Overseas Markets Bounce Back, Greenspan's Not Finished
U.S. markets closed sharply lower Monday as mid-day gains succumbed to a late-day selloff. In the volatile trading session, the S&P 500 Index traded as high as 13 points above Friday's close, but ultimately finished down 4 points. Only six of the Dow Jones Industrial Average's 30 benchmark stocks ended the day in positive ground. Since last Tuesday, the S&P has lost over 5% as concerns that the U.S. economy is decelerating, investment financing is becoming more cautious, the housing market shows little sign of recovery, and the subprime mortgage sector continues its meltdown.
During a visit to Tokyo, Treasury Secretary Henry Paulson said today that despite the recent dip, the global economy is as strong as he's ever seen. He said imminent Chinese reforms will help lessen global volatility, but that investors should remember even strong markets never move in a straight line. Former Fed Chief Alan Greenspan, however, said this morning in a Bloomberg interview that there's a 'one-third probability' of a U.S. recession this year, while also saying he was surprised by the markets' reaction to the comments he made on Feb. 26 on the possibility of a recession. While the yen again climbed yesterday, gaining 2% on the pound and over 1% on the dollar, the dollar was otherwise strong with the U.S. Dollar Index gaining 5%, prompting Wells Capital's Jim Paulsen to say, "If the idea is that the U.S. is slowing, why is the U.S. currency going up?"
In overseas trading this morning, the markets staged a mild reversal. European stock markets closed up 0.5-1%, breaking a five-session losing streak. The yen had its biggest decline in 17 months, falling 1.1% against the pound, 1% vs. the euro, and 0.7% vs. the dollar. In Asia, the Nikkei 225 was up 1.2% while the Hang Seng was up 2%. S&P 500 futures are up 14 points from yesterday's close of 1372.25 at 5:50 EST.
Sources: MarketWatch I II, Wall Street Journal I, II, Bloomberg
Commentary: The Indian Market Broke Before the Chinese • About Recent Financial Turbulence • Behind the Global Stock Market Shake-out
Stocks/ETFs to watch: CurrencyShares Japanese Yen Trust (FXY), S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
New Century Leads Subprime Lender Selloff as its Shares Plummet 70%
Shares of subprime lender New Century Financial Corp. fell nearly 70% yesterday, their worst drop ever, leading several suffered their biggest drop ever, leading a widespread decline in the share prices of subprime mortgage companies. New Century's disclosure that it was the subject of a criminal probe into its accounting practices as well as into the trading of its securities sent shares down $10.09 to just $4.56 (the shares have traded for as much as $51.97 in the last 52 weeks). Other subprime lenders to tumble include Fremont General Corp. (-32%), Accredited Home Lenders Holding Co. (-26%) and NovaStar Financial Inc. (-41%). Additionally, less risky lenders like Countrywide Financial Corp. took a hit, falling 4.9% after Lehman Brothers analyst Bruce Harting cut his outlook on shares to 'equal weight' from 'overweight.' J.P. Morgan analyst Andrew Wessel believes New Century will likely declare bankruptcy soon saying the company's "only hope of avoiding insolvency is to find a larger partner to provide capital in return for majority ownership." Reuters reports bonds backed by New Century loans, which use credit-default swaps as a gauge, escaped yesterday's selloff relatively unscathed. Meanwhile, the Wall Street Journal is reporting that the sharp drop has led several investment firms to prepare to increase their bets on a recovery in subprime lenders' share prices.
Sources: Bloomberg, Business Week, Reuters, Wall Street Journal
Commentary: Stifel: Subprime Mortage Sector in 'Downward Spiral' • Asset-Backed Insecurities: Containing the Subprime Mortgage Collapse • Crisis in the Subprime Market: The First Step is Admitting You Have a Problem
Stocks/ETFs to watch: New Century Financial (NEW), Countrywide Financial Corp. (CFC), Accredited Home Lenders Holding Co. (LEND), Novastar Financial Inc. (NFI), Fremont General Corp. (FMT). Competitors: Fannie Mae (FNM), Freddie Mac (FRE), HSBC Holdings (HBC), Wells-Fargo (WFC). ETFs: Vanguard REIT ETF (VNQ)
Research in Motion to Restate Earnings; Balsillie Steps Down as Chairman
Blackberry manufacturer Research in Motion will restate $250 million in earnings and co-CEO Jim Balsillie will step down as chairman after a seven-month investigation into a stock-options backdating scandal. RIM's financial statements for Q2 and Q3 will also be delayed. Balsillie and Mike Lazaridis, the other CEO, will pay C$5 million each to cover the costs of the probe. The restatement significantly exceeds RIM's January forecast that about $45 million in earnings would have to be restated. The investigating committee learned that all options granted before February 2002 were accounted for incorrectly, as were two-thirds of the grants between 2002 and August 2006. RIM said in a statement that "[h]indsight was used to select grant dates with favorable pricing," but also claims there is no evidence of intentional misconduct. The company also announced yesterday that it added a record one million subscribers in its most recent quarter. RIM shares shed 1% on the restatement news to reach $134.52.
Sources: MarketWatch, Bloomberg, MSNBC.com, Wall Street Journal (I, II)
Commentary: Selloff Creates Buy Opportunity in Research In Motion • Apple and BlackBerry Both Beloved of Goldman • Research in Motion: New 8800 Model on the Move. Conference call transcript: F3Q07 (Qtr End 12/2/06)
Stocks/ETFs to watch: Research In Motion Limited (RIMM). Competitors: Palm, Inc. (PALM), Nokia Corp. (NOK), Apple Inc. (AAPL). ETFs: Wireless HOLDRs (WMH), iShares Goldman Sachs Networking (IGN)
Motorola: Say No To Icahn
Motorola has informed its shareholders in a notice for the firm's annual meeting (to be held May 7) that "Mr. Icahn's nomination has not been endorsed by your board of directors. We urge stockholders not to sign any proxy card that you may receive from the Icahn entities." Carl Icahn and his entities currently own a 1.4% stake in Motorola and last week they announced they intend to buy more shares. Icahn and Icahn Partners LP are each filing to buy $120 million - $500m and two affiliates are said to have filed to acquire between $500m to less than 25% of Motorola's shares outstanding. Motorola is reportedly in talks with Icahn, but it is unclear whether his entities will nominate him or seek investor support from proxy votes, according to Bloomberg. Motorola's shares have struggled over the past year, currently at $18.50, trading near their 52-week low and 30% off their 52-week high of $26.30.
Sources: Bloomberg, The Wall Street Journal
Commentary: Icahn Wants More Motorola • Icahn Files to Buy Another $2B Motorola Shares • Motorola: Skeptical On Ichan Purchase, Awaiting Catalyst
Stocks/ETFs to watch: Motorola (MOT). Competitors: Nokia (NOK), Ericsson (ERIC). ETFs: HOLDRS Broadband (BDH), HOLDRS Wireless (WMH), iShares Goldman Sachs Semiconductor (IGW), iShares Goldman Sachs Networking (IGN)
AMD Warns Q1 Revenue Target Miss Likely, Stock Sinks Lower
Advanced Micro Devices warned yesterday it will likely come up short of its Q1 (ending Mar. 31) revenue target of $1.6 - $1.7 billion. Analysts were expecting $1.66b, according to a Thomson poll. AMD's shares opened 4% lower yesterday, touching their lowest levels since Oct. 2004, but rallied back some to finish down 1.6% to $13.95. The Wall Street Journal notes at yesterday's Morgan Stanley investor conference AMD CEO Hector Ruiz said he is still "bullish for the company for the year" and is "not in any way disappointed that we have to make some adjustments." Ruiz cited problems related to a change in AMD's distribution strategy in order to meet demand from new large customers. One analyst comments problems at Dell likely hurt AMD, but he doesn't agree with Ruiz that AMD's issues are short-term. Separately, Prudential Financial reiterated its "underweight" rating on AMD, while lowering its target share price to $12 from $16.
Sources: Bloomberg, newratings.com, The Wall Street Journal, ZDNet
Commentary: Intel: February Processor Sales Better Than Expected, at AMD's Expense • AMD: Disappointing Demand Means Lower Stock Price • Advanced Micro Devices: Will Somebody Please Stage an Intervention?
Stocks/ETFs to watch: Advanced Micro Devices (AMD). Competitors: Intel (INTC). ETFs: Semiconductor HOLDRs (SMH), iShares Goldman Sachs Semiconductor (IGW), SPDR Semiconductor (XSD)
ADC Beats on Earnings and Sales, Guides Higher
After-hours Monday, telecom equipment maker ADC announced Q1 2007 net earnings of $3.6 million on revenue of $297 million, up from a $1.8 million loss in Q1 2006 on revenue of $272 million, and beating analyst estimates of $263 million. EPS were $0.03 vs. a $0.02/share loss last year. Earnings from continuing operations were $0.08/share, beating analyst estimates of $0.06. ADC forecast full-year 2007 EPS of $0.86 on revenue of $1.26-1.29 billion; analysts were calling for per-share earnings of $0.85. CEO Bob Switz said, "We are pleased with this performance in the face of several customer timing variables, including merger integration in the U.S. and regulatory reviews in other countries." In after-hours trading yesterday, shares were up 5.5% ($0.84) to $16.11.
Sources: MarketWatch, TheStreet.com, Conference call transcript: F1Q07,
Commentary: Earnings Preview: Four Companies That Could Surprise This Week • ADC Telecom: JP Morgan Sees Stronger Outlook Than Expected - http://telecom.seekingalpha.com/article/25379 • ADC Telecommunications Seeks China Entry via Acquisition
Stocks/ETFs to watch: ADC Telecommunications Inc. (ADCT). Competitors: ADTRAN Inc. (ADTN), Andrew Corp. (ANDW), Tyco International Ltd. (TYC). ETFs: iShares Dow Jones U.S. Telecom Sector Index ETF (IYZ), Telecom HOLDRS ETF (TTH), Vanguard Telecom Services ETF (VOX)
McAfee Announces EMC Corp.'s David DeWalt Will Be Its New CEO
McAfee has named David DeWalt, EMC Corp.'s current head of customer relations, as its new CEO, effective April 2, replacing George Samenuk who was forced to step down in October, a result of the stock options probe that has also forced McAfee to restate 10 years worth of results. DeWalt said of his new job, "I have to restore the image of McAfee... make sure we're beyond squeaky clean as a company." DeWalt, will remain at EMC Corp. through April 1. McAfee shares closed lower by $0.43, or 1.43%, to $29.55 yesterday before gaining $0.45, or 1.52% to $30.00 in after hours action on the news.
Sources: Press Release, Wall Street Journal, Bloomberg, Reuters
Commentary: McAfee Suffers 9% Profit Drop; Annual Report Will Be Late • McAfee: Takeover Target With Options Issue Behind It? • Options Scandal Investigations Heat Up With McAfee, CNET Firings
Stocks/ETFs to watch: McAfee (MFE), EMC Corporation. Competitors: Symantec (SYMC), Microsoft (MSFT). ETFs: Internet HOLDRS (HHH)
Microsoft to Attack Google Over Copyright Cavalierism
Microsoft will launch a venomous attack on rival Google today for what it calls Google's 'cavalier' approach to copyright protection. In a speech prepared to be given before the Association of American Publishers [AAP], Microsoft attorney Thomas Rubin argues that Google's success has been at the expense of real content providers such as book publishers, video makers, and software authors. "Companies that create no content of their own, and make money solely on the backs of other people’s content, are raking in billions through advertising revenue... Google takes the position that everything may be freely copied unless the copyright owner notifies Google and tells it to stop," says Rubin. He calls Google's interpretation of 'fair use' overly broad. His arguments largely echo accusations at the heart of a 16-month-old lawsuit filed against Google by five book publishers and organized by the AAP (the lawsuit is currently in the discovery process with no trial date). In response, Google VP David Drummond said Google complies with international copyright laws, and brings added exposure and revenue to authors, publishers and producers of content.
Sources: CNET News, New York Times
Commentary: Google Comes Under Fire For Alleged Support Of Pirated Content • Mark Cuban: YouTube's Copyright Infringement is Arrogant • Publishers sue Google over book search project [CNET news]
Stocks/ETFs to watch: Google Inc. (GOOG), Microsoft Corp. (MSFT)
A&P to Buy Pathmark for $679 Million
The Great Atlantic & Pacific Tea Co., owner of the A&P and Food Emporium supermarket chains, will purchase Pathmark Stores Inc. for $689.7 million ($1.3 billion including debt). Pathmark investors will receive $9 in cash and 0.13 share of Great Atlantic stock for each Pathmark share they hold. This amounts to a 9.6% premium over Pathmark's share price on February 26, the day before the two companies made it public that they were considering a combination. The merger is intended to cut $150 million in annual costs and improve Great Atlantic's competitive position in the Northeast, particularly against Wal-Mart and Costco, which are expanding their grocery businesses in the region, and high-end gourmet food shops like Whole Foods. Pathmark and Great Atlantic are both expected to post losses this year -- the third in a row for Pathmark and the sixth in seven years for Great Atlantic -- but they forecast a profit for the year after the completion of the purchase. The deal is expected to close in the second half of Great Atlantic's fiscal 2007. Shares of Pathmark rose 11% to $12.46 on the news, their highest level since August 2002. Great Atlantic shares gained 5.3% to reach $32.50.
Sources: Bloomberg, Business Week, Reuters
Commentary: It's Merger Monday! • A&P in Talks to Buy Pathmark for $652.5 Million • 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), Wal-Mart Stores Inc. (WMT), Costco Wholesale Corp. (COST), Whole Foods Market, Inc. (WFMI). ETFs: Consumer Staples Select Sector SPDR (XLP), Vanguard Consumer Staples ETF (VDC), PowerShares Dynamic Consumer Staples (PSL)
HSBC Posts Record Annual Profit Despite Subprime Woes
HSBC Holdings, Europe's biggest bank, took a $10.6 billion hit on its U.S. mortgage lending unit, but still managed to post a record 2006 pretax profit of $22.1 billion on gains in Asia, Mexico and the emerging markets. This result was up from $21 billion in 2005, but missed Street expectations of $22.4 billion. However, the 5.7% drop in H2 profit to $7.06 billion ($0.62/share) from $7.49 billion ($0.67) a year earlier still beat analyst forecasts of $6.95 billion. On February 7, HSBC issued a warning about its U.S. subprime mortgage portfolio and announced that it had fired its head of North American operations. The bank states there has been no further deterioration since then. HSBC has been a big buyer for several years of both subprime loans, which are designed for people with problematic credit histories, and "piggyback" loans, which are designed for people who cannot afford a 20% down payment on a house. The U.S. housing downturn has caused a dramatic increase in defaults on these loans. HSBC's North American bad debt soared to $6.8 billion in 2006 from $4.9 billion, accounting for 64% of the group's total -- though the region only represents 21% of profits. HSBC is restructuring its U.S. personal risk business to avoid this kind of risk exposure in the future.
Sources: Bloomberg, MarketWatch, Reuters
Commentary: Delinquencies in Sub-prime Mortgages Hit HSBC, Shares Trade Lower • HSBC, Mortgage REITs, New Century and Novastar • HSBC Struggles Against Global I-banks
Stocks/ETFs to watch: HSBC Holdings plc [ADR] (HBC). Competitors: Barclays plc (BCS), Citigroup Inc. (C), Lloyds TSB Group plc (LYG). ETFs: BLDRS Europe 100 ADR Index (ADRU), iShares NYSE Composite Index (NYC), SPDR DJ Global Titans (DGT)
Citigroup Bids $10.8 Billion for Nikko Cordial
Citigroup announced a $10.8 billion (¥1,350/share) bid for troubled Japanese brokerage Nikko Cordial, of which it already owns a 4.9% stake. Citi is reportedly aiming for at least a 50% stake, as rival Mizuho, a 4.8% shareholder of Nikko, has already retreated from trying to make an acquisition. Shares of Nikko surged 14% to ¥1,340 today ahead of Citigroup's announcement. Bloomberg reports this will be the second largest foreign acquisition of a Japanese company and the biggest by Citigroup since Charles Prince became CEO in 2003. Citi also owns a 49% stake of an investment banking joint venture with Nikko. Nikko faces a possible delisting by the Tokyo Stock Exchange, which is set to make its decision on March 9. Harris Associates recently became Nikko's biggest shareholder, increasing its ownership to 7.2% from 6.2%. The chief investment officer at Harris comments, "The business is worth over 2,000 yen, for sure, in the long term."
Sources: Bloomberg, Reuters
Commentary: Nikko Cordial's Roller Coaster Ride Continues • Citigroup Has Decisions to Make Amidst Nikko Cordial Uncertainty • Citi Got a Good Deal on the Online Bank 'Egg'
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)
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