Monday, July 21, 2008

Pharma Sparks Starting to Fly

Merger activity is picking up in the big pharma sector. With stocks such as PFE yielding around 7%, dividends have supported the shares. Now, the weak dollar is causing the earnings to pop and one company is going after another.


So many stock groups, including pharmacy companies have struggled against the pending doom of big government. With congress in the control of democrats, the risk to drug companies is considerable. Drug companies must spend small fortunes time and again before succeeding in making a large fortune.

One of the fairy tales often told that supports democratic spending is the one about consumers accounting for 70% of the GDP. I and many others have repeated this false notion for two reasons. First of all, it seems to be an innocent number and second is because of the way government numbers are reported. Liberal media politicians have succeeded in making us all believe that the way to prosperity is to encourage more spending. The $600 rebates created more federal debt. Obama wants to do them again.

In the past, I have presented the national income formula as Y=C+I+G+(Net Exports). The problem is that the I and the G are like exports, net numbers. Consumer consumption is not so complicated. Add up what all consumers spend and you easily arrive at one large number, but how much do companies invest? how much does government spend? The numbers used to insert into the formula are the net investment numbers and net government spending. A lot of "canceling out" occurs in the process. This morning the Market Oracle web site notes what I call the see-saw effect of algebraic formulas, if Y stays the same, then if G goes up, either C or I or both must go down. Democrats seem to think that G could go up to 100% of Y and still be good for the people. Castro tried this approach and we know the results there. The government owes all the houses but lets the citizens use them "free of charge". Who needs central air conditioning in the warm balmy climate of Cuba anyway?


Obama did not just luck into the democratic nomination. Look at his current position on going after terrorist in Afghanistan and you would think he has always been a military hawk. The man is trying to take McCain's issues away. If he succeeds, the perception is that democrats will devastate the drug business, but, in the natural economic cycle, the next 10 years should be good ones for the drug industry. LANNY DAVIS IS ALSO SMART. Lanny is a true blue Clinton professional politician. He notes that Obama is only ahead 4% or so with three months to go. Lanny says democrats should be worried. Lanny understands that democratic presidential candidates tend to be quarter horses versus republican thoroughbreds. A quarter horse is a fine horse and a winner in short distance races. Thoroughbreds are "top end" breeds. They run like the wind once they have warmed up. The winner will win by only a nose.

Obama faded in the last stages of the nomination campaign. McCain has not showed us much so far. Obama is smooth. He is to be admired for his skills. The question is, will substance win over style or vice versus. Obama's policies are the wrong medicine. The key to having a high Y in the formula is to realize that consumers and businesses spend more wisely than do governments. Consumers and businesses spend for "pure" reasons relative to government. When the government pays $350 per $1,000 for wind mill construction, it does not matter to the spender if the investment makes sense for the country. The $350 is going to a "friend". This is the equivalent of the King paying his brother to build wind mills.

One of McCain's strengths is his fight against pork barrel spending. The people have seen that democratic and republican lead congresses cannot resist excessive spending. The most positive thing McCain has to offer is his insistence that spending be justified. Under a McCain presidency, drug companies will be allowed to search for cures and to profit if they are successful.