Anderson Report: More Housing Carnage to Come, but No Recession
The closely watched quarterly Anderson Report, to be released today by UCLA, forecasts the housing market will likely decline even further as the subprime mortgage market continues to implode. The report does not, however, foresee a recession. Rising delinquencies and defaults have prompted a tightening of credit standards that should shrink the number of first-time buyers and make it harder for subprime borrowers to refinance. "For all practical purposes, the subprime market is in the process of shutting down," wrote senior economist David Shulman in the report. Shulman forecasts that housing starts will reach 1.33 million units this year, down from an earlier forecast of 1.48 million units. "For a housing market that has already witnessed housing starts decline by 36%, this is not good news," he wrote. The report nevertheless forecasts a softening of the economy rather than a full-scale recession. GDP growth is projected in the 1.7-2.5% range for the first three quarters of 2007 and should average 3.25% in 2008. The report projects unemployment will reach 5% in Q3, up from February's 4.5%, before beginning a decline.
Sources: Business Week, LA Times
Commentary: New Home Sales Drop for Second Month Straight • New Century Financial on Brink of Bankruptcy
Stocks/ETFs to watch: Lennar Corp. (LEN), KB Home (KBH), D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM), Toll Brothers Inc. (TOL), New Century Financial Corp. (OTCQB:NEWC), Accredited Home Lenders (LEND), Novastar Financial (NFI), Fremont General (FMT), Fieldstone (FICC). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones US Home Construction (ITB)
Related: The UCLA Anderson Forecast
AT&T, America Movil May Acquire Stake in Telecom Italia
In a press release yesterday, Pirelli & C. S.p.A. said it received two proposals to purchase two stakes in Olimpia, a holding company with an 18% stake in Telecom Italia, from AT&T and America Movil. Each firm aims to buy a 1/3 stake. Pirelli owns 80% of Olimpia, and AT&T owns 8% of America Movil. Pirelli mentions the proposals value Telecom Italia at €2.82 ($3.77) per share (excluding debt). Telecom Italia closed last Friday at €2.14. Bloomberg estimates each one-third stake is worth approximately $3.2 billion. Despite the 32% premium over Friday's close, it will still result in a €3.6b loss for Pirelli, according to The Wall Street Journal. Pirelli said there will be exclusive negotiations with both parties until April 30, although two Italian banks have right of first refusal. Italy's Communications Minister said he was "extremely worried" about the possible sale to foreign companies and the Journal says he encouraged Italian banks and investors to counterbid. An AT&T spokesman commenting on the proposal said, "We're a global company now, and it's very important for our global customers that we have strong assets and strong relationships around the world."
Sources: Press release, Bloomberg, Reuters, The Wall Street Journal
Commentary: The World's Top 25 Emerging Market Multinationals • AT&T, Quest and Verizon, But Not Sprint, to Compete for Big Govt. Contracts • Telecom Italia's Fixed-Mobile Divorce [Sept. '06]
Stocks/ETFs to watch: AT&T (T), America Movil (AMX), Telecom Italia (TI). ETFs: iShares Dow Jones U.S. Telecom Sector Index (IYZ), Telecom HOLDRS (TTH), BLDRS Emerging Markets 50 ADR Index (ADRE)
Google In the Running to Buy DoubleClick
Google has joined Microsoft, Yahoo and Time Warner's AOL unit as a prospective purchaser of online ad company DoubleClick. The potential sale price of the company is in excess of $2 billion, which some analysts believe diminishes the odds of a Microsoft win. DoubleClick is majority-owned by private equity firm Hellman & Friedman, which stands to make a tidy profit on its original $1.1 billion purchase of the company in 2005. DoubleClick offers the lucrative service of connecting advertisers and publishers via online systems. AOL, along with News Corp.'s MySpace, is one of DoubleClick's main customers, and Time Warner's interest in the company is thought to be a means of protecting the relationship -- although there is speculation that Time Warner is already out of the race.
Sources: Wall Street Journal, Reuters
Commentary: DoubleClick Exploring a Possible Sale -- WSJ • Google, Yahoo, AOL, MSN: Big on Internet Advertising • Google: Focused on Better Targeted Advertising
Stocks/ETFs to watch: Google Inc. (GOOG), Microsoft Inc. (MSFT), Yahoo! Inc. (YHOO), Time Warner Inc. (TWX). ETFs: SPDR DJ Wilshire Large Cap (ELR), First Trust Dow Jones Internet Index (FDN), First Trust IPOX-100 Index (FPX)
Conference call transcripts: Google Q4 2006, Microsoft F2Q07 (Qtr End 12/31/06), Yahoo! Q4 2006
Tribune Considering Two Sweetened Offers; Said to Be Favoring Zell
Now past its self-imposed March 31 deadline for a decision, the Tribune Company is considering sweetened offers from both Sam Zell and billionaires Ron Burkle and Eli Broad. The company is said to be favoring the Zell bid. Both offers are reported to be based on employee stock ownership plans [ESOPs], which offer significant tax benefits but expose the company's employees to future downturns in the business. Burkle and Broad, who complained last week that Zell had been given exclusive access to some of the company's financial information, raised their bid on Thursday after seeing the data in question. Their bid is now $8.1 billion ($34 a share), including $500 million in cash in exchange for warrants that would give them a 40% stake in the company. On receipt of the pair's new bid, the Tribune asked Zell to sweeten his $33-per-share offer, which he reportedly has done, though terms have not been disclosed. The Tribune's shares, which have risen more than 10% over the past two weeks on speculation the company will soon be bought, closed Friday up 1.8% at $32.11.
Sources: Bloomberg, Wall Street Journal (I, II), LA Times, Chicago Tribune, MarketWatch
Commentary: Burkle and Broad Might Sweeten Offer for Tribune Co. -- New York Times • Bloomberg: Tribune Near Acceptance of Zell's $8 Billion Offer • Zell's Offer for Tribune Gaining Favor
Stocks/ETFs to watch: The Tribune Co. (TRB). Competitors: Gannett Co. (GCI), The New York Times Co. (NYT), The Washington Post Co. (WPO), The McClatchy Company (MNI)
Conference call transcript: Q4 2006
EMI Group To Sell Most of Its Catalog on iTunes Without DRM Software
In what is expected to be a groundbreaking announcement today, music company EMI Group plans to announce the sale of large parts of its music catalog today to Apple's iTunes store, without the digital rights management [DRM] software that prevents buyers from illegally sharing their music over the internet. The move comes in the midst of a growing debate within the music world over the best strategy to recoup falling record sales. Apple CEO Steve Jobs has urged the music industry to drop its insistence on selling digital music with DRM software attached, arguing the software has been ineffective at combating digital piracy since most music is still bought on unprotected CDs. EMI also plans to sell its music on other labels. Sources in the know say the one major exception to EMI's music sales will be the Beatles catalog, which it has no plans to release as of yet.
Sources: Wall Street Journal, Reuters, L.A. Times, AP
Commentary: Is Apple iTunes Setting CD Prices? - Seeking Alpha • EMI Group Goes the MP3 Route • Financial Impact of Baidu-EMI Partnership Difficult To Assess; Likely Positive
Stocks/ETFs to watch: EMI Group plc (OTC:EMIPY), Apple (AAPL). Competitors: Warner Music Group Corp. (WMG), Sony (SNE), Digital Music Group (DMGI), Napster, Inc. (NAPS). ETFs: Internet Architecture HOLDRS (IAH)
TRANSPORT AND AEROSPACE
Chrysler Receiving Bids, Worth Up to $9B -- Report
On Saturday, The Welt am Sonntag (a German newspaper) citing people familiar with the matter, said DaimlerChrylser has received bids between $6 billion - $9 billion for Chrysler. Cerberus Capital Management is said to have submitted a bid, according to the sources, with particular interest in its finance arm. Friday was a deadline for interested parties to notify DaimlerChrysler's investment banking advisor, JP Morgan, ahead of the company's annual shareholder meeting this Wednesday. The Blackstone Group and Centerbridge Capital Partners were expected to make offers, but this has not been confirmed. Magna International, a Canadian auto parts supplier reportedly offered $4.6b - $4.7b, but is looking for a private equity partner, which a source told BusinessWeek is Ripplewood Holdings. General Motors initially showed interest in Chrysler, but is not believed to be considering making an offer. Daimler-Benz paid over $35b for Chrysler in 1998. Shares of DaimlerChrysler are trading at their highest levels since 1999, gaining 0.3% to $81.81 on Friday.
Sources: Bloomberg, Detroit Free Press, Forbes newswire, MarketWatch, Reuters (i, ii)
Commentary: GM Unlikely To Make Chrysler Bid After First Offer Was Rebuffed • DailmerChrysler: In The Firm Embrace of Magna International • Chrysler Sale Looms Nearer, Will Maintain Ties - WSJ
Stocks/ETFs to watch: DaimlerChrysler (DCX), Magna International Inc. (MGA). Competitors: General Motors (GM), Ford (F), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY). ETFs: iShares MSCI Germany Index (EWG), WisdomTree International Cons Cyclical (DPC), iShares S&P Global Cons Discretionary (RXI)
AirTran Sweetens Midwest Offer Again
Discount airline company AirTran Holdings is expected to announce another sweetening of its hostile bid for Midwest Air Group, this time to $15 per share. The bid will consist of $9 in cash and .582 shares of AirTran for each Midwest share. AirTran's new offer, which is 13% above its last one, values Midwest at $389 million. The new bid constitutes an 83% premium above Midwest's average closing price prior to AirTran's original bid last October. Midwest's shareholders will vote on the offer at a meeting on May 23, at which time AirTran will also propose three new directors. Midwest's current directors have resisted AirTran's attempts to take over the company, but they are under new pressure from the Octavian Master Fund, which holds a 5% stake in Midwest. In a letter sent last week to Midwest's executives, Octavian CEO Richard Hurowitz said Octavian "would strongly encourage and expect the board and management team of Midwest to ... immediately enter into good faith negotiations" if AirTran increased its bid. Midwest shares closed up 1.8% to $13.51 on Friday; AirTran gained $0.07 to close at $10.27.
Sources: Wall Street Journal, New York Times
Commentary: Midwest Air: Octavian Would Support Higher Offer From AirTran • In Direct Plea To Shareholders, AirTran Ups Bid For Midwest
Stocks/ETFs to watch: AirTran Holdings, Inc. (AAI), Midwest Air Group, Inc. (MEH). Competitors: Southwest Airlines Co. (LUV), UAL Corp. (UAUA), Northwest Airlines Corp. (NWACQ.PK). ETFs: iShares Dow Jones Transportation Index ETF (IYT)
First Data in Late-Stage Negotiations to be Taken Private by KKR
Credit card processing company First Data is in late-stage talks to be taken private by Kohlberg Kravis Roberts for a rumored $25.6 billion. The $34-per-share offer represents a 26% premium to the shares' $26.90 close on Friday. First Data processes checks, as well as ATM, debit-card and credit-card transactions. Last year, the company reported $7.08 billion in revenue and net income of $1.51 billion. Growth is slowing, however, as it becomes harder to convince card-laden Americans that they need another one. Banks are also increasingly handling some of their own card processing operations. First Data recently spun off Western Union, its fastest-growing unit, and announced in February that it will streamline its business by exiting the official-check and money-order business. It is also expanding its network and data analysis capabilities through acquisitions -- four over the past two months -- and announced last week that it is purchasing a Polish card firm for $325 million as part of a drive into Central and Eastern Europe.
Sources: Wall Street Journal, Reuters, MarketWatch, New York Times
Commentary: First Data Corp. Exits the Check and Money Order Business • First Data Corp. Insecure Following Western Union Spinoff • First Data Corp. Undervalued?
Stocks/ETFs to watch: First Data Corp. (FDC). Competitors: Fidelity National Information Services Inc. (FIS), Fiserv Inc. (FISV), Total System Services, Inc. (TSS). ETFs: iShares Dow Jones U.S. Financial Services (IYG), Rydex S&P Equal Weight Financial Services (RYF)
Bill Miller Continues To Feel the Pressure As He Trails the S&P 500 Once Again
After 15 straight years of beating the S&P 500 as sole manager of the Legg Mason Value Trust mutual fund, legendary fund manger Bill Miller is starting to feel the pressure of being a 'loser' - and the timing couldn't be worse. Miller's streak came to an end last year in a big way: his fund returned 5.9%, trailing almost threefold a 15.8% gain by the S&P 500. So far in 2007, Miller's Legg Mason Value Trust is again trailing the S&P 500, with a 1.7% loss through March 29, compared with only a 0.23% decline for the S&P 500. Unfortunately for Miller, his cold streak hit at a particularly inopportune moment; Legg Mason traded its brokerage arm for Citigroup's money management division in 2005, doubling Legg Mason's assets, which currently stand at roughly $945 billion. According to James Schmidt, a money manager at rival John Hancock Funds Advisers, Miller's slump has happened "just when sales of that fund could have really exploded." According to Legg Mason Senior VP David Nelson, "the pressure on Bill is enormous." Miller has been buying up shares in unpopular companies like AES Corp., Sprint Nextel and Tyco International Ltd. in hopes of turning things around.
Commentary: What Bill Miller Is Buying And Selling • Bill Miller's 15-Year Winning Streak Comes To An End • Bill Miller : 15 Years of Good Luck, or an Unlucky 2006?
Stocks/ETFs to watch: Legg Mason, Inc. (LM). Competitors: A.G. Edwards, Inc. (AGE), BlackRock (BLK), T. Rowe Price Group (TROW), Franklin Resources (BEN). ETFs: iShares Dow Jones US Broker-Dealer (IAI)
Related: Legg Mason Value Trust [LMVTX] Portfolio Holdings (as of 12/31/06)
Novartis Lowers Growth Forecast On Suspension of Zelnorm Sales; Shares Fall
Shares of Novartis AG fell 4% in trading Friday after the company announced it will have to suspend its U.S. and Canadian sales of IBS-drug Zelnorm, due to an apparent link to angina, heart attacks and strokes. The decision came after the FDA requested 'further discussion' on the medicine, leading the company to cut its growth targets for 2007. Zelnorm was considered to be one of Novartis' key growth drivers in the coming year. The company will work with the FDA to hopefully make the drug available to people with no other treatment options. While the company says it hasn't found a connection between Zelnorm and increased cardiovascular risk, the FDA culled data from 29 clinical trials, showing a risk of 0.11% for those on Zelnorm, versus a far more insignificant risk of 0.01% for those that took the placebo. Novartis CEO, Daniel Vasella, denied the FDA's claims, saying "there was no reason to pull it... for the appropriate patient population it is a product that has great benefits." As a result of having to pull Zelnorm from the North American market, the company forecast growth for FY2007 at 5%; previously Novartis had projected growth in the mid- to high single-digit range.
Sources: Press Release, Wall Street Journal, MarketWatch, Reuters
Commentary: Biotech Day In Review: Novartis Pulls Zelnorm Off The Market • Teva v. Novartis: Federal Decision Has Broad Implications For Generics • Novartis Gets Sooner Than Expected FDA Approval for Hypertentsion Drug
Stocks/ETFs to watch: Novartis AG (NVS). Merck & Co. (MRK). Competitors: Pfizer Inc. (PFE), Wyeth (WYE), Schering-Plough Corp. (SGP), Novartis AG (NVS), Teva (TEVA), AstraZeneca plc (AZN), GlaxoSmithKline plc (GSK), Sanofi-Aventis (SNY), Eli Lilly & Co. (LLY), Abbott Laboratories (ABT), Amgen (AMGN). ETFs: Pharmaceutical HOLDRs (PPH)
China Criticizes U.S. Anti-Subisidy Tariffs; Dollar Weakens
On Friday, U.S. Commerce Secretary Carlos Gutierrez announced tariffs on two Chinese manufacturers of glossy paper, at 10.9% and 20.4%, respectively (based on the total amount of their illegal subsidies), effective immediately. His counterpart in China responded over the weekend, saying, "China strongly demands the U.S. to reconsider this decision and correct it as soon as possible." China had been exempt from such tariffs over the past 20 years, but now there's concern tariffs could be extended to other industries such as steel and textile. The chief currency strategist at TD Securities in Toronto commented, "The whiff of protectionism killed off the bullish sentiment on the dollar," which fell against both the euro and yen. The dollar also faces pressure due to the situation in Iran. The possibility of trade tensions escalating with China has some analysts worried, since it is the second largest investor in U.S. treasuries. Bloomberg mentions U.S. government data shows China's exports of glossy paper doubled in 2006 to $224 million.
Sources: Bloomberg [i, ii], MarketWatch, The New York Times, The Wall Street Journal
Commentary: The Shanghai Stock Index Bubble • China Passes Law Bolstering Private Property Rights • China's Premier Says Plans to Diversify Reserves Won't Affect U.S. Dollar
Stocks/ETFs to watch: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT), PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)
BoJ's Tankan Shows Optimism Slips among Large Manufacturers; Stocks Drop
The Bank of Japan's quarterly tankan (short-term economic outlook) released today, showed a dip in business confidence among large manufacturers. The headline index reading of 23, is the first drop in a year, down from 25 in Dec. and short of economists' average estimate of 24. The +23 reading means businesses with a positive outlook outnumbered those with a negative forecast, by 23%. Stocks initially rallied, as today was the start of the new fiscal year, and corporate spending plans among large manufacturers came in at +2.9%, beating economists' estimates. However, stocks came under selling pressure in afternoon trading, in what the director of sales at Meiwa Securities called a "nameless fear following the last global stock sell-off." The Nikkei 225 lost 1.5% to 17,028.41, the broader TOPIX fell 1.8% to 1,682.49 and the yen last traded at ¥117.8/$1. Companies seem to be most concerned about a slowing U.S. economy and the possibility of a stronger yen. The BoJ is expected to maintain its gradualist approach, with another rate hike unlikely until after the upper house elections in July.
Sources: Bloomberg, MarketWatch, Reuters [i, ii]
Commentary: The “Euro /Yen” Tug-of-War • BoJ to Maintain Accommodative Policy; Watching Real Estate Prices • Japan: Weekly and Year-to-date ETF and CEF Performance
Stocks/ETFs to watch: Toyota (TM), Sony (SNE), Canon (CAJ), Mitsubishi UFJ FG (MTU), Mizuho FG (MFG). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 Index (ITF), The Japan Equity Fund, Inc. (JEQ)
Related: Tankan Outline and Summary [pdf]
Four Foreign Banks Incorporate in China
In a vivid manifestation of the liberalization of China's banking sector since the country's entrance into the WTO in 2001, four foreign banks -- HSBC, Citigroup, Standard Chartered plc and Hong Kong's Bank of East Asia -- completed local incorporation in the country today. Now that they are incorporated, they are free to apply for the ability to offer yuan-based services and thereby gain access to China's $2 trillion in household savings. Citigroup CEO Charles Prince announced last week that Citigroup will almost double its branches in China to nearly 30. Citibank (China) plans to issue debit cards and underwrite domestic bond sales. Bank of East Asia plans to more than triple its current 27 branches by 2010 and forecasts mainland China operations will account for 35% of profit by then, up from the current 15%. HSBC Bank (China) Ltd., which has 48 billion yuan of outstanding loans and 64 billion yuan of deposits, will focus on premier banking (minimum requirement 500,000 yuan, or approximately $65,000) and asset management. Eight other foreign banks are in the process of incorporating in China, including JPMorgan, ABN Amro, and Hang Seng. Deutsche Bank and BNP Paribas plan to apply as well.
Sources: Bloomberg, Mercury News
Commentary: Citigroup CEO Outlines Planned Chinese Expansion • HSBC, Citigroup, Get Key Approval for Chinese Banking • The Inevitable Collapse of China's Banks
Stocks/ETFs to watch: HSBC Holdings plc (HBC), Citigroup Inc. (C), Bank of East Asia Ltd. [ADR] (OTCPK:BKEAY), Standard Chartered plc [London: STAN]. ETFs: BLDRS Europe 100 ADR Index (ADRU), PowerShares Intl Dividend Achievers (PID), First Trust Morningstar Div Leaders Idx (FDL), WisdomTree High-Yielding Equity (DHS), SPDR DJ Wilshire Large Cap (ELR)
Conference call transcript: Citigroup Q4 2006
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