CHICAGO, Jan. 11, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: The Coca-Cola Company (NYSE: KO), DuPont Fabros Technology Inc. (NYSE: DFT), United Parcel Service Inc. (NYSE: UPS), Caterpillar Inc. (NYSE: CAT) and Celgene Corporation (Nasdaq: CELG).
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Here are highlights from Monday's Analyst Blog:
Debt Ceiling = Impending Doom?
Going by history, this whole new episode of debt ceiling is yet another political play.
While some Republican lawmakers are against raising the debt ceiling without dealing with government spending, others recognize the need to allow the government to act otherwise. Though Republicans won control over the House of Representatives in the November General Election with a promise to address the debt issue and cut government spending, they now look as if they may compromise on the debt front.
On the other hand, though the Obama administration knows that knocking the debt limit would be disastrous on the economy, it is unable to implement a spending cut as this would curb economic recovery.
Political parties can fiddle with the issue as per their wishes. If a party wants to keep the issue alive, it will give the ceiling a slight nudge so that the question surfaces soon. Adversely, there will be a big push in case a party wants to avoid the debate for a long time.
Government Spending Gone Awry
Though the government did not cut spending to continue with its monetary and fiscal stimuli that were obligatory to helping the economy get back into place, many U.S. companies are just manipulating policies to mint more money and remain competitive in the free trade marketplace, injuring the livelihood of middle-class Americans.
With the government supported economic recovery, the U.S. companies are hiring employees out of the domestic periphery to stay competitive. For most of the U.S. companies, international demand for goods and services is growing much faster than the domestic requirement.
The Coca-Cola Company (NYSE: KO), DuPont Fabros Technology Inc. (NYSE: DFT), United Parcel Service Inc. (NYSE: UPS) and Caterpillar Inc. (NYSE: CAT) are among the U.S. companies that have created significant jobs out of the country in recent years.
It's time the companies give serious thought to U.S. workers. Under the existing policies, job movement to foreign countries will continue, pushing the U.S. economy to a riskier zone.
What is Likely to Ensue?
It is almost certain that Congress will raise the debt ceiling prior to knocking it. If we are to go by past records, this should tidy up economic mess related to the debt issue for the next few years.
However, in order to gain Republican support, the government will have to figure out some spending cuts, which will again moderate the efficacy of its stimulus packages.
A Catch-22 Situation
If the government withdraws the monetary and fiscal stimulus to control spending too soon, there is the risk of regressing into another financial crisis. Then again, fiscal strictness is called for in a country wading in pools of debt and deficit.
On the other hand, if the government continues the stimulus for a long period, the rising fiscal deficits may lead to a sovereign debt crisis. This could again threaten the economic recovery.
Increasing the ceiling definitely enables the government to continue borrowing, but this raises concerns related to debt escalation rather than providing a debt solution. Instead, greater efforts to pay down the debt or spending less would be a more feasible way out.
But then again, cementing the ceiling where it is would forbid the government from borrowing further to fund its obligations. This would subsequently lead to a more immediate economic mess.
Raising the ceiling should be viewed as an effort to buy some more time in order to address economic problems. However, the government should use this time wisely to control spending.
Celgene Lowered to Neutral
We are downgrading Celgene Corporation (Nasdaq: CELG) to Neutral from Outperform following the risk of cancer associated with the use of Revlimid as a maintenance therapy in patients suffering from multiple myeloma (MM).
The disturbing data was presented at the American Society of Hematology (ASH) late last year. Even though prolonged treatment with Revlimid extended the survival without the disease worsening, data from some studies revealed an increase in the number of patients with secondary malignancies in the Revlimid arm compared to placebo.
The concerns did not bother Celgene's management who stated that the risk was within the expected range. However, we believe that any setback regarding Revlimid, Celgene's key growth driver, would hit the company hard.
Another cause for concern is the disappointing performance of Thalomid, approved as a first-line therapy for MM in combination with dexamethasone. We believe this decline will continue as safer and more effective drugs are available for multiple myeloma. The continuing decline in Thalomid sales has the potential to hurt Celgene's top line if other products do not perform impressively enough.
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