Subprime Fallout Serious, But Unlikely to Derail Economy
In a Wall Street Journal survey of 60 economists, 32 said it is either 'very' or 'somewhat' likely that subprime weakness will spill over into the broader mortgage market. However, only 22% said that subprime difficulties have made them downgrade their overall market forecasts, and a significant 80% said they felt "the worst of the housing bust is behind us." They put the likelihood of recession at 25% (less than Greenspan's recently stated 33%). Half of the economists saw the economy improving in the next 12 months, 27% expect it to get worse, and 22% said it would stay the same. In related news, Adam Topalian, Lehman Brothers fixed income strategist, said at a dinner last night that the greatest present risk for investors is that subprime lending troubles trigger a spiral of falling home prices and mortgage defaults. While there is not enough evidence to indicate that such a scenario is presently in place, he said, the risk of a broad market impact is "very real." He said that if lenders, in fear of more defaults, pull back sharply, it "could lead to a vicious spiral of continued housing price depreciation and defaults," while saying he believed it was unlikely that subprime defaults would in any way derail the U.S. economy.
Sources: Wall Street Journal, Reuters
Commentary: IndyMac: 'Don't Label Us a Sub-Prime Lender' • Subprime Horror Stories: Mortgage Market Carnage, Foreclosure Hype and More • Housing Bubble and Real Estate Market Tracker
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)
Greenspan: Subprime Meltdown Will Spread if Housing Prices Drop Further
Former Fed chair Alan Greenspan said at a conference yesterday that if housing prices continue to fall, the collapse of the subprime mortgage market could spill over into other segments of the economy. Greenspan has said several times over the past few weeks that he believes a recession is possible, giving it a one-third probability by the end of 2007. He called it "quite remarkable" that the country has not yet seen an impact on personal consumption from the housing slowdown, given that a "fairly significant" proportion of consumer spending from 2001 through 2005 was attributable to the boom in housing prices. Yesterday, the Mortgage Bankers Association reported that in Q4, U.S. subprime borrowers were delinquent on their mortgage payments at the highest rate in four years and foreclosures on all varieties of home loans hit an all-time high. Many subprime mortgage originators, squeezed by demands that they buy back bad loans, are now seeking buyers or bankruptcy protection. Current Fed chair Ben Bernanke and Treasury Secretary Henry Paulson have said recently that they do not expect the subprime mortgage meltdown to seep into the rest of the economy.
Sources: Mercury News, MarketWatch, Bloomberg
Commentary: Kass: Four to Blame for the Subprime Mess [TheStreet.com] • Mortgage Crisis: Fed Was Asleep At the Wheel • Will the Economy be Affected by a Housing Recession? • U.S. Foreclosure Rate Hits Record High
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
Pitney Bowes Offers 53% Premium for MapInfo Corp.
Shares of location intelligence company MapInfo Corp. rose 51% yesterday to $20 on news the company would be acquired by Pitney Bowes Inc. in an all cash offer for $408 million, or $20.25 per share. The buyout price represents a 53.3% premium over Wednesday's closing price of $13.21. MapInfo produces location-specific software that provides customers the ability to decide where to place a retail location or a wireless tower in order to maximize business. The deal will likely close in the second quarter. According to the press release, "Pitney Bowes expects the acquisition to be neutral to earnings per diluted share in 2007. However, after aligning MapInfo's accounting with the policies used by Pitney Bowes for its software businesses, the acquisition is expected to reduce reported earnings per diluted share by approximately $.04 in 2007."
Sources: Press Release, Forbes, Reuters, Information Week, Wall Street Journal
Commentary: Don't Be Fooled By Pitney Bowes' Recent 'Blowout' Quarter • Cramer's Take on PBI
Stocks/ETFs to watch: MapInfo Corporation (MAPS), Pitney Bowes (NYSE:PBI)
Microsoft Gets Boost in Alcatel Patent Battle
Score another one for Microsoft in its court battle with Alcatel-Lucent: a judge yesterday dismissed several of Alcatel-Lucent's claims that Microsoft and co-defendants Gateway and Dell infringed its user interface technology patent. The decision strikes down Alcatel-Lucent's claim that Gateway and Dell computers, using Microsoft programs Outlook and Quicken, made inappropriate use of its technology for "filling out computerized forms using on-screen tools." The patent is being addressed in the third of a series of six trials being held in San Diego concerning Alcatel-Lucent's intellectual property. The first trial ended last month in a $1.5 billion judgment against Microsoft regarding its infringement of an MP3 digital music technology patent. Microsoft won the second case. In separate news, Microsoft CEO Steve Ballmer took a swipe at rival Google yesterday. "They are trying to double in a year," he told a gathering of students at the Stanford Graduate School of Business. "That's insane in my opinion." Decrying Google's management structure of "a random collection of people doing their own thing," Ballmer claimed Google is at the "fun stage" of milking a good idea for all it's worth. Whether Google's strengths extend far beyond search remains to be seen, suggested Ballmer.
Sources: MarketWatch (I, II)
Commentary: Microsoft Takes Next Round in Battle with Alcatel-Lucent • Alcatel-Lucent Wins $1.52 Billion Patent Judgment Against Microsoft • Google To Microsoft: Let's Rumble
Stocks/ETFs to watch: Microsoft Corp. (NASDAQ:MSFT), Alcatel-Lucent [ADR] (ALU), Gateway Inc. (GTW), Dell Inc. (NASDAQ:DELL), Google Inc. (NASDAQ:GOOG). ETFs: SPDR DJ Wilshire Large Cap (ELR), Broadband HOLDRs (NYSE:BDH)
Conference call transcripts: Microsoft F2Q07 (Qtr End 12/31/06), Alcatel-Lucent Q4 2006, Google Q4 2006
WebEx: Shares Jump 22% on News of $3.2B Acquisition by Cisco
WebEx, a leader in on-demand collaboration applications (Internet teleconferencing), has agreed to a $2.9 billion (net of existing cash) cash acquisition by Cisco Systems. Its shares gained $10.18 (or 22%) to $56.38 yesterday, reaching an all-time high. In a press release, Cisco said it expects the deal to close in its fiscal Q4 ending in July, subject to domestic and international antitrust approval. The acquisition is expected to be neutral to its non-GAAP FY'08 earnings. WebEx's CEO Subrah Iyar commented that "Cisco and WebEx share a vision of web collaboration as a key to accelerating business processes and critical to durable competitive advantage." Dow Jones Newswires reports Iyar said WebEx controls a 65% share of the online collaborative market. Analysts reacted positively to the deal, although Cisco's shares lost 0.15% to $25.81 on the day. Cisco faces heightened competition in business communications from Microsoft, which recently announced beta versions (available later this month) of its Office Communications software.
Sources: Press release, CNET, Bloomberg, Dow Jones Newswires
Commentary: Cisco On the Acquisition Hunt: What Does it Hope to Accomplish? • Cisco to Acquire WebEx: Why I Love This Deal • Cisco's WebEx Acquisition Signals New Model Aimed At Microsoft
Stocks/ETFs to watch: Cisco Systems (NASDAQ:CSCO), WebEx (WEBX). Competitors: Citrix Systems (NASDAQ:CTXS), Microsoft (MSFT). ETFs: Internet Architecture HOLDRs (NYSE:IAH), iShares Goldman Sachs Networking (NYSEARCA:IGN), Technology Select Sector SPDR (NYSEARCA:XLK)
Tribune Reviewing "Self-Help" Plan
The Tribune Company is reevaluating its so-called "self-help" plan even as its interest in real estate magnate Sam Zell's takeover offer evaporates, the Wall Street Journal reported today. The in-house restructuring would entail taking on debt to pay a dividend, spinning off the TV-station group and selling the Chicago Cubs baseball team. But ongoing declines in print-ad revenues mean the company will likely borrow less and pay a smaller dividend than originally intended. Zell intended to finance his proposed $13 billion buyout in part by giving majority control to an employee stock-ownership plan [ESOP], but such a plan would require Tribune employees to attach their retirement benefits to company stock -- a risky proposition in the current newspaper environment. An ESOP would give the company some tax breaks and enable it to buy out its largest shareholder, the Chandler family; but would also involve the assumption of a worrisome amount of debt. The company, which owns The Los Angeles Times, Chicago Tribune, Baltimore Sun and Newsday, has set a March 31 restructuring deadline. Tribune shares closed down 1.66% yesterday at $29.62.
Sources: Wall Street Journal, Reuters, Washington Post, Chicago Tribune, New York Times
Commentary: A Sam Zell Takeover May Be Tribune's Best Bet - Barron's • Tribune Mulls Offer from Sam Zell • WSJ: Tribune Co. Now Leaning Away From Selling Itself
Stocks/ETFs to watch: The Tribune Company (TRB). Competitors: Dow Jones & Co. Inc. (DJ), Gannett Co., Inc. (NYSE:GCI), New York Times Co. (NYSE:NYT)
Conference call transcripts: Q4 2006
ENERGY AND MATERIALS
OPEC to Maintain Output Quotas
Despite the importuning of the International Energy Agency [IEA] to increase production to meet demand, OPEC decided yesterday to maintain constraints on output designed to protect a $60 floor on the price of crude. OPEC agreed to two production cuts, one in October and one in February, with the object of reducing supply by 1.7 million barrels a day. Though not all members are fully complying, the reductions have maintained the oil price near $60. The cartel's refusal to relax the cuts and raise production means that oil prices could shoot up as demand for gasoline rises in the spring. (In April and May, refineries conclude maintenance programs and resume production of gasoline out of crude oil.) Yesterday's meeting was the first attended by new OPEC member Angola, which, like Iraq, is not subject to the production quotas. Angola's oil production has increased four-fold in the past twenty years on a series of large discoveries and subsequent massive developments by Western energy companies, including Chevron and ExxonMobil. After the meeting, crude oil for April delivery fell $0.61 to close at $57.55 a barrel on the New York Merc.
Sources: International Herald Tribune, MarketWatch, Bloomberg, USAToday
Commentary: Energy Watchdog: More OPEC Crude Needed • Why the Rapid Decline in Saudi Oil Production is Involuntary • Lower Inventories Push Crude, Motor Gas Futures Higher
Stocks/ETFs to watch: Energy companies that are investing in Angola: Chevron Corp. (NYSE:CVX), Total S.A. (NYSE:TOT), BP plc (NYSE:BP), Exxon Mobil Corp. (NYSE:XOM). ETFs: United States Oil Fund ETF (NYSEARCA:USO), Barclays Bank Zero Cpn ETN (NYSEARCA:OIL), PowerShares DB Oil Fund (NYSEARCA:DBO)
OMI Corp. Might Be for Sale - WSJ
The Wall Street Journal reported today that oil tanker operator OMI Corp. is evaluating strategic options that might include the sale of the company. The company has a market cap of approximately $1.4 billion and operates a 40-tanker fleet that transports oil and petroleum products. The fleet is notable for being relatively young; OMI's oldest tanker was built in 1999. The Connecticut-based company reported net income of $306 million on revenue of $719 million in 2006, a quadrupling of 2001 levels. Possible bidders might include larger rivals Teekay Shipping and Frontline Ltd. or private equity firms. OMI shares gained 3.6% to close at $22.93 yesterday. Shares of the company's competitors gained as well.
Sources: Wall Street Journal, Reuters
Commentary: Energy Stock Trader: Wednesday Outlook • Everything You Wanted To Know About Shipping And Were Afraid To Ask
Stocks/ETFs to watch: OMI Corp. (OMM). Competitors: General Maritime Corp. (NYSE:GMR), Frontline Ltd. [USA] (NYSE:FRO), Teekay Shipping Corp. (NYSE:TK). ETFs: Oil Service HOLDRs ETF (NYSEARCA:OIH), PowerShares Dynamic Oil & Gas (NYSEARCA:PXJ), SPDR Oil & Gas Equipment & Services (NYSEARCA:XES)
Accredited Home Lenders to Sell $2.7 Billion of Loans
Subprime mortgage lender Accredited Home Lenders, bowing to the pressure of margin calls, has reached a deal to sell $2.7 billion of loans to an unidentified buyer at a sizeable discount. The sale, which should be completed over the next two days, is expected to result in a pre-tax charge of about $150 million. The loans to be sold are funded out of the company's warehouse and repurchase credit facilities, asset-backed commercial paper facility, and equity. Accredited will hold onto about $120 million of loans, most of which were originated on or after March 7, 2007. The company's shares have more than doubled over the past two trading sessions on rumor that Accredited was about to get either a capital injection or a takeover offer. The sale of the loans will give the company enough liquidity to continue pursuing such strategic options. Mortgage company shares gained yesterday after Bear Stearns -- the largest underwriter of mortgage-backed bonds -- said it is in the market for bad debt, including delinquent subprime home loans; and the Blackstone Group agreed to buy PHH Corp.'s home-loan business.
Sources: Reuters, Bloomberg, Digital50.com
Commentary: Subprime Lending Bust: Worst Crisis Since Enron? • Stifel: Subprime Mortgage Sector in 'Downward Spiral' • New Century Leads Subprime Lender Selloff as its Shares Plummet 70%
Stocks/ETFs to watch: Accredited Home Lenders Holding Co. (LEND), New Century Financial (OTCPK:NEWC), Countrywide Financial Corp. (CFC), Novastar Financial Inc. (NFI), Fremont General Corp. (FMT). ETFs: iShares Cohen & Steers Realty Maj. (NYSEARCA:ICF), iShares Dow Jones US Real Estate (NYSEARCA:IYR), Vanguard REIT ETF (NYSEARCA:VNQ)
Nikkei Shimbun: Mizuho Will Sell Stake in Nikko to Citigroup
Nikko Cordial's ordinary shares traded in a narrow range today (¥1,684 to ¥1,691), following a report in the morning edition of the Nikkei Shimbun saying Mizuho has decided to sell its entire 4.8% stake in Nikko to Citigroup. Nikko closed up 0.1% to ¥1,687, but still under Citigroup's ¥1,700/share bid. Mizuho's stake has been viewed as a key determinant in whether Citi's bid will succeed. The Nikkei didn't cite any sources, but said Mizuho is cooperating to help speed up Citi's tender offer, as it aims to strengthen its operational relationship with Citi. There has yet to be any word from Nikko's four largest shareholders (since Citi raised its bid to ¥1,700, from ¥1,350), three of which previously said Nikko is worth more than ¥2,000/share. The Nikkei report suggested Mizuho and also Dai-Ichi Life's (1.4% stake) expected acceptance could influence the four overseas funds, which own a combined 25+ percent stake. Mizuho is seen earning around ¥30 billion from a sale price of ¥80 billion, according to the Nikkei, but its shares lost 2.3% today.
Sources: Nikkei Shimbun, Reuters, Forbes XFN-Asia newswire
Commentary: Nikko Cordial: Mizuho Financial Plans to Sell Entire Stake to Citigroup • Citi Says Bid for Nikko is Fair; Citi Also Eying Growth in China • Citi Boosts Bid for Nikko Cordial by 26%
Stocks/ETFs to watch: Citigroup (NYSE:C), Nikko Cordial (OTC:NIKOY), Mizuho Financial Group (NYSE:MFG).
Competitors: Mitsubishi UFJ Financial Group (NYSE:MTU), ABN Amro Holding N.V. (ABN), Nomura Holdings (NYSE:NMR). ETFs: iShares S&P Global Financial Index Fund (NYSEARCA:IXG), iShares Dow Jones US Financial Services (NYSEARCA:IYG), Financial Select Sector SPDR (NYSEARCA:XLF)
CVS Shareholders Approve Caremark Buyout; Calpers Opposes Deal
CVS Corp. shareholders approved their company's offer to buy Caremark by a margin of more than 9-to-1 at a special shareholder meeting in Woonsocket, Rhode Island yesterday. Now all that's left for the deal to go through is for Caremark shareholders to vote in approval later today.Calpers has come out against the proposed CVS-Caremark merger, voting against the deal with more than 2.1 million Caremark shares and more than 3.1 million CVS shares. According to Clover Capital Management's Matt Kaufler, "The odds are in favor of Caremark shareholders approving the CVS deal. Caremark investors will be focused more seriously on the fact that Express Scripts doesn't have antitrust clearance and CVS does." Caremark shares rose $1.67, or 2.73%, to 62.75; CVS shares rose $1.03, or 3.19%, $33.34.
Sources: Reuters, MarketWatch, Bloomberg,
Commentary: Express Scripts Says Current Caremark Bid is 'Best and Only Offer' • Don't Expect Express Scripts to Bow Out of Caremark Rx Bidding • Is CVS' Bid the Fix Caremark Investors Need?
Stocks/ETFs to watch: Caremark Rx, Inc. (CMX), CVS Corp. (NYSE:CVS). Competitors: Express Scripts, Inc. (NASDAQ:ESRX), Medco Health Solutions Inc. (NYSE:MHS), UnitedHealth Group Inc. (NYSE:UNH), Wal-Mart Stores, Inc. (NYSE:WMT). ETFs: iShares Dow Jones US Healthcare Provider (NYSEARCA:IHF), Retail HOLDRs (NYSEARCA:RTH)
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