Corporate Debt Bubble: Not If, When -- WSJ
Wall Street Journal's Heard on the Street column says publicly traded companies are loading up on debt in order to leverage shareholder returns, a plan that could have serious consequences if future earnings miss targets, leaving them with unmanageable debt loads. Executives as Scotts Miracle-Gro, Domino's Pizza, Health Management Associates and Dean Foods have in recent months announced plans that take advantage of hospitable credit markets to buy back shares and/or issue significant dividends using borrowed money. Proponents say 'leveraged recapitalizations' make companies more efficient, return value to shareholders, and allow them to write-off debt interest as a tax deduction. They say recent LBOs prove U.S. companies are underleveraged; if companies don't leverage themselves, private buyers simply do the same and take them off the market. But Bill Conway, co-founder of private-equity giant Carlyle Group, recently issued a directive warning of a "corporate debt market bubble." Analysts compare today's corporate debt climate to the now-collapsing subprime mortgage market which likewise required precious little proof of ability to repay. Big bank insiders are 'eerily candid' about credit cycle dangers, but admit they don't want to miss the 'next big deal,' lest their banks, or their bonuses, suffer. 'Covenant lite' loans, so called because of their scant performance requirements, are already at $41 billion in 2007 -- more than the last 10 years combined -- and represent 37% of all corporate loans, vs. 1% in 2005. Still, while admitting that the markets simply can't go any further, S&P analyst Steven Miller warns: "If you tried to call the end, you'd be really poor waiting for it."
Sources: Wall Street Journal I, II
Commentary: • Next Stop: Corporate Subprime Lenders? • Deconstructing the Current Bull Market • Corporate Debt Picks for a High Risk Market
Stocks/ETFs to watch: Scotts Company (SMG), Domino's Pizza Inc. (DPZ), Health Management Associates Inc. (HMA), Dean Foods Company (DF)
Related: Covenant Lite Loans (video) [WSJ]
S&P: Subprime Meltdown Could Affect Car Loans
The surge in delinquencies and foreclosures in the subprime mortgage market may be seeping into low-end car loans, Standard & Poor's reports. "For the subprime sector, 60-plus-day delinquencies (on 2005 loans) once again moved above the levels seen in the 2003 and 2004 vintages after a steady five-month increase," S&P said. A slight uptick in delinquencies among subprime car loans suggests that subprime mortgage holders, unable to make their house payments as their adjustable-rate mortgages are reset upward, are also having trouble making their car payments. Car loan delinquencies might also be exacerbated by the relaxation of credit standards by some subprime auto lenders, like Capital One Financial. Still, the impact of the subprime mortgage crisis on car loans will likely be contained, since most subprime auto borrowers are renters, not homeowners. High-quality car loans, like their housing equivalents, continue to do well.
Commentary: Rise in Sub-Prime Defaults Leave Investors Asking Who's Next • How the Sub-Prime Mortgage Crisis Could Spread • Detroit Homes Selling For Less Than SUVs: A Housing Bust Metaphor
Stocks/ETFs to watch: Capital One Financial Corp. (COF), American Express Company (AXP), Bank of America Corp. (BAC)
New Home Sales Drop for Second Straight Month
Sales of new homes declined for the second consecutive month in February to a near-seven-year low and unsold inventory continued to rise, dashing hopes that the housing slump has hit bottom. New home sales fell 3.9% to 848,000 units annualized, their lowest pace since June 2000, from 882,000 in January, according to a Commerce Department report released yesterday. Analysts had been expecting a rise to just under one million. The inventory clearance rate of 8.1 months -- its highest in sixteen years -- is probably even worse than it appears, since it does not include homes put on the market after buyer cancellations. Rising delinquencies and foreclosures, particularly among subprime borrowers, are expected to add to unsold inventory, and a corresponding tightening of credit standards among lenders is hurting sales. Gary Thayer, chief economist at A.G. Edwards: "The drop in sales of new homes in February shows a very weak housing market and suggests that home construction will remain a drag on the economy for much of the year." U.S. government bond prices rose and the dollar fell on speculation the report would prompt the Fed to cut interest rates, and shares of streetTRACKS SPDR Homebuilders ETF (XHB) fell 1.53% to $34.17 in yesterday's trading.
Sources: Wall Street Journal, Business Week, MarketWatch, Reuters
Commentary: New Home Sales Data: 7 Year Low • Homebuilders, Financials Drag Broader Market Down • Don't Celebrate Quite Yet: Housing Still Hasn't Bottomed
Stocks/ETFs to watch: Lennar Corp. (LEN), KB Home (KBH), D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM), Standard Pacific Corp. (SPF). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones US Home Construction (ITB)
Microsoft: Initial Global Sales of Vista 'Strong'
Microsoft announced more than 20 million Windows Vista licenses were sold in the opening month of its public launch (Jan. 30 - Feb. 28). This is more than double the pace of Windows XP, which sold 17 million licenses in its first two months. However, Paul Kedrosky of the Infectious Greed blog and Michael Silver, VP of research at Gartner, both note Vista's sales are not as impressive when considering the PC market has almost doubled since XP was launched. In a press release, Microsoft quotes a Dell executive who mentioned a strong consumer preference for the premium version of Vista and says, “Customers' initial experience ... has been quite positive." An HP executive is quoted saying, "We are pleased with the customer acceptance of our Windows Vista offerings ...." Shares of Microsoft gained 0.7% to $28.22 in normal trading yesterday and traded down $0.02 in after-hours activity following its sales update, on volume of nearly 2.4 million.
Sources: Press release, Associated Press, Wall Street Journal
Commentary: Parsing the Vista Numbers: Not So Fast, Microsoft • 10 Reasons Why Microsoft's Vista Has Missed The Mark • Ballmer Says Some Analysts' Vista Estimates 'Overly Aggressive' -- Street Reacts
Stocks/ETFs to watch: Microsoft (MSFT). Competitors: Apple (AAPL), Red Hat (RHT). ETFs: Software HOLDRs (SWH), iShares Goldman Sachs Software Index (IGV), Technology Select Sector SPDR (XLK)
Yahoo to Offer Cellphone Web-Ad Network
Yahoo is expected today to announce the launch of Yahoo Mobile Publisher Services, a mobile ad network that will give advertisers access to both Yahoo mobile services and those of other online publishers. Yahoo is planning to quickly expand its publishers' network, which currently consists of three services (cellphone video service MobiTV; browser maker Opera; and Yellow Pages site Go2). The launch is critical to Yahoo's effort to close the gap with Google, which leads it in Internet search and search-related advertising. In January, Yahoo introduced oneSearch, mobile search software that allows users to find information easily. The market for ads on websites viewable on cellphones is small, but expected to grow fast: $224 million is forecast to be spent on mobile display ads by 2010, ten times the $22 million spent in 2005. Yahoo is now the first major Internet firm to launch a mobile ad network. Jupiter Research analyst Kevin Heisler: "One area where Google has not outshined Yahoo is mobile search."
Sources: New York Times, News.com, MarketWatch, SeattlePI
Commentary: Yahoo Expands Its Mobile Search • Yahoo "Go" to Run on Windows Mobile Devices • Yahoo Takes Mobile Advertising To International Market
Stocks/ETFs to watch: Yahoo! Inc. (YHOO). Competitors: Google Inc. (GOOG). ETFs: Internet HOLDRs (HHH), First Trust Dow Jones Internet Index (FDN), First Trust NASDAQ-100-Tech Index (QTEC)
Conference call transcripts: Yahoo! Q4 2006, Google Q4 2006
Related: Yahoo! oneSearch
Time Kills Off 'Life,' Citing 'Dramatic Market Shift'
Time Warner subsidiary Time Inc. announced it was ceasing publication of legendary 'Life' magazine due to weak ad sales. In its third incarnation, the magazine, which was popularized in the first half of the 20th century for its glossy cover photos of celebrities from Bette Davis to the Beatles (pictured), had become a Friday newspaper supplement targeting the entertainment business as its primary advertiser. 303 different papers distributed 'Life,' with the L.A. Times distributing more than a million copies each Friday. The closing will result in 42 layoffs including 17 editorial positions. Unable to compete for advertising dollars with the likes of Parade and USA Weekend, ad pages were off 21% so far in 2007. According to Time Inc. CEO Ann Moore, "The market has moved dramatically since October 2004, and it is no longer appropriate to continue publication of 'Life' as a newspaper supplement." 'Life' will continue to live on in web form.
Sources: Variety, Reuters, Motley Fool
Commentary: Five Candidates To Buy Maxim Magazine • Old Media Needs a Reality Check, Not a Funeral • Why Print Journalism Will Never Really Die
Stocks/ETFs to watch: Time Warner Inc. (TWX). Competitors: The Tribune Company (TRB), Gannett Co. (GCI), The New York Times Co. (NYT), The Washington Post Co. (WPO), The McClatchy Company (MNI). ETFs: Internet HOLDRS (HHH), PowerShares Dynamic Media Portfol. (PBS), Consumer Discretionary SPDR (XLY)
Related: 'Life' Homepage
TRANSPORT AND AEROSPACE
Good Year? Try a Good Seven As Goodyear Hits Multi-year High
Goodyear Tire & Rubber Co. shares surged to their highest point in seven years yesterday on news it was selling one of its units for far more than analysts were expecting to private equity investor the Carlyle Group. According to Deutsche Bank analyst Rod Lache, the price Goodyear got for its Engineered Products unit, which produces hoses and conveyor belts, "surpassed our most ambitious assumptions." Lache, who has a 'Buy' rating on the shares, believes the company will use the proceeds to pay debt and help fund a retiree health-care trust, which should add to its bottom line. The sale price was reported at $1.47 billion; shares responded by gaining nearly 5% to $31.76 at market close yesterday on above average volume of 7.33 million shares. Goodyear is up 51% this year, behind only RadioShack in the running for S&P 500's top gainer.
Sources: Bloomberg, MarketWatch (i), (ii)
Commentary: S&P 500 Stocks Furthest Above, Below 50-, 200-Day Moving Averages • Goodyear Strike Punctures Net Income • Cramer's Take on GT
Stocks/ETFs to watch: The Goodyear Tire & Rubber Company (GT). Competitors: Cooper Tire & Rubber Company (CTB), Bandag, Inc. (BDG)
GOLD AND MINING
Treasure Hunter Odyssey Marine Jumps on Gold Ship Recovery Agreement
Small cap stock Odyssey Marine Exploration rose over 15% Monday after the company announced a diplomatic agreement allowing it to recover the shipwreck of HMS Sussex, an 80-gun English warship lost in 1694 believed to have been carrying about 10 tons of gold and 100 tons of silver worth between $500 million and $4 billion. If correct, that would make the Sussex the most valuable treasure trove ever salvaged. Spain and the UK agreed that both countries would cooperate to ensure that the recovery of the wreck believed to be HMS Sussex is conducted in a way that preserves any archeological findings. At the same time, Spain recognized that under international law the Sussex wreck belongs to the UK. The agreement resolved a stand-off that had prevented Odyssey Marine from excavating the wreck it believes to be the Sussex. The company, which utilizes innovative methods and state-of-the-art technology to conduct deep ocean search and recovery operations, has signed an exclusive partnership agreement with the UK Government for the recovery of the shipwreck and will split the bounty with the UK Government. Odyssey Marine hasn't recovered any significant wrecks since its recovery of the SS Republic in mid 2004. The company stated in a recent operational update that it has has three projects in the Mediterranean, one of which has located 161 shipwrecks, of which 25 are 19th Century and 12 17th-18th Century. According to Spanish archaeology professor Manuel Martín Bueno, "There is more gold in the Gulf of Cándiz than in the vaults of the Spanish national bank".
Sources: Company press release, Spiegel news coverage, Mail & Guardian news coverage, eitb news coverage, Odyssey Marine Exploration Inc company profile, Odyssey Marine Exploration November 30th Operational Update, Odyssey Marine Exploration Announces 2006 Financial Results.
Stocks/ETFs to watch: Odyssey Marine Exploration Inc (OMR).
New Century Financial on Brink of Bankruptcy
Analysts are speculating that New Century Financial, the beleaguered subprime mortgage lender, will shortly file for Chapter 11 bankruptcy protection. Their evidence is the disclosure that Barclays and Morgan Stanley, two of New Century's main lenders, are repossessing loans that had been used to secure financing. New Century will hand over the loans it made with Barclays credit lines; in exchange, it will be forgiven the obligation to buy back $900 million of those loans. Morgan Stanley will auction off $2.48 billion of New Century subprime mortgages that constitute the collateral behind New Century's $2.5 billion credit line from the investment bank. Stifel Nicolaus analyst Christopher Brendler: Both banks "felt so uncomfortable with" New Century's ability to repay them that "they decided to just take the loans and auction them off themselves...I'm surprised that New Century hasn't filed for bankruptcy already." All New Century's lenders are pulling their financing, and it has received default notices from Barclays, Bank of America, Citigroup, Credit Suisse, Goldman Sachs and Morgan Stanley, among others. If all its lenders demand mortgage repurchases simultaneously, New Century could owe $8.4 billion, an impossible sum that would force the company's liquidation.
Sources: Wall Street Journal
Commentary: California, Fannie Mae Sever Ties With New Century • New Century Halts New Loans; Einhorn Resigns
Stocks/ETFs to watch: New Century Financial Corp. (OTCQB:NEWC), Accredited Home Lenders (LEND), Novastar Financial (NFI), Fremont General (FMT), Fieldstone (FICC)
Sanofi Board Split Over Bristol Myers Meger -- London Times
According to a report this morning in the London Times, the board of French drugmaker sanofi-aventis is split on whether to make a bid for Bristol-Myers Squibb Co. It says sanofi's chairman, Jean-Francois Dehecq, favors the deal, while CEO Gerard Le Fur thinks the company is better off focusing on its own drug research and development. Citing unnamed sources, the paper said the older Dehecq's opinion likely carries more weight among both board members and sanofi shareholders. Sanofi officials this morning declined to comment on whether the company was considering a Bristol-Myers merger, but denied there was a difference of opinions between its chairman and CEO. Rumors of a potential merger first emerged on Jan. 29 when French financial newsletter La Lettre de l'Expansion claimed the two had signed a pre-merger agreement.
Sources: London Times, Market Watch, Reuters I, II
Commentary: WSJ: Bristol- Myers Transaction Price Already Priced In • Will Sanofi -Aventis Merge With Bristol- Myers Squibb? • Bristol- Myers New CEO Appointment Only Increases Takeover Rumors
Stocks/ETFs to watch: sanofi-aventis (SNY), Bristol-Myers Squibb Co. (BMY). Competitors: Merck & Co. Inc. (MRK), Novartis AG (NVS), Pfizer Inc. (PFE), GlaxoSmithKline plc [ADR] (GSK). ETFs: Pharmaceutical HOLDRs (PPH), iShares Dow Jones US Pharmaceuticals (IHE), SPDR S&P Pharmaceuticals (XPH)
Beckman Coulter Faces Criticism and a Credit Review after Biosite Announcement
Shares of biomedical equipment manufacturer Beckman Coulter lost 6.8% to close at $62.51 yesterday, their steepest drop in seven months, after the company announced it will pay a substantial premium to purchase Biosite, a manufacturer of diagnostic tests. Biosite's shares shot up 51% to close at an all-time high of $83.80. Beckman has offered $85 per share for Biosite, a 53.5% premium to Biosite's Friday close. The price has prompted criticism that Beckman is paying too much as well as a review by all three credit rating agencies. The acquisition will give Beckman a leading position in cardiac immunoassays, but the leverage required to finance the purchase has raised concern. Further, Beckman will be paying five times Biosite's trailing 12-month revenue of $308.6 million, while recent similar acquisitions have been more in the range of three times revenue. Piper Jaffray analyst William Quirk: "With Beckman's revenue more exposed to the maturing BNP market [BNP is a cardiac immunoassay jointly developed by the companies], we believe this acquisition will be dilutive to Beckman's earnings per share through 2008." Counters Beckman CEO Scott Garrett: "We got favorable borrowing terms, and Biosite is the best company in our industry when it comes to developing new tests and taking advantage of the explosion in the life sciences industry."
Sources: Business Week, Forbes, MarketWatch, Bloomberg
Commentary: Beckman Coulter to Acquire Biosite Inc. for $1.55 Billion • A Hefty Price for Biosite [Business Week]
Stocks/ETFs to watch: Beckman Coulter Inc. (BEC), Biosite Inc. (BSTE). Competitors: Abbott Laboratories (ABT), Dade Behring Holdings Inc. (DADE), Thermo Fisher Scientific, Inc. (TMO). ETFs: Rydex S&P Smallcap 600 Pure Growth (RZG)
Conference call transcripts: Biosite Q4 2006
BoJ to Maintain Accommodative Policy; Watching Real Estate Prices
In parliamentary testimony, Bank of Japan Governor Toshihiko Fukui reiterated the bank's gradualist approach to raising interest rates. He also said land price gains "(do not yet) warrant concern of excessiveness." The BoJ voted unanimously last week to hold its benchmark rate at 0.5%. A closely watched land price report published last week shows some patches of double-digit gains in metropolitan commercial land in 2006, with an 8.9% increase overall for Tokyo, Osaka and Nagoya. Residential land prices rose 2.8%, for the first nationwide increase in 16 years. Fukui said, "Rising land prices won't automatically prompt a rate increase," but noted the BoJ is monitoring prices. Economists have mixed reactions whether rising land prices will force the BoJ to raise rates. Finance Minister Koji Omi stated last week the gains are not a signal of another bubble emerging. He commented yesterday that rate decisions are the BoJ's responsibility, but The Wall Street Journal says he "hinted that higher interest rates aren't welcome."
Sources: Bloomberg, The Wall Street Journal
Commentary: BoJ Holds at 0.5%, Yen Weakens, Nikkei Gains • Reflation and Global Trade Growth: Japan's Recipe for Winning Stock Picks • James Grant's Long Case for the Yen
Stocks/ETFs to watch: ORIX (IX), Mitsubishi UFJ Fin. Grp. (MTU), Mizuho Fin. Grp. (MFG), Nomura (NMR), NIS Grp. (NIS). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF), CurrencyShares Japanese Yen Trust (FXY)
Related: Bank of Japan Feb. 20-21 Monetary Policy Meeting Minutes [pdf]
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