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Lemley Yarling Management Co
15624 Lemley Drive
Soldiers Grove, Wi 54655
Bud: 312-925-5248       Kathy: 630-323-8422

Comments on activity in client accounts

18 December 2015

We'll be traveling from the 24th to the 1st so this is our last post of the year.

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The Banksters used the Fed rate increase of 0.25 to raise their prime rate from 3.25% to 3.50%. Of course they didn't raise the rate they pay on deposits from the close to zero the rates have been for it seems forever.

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Our kind of forecast from a fellow we respect:

Stocks are set up for a 'Santa Claus' rally to all-time highs by the end of 2015.

That's the bullish call from Raymond James' Jeffrey Saut, as stocks rally for a second day in a row, and the S&P 500 crawls out of negative year-to-date territory.

"I think the market has the potential here for a rip-your-face-off type rally," he told CNBC on Tuesday morning. "It's human nature to read into negativity what happened last Friday, but it really doesn't deconstruct the bullish case right here."

Saut listed three things that inform his conviction:

There are "massively oversold conditions" in the stock market.

The upcoming expiration on December stock options, worth over a trillion dollars, has everyone worried. However, Saut says this typically has a bullish tilt.

We're approaching the so-called Santa Claus-rally, the period between Christmas and New Year's Eve when, historically, stocks tend to rally.

As for the big news of the week — the FOMC's interest-rate decision tomorrow — Saut doesn't think it's bad news for stocks. He says markets will not be spooked after an expected rate hike on Wednesday because Yellen will reassure everyone that the pace of future increases would be gradual, and that the Fed would take the first few months of the New Year to assess the impact of a hike on markets before moving again.

All this should push the S&P 500 above its all-time high of 2,134.72 reached on May 20, Saut says. On Tuesday, the index opened at 2,047, and would need to rally 4% in the 11 trading days left for 2015.

Saut is also not spooked by the decline in crude oil prices. He says oil started a bottoming process at about $42 per barrel in February, despite prices falling to seven-year lows and below $35 per barrel yesterday.

And energy companies would easily be able to clear the bar to report year-on-year growth in the New Year because of the sharp declines this year.

http://www.businessinsider.com/jeffrey-saut-says-stocks-will-hit-all-time-high-2015-12

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Folks chasing yield have purchased hundreds of billions of dollars of Junk bond funds and now the gurus are telling them they were fools to take the risk. Wall Street, always will to blame the consumer of the products Wall Street creates.

The decline of high-yield bonds is finally making headlines — hard not to after a fund collapsed and the largest junk bond ETF lost 2% in a day — but the slide has been a long-time in the making. The SPDR Barclay's High Yield Bond exchange-traded fund (ticker: JNK ) has been in decline for the better part of the past two years. It is now, however, in an accelerated declining trend that is flashing a warning for this market and indeed all risk-based financial markets.

Junk bonds are considered a "risk on" asset since the credit risk they carry is by nature higher than that of many other assets. When investors feel bold they flock to these bonds along with stocks and perhaps exotic investments in art and automobiles. When they are nervous or outright bearish, investors move money into safer assets such as Treasury bonds and cash. Right now, it seems that investors are fleeing from junk bonds in a hurry, especially on Friday, when the iShares iBoxx $ High Yield Corporate Bond fund ( HYG ) had its worst day in 4 years.

http://www.barrons.com/articles/junk-bonds-send-ominous-warning-to-the-market-1450129053

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We took our loss in VMware and moved on the QUALCOMM which is equal quality and volatility and is down as much as VMW his year. VMW is tied up in the Dell EMC merger and will be for the next year. Given the terms of the Dell/EMC deal it is hard for Arbs to manage risk and that's our guess why the VMW shares are lower and will stay that way until more details on the final deal become apparent mid-year 2016.

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We also added to Ascena as it dropped to a new low. We listened to the quarterly conferences call and were favorably impressed by their strategy. Insiders own 25% of the company and the large debt load is not due for 7 years and should be reduced substantially by cash flow and tax savings.

Unlike the Banksters and Private Equity Crooksters, the folks who own Ascena decided to do a public deal and risk their equity (they own 25%) to take on $1.8 billion in debt to buy Ann Taylor which has over $2 billion in sales.

Au Contraire, in 2011 a private equity firm and management took J Crew private at a price of $3 billion. At the time J Crew's revenues were a bit over $2 billion (ANN was purchased by ASNA for $1.8 Billion and has $2 billion in revenues). Once private, J Crew owners paid themselves a $500 million dividend by borrowing another $500 million on top of the $3 billion. J Crew is now in trouble not so much because it has missed the market on clothing but because it has so much debt.

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We sold GM common and bought the same number of warrants to keep exposure and raise some money for other ventures.

We also did some switching in accounts selling MRO and XOP and buying Murphy, British Petroleum and the large cap oil ETF (IEO) in order realize tax losses to offset gains without surrendering our position in the oil area.

We remain positive on the markets. Most of our stocks have had 30% and greater corrections this year (we also buy out of favor value situations) and if not for Apple and Amazon and some other tech and drug mainstays markets would be a lot lower.

Some gurus have offering the old saw * that when the Fed raises rates market drops follow. That may be true when rates are at a normal level. But current rates are abnormally low (as in never this low even during WWII) and need to be raised to more reasonable levels over time for the health of the economy.

*A saw is an old saying or commonly repeated phrase or idea; a conventional wisdom. While "old saw" is a common phrase for "saw", some consider it a tautology. [**

**In rhetoric, a tautology (from Greek ταΰτός, "the same" and λόγςο, "word/idea") is a logical argument constructed in such a way, generally by repeating the same concept or assertion using different phrasing or terminology, that the proposition as stated is logically irrefutable, while obscuring the lack of evidence or valid reasoning supporting the stated conclusion.

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News on issues we own:

The analysts at Morgan Stanley are more bullish on Symantec Corporation (NASDAQ:SYMC) today, as they upgraded the computer security company to 'Overweight' from 'Equal Weight' and raised their price target to $26 per share from $24 per share. Morgan Stanley's upgrade comes just days after the analysts at Citigroup wrote that Symantec Corporation (NASDAQ:SYMC) could face "less favorable trends" after performing a survey of 51 Chief Information Security Officers. With the sell-side somewhat divided, the buy-side is becoming more optimistic, with 38 elite funds long the stock at the end of September, up by three over the quarter. Ken Griffin's Citadel Investment Group holds 9.43 million shares of Symantec as of September 30.

http://www.insidermonkey.com/blog/why-are-these-stocks-trending-today-4-403171/

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Qualcomm has a message for its shareholders: Breaking up is hard to do. And in the opinion of the company's top management, it is less profitable than staying together.

On Tuesday, the chip maker, which was an early leader in advanced semiconductors for smartphones, released the results of a month-long review that it undertook partly under pressure from activists. The study evaluated whether Qualcomm should split into two separate companies, with one focused on making research advances and selling intellectual property, and the other on making chips. The conclusion: no split necessary.

"The strategic benefits and synergies of our model are not replicable through alternative structures," Steven Mollenkopf, Qualcomm's chief executive, said in a statement. "We therefore believe the current structure is the best way to execute on our strategy."

Continue reading the main story

http://www.nytimes.com/2015/12/16/technology/qualcomm-analysis-concludes-a-split-would-be-detrimental.html?hpw&rref=technology&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

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More QCOM:

Qualcomm Is Worth Far More Than $48 per Share; JPMorgan Pounds the Table

By Jim Swanson , Benzinga Staff Writer

QUALCOMM shares have declined 35.33 percent year-to-date, falling to a low of $46.83 on December 14.

Rod Hall of JPMorgan has upgraded the rating on the company from Neutral to Overweight, while lowering the price target from $57.50 to $55.00.

The upgrade is based on the stock valuation, which Hall mentioned was now meaningfully below the bear case valuation levels.

Analyst Rod Hall mentioned, "With the ongoing negative press around both the QCT and the QTL segments, we believe that most investors are now focused on estimating the worst case valuation for Qualcomm."

Hall believes the stock is worth $55 per share, assuming that QCT re-rates closer to peer multiples as its cost cutting initiatives bear fruit and scale improves.

According to the JPMorgan report, "Our proprietary "big data" analysis of 2,142 essential patents and their expiration dates also informs our DCF of QTL. Given this attractive value and likely self help in 2016 we believe that Qualcomm now represents a solid buying opportunity."

Hall expects QCT to "make strategic changes to diversify its business away from the wireless industry while simultaneously increasing cost savings." For QTL, that the consensus valuation could prove to be too low.

Hall also explained that even if QCT's share at Samsung were to decline to zero in FY16 from 15 percent in FY15, it would translate to an 8 percent impact on the segment's EPS, or $0.10.

"We see this as conservative in light of the potential launch of new Snapdragon 820 smartphones by Samsung," Hall noted.

The FY16 EPS estimate has been increased by one percent to $4.12.

Read more: http://www.benzinga.com/analyst-ratings/analyst-color/15/12/6057100/qualcomm-is-worth-far-more-than-48-per-share-jpmorgan-po#ixzz3uc6tS6Ll

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Shares of commodity capital equipment maker Joy Global Inc. (NYSE:JOY) are trending today after the company reported its latest earnings results. For its fourth fiscal quarter, Joy Global reported an EPS of $0.43 on revenue of $865.57 million, exceeding analyst earnings estimates by $0.01 per share and revenue expectations by $74.43 million. Because of the challenging commodity climate, quarterly bookings declined by 21% year-over-year to $617 million and the company cut its quarterly dividend to $0.01 per share from the previous $0.20 per share. For the full year, Joy Global Inc. (NYSE:JOY) earned $1.95 per share on net sales of $3.172 billion. Management expects 2016 adjusted earnings per share to be $0.10-$0.50 on revenue of $2.4-$2.6 billion.

http://www.insidermonkey.com/blog/why-are-these-stocks-trending-today-5-403452/2/

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Shares of 3D Systems Corporation (NYSE: DDD) have dipped 70 percent year-to-date, almost trading at their 52-week low on November 12 at $8.52.

Stephens' Ben Hearnsberger has upgraded the rating on the company from Equal-Weight to Overweight, while maintaining the price target at $12.

Recent industry checks indicate that while demand continues to be subdued, it is not terminal, and Hearnsberger expects restructuring efforts by the company to meaningfully improve profitability in FY17.

Analyst Ben Hearnsberger mentioned that the stock valuation was now low enough for the restructuring initiatives alone to lead to better-than-expected results in FY17.

Hearnsberger also expects limited revenue growth for 3D Systems over the next couple of years, with flat gross margins and improved operating expense leverage.

Following the organic growth peak of 29 percent in FY13, growth rates have significantly dropped to -15 percent in the most recent quarter.

According to the Stephens' report, "This slowdown in demand, combined with significantly increased investment, has resulted in earnings per share decline from ~$0.85 in FY'13 to ~$0.11 expected in FY'15."

This has also lead to a steep decline in the stock valuation from the 2013 highs, which Hearnsberger attributes "mostly to strategic moves undertaken by predecessor CEO and un-achievable expectations set by the market."

However, Hearnsberger sees 3D Systems as a "self-help" story, with opportunity for improved profitability even in the absence of historical top line growth rates. FY16 is likely to be a restructuring year for the company, with a return to historical profitability in FY17.

The EPS estimates for FY15 and FY16 have been lowered from $0.11 to $0.05 and from $0.20 to $0.10, respectively.

http://finance.yahoo.com/news/3d-systems-management-shakeup-makes-154430158.html

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11 December 2015

We sold Whole Foods when it popped $2 higher on Friday in a market that was down 225 points. There have been rumors that WFM would be taken private and one of those must have been circulating. Our thought is that Whole Foods should buy Sprouts or Fresh Market rather than spending internally to expand its 365 Market concept stores. Borrowing $15 billion to go private would limit expansion potential to a great degree. That is our thought on why we sold the rumor.

With the proceeds we bought Fresh Market in many accounts .

We also eliminated Twitter (every time we buy it we are uncomfortable owning although we have profited trading) for a scratch and bought Murphy Oil and Ascena Retail and added to our GM B warrants. We also repurchased CAT and added British Petroleum in a few larger accounts. The volatility bothers but is part of current market conditions. There's not much we can do about it. Tax loss selling and day traders and computer jockeys have changed the daily patterns. The stocks we own have value.

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Jim Cramer on DDD

3D Systems: "I've hated this one for 50 points. I should have hated it for 100 points. It's just not my cup of tea."

Bud Lemley on DDD:

Only 9 more points of hate left. We are willing to own as a speculation after an 80% correction

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Alcoa:

Gabelli's Justin Bergner thinks shares of the Alcoa (AA) could gain 27% thanks to his new math on the company's split:

After reviewing our valuation analysis, we make tweaks to our valuation analysis, which have the effect of adding ~$0.70 to pre/post-separation Private Market Value and $1.20 to combined post-separation trading value. We reiterate our buy, with unchanged earnings and EBITDA estimates, and note non-core assets as a source of separation liquidity.

For our Private Market Value post-separation and pre-separation we add

  • $0.30/share for power, as we discard one artificially low comp used to value Alcoa's Brazilian and Suriname hydro capacity. The Yadkin US hydro plant we value per Brookfield Renewable Energy Partners EV/MW.
  • $0.20 — $0.25/share, as we now assume flat pension returns in 2015 vs down 3.5% in our October initiation. We continue to deduct $2.3B after-tax pension liability as a $300mm non-service cost pension add back is offset by $300mm of higher pension costs at a 5.5% vs 8% assumed return and vs 5% returns 2007-2014. While most pension plans assume 7%+ returns, our conservative stance seems appropriate for Alcoa, given its $15B PBO.
  • $0.10/share, valuing the alumina segment based on the full Alumina Ltd (AWC) EV, rather than deducting for AWC's ~$150 Ma'aden share, as AWC's corporate costs slightly understate Alcoa's alumina profitability.
  • $0.10/share, adding Century Aluminum's (CENX) pension deficit in deriving an EV/ton that we apply to Alcoa's smelting capacity.
  • We add 0.5x turns to the EPS segment "Value Add" trading multiples to reflect EPS scarcity value once PCP is sold and opportunities to close the margin gap with PCP. Our combined YE'16 trading value increases by $0.50 to $11.90 per share, offering 27% upside. The implied 10.5x "Value Add" EBITDA multiple seems appropriate.

In the most recent issue of Barron's, Leslie Norton argued that Alcoa's split could lift shares 50%.

http://blogs.barrons.com/stockstowatchtoday/2015/12/07/why-alcoa-can-gain-more-than-25/?mod=yahoobarrons&ru=yahoo

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From the WSJ this morning:

When oil and gasoline prices began to tumble in mid-2014, experts widely expected it would jolt spending by U.S. consumers and businesses. It hasn't turned out that way.

Instead, the pace of business investment has slowed significantly, due to drags from weak commodity prices, a strong dollar and concern about the global economy. Consumer spending, meanwhile, has been uneven, with car and home sales up, but inflation-adjusted spending at retailers sluggish since the middle of this year.

Now, oil and commodity prices are showing still more weakness, with wide ramifications to U.S. industry and the Federal Reserve.

Oil prices dipped again Thursday after a report from the Organization of the Petroleum Exporting Countries indicated demand for its crude was lower than earlier estimates. Brent crude, the global benchmark, fell 0.9% to $39.73 a barrel, while U.S. crude slid 1.1% to $36.76 a barrel.

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Our take is that lower oil prices are good for consumers and bad for highly leveraged oil producers. The fact that businesses are slowing investment is not good but then many public corporations are currently being run with a short term time horizon and to please Wall Street mavens. That is a reality and we aren't going to lose sleep over low gasoline and heating oil prices. In the long run low energy prices are good for the person on the street. Business will cope with what is a long term positive. The U.S. will be keeping its oil in the ground while the Saudis will be deleting theirs. The reality is that oil prices will not stay low for the long term since the OPEC counties and Russia need the revenue from higher prices to sustain their economies. The better financed oil companies will adjust production- make less money but continue to do what they do. A $40 versus $80 oils price means over $100 billion in U.S. consumer pockets. Oil workers will lose jobs and oil companies' profits will drop but the offset of increased buying/savings is a plus—except of course for the hardship suffered by the workers who lost their jobs.

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Dow and DuPont are going to merge and then split into three companies. Ain't modern finance great- fees for combining and then more fees for splitting? To combine, the two companies need at least 2 investment banks to help them merge, two investment banks to give fairness opinions and two law firms for legal opinions (we've never heard of an investment bank not giving a fairness opinion- no opinion no fee.) Most probably there will be more than two investment banks helping them to combine. When splitting into three they will need three times whatever they need to combine into one. Golden Parachutes will be floating, gobs of fees for investments banks, bonuses for executives and pink slips for workers. If companies keep merging/financial engineering in the name of immediate profit eventually there will be one large company in this country controlling all production. 90 % of people in the U.S. will be out of work and those unemployed folks won't have the wherewithal to buy the products the super company makes. Then of course the financial geniuses will begin the process of splitting the company up earning fees on the breakup as they did on the conglomerating. Think AT&T split up and recombining from 1980 to 2015. Two articles below discus this topic.

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From WSJ no less:

Dow-DuPont Merger: Better Living through Layoffs

This is not an America playing to win. It's an America playing not to lose. The idea of a merger of DuPont and Dow Chemical reflects a stark, unpleasant truth about the U.S. economy.

By Dennis K. Berman

To the eyeshades on Wall Street, a DuPont - Dow Chemical merger is a thing of utter sensibility. Cut costs. Rationalize. End two problems with one final $60 billion flourish.

But there is a mournful edge to the whole idea. It's as if these two companies—absolute bedrock of U.S. industrial might—have given up faith in themselves and their futures.

Is thriving, surviving, and adapting through 331 years of total history not enough to keep these companies confident? DuPont was founded in 1802, Dow Chemical Co. in 1897. Surely they've persevered through things tougher than activist investors in argyles and loafers.

More

Dow Chemical and DuPont Are in Advanced Talks to Merge

Buffett May Get Dow Chemical Stock, but Regret It

Self-confidence seems to brim only in Silicon Valley. Across the American business world, the goal is to cut costs, consolidate, do more with less.

You can literally feel it when you are shoved onto on a shrunken middle seat on a United Continental or American-US Airways flight. Or perhaps when you drink a future Budweiser-Miller brew. Or are left selecting health insurance among a dwindling set of megaproviders.

The argot of American business has been reduced to "sensible growth," "dividend return" and "listening to shareholders."

This is not an America playing to win. It's an America playing not to lose.

There are three main reasons for this:

1) The economy at large isn't producing enough growth to keep stockholders content. For the largest companies—who are more or less indexed directly to U.S. and global growth—there is little they can do but keep cutting costs. (Predictions for 2016 global GDP growth of 3.3% seem very aggressive.) Eventually, this takes the forms of mergers, and 2015 has produced over $4 trillion of transactions. The vast majority of them are "in industry," which is banker-ese for cost-cutting exercises. The CEO of Fiat Chrysler Automobiles NV is literally begging General Motors Co. to buy his company.

2) Activist investors. They may well just be ciphers for the bigger economic forces at work, but their particular brand of behavior modification has shaken boards to their core. Activists can absolutely do good for companies and the economy. (An in-depth Journal study of their influence showed a mixed track record.) The more important change is how they have forced boards into an intellectual sameness, and certainly a fear of reproach.

Activists, as I've written before, "patrol the markets like prison guards with billy clubs." Such seems the case with DuPont and Dow Chemical, both upended by activists.

3) China. Why couldn't Sinochem International Corp. become the Huawei Technology of agriculture? Few in the U.S. know much about companies like the state-owned Sinochem, which are increasingly advanced players in the global market for chemicals and agriculture technology. It's not hard to imagine a future where Sinochem slowly takes market share in small markets, and then works its way across Asia, Africa and into Europe and the Americas. It could be much in the way that Huawei has done for telecom, forcing a four-way merger between the last Western majors of Lucent Technologies, Alcatel, Nokia Corp and Siemens. For Dow and DuPont, perhaps it's best to merge sooner than la

Each of these reasons suggest that a DuPont-Dow deal is, intellectually, a perfectly sensible outcome.

Emotions are another matter. It's only a matter of time until the congressional hearings and testimony from very angry farmers. Eventually someone will tote up the loss of research and development, jobs, and economic support for communities.

And then perhaps the final, creeping fear: If the likes of Pfizer Inc., Anheuser-Busch, DuPont, UnitedHealth Group Inc. and American Airlines Group Inc. have lost faith in the future, why should we feel any different?

http://www.wsj.com/articles/dow-dupont-merger-the-shrinking-of-american-ambition-1449630924

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Henry Ford and the Model T

The home of the Ford Model T is now an abandoned factory complex along busy Woodward Avenue in Highland Park, Mich., and there's not much to distinguish this place from Detroit's other industrial ruins.

But if you stop and walk up to the front of the building, you'll find a historical marker telling us that by 1925, this place churned out more than 9,000 Ford Model T's a day.

And it ends with this: "Mass production soon moved from here to all phases of American industry, and set a pattern of abundance for 20th century living."

That actually helped America's 20th century middle class take off.

U.S.

Model T: 'Universal Car' Sparked Gasoline Demand

January 1914 was a frigid month in Detroit — much like January 2014 has been, but nonetheless thousands lined up in the bitter cold outside to take Henry Ford up on an extraordinary offer: $5 a day, for eight hours of work in a bustling factory.

That was more than double the average factory wage at that time, and for U.S. workers it was one of the defining moments of the 20th century. Five dollars in 1914 translates to roughly $120 in today's money. While many economists say today's employers could take some pointers from Ford, they also say 2014 is a totally different world for U.S. businesses and workers.

High Wages for Repetitive Work

Henry Ford was a hard-nosed businessman; he didn't introduce the $5 workday because he was a nice guy, says Bob Kreipke, corporate historian for the Ford Motor Co.

YouTube

"It was mainly to stabilize the workforce. And it sure did," Kreipke says. "And raised the bar all over the world."

He says to understand why Ford thought this was a smart move in January 1914, you have to go back to another huge shift that happened a few months earlier: By 1913, Model T production totaled 200,000 — a feat made possible by the creation of the first moving assembly line. Conveyor belts transported small parts to workers, each of whom performed a specific task.

This tremendously sped up production, but Ford still had a problem: While he had standardized production, he hadn't standardized his workforce. Now, he didn't need particularly skilled workers; he just needed ones who would do the same repetitive, specialized tasks hour after hour, day after day.

Kreipke says there was chronic absenteeism and lots of worker turnover. So Ford gambled that higher wages would attract better, more reliable workers.

"It was an absolute, total success," Kreipke says. "In fact, it was better than anybody had even thought."

The benefits were almost immediate. Productivity surged, and the Ford Motor Co. doubled its profits in less than two years. Ford ended up calling it the best cost-cutting move he ever made.

It's widely believed that Henry Ford also upped wages to expand his market — paying employees enough to buy the cars they made. While that wasn't Ford's main motivation, it was a welcome byproduct, and a game changer, says University of California, Berkeley, labor economist Harley Shaiken.

"What that gave us was an industrial middle class, and an economy that was driven by consumer demand," Shaiken says.

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The Middle Class Took Off 100 Years Ago ... Thanks To Henry Ford?

Henry Ford may have paid his workers a good wage, but it wasn't out of charity — it was a good business decision that some say helped the middle class take off.

Today's Economy Is Different

He says Ford proved that higher wages led to more productivity, which in turn was good for business. That positive feedback loop gave rise to a broad, prosperous middle class. But over the years, waves of economic pressures and political changes have broken that link.

"Today, overwhelmingly employers view the lowest wage as the most competitive wage," Shaiken says.

These days, global supply chains feed a hypercompetitive auto industry where no one wants to give up even an inch of ground, and keeping up with technology takes precedent over stabilizing the workforce. This just isn't Henry Ford's economy anymore, Shaiken says.

"There are very real economic pressures out there that push down on wages," he says. "So it's not a simple story, but that doesn't mean that there isn't a core truth into what Ford found."

So a century after Henry Ford started paying $5 a day, it's not at all clear that today's employers and workers can reach a similar bargain and reboot a 21st century version of the working middle class.

http://www.npr.org/2014/01/27/267145552/the-middle-class-took-off-100-years-ago-thanks-to-henry-ford

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Finally we have included a WSJ article explain how drugs are priced. It turns out that pricing has less to do with the cost of finding the drug and much more to do with how much the market will bear as in what's it worth to you to have your life saved/extended.

How Pfizer Set the Cost of Its New Drug at $9,850 a Month

Process of setting the price for breast-cancer treatment shows arcane art behind rising U.S. drug prices.

By Jonathan D. Rockoff

Pfizer set the price of a new breast-cancer drug in an elaborate process of market research that included testing the views of oncologists and health-plan officials.

Days before Pfizer was to set the price for a new breast-cancer drug called Ibrance, it got a surprise: A competitor raised the monthly cost of a rival treatment by nearly a thousand dollars.

Three years of market research—a stretch that started almost as soon as the new treatment showed promise in the laboratory—was suddenly in doubt. After carefully calibrating the price to be close to rivals and to keep doctors and insurers happy, Pfizer was left wondering if its list price of $9,850 a month for the pills was too low.

Related

Five Things to Know About How Drug Prices Are Set

Doctors Object to High Cancer-Drug Prices (July 23)

Why the U.S. Pays More Than Other Countries for Drugs (Dec. 1)

"What do you think if we take that up?" asked Albert Bourla, Pfizer's executive overseeing cancer drugs, speaking to his colleagues at the final price-setting meeting last January.

It was a tricky issue. Drug companies have been reaching for new heights of pricing. They routinely raise the cost of older medicines and then peg new ones to these levels.

Yet Pfizer knew setting a price too high for Ibrance might backfire. It could antagonize doctors and prompt health insurers to make prescribing the pills a cumbersome process with extra paperwork that doctors dislike.

A look at Pfizer's long journey to set Ibrance's price—a process normally hidden from view—illuminates the arcane art behind rising U.S. drug prices that are arousing criticism from doctors, employers, members of Congress and the public. A Senate committee is holding a drug-price hearing on Wednesday, focusing on sudden large increases imposed by companies that purchased the rights to drugs developed by others.

Pricey options

The average cost of a branded cancer drug in the U.S. is around $10,000 a month, double the level a decade ago, according to data firm IMS Health. Cancer doctors say high costs are unavoidable because all of the options are pricey.

"I think that says something about where we all are in terms of drug costs: We've gotten used to something that is pretty outrageous," says Eric Winer, who heads the women's cancers division at Dana-Farber Cancer Institute in Boston.

Pfizer's multistep pricing process shows drugmakers don't just pick a lofty figure out of the air. At the same time, its process yielded a price that bore little relation to the drug industry's oft-cited justification for its prices, the cost of research and development.

Instead, the price that emerged was largely based on a complex analysis of the need for a new drug with this one's particular set of benefits and risks, potential competing drugs, the sentiments of cancer doctors and a shrewd assessment of how health plans were likely to treat the product.

In the end, "we went to the right point where patients get the maximum access, payers will be OK and Pfizer will get the [returns] for a breakthrough product," Dr. Bourla said.

The process began in November 2011 when Mace Rothenberg, a scientist who oversees Pfizer's development of cancer drugs, flew to California to review early clinical-trial data on a laboratory compound.

Then called simply PD-0332991, it grew out of work on proteins that help regulate how cells form and divide. In cancer, some of these can shift into overdrive. The research on this won a Nobel Prize. It also set off a hunt by drugmakers for a way to put the brakes on the overactive proteins, called cyclin-dependent kinases.

Visiting Pfizer labs in La Jolla, Dr. Rothenberg saw a slide with two curves veering far apart. It showed that the length of time before breast-cancer patients' disease progressed was twice as long for those who took Pfizer's compound in addition to an existing drug versus patients getting just the older drug.

"I think we have something special," Dr. Rothenberg told the scientists leading the research.

When he got back to New York, he began talking up the compound to win the internal investment needed to develop it, as well as to involve others who would eventually set a price. Pfizer wasn't going to fund further clinical testing and other development costs if it couldn't anticipate good financial returns from a resulting drug.

In this case, the opportunity was clear. Pfizer's novel compound targeted advanced breast cancer fueled by estrogen—a disease for which existing therapies, a decade or more old, offered only a modest extension of life. A drug that could do better would fill an unmet need and could be priced accordingly. So in 2012, while scientists continued their work, Pfizer employees on the commercial side started on the market analysis that would eventually lead to a pricing decision.

More clinical results arriving in December 2012 supported the compound's promise, but also showed it was associated with lower counts of infection-fighting blood cells. The studies weren't long enough to answer a key question: whether the compound helped people live longer.

They were encouraging enough to keep the Pfizer pricing team going, though. The team began interviewing cancer doctors, seeking to gauge interest in a possible drug with this one's profile of benefits and risks.

Importantly, Pfizer wanted to know what the oncologists would consider comparable treatments.

Among the doctors consulted was Debu Tripathy, then co-leader of the Women's Cancer Program at the University of Southern California. Dr. Tripathy, now at University of Texas MD Anderson Cancer Center in Houston, says he was excited about the prospective drug described, though he would have liked to see evidence it extended lives.

For a drug comparison, he says he pointed the company to a widely used breast-cancer drug called Herceptin.

Pfizer's compound "looks about as good as Herceptin. Maybe you should price it like that," Dr. Tripathy recalls telling Pfizer.

Herceptin was much cheaper than most other branded breast-cancer drugs, he knew. It cost about $4,775 a month in late 2013, according to its maker, Roche Holding AG , and data firm Truven Health Analytics.

Dr. Tripathy says Pfizer staffers told him it would be better to compare their compound to newer drugs. These are much costlier than Herceptin.

Pfizer says Herceptin wouldn't have been a good benchmark because it wasn't one of the newest drugs in use and because of differences in how it is taken, the kind of cancer it treats and the length of time it stalls tumor growth.

In 2013, Pfizer hired outside firms to conduct hourlong interviews with more than 125 cancer doctors in six cities, while commercial staffers observed. Doctors said they were impressed, and many said that despite having to monitor patients for infections, they would prescribe "Product X" if the price was reasonable.

Most of the doctors, according to two Pfizer staff members, pointed to three drugs the company should consider as pricing benchmarks: Kadcyla and Perjeta from Roche and Afinitor from Novartis AG .

Like Herceptin, two of these differed from Pfizer's drug in the kind of breast cancer treated and in how they were administered. Only Afinitor closely paralleled Pfizer's compound by attacking the same type of breast cancer and being in pill form.

For all three, the cost of treating a patient for a month was between $9,000 and $12,000, including any other drugs that had to be taken with them. These are list prices, from which health plans and insurers negotiate discounts of 20% or so.

"We're going to be somewhere in this ballpark," a Pfizer staffer involved in the pricing research recalls thinking.

Competing factors

The company wanted a price that would maximize its revenue without deterring health plans or keeping the drug from getting to patients it could help. Dr. Bourla recalls telling staff members in late 2014 that the company had "a moral obligation": The patients had a deadly disease that this drug could help, and "it is our responsibility to get it to them."

It was time to talk to insurers.

Pfizer hired firms that surveyed more than 80 health-plan officials such as medical directors and pharmacists. They were asked what restrictions, if any, they might place on a drug with this one's profile, at various monthly prices from $9,000 to $12,000.Pfizer executive Albert Bourla gave final approval last January to a price for the company's new breast-cancer drug Ibrance, following a years-long process by other Pfizer officials that included testing the views of oncologists and health-plan officials. Photo: Pfizer

At $11,000 a month, one official said the plan "would definitely require physicians to document medical necessity for Product X," according to a person familiar with the surveys. It was the kind of paperwork obstacle Pfizer wanted to avoid.

Staff members put together a chart estimating the revenue and prescription numbers at various prices similar to those of the three drugs Pfizer had decided to use as benchmarks.

The chart showed a 25% drop in doctors' willingness to prescribe the new drug if it cost more than $10,000 a month. This indicated Pfizer might collect higher returns by charging toward the lower end of its range.

Pfizer also had been talking with the Food and Drug Administration. The agency agreed in late 2014 to a speedy review, without waiting for results from an elaborate "Phase 3" clinical trial, so that patients with life-threatening conditions could get the drug earlier. This sped up the time to market by about two years.

Pfizer took steps to put the drug in patients' hands as fast as possible after FDA approval. Oral cancer medicines aren't dispensed at local drugstores but at specialty pharmacies that help patients gain insurance approvals, remind them to take pills and assist with side effects. Pfizer lined up 24 of these to supply the drug once approved.

Hoping to smooth the drug's way onto health-plan lists of covered medications, Pfizer economists created a dossier containing data on clinical benefits and risks, plus—important to the plans—the likely effect on their budgets.

The economists mined electronic health records, drug-prescription tallies and health-insurance claims to estimate the number of prescriptions, costs of treating side effects and monitoring patients for infections, and spending that might be avoided if the drug kept cancer at bay longer.

The economists cited a 2012 report showing that a typical million-member commercial health plan spent $320 per member a month, of which the spending on cancer drugs came to just $4.20. Scenarios they ran indicated the new drug, if priced below $10,000 a month, would increase that spending no more than six cents. Pfizer set the price of Ibrance, a new breast-cancer drug, at $9,850 a month. Photo: Pfizer/Associated Press

Pfizer staff members staged two mock reviews by health-plan officials. The officials, who were paid for their time, sat around a conference table and simulated a day-long discussion of how to handle a drug such as this one.

Pfizer employees say the mock reviews supported a monthly price below $10,000. If it was higher, insurers could start requiring doctors to fill out paperwork justifying its use.

The staff felt they finally had it. When they met in November 2014 to nail down a price, they picked a figure just below the cutoff: $9,850 a month. This would be the list price, from which health insurers and pharmacy-benefit managers would negotiate discounts and rebates with Pfizer.

The staffers just needed a green light from Dr. Bourla, the executive overseeing cancer drugs.

The price they had picked was well below the cost of treatment involving one of the three benchmark drugs Pfizer had identified. But it was close to the price of the other two, and slightly above the price of the most direct competitor, Novartis's Afinitor.

Then, on Jan. 6, 2015, Novartis raised Afinitor's price 9.9%. Novartis says it adjusts prices to reflect "an evolving health-care and competitive environment," new evidence and the need to support R&D.

The new price for the close rival drug put its monthly price $687 above what Pfizer was planning to charge.

Meeting in Dr. Bourla's New York office three days later, Pfizer staff members mentioned that price increase. Dr. Bourla asked if Pfizer, too, should go higher.

"This may make some plans just not use it, and some will make things difficult and that will frustrate patients," he recalls being told.

Alternatively, Dr. Bourla asked, should Pfizer charge a lower price than it was planning? Would doing so reach substantially more patients? He says staffers told him that a price closer to $9,000 a month wouldn't improve health-plan coverage, and Pfizer would be leaving money on the table.

They were back to $9,850. "Let's go with that," Dr. Bourla said.

On Feb. 3, the FDA approved Ibrance. Within hours, pills were on their way to pharmacies.

Sales are off to a strong start. The drug has been taken by about 18,000 breast-cancer patients so far.

Industry analysts expect Ibrance will eventually bring Pfizer billions of dollars a year in revenue.

http://www.wsj.com/articles/the-art-of-setting-a-drug-price-1449628081gg

*****

4 December 2015

Markets meandered for the first three days of the week; then dropped on Thursday by a little over 1% and rallied 2% on Friday. Consensus now is that the Fed raises rates in December. OPEC decided not to cut output on Friday and Oil and oil stocks retreated.

We are holding pat through year end. We did add a few shares of Union Pacific to large accounts when it made a yearly low on Friday and we switched U.S. Steel at a scratch loss to equal shares of 3D Systems.

One news item and one opinion piece follow

Shares of QUALCOMM, Inc. surged higher by more than 7 percent Wednesday morning.

Qualcomm announced an agreement to license its patents to Xiaomi.

As part of the agreement, Qualcomm will allow Xiaomi to use its patents in new 3G and 4G devices.

Shares of Qualcomm spiked higher on Wednesday after the company announced a new agreement with Xiaomi, a major China-based smartphone manufacturer. As part of the agreement, Qualcomm has granted Xiaomi a royalty-bearing patent license to develop, manufacture and sell 3G and 4G devices.

Read more: http://www.benzinga.com/news/15/12/6015955/qualcomm-is-surging-following-xiaomi-partnership#ixzz3tBWObW9g

*****

This Pro Publica story was co-published with The New York Times.

Mark Zuckerberg did not donate $45 billion to charity. You may have heard that, but that was wrong.

Here's what happened instead: Zuckerberg created an investment vehicle.

Sorry for the slightly less sexy headline.

Zuckerberg is a co-founder of Facebook and a youthful mega-billionaire. In announcing the birth of his daughter, he and his wife, Priscilla Chan, declared they would donate 99 percent of their worth, the vast majority of which is tied up in Facebook stock valued at $45 billion today.

In doing so, Zuckerberg and Chan did not set up a charitable foundation, which has nonprofit status. He created a limited liability company, one that has already reaped enormous benefits as public relations coup for himself. His PR return-on-investment dwarfs that of his Facebook stock. Zuckerberg was depicted in breathless, glowing terms for having, in essence, moved money from one pocket to the other.

An LLC can invest in for-profit companies (perhaps these will be characterized as societally responsible companies, but lots of companies claim the mantle of societal responsibility). An LLC can make political donations. It can lobby for changes in the law. He remains completely free to do as he wishes with his money. That's what America is all about. But as a society, we don't generally call these types of activities "charity."

What's more, a charitable foundation is subject to rules and oversight. It has to allocate a certain percentage of its assets every year. The new Zuckerberg LLC won't be subject to those rules and won't have any transparency requirements.

In covering the event, many commentators praised the size and percentage of the gift and pointed out that Zuckerberg is relatively young to be planning to give his wealth away. "Mark Zuckerberg Philanthropy Pledge Sets New Giving Standard," Bloomberg glowed. Few news outlets initially considered the tax implications of Zuckerberg's plan. A Wall Street Journal article didn't mention taxes at all.

Nor did they grapple with the societal implications of the would-be donations.

So what are the tax implications? They are quite generous to Zuckerberg. I asked Victor Fleischer, a law professor and tax specialist at the University of San Diego School of Law, as well as a contributor to DealBook. He explained that if the LLC sold stock, Zuckerberg would pay a hefty capital gains tax, particularly if Facebook stock kept climbing.

If the LLC donated to a charity, he would get a deduction just like anyone else. That's a nice little bonus. But the LLC probably won't do that because it can do better. The savvier move, Professor Fleischer explained, would be to have the LLC donate the appreciated shares to charity, which would generate a deduction at fair market value of the stock without triggering any tax.

Zuckerberg didn't create these tax laws and cannot be criticized for minimizing his tax bills. If he had created a foundation, he would have accrued similar tax benefits. But what this means is that he amassed one of the greatest fortunes in the world — and is likely never to pay any taxes on it. Any time a superwealthy plutocrat makes a charitable donation, the public ought to be reminded that this is how our tax system works. The superwealthy buy great public relations and adulation for donations that minimize their taxes.

Instead of lavishing praise on Zuckerberg for having issued a news release with a promise, this should be an occasion to mull what kind of society we want to live in. Who should fund our general societal needs and how? Charities rarely fund quotidian yet vital needs. What would $40 billion mean for job creation or infrastructure spending? The Centers for Disease Control and Prevention has a budget of about $7 billion. Maybe more should go to that. Society, through its elected members, taxes its members. Then the elected officials decide what to do with sums of money.

In this case, it is different. One person will be making these decisions.

Of course, nobody thinks our government representatives do a good job of allocating resources. Politicians — a bunch of bums! Maybe Zuckerberg will make wonderful decisions, ones I would personally be happy with. Maybe not. He blew his $100 million donation to the Newark school system, as Dale Russakoff detailed in her recent book, "The Prize: Who's in Charge of America's Schools?" Zuckerberg has said he has learned from his mistakes. We don't know whether that's true because he hasn't made any decisions with the money he plans to put into his investment vehicle.

But I think I might do a good job allocating $45 billion. Maybe even better than Zuckerberg. I am self-aware enough to I realize many people would disagree with my choices. Those who like how Zuckerberg is lavishing his funds might not like how the Koch brothers do so. Or George Soros.

Mega-donations, assuming Zuckerberg makes good on his pledge, are explicit acknowledgments that the money should be plowed back into society. They are tacit acknowledgments that no one could ever possibly spend $45 billion on himself or his family, and that the money isn't really "his," in a fundamental sense. Because that is the case, society can't rely on the beneficence and enlightenment of the superwealthy to realize this individually. We need to take a portion uniformly — some kind of tax on wealth.

The point is that we are turning into a society of oligarchs. And I am not as excited as some to welcome the new Silicon Valley overlords.

http://www.propublica.org/article/how-mark-zuckerbergs-altruism-helps-himself

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