Dollars and Jens
Wednesday, November 26, 2003
Wyeth wins fen-phen case in Atlanta
Wyeth won a case brought by a patient claiming she suffered heart injuries from the diet drugs known as fen-phen, a rare victory in the matter that has forced the drugmaker to take $16.6 billion in charges so far.
The stock is well up on the news.

latest numbers
The initial claims report comes a day early this week, and comes in at 351,000. The job market is picking up steam.

Where Dante Never Set Foot
"So, Steven, are there people whom you'd put in a lower circle of Hell than conscienceless murderers, traitors, and people who talk in movie theaters?"

Yes, as a matter of fact. Yes there are.
The law firm of Stull Stull & Brody said Tuesday that an amended complaint was filed against Merck & Co. on behalf of investors.

In a press release Tuesday, the firm said Merck's filings describing its increasing revenue and financial performance were "false and misleading" because they failed to disclose the impact that safety concerns about Vioxx had on sales of the drug and liability Merck was facing as a result of lawsuits related to Vioxx.
Granted, when management really Kozlowskis a company, shareholders should have recourse against said management, but not against the company and its new shareholders. Even so, most lawsuits by shareholders and former shareholders are pure sour grapes by people who either simply made a bad decision or rolled snake-eyes, and this looks like it fits the bill. If managers tell blatant lies to their shareholders, they should be suspended, preferably by their toes. But if a lawsuit is predicated on "fail[ure] to disclose... sales" before managers are legally required to announce -- to their shareholders and to their competitors -- how much they've been selling, that lawsuit should result in capital punishment. For the plaintiffs' lawyers.

Tuesday, November 25, 2003
latest numbers
That 7.2% growth figure? They've revised it upwards. 8.2% now. Deflator reiterated at 1.7%.

A fellow on Rukeyeser a couple weeks ago complained about the way in which the GDP is calculated, and there are legitimate complaints to be made, but his were essentially about the determination of how much of nominal growth is real and how much is inflation. Well, you're looking at 10% nominal growth now; how much of that do you think is inflation? The CPI that famously overstates inflation hasn't shown signs of life. The PPI is restrained. If you want to stretch and convince yourself that inflation could have been running at 4% last quarter, you still have 6% growth. I refuse to be upset about that.

More Drug Reimportation
Speaking of which, drug researcher Derek Lowe (who isn't, as far as I know, the same Derek Lowe who pitches for the Red Sox) recently linked to a letter by "Milton Friedman and many others" opposing allowing re-importation as applying price controls to American drugs. I think -- hope -- many people expect that Canada would be forced to eliminate (or at least lessen) their price controls as a result, but I may have been too optimistic about that.

Also important, though, is the fact that Canada has limited pharmaceutical companies' liability in a way that the United States has not, and there's evidence that this is as big a factor in the price differences between the countries as is the provinces' pricing power.

Friday, November 21, 2003
drug reimportation
One Kevin Hassett of AEI writes that reimportation of prescription drugs is probably dead, and says
This is good news for Americans because the alternative — extensive reimportation — would likely have destroyed the incentives that U.S. firms have to develop new drugs. Cancer patients hoping for a new cure for their disease could abandon hope.
Indeed, it is true that the lack of patent profits outside the United States makes it unappealing to drug companies to develop drugs they should, and that this would be worsened by allowing reimportation, so that overall costs of such a policy presumably exceed the benefits of it. The benefits, however, accrue entirely to Americans; my intuition is that the costs to Americans are probably less than the benefits to Americans. I'd be inclined to play nice on this issue, except that
  1. We would merely be taking the same sort of rent-seeking actions that those other countries have already taken, and
  2. we would be doing so in such a way that, when they knock it off, we will automatically knock it off as well; reimporting from another country only underprices drugs if they're underpriced in the other country.
To be fair, there are a number of goods that are priced higher in the United States than in other countries, and an element of price discrimination is probably economically optimal, so I would make reimportation illegal again if other countries quit screwing with markets to try to fleece us. I'm willing for us to carry to world's burdens because we're willing to pay more, but not because we deal with drug companies fairly and others don't.

When a Morningstar analyst evaluates a stock, (s)he categorizes it as either "no moat", "narrow moat", or "wide moat". As any follower of Warren Buffett can guess, the presence of a "moat" serves as a barrier to competition, and a source of pricing power. A business which manufactures a commodity has no moat; a company which manufactures a patented product with an installed base and no good substitutes has a wide moat.

In a recent column, they announce five new wide-moat stocks. One that particularly attracts my attention is the Chicago Merc:
This one's right in our back yard, and it's got one heck of a business. Exchanges tend to benefit from the network effect, which is one of the most powerful types of competitive advantage. In short, the more buyers and sellers who trade on an exchange, the greater the liquidity, and the lower the trading costs. The Merc is in an even better position than some exchanges because its products are not fungible across exchanges. In other words, if you buy a future on the Merc, you have to sell it on the Merc as well. And since the Merc has exclusive contracts for futures based on the S&P 500 and Nasdaq indexes, you can see what a wide moat the firm has built for itself.

There is some competition on the horizon with the Eurex exchange entering the U.S. next year, but we think the threat is overblown, given the Merc's exclusivity contracts. Also, volume growth in futures can be pretty volatile and tough to predict. To mitigate the latter risk, we're assuming essentially flat volumes in equity and interest-rate index products for the next couple of years, after which we're assuming they revert to their long-term growth level of about 20%. Even so, the shares look very reasonably priced to us.
I don't know a lot about the industry (the 20% growth rate sounds pretty bold, but there has been a lot of growth in funky derivatives), but most of the reasoning about the moat-size seems solid, and it's trading at 18 times earnings, which is less expensive than most of the stock market. I'm not ready to endorse it, mostly because -- as I said -- I don't know the business well enough. But it may be worth a look. Dean has pointed me this way before -- maybe he has something to add.

Thursday, November 20, 2003
At the Kitchen Cabinet, a blog with which Dean and I have interacted at our other blog, Lily Malcolm throws us a link, and compares us to CNBC. Apropos which, I solemnly swear that we will never broadcast golf on the weekends.

Her entry immediately below that one, incidentally, touches on the KPMG tax-shelter scandal. You'd think we'd have mentioned that, or the mutual fund scandals, but I guess we don't really have anything to say. That doesn't always stop us, but sometimes it does.

Some representative of the mutual fund industry was on "Nightly Business Report" tonight. He said that he thought mutual funds should be run with the interests of shareholders in mind. "How about puppies and apple pie?" I thought. "Do you like puppies and apple pie? And are you pro-mother, or anti? Take a stand!"

I'm supposed to be creating a power-point presentation on junk bonds. Did you know that fallen angels have a higher credit-rating volatility than original-issue junk bonds? This is especially true for the first couple of years after they fall below investment-grade, when they have a substantially higher rate of default than original-issue junk of the same credit rating. But they also have a higher chance of being upgraded. That's the most interesting thing I've learned from this project.

Heaven and Hell in This Life and the Next
Here's an unusual kind of economic study:
The most striking conclusion, though, is that belief in the afterlife, heaven and hell are good for economic growth. Of these, fear of hell is by far the most powerful, but all three indicators have a bigger impact on economic performance than merely turning up for church. The authors surmise, therefore, that religion works via belief, not practice.
The whole paper is at NBER's site.

latest numbers
355,000 initial claims of unemployment. The markets are more interested in terrorism this morning.

Wednesday, November 19, 2003
latest numbers
October Building permits and housing starts revised up from 1.88M to 1.97M each, basically. That surprised the market, which started upward but is mostly just hovering a little higher than yesterday's close. Leading economic indicators tomorrow at 10 Eastern, and, as every Thursday, the 8:30 Initial Claims of unemployment report; that latter is expected around the same as last week, in the three sixties, suggesting jobs are continuing to be created at a respectable but not yet impressive pace.

I didn't realize this; the new energy bill is set to repeal PUHCA.
The [Public Utilities Holding Company] Act prohibited utilities from mixing non-utility operations and power generation to prevent them using revenue from their protected markets to subsidize other ventures. It also limited how much debt a utility could accumulate.
The accent is on the first syllable, long 'u', ending schwa, PYOOku.

Tuesday, November 18, 2003
technical observation
QQQ closed below its exponential 35-day moving average for the first time since early April.

Monday, November 17, 2003
Media tycoon Conrad Black resigns
Media tycoon Conrad Black resigns:
The move follows an internal inquiry which found that Lord Black and other executives had received more than $32m (£19m) in unauthorised payments.

Described as "non-competition" payments, they were paid by buyers of Hollinger International newspapers to prevent the firm from launching new rival titles.

Hollinger shareholders have argued that the payments should have benefited the company rather than its directors.

Saturday, November 15, 2003 SCO Targets Torvalds, Stallman
Forbes has more news on the SCO-IBM Linux lawsuit
On Nov. 11, the same day that Forbes reported that IBM had sent subpoenas to investors and analysts who supported SCO -- and a day in which SCO shares suffered a 10% drop--SCO fired back, telling the court it would issue subpoenas to Linus Torvalds, creator of the Linux free operating system kernel, and Richard Stallman, president of the Free Software Foundation.

SCO won't say what it hopes to accomplish with the subpoenas. A SCO spokesman says he doesn't even know which subpoenas, if any, have been served. Torvalds says he got his Wednesday evening. Stallman says he hasn't received one yet.

In addition to Torvalds and Stallman, SCO told the U.S. District Court in Utah it would issue subpoenas to Transmeta, a chip-design company that employs Torvalds; the Open Source Development Lab, where Torvalds currently works, on leave from Transmeta; software maker Novell; and Digeo, maker of Linux-based TV set-top boxes.

Oddly enough, on Nov. 11, SCO Executive Vice President Christopher Sontag complained to Forbes about IBM's decision to send subpoenas to investors and analysts who supported SCO. Sontag called the move "an attempt to bully and intimidate" and said IBM was engaged in "legal gamesmanship."

So why didn't Sontag mention that, uh, SCO itself was about to target Torvalds and Stallman with subpoenas? SCO's spokesman says Sontag and Darl McBride, SCO's chief executive, did not know that SCO's lawyers were planning the move.
In past updates, I've excerpted pretty much everything I found interesting and new in the stories I've linked to; this time, if you're particularly interested in the case, read the whole thing. Incidentally, Yahoo reports SCO's beta as 5.2 (anything over 1.5 or 2 indicates exceptionally high share-price volatility).

Friday, November 14, 2003
Latest numbers
PPI came in at .8%, well ahead of the expected .2%. This raises interest rate expectations. Initial consumer sentiment numbers I believe are due later this morning.
Update: Consumer sentiment at 93.5, up four points from last month. 91.3 expected.

Thursday, November 13, 2003
Latest numbers
Initial jobless claims at 366K. Trade deficit a bit worse than expected, but this morning's numbers are basically in-line. Last week's number was revised up from 348k to 353k.

Wednesday, November 12, 2003
evils of taxes
The costs of complying with the personal income tax. IBM Subpoenas SCO Investors, Analysts
According to Forbes, the Linux lawsuit isn't all hugs and foot-massages:
The legal battle between SCO Group and IBM is widening, as IBM has sent subpoenas to investors and analysts who have supported SCO.

On Oct. 30, IBM issued subpoenas to Baystar Capital, Deutsche Bank, Renaissance Ventures and Yankee Group, companies that have either invested in SCO or published reports suggesting that SCO's claims against IBM could be legitimate.

"I view this as an attempt to bully and intimidate analysts--to try to cow them into silence," says Christopher Sontag, executive vice president at SCO, in Lindon, Utah.

IBM will not say why it issued the subpoenas. But a company spokesman says IBM is frustrated by SCO's reluctance to produce proof of its allegations. "It is time for SCO to produce something meaningful. They have been dragging their feet and it is not clear there is any incentive for SCO to try this in court," he says.

IBM has filed two motions to compel discovery, the most recent one on Nov. 6.

Sontag says SCO has provided 1 million pages of documents to IBM and that IBM in return has provided only 100,000 pages to SCO. "The foot-dragging is on the part of IBM," he says.
Is the first sentence of that last paragraph supposed to prove the second?

Tuesday, November 11, 2003
Why health care is so expensive

My brother notes the economic difference between healthcare for humans and animals. Certainly insurance and litigation are the major part of it, but I expect demand elasticity has something to do with it as well; a doctor is less in competition (price-wise) with other doctors than are veteranarians with other veteranarians, but the latter are also in tighter competition with "take it someplace peaceful and shoot it". This is true of pets, but even more of farm animals.

We also may care less about how much our animals enjoy their food, while more willingly buying junk for our kids and letting them pay to have their arteries scraped out later in life.

The infamous steel tariff
The WTO has declared the Bush steel tariff a violation of international trade agreements; good for them. Now, as the Wall Street Journal says, the administration should correct its mistake.
The best solution is for the Administration to recognize the WTO decision for what it is: a golden opportunity. The U.S. economy is showing signs of recovery, but nothing is certain. By citing the verdict and dropping the tariffs now, Mr. Bush can further aid the economy, in particular one sector that is still struggling to get on board the recovery train: manufacturing. Along the way, he'll save other industries from big hits to their exports. And by complying with global trade rules, the U.S. will gain needed credibility in its attempts to get free-trade talks back on track.

Monday, November 10, 2003
comical Canadian economic mismanagement
The furore over insurance in Alberta began in the first place not because rates were rising but because some companies were refusing to write new policies. Now that they are faced with government-mandated maximum prices,

If that doesn't get you over to Colby, it's probably because you can infer the rest of his post.

While you're at Colby, see also the long post on the closed-shop wheat cartel subjugating Western Canadian farmers. One thing I'd add is that, even if a majority of western farmers do want to force their neighbors to stay in the cartel, that wouldn't make it right — modern labour law notwithstanding.

property taxes

It's a week now since Warren Buffett's letter to the Wall Street Journal has been published, explaining that what he said about California property taxes was misrepresented:

What I said in respect to property taxes was very specific. I gave him an example of three houses, two in Laguna Beach and one in Omaha. The first Laguna Beach house is a property that I bought in the early 1970s. It has a current market value of about $4 million and, because of the limitations embodied in Proposition 13, carried taxes of only $2,264 in 2003 vs. $2,241 in 2002. The second house, located just in back of the first, is one that I purchased in the mid-1990s. It has a market value of about $2 million and, simply because I bought it later than the first, carried taxes of $12,002 in 2003 vs. $11,877 in 2002. I pointed out to Joe that these figures mean that the tax rate on the second house -- same neighborhood, same owner, same ability to pay -- is roughly 10 times the rate on the first house.

I then referenced my house in Omaha, which I believe to be worth about $500,000 (though it's assessed at $690,000). Taxes on it were $14,401 in 2003 and $12,481 in 2002.


The severe failings in the article were compounded a few days later when the Journal's editorial page made the mistake of relying on the accuracy and completeness of the Journal's reporting. Though the editorial would have undoubtedly made many of the same points it did had the writer read a complete account of my views, its analysis would have had to be at least somewhat different if the editorial writer had been aware of both points I had made.

For example, the statement in the editorial's second paragraph that "no doubt the non-billionaires in Chico will appreciate Mr. Buffett's generosity with their cash flow" would make no sense if the writer had understood that I was criticizing the inequities within California. My sympathies are clearly with the "non-billionaire" family purchasing a $300,000 house in Chico today that faces real estate taxes materially higher than those borne by this non-resident billionaire on his $4 million house in Laguna. This family, because of Proposition 13, has been selected to subsidize me.

I share his feelings that "Residential property taxes in California are wildly capricious, tied as they are to the date of purchase rather than the value of the property or financial circumstances of the owner." There seems, though, to be a substantial political constituency for preventing people living in certain houses from having to move when those houses appreciate, creating for them paper wealth but practical cash flow problems. So I'd like to put forth a compromise idea: create this cap on property taxes, but instead of waiving the taxes in excess of the cap, defer them until the house is sold. When the house is sold, the owner recovers the appreciation on the property, and then pays the deferred property taxes, perhaps capped at a fraction of the sale price of the house.

It seems to me that someone liquidating a windfall gain on their real estate would make a less sympathetic character politically than someone who's just trying to keep his house; the down side here is that, at least initially, the city hasn't solved its cash-flow problem created by the cap, and while some of the perverse incentives not to sell a house you've had for a long time are mitigated here, that final cap, which is probably essential to the plan, will prevent them from being removed entirely. (Time-value of money — that the taxes being deferred are worth more when the debt is incurred than when it's paid — also becomes a significant issue for the houses in question, but I've confusingly decided not to comment on that.)

With today's sophisticated financial opportunities, in which anyone with home equity could borrow on it to pay property taxes, it seems to me that the initial complaint is a bit under-founded, but I was never so sympathetic to it anyway; I can't get my mind around the concept that there's a reason it makes sense to tax ownership of real estate, but that if one got to one's valuation by way of appreciation rather than recent purchase one is not tieing up resources or using services or whatever that a new purchaser would be. Reducing the friction associated with real estate sales seems like a small gain compared to whatever else the issue entails.

Friday, November 07, 2003
Expensing Options
Glassman writes against expensing stock options, introducing the topic with
An accounting board is rushing to require companies to treat stock options as an immediate expense, thus reducing the profits they report to shareholders — even though no one has yet found a way to value options expenses accurately. [Emphasis added.]
1. The proposal doesn't alter the economics of a company; indeed, not even its taxes. The only thing being altered is what is reported to shareholders.
2. The options cannot be valued accurately, but neither can anything else, except within tolerances. Right now they're counted as zero; not only do we know that that's not correct, we know in which direction we need to go to get closer to the right number. We should get closer to the right number.
If the Federal Accounting Standards Board, or FASB, changes the rules, many of these firms say they will have to scrap their options programs, which have helped attract the best and the brightest talent and have created a revolution that has boosted the entire economy.
I could get tedious on this point, but let's make it clear why we have to scrap the options program: because the shareholders would be furious if they understood how much of the store we're giving away. We would much prefer to continue to give away shareholder money, paying more than the shareholders would approve for talent, and we don't want the FASB making us 'fess up.

The companies need to ask themselves a simple question: is it worth the options in question, in addition to salary, to attract the talent in question? If it is, go forward with the program, whether you get to lie about its cost or not. If it isn't, don't go forward with the program, whether you get to lie about it or not. Do what is best for the company, not what produces the best short-term reported earnings.

latest numbers
Unemployment to 6.0%, down from 6.1% and in line with my own expectations, though I can't say about anyone else. Nonfarm payrolls up 126k with September's figure revised up to 125k from 57k; more good news from the labor market.

Lawsuit News
I mentioned a couple of intellectual-property lawsuits a few weeks ago -- a razor-patent lawsuit by Gillette against Schick (which is owned by Energizer), and a lawsuit by the SCO Group against IBM claiming that IBM incorporated SCO Group intellectual property into Linux. There's news on both fronts -- I've incorporated both into this entry, but if you just want the Linux news, I've created an extra anchor for that.

First, though, an article or two in the Gillette v. Schick case, the evidentiary hearing for which has been taking place over the last couple of days. I've excerpted the meat of the articles here:

The hearing was over Gillette's lawsuit that claims Schick's Quattro, a four-bladed razor, uses the same technique to stack the blades in the cartridge as Gillette's Mach3 three-bladed razor and otherwise violates Gillette patents. Gillette is seeking a preliminary injunction to stop Schick from selling Quattro, which went on the market in September.

During the first of a scheduled two-day evidentiary hearing, Gillette presented witnesses who tried to show the affect Quattro has had on its business and to also defend the patent.

One Schick lawyer suggested during cross-examination that Gillette's three-bladed technology was merely a natural progression from two-bladed technology introduced in the 1970s.

John Terry, retired head of research and development for Gillette, rejected that suggestion.

"Having struggled with the problem for over 20 years, I don't think it was obvious and if it was so obvious, Schick-Wilkinson would have done it," he said.

"There's nothing anywhere that says four blades," Richard Rochford, an attorney for Schick, said of Gillette's patent that covers its top-selling Mach3. In fact, Rochford said the technical measurements in Gillette's patent do not leave room for a fourth blade.

But John Nathan, an attorney for Gillette, said that any razor head that includes any group of three blades would be covered by Gillette's patent. He likened the Quattro to adding a fifth leg to a four-legged table.

In the SCO v. IBM (Linux) battle, a little bit of news on the lawyers' contingency fee:
Lawyers for software company SCO Group could wind up with 20 percent of the proceeds if the company were to be sold or reach a legal settlement, according to a recent document filed with regulators.
As far as I found in the Wall Street Journal, all they have on this is one sentence in their "business briefs" column. I'm not finding the filing at the SEC website, but I may just not be looking in the right place. If you see what I'm missing, let me know.

Thursday, November 06, 2003
latest numbers

In experimental physics the way I did it — I was a theorist — there were certain data to which my first response was to smack the equipment and try again. Initial claims of unemployment at 348,000 is a smack-the-equipment kind of number; it's good enough that I would actually be in a better mood with something a bit higher.

A friend who worked at the Federal Reserve told me once there was an effort to determine whether the weather had a short term impact on these numbers, perhaps pushing some claims from one week to the next. If next week's number comes in below 390,000, I promise to believe this week's number.

Anyway, productivity for Q3 preliminarily at 8.1%. If you hear people asking, "how can the economy be doing so well if it's not producing any jobs?", well, productivity tends to be the answer. Productivity above 3% is not realistically sustainable, and we won't be sustaining 7% growth without a pick-up in jobs; in fact, part of this may be due to the way numbers are calculated and the fact that inventories dropped substantially in the third quarter. That will tend to boost productivity numbers, insofar as I know what I'm talking about; as inventory numbers are bounded below, that's the kind of temporary effect that can't be sustained. It's also a hallmark of incipient economic recovery.

Wednesday, November 05, 2003
The Boston Globe today has a story about Gillette's latest earnings report (which was pretty good, in large part because of the weak dollar). It touches on the patent lawsuit against Schick, which I mentioned a few weeks back. They seem to be meeting in court today; Gillette's request for an injunction will be granted or denied by the week-end.

latest numbers
ISM Services came in ahead of consensus (64.7 vs 63.4), factory orders were up less than expected (.5% vs .6%); nobody really cares, but if we don't pretend to this blog becomes derelict property seizable by the state.

Monday, November 03, 2003
latest numbers
ISM index (Institute of Supply Management, I believe; a number above 50 represents manufacturing growth) came in at 57, ahead of reported expectations of 55.8, though after last week nobody's really surprised by moderately good news. I think a lot of us are eagerly awaiting the unemployment rate to be released on Friday; if the unemployment rate isn't down a tick, it will be because the measured labor force increased. Mind, I've been wrong before.

"Study" Says Companies Shouldn't Give Out Earnings Guidance
I provide this story more as general reading material than as something I have a comment on, but I would like to point out that the term "poll" would be more appropriate than "study". The word "study" suggests that someone found a causal relationship between giving earnings guidance and low shareholder returns, or low returns on equity, or osteoporosis, or whatever. This is just a poll of AIMR members, many of whom believe that specific earnings numbers lead to earnings manipulation.

I figure they're probably right to some extent, but I don't see this as a huge problem. My suggestion to corporate management is this: tell us what you know, and don't tell us what you don't know.

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