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GreenWood Investors July 2020: Thinking Now & Later

GreenWood Investors July 2020: Thinking Now & Later

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Cote

GreenWood Investors commentary for the month of July 2020, titled, “Thinking Now & Later.”

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Before it was cool to dump on General Electric and its “we must beat the quarter” Jack Welch-era style management, in a public manner, David Cote did so by proving there was a better way. In his new book, Winning Now, Winning Later, Cote lays out his playbook for achieving one of the best track records of the past 20 years – a roughly 800% total return as Honeywell Chairman and CEO. In 1999, Cote left GE as CEO Appliances for a short stint at TRW before becoming Honeywell CEO. Over the course of more than 15 years at Honeywell, Cote executed spin-offs, M&A, cost-cutting and R&D investment in a way that culminated in a trouncing of the S&P 500 by 2.5x with a collection of assets few others would have wanted at the time. Using 2003 as the base year, given it was Cote’s first full year and not burdened by significant write-offs, here’s the result:

In case you’d like the synopsis right from the horse’s mouth, one should go to Cote’s shareowners letter from the 2016 Annual Report.

Learning About Cote's Past

While there is plenty of source material to learn about Cote’s past, if there was only one to pick, aside from his new book, I would recommend a 2017 podcast he did with David Novak. In between stories of him taking 6 years to graduate college, owning a lobster boat, and leading Honeywell, an interesting turning point lesson was when Cote was told he would be passed over by Welch to be his successor. After 20 years at GE, Welch told Cote in Summer 1999 that he had to leave the company by year end. Recognizing his time had come due, Cote asked Welch multiple times what it was he could improve, but was stonewalled, and instead of answers, he was offered a cushy “conciliatory” role at GE Capital.

While this was only the start of people doubting his capabilities of being CEO, thankfully Cote chose to forge his own path, believing he could do better than simply managing for the next quarter. And the years have shown he’s proven them all wrong with a focus on both long and short term results.

When it comes to legendary CEOs, we hold Sergio Marchionne above most others. He was the pinnacle of a CEO managing conflicting dualities – able to master the boardroom, yet understand and motivate the common line-worker. To this day, this duality permeates through Exor’s purpose and values even after Sergio has left us.

Cote's Management Thesis

In a similar vein to Marchionne, at the heart of Cote’s management thesis is that successful organizations must be able to do two seemingly conflicting things at the same time. While confusing perhaps in concept, every organization faces this dichotomy. For example, should an industrial company hold low inventory to improve its working capital, or should it have quick response times for customer orders, which likely increases inventory on hand. To Cote, this is not a question of either or, it’s about doing both. And to this end, it’s not about balance; the company must do both and do them both well – hold low inventory and offer great customer product delivery, which is both measurable and continuously improved upon.

Now, the only way to achieve both objectives is to 1) recognize the conundrum, 2) understand where processes can improve, and 3) make decisions where tradeoffs are needed. Often times, overcoming the first step is a challenge. In his book, Cote mentions multiples times how it drives him crazy that almost all members of an organization initially believe that short-term and long-term goals are mutually exclusive – even though he has proven they’re not. It takes a change of viewpoint and actions elsewhere in the organization to prove otherwise. Secondly, just being smart is not enough to achieve results; it’s important to gather and understand all the facts in order to know how a process can improve. And lastly, appreciating the people who implement these changes, and developing benchmarks for them with good measurement tools to make sure the new processes don’t have detrimental outcomes.

Clearly, not all the ideas to balance short and long-term performance come easily. This is why Cote is very open about the need for “X days”, or 12 days annually, which he used for planning and free thinking. In particular, he would take 2-3 full days a year, or “blue book days”, with nothing on his calendar in order to force himself to let his mind wander and think creatively about big problem solving for the organization. This is how the the Honeywell Operating Systems (“HOS”) came to be. Based on the Toyota Production System, HOS is built on the foundation of continuous improvement. The concept is that today has to be better than yesterday, and tomorrow has to be better than today. It is an integrated system built on a strong Six Sigma foundation to drive sustainable safety, quality, delivery, cost, and inventory improvements with a focus on standardized work, rapid problem solving, continuous improvement, and knowledge sharing across the organization.

Future Capital Allocation

A central tenet of executing on this vision for both short-term and long-term performance is to keep fixed costs flat while the business grows revenues. This is a lot easier said than done; however, it is a very powerful tool when it comes to future capital allocation. Depending on the business, variable margins are likely to be 35-70%, and so if the business can grow sales, even just slightly, while holding fixed costs constant, then that fall through to profits can be substantial. What it does is provide tremendous flexibility to simultaneously re-invest in the business and provide capital returns to shareholders.

For example, over the course of 15 years, the back office team (HR, Legal, Finance, IT) at Honeywell was able to take down real costs by over $1 billion, while also improving service levels. The cumulative effect of these savings was significant, and it gave Cote the flexibility to invest in R&D and M&A to improve the growth profile of Honeywell in the latter years of his tenure. It was this seed planting that allowed Honeywell to handily outperform the S&P 500 coming out of the GFC.

Following his retirement from Honeywell in 2017, Cote partnered with Goldman Sachs in order to acquire an asset where he could invest a sizable portion of his wealth and utilize his playbook to grow that wealth. Cote found this asset in Vertiv, and following the acquisition and public listing of the company in February 2020, Cote became its Executive Chairman. Cote characterizes Vertiv, which powers and cools data centers, as “ticking all of the boxes” by having great positions in good end markets, high contribution margins, and margin upside. Cote even jokes saying, “think of Vertiv as a $4 billion, 50 year old start-up.”

GreenWood’s partners will know that we initiated a position in Vertiv during March 2020. While conducting diligence on Vertiv, the margin upside opportunity became fairly obvious as the company operates at roughly 500 basis points below peers. And it appeared that much of the toolkit from HOS, particularly keeping fixed costs flat, could be utilized and expanded upon at Vertiv. But instead of focusing strictly on near-term margin expansion, which sell-side analysts love to linearly pencil in, Cote is naturally emphasizing a key aspect of his playbook, reinvesting for the long-term.

Historically, Vertiv only invested 3% of sales into R&D, but under Cote this is intended to move north of 5% in the coming years. What this means is that Cote is targeting more than 1,000 basis points of margin expansion, which will allow Vertiv to close the gap to peers, while re-investing some of those savings into R&D. While Vertiv naturally has data center secular growth tailwinds, this increased R&D investment will propel Vertiv forward in future years to capture increased global data usage, while competitors have pulled back spend due to Covid-19.

Thoughts On Leadership

It’s not just the blocking and tackling of large problems at industrial corporations that impresses us about Cote. It is also his ability to talk straight and earn the respect of employees. Cote comments that only 5% of leadership is about inspiring the troops, the rest is about picking the right direction for the company and executing on those decisions. But in order to execute, you must rely heavily on your managers, and as it relates to them, Cote says, “Progress occurs because of the irrational demands of general management.” Leaders must be demanding of their people because the employees are far more capable than they think. Good leaders enjoy sparring with smart employees, and while important to persistently pose questions and challenges to employees, it is critical to be polite and respectful.

The interesting thing while reading Cote’s book is that one will come away thinking, “wow, this is all pretty reasonable stuff.” And you’d be right, there is no silver bullet as it relates to business success, the trick is executing on process improvement. Winning Now, Winning Later is a transparent playbook given to the public, and offering ways to improve your processes and recognize the importance of implementing seemingly conflicting ideas. And most exciting, we’re getting to watch this playbook in action today in Cote’s second act at Vertiv. We see Cote as a Builder with sizable skin in the game, and he is an important reason why Vertiv is one of our favorite positions in the portfolio today. We look forward to both short, and long-term performance at Vertiv in the quarters and years to come.


Disclaimer:

This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.

Past performance is no guarantee of future results.

The post GreenWood Investors July 2020: Thinking Now & Later appeared first on ValueWalk.

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Default: San Francisco Four Seasons Hotel Investors $3 Million Late On Loan As Foreclosure Looms

Default: San Francisco Four Seasons Hotel Investors $3 Million Late On Loan As Foreclosure Looms

Westbrook Partners, which acquired the San…

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Default: San Francisco Four Seasons Hotel Investors $3 Million Late On Loan As Foreclosure Looms

Westbrook Partners, which acquired the San Francisco Four Seasons luxury hotel building, has been served a notice of default, as the developer has failed to make its monthly loan payment since December, and is currently behind by more than $3 million, the San Francisco Business Times reports.

Westbrook, which acquired the property at 345 California Center in 2019, has 90 days to bring their account current with its lender or face foreclosure.

Related

As SF Gate notes, downtown San Francisco hotel investors have had a terrible few years - with interest rates higher than their pre-pandemic levels, and local tourism continuing to suffer thanks to the city's legendary mismanagement that has resulted in overlapping drug, crime, and homelessness crises (which SF Gate characterizes as "a negative media narrative).

Last summer, the owner of San Francisco’s Hilton Union Square and Parc 55 hotels abandoned its loan in the first major default. Industry insiders speculate that loan defaults like this may become more common given the difficult period for investors.

At a visitor impact summit in August, a senior director of hospitality analytics for the CoStar Group reported that there are 22 active commercial mortgage-backed securities loans for hotels in San Francisco maturing in the next two years. Of these hotel loans, 17 are on CoStar’s “watchlist,” as they are at a higher risk of default, the analyst said. -SF Gate

The 155-room Four Seasons San Francisco at Embarcadero currenly occupies the top 11 floors of the iconic skyscrper. After slow renovations, the hotel officially reopened in the summer of 2021.

"Regarding the landscape of the hotel community in San Francisco, the short term is a challenging situation due to high interest rates, fewer guests compared to pre-pandemic and the relatively high costs attached with doing business here," Alex Bastian, President and CEO of the Hotel Council of San Francisco, told SFGATE.

Heightened Risks

In January, the owner of the Hilton Financial District at 750 Kearny St. - Portsmouth Square's affiliate Justice Operating Company - defaulted on the property, which had a $97 million loan on the 544-room hotel taken out in 2013. The company says it proposed a loan modification agreement which was under review by the servicer, LNR Partners.

Meanwhile last year Park Hotels & Resorts gave up ownership of two properties, Parc 55 and Hilton Union Square - which were transferred to a receiver that assumed management.

In the third quarter of 2023, the most recent data available, the Hilton Financial District reported $11.1 million in revenue, down from $12.3 million from the third quarter of 2022. The hotel had a net operating loss of $1.56 million in the most recent third quarter.

Occupancy fell to 88% with an average daily rate of $218 in the third quarter compared with 94% and $230 in the same period of 2022. -SF Chronicle

According to the Chronicle, San Francisco's 2024 convention calendar is lighter than it was last year - in part due to key events leaving the city for cheaper, less crime-ridden places like Las Vegas

Tyler Durden Sun, 03/17/2024 - 18:05

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International

Mistakes Were Made

Mistakes Were Made

Authored by C.J.Hopkins via The Consent Factory,

Make fun of the Germans all you want, and I’ve certainly done that…

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Mistakes Were Made

Authored by C.J.Hopkins via The Consent Factory,

Make fun of the Germans all you want, and I’ve certainly done that a bit during these past few years, but, if there’s one thing they’re exceptionally good at, it’s taking responsibility for their mistakes. Seriously, when it comes to acknowledging one’s mistakes, and not rationalizing, or minimizing, or attempting to deny them, and any discomfort they may have allegedly caused, no one does it quite like the Germans.

Take this Covid mess, for example. Just last week, the German authorities confessed that they made a few minor mistakes during their management of the “Covid pandemic.” According to Karl Lauterbach, the Minister of Health, “we were sometimes too strict with the children and probably started easing the restrictions a little too late.” Horst Seehofer, the former Interior Minister, admitted that he would no longer agree to some of the Covid restrictions today, for example, nationwide nighttime curfews. “One must be very careful with calls for compulsory vaccination,” he added. Helge Braun, Head of the Chancellery and Minister for Special Affairs under Merkel, agreed that there had been “misjudgments,” for example, “overestimating the effectiveness of the vaccines.”

This display of the German authorities’ unwavering commitment to transparency and honesty, and the principle of personal honor that guides the German authorities in all their affairs, and that is deeply ingrained in the German character, was published in a piece called “The Divisive Virus” in Der Spiegel, and immediately widely disseminated by the rest of the German state and corporate media in a totally organic manner which did not in any way resemble one enormous Goebbelsian keyboard instrument pumping out official propaganda in perfect synchronization, or anything creepy and fascistic like that.

Germany, after all, is “an extremely democratic state,” with freedom of speech and the press and all that, not some kind of totalitarian country where the masses are inundated with official propaganda and critics of the government are dragged into criminal court and prosecuted on trumped-up “hate crime” charges.

OK, sure, in a non-democratic totalitarian system, such public “admissions of mistakes” — and the synchronized dissemination thereof by the media — would just be a part of the process of whitewashing the authorities’ fascistic behavior during some particularly totalitarian phase of transforming society into whatever totalitarian dystopia they were trying to transform it into (for example, a three-year-long “state of emergency,” which they declared to keep the masses terrorized and cooperative while they stripped them of their democratic rights, i.e., the ones they hadn’t already stripped them of, and conditioned them to mindlessly follow orders, and robotically repeat nonsensical official slogans, and vent their impotent hatred and fear at the new “Untermenschen” or “counter-revolutionaries”), but that is obviously not the case here.

No, this is definitely not the German authorities staging a public “accountability” spectacle in order to memory-hole what happened during 2020-2023 and enshrine the official narrative in history. There’s going to be a formal “Inquiry Commission” — conducted by the same German authorities that managed the “crisis” — which will get to the bottom of all the regrettable but completely understandable “mistakes” that were made in the heat of the heroic battle against The Divisive Virus!

OK, calm down, all you “conspiracy theorists,” “Covid deniers,” and “anti-vaxxers.” This isn’t going to be like the Nuremberg Trials. No one is going to get taken out and hanged. It’s about identifying and acknowledging mistakes, and learning from them, so that the authorities can manage everything better during the next “pandemic,” or “climate emergency,” or “terrorist attack,” or “insurrection,” or whatever.

For example, the Inquiry Commission will want to look into how the government accidentally declared a Nationwide State of Pandemic Emergency and revised the Infection Protection Act, suspending the German constitution and granting the government the power to rule by decree, on account of a respiratory virus that clearly posed no threat to society at large, and then unleashed police goon squads on the thousands of people who gathered outside the Reichstag to protest the revocation of their constitutional rights.

Once they do, I’m sure they’ll find that that “mistake” bears absolutely no resemblance to the Enabling Act of 1933, which suspended the German constitution and granted the government the power to rule by decree, after the Nazis declared a nationwide “state of emergency.”

Another thing the Commission will probably want to look into is how the German authorities accidentally banned any further demonstrations against their arbitrary decrees, and ordered the police to brutalize anyone participating in such “illegal demonstrations.”

And, while the Commission is inquiring into the possibly slightly inappropriate behavior of their law enforcement officials, they might want to also take a look at the behavior of their unofficial goon squads, like Antifa, which they accidentally encouraged to attack the “anti-vaxxers,” the “Covid deniers,” and anyone brandishing a copy of the German constitution.

Come to think of it, the Inquiry Commission might also want to look into how the German authorities, and the overwhelming majority of the state and corporate media, accidentally systematically fomented mass hatred of anyone who dared to question the government’s arbitrary and nonsensical decrees or who refused to submit to “vaccination,” and publicly demonized us as “Corona deniers,” “conspiracy theorists,” “anti-vaxxers,” “far-right anti-Semites,” etc., to the point where mainstream German celebrities like Sarah Bosetti were literally describing us as the inessential “appendix” in the body of the nation, quoting an infamous Nazi almost verbatim.

And then there’s the whole “vaccination” business. The Commission will certainly want to inquire into that. They will probably want to start their inquiry with Karl Lauterbach, and determine exactly how he accidentally lied to the public, over and over, and over again …

And whipped people up into a mass hysteria over “KILLER VARIANTS” …

And “LONG COVID BRAIN ATTACKS” …

And how “THE UNVACCINATED ARE HOLDING THE WHOLE COUNTRY HOSTAGE, SO WE NEED TO FORCIBLY VACCINATE EVERYONE!”

And so on. I could go on with this all day, but it will be much easier to just refer you, and the Commission, to this documentary film by Aya Velázquez. Non-German readers may want to skip to the second half, unless they’re interested in the German “Corona Expert Council” …

Look, the point is, everybody makes “mistakes,” especially during a “state of emergency,” or a war, or some other type of global “crisis.” At least we can always count on the Germans to step up and take responsibility for theirs, and not claim that they didn’t know what was happening, or that they were “just following orders,” or that “the science changed.”

Plus, all this Covid stuff is ancient history, and, as Olaf, an editor at Der Spiegel, reminds us, it’s time to put the “The Divisive Pandemic” behind us …

… and click heels, and heil the New Normal Democracy!

Tyler Durden Sat, 03/16/2024 - 23:20

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Government

Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

A…

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Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

A Harvard Medical School professor who refused to get a COVID-19 vaccine has been terminated, according to documents reviewed by The Epoch Times.

Martin Kulldorff, epidemiologist and statistician, at his home in Ashford, Conn., on Feb. 11, 2022. (Samira Bouaou/The Epoch Times)

Martin Kulldorff, an epidemiologist, was fired by Mass General Brigham in November 2021 over noncompliance with the hospital’s COVID-19 vaccine mandate after his requests for exemptions from the mandate were denied, according to one document. Mr. Kulldorff was also placed on leave by Harvard Medical School (HMS) because his appointment as professor of medicine there “depends upon” holding a position at the hospital, another document stated.

Mr. Kulldorff asked HMS in late 2023 how he could return to his position and was told he was being fired.

You would need to hold an eligible appointment with a Harvard-affiliated institution for your HMS academic appointment to continue,” Dr. Grace Huang, dean for faculty affairs, told the epidemiologist and biostatistician.

She said the lack of an appointment, combined with college rules that cap leaves of absence at two years, meant he was being terminated.

Mr. Kulldorff disclosed the firing for the first time this month.

“While I can’t comment on the specifics due to employment confidentiality protections that preclude us from doing so, I can confirm that his employment agreement was terminated November 10, 2021,” a spokesperson for Brigham and Women’s Hospital told The Epoch Times via email.

Mass General Brigham granted just 234 exemption requests out of 2,402 received, according to court filings in an ongoing case that alleges discrimination.

The hospital said previously, “We received a number of exemption requests, and each request was carefully considered by a knowledgeable team of reviewers.

A lot of other people received exemptions, but I did not,” Mr. Kulldorff told The Epoch Times.

Mr. Kulldorff was originally hired by HMS but switched departments in 2015 to work at the Department of Medicine at Brigham and Women’s Hospital, which is part of Mass General Brigham and affiliated with HMS.

Harvard Medical School has affiliation agreements with several Boston hospitals which it neither owns nor operationally controls,” an HMS spokesperson told The Epoch Times in an email. “Hospital-based faculty, such as Mr. Kulldorff, are employed by one of the affiliates, not by HMS, and require an active hospital appointment to maintain an academic appointment at Harvard Medical School.”

HMS confirmed that some faculty, who are tenured or on the tenure track, do not require hospital appointments.

Natural Immunity

Before the COVID-19 vaccines became available, Mr. Kulldorff contracted COVID-19. He was hospitalized but eventually recovered.

That gave him a form of protection known as natural immunity. According to a number of studies, including papers from the U.S. Centers for Disease Control and Prevention, natural immunity is better than the protection bestowed by vaccines.

Other studies have found that people with natural immunity face a higher risk of problems after vaccination.

Mr. Kulldorff expressed his concerns about receiving a vaccine in his request for a medical exemption, pointing out a lack of data for vaccinating people who suffer from the same issue he does.

I already had superior infection-acquired immunity; and it was risky to vaccinate me without proper efficacy and safety studies on patients with my type of immune deficiency,” Mr. Kulldorff wrote in an essay.

In his request for a religious exemption, he highlighted an Israel study that was among the first to compare protection after infection to protection after vaccination. Researchers found that the vaccinated had less protection than the naturally immune.

“Having had COVID disease, I have stronger longer lasting immunity than those vaccinated (Gazit et al). Lacking scientific rationale, vaccine mandates are religious dogma, and I request a religious exemption from COVID vaccination,” he wrote.

Both requests were denied.

Mr. Kulldorff is still unvaccinated.

“I had COVID. I had it badly. So I have infection-acquired immunity. So I don’t need the vaccine,” he told The Epoch Times.

Dissenting Voice

Mr. Kulldorff has been a prominent dissenting voice during the COVID-19 pandemic, countering messaging from the government and many doctors that the COVID-19 vaccines were needed, regardless of prior infection.

He spoke out in an op-ed in April 2021, for instance, against requiring people to provide proof of vaccination to attend shows, go to school, and visit restaurants.

The idea that everybody needs to be vaccinated is as scientifically baseless as the idea that nobody does. Covid vaccines are essential for older, high-risk people and their caretakers and advisable for many others. But those who’ve been infected are already immune,” he wrote at the time.

Mr. Kulldorff later co-authored the Great Barrington Declaration, which called for focused protection of people at high risk while removing restrictions for younger, healthy people.

Harsh restrictions such as school closures “will cause irreparable damage” if not lifted, the declaration stated.

The declaration drew criticism from Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, and Dr. Rochelle Walensky, who became the head of the CDC, among others.

In a competing document, Dr. Walensky and others said that “relying upon immunity from natural infections for COVID-19 is flawed” and that “uncontrolled transmission in younger people risks significant morbidity(3) and mortality across the whole population.”

“Those who are pushing these vaccine mandates and vaccine passports—vaccine fanatics, I would call them—to me they have done much more damage during this one year than the anti-vaxxers have done in two decades,” Mr. Kulldorff later said in an EpochTV interview. “I would even say that these vaccine fanatics, they are the biggest anti-vaxxers that we have right now. They’re doing so much more damage to vaccine confidence than anybody else.

Surveys indicate that people have less trust now in the CDC and other health institutions than before the pandemic, and data from the CDC and elsewhere show that fewer people are receiving the new COVID-19 vaccines and other shots.

Support

The disclosure that Mr. Kulldorff was fired drew criticism of Harvard and support for Mr. Kulldorff.

The termination “is a massive and incomprehensible injustice,” Dr. Aaron Kheriaty, an ethics expert who was fired from the University of California–Irvine School of Medicine for not getting a COVID-19 vaccine because he had natural immunity, said on X.

The academy is full of people who declined vaccines—mostly with dubious exemptions—and yet Harvard fires the one professor who happens to speak out against government policies.” Dr. Vinay Prasad, an epidemiologist at the University of California–San Francisco, wrote in a blog post. “It looks like Harvard has weaponized its policies and selectively enforces them.”

A petition to reinstate Mr. Kulldorff has garnered more than 1,800 signatures.

Some other doctors said the decision to let Mr. Kulldorff go was correct.

“Actions have consequence,” Dr. Alastair McAlpine, a Canadian doctor, wrote on X. He said Mr. Kulldorff had “publicly undermine[d] public health.”

Tyler Durden Sat, 03/16/2024 - 21:00

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