Tycoon Research Weekly Market Advisory - Vol 1, Iss 8

Tycoon Research Weekly Advisory

December 23, 2004: Volume I, Issue VIII

Happy Holidays to You and Yours! Enjoy Your Day Off TOmorrow...
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IN THIS WEEK'S ISSUE:
1. WATCHIN THE WHEELS GO ROUND AND ROUND: Buyers of Treasury inflation-protected securities (TIPS) appear to be worrying moreabout inflation.

How rising prices can affect you both as an investor and a consumer.

--By Tycoon Research

2. ANOTHER BRICK IN THE WALL: Shareholders of both Merck and Pfizer have much bigger problems than just selling bad drugs.

And as always, all of the problems start at the top.

-- By the Tycoon Editorial Staff (that means more than 1 person)

**STOCKS MENTIONED THIS WEEK: Merck (SYM: MRK), Pfizer (SYM: PFE),Johnson & Johnson (SYM: JNJ), Hershey (SYM: HSY), Gilette (SYM: G)

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1. WATCHIN THE WHEELS GO ROUND AND ROUND: Buyers of Treasury inflation-protected securities (TIPS) appear to be worrying moreabout inflation.

How rising prices can affect you both as an investor and a consumer.

--By Tycoon Research

OK, NOW IT'S PERSONAL.

No, it wasn't the news that Producer Price Index (PPI) shot upan unexpected .5 percent in November.

I could've slept through that one.

Nor was it the news that prices of personal care products rose1.6 percent during the past three months.

Heck, what do I know about personal care products anyway?

Other than Gilette (SYM: G) razors, none of that other stuff ever did anything to make MY mug look more presentable.

And it certainly wasn't the news about the year-to-date increase in energy prices.

At this stage of the game I don't even bother asking the gas station attendant to take me out to dinner before they give itto me.

No, the news that pissed me off the most concerned a certain chocolate manufacturer located in Hershey, Pennsylvania.

The same chocolate manufacturer responsible for the tormenting binge/purge obsession I've carried with me since thedays of youth.

The very same chocolate manufacturer who Jack Lalane gets onhis knees and thanks every night before he goes to bed.

Yes, ladies and gentlemen, if you're still in denial, the name of the company in question is Hershey Foods (SYM: HSY)

What made it so personal for me was their announcement last week that they were raising prices by close to 6 percent.

6 percent!

That means that for every dollar I spend on chocolate I justgot slapped with a additional "tax" of 6 cents.

And for those vaguely familiar with the size of my waistline, that's a fair sized tax! Now do you know why it's so personal?

As a matter of fact, as soon as I hung up the phone with my tailor(who was kind enough to share the "good" news with me), I began todig through my economic notes.

Guess what I found out?

I found out that Hershey had every right to do what they did.

Why?

Because the Producer Price Index (PPI) has risen a whopping 5 percent during the past 12 months.

5 percent's a big number.

A 5 percent rise in producer prices means that it costs companieslike Hershey more money to make chocolate.

Think about that for a moment.

If you sell $100 worth of chocolate each day and it cost you $80 to do it, if you don't raise prices, your profit is going to automatically decline by $4 next year (5 percent of $80).

That means that your $20 in net profit turns into $16 before theyear even starts.

That's not good.

And if your profit declines by 20 percent then it's safe toassume that your stock is sure to follow.

That's why Hershey raised prices.

As a matter of fact, Hershey has such a powerful (read: addicting) product that they're able to raise prices above the rate of inflation.

They raised prices by almost 6 percent (5.8 percent to be exact).

That means that Hershey is getting to have its cake..., er, chocolateand eat it too.

You know why?

Using the example from above, Hershey is now sellingchocolate for $106 instead of $100 per day.

But the cost to make the chocolate has risen by only $4.

Therefore, Hershey, in all it's Willy Wonka glory, is actually pocketing an extra $2 per day.

When you sell billions of dollars of chocolate each year thatadds up.

But most companies don't have that luxury.

Think about it.

Some companies that you own sell $100 in products per day don't have pricing power at all.

They have to absorb the cost all by their lonesome.

Thus, their profits are bound to decline along with their stocks.

But you know what's even worse?

A company that is in an industry where prices are actually DECLINING.

So, instead of making $100 per day next year, they'll only sell theirproducts for $98 per day.

In addition, their costs have gone from $80 to $84.

What happens then?

They watch their profit decline from from $20 to $14.

You could guess what happens to their stocks as well.

For those of you reading this who haven't yet signed up for the Tycoon Report, this is your chance.

Why?

Because we own companies that can raise prices above the rate of inflation.

Companies that have pricing power.

Companies that have strong brand names.

Stocks that have outperformed the market in uncertain times.

And the best part is, that we're still giving you a no obligation free 30-day trial to see for yourself.

But that's not all.

If you act now, you'll get access to our December Issue,which will name the stocks we think have the best chance ofraising prices above the inflation rate in 2005.

Remember, you are what you read.

Visit here now to learn more about this offer:

http://www.tycoonresearch.com/login_visitors.asp?Source=111

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2. ANOTHER BRICK IN THE WALL: Shareholders of both Merck and Pfizer have much bigger problems than just selling bad drugs.

And as always, all of the problems start at the top.

-- By the Tycoon Editorial Staff (that means more than 1 person)

YOU MAY NEED TO SIT DOWN FOR THIS ONE.

It seems that the bigwigs at both Merck (NYSE: MRK) and Pfizer (NYSE: PFE) have been discussing ways to get past the PR nightmareof selling painkillers that cause heart attacks to sick people.

My own sources (read: fake people) tell me that in one meeting, theMr. Magoo-like Chairman and CEO of Merck Raymond Gilmartin,proposed offering a free bottle of PEPCID for anybody who purchased 100 shares of his stock.

That's right...Pepcid.

The heartburn medicine.

Ladies and Gentlemen, I think it's about time for an intervention.

Not the kind of intervention where we sit down with a DRUG USER and tell him he/she needs help.

The kind where we sit down the DRUG DEALER and tell them that THEY NEED HELP.

Yeah, this is a new one for me too folks.

Here's why an intervention is needed:

The problems that pure-play drug companies in BigPharma are facingright now have their roots in mismanagement dating back closeto ten years.

Now, don't get me wrong.

I'm not saying that they're stocks haven't performed well during thelate 90's.

Far from it.

What I am saying is that their stocks have performed too well.

So well in fact that while the bigwigs were fantasizing about thenew toasters they recieve from depositing their stock-option checksat the bank, the forgot the most important rule to selling drugs -

MAKING NEW DRUGS!

Here's a sobering statistic for you:

In 1996 the FDA approved 53 new drugs.

In 2003 that number dropped to 21.

During the same time, annual R & D spending for bigpharma nearlydoubled to $33 Billion per year.

$33 Billion dollars.

That means that in 1996 the drug companies spent, on average, $320 Million to introduce a new drug from start to finish.

In 2003 that number ballooned to $1.5 Billion per drug.

Now I admit, I am not a drug-stock analyst.

Not by a long shot.

As a matter of fact, and let me make this very plain - I don'tthink I've ever even owned a drug stock.

And while I do fancy myself somewhat of a business analyst (at least that's what I say to meet women), I've never quite been able to get my mind around the science of making the kind of products drug companies make.

Sure, I've taken an occasional antibiotic when sick.

Heck, a friend even got me to take a Vicodin at a summer partyat the Hamptons many years ago (he was my last intervention).

But ever since I read a statistic some years ago that said over90 percent of all drugs never make it past the FDA, I've neverbeen comfortable with the odds.

This is not to say that they haven't made investors a lot ofmoney - I personally know one or two people who are a sliveraway from the Forbes 400 list - but it's never been my bag.

But I do understand how to invest.

And the first rule of investing is to make more money than you spend.

That rule applies to you whether you're an investor spending IRAmoney or My-Favorite-GilMARTIAN running Merck.

At that, ladies and gentlemen, means that the problem, as always, starts at the top.

But the problem hasn't been universal.

Companies like Johnson and Johnson (SYM: JNJ), probably seeing that timewas needed for the science to catch up to the investment, continuedto diversify into consumer health products and medical devices.

But much of the rest of them have been in denial.

If that wasn't the case, then why haven't shareholders of these companies held these CEO's accountable for research inefficiency?

(Michael Eisner could only wish for breaks like that.)

It's because of the money.

Yes, that's it.

Shareholders have made so much money in the past several years that theyforgot they needed to take a long hard look at the product pipeline.

But it's not just investors who drank too much of the fruit punchat this party.

It's the leadership.

And they're the ones that should have been pulling away the bowl instead of spiking it.

But that didn't happen.

Far from it.

And while I'm sure most bigpharma stocks are relatively cheap tradingnow at a soft 15 P/E, I would tread carefully.

Just because their stocks may have limited downside doesn't mean thatthey have upside.

Ultimately, the only thing that makes a stock rise are earnings or the prospect of earnings to come.

And without products in the pipeline many investors may be leftjust pipe-dreaming.

Dont forget: you are what you read.

-- The Tycoon Editorial Staff (that means more than 1 person)
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