1/26/09 (Pfizer Takeover, McDonald's getting FAT)

Traders –

Volatility has been coming in since the inauguration – first it was a jolt down, then up, and the ping pong continues with less drastic moves. Obama has come out of the gate with Executive Orders and action – something the American (and world community) wants to see (regardless of political beliefs) – we certainly didn’t want him to be a bump on the log.

The big “sausage” is the new $800 billion plus stimulus. Obama wants it to be bi-partisan and he has meet and will meet this week with Republicans (even if he doesn’t need their vote). The Republicans are standing ground and do NOT want a blank check written on the backs of our children and grandchildren who will be picking up the bill – along with current businesses (which will curtail growth). The week will play out and this is the first big test for Obama and reaching across the aisle (which is already upsetting Pelosi and others – since they have it in the can already – “why bother going back to the Republicans when we can pass this now!”) – Obama sees value in bringing parties together – sure he has won and also controls both houses. It will be an interesting week in politics.

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Pfizer acquisition of survival or vulture?

In this economy we will see two types of mergers – survival mergers (like BofA and Merrill) and vulture mergers (taking over a struggling company with debt) – the question is which one is Pfizer? It’s hard to tell – they are seeing some of their product lines hit the life cycle (meaning they’ll lose exclusivity on the patent – facing generic competition as early as 2011) and as well as law suits. Pfizer has also missed earnings – however it has been pointed out that prior to the economic slowdown Pfizer has been positioning itself for acquisitions – (in the drug trade a successful drug is a one-trick pony – sure it brings in large revenue, but at some point the life cycle ends and you BETTER have something in the pipe line). Pfizer has been living off the world’s most successful drug – Lipitor (after the acquisition of Warner-Lambert for $115 billion and the developer of Lipitor). Pfizer has also had some smack-downs as well – Bextra was pulled and Celebrex lost half its sales after the Vioxx scare (a similar drug).

The questions that are always asked internally in the Drug World (or I suppose they must be asked) are: What do we have in the pipe-line? What is projected revenue? How much does it cost for the next NEW drug in R&D? What does our competition have and would it be cheaper to acquire? = The formula will always be: (footprint of drug sales, how many people will need or want it, Possible Revenue x life cycle, before competition) – (R&D, Marketing, Legal) = margins (or profits). If you can replace the (R&D, Marketing, Legal) with (Acquisition) and the acquisition has faster time to market (with pre-approved drugs by the FDA with a new and long life cycle), that might be the better option.

These are also lean economic times. Pfizer did see a slow down, but still beat analyst forecasts. This acquisition also means they had to go out and borrow money. They are also looking to trim some fat, layoffs (19,000), 5 plants closed, and a dividend cut to ride out the hard time and to keep margins in the black.

Pfizer futures, well it will probably be fine – it will face some bumps with the acquisition of Wyeth (that has a couple of legal issues), as well as integration. The dividend cut also makes it less attractive as a static return performer, but what companies pay dividends anymore?

For traders – the deal will make for some short-term Arb opportunities: (cash-n-stock transaction): I haven’t looked at the current spreads or the exact formula, but it will be in there and probably worth the play. Get in before the spread closes down too much = don’t forget to add in the cash. Note: Our new platform Obsidian separates out the new/old option classes with cash deals. Additionally the new Spread Maker allows for stock arbitrage (just released last week) = call Lawrence if you have any questions about it. http://www.silexx.com/

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McDonald’s – Big Mac Attack

No surprise here, economic slowdown means more people scale down to cheap, fast, crap food. Expect cheap crap food to expand and do better in leaner times. It is the law of trickling down. The top of the pyramid is thin and the bottom is fat. Those at the top (the few) that could afford to go to Ruth Chris Steak house ($100 plus) once a week have scaled down to Outback Steak House ($50),

those (more than few) that went to Outback Steak House ($50) once a week have scaled down to Applebee’s ($25),

the many that went to Applebee’s ($25) are scaling down to McDonalds ($10),

and the masses at the bottom that already go to McDonald’s ($10) – well they are already at the bottom.

The point is the bottom of the food chain is swelling. More people are scaling back and that means the top gets thinner and the bottom gets fatter.

In the options / volatility world you could say McDonald’s has fat tails!

McDonald’s is a recession stock, just like Wal-mart. People need to eat and sleep, regardless of the economic situation. It’s no surprise that more people will go to the cheaper food, it’s sad because the food is barely eatable and means more fat, sick, high cholesterol, and a less healthy nation (faster). I guess that is good news for Pfizer, maybe the own McDonald’s stock.
It would be interesting if someone had done a study on the health of a nation (based on eating habits) in recession times – I would guess that people would get less healthy because eating habits change for the worse.

Too bad people forgot how to cook, which is still cheaper than going to McDonald’s. But we live in an instant society. Maybe with people out of work they can start learning how to cook again. My hopes are not that high.

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Futures Pre-Market

The futures are seeing a pop in the pre-market and getting close to (and some cases above) fair value. The spreads are pretty narrow, but we might see a slight pop in the market.

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Support / Resistance

We are flirting with supports in hear. The nation (and world) has absorbed the Obama hand over well – with a slight jolt of volatility. Now it is back to perception with the big ticket item (the massive stimulus package).

INDU 8000 / 8500 (We closed above the support – watch it closely)

NDX 1100-1150 / 1200 (We are just above the 1150 mid-level support and below the 1200 resistance)

SPX 800 / 850 – 900 (850 use to be a pivot point, is it now resistance?)

RUT 400 (450) 500 (The RUT has continued to be the driver for the last year – it held well above support as the narrower indices fell to their supports – does the market continue to look at the broad base to set the stage?)

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Conclusions

Perception is back on the table, the volatile event of the inauguration is over and we have had a weekend to really absorb it. The stimulus package is next, does the nation (and world) by that it will be the life saver we need? Who knows – Obama needs to sell it – regardless if it works or not. Of course I am not a believer of taking this nation into massive debt, because I believe it will cause a hidden bubble of hyper-inflation in the dollar that when it bursts, there is nothing the government will be able to do. Should we suffer now (without massive bailouts) and get our nation in order, or do we just extend the credit line some more?