Michael's random thoughts

It’s Deja Vu All Over Again – Pfizer acquiring Allergan

2015-11-23T15:50:00.000-05:00

Instead of bringing back a research driven company by rebuilding a culture of discovery and innovation, Pfizer is reverting to its old bag of tricks – acquiring another large pharma company. It is sad for many long term healthcare investors to see the leftovers of what used to be the best pharma company in the world being once again merged and squeezed. The big pharma mergers and acquisitions record is pretty terrible. The primary tangible results were closures of a large number of research labs and destruction of shareholder value. The overall industry benefited from the best scientists leaving the large companies after the mergers and starting or finding new homes in smaller and nimbler pharma or biotech companies. Unfortunately, the large companies were left with those who could not easily leave.

The merger news reminded me of some of my quotes in Bloomberg News article from January 2009, right after the announcement of Pfizer’s $68 Billion bid for Wyeth: Pfizer Bids About $68 Billion for Wyeth;Boards Meet:

"Michael Obuchowski at First Empire Asset Management of Hauppauge, New York, said smaller potential acquisitions, such as Foster City, California-based Gilead Biosciences Inc., the biggest maker of HIV treatments, would cost less and better enhance Kindler’s plans to make Pfizer leaner and more creative."

“The string of large acquisitions in the past never benefited shareholders,” Obuchowski said. “Acquiring another slow-growing company turns Pfizer into a solid, slow-growing company that won’t grow any better than Pfizer is right now. It’s a company in restructuring acquiring a company in restructuring.”

There might be some positive signs in this particular merger transaction. Technically speaking, Allergan is buying the much larger Pfizer and the company will shift their headquarters to Ireland, gaining better access to Pfizer’s offshore cash. Even more important is the possibility of a future split into two companies – one with older, off-patent drugs and an innovative brand name drug business. Merger with Allergan might help to bolster the (hopefully) innovative drug development based company. Unfortunately, all the usual problems of merging research labs and scientists in those labs will apply to this new entity. Its success is far from certain and based on Pfizer’s track record of research destruction the odds are not in their favor.

Disclosure: We own Gilead (GILD) shares for our clients at Merlin Asset Management and Concert Wealth Management.

It's Apple time again!

2015-10-28T08:01:00.001-04:00

It is amazing that Apple seems to actually surprise anybody with their earnings. This time, sell side analysts displayed several weeks of progressively irrational fear of a slowdown in iPhone sales. It is true that at 63% of revenues, iPhone increasingly dominates Apple’s sales and such a slowdown would have been tragic for Apple. Despite the analysts’ fears, once again, demand in greater China drove iPhone sales, defying skeptics and an 8% hit from a strong dollar.

In addition to continuing growth in iPhone sales (interestingly, the September quarter included only two days of iPhone 6S and 6S Plus sales) Apple continued to sell more Macs, despite the estimated 11% contraction on the overall PC market. As we have seen for the last seven quarters, iPad sales continued its decline. The good news is that, after another 20% decline, iPad sales represent only 8% of Apple revenues, so fewer investors are worried about Tim Cook’s failed promises of an iPad revival. Nobody expected Apple Watch to contribute significantly to the overall financial picture at this early stage of its development and it is still lumped in the Other category that represents only 6% of Apple sales and includes Apple TV, Beats and iPod.

Overall, a very solid quarter with continuing growth in the very difficult (when compared to last year) current quarter. The large (75% of iPhone users) remaining pool of people who have not upgraded to iPhone 6/6 Plus, excellent design of the new iPhone 6S/6S Plus and the continuing large numbers of switchers from other smartphones bodes well for Apple, at least in the near term. Of course, the increasing rate of Android switchers mentioned on the earnings call is hardly surprising. Android is by far the most popular smartphone OS, so 30% of switchers moving from an Android phone could even be interpreted as a low number. With Apple sitting on $150 billion in net cash, the company has a lot of flexibility to continue large share buybacks that will positively affect their earnings per share numbers.

Despite all the positives, I continue to worry about Apple’s future. In 2008, Steve Jobs described Apple’s businesses as a three-legged stool with a hobby on the side. With the second largest product category (Mac sales) representing only 13% of sales, Apple has become an incredibly profitable one product company. The iPhone’s success is once again giving Apple more time, but there is no escaping the desperate need for more hit products that could add one or two more legs (and a perception of stability) to Apple’s stool. We continue to own Apple shares for our clients at Merlin Asset Management and Concert Wealth Management but we also question whether the growth can last much longer without new magical products.

Neuroon sleep mask

2013-12-03T22:49:00.001-05:00

http://www.kickstarter.com/projects/intelclinic/neuroon-worlds-first-sleep-mask-for-polyphasic-sle

What Will Be the Next Gene Therapy? | MIT Technology Review

2013-10-08T09:13:00.001-04:00

What Will Be the Next Gene Therapy? | MIT Technology Review

Wall Street to GOP: Are you nuts?

2013-09-27T09:40:00.001-04:00

In the best-case scenario, investors would come to believe that “we have totally incompetent politicians who are unwilling to pay the bills when they are due,” said Michael Obuchowski of North Shore Asset Management.

Read more: Wall Street to GOP: Are you nuts?

I've been having quite a few conversations with reporters about the potential effects of the government shutdown (and related defunding or postponement of Obamacare) or the political inability to raise the debt limit. After the last few years of displaying unbelievable lack of understanding of economy and an incredible inability to negotiate any reasonable agreements, both sides seem to be at a point where neither side believes that they can give in.

It seems to me that at this point in time republican politicians have a lot more to lose and that they painted themselves in to a corner from which there is no easy escape. The unreal non-filibuster filibuster was a perfect example of political desperation. What an incredible waste of time. If Ted Cruz read the entire Obamacare bill then at least it would have been the first time anybody read that entire bill. Instead, the news reports were giving snippets of comments on Dr. Seuss. Asking to filibuster a bill the same politicians voted into law is the same as refusing to lift the debt ceiling limit that is only being breached because of the laws the same politicians voted for. Saying no to everything is a 3 year old's view of the world.

Maybe it is too much to ask, but it would be great for elected politicians to actually focus on something constructive that would help their constituents and the country to prosper into the future. If they voted on something that they now suddenly consider to be bad for the country, a better alternative would be to work on better ideas that the voters could get behind rather than just throwing temper tantrums threatening the economic growth and well being of the same voters.

Kids 1 Adults 0

2013-09-26T10:54:00.001-04:00

http://tinyurl.com/mr4kqba

Their claim to be one of the best ice cream places in the USA seems to be vaild...

2013-09-21T16:30:00.001-04:00

Corked wine smell doesn't exist?

2013-09-16T20:50:00.001-04:00

Scientists Have Found Why 'Corked' Wine Smells Bad http://www.businessinsider.com/compound-makes-corked-wine-smell-bad-2013-9?utm_source=androidapp&utm_medium=referral

Hangovers get better later in life???

2013-09-16T17:31:00.001-04:00

Hangovers Actually Get Better Later In Life http://www.businessinsider.com/older-drinkers-have-fewer-hangovers-2013-9

It's a great Summer(s) day

2013-09-16T09:01:00.001-04:00

Nothing gets investors more excited than eliminating some uncertainty. Everybody agreed that it would have been an ugly fight for Larry Summers to get confirmed as the next Fed chair. It looks like the current or previous vice chair will be getting the job.

Wednesday night racing in Oyster Bay

2013-09-11T17:53:00.001-04:00

Beautiful southerly in Oyster Bay - great evening for a race!

Is Apple just another fruit followup

2013-04-25T11:20:00.000-04:00

My Apple rant did elicit some interest from the financial media:

Is Apple just another fruit?

2013-04-24T14:37:00.001-04:00

I don’t remember ever being that cranky after a quarterly call from an awesome, incredibly profitable company. I think Tim Cook is a great operations guy and he fully deserves to be the COO. Can we please have somebody with balls to become the CEO so Tim Cook can apologize to him/her in private and the real CEO can tell the investors how awesome the company is and manipulate sell side analysts' expectations as one should? Yes, I did just say that. It was hardly an embarrassing quarter for Apple. What made the results embarrassing was the executives' apologetic attitude and complete failure to communicate with the analysts. Somebody please call Greg Maffei for help? His Microsoft quarterly calls should be studied by all public companies. I am sure that he has a big enough ego to run Apple. It seems that it should be a prerequisite in Apple CEO interviews.

That was the most poorly managed quarterly call in some time. Did they waterboard Peter Oppenheimer to follow the apologetic spin? This is unbelievable. Do we really need the reality distortion field to make Apple tick? What happened to the amazing culture that Steve created? Was it really all Steve Jobs? Were they completely blinded by the lawsuits and just lost their focus? Apple sounded nearly like RIM talking about future amazing products sometime in our lifetime (or end of the year, whichever comes first). Maybe they should also change their name to some berry out of respect for fruits? After following Apple for so many years I fell that I am understanding the company less and less.

There are many ways to skin a cat (or peel a fruit for that matter) and that was not how one should do it.

Full disclosure. I own Apple shares personally and for our clients at North Shore Asset Management.

2012 EIEIO Cup Regatta at Seawanhaka Corinthian Yacht Club

2013-02-27T20:29:00.001-05:00

Click here to view this photo book larger

Turn your favorite photos into a photo book at Shutterfly.com.

Last sail of the Oyster Bay season

2012-10-23T19:17:00.001-04:00

iPhone 5 and thoughts about the future of Apple

2012-09-13T06:53:00.001-04:00

The new iPhone5 is certainly a great phone by itself. It has all the necessary “next generation” phone characteristics: it is thinner, lighter, has a bigger screen (finally - although nowhere close to the currently best-selling phone - Samsung Galaxy SIII’s 4.8”). Of course it has a next generation processor, better camera with 720p video, longer battery life and finally brings iPhone’s capabilities to use LTE – true 4G data network that has been growing rapidly in the US and is beginning to catch on in the rest of the world.

At the same time, just meeting the expected specs is hardly exciting and we can expect a lot of criticism of the new iPhone as just another high end phone with a smallish screen. Unlike in the past, we pretty much knew everything about iPhone 5, with leaks about nearly all of the obvious features, so the phone as such was not a surprise and largely a disappointment to the tech geeks who wanted to see a leap ahead of the competition. At this point, iPhone 5 is a very competent, beautifully looking phone with nearly all of the characteristics of a high end Android phone (except for the still small screen size).

Much more interesting is the increase in the understanding of Apple’s product design directions. We had hints of it in the limited changes from iPhone 4 to iPhone 4S, but now it is very clear that Apple has become a true master of adding just enough new features to the next generation iPhone to encourage the majority of current users to upgrade and to maintain iPhone dominance as the best selling phone. Even more important might be the idea that Apple is focusing on increasingly using software (even more than in the past) to differentiate their products and to maintain their dominance of users mindshare if not the actual numbers of phones sold worldwide. It seems that the iPhone5 was not designed to be awesome or revolutionary, but was specifically designed to be a perfect iOS6 platform. With the new iPod Touch seemingly much closer to the iPhone 5 in its design than the last year’s iPhone 4s (as one would have expected based on Apple’s history), Apple’s focus is seemingly shifting to providing a platform for iOS consumption. Even the new iPod Nano looks like a smaller version of iPod Touch and extends the reach of the iOS operating system from a $149 device that plays music and videos all the way to the $829 iPad with 200,000 apps and LTE.

If this is true, then we should expect any future hardware improvements to be driven by the idea of providing an excellent platform for the new versions of iOS and less on leaping over competition with revolutionary hardware designs. Does it make Apple just another electronics company? Is Jonathan Ive going to hang around to make small incremental improvements to a small number of products? Maybe, maybe not and it is probably nothing that will happen in the near future, but despite many rumors, we have not seen anything revolutionary out of Apple for quite some time. The situation reminds me of what Amazon has been doing lately. The new Amazon Kindle Fire might not be the best tablet at any price, but it is a very competent device and the entire range of Kindles was specifically designed to enable and encourage increased consumption of Amazon’s services. Jeff Bezos recently stated that “We want to make money whenpeople use our devices, not when they buy our devices.”

Is that the future direction for Apple? Not at this point in time. Considering that iPhone represents approx. 50% of Apple’s revenues and more than 70% of their profits, a competitive iPhone is extremely important to Apple’s future success. Combined with iPad’s nearly complete dominance of the tablet space and Ipod’s continuing dominance of the music player space, it is an impressive franchise that will be difficult to challenge for some time to come.

With its beautiful design and just enough new features to get the majority of the current users to upgrade and to attract millions of new users, the iPhone 5 will likely become the best-selling phone ever and will be a big success for Apple. At the same time, I will be looking at Apple’s future products thinking more about Apple’s long term evolution as a company rather than the next quarter or two of best-selling devices.

Disclosure: As of this writing, we own Apple, Inc. (AAPL) shares for our clients at North Shore Asset Management, LLC.

Old Market in Poznań

2012-09-13T06:28:00.000-04:00

Krajkowo, Poland

2012-08-26T10:49:00.001-04:00

IOD Celebrity Invitational Regatta

2012-08-20T22:03:00.001-04:00

Scuttlebutt - Sailing Forum: DISCUSSION: Event Reports: Nantucket Race Week 2012

Apple Stock Drops On Missed Estimates After IPhone Lull

2012-07-25T09:15:00.001-04:00

Bloomberg news: Apple Stock Drops on Missed Estimates After IPhone Lull

Internet IPO Puts Rise at Record Rate Before Facebook

2012-05-15T23:27:00.001-04:00

Businessweek.com: Internet IPO Puts Rise at Record Rate Before Facebook: Options

Groupon, the largest daily-deal website, reported profit yesterday that topped analyst estimates as marketing costs dropped and it expanded. The results, which spurred an 18 percent rally in the shares after the close of U.S. trading, may bring investors back to social media companies, according to Michael Obuchowski of First Empire Asset Management.‘

Turning Point’

The results “might be a turning point,” Obuchowski, chief investment officer at First Empire Asset Management in Hauppauge, New York, which manages about $4.9 billion, said yesterday in an interview. “If Groupon can appease the investors and show solid numbers, then that could turn the tide and generate a lot more interest in those companies in general,” he said. These are “risky but potentially game- changing business models,” he said.

Global Risks and Global Response

2012-04-29T22:22:00.000-04:00

Under another Mario taking over its reins, the European Central Bank (ECB) finally became much more attuned to the economic growth risks. Many have argued that ECB’s prior obsession with real or imaginary inflation under Jean-Paul Trichet contributed to the European economic woes with repeated increases in interest rates enacted with what proved to be the worst timing possible (July 2008 and July of 2011 are just two of the best examples). In contrast to his predecessor, Mario Draghi’s first order of business was to reverse the misguided interest rate increases and to provide support and increased liquidity to the European banking system that was hanging on a thread on the edge of the abyss threatened with significant exposure to the rapidly deteriorating in value sovereign European debt. The ECB’s decisive action that roughly followed the Fed’s blueprint, provided the shock therapy that helped markets regain composure and pushed many speculators to the sidelines. It is interesting to note the change in the VIX volatility index during the last 12 months (see Figure 1).

Figure 1. CBOE SPX Volatility Index. Source: Bloomberg.

The ECB’s decisive actions during December nearly cut VIX in half since its December 8th high of 30.59. One of the most significant issues affecting investors during the last 12 months was the effect of the European slowdown on China. With European Union being the largest market for Chinese exports, a deep European recession could have had a quite debilitating cascading effect around the world. If the Chinese economy slowed down significantly, that would have affected global demand for industrial commodities, seriously hurting the economies of rapidly growing materials exporting countries.
A slowdown in the Chinese economy would have also had a negative effect on the US economy. Despite the common perception that US is primarily an importer of Chinese goods, in 2011 China was Unites States’ 3rd largest export market (behind Canada and Mexico) and continued to be the fastest growing one (See Figure 2). Despite the incredible 542% increase in the US exports to China since 2000, the $103.9 billion in 2011 placed the US in 5th place, with only a 7% market share of total imports into China.

Figure 2. US Exports to China since 2000. Source: US Department of Commerce.

The recent experiences of the 2008 global recession and the threat of an upcoming Euro wide recession seemed to have affected China more indirectly but with much more important long term consequences. The effect was a policy shift from strongly encouraging growth via exports to an effort to increase internal consumption in China. Such a shift is expected to enable China to be less dependent on the vicissitudes of global demand for goods and provide more stable growth by building a consumer economy. There are some fears that China’s move away from exports will negatively affect demand for commodities, but the more reasonable rate of increase in commodities demand is likely to be a healthier sustainable path that will push many of the short term speculators into other areas of interest. More about China and the effects of its internal changes on the US equity markets later on.

Atlanta Fed's Jobs Calculator

2012-03-09T07:38:00.000-05:00

I've been playing with the Atlanta Fed's Jobs Calculator: http://www.frbatlanta.org/chcs/calculator/index.cfm. It is a fascinating exercise and really helps to understand the relevance of some of the variables involved. The Jobs Calculator uses current, seasonally adjusted BLS statistics for employment, number of unemployed, civilian labor force, labor force participation rate, population growth, etc. You can enter the target unemployment rate and number of months needed to achieve that target rate. The calculator then outputs the required average monthly change in both household employment and in payroll employment that is needed to reach the target unemployment rate in the specified period of time. Of course, at this point, the most interesting exercise is the change in employment needed to reach below 8% unemployment rate by the end of October. The Employment Situation report for October will be released on November 2nd, only a few days before the election day on November 6th.

According to the Jobs Calculator, to achieve a 7.9% unemployment rate, we only need average monthly change in payroll employment of 152,775 - more than 30% below the expected February's change of 225,000. If the monthly change in payroll stayed at 225,000 for the next 8 months, the expected unemployment rate would drop to 7.5% by the end of October. If it stayed on average at January's level of 243,000, the expected unemployment rate would be 7.4%.

Taking into account jobless claims settling comfortably below the magical 400,000 number and a declining, or at least anemic labor participation rate, those numbers are not unreasonable and may even be somewhat pessimistic. There is of course a big discussion about recent changes in BLS' statistics, seasonal adjustments during this unusually warm winter, etc., but the most important variable seems to be the labor participation rate. Many investors (including myself) expected that with improving job prospects, the labor participation rate will reverse its decline and push the unemployment rate higher at least for a period of time. Apparently there is no real data supporting such a logical expectation. Caroline Baum addressed this topic yesterday her excellent column arguing that labor force participation might be primarily a function of age distribution, with aging population moving to a lower participation rate. She cited Barclays economists failed to identify any period of time in the last 45 years where jobless rate was driven by those reentering the labor pool rather than those losing their jobs. If labor participation rate dropped to 63.5% (form current 63.7%), the average change in payroll at January's level of 243,000 would result in the expected unemployment rate of just above 7.1%. We might have some interesting months ahead of us.

Device Hacking Continues: Medtronic, Others 'Lacked Foresight' | Qmed

2012-03-01T08:03:00.000-05:00

Device Hacking Continues: Medtronic, Others 'Lacked Foresight' | Qmed

Google Sea View

2012-02-26T07:23:00.001-05:00

Watch "Catlin Seaview Survey" on YouTube