U.S. Banks Refuse to Lend Against Credit Portfolios -- FT
U.S. banks have begun refusing to allow hedge funds to borrow against their subprime credit portfolios. According to the Financial Times, banks caught in the credit market debacle have cut off lending to funds that use credit portfolios -- including mortgages, collateralized debt obligations and subprime securities -- as collateral, leaving the highly leveraged funds heavily reliant on their prime brokers. Bank of America and Countrywide were cited by the funds, although there were believed to be others, the FT said. "My prime broker is my first source of borrowing, but I used to get additional financing from other sources. I called my usual banks last week to ask for their terms, and they told me there weren't any terms because they weren't lending against my credit portfolio any more. I'm not that happy. I need more than just one lender," one hedge fund manager said. There was no evidence, the FT added, that prime brokers have eliminated lending to their clients. Bank of America declined to comment, and Countrywide did not return calls.
Sources: Financial Times
Commentary: The Well of Liquidity is Running Dry • Is This a Liquidity Crisis or An Insolvency Crisis?
Stocks/ETFs to watch: BAC, CFC
U.S. Trade Deficit Shrinks; GDP Outlook Bright
The U.S. trade deficit beat expectations by narrowing in June on record exports, appearing to confirm the Fed's supposition that global demand for American products will cushion the economy from the ill effects of the housing slowdown. "The economy needs something to step up and lead it forward and it looks like the export sector has become that savior," said economist Joel Naroff. The surprising deficit result could result in an upward revision of Q2 GDP above its current 3.4% estimate, possibly above 4%. The trade gap slimmed in June by 1.7% to $58.1 billion from a revised $59.2 billion in May, though the deficit with China widened. The deficit is running at an annualized rate of $705.5 billion, 7% below last year's record $758.5 billion figure. Last week, Fed policymakers cited increased employment and strong global demand to justify their forecast of "moderate" economic growth. In June, exports rose 1.5% to $134.5 billion on sales of petroleum products, semiconductors and cars. Exports of services, foods, industrial supplies and cars all set records. Imports also set a record at $192.7 billion. Foreign demand for U.S. products is being spurred by strong growth abroad -- China, for example, expanded 11.9% in Q2 from the previous year -- as well as the state of the dollar, which has weakened 7% since the beginning of 2006.
Sources: Bloomberg, MarketWatch, Business Week, Wall Street Journal
Commentary: The U.S. Economy: Business As Usual? • Trade Deficit Narrows Sharply on Record Exports • Monthly Budget Surplus Second-Highest Ever, But Trade Deficit Widens Over 10% [May 11, 2007]
Stocks/ETFs to watch: SPY, DIA, AGG, FXE
VMware Surges in Biggest Debut of 2007
Bucking negative trends in the broader market, shares of EMC spin-off VMware Inc., touted as the most highly anticipated technology IPO since Google nearly three years ago, surged in their Tuesday debut closing up 79% from their $29 pricing at $51. It was the biggest IPO of the year in terms of one-day gains. The shares opened at $51.99 and rose as much as 90% to $55.50 in intraday trade. VMware makes virtualization software, which allows multiple operating systems to run simultaneously on the same computer, thereby cutting costs. "This is a milestone for VMware," said VMware CFO Mark Peek. "We still believe we're in the very early stages of virtualization, but this reaction says a lot about our market and our products." Reports surfaced Tuesday that Citrix may buy XenSource, one of VMware's main competitors. According to IDC, the virtualization solutions category is projected to grow to $11.7B by 2011 from $5.5B in 2006. Jeffries & Co. said VMware "is on a trajectory that mirrors Microsoft, Oracle and Veritas in [their] early days." VMware sales doubled in the first half of 2007 to $555.5M from $285.5M, on track to reach $1B annually for the first time. Profits in the first half more than doubled to $75.3M. The 33 million share offering raised about $1B. The closing price implied market cap of about $19B, placing VMware just behind Adobe Systems and ahead of Symantec as the biggest software companies. EMC continues to hold 87% of VMware's common shares and 98% of the combined voting power of the shares. Last month, Cisco said it would purchase a 1.6% in Vmware, while Intel said it would take a 2.5% stake. EMC shares, which rose 7.5% on Monday ahead of the IPO, fell 3.7% Tuesday.
Sources: Financial Times, MarketWatch, CWN
Commentary: VMware Blasts Off: Lessons and Implications • Did EMC Price VMware Too Low? • Is the VMware IPO Worthy of All the Hype?
Stocks/ETFs to watch: VMW, EMC. Competitors: MSFT
Applied Materials Q3 Beats Street, But Gives Weak Guidance
Applied Materials reported fiscal Q3 net income fell 7.5% to $473.5 million, or $0.34/share on sales growth of less than 1% to $2.56B, topping analyst expectations of $0.32/share on sales of $2.53B. Shares fell 3.8% to $20.43 after the release, mostly due to disappointing Q4 guidance. Applied forecast Q4 EPS of $0.26-$0.29, on revenues of $2.26B-$2.39B. Analysts were expecting $0.30/share on sales of $2.46B. For Q3, Applied said new orders fell 14% both y/y and sequentially, to $2.28B. Gross margin declined 6% to 47.5%, but improved 2.6% over Q2. CEO Michael Splinter said "... equipment spending will be slightly lower in the second half of the calendar year, primarily due to foundry spending not materializing [despite utilization moving into the 90% range, as existing lines are being stretched and the 65-nm ramp is taking longer to develop than anticipated]. While foundry remains weak, we expect memory capital investment to remain relatively strong and logic to be flat" (full earnings call transcript). Shares of Applied lost 2.3% to $21.24 during normal trading Tuesday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Best, Worst Performing Stocks Since the Market Top On 7/16 • BOA On Semi Equipment Stocks: DRAM Price Pop Mere Inventory Build • Chipmakers Slash 2007 Forecasts
Stocks/ETFs to watch: AMAT. Competitors: KLAC, LRCX, NVLS. ETFs: SMH, IGW, PSI, PBW
DirecTV to Offer Internet Over Electric Power Lines -- WSJ
DirecTV Group will expand its ISP business. The satellite-television provider is reportedly set to sign a deal with Current Group LLC to provide high-speed Internet service carried over electric power lines. Broadband-over-power-line offers Internet access that is faster than some Internet plans from cable and phone companies. According to the Wall Street Journal under the agreement, which is expected to be signed today, DirecTV will market a bundled package of Current's broadband and VOIP services under the DirecTV brand. It already resells high-speed Internet services from AT&T, Verizon and Qwest under their brand names. Current is building out broadband networks in Cincinnati and Dallas-Fort Worth and is in talks with a number of utilities around the world regarding a commercial roll-out, the Journal reported. According to the report, DirecTV has yet to determine pricing, but says TV, Internet and phone services packages will be competitive with those offered by phone companies.
Sources: Wall Street Journal
Commentary: Internet Video: Not About to Kill Cable TV - Barron's • Cable Providers Continue To Balk At 'A La Carte' Offering • John Malone's Three Part Plan For DirecTV
Stocks/ETFs to watch: DTV, T, VZ, Q
Earnings call transcript: DIRECTV Group Q2 2007
Berkshire Hathaway Reports Taking Stake in Dow Jones
Berkshire Hathaway Inc., Warren Buffett's holding company, reported in a quarterly summary filing of its $61.1 billion portfolio that it bought 2.78 million shares of Dow Jones between the announcement of Rupert Murdoch's $60 per share offer for the company at the end of April and the sealing of the deal three months later. Berkshire Hathaway did not disclose what it paid for the shares. "There's no way he would have bought this company outright, especially in a bidding war, but he loves arbitrage,'' said investment manager Mohnish Pabrai. Berkshire Hathaway also bought 8.7 million shares of Bank of America valued at $425.3 million, a new holding for the company. It also boosted existing stakes in healthcare companies Johnson & Johnson and sanofi-aventis, health insurers UnitedHealth Group and WellPoint, and banks Wells Fargo and US Bancorp. The Wells Fargo stake was worth $9 billion at the end of June.
Sources: Bloomberg, Reuters, Forbes
Commentary: Berkshire's Net Rises 33% On 13% Revenue Growth • Dispelling The Fallacy of "Buffett Can't Buy More" • Is Berkshire Hathaway a Buy at $111,000?
Stocks/ETFs to watch: BRK.A, BRK.B, DJ. Competitors: BX. ETFs: ELG, PRFF
Mattel Could Be Hit With Lawsuits on Recalls
Mattel Inc. could face a series of lawsuits after it was forced to take back about 20 million toys worldwide. On Tuesday, the U.S. toy maker recalled 18.2 million magnetic toys and another 250,000 Pixar Sarge toy cars (pictured) with lead paint. Earlier this month the company's Fisher-Price unit was forced to recall about 1.5 million preschool toys for the same reason. The company said yesterday it may still recall more products as it steps up testing and quality control on thousands of toys. "Mattel has a spectacular reputation that they risk now in a very dramatic way," said public relations expert Howard Rubenstein. "It is a mighty blow. They have got to be prepared for a lengthy series of court battles." Lawyer Ted Tanenebaum told Reuters, "If there are potentially kids who are harmed out there ... then there are going to be big lawsuits." However another lawyer, who often defends companies in product liability suits, said that although he expected to see lawsuits filed, they were unlikely to harm the company: "Unless someone can say that a specific child suffered lead poisoning and they can trace it to that particular toy, it is going to be hard really to bring a claim," said Creighton Magid of the law firm Dorsey & Whitney. Mattel launched a national advertising campaign Tuesday assuring customers its was taking steps to ensure the future safety of its toys: "Our long record of safety at Mattel is why we're one of the most trusted names with parents," CEO Bob Eckerty wrote in a full-page ad that ran in Tuesday's Wall Street Journal, New York Times and USA Today. So far Mattel shares have weathered the storm. Shares fell $0.57 (2.4%) Tuesday to $23, and are down just 2.5% since the first recall was reported.
Sources: Reuters, Wall Street Journal
Commentary: Despite Mattel Recall, I Remain Bullish • Mattel's Earnings Worse Than They Appear
Stocks/ETFs to watch: MAT. ETFs: FXI, PGJ
Earnings call transcript: Mattel Inc. Q2 2007
TRANSPORT AND AEROSPACE
AirTran Back in the Bidding for Midwest
AirTran Holdings Inc. on Tuesday offered $16.25/share in cash and stock for Midwest Air group, renewing its efforts to take over the Milwaukee-based carrier. On Sunday AirTran had said it was abandoning its previous $15.75/share cash and stock bid for the carrier after Midwest said it would pursue a deal with TPG capital, that would including Northwest Airlines as a passive investor. The new AirTran bid is worth $445M, $14M more than its previous $431M offer, and also is above the $16/share, $400M, all cash bid from TPG. Midwest said it would take the revised offer under consideration. AirTran COO Bob Fornaro told Reuters, "They believe our deal is superior." Meanwhile, Pequot Capital Management, a Connecticut hedge-fund manager that owns 8.8% of Midwest said it had "significant concerns" with Midwest's decision to pursue the TPG bid, saying it was not not convinced that the taxable, all-cash bid was superior to even the earlier AirTran offer. The new offer is the fourth time AirTran has raised its bid since it made its overture public last December. It said it was prompted to revive the bid because of "urging" by a "substantial number" of Midwest shareholders.
Sources: Press release, MarketWatch, Reuters, AP, Wall Street Journal
Commentary: Midwest to Take Off With TPG Capital, Northwest • Top Shareholder Urges Midwest To 'Seriously Engage' AirTran's Offer
Stocks/ETFs to watch: AAI, MEH, NWA
Thornburg Mortgage Hit With Margin Calls; Shares Plunge 47%
Shares of Thornburg Mortgage Asset Corp. plummeted 47% to close at $7.61 Tuesday before rebounding 25% to $9.48 in AH trading after the REIT announced it is delaying a dividend payment because of margin calls. Payment of Thornburg's Q2 dividend of $0.68, which was to have taken place on August 15 to shareholders of record as of August 3, will be postponed until September 17. The company's board said it is taking this step because of "significant" upheaval in the mortgage market that has set off an "unprecedented" drop in the market value of its AAA-rated mortgage securities. The slide, which began on August 9, triggered the margin calls. The company has met its commercial paper obligations but is forced to delay funding mortgage loans to its lending partners. Its book value per share has declined to $14.28 as of Aug. 13 from $19.38 as of June 30, with most of the drop occurring over the past week. President and CEO Larry Goldstone told CNBC Thornburg has "no intention" of filing for Chapter 11 bankruptcy protection. The company is exploring other options to improve shareholder value, he said, possibly including "the opportunistic sale of our mortgage assets."
Sources: Press release, MarketWatch, Reuters
Commentary: Thornburg Mortgage's 'Unprecedented' Moratorium on Locking • Tuesday's Analyst Upgrades and Downgrades
Stocks/ETFs to watch: TMA, CFC, IMB, FNM, FRE, WFC. ETFs: DON, REM
Agilent Posts Q3 Miss; Shares Sink After Hours
Scientific testing equipment manufacturer Agilent Technologies shed 12.3% to close at $36.33 in AH trading Tuesday after the company reported a 19% drop in Q3 net earnings and forecast Q4 results below expectations. The company posted Q3 net profit of $185 million ($0.45/share) against $227 million ($0.54) in Q3 2006. Excluding items, adjusted earnings were $194 million ($0.48/share) versus $166 million ($0.39) in the year-ago period. Net revenue rose to $1.37 billion from $1.24 billion. (See earnings call transcript.) The company had forecast Q3 EPS of $0.46-0.50 in May, and analysts were expecting EPS of $0.49 on revenue of $1.39 billion. "The surprise was Japan, where orders were weak across the board and down 24%,'' said CFO Adrian Dillon. For fiscal Q4, Agilent is forecasting a "softer than normal" revenue increase "because of weak Asian electronic measurement markets," according to a release. The company is expecting adjusted Q4 EPS of $0.50-0.54 on revenue of $1.39-1.43 billion. Analysts had been expecting EPS of $0.58 on $1.48 billion in revenue.
Sources: Press release, MarketWatch I, II, Bloomberg, CNBC.com, Dow Jones
Commentary: Biotech Day In Review: Agilent Buys Stratagene For $245.5 Million • Cramer's Take on A
Stocks/ETFs to watch: A. Competitors: TEK, TER, TMO. ETFs: PHW
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