PPI Up 0.9% in December, More than Expected
The Labor Department reported yesterday that the producer-price index, an indicator of inflation, rose 0.9% in December -- faster than the market anticipated. Core wholesale prices, which exclude energy and food, rose 0.2%, again more than forecast. The report raises the specter of a Fed interest rate hike, though the rise in inflation is likely to be erased by the 20% pullback in crude oil prices since mid-December. The Fed also released its regional survey, the Beige Book, which indicates that the U.S. economy is growing modestly and the labor market remains tight. The service and tourism sectors expanded nearly across the board, retail and autos were sluggish, and the factory sector slowed. Residential building continues to slow in the face of high inventories, but the commercial real estate market is strong. The December consumer-price index is scheduled to be released today, for which economists expect a 0.4% increase. The CPI offers a better view on how energy prices are affecting inflation. Treasuries slipped slightly on the PPI report and the dollar fell against European currencies.
• Sources: Bloomberg (I, II), Reuters, Business Week, MarketWatch
• Related commentary: PPI Data Comes In Higher Than Expected, 'Era of Low Inflation'? Grandma Begs to Differ, Overbought, Overbullish Climate Leaves No Room to Get Out, Fed's Kohn: Soft Landing Likely for U.S. Economy, Too Early To Worry About Employment Being Too Strong
• Potentially impacted ETFs: S&P 500 Index (NYSEARCA:SPY), NASDAQ 100 Trust Shares ETF (QQQQ), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), iShares Lehman TIPS Bond Fund (NYSEARCA:TIP)
Brookfield Announces Intent To Buy Mills Corp. - Gazit Globe Reacts With Higher Bid
With its stock price fluctuating wildly over the last year and mired in debt, Mills Corp. shares shot up 26.39%, or $4.69, to $22.46 on news it would be bought out by Brookfield Asset Management. Mills owns 38 shopping malls across the U.S.; Brookfield is acquiring the struggling company for $1.35 billion in cash, or $21 per share. Including assumed debt and preferred stock, the deal will be worth $7.5 billion. With two of Mills' major shareholders proposing recapitalization plans and facing a March 31 deadline to repay a $1.1 billion loan from Goldman Sachs, Mills agreement to be bought by an outside player came as a surprise to some. "We were surprised at the timing of this announcement," said Morningstar analyst Akash Dave. "We thought there'd be some announcement of their strategic intentions [first]." Mills shares have dropped from a high of $65 in July of 2005 to a low of just over $12 this month. After the buyout offer was announced yesterday, Gazit-Globe, Mills second largest shareholder, raised its previous offer of $21 a share by a dollar, opening the door for continued drama surrounding Mills' future.
• Sources: Press Release, Bloomberg, Reuters, Business Week, Wall Street Journal
• Related commentary: Mills Corporation - How Badly is it Doing?, Chaim Katzman Claims The Mills Corp. Is Stonewalling His Recapitalization Efforts, Gazit Globe Wants to Recapitalize Mills Corp.
• Potentially impacted stocks and ETFs: Mills Corp. (MLS), Brookfield Asset Management Inc. (NYSE:BAM), Goldman Sachs (NYSE:GS). Competitors: Developers Diversified Realty Corp. (NYSE:DDR), General Growth Properties Inc. (NYSE:GGP), Simon Property Group Inc. (NYSE:SPG)
Vornado Group Outflanks Blackstone in New Bid for Equity Office REIT
A bidding group of three suitors including Vornado Realty Trust have submitted a $52 per share, or $21.6 billion, takeover bid for Equity Office Properties Trust. The bid outflanks private equity firm the Blackstone Group, by which Equity Office had already agreed to be acquired for $20 billion. The other participants in the new bid are Starwood Capital and Walton Street Capital. Their offer, which amounts to $37.6 billion including debt, is comprised of 60% cash and 40% Vornado stock. The Blackstone deal, which is all cash, is worth $36 billion including debt. Blackstone contends that the Vornado deal is inferior because its value depends on the price of Vornado stock. Equity Office shares, which rose $1.09 to $50.94 yesterday afternoon, reached levels beyond the Blackstone offer price on speculation that there would be another bid. Vornado shares dropped $3.38 to $122.55. Equity Office shareholders will vote on the Blackstone bid on February 5.
• Sources: Bloomberg, Reuters
• Related commentary: Blackstone Acquiring Equity Office in Largest Private-Equity Deal Ever, Vornado Realty Trust: Pleasing Shareholders For Over 30 Years, Blackstone Group's 'Zell Buyout' Is Questionable At Best, REITs Trading At Big Premium To Book Value, REITs vs. Homebuilders -- Not What You Think, Volatility Index [VIX]: Is 10 the New 12?
• Potentially impacted stocks and ETFs: Vornado Realty Trust (NYSE:VNO), Equity Office Properties Trust (EOP). Competitors: Boston Properties Inc. (NYSE:BXP), Mack-Cali Realty Corp. (NYSE:CLI), Brookfield Properties Corp. (NYSE:BPO). ETFs: iShares Cohen & Steers Realty Majors (NYSEARCA:ICF), Vanguard REIT Index ETF (NYSEARCA:VNQ), iShares Russell Midcap Value Index (NYSEARCA:IWS), WisdomTree Dividend Top 100 (NYSEARCA:DTN), iShares Russell Midcap Index (NYSEARCA:IWR)
TECHNOLOGY AND INTERNET
Apple Reports Record Earnings, Beats Street, But Stock Down on Guidance
There were high hopes for Apple's earnings release today after the market closed, as buzz over the iPhone and Apple TV has drawn attention away from concerns about a stock options scandal involving CEO Steve Jobs, and there was pressure on Apple to surprise to the upside after mostly disappointing earnings so far from the tech sector. Apple did its part by reporting record net income of $1 billion, or $1.14/share (diluted) on revenue of $7.1b (+24% y-o-y), also a record. The Street was looking for earnings of $0.78/share and Apple had previously forecast EPS of $0.70 to $0.73 on revenue of $6b to $6.2b. In the quarter iPod sales grew 50% (y-o-y) to $3.43b, accounting for almost half of Apple's revenue. Sales of Macs grew 28%, outpacing global PC shipment growth of 5.7% in the quarter, according to IDC. Apple reports gross margin improved by 4% y-o-y to 31.2% and said it "generated over $1.75 billion in cash during the quarter to end with $11.9 billion." However, Q2 revenue guidance of $4.8b to $4.9b and EPS of $0.54 to $0.56 was far short of analysts' consensus estimate of $5.23b and $0.60/share. In normal trading Apple lost 2.21% to close at $94.95. In extended trading Apple shed another 0.8% to $94.17 on volume of 14.4 million, having traded between $93.25 to $99.48. Separately, Bloomberg reports that analysts estimate Steve Jobs to be worth about 25% of Apple's market value, meaning if he were to leave, about $20b of market value could disappear.
• Sources: Apple F1Q07 (Qtr End 12/30/06) Earnings Call Transcript, Apple press release, Bloomberg [I, II], WSJ
• Related commentary: Apple Earnings Preview, iPhone's Second Version Will Pose the Real Threat, Apple is Ratcheting Higher: Is it Stock Split Time?, Apple's iPhone Won't Cannibalize iPod
• Potentially impacted stocks and ETFs: Apple (NASDAQ:AAPL). ETFs: NASDAQ 100 Trust Shares (QQQQ), Internet Architecture HOLDRs (NYSE:IAH), iShares S&P Global Technology (NYSEARCA:IXN), Technology Select Sector SPDR (NYSEARCA:XLK)
Trying to Sort Out Tribune Bids After Sale Deadline Passes
Yesterday's deadline for bids on the Tribune Company came and went; while several private equity firms expressed interest, NY Times reports none placed a bid. However, WSJ reports that TRB did receive at least one proposal from a private equity firm interested in its TV stations. Two other proposals, neither true bids, of interest: (1) Real estate investor Eli Broad and supermarket magnate Ronald Burkle yesterday proposed a leveraged recapitalization: they would borrow about $11 billion, and offer Tribune shareholders a $27/share dividend, leaving them with $7 a share in equity. They would also put up $500 million in cash, which would give make them the company's largest shareholders (34%). A source said the pair didn't have plans to sell any assets. (2) Its present biggest shareholder, the Chandler family (20%), seems to want to make a (yet unfinished) proposal to buy TRB's newspapers and spin off its TV stations, in partnership with a private equity firm. It already has commitments for half of the money needed, and is looking for more investors. Many see the Chandler offer as an effort to prop-up the value of its shares, in the face of a tepid response to the ill-fated auction which began last fall.
• Sources: New York Times, Wall Street Journal
• Related commentary: Tribune Co.'s Second Largest Shareholder Hires Outside Adviser in Possible Break With Management, The Chandler Family Takes Tribune Co.'s Fate into Its Own Hands, Low-Balled in Its Bid to Sell, Tribune Company Ponders Its Options. Conference call transcript: Tribune Q3 2006
• Potentially impacted stocks and ETFs: Tribune Company (TRB), The New York Times Co. (NYSE:NYT), Washington Post Company (WPO), Gannett Co. Inc. (NYSE:GCI), McClatchy Company (NYSE:MNI)
Sirius and XM Soar on Merger Speculation, Tank on FCC Chairman's Comments
Yesterday speculation of a possible merger between the lone two satellite radio players, Sirius and XM peaked, and was at least temporarily squashed as FCC Chairman Kevin Martin said there's a ban in effect since 1997 preventing a single owner for both services. Sirius Satellite Radio fell 7% to $3.86 and XM Satellite Radio dropped nearly 10% to $15.45. Shares of both had been up more than 15% year-to-date. The chairman's comments prove any attempt at a merger will face tough challenges including an FCC rule change and Dept. of Justice approval. However, Stifel Nicolaus analyst Blair Levin commented last month in a research note that the FCC rule can be changed and said, "the analysis that this is a condition and therefore the merger is a non-starter is just wrong," in an interview yesterday. Bloomberg quotes Reed Hundt, former FCC chairman and currently an antitrust laywer who said, "In my eyes the combination of two satellite radio firms would not significantly reduce choice in the music business."
• Sources: Bloomberg
• Related commentary: FCC Chairman Martin Dashes Sirius-XM Merger Hopes, Shares Tumble, XM Softens Stance on a Merger with Sirius, But DoJ and FCC Stand in the Way, XMSR and Sirius: The Street Weighs In, More From The Sirius/XM Satellite Radio Merger Rumor Mill. Conference call transcripts: Sirius Q3'06, XM Satellite Radio Q3'06
• Potentially impacted stocks and ETFs: Sirius Satellite Radio (NASDAQ:SIRI), XM Satellite Radio Holdings (XMSR)
McDonald's Beats Q4 Forecasts
McDonald's shares reached a seven-year high of $44.86 yesterday when the company reported Q4 profit well ahead of analyst expectations on higher sales of chicken wraps and a gain from the Chipotle Mexican Grill spin-off. Preliminary net income hit $1 a share from $0.48 last year ($0.61 excluding Chipotle) while global same-store sales rose 7.2%. Analysts were expecting $0.58. European same-store sales surged 8.2% in December on new products, the 11th consecutive month sales have increased. The company is considering further asset sales after the successful split from Chipotle. McDonald's has extended its hours, renovated restaurants, and introduced items like meal-sized salads and locally targeted dishes, like pasta salads in Italy. McDonald's will report complete Q4 and full-year results Jan. 24.
• Sources: Bloomberg, Reuters, MarketWatch
• Related commentary: A Virtual Happy Meal: McDonald's Redbox a Smashing Success, 20 Stocks Owned By Top Activist Funds, McDonald's Profits Climb -- For 10th Straight Quarter
• Potentially impacted stocks and ETFs: McDonald's Corp. (NYSE:MCD). Competitors: Burger King Corporation (BKC), Yum! Brands Inc. (NYSE:YUM). ETFs: Vanguard Consumer Discretionary ETF (NYSEARCA:VCR), iShares Dow Jones US Consumer Services (NYSEARCA:IYC), PowerShares Dynamic Food & Beverage (NYSEARCA:PBJ), Consumer Discretionary SPDR (NYSEARCA:XLY)
AEROSPACE AND DEFENSE
AMR Posts Q4 Upside Surprise; Southwest Air's Profit Drops on Fuel Costs
AMR Corp., parent of American, posted a Q4 upside profit surprise yesterday on higher prices and strong demand, while Southwest Airlines Co. posted a drop in quarterly profit on higher fuel expenditures. AMR saw a $17 million profit in Q4 versus a year-earlier loss, its first full-year and Q4 profit since 2000. Net income came in at $0.07, beating Street forecasts of a $0.044 loss. AMR's Q4 revenue rose 4.4% to $5.4 billion on record demand and ten fare increases. Southwest paid $1.56 per gallon for jet fuel, up 28% over last year because of a worsening hedge position, but AMR paid $1.88 per gallon -- 8% less than last year -- as the price of crude fell. Southwest suffered a drop in profits from $70 million a year ago to $57 million, or $0.12/share, roughly in line with estimates. Revenue gained 15% to $2.28 billion. Full-year profit came in at $499 million, or $0.61/share, versus $484 million, or $0.60/share, in 2005 -- the airline's 34th consecutive annual profit. The Amex airline index has enjoyed an 18% jump in three months on market improvement and merger speculation.
• Sources: Reuters, Bloomberg
• Related commentary: Crude's Fall Boosted Airline Stocks, Will Chester's Mid-Cap Picks -- Barron's, Boeing One-Ups Airbus Yet Again With FedEx Contract
• Potentially impacted stocks and ETFs: AMR Corporation (AMR), Southwest Airlines Co. (NYSE:LUV). Competitors: Delta Air Lines Inc. (DALRQ.PK), Northwest Airlines Corp. (NWACQ.PK), UAL Corp. (UAUA), JetBlue Airways Corp. (NASDAQ:JBLU). ETFs: streetTRACKS DJ Wilshire Mid Cap Value (EMV), streetTRACKS DJ Wilshire Mid Cap (EMM)
JPMorgan Chase Reports Eighth Straight Estimate Beating Quarter
For the eighth straight quarter, JPMorgan Chase & Co. reported estimate-beating results yesterday before the markets opened, sending shares slightly higher in composite trading. The third largest U.S. bank by market cap added $0.04, 0r 0.08% to $48.43 on a 68% increase in fourth-quarter net income resulting from strong performance from its investment banking unit as well as profits resulting from the sale of its corporate-trust business. On the downside, JPMorgan's consumer banking division, responsible for consumer mortgages and college loans, pulled in earnings that were lower by 11% from the year earlier period. By the numbers, profits climbed to $3.91 billion, or $1.09 a share, from $2.64 billion, or EPS of $0.74 during the year earlier period. The results beat the $0.95 average estimate compiled by Bloomberg; Reuters' consensus estimates were for EPS of $0.94. Fourth-quarter revenue rose to $16.9 billion, a gain of 14% over the prior year period; the consensus estimate was for revenue of $15.8 billion.
• Sources: Press Release, Bloomberg, Reuters, AP
• Related commentary: JPMorgan: Outlook For 2007 Positive, JP Morgan Gets a Fan in Morgan Stanley, Cramer's Take on JPM
• Potentially impacted stocks and ETFs: JPMorgan Chase & Co. (NYSE:JPM). Competitors: Citibank (NYSE:C), Bank of America (NYSE:BAC), Wachovia (NASDAQ:WB), Wells Fargo (NYSE:WFC). ETFs: Financial Select Sector SPDR (NYSEARCA:XLF), WisdomTree High-Yielding Equity (NYSEARCA:DHS), WisdomTree LargeCap Dividend Fund (NYSEARCA:DLN), KBW Bank ETF (NYSEARCA:KBE), iShares Dow Jones US Financial (NYSEARCA:IYF), iShares Dow Jones US Financial Svc. (NYSEARCA:IYG), Regional Bank HOLDRS (NYSEARCA:RKH), Vanguard Financials ETF (NYSEARCA:VFH)
Differing Accounts On GE/Abbott Deal
Several reports appeared last night with differing details regarding General Electric's proposed acquisition of Abbott Laboratories’ medical diagnostics unit. While the Wall street Journal claimed specific details "couldn't be learned," the New York Times said the deal will cost GE "as much as $5 billion, according to people involved in the negotiations" while Bloomberg claimed the purchase will cost GE "about $8 billion" according to "people familiar with the matter." The Journal also reported that it is possible GE may be purchasing most but not but not all of the Abbott unit while the New York Times made no such distinction. Last year, the division's sales represented about 18% of Abbott's revenue but just 7% of its operating profit leading to concerns GE may be overpaying. The deal would serve to broaden the scope of GE's $17 billion health-care business.
• Sources: Wall Street Journal, New York Times, Bloomberg
• Related commentary: Top Picks for 2007 from JPMorgan HealthCare Analysts, Knee-Jerk Drop in Healthcare May Be Buying Opportunity
• Potentially impacted stocks and ETFs: Abbott Laboratories (NYSE:ABT), General Electric (NYSE:GE). ETFs: :iShares Dow Jones US Pharmaceutical Indx (NYSEARCA:IHE), iShares Dow Jones US Healthcare (NYSEARCA:IYH), Pharmaceutical HOLDRS (NYSEARCA:PPH)
Novartis Posts 23% Rise in Q4 Profits, Falls Short of Forecasts
Swiss drugmaker Novartis AG reported net profits of $1.66 billion ($0.70/share), missing analyst estimates of $1.78b. The 23% rise was helped by strong sales of hypertension and cancer medications and copycat drugs, but fell short in part due to a major contact lens recall. Sales revenues were up 16% to $10.05b, higher than analyst forecasts of $9.66b. In 2007 NVS will be launching a new diabetes drug (Galvus) and hypertension drugs (Tekturna and Exforge), causing analysts to question whether it can keep margins at their current 29.7% while hiring additional sales staff to market the products. The December $2.5b sale of its food nutrition unit to Nestle SA has led to speculation that its Gerber baby foods division might also be up for grabs; last week a Nestle spokesman said the company would be interested if Novartis put the division up for sale. CEO Daniel Vasella said yesterday in a CNBC Europe interview that "several parties" had expressed interest in Gerber following a WSJ article speculating that Nestle may try to buy it, but added that no talks are currently going on. Shares, up 4.1% over the last year (vs. 2.6% and 1.5% for competitors GlaxoSmithKline and Sanofi-Aventis SA) were down 0.3% in Zurich this morning.
• Sources: MarketWatch, Wall Street Journal, Bloomberg
• Related commentary: Novartis May Sell Gerber Unit To Nestle, Big Pharma's Big Decision: Diversify Or Focus?, Novartis: Strong Growth and Reasonable Valuation
• Potentially impacted stocks and ETFs: Novartis AG (NYSE:NVS), GlaxoSmithKline plc (NYSE:GSK), sanofi-aventis (NYSE:SNY), Pfizer Inc. (NYSE:PFE), Merck & Co. Inc. (NYSE:MRK), Teva Pharmaceutical Industries (NYSE:TEVA). PowerShares Dynamic Pharmaceutical (NYSEARCA:PJP), iShares Dow Jones U.S. Pharmaceuticals (IHE), SPDR Pharmaceuticals (NYSEARCA:XPH)
BoJ Maintains 0.25% Target; Nikkei Up, Yen Hits Multi-year Lows
At the conclusion of a two-day monetary policy meeting the Bank of Japan voted 6-3 to keep the overnight call rate unchanged at 0.25%. In a separate statement, the BoJ said the economy continues to "expand moderately" and is expected to continue doing so. It did note weaker-than-expected private consumption has caused economic developments to "deviate slightly downward" from its October outlook. The BoJ's decision is in-line with government officials' urging to put off a rate hike due to weakness in consumption. As expected, BoJ governor Toshihiko Fukui reiterated the BoJ's "gradual" approach. The yen is now trading at nearly a four-year low and it weakened further against the euro. One benefit of not hiking this time is the BoJ will be able to review fourth quarter data, which is expected to show improvements, particularly in consumer spending. Prior to today's decision, six straight BoJ votes were unanimous. The BoJ's next rate decision meeting is Feb. 21.
• Sources: Bank of Japan, Bloomberg [I, II]
• Related commentary: The Yen's Slide: How Much Longer?, Japan: A lot of Idle Cash 'Gradually' Flowing into Stocks, Japan's November Industrial Production Sets Record, Electronics Inventories Down, Mixed Economic Data May Force BoJ to Postpone Hike, Japan: 2006 Year in Review, 2007 Outlook
• Potentially impacted stocks and ETFs: Mitsubishi UFJ Fin. Grp. (NYSE:MTU), Mizuho Fin. Grp. (NYSE:MFG). ETFs: iShares MSCI Japan Index (NYSEARCA:EWJ), iShares S&P/TOPIX 150 (ITF), BLDRS Asia 50 ADR Index (NASDAQ:ADRA)
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