U.S. Current Account Deficit Hits New Record
The U.S. current account deficit hit a record $225.6 billion in Q3, reflecting high oil prices and burgeoning demand for foreign goods. Measured as a percentage of U.S. gross domestic product, the trade gap was the second-highest ever, at 6.8%. The current account measures U.S. trade and investment in goods and services abroad, and its astronomical size -- on an annualized basis, the deficit has tipped $900 billion -- is considered a primary risk to the global economy. The U.S. needs about $2.5 billion a day to finance the deficit, and if investors lose faith in U.S. assets and send their money elsewhere, the dollar might drop sharply and interest rates shoot up. While some believe the deficit has peaked, thanks to lower oil prices and robust exports, other analysts fear that the sheer vastness of the remaining shortfall will keep external financing risk high. U.S. exports increased to $262.1 billion from $252.8 billion, but that gain was offset by imports, which rose to $480.7 billion from $463.4 billion. The trade gap is particularly wide with China, prompting some U.S. legislators to call for higher tariffs and other measures to combat what they consider unfair Chinese currency policies.
• Sources: LA Times, MarketWatch, Reuters, Bloomberg
• Related commentary: Overall Trade Deficit Slims, But Gap with China Balloons, It's Still The Economy, Stupid, China's Trade Surplus Keeps Growing and Growing, Dollar Rangebound as Trade Deficit Higher Than Expected, U.S. Trade Deficit: Not as Ominous as it Sounds
• Potentially impacted ETFs: Euro Currency Trust ETF (FXE)
TECHNOLOGY AND INTERNET
Oracle Earnings Solid, But Slowdown in Software Sales
Oracle reported F2Q07 earnings post-expenses of $967 million (18 cents/share) on revenue of $4.16 billion; analysts had expected 22 cents/share in earnings before options and acquisition expenses, a number the company met. Shares dropped about 2% after hours following the report, perhaps due to company guidance of a flat F3Q. F2Q earnings were up fully 26% from the year-ago quarter. CEO Larry Ellison, who has pledged to grow earnings 20% annually through organic growth and acquisitions, indicated that deferred revenue over the next three quarters may be greater than expected. The tepid report, however, left some analysts wondering if IT spending in general has become softer in corporate America. Software sales totaled $1.21 billion, up 14% y/y but short of guidance to 15-20% growth. In the conference call, Oracle president Charles Phillips said, "We continue to gain market share in applications from SAP, in middleware from BEA, and in database from IBM." Oracle stock is up over 40% this year.
• Sources: Oracle F2Q07 Earnings Call Transcript, Bloomberg, WSJ, BusinessWeek
• Related commentary: Goldman On IT Trends: What Tech Companies Stand To Gain?, Oracle Investors Should Be Content With Stellent Acquisition -- Barron's, Oracle Taking On Red Hat in Linux Market
• Potentially impacted stocks and ETFs: Oracle (ORCL) Competitors: SAP (SAP), BEA (BEAS), IBM (IBM) ETFs: iShares Goldman Sachs Software Index (IGV), PowerShares Dynamic Software (PSJ)
AT & T/ Bell South Merger Stalled as FCC Member Refuses to Vote
AT&T's proposed $86 billion acquisition of Bell South, which would create the largest telecommunications merger in the U.S., has been stalled by the departure of Republican Robert McDowell from the FCC's panel of five. The remaining members form a deadlock of two Democrats, who want A &T to comply with certain conditions, and two Republicans, who are demanding no concessions. AT&T has refused to agree to the proposed conditions which include granting availability of high-speed broadband lines to all customers and reducing the rates its charges competitors for access to large-capacity data lines. McDowell, a former lobbyist for CompTel, a group of small carriers opposing the deal, has abstained from the vote for ethical reasons. Although FCC General Counsel Sam Feder gave McDowell permission to cast his vote, after consulting with the executive branch's Office of Government Ethics, McDowell resolved to "follow my own personal sense of ethics" and "disqualify myself from this matter." On the news of McDowell's abstention, shares of AT & T closed at $35.47, down 19 cents, while BellSouth fell 72 cents to $45.33.
• Sources: Wall Street Journal, New York Times, USA Today
• Related commentary: AT & T Considers Its Next Move, Will AT &T Let its Bid to Take Over Bell South Die? , AT & T Won't bend further to Get FCC Approval for the Bell South Deal, Justice Dept. Antitrust Chief: AT&T/BellSouth Merger is 'Straightforward Deal'. Conference call transcripts: Bell South Q3 2006, AT & T Q3 2006
• Potentially impacted stocks and ETFs: AT &T (T), Bell South (BLS). Competitors: Verizon (VZ), Sprint Nextel (S), Qwest Communications (Q) and Comcast (CMCSA). ETFs: iShares S&P Global Telecommunications (IXP), iShares Dow Jones US Telecom (IYZ), Technology Select Sector SPDR (XLK), Telecom HOLDRs (TTH) and Vanguard Telecom Services (VOX).
No Slow Boat, Verizon and Asian Telcos To Build New Trans-Pacific Pipeline
Targeting the sustained economic growth in China and the high growth markets in Asia, a consortium of telecom carriers including Verizon, Chunghwa Telecom of Taiwan, Korea Telecom and three Chinese telcos, plan to build an advanced undersea fiber-optic cable linking the U.S. and the Pacific. The "Trans-Pacific Express" project is expected to cost $500 million, split six ways, with construction beginning in Q1'07 and ending by Q3'08. Verizon says the new cable will have 60x more capacity than the current one, allowing 62m simultaneous phone calls. The current, lone U.S.-China cable in operation was completed in 2000 by 14 carriers at a cost of $1b, according to a Wall Street Journal article. The same article says AT&T, Telekom Malaysia, and a Singaporean carrier are discussing building a cable linking S.E. Asia and the U.S., according to people familiar with the matter.
• Sources: Press release, The Wall Street Journal
• Related commentary: Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future, Verizon's Fiber Plans Are Fine But Watch the Balance Sheet, Verizon: 2007 A 'Tipping Point' For Earnings Growth?
• Potentially impacted stocks and ETFs: Verizon (VZ), China Telecom (CHA), China Netcom (CN), China Unicom (CHU), Chunghwa Telecom (CHT), AT&T (T). ETFs: iShares S&P Global Telecom (IXP), Telecom HOLDRs (TTH), Vanguard Telecom Svcs (VOX), PowerShares Golden Dragon Halter USX China (PGJ)
Ebay Closes Chinese Site, Will Partner With Tom Online
Ebay is closing its Chinese operations after nearly five years of fighting a losing battle with local competitors. The company announced that instead it is starting a joint venture with Li Ka-shing. The world's largest online auction site will pay about $40 million for a 49 percent stake in a business connected with Li's Tom Online Inc., which sells cell phone ring tones. Tom Online will invest $20 million. The joint site will be launched next year. Ebay will maintain a site for Chinese consumers to do business with foreigners, in addition to a technology development center based in Shanghai. Tom Online's ADR shares climbed 12 percent in U.S. after-hours trading to $17.25. EBay shares were down 50 cents, or 1.5 percent, to $32.42. Ebay stock is down 25% for the year. Analysts were not surprised by Ebay's difficulties in China, citing cultural differences as a major cause of Ebay's failure.
• Sources: Bloomberg, Marketwatch.com, San Jose Mercury News
• Related commentary: eBay Watch: Week 11 Listings, Equity Stake in Tom Group and The Venice Project, eBay Watch: Executive Problems at Skype and News From the eBay China Rumor Mill, Online Traffic Trends: Monster and Expedia Falling Conference call transcripts: eBay Q3 2006 Earnings Call Transcript
• Potentially impacted stocks and ETFs: eBay (EBAY), TOM Online (TOMO) Competitors: SINA Corporation (USA) (SINA), NetEase (NTES), Amazon.com (AMZN), Yahoo! (YHOO) ETFs: First Trust Dow Jones Internet Index Fund (FDN), Internet HOLDRs Trust Internet HOLDRs Trust (HHH), Fidelity Nasdaq Composite Index Tracking (ONEQ)
Activist Investor Calls For Review of Home Depot Management
Relational Investors, which owns $1 billion of Home Depot stock, or 1.2 percent of shares outstanding, is calling for an independent committee to investigate the company’s management and overall corporate strategy. Home Depot's CEO Robert Nardelli and the company's board have been under heavy criticism for excessive executive compensation which has yielded only poor stock performance. Mr. Nardelli has received $240 million in salary, bonuses, stock grants and company loans since he became CEO in 2000. During Nardelli's tenure, Home Depot’s shares have increased by about 3%. Home Depot's rival Lowe’s Companies, have increased by 177 percent. Analysts report that the company is working on raising the stock price, including a $3 billion dollar share buyback.
• Sources: NY Times, WSJ, Boston Globe
• Related commentary: Don't Scapegoat Bob Nardelli for Home Depot's Stagnant Stock, Private Equity Gone Wild: Home Depot In Play?, Home Depot's Dividend Increase: Not What Bob Nardelli Wants You To Believe Conference call transcripts: The Home Depot F3Q06 (Qtr End 10/29/06)
• Potentially impacted stocks and ETFs: Home Depot (HD) Competitors: Target (TGT), Lowe's (LOW), Best Buy (BBY) ETFs: Retail HOLDRS (RTH), Vanguard Consumer Discretionary VIPERs (VCR), Vanguard Dividend Appreciation VIPERs (VIG)
AEROSPACE AND DEFENSE
Delta Tries to Trump US Airways Buyout Through Bankruptcy
Delta Air Lines Inc., in its effort to thwart US Airways Group's $8.4 billion hostile merger bid, filed a sweeping bankruptcy reorganization plan this morning that values the company at $9.4-$12 billion. This is down from the $12-$14 billion range it reached a few weeks ago. Delta hopes creditors will prefer its plan that values the airline at more than US Airways' offer. US Airways would consider increasing its offer if Delta can substantiate its case, according to "a person familiar with the US Airways strategy." Delta's plan won't offer as much cash as the USA deal, putting most of its value to creditors in equity; under the USA offer Delta claimholders would collectively get 78.5m shares and $4b in cash.
• Sources: WSJ, MarketWatch
• Related commentary: Delta Will Go To $0, US Airways Surprises Delta With Hostile Bid
• Potentially impacted stocks and ETFs: US Airways Group Inc. (LCC). Competitors: AMR Corp. (AMR), Continental Airlines Corp. (CAL), Southwest Airlines Co. (LUV), JetBlue Airways Corp. (JBLU), UAL Corp. (UAUA), AirTran Holdings Inc. (AAI)
Mitsubishi UFJ Ordered to Improve U.S. Banking Practices
The U.S. banking division of Mitsubishi UFJ Financial Group has been ordered by U.S. banking regulators to strengthen its anti-money laundering programs and secrecy protections. Mitsubishi UFJ did not comment on the allegations, but said it agrees to implement necessary measures. Mitsubishi UFJ's ordinary shares in Tokyo actually traded higher intra-day, but were mostly unaffected by the news, losing 0.66% at ¥1.5m ($12.71 ADR equiv. at ¥118/$1) amidst broad market selling. Per the FDIC and NY state Banking Department's enforcement order, Mitsubishi UFJ has a checklist of items with various deadlines to review and comply with such things as improving bank monitoring, customer due diligence and employee training.
• Sources: Bloomberg, The Wall Street Journal
• Related commentary: Credit Suisse Maintains Rating on Japan's Mega Banks, Lowers Targets, Mitsubishi UFJ's H1 Earnings Miss; Boosts Guidance and Dividend, Mizuho's Quiet NYSE Debut; Japan's Mega Banks' Stocks Slump
• Potentially impacted stocks and ETFs: Mitsubishi UFJ Financial Group (MTU). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF), BLDRS Asia 50 ADR Index (ADRA), BLDRS Developed Markets 100 ADR Index (ADRD)
LSE To Shareholders: Reject The Nasdaq Bid, We'll Raise Our Dividend
London Stock Exchange Plc urged its shareholders to reject what it termed a "wholly inadequate" $5.3 billion hostile takeover bid from Nasdaq Stock Market Inc, while pledging a dividend hike of 50% amidst strong projected earnings. LSE CEO Clara Furse hopes to convince shareholders to turn down Nasdaq's offer of 1,243 pence per share for the 71% of the company it does not already own; that offer is 5.6% below LSE's closing price yesterday. According to the LSE, Nasdaq's bid values LSE at just 24.7 times adjusted basic earnings per share for the year, lower than the 29.8 multiple of Nasdaq's previous offer and lower than the 30.1 times multiple that Paris-based Euronext NV commanded in NYSE's takeover. A combined LSE/Nasdaq would align itself against the planned NYSE/Euronext joint platform. Hedge fund investors led by Samuel Heyman have recently bought larger stakes in the LSE, speculating that the Nasdaq bid will go higher.
• Sources: LSE press release, Bloomberg, Reuters, Wall St. Journal
• Related commentary: Treading Carefully In Exchange Stocks, Nasdaq Launches Hostile Bid for London Stock Exchange, Nasdaq's LSE Bid's Fate Likely in the Hands of 'Market Sentiment', Deutsche Börse Drops Euronext Takeover Bid, Clearing Way for NYSE Group
• Potentially impacted stocks and ETFs: Nasdaq (NDAQ)
NYSE/Euronext Merger Gets Crucial Support
Euronext shareholders overwhelmingly approved its proposed merger with NYSE Group this morning; tomorrow NYSE Group shareholders are scheduled to vote. On Monday the merger bid got a double boost -- the backing of a Dutch regulator, and that of a major shareholder in both entities: According to a letter released today jointly, Dutch Finance Minister Gerrit Zalm is likely to approve the transaction provided that certain conditions are met; the Dutch government holds a veto over the combination and had threatened to use it unless its concerns were addressed. And Atticus hedge fund, which owns 8% of NYSE Group (the single-largest shareholder of the exchange) and 9% of Euronext, said it will vote in favor of the deal because shareholders, users and listed companies will all benefit from the creation of a trans- Atlantic stock market. The combined entity will be worth about $29b, have 80 of the world's 100 biggest companies listed on its exchanges, and a total market cap listed companies of around $27 trillion. J.P. Morgan said in a recent note that the consensus view is that the deal will go ahead. There had been objections to the deal over the possible impact of U.S. regulation, particularly the Sarbanes-Oxley Act, on European companies. NYSE Group has set up measures it says will prevent U.S. regulators from having any impact in Europe, including creating an independent regulatory body. On Friday Paris Europlace, a powerful lobby group, scaled back its opposition. NYSE Group shares were up $3.42 to $101.47 in Monday trading, while Euronext shares were down $0.25 to 90.65 euros.
• Sources: MarketWatch, Bloomberg, ABC News, Washington Post
• Related commentary: Treading Carefully In Exchange Stocks, NYSE, Euronext Cooperation Pleases Investors, Assuages Regulators, A Unified, Global Stock Exchange May Be Approaching, NYSE: Gains Are Far From Automatic -- Barron's
• Potentially impacted stocks and ETFs: NYSE Group (NYX). Competitors: Nasdaq (NDAQ), Chicago Mercantile Exchange (CME), InterContinental Exchange (ICE), International Securities Exchange Holdings (ISE), NYMEX Holdings (NMX). ETFs: iShares Dow Jones US Broker-Dealers (IAI), streetTRACKS KBW Capital Markets (KCE)
Lilly Raises Its Bid for Icos to $2.3 Billion
Eli Lilly and Co. increased its bid for Icos 6% from $2.1 billion to $2.3 billion after a complaints from at least one Icos shareholder that the initial bid was not high enough. The Indianapolis-based drug manufacturer raised its offer from $32 a share to $34 after major Icos shareholder, HealthCor, argued that the company was worth over $40 a share. However, Lilly calls its latest bid its "best and final offer." The two companies have a joint venture in Cialis, a drug which treats erectile dysfunction. Lilly believes that the acquisition will cut costs. "We are confident that Icos shareholders will recognize the substantial value and the certainty that Lilly is offering," said Sidney Taurel, Lilly's CEO. Shares of Icos rose 47 cents to $33.82 in mid-morning trading on Nasdaq. Lilly's shares dropped 79 cents, or 1.4 percent, to $53.77 on the New York Stock Exchange.
• Sources: Reuters, New York Times, TheStreet.com,
• Related commentary: Eli Lilly ICOS Buyout Is Not Arm's Length, ICOS Shareholders to Board: Eli Lilly Bid Is at a Discount, Not a Premium, Wall Street Unhappy with Lilly's Forecast for 2007,
• Potentially impacted stocks and ETFs: Eli Lilly (LLY), ICOS Corp. (ICOS). Competitors: Merck & Co. (MRK), Pfizer (PFE), GlaxoSmithKline (GSK), Bristol Myers Squibb (BMY), Wyeth (WYE), Schering-Plough Corporation (SGP). ETFs: iShares Dow Jones US Pharmaceutical Indx (IHE), Pharmaceutical HOLDRS (PPH), SPDR Pharmaceuticals (XPH), Vanguard Health Care (VHT)
BoJ Keeps Target at 0.25%, More Data Watching
Mixed and somewhat weaker-than-expected economic data of late compelled the Bank of Japan to maintain its target overnight call rate at 0.25%. The BoJ's decision was unanimous and widely expected by economists. Consistently disappointing consumption data due to weakness in wages growth was a key catalyst. Takehiro Sato, economist at Morgan Stanley Japan commented ahead of the meeting that "(The costs of delaying) aren't that high and given that the economic statistics are expected to show the economy rebounded in the fourth quarter we expect them to raise rates in January." Regarding a January hike, BoJ Governor Fukui said, "We will carefully analyse data that comes out until the next policy meeting and reach a decision, but we have no preconception." Separately, the Finance Minister announced the GDP deflator will turn positive in 2007-08, a sign "... the economy will become normal." The Nikkei 225 lost 1.1% and the broader TOPIX fell 1.2%, mostly on profit taking. The yen gave up earlier gains to trade above ¥118/$1, again.
• Sources: Bloomberg, FT.com
• Related commentary: BoJ's Tankan Improves In-line, Stocks Higher, Dollar Reverses Course Against Yen, Japanese Stocks Jump, Data Dependent Japanese Investors Have Eyes On BoJ, Positive Economic Data Supports Japan Stocks
• Potentially impacted stocks and ETFs: Mitsubishi UFJ Financial Group (MTU), Mizuho Financial Group (MFG). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF)
U.S. Markets: Psychology of the Herd
Housing: Eye on LoopNet: Internet Real Estate To Benefit From Housing Recovery
Long Idea: Trump Entertainment Is a Clear Winner
Short Idea: Biogen Idec & Genentech Down on Rituxan Related Deaths
Telecom: Mark Anderson's Ten Tech Predictions For 2007
Hardware: AMD Bears Continue To Emerge
Software: Oracle Earnings Solid, But Slowdown in Software Sales
Media: Taiwan: Another Sad Story In Blockbuster's International Saga
Retail: Sears Holdings: Take The Bull By Its Horns and Ride
Transport: Midwest Airlines Is Flying High
Financial: Risk Versus Reward In Financial Institution Stock Valuations
Asia: JT Agrees to Buy Gallaher, More Japanese Firms Seeking Overseas M&A
Small-Caps: HandHeld Adopts Google-Like Acquisition Model
IPO Analysis: 2006: The Year of the IPO?
Sound Money Tips: How to Save on a New Cell Phone Plan
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Oracle F2Q07
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