World Markets Simplified

With the Dow rallying more than 400 points and gold trading up over $30, near the $1,750 level, today King World News has released the eagerly anticipated interview with legendary investor Marc Faber, author of the Gloom Boom and Doom Report. Faber warned KWN that the Chinese economy may crash and noted this will have a huge impact on various economies and markets, "Well if we define a bubble as a period of excessive growth and artificially low interest rates, then China had a huge bubble. Usually bubbles are not deflated by a soft landing, but by a hard landing and this concerns me, actually, much more than the European situation."

Marc Faber continues:

"The European situation is basically hopeless, but it will lead to money printing. In China, if the economy slows down meaningfully or if there is a crash, it will have a huge impact on the demand from China for raw materials, for commodities. It will impact Australia, Africa, the Middle-East and Latin America.

If these countries are faced with declining commodity prices, especially industrial commodities such as copper, nickel, oil and so forth, then they will buy less from China and we will have a vicious spiral on the downside. 

I'm sure the economy (of China) is softer than official statistics would suggest and probably the government will start to print money at some point. So maybe stocks will rebound here because of money printing, but again, it won't help the economy….

When asked about a sputter or collapse in the Chinese economy, Faber stated, "I live in Asia and all I can say is I observe a meaningful slowdown in business activity recently and increasing corporate earnings that disappoint."

When asked if he was aware of capital flight out of China, Faber replied, "There's a huge capital flight, there's no question about this."

When asked why the Chinese are panicking to move their money out of China, Faber responded, "That is a very good question because, you see, the bullish analysts will tell you will tell you, 'Oh, if the Chinese economy slows down they are going to print money and lower interest rates and ease monetary conditions.' 

But if that happens, then obviously capital flight will increase, especially if, unlike all of the expectations, the Yuan or the Chinese RMB begins to weaken rather than to strengthen against the US dollar. So that could actually accelerate the decline or let's say capital outflows and declining asset values in China.

Faber had this to say about the situation in the West, "Well, as you know we have some deflationists, they think the whole debt bubble will collapse and I believe that will eventually be the case. But between now and then there will be QE3, 4, 5, 6 and so forth and in Europe they will print money."

Peter Schiff Explains What Today's Global Fed-Funded Bailout Means For The Future

If anyone is still confused by what has transpired today, here is Peter Schiff explaining in simple words, why what happened "may be one of the most important economic events of the year" and what to do next: "Today's unprecedented announcement by the world's most powerful central banks was a loud and clear bell ringing to buy precious metals. The move, disguised as an attempt to help the fragile state of the global economy, is in reality a move to prop up failing banks in Europe and the US. By reducing interest rates paid for dollar swaps, central bankers are in effect increasing the quantity of global dollars in circulation. The result? The dollar will weaken, inflation will rise, and gold will soar. Gold was up more than $30 today, and the dollar got crushed. I urge you to take 7 minutes to watch the video I recorded exclusively for my subscribers a few hours ago. It explains, in plain language, what happened today – and what is the likely outcome for your portfolio. This may be one of the most important economic events of the year." And pardon Schiff's self-promotional piece at the end, but the truth is that he is essentially correct about what the actions means from a big picture perspective. Furthermore, as Goldman made all too clear, this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads. Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the verge of viability (and beyond) in trying.

For the last year, Pfizer has been laying the groundwork to combat the looming competition against Lipitor, forging deals with insurers, pharmacy benefit managers and patients to meet or beat the price of its generic replacements.

As it loses its patent for Lipitor, the top-selling cholesterol drug, on Wednesday, Pfizer is completing relationships and shoring up discounts — like a reduced co-payment of $4 a month versus the $10 customers would pay for many generic prescriptions.

Some deals require pharmacies to reject prescriptions for low-cost generics, starting Thursday, and substitute a discounted name-brand Lipitor. Some deals have blocked generic makers from mail-order services that account for an estimated 40 percent of all Lipitor prescriptions.

The company’s aggressive strategy may offer lessons for drug makers facing similar losses of patent protection for other blockbuster drugs over the next few years, and may chart a new path for shifts between the big pharmaceutical companies and generic rivals.

Lipitor was the first drug to exceed $10 billion a year in sales, and accounted for almost one-quarter of Pfizer’s revenue in the last decade.

With Pfizer’s plans to try to maintain brand loyalty for the next six months becoming public, industry analysts have raised the company’s earnings outlook by 2 to 4 percent, and now estimate that it could retain 40 percent of the market through next year. Pfizer officials declined to comment on that estimate.

Aiding its chances is a stumbling start-up by generic competitors. Ranbaxy Laboratories, the Indian subsidiary of the Japanese drug company Daiichi Sankyo, won the right to bring the first generic version to market. But Ranbaxy has disclosed it is under federal investigation. It has not yet received Food and Drug Administration approval. Ranbaxy’s president has said it will be ready by Thursday.

Watson Pharmaceuticals of Parsippany, N.J., is a second competitor with a generic version of the drug authorized and manufactured by Pfizer. But Watson has to give about 70 percent of its profits to Pfizer, according to the investment house Sanford C. Bernstein & Company. And Pfizer’s own deals are undercutting both Watson and Ranbaxy on price.

“Pfizer’s tactic of dressing up as a generics company is pulling the rug under the incentive system created to foster the development of generic drugs,” David A. Balto, a lawyer for some generic makers and a former policy director for the Federal Trade Commission, said Tuesday.

Pfizer’s strategy so far is limited to the first 180 days after Lipitor goes off patent. During that period, under law, generic competition is limited and the first entries have historically charged fairly high prices to recoup their costs. After the first six months, any company can enter the generic market, and prices plunge.

Although Ranbaxy and Watson have not yet announced their prices, one top Pfizer official said on Tuesday that its new discounts could be adjusted to beat any tit-for-tat reduction in the expected generic pricing.

“They are a set contract but they could change,” said David S. Simmons, president and general manager of Pfizer’s established products unit. “I mean, it’s at the discretion of two parties. They could change.”

Mr. Simmons said the intention of Pfizer’s discount was to keep Lipitor “at or below generics’ cost to the health care system.”

The discount is also extending to many Medicare prescription drug plans that will dispense Lipitor even if patients ask for generics, according to a memo released by an advocacy group called Pharmacists United for Truth and Transparency.

The memo, from CVS/Caremark, a pharmacy benefit management company, and dated Monday, notified pharmacies that the generic form of Lipitor would not be covered for 29 prescription drug plans it managed for Medicare Part D. Instead, any prescription claims for generic atorvastatin will be rejected with a notice saying: “Brand Lipitor will pay at generic co-pay.”

The company’s memo did not disclose the financial terms.

The government may receive the rebates that drug manufacturers pay to benefit managers and insurers if they are fully disclosed and characterized as rebates, not fees, according to a March report by the Office of the Inspector General for the Department of Health and Human Services. But benefit managers’ records may not be accessible or auditable, it added.

Express Scripts, another large pharmacy benefit manager, is recommending that its clients not accept Pfizer’s deals under the reasoning that it could cost more in the long run, according to F. Everett Neville, vice president for pharmaceutical strategy. “They’re 180-day deals but no one knows what the price of the generic may be if they lower their prices in a month or two,” he said.

Medco Health Solutions, another giant benefit manager, is also recommending that customers switch to the generic version of Lipitor. Medco is sending faxes to tens of thousands of physicians and letters to some of the million people who buy Lipitor through the company, saying they should use generic atorvastatin to save money, said Timothy C. Wentworth, Medco’s group president for employer and key accounts.

At the same time, both Express Scripts and Medco say their own mail-order services will use Lipitor as a “house generic” because Pfizer has guaranteed to match the price and assured a supply.

With mail order increasingly dominant — accounting for an estimated 30 percent of Lipitor sales — those deals are important. Timothy Anderson of Bernstein Research estimated that Pfizer would maintain 90 percent of the mail order market.

Aetna is not taking Pfizer’s offer. “We decided not to participate in the rebate program because it doesn’t support our generic-first philosophy,” an Aetna spokesman, Matt Wiggin, said.

Kevin Hooks, managing partner of the Virtuous Group, a benefits consultant in Las Vegas, also said: “We don’t know what the generic is going to be priced yet. He added, “Right now we think it’ll be a better deal for members to get Lipitor for the first six months, with discount, and then kill the deals.”

Consumers will certainly benefit from generic prices. And Pfizer is making sure of that with a program called Lipitor for You, offering the $4 co-payment card and direct delivery of Lipitor. The program is limited to privately insured people, though, because government programs like Medicare say such discounts could violate antikickback laws and lead to higher health spending.

It’s unclear how taxpayers will fare through the Medicare Part D drug benefits program, administered by private companies. Tony Salters, a spokesman for Medicare, said he could not comment.

Christine K. Cramer, a spokeswoman for CVS/Caremark, said its drug plans had already included the Lipitor rebates in its 2012 Medicare bids, thus lowering premiums for the government and Lipitor users.

Even at the lower price, Pfizer has a huge margin because of the relatively low cost of materials for Lipitor, Bernstein Research estimated. Pfizer, the benefit managers and some insurers insist all of the new discount will be passed along to consumers, companies and other payers.

“Who knows who it’s good for?” said Dr. John Santa, director of health ratings for the independent nonprofit Consumer Reports. With all the companies involved, “and they say consumers are going to be good here, I’d be skeptical,” he added.

Adam J. Fein, a pharmaceutical consultant and blogger, said: “It’s kind of a forerunner of what’s going to happen over the next two years as everyone battles for the incremental profit in the generic wave.” He added: “You have over $80 billion in drugs that are going to go generic. Say $80 billion settles to $10 billion eventually. That’s $70 billion savings. But during that period going from 80 to 10 there’s going to be a lot of money made by the various channel intermediaries, and they all want a piece of that pie.”

We all know the iPhone has had its fair share of battery issues. And even some death grip problems. But this is one for the record books: On November 25, a passenger on an Australian flight, traveling between the city of Lismore and the city of Sydney, looked down to find his iPhone 4 had exploded, and was currently emitting plumes of "dense smoke." 

So say the folks at Regional Express, a major Australian airline. In a press release with the completely wonderful title of "Mobile Phone Self Combustion," Regional Express said the situation was quickly brought under control by a flight attendant. 

"Regional Express flight ZL319 operating from Lismore to Sydney today had an occurrence after landing, when a passenger’s mobile phone started emitting a significant amount of dense smoke, accompanied by a red glow," the release read. "In accordance with company standard safety procedures, the flight attendant carried out recovery actions immediately and the red glow was extinguished successfully. All passengers and crew on board were unharmed." 

As the team over at ABC News points out, this isn't the first time Apple has had trouble with exploding gadgets. In 2009, the European Union looked into allegations that various Apple mobile devices had caught fire. More recently, Apple recalled the original Nano music player, which were reportedly at risk of overheating. 

No word yet from Apple on the Great Australian Airplane Apple iPhone Combustion of 2011.

American Airlines filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest U.S. carrier.

AMR Corp, the parent of American Airlines, also filed for bankruptcy and replaced its chief executive.

The company, which employs about 88,000, has been mired for years in fruitless union negotiations, complaining that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.

United Continental Holdings Inc's United Airlines and Delta Air Lines Inc, both of which used Chapter 11 to cut costs and later found merger partners, are now the largest U.S. carriers. American ranks third.

"The world changed around us," incoming Chief Executive Tom Horton told reporters on a conference call. "It became increasingly clear that the cost gap between us and our competitors was untenable."

AMR named Horton as chairman and chief executive, replacing Gerard Arpey, who retired.

American plans to operate normally while in bankruptcy, but the Chapter 11 filing could punch a hole in the pensions of roughly 130,000 workers and retirees.

AMR pension plans are $10 billion short of what the carrier owes, and any default could be the largest in U.S. history, government pension insurers estimated.

Ray Neidl, aerospace analyst at Maxim Group, said a lack of progress in contract talks with pilots tipped the carrier into Chapter 11, though it has enough cash to operate. The carrier's passenger planes average 3,000 daily U.S. departures.

"They were proactive," Neidl said. "They should have adequate cash reserves to get through this."

PROBLEMS TO ADDRESS

Bankruptcy gives AMR a chance to pare less profitable operations, and could result in the sale of flight routes. The process also gives AMR more flexibility, according to Jack Williams, a professor of law at Georgia State University.

"There are considerable tax benefits that they will be able to use in a bankruptcy case, and they will be able to more aggressively manage their liabilities," Williams said.

But analysts question whether the bankruptcy will address operational shortcomings that have eroded revenue.

"Bankruptcy is not necessarily the be-all, end-all," said Helane Becker, an analyst with Dahlman Rose & Co. "They've got more problems to address in addition to the cost problem."

Shares of AMR closed Tuesday down $1.36, or 84 percent, at 26 cents, down from a 52-week high of $8.89 on January 7. Stock typically is wiped out in bankruptcy.

Shares of rival airlines rallied on expectations that reduced competition could boost fares. AMR had kept a lid on industrywide fares in its effort to keep its airplanes full.

United Continental shares closed up 6.3 percent at $17.63, Delta rose 5 percent to $7.80 and US Airways Group Inc climbed 4.4 percent to $4.46.

AMR shares were halted 28 times on the NYSE on Tuesday for triggering a circuit breaker rule, activated when a stock moves up or down at least 10 percent within five minutes.

SLIMMED-DOWN AMR

In its bankruptcy petition filed in Manhattan, AMR reported assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash.

One bankruptcy rule is "don't wait too long," Harvey Miller, a partner at Weil, Gotshal & Manges representing AMR, said at a court hearing. "Don't wait until the course is irreversible. That is what American Airlines is doing today."

AMR's bankruptcy filing showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick Feinstein in New York.

"It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations," he said.

Experts believe AMR stands to save billions by restructuring its obligations in bankruptcy.

"AMR will no longer have its defined benefit pension plan, helping absorb nearly $7 billion in debt," Morningstar equity analyst Basili Alukos said.

"I imagine the company can save between $1.2 billion to $1.5 billion in labor costs, in addition to savings on repair and maintenance and better fuel burn," he said.

MERGER IN THE OFFING?

AMR said the bankruptcy has no direct legal impact on non-U.S. operations. It also said it was not considering debtor-in-possession financing.

But it could susceptible to unsolicited takeover bids from rival carriers. AMR has long said it could thrive on its own.

Robert Herbst, an analyst with AirlineFinancials.com and a former American pilot, said there was a "95 percent" chance American would join up with another carrier within two years.

"US Airways is probably toward the top of the list but it wouldn't be the only (potential merger partner)," he said.

A US Airways representative did not immediately return a phone call seeking comment.

Most large U.S. carriers are the products of mergers.

United Continental combined the former United Airlines and Continental Airlines, while Delta bought the former Northwest Airlines. US Airways was formed from a 2005 merger with America West Airlines.

US Airways and United Airlines filed for bankruptcy protection in 2002, and Delta and Northwest in 2005. US Airways had tried to buy Delta out of bankruptcy.

Japan Airlines Co, one of American Airlines' alliance partners, filed for bankruptcy last year.

American Airlines said it would remain an active member of the oneworld global airline alliance.

CLSA

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