Contra Greenspan, Inverted Yield Curve Implies 50% Recession Risk
Alan Greenspan, who recently foretold a one-third chance the U.S. economy would slip into recession in 2007, is a rosy optimist compared to the bond market: the inverted yield curve, a predictive model devised while Greenspan ran the Fed, is putting the odds at 50:50. An inverted yield curve means short-term interest rates are higher than longer-term bond yields. The economy has gone into recession six of the past seven times this scenario has occurred since 1960. Short-term rates have topped long-term yields since last July, and the 50-basis-point gap between three-month bills and benchmark 10-year notes is almost the widest it has been since 2001. Economist Christopher Low of FTN Financial interprets that gap as implying a 50% chance of a recession this year. David Ader, head of government bond strategy at RBS Greenwich Capital, counters that surging demand for U.S. securities among overseas investors skews the reliability of the yield curve as a predictor: foreign investors bought $198.6 billion more Treasury notes and bonds than they sold in 2006, up from $18.5 billion in 2001.
Commentary: Greenspan: Recession Possible by End of 2007 • Have Inverted Yield Curves Become the Norm? • Overseas Markets Bounce Back, Greenspan's Not Finished
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
Clearwire Shares Skid 11% in First Two Days
Shares of WiMax provider Clearwire lost nearly 10% last Friday, their second day of trading after an oversubscribed IPO the previous Wednesday night. The company raised $600 million in the IPO, but closed below the $25 IPO price on Thursday and lost another $2.37, or 9.6%, to close at $22.25 on Friday. The exceptional range of WiMax over Wi-Fi contributed to Sprint Nextel's decision last year to invest in a WiMax-based mobile network, a move that gave Clearwire a significant credibility boost -- but rumors that Sprint's build-out is behind schedule are worrying investors. Clearwire, which is backed by Intel and Motorola, only generates about $100 million in annual revenue and has a scant 206,000 subscribers. The company posted net losses of $284.2 million in 2006 and $140 million in 2005, and expects to continue to lose money as it builds out its network. Some fear Clearwire will share the fate of several broadband businesses that enjoyed popular IPOs in the late 1990s and then folded a few years later -- one of which, Teledesic, was started by Clearwire founder Craig McCaw. In addition to racing the clock before the IPO money runs out, Clearwire will have to compete with Qualcomm, which is developing its own high-speed wireless technology. As of Friday's close, Clearwire is valued at $3.6 billion.
Sources: SeattlePI, MarketWatch
Commentary: Clearwire's Oversubscribed IPO Raises $600 Million • Passing On The Clearwire IPO • Are We In For a Mobile Broadband Pricing Drop?
Stocks/ETFs to watch: Clearwire Corp. (CLWR), Sprint Nextel Corp. (S), Intel Corp. (INTC), Motorola Inc. (MOT), Verizon Communications Inc. (VZ). Competitors: Qualcomm, Inc. (QCOM). ETFs: PowerShares Dynamic Telecom & Wireless ETF (PTE), HOLDRS Wireless (WMH)
Report: Warner Music Prepared to Sweeten Bid for EMI
The London Observer, citing Wall Street sources, reports that Warner Music CEO Edgar Bronfman is prepared to sweeten his offer for struggling London-based music company EMI, provided EMI confirms it will consider a revised offer. On March 2, EMI announced that it had turned down a non-binding offer from Warner Music to purchase the company for 260 pence per share on the grounds that it "wasn't in the best interest of its shareholders and undervalues the company." EMI also cited regulatory uncertainty that would accompany the proposal and operational risk the company would incur. EMI, which suffered poor holiday sales from major artists like Robbie Williams and is facing a weak U.S. market, has issued two profit warnings since the start of 2007. Warner Music is not commenting on the development.
Sources: London Observer, MarketWatch, ABCMoney
Commentary: Any EMI Offer Will Be in Cash -- Warner Music • EMI Shares Jump on 'Approach' from Warner Music • EMI Group The Next Company To Go Private?. Conference call transcript: Warner Music Group F1Q07 (Qtr End 12/31/06)
Stocks/ETFs to watch: Warner Music Group Corp. (WMG), EMI Group plc (OTC:EMIPY). Competitors: Sony (SNE). ETFs: PowerShares Dynamic Media Portfolio ETF (PBS), PowerShares Dynamic Leisure & Entertainment (PEJ)
New York Times Gives Shareholders' Complaints an Airing
Late last month, the New York Times invited Morgan Stanley money manager Hassan Elmasry and the T. Rowe Price Group, both large shareholders, to make presentations to the board of directors -- despite the opposition of the paper's controlling shareholders, the Ochs-Sulzberger family. Mr. Elmasry holds 7% of the Times's Class A shares, which have less voting power than the Ochs-Sulzbergers' Class B shares. He wants the paper to dispense with its dual-class share structure and divide the positions of chairman and publisher, both of which are held by Arthur Sulzberger Jr. Elmasry wrote a series of proposals that were intended for the company's proxy, due for release this Wednesday. The Times elected to omit them, prompting Elmasry to send the board a letter containing a "veiled threat" that he would withhold his votes at the annual meeting. Shortly thereafter, the Times issued the invitation to present to the board. On February 22, Elmasry informed the board of his concerns regarding the paper's poor shareholder return, declining circulation in New York, "poorly timed" buyback, "overpaying" for About.com, falling credit rating, and problematic share structure. T. Rowe Price focused more on the paper's capital allocation, particularly its sale of its TV stations for $575 million to Oak Hill Capital Partners. "One of the concerns an investor would have is don't spend it all in one place," said Brian C. Rogers, chairman of T. Rowe Price.
Sources: Wall Street Journal
Commentary: Ochs-Sulzberger Family Won't Yield Control Over Times Board • NY Times Sells Nine Local TV Stations for $575 Million • Morgan Stanley Buys More New York Times Stock. Conference call transcript: Q4 2006
Stocks/ETFs to watch: New York Times Co. (NYT). Competitors: Dow Jones & Co. Inc. (DJ), Gannett Co., Inc. (GCI), The Washington Post Co. (WPO), The Tribune Co (TRB), The McClatchy Company (MNI)
TRANSPORT AND AEROSPACE
Ford Sale of Aston Martin To Private Buyers Nearly Finalized
In a move it hopes will free up capital to allow it focus on its core business, Ford Motor Co. is expected to announce the sale of its Aston Martin luxury sports-car unit at 1 PM London time today. The sale is part of Ford's plan to recover from its worst fiscal loss in its history in 2006 by shedding all non-essential units while implementing across-the-board cost cutting measures. The deal is expected to fetch as much as $850 million dollars in a sale to a group of investors led by British auto-racing champion David Richards, as well as two Kuwaiti Islamic investment companies. Despite its $110,000 price tag, Aston Martin sales account for less than 1% of Ford's global sales volume. Investment Dar spokesman Naji Soweidan, representing one of the prospective Kuwaiti buyers, said Saturday that "nothing is finalized yet." Ford shares traded higher in Frankfort today.
Sources: Wall Street Journal, New York Times, Bloomberg
Commentary: Ford's New Strategy: Bring Back An Old Name • American Cars: No Rewards Under the Hood • Cramer's Take on F
Stocks/ETFs to watch: Ford (F). Competitors: General Motors (GM), Daimler Chrysler (DCX)
Chrysler To Recall 489,000 Vehicles After Reports of Electrical Fires
Already faced with the prospect of being sold by its parent DaimlerChrysler, North American division Chrysler announced Friday it must recall 489,000 vehicles. The recall extends to 3 different vehicle models, the Dodge Durango SUV (pictured), the Jeep Liberty SUV and the latest model (2008) of the Dodge Avenger. The company is recalling 328,000 Durango SUVs after 66 reports of fires linked to 2004-2006 models resulting from electrical overloads in the driver's side instrument panel below the dashboard. In addition, Chrysler is recalling approximately 150,000 Jeep Liberty SUVs and 11,000 Dodge Avengers to fix more minor problems related to ventilation and door alignment.
Sources: New York Times, AP, Detroit Free Press
Commentary: New Direction for DaimlerChrysler? • GM's Wagoner: 'U.S. Auto Industry Consolidation Unlikely' • Cramer's Take on DCX
Stocks/ETFs to watch: DaimlerChrysler (DCX). Competitors: General Motors (GM), Ford (F), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY)
ENERGY AND MATERIALS
Halliburton HQ and CEO Moving to Dubai
Oil equipment and services supplier Halliburton announced yesterday that it is moving its corporate headquarters and CEO David J. Lesar to the United Arab Emirates. The company will maintain its Houston HQ and legal status as an American corporation. The move to Dubai is consistent with Halliburton's new focus on the relatively young, state-owned oil fields of the Middle East. Halliburton is spinning off KBR, its military contracting unit, in order to concentrate on well-drilling and field maintenance. The company is concurrently being investigated by the Department of Justice and the SEC for "improper dealings" in Iraq, Kuwait and Nigeria. “The Eastern Hemisphere is a market that is more heavily weighted toward oil exploration and production opportunities," said Lesar at a conference in Bahrain yesterday. "Growing our business here will bring more balance to Halliburton’s overall portfolio.” The big winner in the Halliburton move could be Dubai, which hopes to establish itself as a regional commercial hub on the scale of Singapore and Hong Kong.
Sources: New York Times, Wall Street Journal (I, II)
Commentary: Halliburton: Is Its Discount Warranted? • Halliburton Net Falls 40% on Income Tax Charge; Demand for Services Remains Strong • Halliburton's KBR IPO: New Political Landscape, New Risks. Conference call transcript: Q4 2006
Stocks/ETFs to watch: Halliburton Company (HAL). Competitors: Schlumberger Limited (SLB), Technip (TKP). ETFs: Oil Services HOLDRs (OIH), iShares Dow Jones US Oil Equipment Index (IEZ), PowerShares Dynamic Oil & Gas Services (PXJ)
Two More Nikko Shareholders Claim Citi's Bid Unacceptable
Orbis Investment Management, a 6.9% Nikko Cordial shareholder and Mackenzie Financial Corp, at least a 5.7% shareholder, have come forward to reject Citigroup's ¥1,350/share ($11.40 at ¥118.4/$1) bid which values Nikko at $10.8 billion. Last week, Harris Associates (7.2% stake) and Southeastern Asset Management (6.6%), both said Nikko is worth more than ¥2,000 ($16.89) per share. Orbis also says Nikko is worth more than ¥2,000/share, while Mackenzie reportedly values it at ¥1,700 - ¥1,800/share. Nikko's four largest shareholders own a combined 26+ percent. Citi owns a 4.9% stake and Mizuho Financial Group, which has voiced an interest in a tie-up with Citi, owns a 4.8% stake. Nikko traded further above Citi's bid to ¥1,424 ($12.03) at the end of the morning session in Tokyo, but finished the day down 0.43% to ¥1,404 ($11.86) -- 4% higher than Citi's bid. Nikko faces a possible delisting from the Tokyo Stock Exchange stemming from an accounting scandal, with a decision expected by the TSE sometime this week.
Sources: Bloomberg, Forbes-XFN Newswire, Reuters
Commentary: Second Nikko Shareholder Says Citi's Bid Too Low, Shares Trade Higher • Mizuho's Role In Citi's Bid for Nikko • 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)
Beijing Ready to Take on More Risk with Foreign Reserves
Chinese news sources are citing a report in Shanghai Securities News, which said Beijing will establish a state foreign exchange investment company modeled after Singapore's $90 billion Temasek Holdings. China has an estimated $1.07 trillion in reserves -- the world's largest -- but according to a report by AP, a Standard Chartered Bank analyst said it earned less than 3% last year, compared to Temasek's annual average return of 18% since 1974. A state official reportedly said the new company, to be named Lianhui, will be launched within the year and preparations are now "well underway." Lianhui will operate Central Huijin Investment, the investment arm of the People's Central Bank, which has played a role in injecting capital in Chinese banks to help manage bad loans. According to the Shanghai Securities News report, Lianhui will issue $200b - $250b of Chinese RMB-denominated bonds and will buy a similar amount of forex reserves from the People's Bank. Its first investments will be targeted at China's energy firms. Separately, while at a meeting in Basel, Switzerland, the Vice Governor of the People's Bank said China will continue to buy U.S. treasuries.
Sources: Associated Press, Bloomberg, ShanghaiDaily.com, Xinhua News
Commentary: Treasury Secretary Paulson's Advice To China: Reform and Open Up • China's Trillion Dollar Question • What the Media Isn't Telling You About China's Market
Stocks/ETFs to watch: CNOOC (CEO), PetroChina (PTR), China Petroleum & Chemical (SNP) ETFs: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). Currency: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries:
- Constellation Energy (CEG) shares ($80) have doubled in the past three years. At 18x 2007e earnings, some analysts foresee 20% or more upside.
- Synopsys Inc. (SNPS) is second to Cadence Design Systems (CDNS) in automated chip design, and dominates the digital chip design market. With operating margins of 18% vs. Cadence's 30%, big institutional investors are correct on insisting Synopsis still has huge growth potential. It says it wants to boost margins to "the mid-to-high 20s" in the coming years. Shares could be worth 25% to 40% more than their current $25.15.
- Barron's has learned that Sam Zell's Tribune Company (TRB) bid is better than those of LA Billionaires Ron Burkle and Eli Broad and 20%-owner the Chandler family. Zell wants to take the company private for about $13 billion, acting as its chairman. He will invest $300 million of his own money. The bulk of the company would be owned by its employees through an ESOP, saving taxes, which gives the plan an edge. While Tribune could try and mimic Zell's proposal, Barron's says Zell would likely have the upper-hand over a board that has failed to gain shareholder confidence in recent years.
- Mobile communications software maker Openwave Systems Inc. (OPWV) is a favorite of big-hitters like Harbinger Capital (11%), Fidelity Management (14%) and Carl Icahn. But they can't stand its management, which has failed to develop potential relationships with telecom carriers and phone makers. Openwave sells 'well-received' digital music software, and it recently released 'game changing' software that lets wireless carriers track mobile internet searches. Rumors surfaced last week that its board met to discuss a sale. Michael Goldman of Abbot Capital Partners says Openwave's a "gem" assuming the move to oust management succeeds, and sees it worth $12-14 in a buyout (vs. a current $8.50).
- Bond analyst Carol Levinson doesn't like the low risk premium on corporate junk bonds, which is fueling the huge market for debt-financed LBOs, stock buybacks and spinoffs, while exposing investors to enhanced risk without paying them for the service. Companies under LBO threat make for risky debt investments: when Harrah's Entertainment Inc. (HET) LBO rumors surfaced in the fall, its bonds lost $0.10 on the dollar overnight. Bond safehavens include aerospace and defense companies like Boeing Co. (BA), whose highly-organized workforce is an LBO-deterrent. But some companies' debt can be had for cheap due to (what she sees as likely-unfounded) LBO threats: She likes the bonds of Motorola Inc. (MOT) (it's improved so much there's not much left for a buyer to do), First Data Corp. (FDC), ALLTEL Corp. (AT), Sara Lee Corp. (SLE), Deere & Company (DE), Safeway Inc. (SWY).
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