Regulators Might Release New Subprime Lending Guidelines Today
Banking regulators, concerned that slack underwriting standards left many homeowners with mortgages they cannot pay off last year, might release new subprime mortgage guidelines as early as today. Both the subprime lenders and the borrowers themselves have suffered as housing prices stagnated and interest rates moved up. Zack Gast, a financial-services analyst at the Center for Financial Research & Analysis, expects the new guidelines to "focus on underwriting based on the fully indexed rate on subprime loans," ultimately resulting in reduced demand in the secondary markets for subprime loans. Earlier in the week, Freddie Mac announced it would stop buying loans with "a high likelihood of excessive payment shock and possible foreclosure" in favor of subprime adjustable-rate mortgages at the fully indexed rate.
Commentary: Subprime Mortgages and Market Datapoints • Rise in Sub-Prime Defaults Leave Investors Asking Who's Next • The 'Mysterious Magic' of Subprime Lending Has Faded
Stocks/ETFs to watch: New Century Financial (NEW), HSBC Holdings (HBC), Accredited Home Lenders Holding Co. (LEND). ETFs: Vanguard REIT ETF (VNQ), streetTRACKS KBW Bank ETF (KBE), Regional Bank HOLDRs Trust (RKH)
Countrywide Financial's Delinquencies Rise
Countrywide Financial Corp., the biggest U.S. mortgage lender, reported that payments are late on nearly 20% of its subprime mortgage loans. Countrywide's shares dropped 2.4% to $37.44 on the news. The company submitted a filing to the SEC yesterday that said payments were late on 19% of subprime loans versus 15.2% at the end of 2005 and 11.3% at the end of 2004. Housing prices have stagnated during the sector slowdown and interest rates have gone up, pinching subprime borrowers who are unable to pay their mortgages. More than 20 subprime lenders have closed down or sought buyers over the past year. Payments are late on 2.9% of Countrywide's prime home-equity loans, up from 1.6% a year ago and 0.8% at the end of 2004. In related news, research firm First American LoanPerformance reported that payments were at least 60 days late in December on approximately 14% of subprime loans packaged into mortgage securities, up from 8.3% a year ago.
Sources: Wall Street Journal, Bloomberg, Business Week
Commentary: Regulators Might Release New Subprime Lending Guidelines Today • Subprime Finance Turbulence is Spreading • Only the Strongest Sub-Prime Lenders Will Survive
Stocks to watch: Countrywide Financial Corp. (CFC). Competitors: Bank of America Corp. (BAC), Washington Mutual Inc. (WM), Wells Fargo & Co. (WFC)
SAP Gains Nearly 3% on Unfounded Sale Rumor
ADRs of German enterprise software company SAP rose almost 3% yesterday on a report in a German publication that private equity firm Silver Lake Partners might buy the stake of one of the three founders of the company, who collectively own 32% of SAP. The report has since been denied. WirtschaftsWoche, an economics weekly, declined to name its sources for the report, which UBS analysts were quick to call into question. "While SAP's founders have reduced their day-to-day involvement in SAP and only sit on the supervisory board we think they remain closely tied to the business emotionally," they said. "Following the aborted Microsoft talks, it was clear that any deal would have carried many conditions from SAP's founders. As such, we see them as unlikely to sell to a financial buyer." The three founders, Dietmar Hopp, Hasso Plattner and Klaus Tschira, confirmed today that they are not selling to Silver Lake.
Sources: MarketWatch (I, II, III)
Commentary: Rumors Oracle Looking To Buy SAP Probably Baseless • Goldman On IT Trends: What Tech Companies Stand To Gain?
Stocks/ETFs to watch: SAP Aktiengesellschaft [ADR] (SAP). Competitors: Oracle Corp. (ORCL), Microsoft Corp. (MSFT), International Business Machines Corp. (IBM). ETFs: Software HOLDRs (SWH), iShares MSCI Germany Index (EWG), Morgan Stanley Technology ETF (MTK)
Microsoft Faces Possibility of New Fines from Frustrated EC
Having already been fined approximately $1 billion in previous cases against the European Commission, Microsoft faces the possibility of being fined €3 million ($4m) daily, if it doesn't reply within four weeks, to the EC's Statement of Objections regarding its alleged "unreasonable" fees charged to competitors for information used to create interoperability between servers. Microsoft Senior VP and General Counsel Brad Smith said in a statement that he is "disappointed" with the feedback and its timing, because Microsoft submitted its pricing proposal to the EC last August. Microsoft claims its proposed prices are at least 30% lower than the comparable market rate. It also argues the disputed information required by competitors is protected by patents and thus, can't be expected to "be made available for free." However, the Wall Street Journal cites a lawyer representing Microsoft rivals including IBM, Oracle, Red Hat and Sun, who says, many software patents are overturned upon challenge due to having been incorrectly issued.
Sources: Microsoft press release and Legal Newsroom, EC [I, II], BusinessWeek, Reuters, The Wall Street Journal
Commentary: Windows Vista: Not Exactly Selling Like Hotcakes at Amazon • What Does Microsoft Want to Be When It Grows Up? • A Lesson From Microsoft's Stock Drop, Post-Vista Release
Stocks/ETFs to watch: Microsoft (MSFT). Competitors: International Business Machines (IBM), Oracle (ORCL), Red Hat (RHAT), Sun Microsystems (SUNW). ETFs: Software HOLDRs (SWH), iShares Goldman Sachs Software Index (IGV), Technology Select Sector SPDR (XLK)
Dell Shares Decline on Preliminary Fiscal Q4 Earnings Report
Dell shares fell almost 2% to $22.58 in AH trading last night after the company reported a 33% drop in fiscal Q4 net income and warned that earnings and margins would remain under pressure for the next several quarters. The stock has lost about a quarter of its value over the past year as sales have fallen and competition has heated up from Hewlett-Packard, which overtook Dell as the world's No. 1 PC manufacturer last quarter. Dell's results are not yet official and may have to be restated as part of an SEC probe into its accounting practices. Earnings came in at $673 million ($0.30/share) versus $1.01 billion ($0.43/share) in the year-ago quarter. Revenue dropped 5% to $14.4 billion. Analysts had forecast $0.29 EPS on $14.87 billion in revenue for fiscal Q4 and are expecting $0.28 EPS on $14.3 billion in revenue for fiscal Q1. This marks the first time since 2001 that Dell has posted a y-o-y decline in quarterly revenue growth. Laptop sales were flat and desktop sales fell 18% in the quarter. Dell also announced yesterday that it has received a temporary stay from the NASDAQ regarding the company's possible delisting.
Sources: MarketWatch, Bloomberg, MoneyCentral, TheStreet.com, Wall Street Journal, Press release
Commentary: Dell: Looking Forward, But Not Talking • Dell Is A Contrarian Dream • Dell's Turnaround Is Under Way - Bear Stearns
Stocks/ETFs to watch: Dell Inc. (DELL). Competitors: Hewlett-Packard Co. (HPQ), International Business Machines Corp. (IBM), Sun Microsystems Inc. (SUNW). ETFs: Internet Architecture HOLDRs (IAH), iShares Goldman Sachs Technology Indx (IGM), Fidelity Nasdaq Composite Index Tracking (ONEQ)
YouTube and BBC Sign Three Channel Deal
Google Inc. has had a hard time reaching comprehensive agreements with major media outlets like NBC and Viacom to put their videos on Google's YouTube, but the New York Times reports it has been successful in signing up hundreds of smaller media companies such as the NBA (Monday) and independent label Wind-up Records (Tuesday). But YouTube officials say most of their licensing deals have not been disclosed, that they number over 1,000, and that they are adding over 200 media partners a quarter. The deals, despite their size, seem to be paying off: According to Hitwise, an Internet research firm, over the two weeks after YouTube took down over 100,000 Viacom clips from channels like MTV and Comedy Central, traffic on the site nonetheless went up 14%. And, says the Times, as its audience grows, YouTube becomes increasingly alluring for big media companies. "You fish where the fish are” -- John Caplan of Ford Models agency, a YouTube content partner. Today, the Times says, Google will announce a multiyear agreement with the BBC that will have it create one news and two entertainment channels, two of which will include Google's AdSense ads. BBC content will include celebrity blogs, behind-the-scenes videos, and shows like “Fawlty Towers,” “Doctor Who” and “Life on Earth.” Many of the deals are of a tentative nature, non-exclusive, and withhold some prized content, as partners apparently take a wait-and-see approach before committing full force. Update: The British Broadcasting Corp. has now confirmed its deal with Google, which will include a BBC Worldwide channel including Top Gear, Spooks and the nature documentaries presented by David Attenborough, and a BBC World channel that will carry BBC news clips. MarketWatch reports that the plan is likely to be controversial in the U.K., where the BBC has been criticized for reaching too far into commercial territory.
Sources: BBC, New York Times, Reuters, MarketWatch
Commentary: Google Leads Internet Video Market, Smaller Sites Have Remarkable Showing • Idea for Google: Add Some Ads On Videos • Key Players In The Internet Video Market
Stocks/ETFs to watch: Google Inc. (GOOG). Competitors: News Corp. (NWS), owner of MySpace. ETFs: Internet HOLDRs (HHH), First Trust Dow Jones Internet Index (FDN)
Conference call transcripts: Google Q4 2006 Earnings Call Transcript
Related: YouTube BBC channel, YouTube BBC Worldwide channel
Gap Posts 35% Hit to Earnings but Exceeds Expectations
Gap reported yesterday that profits fell for the sixth consecutive quarter on deep discounts at Old Navy and the company's namesake chain. It also announced it is hiring an executive search firm to help it find a replacement for CEO Paul Pressler, who recently resigned. Q4 net income dropped 35% to $219 million ($0.27/share) from $337 million ($0.39/share) a year earlier and sales rose 2.3% to $4.93 billion. These results beat Street expectations of $0.24 EPS on $4.89 billion in revenue. Sales at North American Gaps dropped 5.9% in the quarter to $1.7 billion; Old Navy's sales were flat at $2 billion; and Banana Republic's were up 14% to $808 million. International sales rose 13% to $496 million. Gap forecast full-year 2007 EPS at $0.80-0.90, excluding a $0.04 charge for the closure of its Forth & Towne chain, shy of analyst forecasts of $0.99. Gap plans to remodel about 200 Gap and Old Navy stores, open about 200 new Old Navy stores and close about 200 Gaps this year.
Sources: MarketWatch, MoneyCentral, Bloomberg, Wall Street Journal, Press release. Conference call transcript: F4Q06 (Qtr End 2/3/07)
Commentary: Time to Go to The Gap - As A Value Stock? • How Gap Can Get Itself Back on Track - Barron's • Barron's Baby Boomer Stocks
Stocks/ETFs to watch: Gap Inc. (GPS). Competitors: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc. (AEOS), J. Crew Group, Inc. (JCG). ETFs: PowerShares Dynamic Retail (PMR)
TRANSPORT AND AEROSPACE
GM Vehicle Sales, U.S. Market Share Rise; Japan's 'Big 3' Continue to Roll
Yesterday marked the release of February light vehicle sales figures and the results again showed a loss of market share among the 'Big 3' U.S. automakers, particularly to Japanese carmakers. Ford and DaimlerChrysler reported declines in sales, 13% and 7.7% respectively, versus a year ago's sales. Reversing its own downward trend, GM said its sales rose 3.4% from the year earlier period. All three of Japan's 'Big 3' reported YoY sales increases, paced by Toyota at 12%, while Honda (3.2%) and Nissan (1.2%) also registered gains. Despite an industry-wide YoY sales drop of 0.5%, the seasonally adjusted annual sales rate held steady at 16.6 million; Bloomberg consensus estimates were for an annual rate of 16.1 million sales. Analysts had also estimated a loss of 7% for GM sales. The total market share of the U.S. 'Big 3' fell to 54% from 56.6% in February 2006. GM managed to increase its market share 1% to 24.6% total. Asian automakers up their share from 37% to 39.4%.
Sources: Bloomberg, Wall Street Journal, AP
Commentary: February Light Vehicle Sales: It's All Relative, Or Is It? • Winners and Losers From January's U.S. Auto Sales Report • Big 3's January U.S. Auto Sales Fall To Lowest Ever As Japanese Gain
Stocks/ETFs to watch: General Motors (GM), Ford (F), DaimlerChrysler (DCX), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY)
ENERGY AND MATERIALS
Buffett Took 4% Stake in Posco Last Year
Share of South Korean steelmaker Posco gained up to 3.8% today after Warren Buffett's firm Berkshire Hathaway Inc. disclosed it holds a 4% stake in the company. Buffett's original investment of $572 million has risen in value to $1.31 billion as of the close on Wednesday. Buffett did not say when the original purchases were made, but it is estimated that most of the position was acquired in 2005, when Posco shares were under pressure from Chinese competition. Posco shares have gained 75% since the beginning of last year, an impressive rally analysts attribute to expectations of further consolidation of the global steel industry after Mittal Steel bought Arcelor in 2006 for about $33 billion and Tata Steel agreed to buy Corus for $12 billion in January. Posco posted its first growth in net income in a year in 2006, and analysts expect earnings to improve further as high-end steel prices rise. Posco also signed a contract last year to build a $12 billion integrated steel complex in Orissa, India. In related news, shares of British food retailer Tesco gained 1.7% when Buffett disclosed his company holds a 2.9% stake.
Sources: MoneyCentral, Bloomberg, MarketWatch I, II
Commentary: Berkshire Discloses 4% Posco Stake, 'World's Finest Steel Company' • Adjusting Your Stop-Loss Upward: What I Learned From Trading Posco • "Steel" This Stock Idea: The Long Case for POSCO
Stocks/ETFs to watch: Posco [ADR] (PKX), Tesco PLC [ADR] (OTCPK:TSCDY). Competitors: Arcelor Mittal (MT). ETFs: BLDRS Emerging Markets 50 ADR Index (ADRE), iShares MSCI Emerg Mkts Index (EEM)
GE Sells Stake in Swiss Re; Reaffirms Q1 and '07 EPS
General Electric has announced it sold its $2.8 billion stake in Swiss Reinsurance and plans to use expected pre-tax proceeds totaling $565 million for restructuring and legal costs. GE sold half of its stake, or 16.65 million shares, back to Swiss Re and sold another 16.65 million shares in the secondary market. GE CEO Jeff Immelt comments, "Swiss Re’s stock has performed well, and we have gained significant value in our equity holdings." Immelt says the focus in '07 continues to be "on generating high-quality earnings and using gains for restructuring." In addition, Immelt says, "GE is off to a strong start for the year. We are confident in our ability to meet our EPS guidance of $0.43-0.45 for the quarter, up 8-13%, and $2.18-2.23 for the year, up 10-12%." According to Reuters Estimates, analysts' average estimates are $0.44 for Q1 and $2.22 for the full year.
Sources: Press release, Bloomberg, Reuters
Commentary: General Electric: Flaw In The Bullish Case? • GE Earnings Double, Meeting Forecast; Strong NBC Numbers • Profiting from Non-Hurricanes
Stocks/ETFs to watch: General Electric (GE), Swiss Reinsurance (OTC:SWCEY). Competitors: General Re -- subsidiary of Berkshire Hathaway (BRKA), Hannover Re (OTCPK:HVRRY), Munich Re (trades in Germany). ETFs: streetTRACKS Dow Jones Global Titans Index Fund (DGT), iShares Dow Jones US Industrial (IYJ), S&P 500 Index SPDRs (SPY)
AIG Misses Estimates; Dividend Raise, Buyback Plan Send Shares Higher
American International Group Inc. reported after the bell yesterday its fourth-quarter profit increased eightfold from the prior year quarter, in which the company had to pay out $1.64 billion in one-time charges. By the numbers, profit was $3.44 billion, good for EPS of $1.31, versus EPS of just $0.17 in the prior year period. Excluding one-time items, EPS was $1.47, below both MarketWatch ($1.49) and Bloomberg ($1.50) estimates. In other news, AIG's board approved a new share buyback and dividend program. The buyback plan will be worth up to $8 billion, of which the world's largest insurer plans to spend $5 billion in 2007 while the dividend will rise roughly 20% a year, under "normal" circumstances. AIG shares rose $1.03, or 1.53%, to $68.44 in after hours trading.
Sources: Press Releases: Earnings, Dividend/Stock Buyback, Bloomberg, Business Week, MarketWatch, TheStreet.com, AP
Commentary: Short and Longer Term Directions For American International Group • Insurance Sector Looks Cheap • Cramer's Take on AIG
Stocks/ETFs to watch: American International Group Inc. (AIG). Competitors: Allianz AG (AZ), AXA (AXA), Chubb Corp. (CB), Hartford Financial Services Group Inc. (HIG). ETFs: iShares Dow Jones US Insurance (IAK), KBW Insurance ETF (KIE)
Major I-Banks Near 'Junk' Status -- Bloomberg
Credit-default swaps tied to the large NY-based investment banks trade at their highest level in 19-months, as even their own traders are valuing them little above non-investment grade ("junk") status. Credit-default swaps, which transfer the credit exposure of fixed income products between parties, are the way in which firms like Goldman Sachs, Merrill Lynch and Morgan Stanley have equitized the U.S. mortgage sector. Heavy losses among the subprime lenders, a result of a rise in delinquent mortgages, have created fears that losses will extend to the major brokerage firms, who have financed the debt through a variety of credit derivatives. Since 2005, Merrill Lynch has financed two mortgage lenders that went under and purchased a third (First Franklin Financial Corp. for $1.3 billion), while Goldman default swaps have risen more than 30%. Prices for credit-default swaps for the bonds of the big I-banks this week traded at levels that equate to debt ratings of Baa2, just two steps above non-investment grade (junk). Scott MacDonald of Aladdin Capital Management: "There's been a little bit of a reappraisal of the financial sector, with a strong desire to get away from subprime exposure."
Sources: Bloomberg, Wikipedia: Credit-Default Swap
Commentary: Nightmare in the Making: Frenzied Activity in the Credit Derivatives Markets • Exchange Traded Credit Derivatives Likely to Hurt Investment Bank Earnings • Rise in Sub-Prime Defaults Leave Investors Asking Who's Next
Stocks/ETFs to watch: Goldman Sachs (GS), Bear Stearns (BSC), Merrill Lynch (MER), Morgan Stanley (MS), Lehman Brothers (LEH). ETFs: iShares Dow Jones US Broker-Dealers Ind. (IAI), Vanguard Financials (VFH), Financial Select Sector SPDR (XLF), iShares Dow Jones US Financial Svc. (IYG)
Most Asian Indices Down as Ugly Week Comes to an End
It has been an up-down ride for Chinese stocks since Tuesday's sell-off, while Japanese stocks fell for the fourth straight session. Some see Chinese stocks as oversold and therefore, buyers moved in to pick up battered stocks. A BNP Paribas (Hong Kong) trader says, "It's very much China-related in terms of sentiment in Hong Kong at the moment; if China goes crazy, Hong Kong will follow, in either direction." The Shanghai Composite gained 1.2% and the Hang Seng rose 0.5%. In Japan, a strengthening yen kept selling pressure on exporters such as Sony and Toyota, as the Nikkei 225 lost 1.35%. Also, data showing zero inflation in January created uncertainty about when the Bank of Japan might raise interest rates again. Benchmark indices in Seoul and Taiwan traded slightly lower. South Korean steelmaker POSCO traded higher on news Warren Buffett owns a 4% stake. Singapore and Australia were off by 0.45% and 0.40%, respectively. The Kuala Lumpur Composite lost 1.4% and India's BSE Index is down 2% in late trading.
Sources: Bloomberg [I, II], MarketWatch
Commentary: China's Total Market Cap? Don't Ask! • David Fry's Daily Market Outlook • Global ETFs: From Overbought To Oversold
Stocks/ETFs to watch: POSCO (PKX), Sony (SNE), Toyota (TM). ETFs: 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), Emerging Markets Index (EEM), Pacific ex-Japan (EPP); Closed-end India funds: (IFN) and (IIF); iPath MSCI India Index ETN (INP)
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