Economists Expect Fed to Sit Tight on Rates Throughout 2007
The housing slowdown is expected to keep U.S. GDP growth at its slowest pace in five years, but stronger consumer spending should counterbalance that drag, according to a survey at the National Association for Business Economics released today. The group expects the economy to grow 2.7% in 2007. Housing construction is forecast to plummet 14.9%, well ahead of the 5.5% drop the group predicted in November and the 4.2% decline in 2006. The economists expect a 3.2% rise in consumer spending, however, that should protect the overall economy. They forecast consumer prices to increase only 1.9% against a 3.2% rise last year, helped by lower energy prices. The core inflation index, though, which excludes food and energy, is forecast to rise 2.3% this year and next. The group believes the Fed will maintain the benchmark federal funds rate at 5.25% for the rest of 2007 and cut it to 5.0% in 2008; in November, it predicted two hikes this year. Once housing stabilizes, GDP should rebound to 3% in 2008. The economists identified subprime mortgage lending as the greatest risk to the financial markets.
Sources: Reuters, Boston.com, Bloomberg
Commentary: Economic Report Summary: Core Inflation Rose, Broad Equity Markets Weakened • GDP By Category, Services Spending, and Foreign Investments in U.S. • Should The Fed Raise Rates?
ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
Ericsson Outbids Arris in Grab for Tandberg TV
Ericsson has topped Arris Group's bid for Norway's Tandberg Television offering $1.39 billion in an attempt to enter the television market. Tandberg's closing price Friday was 100.25 Krona; Arris's offer is for just 96 Krona a share versus Ericsson's which values Tandberg at 106 Krona a share. Ericsson believes a Tandberg acquisition would allow it entry into the fast-growing world of Internet TV. Tandberg is especially strong in the area of MPEG-4 compression technology essential for high quality online viewing. Ericsson has already purchased 11.7% of Tandberg and claims to have agreements from an additional 13% of shareholders it says will accept its offer. Tandberg responded this morning that it has received Ericsson's offer and needs to review it further.
Sources: Press Release - Ericsson Bid, Press Release - Tandberg Response, Wall Street Journal, Bloomberg
Commentary: Arris Group Snaps Up Tandberg TV, Becomes 'Triple-Play' Threat • Ericsson Buying Redback To Fend Off Cisco In IPTV Equipment • Ericsson Still Looks Safe and Sound, Despite Investor Overreaction - Barron's
Stocks/ETFs to watch: LM Ericsson (ERIC), Arris Group, Inc. (ARRS). Competitors: Alcatel-Lucent (ALU), Siemens (SI), Motorola (MOT), Nokia (NOK), Nortel (NT), Cisco (CSCO)
Station Casinos Accepts Management-Led $5.5 Billion Buyout Offer
The board of Las Vegas-based Station Casinos Inc. voted this weekend to accept the $5.5 billion revised buyout offer from Fertitta Colony Partners LLC, a group led by the company's founding family, and real estate company Colony Capital LLC. The group will pay $90 per share, up from its December offer of $82. The raised bid represents a 30% premium over the shares' close on December 1, prior to the disclosure of the original bid. The group will also take on approximately $3.4 billion in debt, bringing the total value of the deal to about $8.9 billion. Fertitta Colony Partners consists of Station's chairman and CEO Frank Fertitta III and his brother, sister and brother-in-law, the four of whom collectively own about about 27% of the company's outstanding shares. Station runs 16 casinos that are oriented toward the local Las Vegas market rather than toward the tourist trade. The company also owns large tracts of undeveloped land in the Las Vegas Valley. The deal is expected to close in six to nine months.
Sources: Wall Street Journal, TheStreet.com, Reuters
Commentary: Station Casinos: Investment Group Urges Rejection Of Buyout Offer • Fertitta Brothers to Take Station Casinos Private • A Quick Guide to the Major Gambling Stocks
Stocks/ETFs to watch: Station Casinos, Inc. (STN). Competitors: Harrah's Entertainment Inc. (HET), MGM Mirage (MGM). ETFs: PowerShares Dynamic Leisure & Entertainment (PEJ)
Tribune Mulls Offer from Sam Zell
Newspaper publisher and TV broadcaster The Tribune Company, on the brink of finalizing a "self-help" internal overhaul, is considering an offer from real estate developer Sam Zell. The highly leveraged deal would be structured around an employee stock ownership plan [ESOP] that would bring the company several federal tax benefits. The deal trumps two other private bids -- a $7.6 billion ($31.70 per share) offer from the Chandler family, the company's biggest shareholder; and a $34.00 per share offer from billionaires Ronald Burkle and Eli Broad -- that the company had already indicated it considered insufficient. The company has instead constructed a recapitalization plan that would spin off its broadcast outlets, retain most of its newspapers, and borrow money to enable the distribution of a large dividend. The board, which is said to continue to favor its self-help plan over Zell's offer, will reach a decision by the end of March. Zell recently sold his Equity Office Property Trust to the Blackstone Group for $39 billion in what was briefly the biggest LBO in history.
Sources: New York Times, Wall Street Journal, MarketWatch, Reuters
Commentary: WSJ: Tribune Co. Now Leaning Away From Selling Itself • Trying to Sort Out Tribune Bids After Sale Deadline Passes • Low-Balled in Its Bid to Sell, Tribune Company Ponders Its Options. Conference call transcript: Tribune Q4 2006
Stocks/ETFs to watch: Tribune Company (TRB). Competitors: Dow Jones & Co. Inc. (DJ), Gannett Co., Inc. (GCI), The Washington Post Co. (WPO), The McClatchy Company (MNI), The New York Times Co. (NYT)
TRANSPORT AND AEROSPACE
Financial Times: Chrysler Considering An All-Equity Deal With GM
The Financial Times is reporting DaimlerChrysler is considering swapping its North American Chrysler unit for a stake in GM. DaimlerChrysler is anxious to unload Chrysler after it reported losses of $1.5 billion last year versus gains of $7.3 at the parent company. Such an arrangement would be advantageous to cash-strapped GM, in the midst of its own turnaround, especially given its current 'junk' debt rating. Meanwhile DaimlerChrysler would stand to benefit as a minority shareholder from cost savings from the multi billion-dollar merger. It has been reported that at least two of DaimlerChrysler's institutional shareholders like the idea of an all-equity deal.
Sources: Financial Times.com, Reuters
Commentary: Large Private Equity Firms Approached About Buying Chrysler • GM To Buy Chrysler? At Least It Hasn't Been Ruled Out • Renault CFO: 'We Want No Part in Chrysler'
Stocks/ETFs to watch: DaimlerChrysler (DCX), General Motors (GM). Competitors: Nissan (OTCPK:NSANY), Ford (F), Toyota (TM), Honda (HMC), Volkswagen (OTCQX:VLKAY)
Boeing to Bring Antijamming Technology to Commercial Satellites
Recent activity by China displaying its ability to shoot down satellites has prompted Boeing to offer advanced antijamming technology to commercial satellite operators for the first time, according to The Wall Street Journal. There are reportedly more than 250 large commercial satellites in high-Earth orbits. The deputy general manager of Boeing's Space and Intelligence Systems division says antijamming technology "could become a differentiator" in the commercial segment. The U.S. government recognizes threats from both a defense and commercial viewpoint. The WSJ reports industry officials say there is growing interest about safeguards among commercial operators in general that could lead to more advanced, but more costly next-generation satellites. A retired U.S. Air Force general believes protection for commercial satellites could even be subsidized by Congress.
Sources: The Wall Street Journal
Commentary: Investment Implications of China's Satellite Killer • Northrop to Bid on $40 Billion Air Force Contract • Boeing's Earnings Fly, So Do Shares
Stocks/ETFs to watch: Boeing Co. (BA). Competitors: Intelsat, Ltd. (private), Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC), General Dynamics Corp. (GD). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)
ENERGY AND MATERIALS
TXU Smoothes Path for Biggest-Ever Buyout
Texan energy producer TXU will cancel eight of 11 planned coal facilities to gain support from environmentalists for its $44 billion buyout by a consortium led by Kohlberg Kravis Roberts and Texas Pacific. TXU shares soared 17% to $70.30 in AH trading on news of the bid. The consortium will pay about $70 a share, valuing the company at $32 billion, and assume $12.38 billion of TXU debt. The consortium pre-empted environmentalist opposition, which has scuppered such deals in the past, by approaching the groups in advance. In addition to cancelling the Texan plants, TXU will scrap planned facilities in Virginia, Maryland and Pennsylvania; back a carbon dioxide emissions limit; and invest in energy efficiency programs. The deal could still run aground on government regulations and objections from consumers long hostile to TXU. Also, if the cancelled Texan plants are not built by other firms, there may not be enough supply to meet demand and Texan electricity prices could skyrocket. TXU was an attractive buyout candidate because in Texas, there are almost no price controls on electricity. The deal bumps the recent Blackstone buyout of the Equity Office REIT, which totaled $39 billion including debt, from the position of biggest buyout in history.
Sources: Wall Street Journal (I, II, III), Reuters, Bloomberg, MarketWatch
Commentary: TXU Building 11 Coal Plants Just 'Under the Wire' Of New Regulations? • TXU, NewsCorp, AutoNation Top List of Hedge Fund Pullouts in 2Q'06 • Is Prudence Passé? Private Equity and LBO Cyclical Sector Targets. Conference call transcript: TXU Q3 2006
Stocks/ETFs to watch: TXU Corp. (TXU). Competitors: American Electric Power Co. Inc. (AEP), Centerpoint Energy Inc. (CNP), Reliant Energy Inc. (RRI). ETFs: Utilities HOLDRs (UTH), Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU)
Apax Partners and Morgan Stanley to Buy Hub International for $1.7 Billion
Apax Partners and the private-equity investment arm of Morgan Stanley will buy Chicago insurance brokerage Hub International Ltd. for approximately $1.7 billion, it was announced today. The group will pay Hub $40 per share, a 16% premium over the shares' Friday close. Hub provides insurance and employee benefit services to medium-sized companies and derives one-quarter of its business in Canada. Insurance brokers, with their relatively small capital investment requirements and hefty profit margins, hold great appeal for private equity firms. In 1998, Kohlberg Kravis & Roberts bought Willis Group Holdings Ltd. for around $300 million; in 2001, they brought Willis Group public for a gain of $1.2 billion. Apax and Morgan Stanley plan to provide a capital infusion to Hub and expand its reach in the American South. Morgan Stanley's principal investment group, in keeping with the new strategy of CEO John Mack, is becoming much more active; it is also involved in the pending record-setting buyout of electricity company TXU Corp. Hub is entitled to continue to solicit proposals until March 19.
Source: Wall Street Journal
Commentary: A General Insurance Brokers Story • Apax, Morgan to buy Hub Int'l for $1.7 billion [Reuters] • Apax, Morgan to buy Hub Insurance for $1.7 billion [MarketWatch]
Stocks/ETFs to watch: Hub International Ltd. (HBG), Morgan Stanley (MS). Competitors: Aon Corp. (AOC), Brown & Brown Inc. (BRO), Marsh & Mclennan Companies Inc. (MMC). ETFs: iShares Dow Jones US Broker-Dealers (IAI), Vanguard Financials ETF (VFH), KBW Capital Markets ETF (KCE)
Nikko Cordial Up 13% on Rumor Citigroup May Boost Stake
It has been a rollercoaster ride for shareholders of Nikko Cordial following an accounting scandal last month that sent its shares lower by 28% in the ensuing two days. With today's 13% jump to ¥1,364 however, its shares have recovered their pre-scandal value. Bloomberg reports sources say Citigroup may raise its stake in Nikko to 33.4% (valued at ¥380 billion, or $3.1b), from 4.9%, in order to gain a management veto. Citigroup previously owned more than 20% of Nikko but has cut its position in recent years. Citigroup also owns a 49% stake in an investment bank joint-venture with Nikko and has signaled interest to expand its retail banking presence. A listing on the Tokyo Stock Exchange is also under consideration. Citigroup is not the only interested party. A Mizuho spokeswoman confirmed the bank is "interested." It currently owns a 4.8% stake.
Commentary: Citigroup Has Decisions to Make Amidst Nikko Cordial Uncertainty • Citigroup: Japan Expansion and M&A Could Bring Tokyo Exchange Listing • Eye on the Prize: Citigroup and Mizuho Battle for Nikko Cordial
Stocks/ETFs to watch: Citigroup (C), Nikko Cordial (OTC:NIKOY), Mizuho Financial Group (MFG). Competitors: Mitsubishi UFJ Financial Group (MTU), ABN Amro Holding N.V. (ABN). ETFs: iShares S&P Global Financial Index Fund (IXG), iShares Dow Jones US Financial Services (IYG), Financial Select Sector SPDR (XLF)
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
- Barron's cover story picks stocks likely to benefit from an aging baby boom generation: Retail: Chico's (CHS), Whole Foods Market Inc. (WFMI), Talbots (TLB), Gap (GPS), Helen of Troy's (HELE) and Mattel (MAT). CE: Nintendo (OTCPK:NTDOY). Transport: Ford (F). Housing: Pulte Homes (PHM). Healthcare: Allergan (AGN), Estee Lauder (EL), AMN Healthcare Services (AHS), UnitedHealth Group (UNH), Walgreen (WAG), Stericycle (SRCL). Insurance: Hartford Financial Services Group (HIG). Accommodation: Starwood Hotels & Resorts Worldwide (HOT).
- Mark Roberts, Founder of Off Wall Street Consulting Group, gives three short and two long picks for 2007. Shorts: (1) Mohawk Industries Inc. (MHK) -- "We have called carpet dealers all over the country and, except for a couple of pockets, business is terrible." (2) Fossil Inc. (FOSL) -- people who bought its watches now use their cell phones and MP3 players to tell time. (3) Healthways Inc. (HWAY) -- recent Medicare studies have failed to show that disease management saves money. Longs: (1) SAIC Inc. (SAI) -- more than half its 44,000 employees have hard-to-obtain security clearances, allowing it to grab the lion's share of government intelligence contracts. (2) Republic Airways Holdings Inc. (RJET) -- the airline outsourcer's earnings are more predictable than traditional airlines, without the fuel-cost, fair price, or passenger load risks.
- On Thursday, Universal Electronics Inc.'s (UEIC) sales ($236 million) and earnings ($1.06 a share) considerably topped Street estimates. It holds 168 remote-control related patents, more than 75% of its revenue comes from technology licensing, and it makes 75% of all remote controls sold to U.S. cable companies. Flat-panel TV growth and services such as TiVO leave Universal with lots of room to grow.
- Siemens' (SI) 12 divisions were in the black in FQ1 2007 for the first time in six years, with operating profits up 51% and 2006 net up 35%. Siemens is under investigation for bribing its way into $500m of contracts; it has promised to initiate controls to ensure ethical behavior. New growth directions include energy, environmental care, infrastructure, health care, and emerging markets. Shares should climb at least 10% in 2007, unless the scandal reaches CEO Klaus Kleinfeld, architect of the company's revival.
- Burger joints have flourished in recent years as middle-income Americans, hit with weak home prices high gas prices and interest rates, would just as soon save a few bucks. Nutritious menu options have made their spoons less greasy, and have proven healthy for their businesses as well. Leader of the pack McDonald's (MCD) shares could easily rise another 10% thanks to expanded breakfast offerings.
- To grow cash-flow/share by 35% in 2006 and 45% in 2005, and double its share price since 2004 (to $55), Brookfield Asset Management Inc. (BAM) uses a Buffett-like business model that stresses strict value investment, contrarianism, high quality long-term asset purchases after extensive research, and retaining good management. Brookfield is now focusing on infrastructure such as ports, pipelines and railroads. While competition from the likes of Goldman Sachs (GS) could pressure prices in the short-term, Brookfield's investments should yield Buffett-like profits, sending shares to $70.
- Accounting errors led the Fed to find fault with Fifth Third Bancorp's (FITB) risk controls in 2002; since then shares are down from $70 to $40. The Street may be overlooking turnaround factors, including dumping some of its low-yield investments, strength and consolidation in regional banks, a thorough management remake, and a yield-curve that will at some point turn the corner improving margins. Shares are above 50- and 200-day moving averages, insiders have been upping their purchases, and just two of the analysts who follow Fifth Third rate its shares a Buy -- making it a contrarian's dream.
- L-1 Identity Solutions Inc.'s (ID) CEO Robert LaPenta recently upped his stake, a decidedly bullish signal considering his strong background in defense and security. Joshua Hong of OwnershipAnalyzer.com says that institutions own 40% of shares outstanding, and together with LaPenta's leadership, give the company its positive momentum. Shares are down 10% but up 12% on the news of LaPenta's recent purchase.
- Qualcomm (QCOM) shares are up 17% in February due to the steady flow of rumors that it is close to renewing its licensing pact with Nokia (NOK) (the present agreement dies April 9). But Qualcomm CEO Paul Jacobs says the two are "pretty much at deadlock." Nokia wants to pay Qualcomm lower fees for its W-CDMA technology, and it wants Qualcomm to pay it royalties for certain patents owned by Nokia. Qualcomm makes most of its money from licensing. Charter Equity's Ed Snyder says there will not be a deal. Last week Jacobs told investors Qualcomm's agreement to provide MediaFlo mobile-video technology to AT&T's (T) Cingular wireless might bring Nokia closer, but author Mark Veverka says he may have been grasping at straws.
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