President Obama is trying to save General Motors (GM) and Chrysler as part of his plan to reindustrialize America. But this is missing the point in the same way that the Treasury and Federal Reserve are trying to recreate the shadow banking system. China has recognized that both the automotive and financial worlds have changed; what are we waiting for?
China’s banking system has largely avoided the complexity of financial innovation and sees no need to catch the history it missed. So too is China ready to jump past the high complexity of sophisticated internal combustion engines and zillion speed automatic transmissions. As far as I know Toyota’s (TM) hybrids and Lexus’ 8 speed auto-trans are leading or beating the Germans in the useless complexity wars. China is bold enough to say that with all-electric cars, complexity is reduced to such an extent that there are no longer any barriers to entry in the world automotive scene.
What will be differentiating factors between vehicles if China is right? Electric motors and batteries will become available off the shelf, and complex transmissions will no longer be needed. Most steering and suspension parts along with digital and analogue computerized controllers, will become more standardized and also be available off the shelf. Of course branding, quality of fit and finishes, and quickly adapting to the fashion of the moment will continue to be important. But the key differentiating factor will be each brand’s software controlling how the standardized parts feel in unison to the driver.
We are already seeing hints of this today. Most auto companies have shared the development of the new breed of 6+ speed auto-trans hardware. But from the driver’s perspective, some shift harsher or much too often. The difference is the software. Drivers would have no idea their cars share the same transmission hardware.
Now take it to next level where there becomes virtually no hardware differentiation between vehicles. And the complexity becomes balancing power consumption and recovery, and battery life. Performance is now driven by the sophistication of the controlling software, thus software is the new horsepower.
Do we have to retain the assemblers for America to be dominant player in the world automotive industry? Is that not the same as saying Dell (DELL) contributes more to the American and world economies than Intel (INTC) and Microsoft (MSFT)? The answer to both questions is obvious. And that does not even consider the risk that assemblers such as GM and Dell face in managing changes in consumer preferences.
Readers could argue that auto parts makers have been squeezed hard by the assemblers, and many are already bankrupt. It can also be said the disk drive and memory manufacturers have lower margins than the box makers. But that misses the point that America does not have to focus on the commodity parts business in any industry. There is plenty of value adding profit to be made in the new auto electric motors, electronic controllers and most of all software.
Historically America has been a nation of innovators, positioned in the most value adding parts of the food chain. We need to be less concerned about the low value adding assemblers and more focused on designing and building high value parts and very high value software. We do not need Ford (F), GM and Chrysler for America to make a lot of money and create a lot of high paying jobs in the auto industry.
Don’t be surprised to see “Intel Inside” on Chevy’s trunk lid.
Disclosures: Author is long INTC and MSFT.
As Detroit Rusts, Silicon Valley will Take Over the Auto Industry
Character Based Banking as Credit Enhancement
Published by clickbroker.blogspot.com
The Wall Street Journal’s “Activist Financier 'Terrorizes' Bankers in Foreclosure Fight” is juicy enough to qualify for the E! Network’s (CMCSA) True Hollywood Story or CBS’s (CBS) 60 Minutes. When you cut through the sensationalism, Bruce Marks’ Neighborhood Assistance Corp. of America (NACA) is executing an elaborate form of brand building for his niche of the mortgage market. He combines a $34.5M federally funded nonprofit mortgage counseling service with a captive mortgage brokerage.
Marks is marketing a club in much the same manner as Costco (COST), Sam’s Club (WMT) and even Abercrombie & Fitch (ANF). Though the Journal paints a much more unsavory picture of a cult rather than a club. Just like a cult, many members might not feel comfortable with the organization they joined. Members get the benefit of applying for low cost mortgages without being held back by moderate or poor credit scores. The price members pay is that they are forced to actively promote the NACA brand, and be associated with activities that include protests and a website calling certain bank executives “predators”.
NACA has agreements with Bank of America (BAC), Citigroup (C), JP Morgan (JPM) and Wells Fargo (WFC) to fund their mortgages and accept their counseling efforts on loan modifications. Marks focuses what the Journal calls “terror” on the banks that aren’t cooperating – HSBC (HBC), Barclays (BCS) and Credit Swiss (CS). Though unsavory, I think the Journal’s characterization of terror might be too strong.
The banks love/hate relationship with NACA centers on the 1977 Community Reinvestment Act (CRA). Banks are forced to issue mortgages to patrons with weaker credit in less desirable neighborhoods where they have branches. The bank solution of charging more interest for high risk often does not totally mitigate credit losses. NACA offers an unusual form of credit enhancement that makes the CRA borrower an equal to or a better credit risk than prime borrowers according to Bank of America. Banks pay NACA a fee of $2500 for each loan originated.
NACA originated $367M mortgages in 2008, insisting the all borrowers pay the same interest rate. The current rate is 4.875%. Each borrower must participate in extensive training on the responsibilities of home ownership and pay NACA dues for the life of their mortgage. Bank of America says few organizations prepare their borrowers as well. But the most important aspect of the credit enhancement is that members are required to participate in group protests and volunteer in the offices. This creates a cult-like environment where a member’s deviation from sound use of credit could be averted by group pressure.
Marks’ theory is that all credit risks are equal after education, so all members should pay the same interest rate and are entitled to a no down payment mortgage loan. NACA tries to insure that borrowers are not overreaching as part of its underwriting process. Marks’ logic is that borrowers past sins will not be repeated, so they should not be punished for them. Part of the membership dues goes toward helping members with mortgage payments when they temporarily are unemployed. The Journal gives few details on the performance of NACA originated loans.
My real interest is not in the good or bad of what I call NACA’s branding activities. Readers can go to the Journal and pass their own judgment. The real question is can banks emulate the best of NACA in a character based lending system on their own, and do they even want to?
NACA’s organization and brand building activities are very labor intensive and are not practical to as Intel (INTC) says “copy exactly.” But banks can implement required home ownership education and continuing group credit counseling in exchange for lower interest rates and fees. Perhaps give PMI rebates as long as borrowers attend monthly credit checkups or audits. Even experienced homeowners could benefit. The refinancing bubble has shown that the distance between responsible and irresponsible use of credit is short.
The want question is more difficult. Creating the excess baggage of group pressure on a bank’s customers could be a competitive disadvantage during times of easy credit. NACA’s business declined during the subprime bubble, even though they offered much greater value to buyers of moderate to lower priced homes. And during good times realtors are likely to steer clients to banks and mortgages brokers that accept both their good and bad credits hassle free.
It all boils down to whether reduced credit risk is an important competitive advantage in a weaker shadow banking environment. With the mortgage securitization market currently limited to Fannie Mae (FNM), Freddie Mac (FRE) and FHA, banks need to start sowing the seeds now for a more trusted mortgage securitization product. Perhaps there is something to be learned from Bruce Marks.
Disclosures: Author is long BAC, C, FNM, FRE and WFC.
Congressman Paul Ryan’s Republican Healthcare Alternative
Published by clickbroker.blogspot.com
The conservative TV pontiffs and their print counterparts, including The Wall Journal editorial page, are saying all hail the free market alternative to the Democrats government takeover of our uniquely American healthcare system. The Republicans are eager to admit that the current system is broken, but reform should not destroy it. After all, for those that can afford it or get unlimited care from the government or their employers, the care is the best in the world.
Republican Congressman Paul Ryan’s “Patients' Choice Act” is a thinly masked rehash of "McCain Healthcare: An Evil Play on Words". Both the Ryan and Senator McCain plans depend on the states, out of the goodness of their hearts, to provide “guaranteed access.” Neither plan actually forces private insurance companies to eliminate medical underwriting, nor provides for enforceable state high risk pools or for a government plan to insure the people a private insurer rejects.
Ryan’s “Patients' Choice Act Q&As” helps us dissect the illusion of guaranteed access. Guaranteed access was never intended to be confused with or imply guaranteed issue. First, consistent with McCain, Ryan would move the tax advantage from employers to employees and individuals. Next, the same type of voluntary insurance exchanges would be regulated at the state level, as would any high risk pools. Each state would act as a laboratory of innovation in cost control and adverse risk redistribution amongst private carriers.
Individuals would be guaranteed access to any plan in their state’s exchange. Any plan licensed in their state is eligible to join their state’s exchange as long as it meets minimum federal standards. Each state has the freedom to establish a high risk pool or develop any other means to fairly redistribute or reinsure the risk between the exchange’s plans. But nothing is actually required along the lines of community rating, or eliminating any form medical underwriting in determining premiums. The participating plans simply “are prohibited from discriminating based on prior medical history or existing conditions and must provide annual open enrollment periods to enroll newly eligible individuals.” The words discriminate and eligible are yet to be defined.
So the implication is that individuals are guaranteed issue of a health insurance policy, meeting at “least the same standard health benefits made available to Members of Congress”, at some undetermined price from their state’s exchange. But the kicker is that each private insurer can chose which (if any) of their plans to make available to each state’s exchange and at what price. While each state can manage, if they chose, adverse selection within each of their exchanges, they cannot manage adverse selection between plans within and outside their exchange.
Individuals will be granted a refundable tax credit to purchase insurance whether they acquire plans from within or outside their state’s exchange. Given that no rules apply outside the state exchanges, full medical underwriting would lead to a large price discrepancy favoring plans outside the exchange. This would lead to only the worst risks migrating to the state exchanges. The only consumer advantage of the exchanges is that plans within must meet minimum federal standards.
The exchanges adverse selection potential relative to external plans would outweigh any process to redistribute risk within each of states’ exchanges. But even more basic, no private insurer might chose to participate in a given state’s exchange. Remember, neither insurers are mandated to offer plans on the exchanges nor are individuals mandated to purchase health insurance at all. So some states might end up offering nothing in their exchanges. And with no government health insurance plan option and a closed high risk pool, states like Florida would offer no reform at all.
The Ryan plan actually offers nothing concrete. Just the dream that states might want to reform health insurance on their own. Many decades of experience has already proved Ryan wrong.
The Faux Demand for Foreclosed Homes
Published by clickbroker.blogspot.com
The Wall Street Journal’s “Investors Pounce on Distressed Homes” implies that when 38% of April single family home sales in Phoenix were all cash, as was 67% in Punta Gorda, FL and 39% in Las Vegas, investors must be controlling the market. At the same time Barclays Capital estimates that foreclosed inventory won’t peak until mid to late 2010 at roughly 1.3M units, investors are currently outbidding end users on the approximately 765.5K foreclosures currently in inventory. When this investor owned inventory returns to the market, end user demand will truly be tested.
The Journal cites Hudson-Cross Financial, Gorilla Capital and smaller funds with $6M to $30M to invest in single family homes at prices difficult to resist. These big time speculators are managed by alumni from major firms such as Deutsche Bank (DB), Morgan Stanley (MS) and D.R. Horton (DHI). Banks find them attractive REO customers because they make all cash offers for homes in bulk (10 to 200 units). After the purchases, the funds then hope to finance up to 50% of their purchases to keep the ball rolling.
The speculators expect a small positive rental return until the housing market improves and they can sell their inventory at a profit. This story sounds similar to the "Big Time Buying in Foreclosed Single Family Homes" article I wrote about Silver Portal’s ventures in the San Diego area. I did not think that a large fund could find the profit in single family home rentals the way experienced mom and pop operators have.
The numbers did not seem to add up, but Silver Portal’s Managing Principal Burland East emailed me to vigorously disagree with my assumptions on occupancy rates, taxes, maintenance and operating expenses. East claimed rents of $1900 per month were factual, a 98.5% lease rate in the San Diego area single home market, an estimated net yield on rentals of 8.8%, and a projected IRR at sale in 5 years of 25% to 30% with 50% leverage. East expects “that prices will not recover in 5 years, they will get back about half the loss since 2005.”
To be fair, The Wall Street Journal’s “Plying the Foreclosure Market” reported that East was looking for moderately priced homes in desirable neighborhoods, so he had a reasonable chance at achieving appreciation success. But in a second email to me East said I should not base my modeling assumptions simply on a newspaper report.
I do not dispute East’s corrections to my previous article for his market, but in general I still do not see how a financial firm can efficiently manage discrete single family rentals. I believe most of these funds will be operating cash flow negative without even considering the value of the money. In order to hope to break even on rentals, their purchases would have to be in the neighborhoods least likely to appreciate quickly.
In property selection, the criterion for a profitable rental is far different than the criteria for strong appreciation. California’s overbuilt far east bay communities are not the equivalent of the San Francisco peninsula or the Silicon Valley. Some neighborhoods are unlikely to ever appreciate back to boom levels.
Now all the TV pontiffs, including CNBC’s financial comic Jim Cramer are citing the bottom of the housing market. They claim the increase in foreclosures and other distressed transactions is leading to price discovery and great opportunities for first time home buyers. I disagree. The anecdotal evidence that I see in southeast Florida is that any properties in stronger hands are holding out, and distress sales reflect marginal or less desirable neighborhoods.
The press likes to talk about the two extremes, multimillion dollars mansions dropping 30% or more and way out xburbs like California’s central valley homes losing more than half their value. But the stable middle class suburbs have yet to capitulate.
With the Fed flooding the mortgage market with liquidity, artificially low interest rates are creating artificial affordability. But what the Journal is telling us is that this affordability is stuck in refinancing, not contributing to the end user purchases of homes. The efforts of these single family home investment funds are equivalent to rearranging the deck chairs on the Titanic.
Price discovery won’t be achieved until the majority of single home buyers actually plan to live in the purchases.
No Disclosures.
The Inflation of Cap and Trade
Published by clickbroker.blogspot.com
Now I finally understand the concept of how cap and trade is supposed to fight global warming and the way the politics are playing out in Congress. The best explanation I found has come from the Financial Times editorial “Cap and trade or coach and horses.”
President Obama’s original idea was to auction permits granting a finite allowance to emit greenhouse gasses to the highest bidders. The supply of permits or allowances would be capped at the level of pollution the government wants to allow. The purchasers of the allowances could then sell them in the open market, thus the trade component.
The Administration should more aptly call the program cap and tax, since the President’s real objective was to pay for his middle class tax cut, healthcare reform, and other social and economic programs. The President’s hands-off policy towards Congress is allowing the real horse trading to take over, and plenty of companies will be able to generate their manure for free.
Just like Bernanke’s Fed is printing money with reckless abandon, the current House proposal will give away 85% of the allowances for free. The idea is to assist consumer friendly electric utilities and punish big bad oil. The beneficiaries would theoretically pass the savings on to consumers.
With 85% of the allowances generating no revenue for the federal government, the temptation to inflate the supply of allowances will be too difficult to resist. If the market does not trust that the supply will be limited, their value will be questionable. Traders will not want to keep any allowances in inventory. Brokers only act as agents and the market would be held back by a lot of friction.
Without an auction and the belief that the supply of allowance will truly be managed, neither the revenue nor the global warming goals of the President will be realized. Inflating the allowance supply will destroy its currency, a lesson neither Bernanke nor Greenspan seemed to grasp.
General Electric’s Virtual Healthcare Economics
Published by clickbroker.blogspot.com
The Wall Street Journal’s “How Washington Rations” opinion piece, subtitled “ObamaCare omen: a case study in 'cost-control’”, opens a worm’s nest into rationing vs. choice. As usual, the Journal is only choosing the juiciest worms to reel in the healthcare reform whale. The Journal would like its readers to believe they are entitled to unlimited choices in healthcare without any economic consequences. And in the payer choice vs. the patient choice argument, the government should not be the chooser even when they are the payer.
The Journal extrapolates Medicare’s decision not to reimburse for virtual colonoscopies to the inevitable rationing of care when or if the public “Medicare for All” health insurance option becomes available. Medicare noted in its ruling, "if there is a relatively high referral rate [for traditional colonoscopy], the utility of an intermediate test such as CT colonography is limited." The Journal interprets this as “duplication would be too pricy.”
Given that Cigna (CI), UnitedHealth Group (UNH) and other private insurers reimburse for the added comfort of virtual colonoscopies, the Journal implies that rationing does not exist in the private sector. When you consider deductibles, co-pays, limits and other traps in private insurance, the rationing argument can go both ways. But one thing is as clear today as in the future; very few real healthcare choices exist within insurance plans. Healthcare has always been and will always be rationed. What will change is just the allocation formula.
The almost hidden revelation at the end of editorial is that General Electric (GE) and Siemens (SI), makers of the big iron CT technology, are exerting pressure on both Medicare and Congress to stop curtailing use of their equipment for virtual colonoscopies. As healthcare reform evolves, more of the purely comfort choices will have to be funded completely out of pocket by patients. This will force not only medical equipment manufacturers, but also the pharmaceutical and medical device industry to prove their value directly to consumers. Political pressure will become less effective.
GE Healthcare appears to be evolving and should not be wasting its resources and good will defending its big iron. It has already admitted that funding has dried up for purchases of high cost imaging equipment. GE is in essence following IBM’s (IBM) decades’ old transition from mainframes to servers to desktops to laptop to netbooks to smart phones. The computer big iron still exists, but it got much cheaper. While IBM subsequently gave up the commodity devices and never ventured to the lowest tiers, this is where GE could shine. All GE has to do is convince consumers (patients) that the comfort and convenience their imaging equipment provides is valuable enough to pay for.
The new form of rationing as the Journal likes to call it will provide great opportunities for private insurers and providers in the truly free market for equipment and medical services not covered by the universal healthcare initiative. I agree with the Journal that the government will decide on the standard of care for basic insurance, and there will be exclusions based on cost. But that will leave an entirely new market for supplemental equipment and services that can be priced with only free market restraint.
Each manufacturer and service provider can choose whether to accept the price restraints of standardized health insurance or take their chances in the unreimbursed free for all. Going back to virtual colonoscopies, the Journal neglected to say that GE, together with the hospitals and the radiologists, could choose to price their equipment and services low enough to mitigate the cost of duplication. Cost controls and restrictions are not all bad; they simply give companies the choice of lowering prices or increasing value.
Disclosure: Author is long GE.
The Structure of Healthcare Reform Emerging
Published by clickbroker.blogspot.com
Bloomberg’s “House Democrats Consider Mandate for Employer Health Insurance” gives us some strong hints on the emerging structure of healthcare reform. Readers can go directly to Bloomberg for the he said/she said, but the compromises are pointing to a laddered (3 layer) approach to making health insurance available to all Americans. The key word seems to be available, not mandated which is consistent with Obama’s presidential campaign.
The foundation will continue to be employer provided health insurance and all employers would be required to play or pay. This would be enforced through a payroll tax. Small employers would be able to purchase insurance though a national exchange from the start. Employees of larger firms that don’t offer health insurance will have access to the national exchange at some unspecified time after the start.
The government will set guidelines for the product offerings and price levels of the exchange plans. Non-employee consumers, otherwise known as the individual market, might not have access to the national exchange.
The second layer will be the expansion of Medicaid to more lower-income people. The third layer is what the private health insurance industry calls the nuclear option, the government plan. Pricing will vary by geography and coverage levels, but the government will set the standards of coverage. Whether private insurers can participate in the government plan similar to Medicare Advantage, has not been disclosed.
Bloomberg’s stating “the public option would be available to some consumers lacking insurance and would operate separately from the health exchange” implies the government plan should be viewed as insurance of last resort or high risk pool. The bipartisan comprise is to move the highest risk applicants to the government plan, allowing private insurers to still medically underwrite, and not enforcing any individual mandates.
The insurance industry appears to have won on their threat of no enforceable mandate means no guaranteed issue. The political will for an individual mandate is waning. Private insurers also have a partial victory with the tight limitation on access to the government plan.
With this more or less business as usual, there is little chance of cost reduction. The New York Times’ “Health Care Leaders Say Obama Overstated Their Promise to Control Costs” is reporting medical service providers are already backing down on their commitment to reduce the growth in healthcare inflation by 1.5%. If the removal of high risk applicants from the private insurers’ pools does not reduce premiums, look for a cram down on healthcare providers after healthcare reform gets started.
Lilly CEO Opines Cost Effectiveness Stifles Innovation
Published by clickbroker.blogspot.com
Pharmaceutical giant Eli Lilly & Co. (LLY) CEO John C. Lechleiter’s Wall Street Journal opinion “Health-Care Reform and the 'Innovation Test'” attacks the establishment of a government health insurance option for all Americans. The subtitle “Government-run insurance plans have curtailed access to new medicines” is not even supported in the text, unless he is implying that America is on the path to adapting the European model for cost-benefit reimbursement screening.
First I will address why a government health insurance option is imperative for healthcare reform, and then discuss each of Lechleiter’s arguments. Private insurance includes many risks beyond preexisting condition exclusions, medical underwriting and policy rescissions. Each policy contains a wide array of limits and restrictions such as the number of doctor visits per year on co-pays, maximum annual and lifetime benefits by finally divided subcategories and overall, pre-approvals, and network restrictions.
Let’s say you are one of the few that has read and understands the hundreds of pages in your health insurance policy and thought you did enough homework to fully comply. You obtain your preapproval, and your hospital and surgeon are in your insurance policy’s network. Then you’re disheartened to learn that your pre-op lab tests were sent to an out of network lab without your knowledge and the radiologist whom you never met, does not accept your plan. To make things worse, the hospital assigns an out of network anesthesiologist for your surgery, without you approval.
As you can see in this example, even with high quality health insurance you cannot stop medical providers from gaming the system at your expense. The private health insurance industry says that new regulation is needed for consumers to regain trust. I say the government option is the only way to set the standard for trust. Under a private only insurance environment, no one is totally secure.
Now let’s exaggerate our example: You are sent by ambulance to an out of network hospital. Your plan only covers 50% of the policy’s predetermined rates for medical services. Your responsibility is the other 50% of the predetermined rates plus any charges in excess of the predetermined rates. The insurer does no negotiation on your behalf. Contrast this with standard Medicare where seniors always only pay 20% of Medicare’s dictated rates. Which leaves you feeling more secure?
In general, Lechleiter claims that private companies are the engine of medical innovation and government inhibits innovation. He fails to distinguish between basic research and application, and does not acknowledge that the government through the NIH and university grants funds most basic research. Most biotech companies are started by professors incubated in the university system, funded by government grants. Further, the NIH and US Military directly fund the most cutting edge research and clinical development at small biotech companies. Vical’s (VICL) DNA plasma based H1N1 flu vaccine is an example.
Lechleiter conveniently leaves out that the pharmaceutical industry spends far more on marketing, sales and promotion than research and clinical development. Instead he wails out against the possibility of the government dictating prices on branded medicines; claiming any type of cost control will stifle innovation. Yet Lilly and other innovative pharmaceutical companies are operating very profitably in Europe, and show no signs of leaving. Does Lechleiter believe Americans should pay more for pharmaceuticals than Europeans?
Lastly, Lechleiter asserts that “private insurers and patients tend to control costs by insisting on value -- forcing companies to demonstrate how the effectiveness or broader savings generated by their product justifies its price.” If this were true, pharmaceutical product life cycle management would be ineffective and healthcare inflation would be well controlled. As I wrote in “GM and UAW Retiring Viagra and Nexium”, private insurers have no incentives to either seek value or manage costs.
Just as the private insurance industry is realizing they cannot survive by simply rejecting any customer that might incur medical expense, big pharma also must come to terms with the fact that innovation cannot exist in a vacuum without the gravity of cost. Only the government has the resources and motivation to determine cost effectiveness. Is one month of life worth $10K, $20K, $30K or $100K?
Don’t let the pharmaceutical industry scare you into believing cost effectiveness will bring rationing. Rationing exists now. When high cost medicines are included in insurance policies, consumers are rationed out by the price of insurance. Only the government can provide an effectiveness basis for rationing. I know this will impact pharmaceutical industry profitability, but they must adapt. The industry will only create value if they have to.
The government subsidizing private insurance will only increase the profits of both the insurers and drug companies, with no real cost containment. Lechleiter just wants more customers while maintaining the status quo. Lilly is joining Merck (MRK), Pfizer (PFE) and UnitedHealth Group (UNH) with their heads in the sand.
Disclosure: Author is long PFE and VICL.
GM and UAW Retiring Viagra and Nexium
Published by clickbroker.blogspot.com
Car sales won’t be the only thing going limp for the UAW retirees. Bloomberg’s “GM Union Retirees Said to Cede Dental, Prescription Benefits” is reporting that General Motors (GM) 522,000 UAW retirees could lose reimbursements for dental care, and certain drugs such as Pfizer’s (PFE) Viagra and AstraZeneca’s (AZN) Nexium (“The Purple Pill”). The loss of vision care and higher co-pays for doctor visits and the drugs that remain in the formulary are also in the works. Only the 62,000 active workers vote on the retirees’ fate.
The two hard hitting issues surfacing: First, almost 8.5 retirees for every active production worker is unsustainable no matter how the Obama Administration slices and dices the numbers. Second, why are the UAW retirees getting any health benefits after they become eligible for Medicare at age 65?
Beyond the above two obvious questions, let’s look at the implications for the pharmaceutical industry. The proposed agreement seems to be segregating drugs by their implied necessity. This is a major step beyond Merck (MRK) and Pfizer reporting weakness in cholesterol drug sales and trouble with getting patients to visit the doctor when they don’t feel ill.
Merck and Pfizer think they just need more advertising to convince patients that they can be ill without feeling ill, so don’t let a bad economy keep you from regularly visiting your doctor. Success in such a campaign is unlikely. The pharmaceutical industry concentration on “preventative” drugs for cholesterol, high blood pressure and pre and post cardiac events over the last two decades has made it vulnerable to deep swings in the economy.
Very few employees get drugs for free anymore. So with no immediate pain, these drugs become expendable when money is tight. And the doctor visits to follow up on cholesterol and high blood pressure treatments are also expendable.
The formulary changes are a bigger issue. The UAW is being forced to make choices for the first time. Not every medicine advertised on TV will be available to them with a subsidy. The process is starting with drugs that help avert inconveniences such as requiring more time for romance, and a little indigestion.
Disappointments aside, the next step will be for unions and employers to start evaluating the cost-benefits of drug choices for real illness. As the true payees, they can be far more successful than private insurance companies have been in the past. The insurers simply raised premiums rather than sustain lawsuits from unhappy policy holders. Now that employees know they cannot have it all, they will be far more open to healthcare rationing of all kinds.
The drug companies are fighting government funding for the comparative cost-benefit analysis of drugs. The pharmaceutical industry should fear voluntary rationing by employers, unions and other employees far more than America replicating Britain’s NICE. The UK’s health service primarily questions the benefits of very expensive drugs. Here we are starting by eliminating fringe drugs. But these fringe drugs have become the lifeblood of big pharma.
It won’t long before employers and employees raise the cholesterol and high blood pressure bar instead of constantly lowering it. Image that – payees realizing they’ve been duked by faux medicine. Add now patients are doing exactly what the free market drug companies don’t want them to do – making choices.
Disclosure: Author is long PFE.
Starbucks Begging for Sympathy
Published by clickbroker.blogspot.com
Toyota’s (TM) Prius sales are dogging, Whole Foods (WFMI) is losing its cache, the solar panel business is hemorrhaging, and Starbucks (SBUX) is retrenching. Even The New York Times reported that Abercrombie & Fitch (ANF) is “Losing Its Cool at the Mall”. And now McDonald’s (MCD) and Wal-Mart (WMT) are the hot stocks. Holly organic, what’s happening? Has our green turned to mold? Has “club retailing” lost its in-crowd?
Abercrombie’s refusal to adapt to “austerity is cool” has certainly taken its toll on sales. They saw discounting as a sure path to brand degradation. But, the new austerity doesn’t have to mean cheap prices. It just means projecting an ostentatious image is out and pretending to sacrifice is in. The new feel good is sacrifice, whether the customer needs to or not.
Sacrifice is different than value. Getting a Coach (COH) bag cheaply is not today’s image. Being seen at McDonald’s instead of The Cheesecake Factory (CAKE) is, even though The Cheesecake Factory might actually be a far better value. No one ever said taking the family to McDonald’s was cheap.
The trick is finding something that you actually want buy at Kmart (SHLD), Wal-Mart or Target (TRG). Starbucks actually does have beverages that customers want to buy, but they haven’t found the level of comfortable austerity that their customers are seeking. The sophisticated consumers are becoming less metro and more manly or womanly. To get them to campout at Starbucks will require an entirely new atmosphere. The faux loft store design is as yesterday as dialup internet.
Yet Starbucks won’t give up on their old formula. The third place, between home and office ended with the real estate bust. Instead of creating an atmosphere where customers feel like they’re roughing it a bit while drinking their $4 coffee, Starbucks has introduced some mild discounting and a ridiculous advertising campaign.
McDonald’s is promoting value, Dunkin’ Donuts taste, and Starbucks feel good in the coffee arena. I can’t speak for McDonald’s, but I think Dunkin’ Donuts and Starbucks regular coffee are equally good. The image of sacrifice is working for McDonald’s, not value as they would like to think. Dunkin’ Donuts counter service has become cool in a retro kind of way. But the Starbucks feel good is yesterday’s brew.
Starbucks’ message is that with your coffee you are buying healthcare for the baristas, fair trade coffee beans, and comfy chairs in a nice atmosphere. Starbucks is begging customers to be sympathetic for all the good they do their employees and the rest of the world. Trouble is their customers might no longer be getting healthcare themselves and lost their own fair trade wages. No matter how much advertising Starbucks pays for, their message is uselessly out of date. And to add to that, Starbucks has been completely silent on universal healthcare.
No one wants to drink $4 coffee amongst Wal-Mart’s complete austerity and lack of cleanliness, but Starbucks is encamping in the better Target stores. Starbucks will have a delicate balance in creating a cool kind of ruggedness, a sophisticated more warehouse – less loft look.
Even in this economic climate, Starbucks can maintain its prices if they create an atmosphere where customers can comfortably sacrifice. Too bad Starbucks is too smooth and packaged for its own good. As Starbucks begs for sympathy, customers just stopped caring. Starbucks is on the way to irrelevance.
No disclosures.
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