Dollars and Jens
Thursday, September 30, 2004
Merck, the Job of the Drug Industry
Merck just can't get a break, can they?

TRENTON, N.J. (AP) -- Pharmaceutical giant Merck & Co. is halting worldwide sales of its blockbuster arthritis drug Vioxx, once viewed as possibly being able to prevent some cancers, because new data from a clinical trial found an increased risk of heart attack and stroke. Its stock price plunged more than 26 percent as the company said the recall will hurt its earnings.

Merck said Thursday that data from the trial showed the increased risk of heart attack and other cardiovascular complications began 18 months after patients started taking Vioxx. About 2 million people worldwide are currently taking Vioxx, according to Merck, and a total of 84 million have taken it since it came on the market with great fanfare in 1999.

Vioxx is one of Merck's most important drugs, with $2.5 billion in sales in 2003 -- about 11 percent of the company's $22.49 billion in revenue that year. But sales dipped 18 percent in the second quarter of this year to $653 million, partly due to increasing concerns about the drug's safety.

"We're taking this action because we believe it best serves the interest of patients," Ray V. Gilmartin, Merck's chairman, president and chief executive, said in a statement.

"Although we believe it would have been possible to continue to market Vioxx with labeling that would incorporate these new data, given the availability of alternative therapies and the questions raised by the data, we concluded that a voluntary withdrawal is the responsible course to take," he said.

Merck, the world's third-biggest drug maker, announced the news before the stock market opened. In morning trading on the New York Stock Exchange, Merck shares plunged $11.98, or more than 26 percent, to $33.09.

You'll remember (or I'll tell you) that during 2003 they saw three or four promising Phase III trials fail.

Wednesday, September 29, 2004
When you're right 52% of the time, Part II
Do you remember that I said I'd take a profit when Google was at 100, just over a month ago? I do.

Well, as the Wall Street Journal so helpfully points out (subscription required), it closed yesterday at 126.86, up $8.60 after — I'm not making this up:
Yesterday came the expected backing for the stock, in the form of positive recommendations, by five of the underwriters of Google's initial public offering. Those underwriters gave the company their highest stock ratings and predicted share gains. (Brokerage firms not affiliated with the IPO haven't been as kind.)
Well, as the T-shirt says, never underestimate the power of stupid people in large numbers. I'm not short, nor do I encourage you to be — to paraphrase Keynes, Google's price can certainly stay irrational longer than most of us can stay solvent. But I'd be even happier to take the profit now.

Tuesday, September 21, 2004
interest rates
Some thoughts on low interest rates.
  1. The 10 year bond is now around 4.1%. Projections for nominal growth over the next decade are 5.2% per year. Money collected in taxes now would be a larger portion of the economy than would be required to pay off debt ten years from now, provided those projections are anywhere near accurate. Good reason to be less concerned about a deficit of 3.5% of GDP; that deficit is an uncharacteristically rational response on the part of the government to low interest rates.
  2. Perhaps instead of setting a target for the federal funds rate, the FOMC should target the difference between it and the 10-year yield. (This would be fundamentally different from such things as price rules; the FOMC would not need to be shy about changing this target every 6 weeks, or between meetings as may be necessary.) In any case, it seems hard to think they need to hurry short rates higher when the ten-year yield is so low.

Monday, September 20, 2004
Russian Barbarians
Preface: this is a bit ranty, and not well-edited; I'm writing this at an hour which I consider uncomfortable, and I'm a more than a little bit angry. Please forgive.

The term "civilized" is a bit ambiguous, but I think one measure of how civilized a government is is the extent to which it serves its citizens rather than serving the personal ambitions of those in power. Now, I have no doubt that power-brokers in the American government skim a little off the top. I don't think this takes the form of outright graft very often, but I assume that Congressional perks go beyond what a disinterested arbitrator would consider appropriate; certainly if the mother of a House Appropriations subcommittee chairman contracts a particular disease, funding for research to cure that disease is more likely to increase than if my mother contracts the disease. I could actually write for a while about milk price supports or cement tariffs. But I think most people in our government are at least well-intentioned, and our government takes many actions which do more good than harm.

On the other hand, there's Russia.

In case you aren't familiar with the Yukos saga, a brief overview (subject to a lot of my own ignorance): Yukos used to be a big state-owned oil company. A few years after the USSR died, when Russia was selling off state assets (good thing) to a small collection of businessmen with connections (bad thing), Yukos became a big privately-owned oil company. I don't know all of the details between then and now, but the head of Yukos -- one of the wealthiest men in Russia -- was arrested shortly after making comments critical of Putin, and Yukos has been handed a large (multi-billion dollar) bill for back-taxes. As I've admitted, I don't know the situation, but I take it for granted that the oil executive is corrupt and that he's less corrupt than Putin (or whichever of his underlings signed the arrest warrant). I don't know whether or not he committed whatever crimes he's charged with, but I doubt the question was particularly relevant to his arrest. I also don't know whether Yukos actually evaded taxes for years, or whether the government just decided to invent it a tax bill; again, I can't see that it makes a difference.

What is clear is that Yukos has a large tax bill to pay off. And in many news stories about the high price of oil, speculation over the fate of Yukos has been mentioned. Yukos produces around 2% of the world's output; this might not sound like much, but short-term demand for oil is very inelastic, so the effect of a small supply disruption on prices can be substantial. Further, in an economically-sane, civilized system, there would be little danger of a government-induced supply-disruption. After all, even if they do owe the government money and have liquidity constraints, a civilized government would work out some terms by which the oil company can keep producing while paying its taxes (assuming the company is worth more alive than dead). The Russians did invent the "scorched-earth policy", but this was a tactic of warfare against foreign invaders, not a means of transfering private wealth to the government.

But suppose collecting taxes is of less importance than shafting the political enemies of the administration...

Sept. 20 (Bloomberg) -- OAO Yukos Oil Co. will halt crude supplies to China's biggest oil company as of tomorrow, the first time the Russian government's demands for billions of dollars in back taxes has disrupted Yukos shipments to world markets.

Yukos will end exports to China National Petroleum Corp. that average 400,000 metric tons a month (95,000 barrels a day), said Sergei Prisyazhniuk, Yukos's China representative. A freeze on Yukos bank accounts is preventing the company from paying railway bills, and European buyers may face similar cuts, Prisyazhniuk said, declining to give details.

Friday, September 17, 2004
Employment trends
The other post was a bit long-winded and meandering, so I create a new post for a brief comment on another topic: does the burst of productivity growth cause unemployment? For the most part, the correct answer to this question is also provided by the 2004 ERP:
Nonetheless, one should not conclude that rapid productivity growth causes low employment growth. Rapid productivity growth means that output must increase faster for employment to expand, but it also means that the economy is capable of growing faster. In the long run, the faster rate of potential output growth is undoubtedly a good thing for living standards.
The one caveat I'd throw on is that productivity growth often involves restructuring of the economy, which does imply a short-term increase in unemployment; it's essentially frictional, but it shows up the same in the statistics.

Employment reports
I noted a while ago that this past weekend would be the snapshot date for the last employment report to be released before the election; that is, the September employment report, to be released in October, is supposed to capture the level of U.S. employment on September 12, which was this past Sunday. Further job gains will presumably do little to help President Bush.

I'm now going to rip off a large chunk of the economic report of the President for 2004 on the difference between the surveys:
Everyone who works is either employed by a firm or is self-employed. Therefore, to count the total number of workers, one could ask each person whether he or she is employed, or one could ask each firm how many workers it employs. The Bureau of Labor Statistics, the agency responsible for tracking employment, uses both approaches. When the BLS asks individuals about their employment status, the results are summarized in the household survey of employment. When the BLS asks firms, it produces the establishment survey of employment.

Though both surveys ask about employment, they have some important differences that can cause their results to diverge. For example, the establishment survey obtains data from about 160,000 businesses and government agencies that represent about 400,000 worksites and employ over 40 million workers. The sample covers about one-third of all nonfarm payroll jobs in America. The household survey, in contrast, collects data from about 60,000 households, thereby directly covering fewer than 100,000 workers. The establishment survey’s larger base of respondents means the calculated margin of error of its estimates is significantly smaller than that associated with the household survey estimates. In addition, the establishment survey is revised annually to match complete payroll records from the universe of establishments participating in state unemployment insurance programs, while the household survey is not.

Furthermore, definitional differences affect the scope of employment measured by the surveys. The establishment survey estimate represents the number of payroll jobs, or the number of jobs for which firms pay compensation, while the household survey estimate represents the number of employed persons. Because some people hold more than one job, the total number of payroll jobs can exceed the total number of employed persons. On the other hand, the household survey includes employees working in the agricultural sector, the unincorporated self-employed, unpaid family workers, workers in private households, and workers on unpaid leave from their jobs. The establishment survey excludes all of these categories because they are not reported on the nonfarm business payrolls that provide the source data for the survey.

These differences and other factors create a gap between the household and establishment surveys’ employment estimates, though they tend to display similar long-term trends. The average gap since 1990 has been about 6 percent, or 8 million workers.

While long-term trends in the two surveys are similar, over shorter periods of time their trends have sometimes diverged. This has been the case since late 2001, when employment from the two surveys has trended in opposite directions. For the first time in the two series’ histories, one showed a large and sustained decrease in employment while the other showed a large and sustained increase. In particular, the establishment survey reported a decline in employment of over 1.0 million from the end of the recession in November 2001 to August 2003, while the household survey reported an increase of over 1.4 million. In every month of 2003, the establishment survey showed employment below the November 2001 level, while the household survey showed it above this level. Such a sustained string of divergence is unprecedented.

One possible explanation is that the establishment survey misses some new firms and therefore may underestimate employment at the start of an economic expansion. Past revisions to the establishment survey offer some support for this theory. For the recent data, however, this theory can explain at most the divergence since March 2003, because establishment survey data up to that point appear consistent with unemployment insurance records that cover all establishments. Another possible explanation is that the household survey results are overstated because of the way in which the survey results are extrapolated to represent the entire population. Specifically, information from the 2000 Census, together with estimates of how the population is changing over time, are used to determine how many actual U.S. households correspond to each household in the sample. If, for example, immigration has been unexpectedly low because of tighter border controls and the weaker labor market over the past few years, the estimated number of U.S. households corresponding to each household in the sample may be overstated. As a result, the estimates of total employment (and other aggregates based on the population estimates) from the household survey could be too high.

Both surveys contain valuable information about current economic developments, but, as with all economic statistics, the data from both surveys are imperfect. The Bureau of Labor Statistics has stated that the establishment survey is generally the more reliable indicator of current trends in employment. Still, the explanation for why these two surveys’ results have diverged so markedly over the last few years, and what this might indicate about the economic recovery, remains a puzzle.
Note that well over 1 million jobs have been created in the past year; thus payroll employment is higher than it was in November of 2001. Regardless of which survey you want to lean on, it seems a bit unfair to blame the President for the heavy job losses that took place in his first ten months in office, at the beginning of which the economy was just leaving what is now widely acknowledged as an unsustainble bubble period. The unemployment rate is lower than it was in 1996, when President Clinton was reelected. It seems a stretch to call even the employment data "weak".

Sunday, September 12, 2004
known unknowns
Pepsi just did its Billion Dollar Giveaway, in which it didn't give away a billion dollars. Of course, even if it had, it wouldn't have; the possibility was insured against, by the good people at Berkshire Hathaway. And even then, the money was to be paid so far in the future that, if you wanted it now, it would only be a quarter of the amount.

As there was a 1 in 1000 chance of a $250,000,000 event, a sort of "fair value" of $250,000 could be assigned to the risk. In fact, while terms weren't disclosed, I would assume that the money that changed hands considerably exceeded this, for all the reasons insurance exists as a business: risk has disutility, and even a mind-bendingly financially solid company — I own stock in Berkshire Hathaway, by the way — is going to charge a premium for carrying that. What's interesting about this risk, as opposed to the more quotidian risks against which insurance companies insure, is that it's so easy to quantify. Sure, companies have actuaries and underwriters and have a decent handle on how much risk they're taking on when they write a car insurance policy, but they kind of know there's a certain amount of variety in the categories into which they can put people, and you can get a wide range of quotes if you call a number of even reputable insurance companies. Any range Pepsi would get would be based not on estimates of risk, but simply how willing the company would be to bear that risk; Berkshire Hathaway is extremely willing to bear risk, as long as it feels it knows what that risk is that it's bearing.

US Airways is back in bankruptcy. This is a company that could actually make it if the chaff were allowed to fall away.

Thursday, September 02, 2004
Nasdaq Valuation
According to Morningstar, the Nasdaq-100 isn't badly overvalued. This is largely because they consider the ten highest-weighted companies in the index to be solid and reasonably priced.

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