U.S. Equities Hit Three-Month Low On Fears of Rate Increase
The S&P 500 and DJIA had their worst showing in three months Thursday after a surge in bond yields above 5% gave the market jitters that the Fed will raise interest rates. A spike in the oil price to $67 also sent shares down. The S&P 500 dropped 1.8% to 1490.72 and the DJIA 1.5% to 13,266.73. Over the past three days, the indices are down 3.2% and 3%, respectively. The decline ended a three-month bull run that brought the S&P 500 to record levels. "[A] week ago, everything was euphoric," said Andrew Brooks, head trader at T. Rowe Price. "This is just a little bit of a gut check to remind us that it's not straight up." Banks and brokerages saw a collective 1.7% decline, and all 16 homebuilders' shares fell on fears that mortgage demand will slow. Wal-Mart, Macy's and J.C. Penney all shed points on disappointing May sales numbers. Benchmark 10-year note yields were up to 5.13%. Bill Gross, manager of world-leading bond fund PIMCO, said 10-year yields could reach 6.5% by 2011. A government report Thursday said labor costs are up more than anticipated, making it more likely that companies will raise prices and fuel inflation. Options traders raised the odds of a boost to 5.50% in the fed funds rate to nearly 41%. A month ago, the odds were zero.
Sources: Bloomberg, MarketWatch, Wall Street Journal
Commentary: Under-Invested Money Should Stem This Selloff • Most Market Sectors Still Nowhere Near Oversold • Bond Yields Are Rising - Trouble For Equities?
Stocks/ETFs to watch: SPDR S&P 500 (SPY), NASDAQ 100 Trust Series I (QQQQ), DIAMONDS Trust, Series 1 (DIA), iShares Russell 2000 Index (IWM)
Tyco Moves Ahead With Breakup Plan
Tyco International said on Thursday its board has approved its separation into three publicly traded companies. Tyco shareholders will receive one share of its new healthcare company, Covidien (ticker COV), and one share of Tyco Electronics (ticker TEL) for every four of their shares in the parent company. The board also approved a 1-for-4 reverse split of shares in the parent company. Tyco says the separation, which may cost up to $1.6 billion, will allow the separate companies to grow better by setting their own strategies for acquisitions and use of resources. Shareholders as of June 18 will participate in the June 29 split. CEO Ed Breen will continue running the remaining company, including ADT security, fire equipment and services, and industrial valves. Rich Meelia will head Covidien, and Thomas Lynch will be CEO of Tyco Electronics. Tyco filed with the SEC Thursday to withdraw debt offerings the three entities registered for, saying there was no need for the issues since it has "debt financing in place to allow us to complete the spin-offs of Covidien and Electronics." After the break-up, Tyco has said it will explore the possible sale of its infrastructure services business, whose 2006 sales totaled $1.2 billion. We are now in the final stages of completing this complex transaction which will provide these businesses with the focus and flexibility to achieve their long-term growth potential," said CEO Breen.
Sources: Press release, Bloomberg, Reuters
Commentary: Pre-Spinoff Tyco Is A Buy • Tyco: Breaking Up and Taking Off • Looking Beyond the Scandal at Tyco
Stocks/ETFs to watch: Tyco International Ltd. (TYC), Covidien (COV), Tyco Electronics (TEL)
National Semiconductor Beats Forecasts with 24% Drop in Q4 Profit
Chip manufacturer National Semiconductor posted a better-than-expected 24% drop in fiscal Q4 profit, sending its shares up 10.3% to $28.45 in AH trading. Net income came in at $90.1 million ($0.28/share), down from $118.8 million ($0.34) in the year-ago quarter. Revenue was down 20% to $455.9 million from $572.6 million a year ago, but was up 5.8% from Q3 on increasing demand. Analysts were expecting EPS of $0.23 on revenue of $451.3 million. The company said its wireless business was up 33% from the previous quarter and billings increased 16%. Also, inventories were relatively low. "Market conditions signal smoother sailing ahead," said CEO Brian Halla. "We are confident we can continue our growth." The company also announced a $1.5 billion accelerated stock buyback, for which it will take on $1.5 billion in investment-grade debt. This brings the company's total buyback authorization to $2.4 billion.
Sources: Press release, MarketWatch, Reuters, Bloomberg
Commentary: Semis With Highest, Lowest Production To Sales Ratio • National Semi: Relational Investors Boosts Stake By Almost 4M Shares • The Long Case for Semi Stocks
Stocks/ETFs to watch: National Semiconductor Corp. (NSM). Competitors: Analog Devices Inc. (ADI), STMicroelectronics NV (STM), Texas Instruments Inc. (TXN). ETFs: Semiconductor HOLDRs (SMH)
Conference call transcripts: F4Q07
Infinera IPO Soars 52%, Best Tech Launch of '07
Shares of Infinera Corp. jumped 52% to $19.71 in their first day of trading on the Nasdaq. Infinera's IPO was priced at $13/share ($182m total on 14m shares), above the expected $10 - $12 range set by a group of underwriters. It opened at $16 and gained as much as 63% to $21.24 intra-day. Bloomberg reports an additional 2.1 million shares may go to underwriters, raising the offering to as much as $209.3 million. The publisher of IPO research and tracking company Morningnotes.com says "[s]tocks focusing on telecommunications equipment, network systems and network subsystems have been the darlings of the technology sector this year." Infinera makes photonic chips using indium phosphide (instead of the slower industry standard silicon) for optical networking gear. Infinera's sales surged nearly 17-fold in Q1 to $49.2m, but two companies, Level 3 Comm. and Broadwing, accounted for 75% of sales in '06. Infinera is not profitable, having posted a $19.8m loss in Q1 and an $89.9m loss in '06. It has a market cap of $1.64b.
Sources: Bloomberg, MarketWatch
Commentary: This Week's IPOs Part I: Einstein Noah Restaurant Group, FBR Capital Markets Corp., Infinera Corp. • Why I'm Relieved by the Infinera S-1 • Infinera S-1: Cost of Goods Sold is Higher Than Revenue • The Effect of Internet Video: Market or Investor Discontinuity?
Stocks/ETFs to watch: Infinera Corp. (INFN). Competitors: Alcatel-Lucent (ALU), Cisco Systems, Inc. (CSCO), Ciena Corp. (CIEN), PMC-Sierra (PMCS)
Xilinx Offers New, Mixed Guidance For Upcoming Quarter
Programmable chip maker Xilinx, Inc. said after Thursday's close it expects sales in its upcoming quarter at the low end of its prior guidance range, which had called for growth in a range of 1%-5%. The company expects gross margins in a range of 62%--63%, slightly higher than previously expected, with operating expenses falling about 5% sequentially, also slightly better than previously expected. Last quarter Xilinx posted EPS of $0.27 on net revenue of $443.5 million. Shares fell 0.44% on the news in after hours trading.
Sources: Press Release, MarketWatch, TheStreet.com, AP
Commentary: Bear Stearns Cautions Investors On Xilinx, Altera; Sees Weakening PLD Market • Xilinx is the First Semi To Impress This Quarter • Xilinx Issues Convertible Notes At No Benefit To Shareholders
Stocks/ETFs to watch: Xilinx, Inc. (XLNX). Competitors: Altera Corporation (ALTR), Lattice Semiconductor (LSCC), Actel Corporation (OTCQB:ACTL). ETFs: Semiconductor HOLDRs (SMH), SPDR S&P Semiconductor (XSD)
Conference call transcripts: Xilinx F4Q07 (Qtr End 3/31/07) Earnings Call Transcript
SEC to Fine Nortel Up To $100 Million in Accounting Fraud Settlement
The SEC will fine telephone equipment manufacturer Nortel Networks Corp. up to $100 million for accounting fraud, according to a Bloomberg report Friday. The fine is the first test of a new policy that gives the SEC's commissioners more sway in decisions on corporate penalties, and is generally considered to be a gauge of the kinds of penalties the SEC will seek. Up to now, the SEC has imposed a broad range of penalties: Xerox paid $10 million in 2002 to settle charges that it had overstated revenue by $3 billion; but WorldCom paid $750 million a year later. In 2004, the SEC launched a probe into Nortel's accounting. The following year, the company restated results and admitted a $3.4 billion revenue overstatement. The SEC has since sued former CEO Frank Dunn and three other ex-company executives for earnings manipulation between 2000 and 2004 committed to meet Street forecasts and trigger bonus payments. "This was an easy case for the SEC to buy into imposing a penalty because the facts were so terrible,'' said Duke securities law professor James Cox. Shares are down 3.6% YTD.
Sources: Bloomberg, Reuters, RTT News
Commentary: Nortel Posts $107 Million Q1 Loss, CEO Bullish On Company's Prospects • Nortel News: Blade Fracas, OSC Settlement, Base Station Joint Venture • Judges Approve Nortel Settlement of Around $2.45 Billion
Stocks/ETFs to watch: Nortel Networks Corp. (NT). Competitors: Alcatel-Lucent (ALU), Cisco Systems, Inc. (CSCO), Motorola Inc. (MOT). ETFs: Broadband HOLDRs (BDH), iShares Goldman Sachs Networking (IGN), Morgan Stanley Technology ETF (MTK)
Conference call transcripts: Q1 2007
ITC Slaps Partial Ban on QUALCOMM, Shares Rally on Plans to Appeal
The U.S. International Trade Commission [ITC] voted Thursday to partially ban imported cell phones installed with chips made or designed by QUALCOMM, related to an ongoing patent dispute with rival Broadcom. QUALCOMM said it plans to seek a stay and presidential veto. The ban applies to phones made after June 7 and does not apply to those already on the market. Ahead of the ITC's ruling, shares of QUALCOMM fell 2.87% to $41.02 in normal trading, but last traded up 1.68% to $41.71 in after-hours activity on volume just shy of 5.1 million. Broadcom lost 2.24% to $30.11, but added 1.12% to $30.45 in extended trading on volume of 317,000. Wireless carriers, including Verizon, which said it will also seek a veto and immediate stay, told the ITC in March that a total ban of phone imports with QUALCOMM chips would cost them billions of dollars in investments and profits. While Broadcom said in a statement it is willing to negotiate a licensing agreement with QUALCOMM, the latter's general counsel said such talks are "impossible" because the compensation terms Broadcom wants "would be destructive to our business model."
Sources: Press releases [I, II], Bloomberg, MarketWatch, The Wall Street Journal
Commentary: Nokia's Qualcomm Smear Campaign Won't Work • Nokia Readies for China's 3G Rollout • QUALCOMM: Profit and Sales Up Double-digits, Raises Guidance, Shares Higher
Stocks/ETFs to watch: QUALCOMM (QCOM), Broadcom (BRCM).
Competitors: Nokia (NOK), Samsung Electronics [not traded in U.S.; see iShares S. Korea (EWY)], Texas Instruments (TXN). Wireless carriers: Verizon (VZ), Vodafone (VOD), AT&T (T), Sprint Nextel (S), [T-Mobile] Deutsche Telekom AG (DT). ETFs: Broadband HOLDRs (BDH), Wireless HOLDRs (WMH), iShares Goldman Sachs Networking (IGN)
Conference call transcripts: QUALCOMM F2Q07, Broadcom Q1 2007, Verizon Q1 2007
Pepsi Outbids Coke in Fight for Ukrainian Juice Maker
PepsiCo and PepsiAmericas says it has won the bidding war with Coca-Cola for Ukrainian juice-maker Sandora. Pepsi will buy 80% of the company for $542 million plus debt. The deal is expected to close in the third quarter. It provides PepsiAmericas and PepsiCo with a strong platform for growth in the Ukrainian beverage market, "one of the fastest growing beverage markets in Europe," it said. It also bolsters Pepsi's international portfolio, as it seeks to overcome weak U.S. soda sales; more than half of Pepsi's Q1 profit growth was from sales of drinks and snacks outside North America. "Sandora's market-leading brands will be a wonderful addition to our portfolio," it said PepsiAmericas expects the acquisition to be $0.02-0.03 dilutive in 2007, and $0.01 accretive to 2008 EPS. It said the purchase will have no impact on PepsiCo's EPS guidance for 2007. PepsiCo shares are up 9.4% over the past year; PepsiAmericas is up 4.6% in the same period.
Sources: Press release, Wall Street Journal
Commentary: Jones Soda: The Long Case, and a Threat to Coke and Pepsi • Super Fizzy Soda Stocks • Pepsi Shares are Overbought - A Sell Sign
Stocks/ETFs to watch: Pepsico Inc. (PEP), PepsiAmericas Inc. (PAS), Coca-Cola Company (KO)
ENERGY AND MATERIALS
Rexam Contemplates Purchase of Owens-Illinois Plastics - WSJ
The Wall Street Journal is reporting Owens-Illinois may sell its plastics divisions to Britain's Rexam PLC for upwards of $1.5 billion. The deal may close as soon as Monday according to the Journal, though there are still unresolved issues between the companies. Rexam responded to the Journal's article with a 'Statement regarding media speculation' which said, "An acquisition, if agreed, would only occur on conditions which meet Rexam's investment returns criteria and is likely to be funded from a combination of its Glass disposal proceeds, debt and an element of equity." Rexam, one of the world's largest can makers, has been acquiring plastics divisions globally in recent years. Owens-Illinois announced the division was up for sale in January; it reported revenue of $770 million last fiscal year, mainly on sales of pharmaceutical packaging. The company is refocusing on glass packaging (beer bottles, etc.) after reporting a $27.5 million loss last year on $7.5 billion in sales. Plastic makers' margins have suffered recently as a result of higher oil prices, an essential ingredient in the plastics making process. The deal would come on the heels of GE's $11.6 billion sale of its plastics unit last month to the Saudis.
Sources: Rexam Statement Regarding Media Speculation, Wall Street Journal, Reuters, AFX News, MarketWatch
Commentary: GE Sells Plastics Unit to Sabic for $11.6 Billion • GE's Plastics Division Sale To Fund Buybacks, Restructuring • O-I And The Cost Of Executive Shifts
Stocks/ETFs to watch: Rexam PLC (OTCQX:REXMY), Owens-Illinois, Inc. (OI). Competitors: Amcor Limited (AMCR), Silgan Holdings (SLGN), Crown Holdings (CCK)
Related: Wikipedia: Plastic
Bank of America Criticizes "Shocking" Dutch Court Ruling on LaSalle Sale -- FT
In an appeal filing, Bank of America [BofA] accused a Dutch court of breaking EU and Dutch law by blocking its $21 billion purchase of LaSalle Bank from ABN Amro, according to the Financial Times. The LaSalle sale was inked in conjunction with a sale of ABN itself to Barclays for €64 billion. The Dutch commercial court, the Enterprise Chamber, was approached by irate ABN investors who considered the LaSalle sale a poison pill intended to discourage the sale of ABN to a consortium that had put forward a rival bid of €71 billion. The Barclays bid is contingent on completion of the sale, but the consortium, led by Royal Bank of Scotland, wants LaSalle as part of any deal. The court sided with the investors and froze the sale until a shareholder vote, as yet unscheduled, could be held. The Dutch Supreme Court is now hearing appeals from BofA and ABN and is expected to rule by early July. In its appeal, BofA said it was "shocking" that the Enterprise Chamber "chose to disregard fundamental Dutch and European Union company law designed to protect third parties" for reasons that were "incomprehensible." If the Supreme Court upholds the freeze, BofA will sue ABN for "billions in damages."
Sources: Financial Times, Reuters, Forbes, Bloomberg
Commentary: RBS Says It's Not in Talks With Bank of America to Resolve LaSalle Sale • RBS-Led Consortium and Bank of America Near Deal on LaSalle -- WSJ • Judge Orders Freeze of ABN Sale of LaSalle to BoA
Stocks/ETFs to watch: ABN Amro Holding N.V. (ABN), Barclays PLC (BCS), Royal Bank of Scotland Group plc [ADR] (RBSPY), Fortis NV [ADR] (FORSY), Bank of America Corp. (BAC). Competitors: HSBC Holdings plc ADR (HBC), Deutsche Bank AG (DB), UBS AG (UBS). ETFs: iShares MSCI Netherlands Index (EWN), streetTRACKS KBW Bank (KBE), HOLDRS Regional Bank (RKH)
Johnson & Johnson to File for Approval for Five New Drugs in 2007
Johnson & Johnson announced at an analyst meeting Thursday that it expects to file for approval for five new compounds by the end of 2007 and a further seven to 10 between 2008 and 2010. The company said it invested $5 billion in R&D last year, resulting in its best-ever drug pipeline. J&J plans to focus its research effort on disorders of the central nervous system, including infectious and cardiovascular diseases, oncology and hematology, immunology, metabolics, pain, and reproductive health. Sales slowed in 2005 and 2006 on competition from generic drugs and pricing pressure. According to Joseph Scodari, worldwide chairman of pharmaceutical products, many of the company's experimental drugs "have the potential to be first in class or best in class." In consumer products, the company forecasts its recent $16.6 billion acquisition of Pfizer's consumer unit should produce $500-600 million in synergies.
Sources: MarketWatch, Forbes, CNN.com
Commentary: Jeffrey Saut: Strong Stocks in Strong Sectors • Dow Components Furthest Above, Below Their 50-DMAs • Stock Portfolio to Weather a Volatility Shock
Stocks/ETFs to watch: Johnson & Johnson (JNJ). Competitors: Merck & Co. Inc. (MRK), Novartis AG (NVS), Procter & Gamble Co. (PG). ETFs: Health Care Select Sector SPDR (XLV), Pharmaceutical HOLDRs (PPH), PowerShares FTSE RAFI Health Care (PRFH), Vanguard Health Care ETF (VHT)
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