Bernanke Keeps Inflation Discussion Academic at Symposium
Fed Chair Ben Bernanke said in a speech to a symposium Tuesday that the public's perception of inflation is itself a factor in determining prices. He was interpreted to mean that a refusal by Americans to accept current price increases as normal should contribute toward lowering inflation in the future. Bernanke's comments were criticized as overly academic, since they addressed neither the practical boundaries of the Fed's so-called "comfort zone" on inflation nor the notion that the Fed adopt a specific inflation target. The Fed is also being criticized for focusing on the "core" inflation index, which excludes food and energy prices. Bernanke alluded to energy price swings in his speech, but implied that they do not yet pose a threat: "[T]he sharp increases in energy prices over the past few years have not led either to persistent inflation or to a recession, in contrast...to the U.S. experience of the 1970s." Inflation expectations, he said, are less affected than they used to be by such swings, but are still "imperfectly anchored." Not all economists fault the Fed for its chosen inflation gauge. "The Fed is pretty powerless to do something about the price of energy or the price of food," said Princeton economist Alan Blinder. "I don't want to charge the Fed with responsibility for something it can't do." In related news, House Financial Services Committee Chairman Barney Frank is bringing Harvard's Benjamin Friedman to testify in opposition to a federal inflation target.
Sources: Chairman Bernanke's speech, New York Times, MarketWatch, Wall Street Journal I, II
Commentary: FOMC Takes a Dovish Stance Despite Persistent Inflationary Risks • Core Inflation Remains a Low 0.1% • Where The 'Fed Model' Has Validity - And Where Not
Stocks/ETFs to watch: ETFs: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
Moody's Downgrading Subprime Mortgage-Backed Securities; S&P to Follow
Moody's announced Tuesday that it will downgrade hundreds of securities backed by subprime mortgages, and S&P will likely do the same. S&P said it might cut the ratings of up to 612 such bonds, worth $12 billion, and will revise its ratings methodology. It is also planning to review the "global universe'' of CDOs that are based on subprime loans, threatening CDO investors with a potential loss of up to $250 billion. Moody's is downgrading 399 mortgage-backed bonds issued in 2006 and reviewing 32 more, amounting to $5.2 billion. It also slashed the ratings of 52 bonds issued in 2005. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything," said risk analyst Christopher Whalen. The downgrades -- believed by many to be long overdue -- reflect surging mortgage delinquencies, sluggish home prices, and poor underwriting standards for loans. In related news, U.S. officials charged 26 people Tuesday, including real estate appraisers and mortgage brokers, with criminal conspiracy and fraud. They are alleged to have invented buyers, stolen identities and falsified appraisals to acquire subprime mortgages on over $200 million in property. Moody's shares shed 1.8% to close at $60.39 and shares of McGraw-Hill, which owns S&P, were off 4.4% at $64.24.
Sources: Wall Street Journal, Bloomberg I, II, MarketWatch I, II, Dow Jones, TheStreet.com, Financial Times
Commentary: Rating Agencies Could be Liable for Investor Losses -- Study • Moody's Concerned About Lending Standards Slide • Credit Rating Companies: The Subprime Debacle's Latest Casualties • S&P finally says subprime is mostly junk [MarketWatch]
Stocks/ETFs to watch: Moody's Corp. (MCO), Thomson Corp. (TOC), The McGraw-Hill Companies, Inc. [owner of Standard & Poor's] (MHP). ETFs: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT)
Microsoft Ignites Potential Price War with CRM Live
In what could be the start of a price war for on-demand CRM [customer relationship management] software, Microsoft said Tuesday its soon-to-debut CRM Live system will cost $44/user for the professional edition and $59/user for the enterprise edition. Competitor Salesforce.com charges $65/seat for its professional edition, and $125/user for the enterprise version. Microsoft spokesman Brad Wilson touted CRM Live Tuesday at Microsoft's worldwide partner conference in Denver, saying its "killer advantage" is its ability to also offer partner-created apps through its Solutions Marketplace, which lets users see snapshots of the apps and download them. CRM Live also boasts Microsoft Outlook integration. The software-as-a-service [SaaS] offering is a departure for Microsoft from its focus on traditional product sales. Salesforce spokeswoman Jane Hynes warned that the hybrid approach (traditional/SaaS) being attempted by Microsoft cannibalized sales of Oracle's traditional software after it acquired CRM on-demand vendor Siebel. Microsoft customers in North America will have the chance to kick CRM Live's tires for free under an early access program this year. Michael Maoz of Gartner research said in an email: "Salesforce.com is better focused from a sales and marketing perspective." He gave the Microsoft offering "only a slight chance of succeeding over the next 18 months." Separately, Microsoft COO Kevin Turner hinted Q4 results would be strong: "We've had a very good year, [with] unprecedented growth in the first three quarters."
Sources: TheStreet.com, PC World
Commentary: Microsoft's Entry to CRM Space Threatens Salesforce.com • Salesforce.com: Growth Is Becoming More Expensive • Salesforce.com's Overlooked Growth Area: Online Marketing
Stocks/ETFs to watch: Microsoft Corp. (MSFT), salesforce.com Inc. (CRM). Competitors: SAP AG ADR (SAP), Oracle Corp. (ORCL), Google Inc. (GOOG)
Second JP Morgan Report Calls Nano iPhone Into Question
After a report by JP Morgan analyst Kevin Chang that Apple was preparing to convert its iPod Nano into a mobile phone sent its shares to an all-time high of $132.35 Tuesday (+1.5%), three JP Morgan colleagues of Chang's issued a second report questioning the veracity of his report. JP Morgan analysts Bill Shope, Elizabeth Borbolla and Vlad Rom said Apple was more likely to release a 3G version of the iPhone next and questioned Chang's assertion that a patent filing by Apple indeed did refer to a Nano iPhone, saying the filing "gives little information on actual upcoming products." In his report, Chang also cited unnamed supply chain sources. A JP Morgan spokesman addressed the discrepancy between the two reports saying, "it's not unusual for two analysts to have slightly different views," as the analysts in question cover different tech sectors.
Sources: The Age, AP, tuaw.com
Commentary: Apple To Convert iPod Nano To Mobile Phone In 4Q -- Analyst • iPhone Watch: Sales May Be Slowing, Software Upgrade Rumors Abound • iPhone: A Look Inside
Stocks/ETFs to watch: Apple Computer Inc. (AAPL), JP Morgan (JPM). Competitors: Nokia Corp. (NOK), Motorola Inc. (MOT), Ericsson ADR (ERIC), Palm Inc. (PALM), Research In Motion Ltd. (RIMM). ETFs: Internet Architecture HOLDRs (IAH), PowerShares QQQ (QQQQ), Technology Select Sector SPDR (XLK)
Conference call transcripts: Apple F2Q07 (Qtr End 3/31/07) Earnings Call Transcript
EA Reveals Details of Two Spielberg Games
Electronic Arts announced minimal details of two video game titles under development with film director and producer Steven Spielberg, ahead of this week's E3 Media & Business Summit. EA and Spielberg entered a multi-year three game collaboration in 2005. The first game (code named PQRS), designed exclusively for Nintendo's Wii, was described as an action-packed interactive "blocks" game. It is scheduled for release within EA's fiscal year ending in March. The second game (code named LMNO) was referred to as the "more ambitious" project, an action-packed adventure that "puts you in the leading role of an emotional journey where your actions tell the tale," designed for Sony's PlayStation 3 and Microsoft's Xbox 360. A release date was not provided, but it will not be ready by this fiscal year. An EA manager said he thinks both projects are "great opportunities to move across different media." The third game was said to still be at the idea stage. Shares of EA lost 1.8% to $49.44 on Tuesday.
Sources: Press release, Reuters, Wall Street Journal
Commentary: Has Electronic Arts Finally Gotten the Joke? • Electronic Arts: Hurting From Wii Ramp Up • EA Sports Disappoints With 'Watered-Down' Games
Stocks/ETFs to watch: Electronic Arts Inc. (ERTS). Competitors: Activision Inc. (ATVI), TakeTwo Interactive Software Inc. (TTWO), THQ Inc. (THQI), Konami Corp. (KNM). Game console stocks: Sony Corp. (SNE), Nintendo Co. Ltd. (OTCPK:NTDOY), Microsoft Corp. (MSFT). ETFs: iShares Goldman Sachs Software Index Fund (IGV)
Earnings call transcripts: Electronic Arts F4Q07
Sources: Official E3 website
Burkle and Greenspan Present Alternatives to Murdoch Bid for Dow Jones
Supermarket magnate Ron Burkle and Internet entrepreneur Brad Greenspan met late Tuesday with a committee of Dow Jones's board to propose alternatives to Rupert Murdoch's $5 billion offer for the company. Burkle, who is acting as advisor to the Dow Jones journalists' union in its search for a rival bidder, has been exploring an employee stock-ownership plan for the company. Greenspan, who offered $60 per share for 25% of the company last month, has approached other potential investors, including EchoStar Communications and Intel. The proposals are viewed as a long shot, since even individuals who oppose a Murdoch takeover question the viability of a takeover by anyone else. "The search for any buyer but Murdoch makes little sense to me," said former Dow Jones CEO Peter Kann, who hopes the Bancroft family -- the company's controlling shareholders -- will not sell at all. "[I]f the family is going to sell," he wrote in an email, "I see no point in pursuing industrial conglomerates, Internet entrepreneurs, supermarket magnates and real-estate developers...at least [Murdoch] loves newspapers...and would seem to have little incentive to tarnish a trophy he has coveted for so long." The Tuesday meeting was apparently intended to mollify several Bancrofts, including Dow Jones director Leslie Hill, who are frustrated by the company's failure to locate an alternative to Murdoch. The family's board representatives will meet with company advisors Wednesday to review the new proposals.
Sources: Wall Street Journal, AP
Commentary: Dow Jones: Report of a Completed Sale Is Premature • Dow Jones Board Takes Over News Corp. Talks; MySpace Founder Makes an Offer • Is Brad Greenspan the Bancrofts' White Knight?
Stocks/ETFs to watch: Dow Jones & Company Inc. (DJ), News Corp. (NWS). Competitors: Reuters Group PLC [ADR] (RTRSY). ETFs: PowerShares Dynamic Media Portfolio ETF (PBS)
Earnings call transcripts: Dow Jones Q1 2007, News Corporation F3Q07
Amazon, TiVo Announce 'Buy on TV'
Amazon and TiVo launched a much-awaited rental and purchase feature for their "Amazon Unbox on TiVo" service that bypasses the PC, meaning TV shows and movies can be rented/bought directly on screen via Series 2 and 3 (broadband-connected) TiVo boxes. The selection spans more than 10,000 movies and shows available on Unbox. Movie rentals cost $1.99 - $3.99, or $9.99 - $14.99 to purchase. TV shows cost $1.99 per episode. Amazon and TiVo began their partnership in March, but required media to be downloaded first on a PC and then either watched there or transferred to a TV. Bloomberg reports neither party would say how many customers use the service. Rival service and media providers such as Apple and Wal-Mart require a PC and synchronization with a TV. Shares of Amazon fell 2.5% to $70.28 on Tuesday, while TiVo gained 4.2% to $6.16.
Sources: Press release, Bloomberg, Reuters, WashingtonPost.com Tech Blog
Commentary: How Will TiVo/Amazon Deal Affect Cable Companies? • TiVo: Shareholders Stuck In the Wrong Mister Rogers' Neighborhood • TiVo/Comcast Seal DVR Software Pact
Stocks/ETFs to watch: Amazon.com Inc. (AMZN), TiVo Inc. (TIVO), Apple Inc. (AAPL), Sony Corp. (SNE), Comcast Corp. (CMCSA), Echostar Communications (DISH), DirecTV (DTV), Netflix, Inc. (NFLX), CBS Corp. (CBS), Disney Co. (DIS), General Electric Co. (GE), Lions Gate Ent. Corp. (LGF), News Corp (NWS), Time Warner Inc. (TWX), Viacom Inc. (VIA)
Earnings call transcripts: Amazon.com Q1 2007, TiVo F1Q08
Sears Plunges 10% On Lowered Earnings Outlook
Department store operator Sears Holdings Corp. warned Tuesday that its second-quarter profits may decline as much as 46% on weak sales, sending its shares lower by 10%, their biggest one-day drop in more than four years. Net income is expected to be in a range of $160 million to $200 million, versus $294 million in the year earlier period. During the first nine weeks of Q2, same store sales at locations open at least a year fell 4% at Sears and 3.9% at Sears-owned Kmart stores. In the press release, Sears CEO Aylwin Lewis said his company's poor results "underscores our ongoing need to become more relevant to consumers." In other news, Sears' Board approved the repurchase of "up to an additional $1.0 billion of the Company's common shares," in addition to the $121 million still available for buybacks.
Sources: Press Release, Bloomberg, Reuters, MarketWatch
Commentary: Consumers Are Willing to Spend - So Why Aren't Retailers Performing Better? • Sears Holdings: Broken Retailers Unable to Overcome Blighted Images • Cramer's Take on SHLD
Stocks/ETFs to watch: Sears Holdings Corporation (SHLD). Competitors: Wal-Mart Stores Inc. (WMT), Target Corp. (TGT), J.C. Penney Company (JCP). ETFs: PowerShares Dynamic Retail (PMR), Claymore/Zacks Sector Rotation (XRO)
Liz Claiborne to Divest 16 of 36 Apparel Brands -- WSJ
Clothing retailer Liz Claiborne Inc., hit by downturns in department-store sales, has engaged boutique investment bank Centerview Partners to assist it in selling or licensing 16 of its 36 brands, according to a report in the Wall Street Journal. It is also cutting 8% of its non-retail work force (600-800 people) and reorganizing its management structure. The brands that are not sold or licensed might be kept by the company or discontinued. The brands to be divested are Sigrid Olsen, Prana, Ellen Tracy, Dana Buchman, Mac & Jac, Kensie, Intuitions, C&C California, Enyce, Laundry, Tint, Stamp10, First Issue, Emma James, Tapemeasure and J.H. Collectibles. Collectively, they account for approximately $800 million of the company's $5 billion in annual revenue. The divestiture represents an about-face from Liz Claiborne's decade-long strategy of acquiring as many brands as possible as a hedge against fashion cycles. "Post restructuring, Liz will transform from a merger and acquisition driven company to an organic growth story," said Credit Suisse analyst Omar Staad. New CEO William McComb is also expected to double ad spending for "power brands" Juicy Couture, Lucky, Mexx and Kate Spade, which are sold in Liz Claiborne's own stores.
Sources: Wall Street Journal, Reuters, MarketWatch, RTTNews, Fashion Television, New York Business
Commentary: Russell 1,000's Best, Worst Performing Stocks Since March 5 Bottom • Is Prudence Passé? Private Equity and LBO Cyclical Sector Targets • Liz Sets Sights on China with Juicy Label
Stocks/ETFs to watch: Liz Claiborne, Inc. (LIZ). Competitors: Benetton Group SpA (BNG), Jones Apparel Group Inc. (JNY), Polo Ralph Lauren Corp. (RL). ETFs: PowerShares Dynamic Consumer Discretionary (PEZ)
ENERGY AND MATERIALS
Gerdau Buys Chaparral for $4.2B
Toronto-based steel producer Gerdau Ameristeel said late Tuesday it will acquire Chaparral Steel for $4.22 billion, or $86/share -- a 14% premium to its $75.69 Tuesday close. The deal is an attempt by Gerdau, which is 67%-owned by Brazil's Gerdau AS, to diversify its product offerings. Chaparral is the number-two maker of structural steel beams in North America; it is also a major producer of steel bars and a recycling company. The acquisition will boost Gerdau's production of the steel used in office buildings and bridges -- which are in heavy demand due to a surge in infrastructure spending and a strong commercial real estate market -- by about 33%. Chaparral said in April it was exploring strategic options, including a possible sale, and that it hired Goldman Sachs to advise it. JP Morgan Chase is advising Gerdau and has promised financing of $4.6 billion. UBS analyst Edmo Chagas criticized the deal: "We believe the acquisition is expensive and slightly negative for Gerdau," he wrote in a research note. Chaparral shares were up 71% YTD, and 20% since it put itself on the block.
Sources: Wall Street Journal, Bloomberg,
Commentary: Chaparral Steel Uses Eco-Friendly Methods In Steel Production • Gerdau Ameristeel Building its Way to the Top • Capital Market Gives IPSCO Top Rating, Gerdau Ameristeel To Outperform
Stocks/ETFs to watch: Chaparral Steel Company (CHAP), Gerdau Ameristeel (GNA), Goldman Sachs Group Inc. (GS), JPMorgan & Chase Co. (JPM). Competitors: Arcelor Mittal (MT), United States Steel Corp. (X)
Tercica Soars 23.6% on Genentech Deal
Shares of Tercica Inc. shot up 23.6% to close at $6.70 in AH trading Tuesday on news the biotech company has inked a deal with Genentech to develop, manufacture and market two products. The new drugs will combine Genentech's Nutropin AQ, a recombinant human growth hormone [rhGH], and Tercica's Increlex, an insulin-like growth factor [rhIGF-1]. One product will be designed to treat short stature in children and the other to treat metabolic disorders associated with growth hormone deficiency in adults. Under the terms of the agreement, Genentech bought 708,591 shares of Tercica stock for $4 million. Tercica will be eligible for "up to $53 million in equity payments, opt-in payments, research and development cost reimbursement and milestone payments," according to a company press release. Tercica will finance and lead the product development; Genentech will have the right to become a full development partner up to the completion of Phase II clinical trials. If Genentech declines and Tercica brings the products to market alone, Genentech will receive royalties. Tercica is aiming to hold mid-stage trials by early next year. "With demonstrated synergies in pre-clinical studies, the combination of rhGH and rhIGF-1 could have the potential for several important therapeutic benefits compared to either rhGH or rhIGF-1 monotherapy alone for the treatment of patients with short stature and AGHD and potentially other adult metabolic disorders," said Tercica CEO John Scarlett.
Sources: Press release, MarketWatch, Forbes, Reuters, TheStreet.com
Commentary: Celgene, Genentech, Gilead: Is Biotech Weakness Creating A Buying Opportunity? • Biotech Week In Review: Flat Never Looked So Good • Growth Stocks See Multiples Compress; Investors, Make a Shopping List
Stocks/ETFs to watch: Tercica, Inc. (TRCA), Genentech, Inc. (DNA). Competitors: Eli Lilly & Co. (LLY), Pfizer Inc. (PFE). ETFs: HealthShares Metabolic-Endocrine (HHM)
Earnings call transcripts: Genentech Q1 2007
Japan: PM Adviser Suggests Diversifying Foreign Reserves
Bloomberg reports Takatoshi Ito, an adviser to Prime Minister Shinzo Abe, said the country should invest $700 billion of its more than $900b of foreign currency reserves in higher-yielding assets. Japan is the largest holder of U.S. Treasuries, with $615b, followed by China with $414b, as of April. Within Asia, South Korea, China and Taiwan have already announced plans to diversify reserves. As a result, the U.S. dollar has lost more than 7% against the euro in the past year. Vice finance minister Hiroki Tsuda said he's "aware of the ongoing debate" and acknowledged the government is studying other nations' investment models, but he said there are no immediate plans to change any holdings. Ito proposed investing around $200b of reserves in corporate debt or mortgage-backed securities, $200b in stocks and the remaining approximately $300b in other assets. He said $200b should be kept invested in highly-liquid assets such as Treasuries, for possible use in national emergencies.
Commentary: Big Mac Index Supports Japanese Bullishness • BoJ's Nishimura Warns Against Pausing for Too Long • US Subprime Concerns Help Stir Yen Rally
Stocks/ETFs to watch: iShares MSCI Japan Index (EWJ). Bond funds: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT). Currency funds: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE), CurrencyShares Japanese Yen Trust (FXY)
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