China Selloff Shakes Markets Around World
U.S. and global markets dropped sharply yesterday following a massive selloff in China. After the Shanghai market closed down 8.8%, its biggest one-day drop in a decade, the DJIA skidded 3.3%, the S&P 500 3.5%, and the Nasdaq 3.9% in their most precipitous collective drop since the September 2001 terrorist attacks. The Nikkei 225 index fell 3.6% and Hong Kong's Hang Seng Index was off 3.8%. U.S. markets were already jittery about the implications of a deteriorating subprime mortgage market and concerns over the economy. Those concerns were fed by a disappointing January durable goods report and comments by former Fed Chairman Alan Greenspan, who said on Monday he considers a recession likely in the U.S. Tuesday's selloff in China was equivalent to an 1,100-point decline on the DJIA. Some analysts believe it reflected the inexperience of the large numbers of retail investors who pushed the Shanghai composite above 3,000 on Monday -- "blind optimism" turning into its opposite, blind panic. Others believe investors were rattled by fears the government will raise interest rates or cut back on money available for lending. In the U.S., the drop affected every sector, from small-cap and tech stocks to large manufacturing companies. The Fed might ease interest rates on the durable goods drop, but rising energy prices could sustain concerns about inflation.
Sources: USA Today, TheStreet.com, New York Times (I, II, III)
Commentary: Reacting to the Selloff • Opportunities In China Following Today's Selloff • Greenspan: Recession Possible by End of 2007
ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
T-bonds Up, Junk Bonds Down as Investors Lose Risk Appetite
While stock prices plummeted yesterday, Treasury bond prices climbed steeply as investors moved money to safer havens. The yield on the benchmark 10-year Treasury note was up 0.12% to 4.51%, its highest level since mid-December. But junk-bond and investment-grade bond prices fell -- pushing the junk/T-bond spread up 0.2% to 2.78%. Among the bonds hardest hit were those of General Motors and Ford, investment banks like Merrill Lynch and Bear Sterns, and mortgage lenders like Countrywide and Residential Capital. The sharp spread widening may signal that investors are losing their appetite for risky debt (like junk bonds), perhaps a reaction to former Fed Chairman Alan Greenspan's speech on Monday in which he said he found investors appetite for risk "disturbing" and that "extremely low" risk premiums on financial assets could become problematic. With investors pulling out of corporate debt, mortgage lenders their tightening lending standards in the wake of the recent rise in sub-prime debt defaults, and in light of yesterday's equity selloff, chances increase that the Fed may step in to bolster the economy by lowering its overnight rate. Yesterday, Fed-fund futures signalled investors now assume a 75% likelihood that the current rate of 5.25% will drop to 4.75% by October.
Sources: Wall Street Journal
Commentary: Carnage on Wall Street • Retail Investors Shedding 'Return Chaser' Attitude • It's not China, It's the Economy
Stocks/ETFs to watch: General Motors Corp. (GM), Ford Motor Co. (F), Merrill Lynch & Co. Inc. (MER), Bear Stearns Companies Inc. (BSC), Countrywide Financial Corp. (CFC). ETFs: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT)
Freddie Mac Moves to Contain Subprime Fallout
Facing shaken financial markets over growing subprime lender bankruptcies and warnings, big bank (HSBC, New Century) reports of record subprime losses and Congressional hearings into predatory subprime lending, government-backed mortgage buyer/lender Freddie Mac announced Tuesday that effective Sept. 1, it would no longer buy subprime mortgages with excessive payment resets or high default probability. Freddie Mac will now require stricter salary documentation and repayment capability proof, and will only buy teaser rate loans where borrowers qualify for the higher reset rate. The firm is developing alternative subprime loans with longer fixed-rate terms, and is also encouraging prime loan practices by setting up escrow accounts for borrowers tax and insurance payments. The ABX index tracking BBB- subprime mortgage-backed bonds has risen 250% since November, to 1,400 basis points. Freddie Mac's sister government mortgage-backer Fannie Mae is choosing to wait-and-see. Instability in the $605 billion of 2006 subprime loans -- 20% of the $8 trillion mortgage market -- has stoked fears that the ABX will affect the higher rated AAA index, portending widening credit problems and continuing housing declines. Freddie Mac was down -1.89% yesterday to $63.70.
Sources: MSN Money, Forbes, New York Times, Wall Street Journal, Washington Post, San Jose Business Journal
Commentary: Easy Money Meltdown • A Low-Risk Long/Short Financial Institution Arbitrage Strategy • Rise in Sub-Prime Defaults Leave Investors Asking Who's Next...
Stocks/ETFs to watch: Freddie Mac (FRE), Fannie Mae (FNM). Competitors: Citigroup (C), Countrywide Financial (CFC), New Century Financial (NEW), HSBC Holdings (HBC), Accredited Home Lenders Holding Co. (LEND), Novastar Financial Inc. (NFI), American Home Mortgage Investment Corp. (AHM), Fremont General Corp. (FMT). ETFs: SPDR Homebuilders (XHB), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT)
Australia's Centro to Buy Nex Plan Excel Realty for $3.4B
Unfazed by a possible REIT market top, nor by subprime's ripple effect, Australia's Centro Properties Group announced a unanimously approved plan to buy New Plan Excel Realty Trust for $3.4 billion in cash, $33.15/share -- a 13% premium over Tuesday's $29.34 close. This is Centro's third U.S. REIT purchase including last year's Kramont and Heritage acquisitions, and will make it the fifth largest manager of U.S. shopping centers. Centro said the deal will add 10% growth in 2007/2008 and 7% annually onward. Analysts expect another 10% rise on the stock, but some doubted the timing and capabilities of the Australian group. Centro says more than 70% of New Plan's shopping centers were part of a major supermarket, a Wal-Mart or a Kroger's, buffering Centro from fluctuating consumer spending, and Kimco Realty, the largest U.S. mall operator announced a 23% earnings increase in Q4. Centro has said it will retain $1.8b of properties, and raise close to $1b to finance the deal. This deal will raise Centro's managed funds by 48% to Australian $23b.
Sources: Reuters, PR Newswire, Wall St. Journal, Financial Standard, Bloomberg, Australia's The Age
Commentary: Real Estate Stocks Are Done - Really?!? • Housing Bubble and Real Estate Market Tracker • Look For Continued REIT Weakness -- Barron's
Stocks/ETFs to watch: New Plan Excel Realty Trust Inc. (NXL). Competitors: Kimco Realty (KIM). ETFs: iShares Dow Jones U.S. Real Estate Index (IYR), streetTRACKS Dow Jones Wilshire REIT Index (RWR)
Autodesk Shares Fall 6.5% on Restatement, Soft Guidance
Autodesk reported only partial results for its latest quarter yesterday saying it was in the midst of an internal options probe that would require it to restate results from 2003-2006. The news sent shares down 6.5% in after hours trading.Autodesk did report revenue grew 19% in its latest quarter totaling $497 million; this was in-line with Thomson Financial consensus estimates. Revenue was helped by model-based 3D software products and gains in emerging markets. Looking ahead, Autodesk predicts revenue between $490-$500 million in its next quarter. Analysts were expecting revenue of $500.6 million. The company expects its financial restatement will add $38-$45 million to past results. As a result of the restatement, Autodesk has not yet filed fiscal second or third quarter statements from the recently ended fiscal year. Shares fell $2.65, or 6.5%, to $38.15 in after hours action.
Sources: Autodesk F4Q07 Earnings Call Transcript, Press Release, Business Week, MarketWatch, TheStreet.com, Reuters
Commentary: Autodesk: FY Q4 Revs In Line; 2008 Guidance Light; Options Probe Finds Backdating; Stock Slips [Barron's] • Think Restatements Don’t Matter? Think Again.[Barron's] • Will Autodesk's 3-D Migration Help Drive Growth?
Stocks/ETFs to watch: Autodesk, Inc. (ADSK). Competitors: Parametric Technology (PMTC), Adobe (ADBE). ETFs: iShares Goldman Sachs Software Index (IGV)
A&P in Talks to Buy Pathmark for $652.5 Million
U.S. supermarket chain Great Atlantic and Pacific Tea Company [A&P] has confirmed it is in talks to purchase the Pathmark chain for $652.5 million, or $12.50 per share, in cash and stock. The price represents a 3.7% premium to Pathmark shares' Monday close. The deal follows on the heels of last week's purchase by Whole Foods of rival Wild Oats Markets for $565 million. A&P, founded in 1859, has a market cap of almost $1.4 billion and operates A&P, Waldbaum's and Food Emporium stores in nine states. Long-standing grocery chains like A&P are faced with competition from discount hypermarkets like Wal-Mart as well as higher-end specialty food stores like Whole Foods and Trader Joe's. The combination of A&P and Pathmark will consolidate the brands in the fragmented Northeast and give A&P more exposure in the mid-Atlantic region. The deal is still subject to shareholder and regulatory approval. Pathmark shares closed yesterday at $11.95 while A&P shares gained $2.30, or 7.4%, to $33.17.
Sources: Reuters, MarketWatch, TheStreet.com
Commentary: SAC Capital's 2007 Transactions: This Hedge Fund Has Been Busy • Whole Foods to Consume Wild Oats • Kroger's: Are Traditional Supermarkets' Salad Days Through?
Stocks/ETFs to watch: The Great Atlantic & Pacific Tea Company (GAP), Pathmark Stores, Inc. (PTMK). Competitors: Kroger Co. (KR), Safeway Inc. (SWY). ETFs: Consumer Staples Select Sector SPDR (XLP), Vanguard Consumer Staples ETF (VDC), PowerShares Dynamic Consumer Staples (PSL)
ENERGY AND MATERIALS
TXU Profit Rises 33% Despite Revenue Decline
TXU Corp. announced yesterday its 4Q06 net earnings rose 33% despite a decline in revenue. In what will likely be one of its last earnings reports before going private in the largest private buyout yet, TXU reported profit after items of $475 million, good for EPS of $1.03 versus profit of $356 million (EPS of $0.74) in the year-earlier period. Excluding one-time items, TXU's EPS was $1.21; analysts were expecting EPS of $1.20. Despite the increase in profit, revenue fell to $2.04 billion from $2.46 billion. The company blamed the decline on mild winter weather and lost customers. For FY2006, TXU reported a profit of $2.55 billion and EPS of $5.46, compared to $1.71 billion (EPS of $2.50) in FY2005.
Sources: Press Release, Wall Street Journal, Bloomberg, MarketWatch, Houston Chronicle
Commentary: TXU Acquisition: Are Investors Succumbing To Short-Term Thinking? • TXU Buyout: Consider the Consequences • TXU Soaring: Largest Leveraged Buyout in U.S. Corporate History
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)
Nikko Cordial's Roller Coaster Ride Continues
Shares of Nikko Cordial fell their daily limit of ¥200, or 15% to ¥1,147, following a report in the Nikkei English News that the Tokyo Stock Exchange is preparing to delist Nikko. TSE President Taizo Nishimuro however, later said the "report is wrong" and no decision has been made. A manager at Daiwa SB Investments comments, "Hedge funds, individuals and other investors will continue to trade speculatively until the exchange makes a final decision." Citigroup owns a 4.9% stake in Nikko and Mizuho owns a 4.8% stake. Both have expressed interest in supporting Nikko, but it is still unclear how the situation will unfold. In an interesting twist, Bloomberg reports two Mizuho officials said Mizuho is no longer trying to acquire Nikko and instead will try to form an alliance with Citi. Meanwhile, Citi is reportedly looking to increase its stake in Nikko to 33.4% and gain a management veto. Yesterday Nikko filed restated earnings for the years ending March 2005 and '06 due to an accounting scandal uncovered in December involving deliberately inflated earnings.
Sources: Bloomberg [I, II], MarketWatch, The Wall Street Journal
Commentary: Nikko Cordial Up 13% on Rumor Citigroup May Boost Stake • Citigroup Has Decisions to Make Amidst Nikko Cordial Uncertainty • Citigroup: Japan Expansion and M&A Could Bring Tokyo Exchange Listing
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), Nomura Holdings (NMR). ETFs: iShares S&P Global Financial Index Fund (IXG), iShares Dow Jones US Financial Services (IYG), Financial Select Sector SPDR (XLF)
Pfizer's Maraviroc Suppresses AIDS Virus in Clinical Trial
Clinical trials indicate that adding maraviroc, Pfizer's experimental HIV drug, to an existing drug regimen prompted suppression of the AIDS virus in twice as many patients, the company reported yesterday. If the drug receives FDA approval, it will become the first new oral HIV medication since the release of protease inhibitors a decade ago. Maraviroc, a CCR5 inhibitor, stops HIV from entering T cells, where they replicate. CCR5 inhibitors, a new class of drug, do not attack the virus itself, so the virus is less likely to to develop a resistance to them. Maraviroc does not appear to bring with it any serious side effects, like liver damage or lymphoma, that have been seen with other CCR5 inhibitors. The FDA will meet on April 24 to review maraviroc. Merck's MK-518 and Johnson & Johnson's TMC125, two more new HIV drugs, will also seek FDA approval this year. Merck's drug (generic name: raltegravir; tentative brand name: Isentress) is an integrase inhibitor that resides in an enzyme HIV uses to replicate itself. J&J's drug, a non-nucleoside reverse transcriptase inhibitor, is designed to battle viruses that have developed resistance to other drugs. All three medications could be on the market by the end of this year.
Sources: MoneyCentral, Wall Street Journal
Commentary: Rob Black's Healthcare Stock Report • Vertex Optimistic on Hepatitis C Drug • Polydex HIV Protection Trial Halted Due to Increased Risk of... HIV
Stocks/ETFs to watch: Pfizer Inc. (PFE), Johnson & Johnson (JNJ), Merck & Co. Inc. (MRK). ETFs: First Trust Morningstar Dividend Leaders Index (FDL), iShares Dow Jones US Pharmaceuticals (IHE), WisdomTree High-Yielding Equity (DHS)
Chinese Stocks Recoup Some Losses, But Rest of Asia Struggles
China's Shanghai and Shenzhen Composite indices both gained around 4% today, recovering from yesterday's more than 9% drops that are being blamed at least partially for the global equity sell-off that ensued; markets from Japan to Australia declined following heavy selling in Europe and the U.S. But Chinese stocks were back in vogue after the Shanghai Securities News cited unidentified government officials that said Beijing won't impose a capital gains tax on stock investments. In addition, the Oriental Morning Post said Beijing may permit qualified foreign investors to purchase up to $120 billion, or 10% of the value of domestic stocks. The Morgan Stanley Capital International Asia-Pacific Index fell 2.9% this morning for its largest one-day decline since June 13, resulting in the loss of at least $239 billion of market capitalization. The Nikkei 225 also lost 2.9%, while the Hang Seng fell 2.5%, the Seoul Composite lost 2.6%, the S&P/ASX 200 lost 2.7%, the Kuala Lumpur Composite fell 3.3% and Singapore's Straits Times Index dropped 3.7%.
Sources: Bloomberg [I, II]
Commentary: Opportunities In China Following Today's Selloff • It's not China, It's the Economy • China is Only the Symptom
Stocks/ETFs to watch: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ), iShares MSCI Asian Indices: Australia (EWA), Hong Kong (EWH), Japan (EWJ), Malaysia (EWM), Singapore (EWS), South Korea (EWY), Taiwan (EWT), Pacific ex-Japan (EPP)
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