Bernanke: Inflation Remains Greater Concern than Risks to Growth
Fed Chair Ben Bernanke testified before the Congressional Joint Economic Committee yesterday that the Fed still maintains an "inflation bias" despite the growth of certain risks to the economy and will thus hold interest rates steady for the time being. Bernanke said that though his forecast for the economy remains substantially unchanged, weak capital spending and a slumping housing sector could cause growth to miss that forecast. Still, with inflation slowly ticking upward, rising prices continue to dictate the Fed's decision-making on interest rates. At last week's policy meeting, the Fed replaced the phrase "additional firming" -- which is usually interpreted to refer to interest rate hikes, and which has been in the Fed's policy statements since last June -- with the phrase "future policy adjustments," which is considered more neutral. Bernanke said the object was not to clue the markets in to pending interest rate cuts, but to give the Fed greater flexibility. The market signaled its disappointment by sending the DJIA down 96.93 points to close at 12,300.36. Bernanke also stated that the effect on the overall economy of the subprime meltdown "seems likely to be contained" and rejects former Fed Chair Alan Greenspan's warnings that a recession is on the horizon.
Sources: Wall Street Journal, Bloomberg, Time, MLive
Commentary: What Is the Fed Thinking? • Reading Between Federal Lines on the Economy • Fed Holds Rates, Eases Stance
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)
Related: Federal Reserve Monetary Policy
Troubled New Century Cuts Ties With Freddie Mac
New Century Financial Corp. voluntarily ceded the right to sell or buy loans from Freddie Mac, the semi-governmental, second largest U.S. mortgage backer, just one week after its big sister Fannie Mae cut NEWC off. NEWC's SEC filing says other lenders who have offered $17.4 billion of credit-- $8.2b of which was utilized-- will also auction off collateralized loans as Barclays and Morgan Stanley will of $900 million and $2.5b respectively. NEWC also owes $1.5b to UBS AG, and $900m each to Credit Suisse Group and Deutsche Bank AG. The move brings NEWC closer to bankruptcy -- possibly as early as Saturday. NEWC had reportedly been trying to use mortgage auctions proceeds to pay off part of its debt, or hoping a buyout will enable a prepackaged bankruptcy. The NY Times says NEWC's most valuable asset is its mortgage loan software platform, but analysts agree that only the auction proceeds will clarify NEWC's asset values. With federal investigations pending, Ohio borrowers foreclosure proceedings suspended, cease and desist agreements with several states—Idaho, Iowa, Michigan and Wyoming signed yesterday -- and class action/civil suits in preparation, buyers will likely beware. NEWC.PK shares fell 21.23% to $1.11 yesterday.
Sources: Bloomberg, Reuters, San Jose Mercury News, SmartMoney, Law Fuel, Dayton Daily News
Commentary: Subprime Fiasco: A Bargain Hunt For Value Players? • California, Fannie Mae Sever Ties With New Century • Irvine, California: No Longer the Silicon Valley of Subprime
Stocks/ETFs to watch: New Century Financial Corp. (OTCQB:NEWC), Fannie Mae (FNM), Freddie Mac (NYSE:FMC), Barclays (NYSE:BCS), Morgan Stanley (NYSE:MS), UBS AG (UBS), Credit Suisse Group (NYSE:CS), Deutsche Bank (NYSE:DB), PMI Group (PMI), MGIC Investment (NYSE:MTG)
Hutchison Essar to Outsource IT to IBM -- Report
Indian telecom operator Hutchison Essar is expected to outsource its IT operations to IBM in a deal worth $1.4-1.6 billion, according to India's Economic Times. The arrangement has been discussed with Vodafone CEO Arun Sarin, whose company took a 67% stake in Hutch last month. (Hutch will be renamed Vodafone Essar after the takeover is completed.) Sarin is said to favor outsourcing, as it would "allow the company to focus on its core business." Vodafone already outsources IT to IBM at its operations in Spain, the Czech Republic, Australia, New Zealand, Portugal, Ireland, Greece and Italy. Over 90% of Hutch’s tech workforce is expected to be absorbed by IBM, which should save Hutch up to $20 million annually. Hutch is following in the footsteps of Indian telecoms Bharti Airtel and Idea Cellular, both of which have inked IT outsourcing deals with IBM. The seven-year Bharti contract was worth $750 million when the parties entered into it in 2004; today, it is worth over $1.5 billion.
Sources: Reuters, Forbes, Economic Times
Commentary: Vodafone's Sarin Is Losing The Plot • Vodafone Makes Smart Move In India
Stocks/ETFs to watch: International Business Machines (NYSE:IBM), Vodafone Group plc [ADR] (NASDAQ:VOD). ETFs: Wireless HOLDRs (NYSEARCA:WMH), Internet Architecture HOLDRs (NYSE:IAH), iShares S&P Global Technology (NYSEARCA:IXN)
Conference call transcripts: IBM Q4 2006, Vodafone Group F1H06 (Half Year End 9/30/06)
Intel Details Penryn and Nehalem Processors
Intel announced yesterday it will begin production of its 45nm Penryn family processors in the second half of this year. Six processors are planned, including dual and quad-core versions for desktops and servers, as well as a dual core mobile and higher-end server processor. Intel also disclosed details of a future generation of processors codenamed Nehalem. The Wall Street Journal reports Intel said the Nehalem processors include the most fundamental design changes in its chips since the Pentium Pro family in 1996. Production is expected to begin next year and will feature a switch to built-in memory controllers, similar to what rival AMD began using in 2003, instead of utilizing chip sets. Intel explains enhancements in Penryn and Nehalem processors will result in "enormous" performance and energy efficiency gains. It said it will have two 45nm manufacturing fabs in production by the end of this year and two more by the second half of 2008.
Sources: Press release, The Wall Street Journal
Commentary: The Chip Glut Is Beyond Semi-Serious • Intel Shows Committment to China, Announces $2.5B Chip Factory • Intel Continues To Ramp Up 45-Nanometer Production Spending
Stocks/ETFs to watch: Intel (NASDAQ:INTC). Competitors: Advanced Micro Devices (NYSE:AMD). ETFs: Semiconductor HOLDRs (NYSEARCA:SMH), iShares Goldman Sachs Semiconductor (IGW), SPDR Semiconductor (NYSEARCA:XSD)
Burkle and Broad Might Sweeten Offer for Tribune Co. -- New York Times
California billionaires Eli Broad and Ronald Burkle have been granted additional financial information by the Tribune Company, suggesting they might sweeten their offer for the media company. This would throw into doubt the general assumption that the company is about to accept Sam Zell's $8 billion, $33 per share buyout offer. Burkle and Broad, whose earlier offer was turned down, complained that Zell had been granted financial information about the company that was not given to other suitors. It is not yet known whether the two are contemplating a buyout based on an ESOP (employee stock ownership plan), as is Zell's. Zell's plan would buy out the Chandler family, whose agitation over alleged company mismanagement put the company on the block; take the company private; pay a substantial dividend and give employees a majority stake. Burkle and Broad's original $36 per share offer for Tribune did not involve an ESOP, did include a big dividend and offered $500 million in equity against Zell's original $300 million. The Tribune has said it would make a final decision about its future by the end of March, but a new offer from Burkle and Broad could push that date back.
Sources: New York Times
Commentary: Zell's Offer for Tribune Gaining Favor • Bloomberg: Tribune Near Acceptance of Zell's $8 Billion Offer • Will a Buyout Save The Tribune Company?
Stocks/ETFs to watch: The Tribune Co. (TRB). Competitors: Gannett Co. (NYSE:GCI), The New York Times Co. (NYSE:NYT), The Washington Post Co. (WPO), The McClatchy Company (NYSE:MNI)
Conference call transcripts: Q4 2006
Circuit City to Replace 3,400 Employees in Cost-Cutting Plan
Electronics retailer Circuit City has unveiled a cost-cutting program that will replace 3,400 employees with lower-paid workers and outsource some of its IT operations to IBM. The company is also considering strategic options, including sale, for its InterTAN Canadian business. The company has lowered its fiscal 2007 sales and earnings forecasts on the back of unexpectedly poor January and February sales. Circuit City will release some workers who are paid "well above the market-based salary range" and replace them with new workers at "the current market range." The company is forecasting Q4 pretax expenses of $11.7 million related to employee terminations and $31 million related to other items. For 2007, it is projecting 8% sales growth, down from a 9-10% forecast. Same-store sales are now projected to grow 6%, down from 7-8%. Pretax earnings from continuing operations excluding items are forecast at 1.2-1.4% of sales. Analysts had forecast 2007 EPS excluding items of $0.65 on sales of $12.68 billion, a 9% increase over 2006. For Q4, they had forecast EPS of $0.65 on 5% sales growth.
Sources: Wall Street Journal, Reuters
Commentary: Circuit City's Layoff-Based Restructuring Plan Impresses Investors • Circuit City Undertakes Major Restructuring • Circuit City: Turnaround 'Increasingly Elusive'
Stocks/ETFs to watch: Circuit City Stores, Inc. (CC). Competitors: Best Buy Co. Inc. (NYSE:BBY), Wal-Mart Stores Inc. (NYSE:WMT). ETFs: Retail HOLDRs (NYSEARCA:RTH), Vanguard Consumer Staples ETF (NYSEARCA:VDC)
Conference call transcripts: F3Q07 (Qtr End 11/30/06)
TRANSPORT AND AEROSPACE
Toyota on a Long Road to Standardize Software for Autos
The morning edition of the Nikkei Shimbun carried an article saying Toyota plans to create its own operating software standard for automobiles. Safety and efficiency are behind the proliferation of IT in autos. Toyota believes it can further enhance these areas, as well as cut costs, by becoming the first auto manufacturer to develop a standard operating system. Reuters says the Nikkei report mentions Toyota already has an in-house software team and plans to develop a working version by around 2015. Toyota affiliates such as Denso and Aisin Seiki are onboard for the project. Reuters also mentions automakers currently have to develop software for each control function and vehicle model. Toyota continues to look for ways to reduce the complexities of auto production, for instance, through the combination and standardization of parts and modules.
Sources: Reuters, Nikkei Shimbun [I , II]
Commentary: Target Marketing: Toyota's Lexus Makeover • GM Vehicle Sales, U.S. Market Share Rise; Japan's 'Big 3' Continue to Roll • Toyota Still Hasn't Crossed the Finish Line
Stocks/ETFs to watch: Toyota (NYSE:TM). Competitors: General Motors (NYSE:GM), Ford (NYSE:F), DaimlerChrysler (DCX), Honda (NYSE:HMC), Nissan (OTCPK:NSANY). ETFs: iShares MSCI Japan Index (NYSEARCA:EWJ), iShares S&P/TOPIX 150 (NYSEARCA:ITF), BLDRS Asia 50 ADR Index (NASDAQ:ADRA)
GM Execs Won't Get Cash Bonuses for Second Year in a Row
Without explaining exactly why, GM said CEO Rick Wagoner and 20 other top executives will not receive cash bonuses again in FY2006, as the company failed to stem losses. The company has lost $12 billion over the last two fiscal years leading several executives including Wagoner, Vice Chairman Bob Lutz and Chief Financial Officer Fritz Henderson to take pay cuts at the end of FY2005. GM's strategy of tying executive pay directly to performance likely has two strategies behind it: to encourage executives to improve performance as soon as possible so their bonuses can be restored and perhaps more significantly, to convince union workers to agree to deeper cuts this year by showing a sense of shared sacrifice during hard times. Last week GM awarded Wagoner $2.8 million in restricted stock units over five years, another perk tied directly to GM's stock performance. GM has refused to comment on whether other salaried and hourly employees will get bonuses. In other news, GM announced it plans to greatly reduce its issuing of non-prime loans after its ResCap mortgage business posted a fourth-quarter operating loss of $651 million, versus a profit of $118 million a year earlier.
Sources: Wall Street Journal, Bloomberg, Reuters, AP
Commentary: General Motors Disclosures: Lessons From a Floundering Giant • GM's First Profit in Two Years is Well Short of Estimates • Will Sub-Prime Woes Affect the Auto Retail Business?
Stocks/ETFs to watch: General Motors (GM). Competitors: Ford (F), DaimlerChrysler (DCX)
ENERGY AND MATERIALS
TXU Comes Under Fire for Alleged Price Manipulations, Distribution Rate Violations
TXU Corp., the Texas electric utility which agreed to be bought by private equity investors Kohlberg Kravis Roberts & Co. for $32 billion, has come under attack by the state's Public Utility Commission [PUC] for what it alleges were manipulations of the utility market in 2005. The company is also accused of transmission and distribution rates that were at least 4% too high, violating strict state regulation and leading to extra profits of $80 million. If found guilty when it appears before the PUC, TXU will face $70 million in proposed market refunds to wholesale power buyers, as well as $140 million in penalties. The findings were confirmed by energy-consulting firm Potomac Economics Ltd., hired by state officials to act as an independent monitor. In addition, Texas legislators are considering empowering the PUC to look into TXU's sale to Kohlberg & Co. to investigate its likely effect on consumers. TXU denied any wrongdoing in sharp terms saying PUC staff "steadfastly refused to share with us the data...used to concoct this irresponsible enforcement action."
Sources: Wall Street Journal, MarketWatch, AP
Commentary: TXU Acquisition: Are Investors Succumbing To Short-Term Thinking? • SEC Alleges Insider Trading of TXU Call Options • TXU Soaring: Largest Leveraged Buyout in U.S. Corporate History At Hand
Stocks/ETFs to watch: TXU Corp. (TXU). Competitors: American Electric Power Co. Inc. (NYSE:AEP), Centerpoint Energy Inc. (NYSE:CNP), Reliant Energy Inc. (RRI). ETFs: Utilities HOLDRs (NYSEARCA:UTH), Utilities Select Sector SPDR (NYSEARCA:XLU), Vanguard Utilities ETF (NYSEARCA:VPU)
Citigroup CEO Outlines Planned Chinese Expansion
Citigroup CEO Charles Prince said this morning at a press briefing in Beijing that his company may add more than 10,000 employees in Asia in the process of its expansion there through expansion and acquisitions. Citigroup now generates 20% of its income from Asia -- compared with competitor HSBC's 41%. It plans to increase its market presence there by buying Taiwanese Bank of Overseas Chinese and Japanese Nikko Cordial Corp. Prince said Citigroup would increase its Chinese branches from 16 to 30 by year-end, mostly in eastern coastal cities. Citigroup and three other foreign banks including HSBC were approved last week by Chinese regulators to incorporate locally, allowing them to start accepting deposits in yuan from Chinese citizens. Citigroup currently employs 3,000 Chinese, and considers it one of its most crucial international markets. In November, it acquired 20% of Southern-China lender Guangdong Development Bank. Citigroup shares have lagged competitors Bank of America and JPMorgan & Chase Co. as has its profit growth; over the past year, Citigroup stock is up 7% vs. 10.4% for BoA and 15.1% for JPMorgan. Shares were down 0.20% yesterday to $50.96.
Sources: Financial Times, Bloomberg
Commentary: Citigroup Advising Barclays on ABN Amro Bid • Citigroup May Report Restructuring Plans ahead of Q1 Earnings -- WSJ • HSBC, Citigroup, Get Key Approval for Chinese Banking
Stocks/ETFs to watch: Citigroup Inc. (NYSE:C). Competitors: HSBC Holdings plc ADR (HBC), Bank of America Corp. (NYSE:BAC), JPMorgan & Chase Co. (NYSE:JPM), Deutsche Bank AG (DB), Credit Suisse Group (CS), Barclays PLC (BCS). ETFs: PowerShares Dynamic Banking (NYSEARCA:PJB), streetTRACKS KBW Bank (NYSEARCA:KBE)
Citigroup Advising Barclays on ABN Amro Bid
In what some analysts are viewing as a tactical coup, Barclays has hired Citigroup as a financial advisor on its merger talks with ABN Amro, thereby removing it as a rival for the Dutch banking giant. Barclays' other advisors include Credit Suisse, Deutsche Bank, J.P. Morgan Cazenove and Lazard. Citigroup's CEO Chuck Prince was reportedly under internal pressure to put in a bid for ABN, but Citigroup is now precluded from acting in conflict with its client. Barclays' remaining potential rivals for ABN include Royal Bank of Scotland, BNP Paribas and Banco Santander Central Hispano. ABN's shareholders will vote in April on proposals by hedge fund TCI, an activist shareholder, on a possible break-up, sale or merger. Management is recommending shareholders opt for the Barclays deal. If the deal falls through, ABN is considering other means of returning cash to shareholders, including the sale of stakes in banks in the Middle East and Latin America. ABN shares have risen about 20% since TCI made its proposals.
Sources: Wall Street Journal, Reuters
Commentary: Citigroup Said to be Considering Rival Bid for ABN Amro • ABN Amro, Barclays Agree to Several Merger Issues • Barclays Approaches ABN Amro Regarding Possible Takeover
Stocks/ETFs to watch: Citigroup Inc. (C), Barclays PLC [ADR] (BCS), ABN Amro Holding N.V. [ADR] (ABN). Competitors: Deutsche Bank AG (DB), JP Morgan Chase & Co. (JPM), Lloyds TSB Group plc (NYSE:LYG). ETFs: First Trust Morningstar Div Leaders Idx (NYSEARCA:FDL), PowerShares Intl Dividend Achievers (NYSEARCA:PID), iShares MSCI Netherlands Index (NYSEARCA:EWN)
Conference call transcripts: Citigroup Q4 2006
Merck Forced To Put Unsuccessful Insomnia Drug To Sleep
In a development Merck and its Danish partner H. Lundbeck called "clearly disappointing," the companies were forced to scrap work on sleeping pill gaboxadol, a result of strange side-effects like disorientation and hallucinations. The drug also proved unable to achieve its stated goals with any regularity during clinical trials. H. Lundbeck’s SVP for drug development, Anders Gersel Pedersen, explained the decision to scrap the drug as follows: “We did not want to bring a product to the market with such a shallow risk-benefit ratio.” As recently as two years ago, Merck felt the drug had "blockbuster potential" but analysts didn't view the drug's cancellation as a major setback, believing sales wouldn't top $250 to $500 million a year. In other news yesterday, Merck was granted an unusual reinstatement of a critical European patent for its third-biggest drug Fosamax, an osteoporosis medicine.
Sources: New York Times, Reuters, MarketWatch, FT.com
Commentary: Biotech Day in Review: Avalon Signs $200 Million Deal with Merck • Merck High On New Drugs' Success; Shares Gain • Merck Pressured to Halt HPV Vaccine Lobbying
Stocks/ETFs to watch: Merck & Co. (NYSE:MRK). Competitors: Pfizer Inc. (NYSE:PFE), Wyeth (WYE), Schering-Plough Corp. (SGP), Novartis AG (NYSE:NVS), Teva (NYSE:TEVA), AstraZeneca plc (NYSE:AZN), GlaxoSmithKline plc (NYSE:GSK), Sanofi-Aventis (NYSE:SNY), Eli Lilly & Co. (NYSE:LLY), Abbott Laboratories (NYSE:ABT), Amgen (NASDAQ:AMGN). ETFs: iShares Dow Jones US Pharmaceuticals (NYSEARCA:IHE), Pharmaceutical HOLDRs (NYSEARCA:PPH)
Have Wall Street Breakfast emailed to you every morning before the market opens.