In The USA: the Next Revolution

[tequila]

Are you prepared to base a conclusion purely on second hand accounts, or are you actually familiar enough with the inner workings of the company to decide what the best uses of its cash are? Surely you realize that analysts may have all kinds of agendas of their own, and that there's likely more than one side to that story... or are you willing to accept the story at face value because it supports your preconceived opinions about corporate governance?

In any event, if you're a shareholder and you disapprove of the Company's use of cash, you've the option to sell your shares. If you're not, why would you care?

Given the number of conclusions that are passed on around here based on less than secondhand accounts, then yes.

Obviously analysts may have their own agendas, but given the market performance of Zimmer and Pfizer they would appear to have a point, as Jamie Dimon's apology for similar behavior at JPMorgan would also appear to indicate. Can you give a solid explanation of why a firm would invest in share buybacks rather than long term research, especially given the short-term incentives for CEOs to indulge in the former rather than the latter?

As for why people besides shareholders should care - if you haven't noticed, this thread is about wealth inequality and responses to such in the U.S. A very large part of this in the U.S. is driven by CEO pay, which has become incredibly skewed in the past 25 years despite no corresponding growth in performance?

Once again, you take it for granted that the exercise of risk assessment is free of error. This is an insane proposition, for the same reasons in finance as it is on the battlefield.

Where are you getting that I expect risk assessment to be flawless?

I do expect, however, that if the gamblers are compensated at such high levels that risk assessment would be better performed than it was in 2008. However, I would settle for the gamblers to lose their government backstop and be broken down to the point where their poor risk assessment did not destroy the entire financial system. Then they can go about being imperfect and going bust or being profitable without hurting the real economy.

By making market for value delivered by services and goods and their expected performance in the future. There's value in ensuring that a bushel of wheat will trade at a certain price five months from now. This is what derivatives fundamentally secure.

Sure, that is what derivatives were meant to do, but if you believe that most derivatives trading is strictly hedging, then you must be one of those who believes that Vegas gambling exists because people really enjoy card games.

With $1 trillion in net assets, the Federal Reserve is one of the single largest actors in the financial markets, but that's three orders of magnitude smaller than notional value of the derivatives market.

More to the point, they are the backstop for much of the gambling that goes on, and the ultimate lender of last resort. They are the ones who will step in when the markets freeze. When they do not, as the ECB seems determined to show us, the whole game can come to an end.

I think trying to determine sustainability from two snapshots is insane.

You don't see that 2008 and 2011 are related? That the Latin American debt crises of the 1980s, the Asian financial crisis of 1997, the equity bubble collapse in 2000, the real estate bubble collapse in 2008, and the European fiscal crisis of 2011 form a pattern of repeated bubbles followed by increasingly severe collapses? That doesn't sound like instability to you?

Perhaps you are one of those who believes the 20th century was very stable - WWI and WWII were just eight years in 100, after all.

[Dayuhan]

Can you give a solid explanation of why a firm would invest in share buybacks rather than long term research, especially given the short-term incentives for CEOs to indulge in the former rather than the latter?

Here's what the company says:

http://www.stltoday.com/business/nat...7a4a78c22.html

“We have to fix our innovative core, and that’s what this R&D change is about,” Read told reporters at Pfizer headquarters in New York Tuesday. The reductions are part of a plan to overhaul the company’s research operation to focus on the most-profitable programs, Read said.

Research and development spending will be $6.5 billion to $7 billion in 2012, the CEO said. That compares with $9.4 billion in 2010 and is $1.5 billion lower than previous Pfizer forecasts. Pfizer plans to buy back $5 billion in shares next year as part of a $9 billion repurchase program, he said.

Tuesday was the first earnings report under Read, who succeeded Jeffrey Kindler in December. Pfizer is counting on products from the $68 billion Wyeth acquisition in 2009 to replace sales lost to generic copies of the cholesterol pill Lipitor, the world’s best-selling drug. Read said Wyeth drugs won’t be enough to make up for that shortfall, and the company must rein in its unproductive spending.

“It’s like being the New York Yankees and having a huge bankroll and never being able to win the pennant,” said Tony Butler, an analyst at Barclays Capital in New York. “This is saying: ‘I’ll take the Cleveland Indians budget and see what we can do with that.’ Spending more doesn’t mean getting anything out.”

“This is all good,” Butler said.

The company plans to halt funding research in the areas of allergy, urology, respiratory, internal medicine and tissue repair, Read said. Pfizer will focus on the more-profitable areas of cancer, neuroscience, inflammation, vaccines and immunology, he said.

“At some point your shareholders and stakeholders demand you have a return on investment in research,” Read said. “We’re looking at areas where we think it’s not a competitive advantage.”

In other words, the strategy is to cut spending on areas they see as having low potential for results and focus on areas perceived as having high potential for results. That's obviously a gamble, just as it would be to pour money into everything regardless of perceived potential, but it's not overtly irrational, and anyone who's going to criticize it would need to look into the actual state of the programs being cut and have an informed opinion on the potential of those programs to generate profitable products. Of course many people will comment without that knowledge, but what does that mean?

The shares being bought back can also be sold back onto the market at a later date if market conditions call for a more expansionary policy and financing is needed. The Company apparently believes that it will be able to sell at a higher price if recovery in the broader economy progresses... again a gamble, but all decisions are a gamble. If it pays off they'll do well. If not they won't. That's business.

As for why people besides shareholders should care - if you haven't noticed, this thread is about wealth inequality and responses to such in the U.S. A very large part of this in the U.S. is driven by CEO pay, which has become incredibly skewed in the past 25 years despite no corresponding growth in performance?

CEO pay has little to no impact on the broader economy, and is primarily an emotional issue. What response would you suggest, really... having the government tell private companies what salaries they can and cannot pay? If the company doesn't generate results the market will have the final say. What more do you want?

[Dayuhan]

Another perspective on Pfizer's R&D move...

http://www.forbes.com/sites/matthewh...dical-surgery/

Whether or not it's the right move remains to be seen, but there's clearly a lot more to it than "hey, let's chop R&D and buy back shares so we can boost EPS and get a big bonus".

[Presley Cannady]

Where are you getting that I expect risk assessment to be flawless?

From your own words.

I do expect, however, that if the gamblers are compensated at such high levels that risk assessment would be better performed than it was in 2008.

In other words, flawless.

However, I would settle for the gamblers to lose their government backstop and be broken down to the point where their poor risk assessment did not destroy the entire financial system.

The "gamblers" include even you if you so much as deposit in a bank.

Then they can go about being imperfect and going bust or being profitable without hurting the real economy.

So no more FDIC insured deposits? Good.

Sure, that is what derivatives were meant to do, but if you believe that most derivatives trading is strictly hedging, then you must be one of those who believes that Vegas gambling exists because people really enjoy card games.

67 percent of derivative trades are interest rate contracts, so you're obviously wrong.

More to the point, they are the backstop for much of the gambling that goes on, and the ultimate lender of last resort.

Wrong. Treasury holders--specifically institutions--are the backstop for most of the "gambling"--as you inartfully put it--that goes on. Central banks are merely their principle agents.

They are the ones who will step in when the markets freeze.

As the system of monetary policy was so designed.

When they doot, as the ECB seems determined to show us, the whole game can come to an end.

I hate to call you on this, but show us what exactly?

You don't see that 2008 and 2011 are related?

A relationship is testable and evident. There's another term entirely for what you're describing.

Perhaps you are one of those who believes the 20th century was very stable - WWI and WWII were just eight years in 100, after all.

No, just one of the ones who doesn't find idle rhetoric particularly useful in understanding the financial system.