from Wall Street to Washington D.C...It is becoming increasingly incontrovertible that the Greenspan/Bernanke "post-Bubble" view and policy prescriptions have been disastrously misguided. They have instead been actively reinforcing ongoing Credit Bubble inflationary forces. And the sad irony is that they have assured just the type of major monetary system breakdown Professor Bernanke has spent his career convincing himself and others that an aggressive Fed could avoid."

Employees at Supervalu's Cub Foods and at Albertson's Jewel supermarkets in the Chicago region are represented by the same two locals of the United Food and Commercial Workers International Union.

Yu Yongding: "We're still facing the possibility of a big devaluation of the US dollar, so the capital losses will be huge. If that happens, it will be a tremendous hit to the Chinese economy."
China will reduce their holdings in U.S. Treasury bonds and other dollar-denominated assets. October's reduction was not an isolated incident.

January crude oil fell $1.33 to $58.06. January Unleaded Gasoline declined 3.2%, and January Natural Gas ended the week down 4.6%.

Wal-Mart's growth will continue in 2006 with plans to open as many as 600 new stores and clubs, including up to 230 new international stores and 370 U.S. units.

The Disappointing And The Good

12/16/05 The Disappointing And The Good

According to the WSJ, an investment group consisting of Cerberus Gruop, Kimco Realty Corp. and Supervalu Inc. are set to win the auction of Albertson's Inc. for about $9.6 billion, or $26 a share, citing anonymous sources. An announcement could come sometime after the board meets this week, the newspaper added. The company is still working out details with CVS Corp., which is in the lead to purchase the company's drug chain for up to $4 billion of the overall purchase price, the report added. If this is the final deal, it is a far cry from the $31 I had figured shareholders would receive. I know that would work out to an annualized return of 35% counting the dividend received, and for that I am thankful, but it would still be disappointing.

GMAC, with assets of about $310 billion, has earned more than GM's auto unit since 2002 and forecasts profit of more than $2.5 billion this year. GM's CEO stated there is ample interest in the purchase of 51% of GMAC. As such, one might consider making a speculative buy of the GMAC bonds. They have recently been downgraded by various credit agencies.

The Philly Fed Index in December rose to 12.6 from 11.5 in November, and that was disappointing. New orders and shipments were lower in December than the prior month. However, prices paid dropped to 49.0 from 56.8; however, prices received also declined to 30.5 from 32.5.

On the other hand, the December Empire State Index rose nicely to 28.7 from 22.8 in November. However, shipments and unfilled orders and employment were lower than in November.

The CPI in November dropped 0.6%, the biggest decline since 1949, due to energy prices plunging 8% (they recovered in December). Excluding food and energy, the CPI rose 0.2% in November. Over this year, the CPI has risen 3.5%. At the same time, production has gained 2.8%.

Importantly, capital flows into the U.S. in October amounted to $106.8 billion. However, we had better look under the hood, so to speak. Chinese holdings of U.S. Treasury bonds declined in October by $4.4 billion and foreign central banks only purchased $13 billion in U.S. Treasury bonds. In other words, private investors were responsible for $97.3 billion in capital inflows. It would be interesting to know the identity of these investors.

For the very first time, Toyota is making the Prius outside Japan. It's not in the U.S., but rather in Jilin Province in China through a joint venture with that country's number one automaker.

Adobe will cut 650 to 700 jobs that were overlapping after their rcent acquisition of Macromedia.

My thanks to Rob Kirby for making the following observation. He pointed out that the Fed will discontinue the publication of M3 monetary aggregate on March 23, 2006, and that coincidentally, on March 20, 2006, Iran is scheduled to begin trading oil for Petroeuros on the Iranian Oil Bourse. Ron asks what happens if Asian countries, such as, Japan and China, no longer require U.S. dollars to purchase oil. Might hey begin to liquidate their U.S. Treausry bond holdings? China liquidated $4.4 billion in October.

Paul L. Kasriel: " When economic growth downshifts in 2006 and so does corporate profit growth, corporate bondholders may start to feel a little exposed. With less cash being generated by corporations with which to buy back shares, even stockholders may begin to feel a bit exposed."

Abu Musab al-Zarqawi, America's most wanted man in Iraq, was arrested last year but released because his captors did not know who he was, an Iraqi government minister has claimed. Are we to believe this? Zarqawi must have had a get-out-of-jail Monopoly card.

Wal-Mart is purchasing Sonae's 140 Brazilian "hypermarkets" for $764 million. This means Wal-Mart willoperate more than 250 stores in 17 of Brazil's 26 states.

Developments

12/15/05 Developments

Amgen signed a definitive agreement to buy Abgenix for $2.2 billion or $22.50 a share. The deal gives Amgen full ownership of panitumumab, which the companies have co-developed. Panitumumab is a new class of drugs that is being developed for metastatic colorectal and other cancers and is seen as having blockbuster potential.

Pier I expects negative mid-single digit comp sales for December and won't provide guidance for the quarter.

Lennar, the homebuilder, expects to meet its 2006 goal of $9.25 per share due to a record $6.9 billion backlog.

Kazakhstan opened the pipeline to China. The 625-mile pipeline is designed to carry 140 million barrels of oil a year and opens a huge market for the Central Asian nation. Kazakhstan is aiming to more than double its production from 1.3 million barrels to 3 million barrels a day by 2015, the Oil Ministry says.

The yen staged its biggest two-day rally since March 2002.

Bush: "We are in Iraq today because our goal has always been more than the removal of a brutal dictator; it is to leave a free and democratic Iraq in its place...We need to remember that these elections are also a vital part of a broader strategy for protecting the American people against the threat of terrorism." Do you think this is why we invaded Iraq in March 2003? Bush maintains he did the right thing and would repeat his decision. Tell that to our 2,150 fighting men and women who have perished and the 20,000+ who have been wounded and injured. Tell that to their families and loved ones. How do you feel about voting for Bush's re-election?

NPD Group Inc., reported that game sales at U.S. retailers declined 18% to about $700 million in November from approximately $850 million during November of the prior year.

Merrill Lynch analysts see room for margin expansion at Saks and the catalysts to make it happen, and noted that improved merchandising and marketing initiatives combined with new planning systems "could act as a catalyst over the next few years."

Robert Toll, CEO of Toll Brothers: "We're nowhere near the sales that we did in '04-'05 on a same-store, per-community basis." The company already has cut its sales projection for next year. Its average home sells for $680,000, he said.

The U.S. trade deficit soared to a record $68.9 billion in October and could reach $800 billion this fiscal year. The October trade deficit with China was
a record $20.5 billion.

Dianne Swonk, Mesirow Financial's chief economist, stated she believes the nation's economic expansion, which started in late 2001, has at least four more years ahead of it. She said that while consumer spending will grow at slower rates, business spending will pick up to replenish tight inventories.

Marsoft: "After rising sharply during the first half of October, the dry bulk rally has sputtered over the past month or so. The Baltic Dry Index, having increased from a low of 1750 in August to a mid-October peak of 3370, fell back below 2800 during the latter half of November. This left the BDI down by more than 50% compared to its level of a year ago.
Much of the weakness seen during the past month has been centered on the Panamax and Cape sectors, where rates fell by an average of 20%. On our benchmark USG/Japan grain route, rates fell from $47 per tonne, or $26,000 per day, to $43 per tonne, or $22,000 per day. Other routes saw similar declines, with earnings for most Panamaxes falling from about $20,000 per day in mid-October to about $16,000 per day by mid-November."

The Bank Credit Analyst sees zero growth for the S&P 500 operating earnings in 2006. By comparison, the overall analyst consensus is for roughly 12% growth.

UnitedHealth Group Inc. , the largest U.S. health insurer by market capitalization, reported today that more than 2 million Medicare beneficiaries have enrolled in new programs offering prescription drug coverage.

Economists are predicting a drop in the Consumer Price Index for November, which is being released this morning by the Labor Department.

Mortgage rates retreated on hopes that consistent interest rate increases are winding down. The average 30-year fixed rate mortgage dropped from 6.39 percent to 6.34 percent, according to Bankrate.com's weekly national survey of large lenders.

Patterns

12/14/05 Patterns

A recent Maritz(R) Poll showed that the
vast majority of those traveling over the winter holidays will choose to
drive, rather than fly. While nearly one in five Americans (19 percent) plan
to travel sometime in December or early January, six out of 10 (58 percent) of
these holiday travelers will drive and one-third (35 percent) will choose to
fly the friendly skies. The remainder will travel by train, bus or some other
means.
When considered against the total number of poll respondents, the numbers
traveling by car versus plane are consistent with similar Maritz Polls taken
over the past two years:

2005 2004 2003
Your own car 11 percent 9 percent 10 percent
Airplane 7 percent 8 percent 6 percent

According to a recent Maritz(R) Poll found that almost nine in 10 (88 percent) holiday shoppers describe themselves as "generous" gift givers. The telephone survey of more than 2,000 adults also revealed that the respondents were honest in their assessment of their generosity levels. The data prove that generous gift givers will spend an average of
$367 more on gifts this holiday season than non-generous gift givers. Those
who described themselves as "somewhat" or "extremely" generous gift givers
plan to spend an average of $843 on holiday gifts this year, which is significantly higher than the $476 that those who consider themselves to be "not particularly generous" plan to spend. Generous gift givers are significantly more likely to take two months or
more to pay off their holiday debts (25 percent) than those who consider
themselves to be not particularly generous (15 percent).

Lehman Brothers investment banking revenues were a record for the quarter, increasing 34% to $817 million from $608 million in the fourth quarter of fiscal 2004. These
results were driven by record merger and acquisition advisory revenue, which
increased 54% from the prior year's period, and solid performances in equity and debt origination, which increased 48% and 15%, respectively, from the prior year's period.

Stephen Roach: “Barring the development of a new technology or the emergence of a new industry, capex (capital expenditure) cycles in high-cost developed economies will be increasingly dominated by the replacement of old capacity than by the expansion of new capacity.”

At least 2,149 of U.S. service members have died since we invaded Iraq in March 2003, according to an Associated Press count.

Factory and service sector supply managers are optimistic about the economy in 2006, according to a semiannual forecast released Tuesday by the Institute for Supply Management. Growth is expected to be strong in the first half of the year, before slowing in the second half. Major economic concerns are inflation-related.

Rather than focus on the Fed dropping the word "accomodation" from their press release, let's
keep a watchful eye on the amount of money they print and how quickly it is printed. That way you
will get a feel as to how fast the value of your dollars is being depreciated.

January natural gas climbed to a high of $15.78 per million British thermal units Tuesday to mark the highest price ever recorded on the New York Mercantile Exchange.

Founded in 1860, Shaw's Supermarkets operates 206 stores in New England (Maine, Massachusetts, New Hampshire, Vermont, Rhode Island and Connecticut) and employs over 30,000 associates. Albertsons purchased Shaw's in 2004. This operation is hardly ever mentioned in an analysis of Albertsons and rarely included in print in the potential value shareholders may receive in a takeover. This is a mistake. Shaw's was a good acquisition and that will be reflected in a final deal for Albertsons.

Oil powerhouse Saudi Arabia said it will post a record budget surplus of 57 billion dollars in 2005 on the back of surging crude prices, and forecast its biggest-ever spending plans for next year.

Meanwhile, some Arco stations are selling unleaded gas in Oregon and Washington for
$1.99 a gallon.

The Season

12/13/05 The Season

About three of every eight adult Americans (37 percent) are concerned about their ability to pay for heating their homes this winter, according to a nationwide survey released yesterday by the National Oilheat Research Alliance (NORA). And about half of Americans(51 percent) say they are concerned that higher energy costs will impact their
budget for holiday shopping this year.

More than two-thirds of U.S. shoppers are expected to buy nearly five cards(gift) on average this year, according to a survey of about 17,500 consumers by accounting firm Deloitte & Touche. In the Deloitte study, just 48 percent of respondents had redeemed all of the cards they received last year.

Paul Kasriel: “Here's the good news. In the third quarter, the market value of households' assets increased by 2.7%. Here's the bad news, the value of households' liabilities increased by 3.0%. So, the leverage of households moved up to 18.24% in the third quarter from 18.19% in the second quarter. The third quarter household leverage ratio is the highest since the record high of 18.32% set in the first quarter of 2003.”

Pfizer repatriated approximately $37 billion in foreign earnings this year(the current market cap is down to $150 billion), which it will use to reduce debt, enhance its balance sheet and invest in business opportunities. In addition, the company has purchased nearly $4 billion in common stock in 2005, and it will continue to buy back its stock in 2006. As Pfizer previously announced, it will provide a comprehensive review of its strategy, operating performance, new product pipeline and financial outlook at its analyst meeting on February 10, 2006. With the increase in the quarterly dividend to 26.3 cents, the stock now yields 5%. If I were running the company, I would repurchase at least $25 billion of the shares at the $20+ level. If this is not an uncommon value, then the world is upside down. Jeff Immelt of GE ran the latter’s medical division before becoming CEO. Pfizer would make a great acquisition for GE.

Whirlpool Corp. stated Monday that once its new refrigerator plant in Ramos Arizpe, Mexico, is operational, 730 employees at its Fort Smith, Ark., plant will be laid off. The layoffs are currently planned for October of 2006.

Yesterday, crude closed at $61.30 per barrel, natural gas rose to $14.84 per million BTUs, and heating oil jumped to $1.77 a gallon.

The November federal deficit surged to $83.1 billion from $57.9 billion a year earlier. The deficit for October and November rose to $130.2 billion versus $115.2 in the like months in 2004. Naturally, Bush continues to maintain the deficit will be cut dramatically in future years. And the Iraq war is also going well. And there is a tie between Iraq and 9/11. Have you had enough of the BS? Here’s yesterday’s sample from Bush: “We're taking the fight to those who attacked us and to those who share their murderous vision
for future attacks.”

Yu Yongding, a Chinese government economist and chief consultant to the central bank, told Market News International that China must reduce accumulating dollar-based assets, and also cut its existing holdings. I strongly suggest bulls on the dollar as well as bulls on our nation’s ability to fund growing twin tower deficits chew carefully on Yongding’s words.

ConocoPhillips will acquire Burlington in a $35.6 billion deal. Under the transaction, subject to approval by Burlington Resources shareholders, Burlington shareholders will receive $46.50 in cash and 0.7214 shares of ConocoPhillips common stock for each Burlington Resources share. This deal represents a transaction value of $92 a share, based on the Dec. 9 closing price of ConocoPhillips stock.

For those who pay very tiny commissions, a little-appreciated route to making money with tiny risk is the following example. Yesterday, one could sell a January(2006) 70 Burlington Resources put for 35 cents. That may seem unexciting to most, but not to me. With the stock at $82+, it gave the buyer of the put the right to sell the stock to me at $70 less the 35 cents in 5 weeks. If the takeover goes forward, the put should expire worthless. That places about 35 cents per share in my pocket or a little ham sandwich. You might be surprised to discover other such examples during 2006. Making money with little risk is exciting. Making money with high risk is for schmucks.

New research on pricing practices of over 4,200 hospitals across the U.S. documents that huge markups in charges to patients are continuing, even after federal changes in Medicare reimbursement policies that were supposed to help contain skyrocketing costs.
The research is contained in the third annual report on charges by the
Institute for Health and Socio-Economic Policy (IHSP), the research arm of the
California Nurses Association. For the third consecutive year, the report
documents a strong correlation between huge hospital markups on their sticker
prices over their costs, high profits and the growth of large corporate
hospital chains.
The new report shows that the nation's 100 most expensive hospitals set
their gross charges at an average of 680% (up from 673% in 2002-2003) of their
costs -- meaning the average top 100 hospitals would bill $680 for a patient's
case where the actual costs were $100, or a 680% charge to cost ratio. The
national average for all 4,184 hospitals surveyed was 244% of costs, an
increase from 232% the prior year.

According to the seasonally adjusted results of the latest Manpower Employment Outlook Survey, conducted quarterly by Manpower Inc,"U.S. businesses are not aggressively seeking to increase staff levels as they enter the new year. Instead, they are looking back over the past several quarters and are concluding that hiring is still on target with their operational needs," said Jeffrey A. Joerres, Chairman & CEO of Manpower Inc. Of the 16,000 U.S. employers surveyed, 23% anticipate an increase in
hiring activity for the first quarter of 2006, while 10 percent expect to
decrease staff levels. Sixty-one percent of employers surveyed foresee no
change in hiring plans, while 6% are unsure of their staffing needs. The
seasonally adjusted Net Employment Outlook for the first three months of the
year is 20%, identical to the fourth quarter of 2005 and nearly the same as a
year ago. Employers in six out of 10 industry sectors surveyed foresee minimal
changes in hiring activity as they move from the fourth quarter into the new
year, including Durable and Non-Durable Goods Manufacturing, Wholesale/Retail
Trade, Finance/Insurance/Real Estate, Education and Public Administration.

Shoppers plan to spend $339 on gift cards, or 33% of their total holiday budget this year, according to American Express.

Thomas H. Lee Partners, the Carlyle Group and Bain Capital announced they had agreed to buy Dunkin' Donuts, Baskin-Robbins, and Togo’s for $2.43 billion.

Marc Faber: “I feel that asset prices will tend to depreciate against the only currencies for which the supply is limited - gold, silver, and platinum…Simply put, since 2000, gold has risen at a much faster clip than the Dow Jones and I would expect this out-performance to continue for the next few years until "gold currency" holders will be able to buy one Dow Jones with just one ounce of gold.”

Headlines

12/12/05 Headlines

General Glut: “With a savings rate of 0% in 2005:III, real GDP for the third quarter would have been $11,087.2bn. It doesn't take a math genius to see that real GDP for 2005:III with a 0% savings rate would have been lower than in 2005:II -- and have generated a 0.0% real growth rate.
In short, without negative savings and all other things being equal, the US economy would be at a standstill. Now that would have been one hell of a headline.”

Just a reminder--- with the workweek holding less hours for the folks on Main Street, that would have equated to a loss of more than 300,000 jobs in November. In other words, there was a net loss of jobs in November and not a gain of 200,000+. That would have been one hell of a headline.

Winston Churchill: "Men stumble over the truth from time to time, but most pick themselves up and hurry off as if nothing happened."

As we turn the calendar into 2006, the Congress will be asked to raise the U.S. debt ceiling. As I have stated on previous occasions, I am firmly against such approval. I prefer to shut down the government until mandatory spending cuts become a fixture in the budget process. In other words, it’s either pay as we go or it doesn’t get spent. Why should those on Main Street work their butts off so the Administration and the Congress can make a mockery of all the hard work? Congressional staffs are too large, government is too large, and they are cancerous growths impacting the financial well-being of this nation. Until rational spending comes into being, close Washington down. That would be one hell of a headline. The hand-outs are bad for our nation’s heart and soul.

Maxwell Anderson: “"When a government takes over a people's economic life it becomes absolute, and when it has become absolute, it destroys the arts, the minds, the liberties and the meaning of the people it governs."

The WSJ reported that ConocoPhillips may buy Burlington Resources for $30 billion.
At $30 billion, Burlington's 2.16 billion barrels of oil and gas reserves would cost $13.88 each. That compares with $10.15 a barrel that Chevron Corp. paid for Unocal Corp. and $10.66 that China National Petroleum Corp. spent for PetroKazakhstan Inc. Norsk Hydro ASA of Norway agreed to pay $18.99 for each barrel of Spinnaker Exploration Co.'s reserves. A big attraction in Burlington is its natural gas reserves are essentially onshore.

Husky Energy Inc. advised today that the Alberta Energy & Utilities Board (EUB) has approved the commercial application for its Sunrise Oil Sands Project, located approximately 60 kilometers northeast of Fort McMurray, Alberta. It is estimated that the
Sunrise lease contains original bitumen in place of 10.6 billion barrels, and
that approximately 3.2 billion barrels of oil resources will be recoverable over the project life of approximately 40 years. Husky, which holds a 100 percent interest in the Sunrise lease, intends to develop the 200,000 barrel per day project in phases. The EUB approval
relates to Husky's bitumen extraction plans, and Husky is completing its alternatives for upstream development, upgrading, transportation and marketing of the produced bitumen.

John Hussman: “If we split year two of the Presidential Cycle into two periods – the first nine months of the year compared with the final quarter - the patterns become apparent. The average market performance during the period from January through September of each second year of the Presidential Cycle has been roughly flat since 1933. The market has been down during these periods nearly as much as it's been up.
Things have usually been more interesting in the fourth quarter, where the average gain has been 8.7 percent. This is the highest average fourth-quarter return of any of the four years of the cycle, including the last quarter of year three and year four. The fourth quarter of the second year is actually where many third-year rallies are born…The 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28 percent, on average. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6 percent).”

As we move into the New Year, there are 15 trading days remaining in December. We will encounter option expiration, tax selling, a Fed rate increase, and seasonal joy that frequently breeds a holiday rally. It’s never too late to position your portfolio for the coming year. Often this year’s dogs turn into next year’s bright spots. Will Pfizer be such an example? Do not make portfolio decisions based solely on tax considerations. That you will regret. One thing is for certain. Tomorrow’s headlines will include some large acquisitions. Most often, it is cheaper to buy than to build from scratch. Yet, the majority of acquisitions are not successful. Maybe that reflects management’s ineptness. Bigger does not mean better. Most managers can’t manage small --- much less large.

This morning, gold is surging again. February futures topped $544 an ounce. For traders, it might be an opportune time to reduce positions. However, the long-term outlook remains quite positive, in my opinion. The same can be said for many commodities.

Aristotle: "A democracy is a government in the hands of men of low birth, no property, and vulgar employments."

You Can Smell The Stench

12/11/05 You Can Smell The Stench

Bush: “The valuable protections of the Patriot Act will expire at the end of this
month if Congress fails to act, but the terrorist threats will not expire on
that schedule. In the war on terror, we cannot afford to be without this
vital law for a single moment.” Has the Patriot Act helped to capture Osama
bin Laden? Our country spends billions each year on defense. With those billions
how is it that bin Laden has not been caught? You can smell the stench. It emanates from 1600 Pennsylvania Avenue.

Yesterday, U.S. casualties came in three separate attacks across Baghdad, the military announced. Two soldiers were killed by small-arms fire in the southern district of Yusufiyah. A third soldier was shot dead in Baghdad and the other died in the northern district of Adhamiya when his patrol was hit by a roadside bomb.
In addition, on Saturday, officials announced that one American soldier had been killed and 11 wounded on Friday when they were attacked by a suicide car bomber near the town of Abu Ghraib just west of Baghdad. That brought to at least 2,140 the number of U.S. military personnel who have died since we invaded Iraq in March 2003, according to an Associated Press count. And for what?

Howard Gruenspecht, the deputy administration of the Energy Information Administration, stated that, eliminating the use of additive MTBE in 2006, may require some refiners to produce more gasoline, putting added pressure on refiners and thereby creating upward pressure on prices at the pump.

I have been asked several times how I arrived at my takeover value for Albertsons.
Rather than provide my entire analysis, I outlined two points: the pharmacy operations of Savon and Osco should approach about $4 billion in value. Secondly, looking over the locations of the 2500 Albertsons stores and the 2500 Kroger stores, there is minimal overlap.

If I am not for myself,
who will be for me?
If I am not for others,
what am I?
And if not now, when?

Rabbi Hillel