NOTES FROM THE FRONT

Pfizer + Wyeth?

NEW YORK (MarketWatch) -- Pfizer Inc. is negotiating to acquire rival drug maker Wyeth in a blockbuster deal potentially worth more than $60 billion that could alter the global drug industry, the Wall Street Journal reported Friday.

News of the possible deal sent shares of Wyeth up 13% in premarket trading Friday, while shares of Pfizer slipped about 2.7%.

Positions: Long Wyeth & Pfizer

GERON CORP. - HUMAN STEM CELL TEST

GERN 5.21, -0.08, -1.5%) said Friday that the U.S. Food and Drug Administration has granted clearance for it to begin trials for what it said was the world's first study of a human embryonic stem cell-based therapy for people. Geron said it will begin a Phase I multicenter trial designed to establish the safety of its treatment, currently referred to as "GRNOPC1," in patients with complete Grade A subacute thoracic spinal cord injuries.

Positions: Long Geron Stock

FIGHTING BACK

PETER R. MACK & CO., INC.

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January 18, 2009

 

 

FIGHTING BACK

 

 

On October 28^th, in Restoring Trust, I wrote of the need for trust to be restored in many facets of our life and society including the economy, the markets, financial institutions, political systems, our fiduciaries and advisors, and lastly, our own self-confidence.

 

Now, less than three months later, the need to do so is even greater. We had then just seen completed a first round of bank bailouts and government forced corporate mergers and suddenly last week witnessed the unraveling of the Bank of America/Merrill Lynch combination so confidently put together in September, and now requiring another major infusion of aid from the Treasury Department. Bank stocks which had recovered and rallied upon the passage of the TARP (Troubled Asset Relief Program) are once again at record lows.

 

In December we learned that the three domestic manufacturers of automobiles were likely to imminently file bankruptcy if they did not receive direct and quick aid from the government, and lest we believe that the phenomenon was restricted to the much-reviled big three, the foreign companies manufacturing in the US such as Toyota and Honda (known as transplants) were also seeing sales and profits plummet.

 

And finally, giving authenticity to the loss of trust in financial advisors and institutions, came the December revelation about the widespread swindle by Bernard Madoff purportedly estimated (by him) to be around $50 billion. Since then, other Ponzi schemes have been reported, and just yesterday came a news report of a Florida money manager disappearing and an estimated $350 million of customer funds missing.

 

Economic statistics being reported for the fourth quarter are truly dismal. Retail sales were sharply lower, housing prices continue to sink, and foreclosures rise. On the jobs front, unemployment rose to 7.2 per cent and is widely expected to continue for some months well into 2009. It should be noted that corporations and organizations make budgets and plans at the end of the prior year based on expectations for the coming year, and generally stick to the plan. The recently-announced layoffs have been in the planning for quite some time and are both a manifestation of the current state of business as well aspart of strategic decisions as corporations restructure and redirect activities. The economic climate in the fourth quarter was quite negative and budgets going forward

were fashioned to be quite austere. Just at the end of last week, GE Capital announced cuts of 11,000; Pfizer by 2,400, Conoco Philips 1,500 and the liquidation of Circuit City will cut another 30,000 jobs.

 

These numbers are almost certain to keep ratcheting upward until the “official” unemployment rate exceeds 9 per cent or more from its present level. To those without jobs and with dim prospects in the market, despair will set in. To the 90 per cent of people still employed, caution and fear will abound and for most of those people, from the self-employed to corporate titans, salaries and compensation will be lower in 2009 than 2008. The mood of conservatism will be entrenched. Yet, a 90 per cent employment rate is still a powerful economic force that can keep the economy from entering a depression, as so many doomsayers suggest.

 

According to recent CNN polls, only about 27% of American people believe that President Bush did a good job in his eight years in office. Aside from most Democrats, that polling figure suggests that more than half of Republicans voted thumbs down. Hendrik Hertzberg writes in The New Yorker (January 19, 2009) that during the last eight years, “the unemployment rate went from 4.2 per cent to 7.2 per cent and climbing; consumer confidence dropped to an all-time low; a budget surplus of two hundred billion dollars became a deficit of that plus a trillion; more than a million families fell into poverty; the ranks of those without health insurance rose by six million; and the fruits of the nation’s economic growth went almost entirely to the rich, while family incomes in the middle and below declined.”

 

That’s the past, but there can be little question that ultimately, the negative mood has to change and the inauguration of Barack Obama and a new team on Tuesday, January 20^th will go a long way to starting us on the way back. The election of Obama was an affirmation of the country’s will to restore trust and demonstrated the ability of the people to overcome centuries of inherent racism and, to a lesser degree, partisan politics.  The nation continues to evolve.

 

On the positive side, many factors are in play that can turn things around. The government, through the Federal Reserve and Treasury Department has unleashed a torrent of funds through the $700 billion TARP program and through Fed lending that has backstopped the banks and financial services. Interest rates on Treasury bonds are at record lows, and have worked through the system, bringing about the lowest mortgage rates in 30 years or more.  Rate cuts are not just in the US. We have seen The Bank of England just reduce interest rates to the lowest levels in 300 years, a lower rate than even George Washington might have borrowed at when he was a farmer in Virginia and an English subject. The ECU is lowering rates as well. Skeptics of the interest rate moves

point to Japan where low, almost negative interest rates, failed to provide any stimulation to the economy over a decade and suggest it could happen here – that Americans will change their habits from consumers to savers – basically a new trick for an old dog. 

It just doesn’t seem likely.

Energy costs have dropped dramatically, with gasoline, home heating oil and natural gas prices far below (over 25 per cent) the levels of a year ago. This drop represents the equivalent of a sizable tax cut for consumers.

 

Finally, President Obama and the Democratic Congress will pass a stimulus package probably in the area of $1 trillion to help move the economy and advance aid to states and municipalities for infrastructure projects. China has recently announced its own stimulus with an additional $600 billion in infrastructure projects to augment their already significant budget.

 

Money will certainly begin to flow with the inauguration of a new administration.

 

More than money, the change in government should bring about effective changes in leadership. I have been a severe critic of Chairman Christopher Cox at the SEC. I hold him personally responsible for changes in market regulations that have harmed – maybe permanently – the workings of markets as we have known them. The Bernard Madoff scheme appears to have been conducted in spite of “whistle blowing” evidence provided to the agency many years ago. As the story unfolds, more evidence of regulatory failure will be revealed and histories will chronicle the collapse of the financial industry under Cox’s watch.

 

 The incoming Chair of the SEC, Mary Schapiro, is an honest, dedicated, non-political public servant and fiduciary. She has been the Chairman of FINRA (Financial Industry Regulatory Authority) the agency that regulates the brokerage industry and our firm. Under Ms. Schapiro, I expect that certain significant remedial actions will be initiated, I hope soon after taking office. I expect her to reinstate the uptick rule regulating short selling, to strengthen and enforce rules prohibiting naked short selling, to  revise certain requirements of FAS 157, and, over time, to put CDSs (Credit Default Swaps) and hedge funds under new regulatory authority.  I think these actions, if taken, will go a long way to restoring trust in the markets and reducing chaotic volatility.

 

With new leadership, I expect a new tone at the FDA (Food and Drug Administration) that will revive an almost-moribund agency and place a premium on science and health for all Americans rather than an agency that has been transformed into one that advanced and promoted the religious ideologies of conservatives. This will encourage the biotech and pharmaceutical industries to rev up their search for new treatments for our major diseases.

 

I foresee an economic revitalization, and an expansion of domestic manufacturing after years of disinvestment and job export to foreign shores.

 

On the other hand, while I am optimistic, nonetheless we are a country at war with an economy that is dangerously weak and depleted. The road to recovery is bound to take a longer time than most would hope for, and the shape of the new economy will look somewhat different from what has gone before.

 

But I certainly wouldn’t sell the economy short – to bet on failure - especially with all the positive forces arrayed against it. In short order, someone will refinance a house and go to Home Depot and buy some paint and a new sink. Someone else will finance a new car.

Money will begin to flow, one transaction at a time, until the cumulative effect changes the statistics and produces better reading and better news, thus giving others the courage to act as well. And so it goes.

 

Hope is on the way and no one should be so cynical as to not share in some optimism. Maybe it will work, maybe not, but it’s what we’ll see kick in very soon, thought out by some of the best minds that America has to offer. One year ago today, I was in the ICU at Yale - New Haven hospital and here I am today, still among you.

 

I will close by adding a poem that I particularly like by the Welsh poet, Sheenagh Pugh, which I think sums it up better than my text.

 

 

SOMETIMES

 

Sometimes things don’t go, after all

from bad to worse. Some years, muscadel

faces down frost, green thrives, the crops don’t fail,

sometimes a man aims high, and all goes well.

A people sometimes will step back from war,

elect an honest man, decide they care

enough, that they can’t leave some stranger poor.

Some men become what they were born for.

Sometimes our best efforts do not go

amiss; sometimes we do as we meant to.

The sun will sometimes melt a field of sorrow

that seemed hard frozen; may it happen for you.

 

-Sheenagh Pugh, “Sometimes”

 

 

 

Peter R. Mack

January 18, 2009

 Peter R. Mack & Co., Inc. and any of its principals including Peter R. Mack may have an investment position, either long or short, in any securities mentioned herein.Furthermore, although the information contained herein is believed to be accurate, neither the firm not its principals make any representation as to its accuracy and the reader should not rely on this information for any purpose. Opinions mentioned herein are subject to change without notification. Material contained herein is for informational and educational purposes only.