I started reading over the Schering-Plough (SGP: chart, web, Y!) 2007 financial report in an effort to do some more research.

Interestingly enough, I’m starting to rethink my position on Schering. SGP had really fallen out of favor with me since the whole Vytorin mess really blew up, and the stock price sunk to $13.83 per share for its 52 week lows.

After digesting some of the numbers though, I don’t think things look all that bad… at least not bad enough to justify the $18 share price.

Back in November of last year, Schering bought Organon BioSciences (OBS) for about $16.1 billion.  Effectively, that entire acquisition went on the books for the entire year.

With that purchase came $3.8 billion worth of acquisition in-process research and development stemming from Organon’s women’s health and animal research.  Effectively this was the cost of doing the research for up and coming drugs relating to women’s health and animal health.

Effectively, this in-process research and development cost was reflected in the $1.04 per share loss for fiscal 2007.  If you look past those costs, Schering turns a healthy profit.

The fact is, you do have to weigh in those R&D costs when refining the value of a company, and as such whether or not to buy stake in the company.  However, so long as there is a return on your R&D, it’s money well spent.

And there-in lies the big dilemma:  Will Schering see appreciable returns on the $3.8 billion R&D hit from 2007?

My gut says yes, but the headlines say no.

The FDA is in the drivers seat right now, as they should be.  I’m not too wound up about the Vytorin study, as the company has diversified its product line enough to make up for those lost sales.  However, recent headlines from Merck make it all too obvious that standards are being tightened in the pharma sector.

The short story is that I think Schering Plough is undervalued below $25, and I think I’ll start buying in small chunks.  If it crosses the $25 mark before next quarters earnings report, I’ll sell half my stake and let the rest ride through earnings.

The company reported Q1 2008 earnings of $0.53 per share, which blew away the estimates of $0.37.  I like that, and I think that trend will continue.

I was sitting in a hotel room watching an interview with Jesse Ventura (you know, the pro wrestler turned governor of Minnesota) recently, and of course the subject was the presidential election.

He made a comment that really intrigued me: Have the two presidential candidates on the ballot, but a third option for “none of the above”.

Essentially, that would represent the folks who are taking the time to do their duty to vote, but don’t have enough confidence in any of the candidates to vote for either of them.  I kind of like that.

To be honest, I don’t see anyone in the running I’m convinced would make a good leader of our country.  Sure, I’d be OK if either Obama or McCain won, but I just can’t see voting for either of them.

So long as it’s not Hillary.  I can’t stand to listen to her talk, and I cringe at the thought of having to sit through a State of the Union address listening to her shrill voice…

None of the above?  Bad idea?

Starbucks (SBUX: chart, web, Y!) has been making valiant efforts in marketing to combat the effects of cheaper coffee shops and gourmet coffee-selling fast food chains.  But they’re coming up short.

I could smell this one coming from miles away (pardon the pun).  The first thing to suffer from a falling economy is the discretionary purchases that have become most routine.  When you first start looking at your budget and ask yourself the question: “where can I save a few bucks here and a few bucks there?” the answer is easy.  You could quit spending $5 on a cup of coffee!

I remember when coffee was complimentary with any meal, and you could buy a cup of joe with all the fixin’s for less than $0.25 and usually for a dime.  That was then, this is now.

Starbucks business model is very focused on coffee, although they have branched out into light pastries and quick gourmet snacks.  But the focus is still on coffee.  Expensive coffee.

I only frequent Starbucks when I travel.  They have quick kiosks right next to the gates at the airport, and generally my travel schedule dictates that I arrive for the earliest of flights to where ever I’m going. Most restaurants aren’t open that early, but Starbucks has the brew going strong (again… the pun) before I’ve arrived.

The problem is that I just want coffee.  Plain old black coffee.  No mocha-lotta-cappa-whatever… just coffee.  I usually end up getting a blank stare from the barrista (er… whatever they call the guy who pours the coffee) for wanting “just coffee” but then after shelling out nearly $3.50 for “just coffee” I make my way to the gate.

I digress.

Starbucks is in trouble.  We’ll find out just how much trouble on Wednesday when they report earnings.  Analysts are predicting an EPS of $0.21, which is just $0.02 more than a year ago.

I’m not a gambling man, but I bet SBUX misses estimates.

I’ve been aimlessly wandering the business journals for the past couple weeks, and really haven’t been all that excited about the financial markets… until now.

The Fed is set to convene on Tuesday and is expected to announce another quarter point rate cut. Up until the last few days, most have expected a half point rate cut, but it appears the calm in the markets has lowered that prediction to just the 0.25% mark.

What would be better?

I think a pause in the cuts would do the markets even better. Over the past several months, rate cuts have been perceived as a way to help soften the blow of credit and housing problems to the financial markets. Consequently, if the Fed thinks things are starting to bottom out, the easiest way to send that signal would be to make no additional cuts…

If the the rate does fall by another quarter point, the rhetoric from the Fed meeting will be very important.  Look for any change in focus on downside risk to growth… it will be very telling.

I’m starting to buy Provident Energy Trust (PVX: chart, web, Y!) again in small bits and pieces.  Natural gas ($natgas: chart) is holding its own even with rising temperatures, mostly due to increased use in electrical power generation.

I’ve also noticed that with the advent of LNG technology (liquified natural gas, where they cool the stuff off so much it turns to a liquid, thus facilitating shipping) we’re starting to see natural gas traded more on a global market.

It used to be that natural gas markets were very focused due to the infrastructure required to handle the gas.  Now that it’s exportable, I think we’re seeing natural gas prices start to increase due to a more widespread market demand…

At any rate, I don’t see natural gas prices coming down anytime soon, at least not to the levels we’re used to at this time of year.

It’s becoming increasingly apparent to me that our airline system is broken.  Today it has been revealed that airline pilots are raising concerns about the minimum amount of fuel carried on board aircraft, with several incidents being filed with the NASA ASRS reporting system of arriving at a destination or an alternate airport with minimum fuel.

It seems that the cost cutting measures management is employing at their airlines is starting to spread into the margins of safety mandated by the Federal Aviation Administration.

This is serious business, folks!

There is a fine line between efficient operating practices and infringing on the safety of customers.  I’m all for airlines having the ability to make money.  As I’ve said before, it’s the beauty of the competitive environment stimulated by a free market.  However, when you cut costs in areas that directly influence safety, any freedom to make money should go out the window.

Many of us have lost sight of the fact that you can fly half way across the country, and back, in less than 10 hours for less than $300.  Does no one else out there think that is absurdly cheap?

You have to pay extra for pillows, blankets, drinks, meals, additional checked bags, aisle seats, exit row seats, direct flights, and of course first class service (which you would think would include all that other stuff free of charge, but doesn’t).

I’m OK with that.  Charge away.  But when you ask the flight crew to carry the absolute minimum amount of fuel as a way to cut costs (you see, the less fuel the lighter the airplane, the better fuel economy, the less operating expense) that’s flat out dangerous.

Unfortunately, the flying public is too naive to realize why the tickets are so cheap… even with jet fuel prices at all time highs…

Think about this next time you pay for that $99 fare on Southwest!

Between the lousy weather and the battered down stock market, it’s been a very mundane weekend.  I’ve taken to, in large part, ignoring the day to day happenings in the stock market, and I think I’m a bit more sane for doing it.

Blogging about many of the financial headlines these days doesn’t seem to interest me as much… Are we in a recession or not?  Who cares?

For the last week, I’ve been checking in on the overall market trends about once a day, versus once an hour or so.  My investments are tied up in fairly secure long-term, proven companies, so it’s not like I’m hunting for the straw that broke the camels back in any one of my holdings.

I’ve got a ton of money sitting on the sidelines, just waiting to be invested, but until I start seeing some money and volume coming back into the market, I’m really hesitant to pull the trigger.

What say you? Has the market burned you out?

I’m continuing to see how television is going to be a thing of the past. Well, not television in the broad sense, more the way television is delivered. Right now, my television programing, my internet connection, and my phone service are delivered over the same pair of copper lines. The same lines that just 5 years ago could only deliver voice service.

It used to be that you had a twisted pair running to your house for telephone and a coax cable running to the house for television and internet (of course before that, it was just rabbit ears…).

I am starting to see how digital data compression is going to open up the world of telecom to even faster, cheaper service. In fact, the internet as we know it today will probably become obsolete.

The latest breakthrough is coming from Cern, the particle physics group that created the world-wide-web (Al Gore takes credit for it, but the really smart folks actually made it come true), and are calling it “the grid”. The grid could will provide the power needed to transmit holographic images or offer high-def video conference calls for the price of a local phone call.

It’s all about speed.

David Britton, professor of physics at Glasgow University and a leading figure in the grid project, believes grid technologies could “revolutionise” society. “With this kind of computing power, future generations will have the ability to collaborate and communicate in ways older people like me cannot even imagine,” he said. -Source

With speeds like this, you’ll be able to transmit and download full albums within seconds, and streaming full length, Hi-Def movies will be common place. Couple this with high-speed wireless networks and you’ll literally be able to whip your TV out of your pocket and take the morning news with you on your morning commute.

The technology is here, and it will make current telecom companies rethink how they deliver their product.

I just received the 2008 tax valuation from my county treasurer. It’s clear that my local housing industry is feeling the effects of the national housing “crisis”, as the appraised value of my house increased less than 1% this year. Compare this to last year where the increase was 4.9%, and the year before when the valuation increased 6%.

Truthfully I’m not terribly disappointed about this, nor am I shocked. Other areas around the country are seeing the value of homes actually decrease, so I’m counting my blessings that my area isn’t yet in that boat.

Looking around the real estate market, there are a ton of houses on the market, and the area is certainly overbuilt. Commercial real estate is even more so. There have been strip malls built that have been vacant for 6 months or more, but curiously this has not deterred builders from building more commercial space.

The current state of the local market makes it attractive to buy a house, but I’d hate to have to sell one right now.

How about your area? Are your valuations still positive?

We’re starting to see the consolidation in the airline industry that we’ve need so badly for the last 5 years or more. ATA Airlines, Aloha Airlines and Skybus (which I wrote about almost a year ago) all quit flying this past week.

I gave Skybus a 3 in 10 chance of surviving, and it looks as if I was right. Rising jet fuel costs and a slowing economic environment got the best of them after only one year. Of course, when you offer tickets for $10 per seat, it doesn’t take a financial analyst to figure out that you might not be in business for long.

That begs the question: if I could figure that out, why couldn’t the execs at Skybus?

Actually, it appears the CEO saw the writing on the wall. Less than two weeks ago, CEO Bill Diffenderffer resigned to pursue a book-writing career. A BOOK WRITING CAREER! Retired sports stars resign to go write books or become sports analysts. Movie stars and politicians resign to go write books. A no-name CEO dumps his company that he spoke so highly of less than a year ago to go write books!? Give me a break! This guy wasn’t even in it to begin with.

I digress.

From a personal standpoint, you never like to see companies go out of business. ATA had to lay off 2,000 employees, which only creates more downside pressure on the economy, and it’s never good when people get laid off. That is, unless you’re going to resign to go write books…

While it’s a personal tragedy to see this happen, consolidation is a key ingredient in a free market. You absolutely have to let the failures fail, and let the successes continue to let their chips ride.

For one, I’ve become tired of hearing airlines complain about rising fuel costs yet refuse to raise ticket prices over fear of dwindling market share. If my companies costs go up, you can bet that part of those costs are passed on to the customer. That’s how a good business works. You’re going to face a reduction in sales when prices go up, but you’re going to face a reduction in revenue if they don’t.

It’s too bad these airlines are going out of business. Now, as long as the government sits on it’s hands and lets the free market play out, the airline business will be healthier for it.