Subprime Shakeout Will Erode New Home Sales - Analyst
According to a research report released yesterday by Credit Suisse analyst Ivy Zelman, the rapid decline of the subprime mortgage industry will lead to yet another drop in new home sales in 2007. Zelman says the current trend of credit tightening for risky borrowers will make it harder for many buyers to get financing, leading to a 20% drop in sales to about 890,000. While entry-level buyers make up the bulk of subprime loan candidates, Zelman says credit tightening will affect "the entire housing food chain," because a lack of entry-level buyers makes it harder for second-tier buyers to upgrade their homes. Zelman, whose research comes largely from surveys with homebuilders and mortgage originators, expects rising mortgage delinquencies to further flood the market with houses as current owners lose their homes, adding as much as 20% to existing inventory. "We are more confident that expectations for a 2007 rebound in demand are premature," Zelman wrote. Homebuilder stocks fell 4.1% yesterday, their biggest decline since Aug. 2006.
Sources: Wall Street Journal, Bloomberg
Commentary: Toll : Housing Slump Almost Done; Horton : Not So Fast • January New Home Sales Plummet 16.6% • Why There's No Such Thing As a Housing Bubble
Stocks/ETFs to watch: Lennar Corp. (NYSE:LEN), D.R. Horton Inc. (NYSE:DHI), Centex Corp. (CTX), KB Home (NYSE:KBH), Hovnanian Enterprises Inc. (NYSE:HOV), Toll Brothers Inc. (NYSE:TOL). ETFs: streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB), iShares Dow Jones US Home Construction (NYSEARCA:ITB)
Job Hiring Turns Cautious - Manpower Survey
A survey to be released today by employment-services company Manpower Inc. reveals U.S. companies are pulling back in their hiring plans, following three years of relatively aggressive hiring. It found that 18% more employers plan to add to their payrolls than those who plan to reduce, vs. 19% in Q1, 20% in Q4 2006, and 20%+ every quarter over the last three years. The hiring picture is still relatively strong, CEO Jeffrey Joerres said, but "there's shifting underneath" as the housing slowdown begins to ripple through much of the economy. Employers in six of its 10 sectors expressed decreased confidence in the coming quarter. "A look at the last three quarters of survey data suggests that employers are shifting into neutral when it comes to hiring," Joerres said.
Sources: Press Release, Wall Street Journal
Commentary: NFP Day: Job Growth Decelerates as the Economy Slows • The Anxiety Economy: Is It All In Our Heads? • Are Economic Gains Just (Temporary) Hot Air?
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)
Texas Instruments Narrows Forecast Range; Stock Drops
Cellphone chip giant Texas Instruments narrowed the range of its Q1 sales and profit forecasts but did not raise the midpoint of its revenue range, contrary to the expectations of some analysts. After the close of trading yesterday, TI projected Q1 revenue of $3.07-3.22 billion and EPS of $0.29-0.33 against an earlier forecast of $3.01-3.28 billion in revenue and $0.28-0.34 EPS. Analysts had forecast $0.31 EPS on revenue of $3.15 billion. The company has posted disappointing results the past two quarters as handset demand has slackened and has begun to decelerate hiring and production.
Recent reports from competitors National Semiconductor, Analog Devices and Microchip Technology of order improvement had led some to assume TI was experiencing the same positive trend. Ron Slaymaker, TI's VP for investor relations, told analysts the "correction is winding down,'' and the company expects sales to rebound in Q2. TI's shares fell 1.8% to $32 in AH trading after the release of the revised forecast.
Sources: Washington Post, Bloomberg, Wall Street Journal, MarketWatch
Commentary: Texas Instruments: Upgrades Ahead of Monday’s Mid-Quarter Update • Texas Instruments: Analog Chip Demand Bottoming • Texas Instruments: Fears of Chip Share Loss. Conference call transcript: Q4 2006
Stocks/ETFs to watch: Texas Instruments Inc. (NASDAQ:TXN). Competitors: National Semiconductor Corp. (NYSE:NSM), Analog Devices Inc. (NASDAQ:ADI), Microchip Technology Inc. (NASDAQ:MCHP). ETFs: Semiconductor HOLDRs (NYSEARCA:SMH), iShares Goldman Sachs Semiconductor (IGW), PowerShares Dynamic Semiconductors (NYSEARCA:PSI)
TRANSPORT AND AEROSPACE
Activity Surrounding a Chrysler Offer 'Accelerating' - WSJ
The Wall Street Journal is reporting that activity surrounding a possible purchase of Chrysler is "accelerating," as parent company DaimlerChrysler looks to have a concrete offer on the table by the company's April 4 shareholder meeting in Berlin. But industry insiders such as Christoph Stürmer of Global Insight in Frankfurt believe DaimlerChrysler won't part with its North American unit: "I don't think they're going to go through with it, because the organization is just not ready to be split up." Most likely to buy Chrysler at the moment: private-equity giants Cerberus Capital Management and a separate group led by Blackstone Group and Centerbridge Partners. Another company that has shown considerable interest is Canadian auto-parts maker Magna International, possibly in partnership with a private-equity firm. The company already gets 25% of its business from Chrysler and the company believes it is in a strong position to negotiate better deals with the auto unions. Meanwhile, Standard & Poor's warned yesterday that it may be forced to reduce Magna's long-term credit rating should the company buy Chrysler, since a deal would put Magna under significant financial stress considering Chrysler's heavy debt load, and would likely could take time away from Magna's core business.
Sources: Wall Street Journal, Bloomberg, Reuters
Commentary: The Dating Game: Magna Likes Chrysler • DaimlerChrysler CEO Zetche: 'Chrysler Difficult To Break Up' • Large Private Equity Meets With Chrysler
Stocks/ETFs to watch: DaimlerChrysler (DCX), Magna International Inc. (NYSE:MGA). Competitors: Ford (NYSE:F), General Motors (NYSE:GM), Toyota (NYSE:TM), Honda (NYSE:HMC), Nissan (OTCPK:NSANY)
Ford Sells Aston Martin: Are Jaguar and Land Rover Next?
As expected, Ford yesterday announced the sale of luxury brand Aston Martin to a consortium of private equity investors for $848 million. Ford is retaining a $77 million stake in the company, placing the total value of the high end carmaker popularized by James Bond at $925 million. Ford shares fell $0.11, or 1.39%, to $7.82 in trading yesterday. The sale of one of its luxury units has caused some to speculate as to whether Ford would try to unload its other luxury units, Jaguar and Land Rover. While Ford's luxury group has not returned profits since 2003, the units are expected to become profitable again in 2007 as luxury car demand rises faster than the regular auto market. Unloading additional luxury car units would effectively put an end to the Premier Automotive Group strategy Ford launched in 1999 in which it set out to take advantage of rising luxury-car demand. Selling the units would give Ford a much needed cash infusion, while allowing the company to focus on its core operations which it hopes to make profitable by 2009.
Sources: AP, Wall Street Journal, Business Week
Commentary: Ford Sale of Aston Martin To Private Buyers Nearly Finalized • The Rise of Toyota and the Demise of the American Auto Industry • Light Vehicle Pricing To Become More Aggressive In 2007?
Stocks/ETFs to watch: Ford (F). Competitors: General Motors (GM), DaimlerChrysler (DCX), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY)
Boeing Starts the Week with $4.5B in New Orders
Yesterday Boeing announced three separate orders totaling $4.6 billion from: Continental Airlines (five 787-9 Dreamliners at $900m; twenty-five 787s ordered to-date), Kuwait's Aviation and Lease Finance (twelve 787s and six 737-800s at $2.26b) and Russian air cargo carrier Volga-Dnepr (five 747-8 freighters at $1.4b with an option to buy five more). In its latest press release, Boeing says it has recorded 475 Dreamliner orders among 37 airlines valued at more than $70b (at current list prices) since the 787 launch in Apr. 2004. Boeing currently forecasts its first 787 delivery next May and MarketWatch reports most production slots are sold-out until 2011-2012. Reuters says Boeing had 64 plane orders year-to-date as of the end of last month, compared to 90 for rival Airbus. Boeing's shares gained 1.9% to $91.20 yesterday and traded as high as $91.87 intra-day. It is currently trading near its 52-week and all-time high.
Sources: Boeing press releases [I, II, III], Associated Press, MarketWatch, Reuters
Commentary: And Then There Were None: UPS Cancels Last Remaining Airbus Order • UPS Orders 27 Cargo Planes from Boeing • Boeing's Earnings Fly, So Do Shares
Stocks/ETFs to watch: Boeing (NYSE:BA). Competitors: EADS (Paris: 005730), Lockheed Martin Corp. (NYSE:LMT), Northrop Grumman Corp. (NYSE:NOC), General Dynamics Corp. (NYSE:GD). ETFs: iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA), PowerShares Aerospace & Defense (NYSEARCA:PPA)
Big Banks Come Out Swinging Against Subprime Originators
Big banks and mortgage companies are putting the squeeze on subprime loan originators as defaults continue to mount. During 2005 and 2006, prior to the onset of the decline in the housing sector, banks enthusiastically purchased subprime loans -- with repurchase agreements attached. Those agreements oblige the originator to buy back a loan in the event that the borrower fails to pay. As more and more banks demand repurchases, more and more originators are filing for bankruptcy protection. Subprime lender New Century Financial said yesterday it has been hit by a wave of defaults and might owe its creditors a combined total of $8.4 billion for mortgage repurchases. If all its lenders demand repurchases, the company will have to enter Chapter 11. Creditor Morgan Stanley gave New Century a $265 million advance last week but also said it was discontinuing further financing. HSBC is making its case for repayment at bankruptcy hearings across the country. HSBC Finance Director Douglas Flint: "It's proving quite difficult in the sense that many of the parties...don't have the wherewithal" to buy back the loans.
Sources: Wall Street Journal
Commentary: Major Banks Try to Offload Subprime Portfolios • New Century Halts New Loans; Einhorn Resigns • New Century Leads Subprime Lender Selloff as its Shares Plummet 70% • HSBC, Mortgage REITs, New Century and Novastar
Stocks/ETFs to watch: HSBC Holdings plc [ADR] (HBC), Morgan Stanley (NYSE:MS), Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc. (NYSE:GS), Credit Suisse Group Inc. [ADR] (NYSE:CS), Bank of America Corp. (NYSE:BAC), New Century Financial Corp. (NEW), Countrywide Financial Corp. (CFC). ETFs: BLDRS Europe 100 ADR Index (NASDAQ:ADRU), WisdomTree High-Yielding Equity (NYSEARCA:DHS), KBW Capital Markets ETF (NYSEARCA:KCE)
Merck Loses Vioxx Retrial to the Tune of $47.5 Million
A New Jersey state court jury has reversed an earlier verdict and ordered Merck to pay a 61-year-old Idaho postman $20 million in compensatory damages and another $27.5 million in punitive damages for a heart attack the man claims was brought on by Merck's drug Vioxx. Merck plans to appeal on the grounds of insufficient evidence and application of incorrect legal standards. The company has now won nine and lost five Vioxx cases. The jury held that Merck was negligent in not providing sufficient warning of the risks of taking Vioxx. It labeled Merck's conduct "oppressive, outrageous or malicious" as well as "intentional and reckless," a phrase that will preclude Idaho caps on damages from applying to the case. If the awards are upheld, they will be the costliest to Merck so far. The company, which faces 27,000 Vioxx lawsuits, pulled the drug from the market in 2004 when it was shown to increase heart attack and stroke risk.
Sources: Wall Street Journal, Bloomberg, Mercury News, MarketWatch
Commentary: New Jersey Jury Offers Split Verdict on Pair of Vioxx-Related Trials • Merck Investors Consider Future Liabilities Despite Company's Legal Victories • Merck's Vioxx Shown to Pose Heart and Kidney Risks. Conference call transcript: Q4 2006
Stocks/ETFs to watch: Merck & Co. (NYSE:MRK). Competitors: Bristol-Myers Squibb Co. (NYSE:BMY), Pfizer Inc. (NYSE:PFE), Sanofi-Aventis (NYSE:SNY). ETFs: Pharmaceutical HOLDRs (NYSEARCA:PPH), iShares Dow Jones US Pharmaceuticals (NYSEARCA:IHE), Health Care Select Sector SPDR (NYSEARCA:XLV)
Johnson & Johnson Subpoenaed on Marketing of Three Drugs
Johnson & Johnson has been subpoenaed by the U.S. Attorneys of Philadelphia, Boston and San Francisco regarding its sales and marketing of three prescription drugs: bestselling antipsychotic Risperdal, epilepsy and migraine drug Topamax, and heart failure medication Natrecor. The subpoenas are inquiring into J&J's corporate supervision of the three subsidiaries that produced the products: Janssen, Ortho-McNeil and Scios, respectively. Last month, the company informed the Department of Justice and the SEC that overseas subsidiaries were "believed to have made improper payments in connection with the sale of medical devices in two small-market countries," a disclosure that precipitated the departure of Michael Dormer, J&J's worldwide chairman of medical devices. J&J says it plans to cooperate fully with the investigations, and analysts do not believe they will cause a significant negative impact on the stock. Drug and device companies are increasingly finding themselves subject to investigation: J&J competitor Eli Lilly announced recently that it has been subpoenaed by 26 state attorneys general regarding Zyprexa, its bestselling antipsychotic drug.
Sources: Press Release, Wall Street Journal, Newsday, TheStreet.com
Commentary: Johnson & Johnson Discloses Serious Payment Breaches in Foreign Unit • Where's the Money Flowing in Healthcare Stocks?
Stocks/ETFs to watch: Johnson & Johnson (NYSE:JNJ). Competitors: Merck & Inc. (MRK), Novartis AG (NYSE:NVS), Eli Lilly & Co. (NYSE:LLY). ETFs: iShares Dow Jones US Pharmaceuticals (IHE), DIAMONDS Trust, Series 1 (DIA), iShares S&P 500 Growth Index (NYSEARCA:IVW)
Boston Scientific Considers IPO for Endosurgery Unit
Heart stent and defibrillator manufacturer Boston Scientific announced late yesterday that it is exploring an IPO of approximately 20% of its endosurgery unit for over $1 billion. The company forecasts the unit will bring in over $1.4 billion in revenue this year. Boston Scientific shares are down approximately 40% since early last year, and the company has been laboring under a $7.2 billion debt burden since its acquisition of Guidant Corp. last April for $27 billion. Boston Scientific's drug-coated stent business has suffered from concerns the devices might cause fatal clotting, the company has come under Congressional and regulatory scrutiny for its aggressive marketing practices, and Guidant's pacemaker business has been plagued by deadly flaws. Boston Scientific has also been issued warning letters by the FDA about quality control. The company hopes spinning off the endosurgery unit will cause Wall Street to value it more fairly. “We’re just not getting credit for how good a business this is,” said CEO James R. Tobin.
Sources: Wall Street Journal, New York Times, Reuters, MarketWatch
Commentary: Biotechs Make Appearances in Best and Worst Lists of WSJ Review • Boston Scientific Addresses Quality Issues at JPMorgan's HealthCare Conference • JNJ, Boston Scientific Heart Stents Are Safe, Says FDA
Stocks/ETFs to watch: Boston Scientific Corp. (NYSE:BSX). Competitors: Johnson & Johnson (JNJ), Medtronic Inc. (NYSE:MDT), Conmed Corp. (NASDAQ:CNMD). ETFs: iShares Dow Jones US Medical Devices (NYSEARCA:IHI)
China's Commerce Minister Discusses Trade Surplus, Critical of U.S. Proposed Tariff
Bo Xilai, China's Commerce Minister, acknowledged his ministry is in charge of cutting the nation's large trade surplus, but he didn't provide any new details or plans. Bo however, was critical of a possible U.S. 27.5% tariff on goods imported from China. He was speaking yesterday, ahead of the customs agency's February trade data release, which showed a $23.76 billion surplus, the second highest ever. "The Chinese government never intends to pursue a large-scale trade surplus with others," Bo said. Regarding a potential U.S. tariff, he said it would be "disastrous" for both Chinese and U.S. companies, adding that "If it were imposed, it would be not only trade protectionism but also trade hegemony." The Associated Press said the minister argued 'a large share of the trade gap with the United States consists of goods made in China by American companies and exported to the U.S. market.'
Sources: Associated Press
Commentary: China's February Trade Surplus Blows Away Estimates, 2nd Highest Ever • Commodities, Gold and Silver to Benefit from China's New Investment Agency • Beijing Ready to Take on More Risk with Foreign Reserves
Stocks/ETFs to watch: iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), PowerShares Golden Dragon Halter USX China Portfolio (NYSEARCA:PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 Year Treasury (NYSEARCA:IEF), iShares Lehman 20+ Year Treas Bond (NYSEARCA:TLT), iShares Lehman TIPS Bond (NYSEARCA:TIP). Currency: PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV), Euro Currency Trust (NYSEARCA:FXE)
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