Commercial Paper Sinks As Investors Flee to Safety
The Fed reported Thursday that outstanding commercial paper dropped 4.2% this week, its biggest weekly fall in at least seven years, as anxious investors flooded into Treasurys. The paper has fallen by $181.3 billion in two weeks, suggesting that investors were not substantially reassured by the Fed's lowering of the discount rate last Friday. Tony Crescenzi, chief bond market strategist at Miller Tabak, said commercial paper could sink by $300 billion, which would constitute the entire amount of such debt backed by home loans. "The asset-backed commercial paper market is basically history,'' said Bill Gross, manager of world-leading bond fund Pimco. Investor aversion to commercial paper sent Treasury yields to their lowest levels since the October 1987 crash. Over half the $1.1 trillion in outstanding asset-backed paper will be due in the next 90 days. Hedge funds and home-loan companies could be compelled to sell $75 billion of debt, according to UBS AG. That could force prices even further down in a market where investors have already lost $57 billion. In related news, Pimco's Bill Gross said Thursday he is buying the debt of financial companies like Goldman Sachs, Merrill Lynch, Bank of America, Deutsche Bank and American Express because their coupons are surging over 6%. "We like that yield," he said.
Sources: Bloomberg I, II
Commentary: Yesterday's Trading: Calm, Cool and Clueless • The Collapse of Fixed Commitments
Stocks/ETFs to watch: SHY, IEF, TLT
KKR Financial Receives Seven Day Standstill On Debt Repayment; Parent Denies IPO Delayed
The Wall Street Journal reports Kohlberg Kravis Roberts-owned KKR Financial Corp. has received a seven-day standstill period to try and craft new terms on the repayment of $5 billion in short-term debt following its request to delay repayment. The mortgage-backed commercial paper is owned by 15 different companies including GE, the money management arms of U.S. Bankcorp and Legg Mason, as well as several money-market funds. One industry expert believes it may make sense for the investors in KKR's debt to accept a repayment delay to avoid forced sales "at incredibly distressed prices." The debt didn't include backup provisions, as is usually customary with commercial paper, due to the fact it was heavily collateralized by mortgage assets. KKR Financial initially issued the debt to invest in high-quality jumbo mortgages. In separate news, KKR Financial parent Kohlberg Kravis Roberts rebuffed a story in Thursday's online edition of the Times of London claiming the leveraged buyout firm had put its $1.25 billion IPO on hold. KKR said in a statement: "As evidenced by the recent filing of an amendment to the registration statement, we are continuing to work on the IPO and have not postponed." Analysts have expressed their opposition to the timing of KKR's IPO, citing the subprime meltdown and ensuing global liquidity crunch that have made it difficult for buyout firms to obtain funds.
Sources: Wall Street Journal, Times of London, Reuters I, II, Hedge Week
Commentary: KKR Financial Looks to Raise $500M in Share Sale • KKR Financial Plunges on Mortgage Losses • KKR Files for $1.25 Billion IPO
Stocks/ETFs to watch: KFN, KKR, GE, LM, USB. Competitors: BX, AHR, DFR, LUM. ETFs: PSP
GS Quant Fund Bounces Back
Goldman Sach’s Global Equity Opportunity hedge fund gained 12% last week, according to a Bloomberg report Thursday citing anonymous investors, after the fund was injected with $3 billion of capital, including $2B from Goldman. The fund was down about 30% in early August after computer models used by the fund succumbed to the market’s erratic movement and caused swift, heavy losses. Global Equity, along with other quantitative funds, such as Renaissance Institutional Equities Fund (who made back almost all of its early August losses), bounced back as the market rebounded and volatility lowered in the last week. Renaissance owner James Simons addressed the uncertainty created by the crisis in a letter to his investors: “Usually such behavior causes first pain and then opportunity…we anticipate the possibility of an attractive opportunity'' for the fund. Though Goldman instilled confidence by adding capital to the Global Equity Opportunity hedge fund, it chose not to increase the capital in its Global Alpha quant fund, which lost 27% during recent market upheaval. Clients of the Alpha fund responded by withdrawing $1.6 billion, leaving the fund with $6.8 billion. Both of the funds are managed by Mark Carhart and Raymond Iwanowski.
Sources: Bloomberg, MarketWatch
Commentary: Goldman Denies Hedge Fund Liquidation • Is the Game Over for Goldman's Quant Fund? • Goldman Sachs: Spin Doctors or Funds Managers?
Stocks/ETFs to watch: GS. Competitors: BSC, MS, LEH. ETFs: KCE, KBE, PJB
Earnings call transcripts: Goldman Sachs F2Q07
Borse Dubai’s Dealings Found Illegal
Borse Dubai was found to have taken illegal actions in its acquisition of a 28.4% stake in Nordic exchange operator OMX AB. Both Nasdaq and Borse Dubai have targeted OMX as takeover target, and entered formal bids for the company (full story). Nasdaq submitted a $3.7 billion offer in stock and cash for the OMX on May 25, but was outbid by government-owned Borse Dubai, who offered $4 billion in cash. In an important blow to the success of Borse Dubai’s bid, Sweden’s Financial Supervisory Authority found that Borse Dubai had broken the law by failing to disclose its transaction, because they felt the move constituted a takeover bid. Though the Swedish authorities did not take any actions against Borse Dubai, saying the breach had been rectified by its subsequent buyout offer, it said the misstep will “be taken into account” when the authorities meet to decide if Borse Dubai is a “fit and proper” potential owner of OMX. Because Sweden sees the OMX as a strategic industry, any new owner must be authorized by regulators. Regulators can block any deal they feel does not meet their standards. The news comes as Nasdaq CEO Bob Greifeld has been meeting with large stakeholders of OMX to convince them that the Nasdaq offer is superior (full story). The Nasdaq has received support for its bid from members of the OMX board, large shareholders such as Nordea Bank, and the Swedish government (full story), who is also a 6% owner in OMX AB.
Sources: Financial Times, Business Week, MarketWatch
Commentary: Nasdaq OMX Bid Aided by Swedish Politics • Key OMX Shareholders Agree to All-Share Payment by Nasdaq -- FT • Borse Dubai Trumps Nasdaq's OMX Bid
Stocks/ETFs to watch: NDAQ. Competitors: CME, BOT, ICE, ISE, NYX
Gap Lowers Costs, Ups Outlook
Gap Inc., the largest U.S. clothing retailer, reported earnings in line with Wall Street expectations, and increased its full-year outlook. For the quarter, Gap net income was $152 million, or $0.19 per share, up from $128 million ($0.15/share) last year. Sales fell 1% to $3.69 billion from $3.71 billion a year ago. Analysts were expecting EPS of $0.19 cents a share and sales of $3.72 billion. Same store sales decreased 5%. Gap trimmed costs by cutting 2,200 jobs during the first half of the year, and said it expects a pretax annualized cost savings of approximately $100 million from the move. "During the second quarter, we made solid progress stabilizing our business, streamlining our organization," board member Bob Fisher said (see full Earnings Call Transcript later today). The company also increased its earnings forecast for the year from $0.76 to $0.86 a share to $0.83 to $0.88. CL King & Associates analyst Mark Montagna was upbeat on the quarter saying "It appears as though the merchandise has made a turn. We're optimistic with the company going forward." Gap also announced its board of directors had approved a new share repurchase program of $1.5 billion. The company traded up 2% to $17.78 in after hours trading; shares have lost almost 11% YTD.
Sources: Press release (.pdf), Bloomberg, Wall Street Journal
Commentary: Gap's New CEO: Good Move For The Company • Is Gap Finally Getting Their Act Together?
Stocks/ETFs to watch: GPS. Competitors: ANF, AEO, JCG. ETFs: RXI, PBJ, RTH
Earnings call transcripts: The Gap Q1 2007
Home Depot Might Cut Price of Supply Unit to Ensure Sale
Home Depot might knock $1.2 billion off the price of its contractor-supply business to push through the increasingly contentious sale of the unit. The DIY retailer inked a deal in June to sell the business to three private equity firms -- Bain Capital, Carlyle Group and Clayton, Dubilier & Rice -- for $10.3 billion (see full summary). The transaction's three bankers, however -- JPMorgan Chase, Lehman Brothers and Merrill Lynch -- continued to balk over the financing through a deadline Thursday night. The WSJ notes that until recently, buyout firms have obtained good financing terms from banks in exchange for rich fees. The credit crunch has caused banks, faced with extensive writedowns, to look for ways to back out of buyouts to which they are committed. The Home Depot deal, beset not only by the tightening of credit but also by the effects of the housing slowdown, now appears expensive. The terms are no longer appealing to the banks, which are said to have argued that their exposure should be reduced if the unit's price is cut. According to sources close to the talks, they have threatened to walk away completely. The sale was intended to finance Home Depot's buyback of $22.5 billion in stock. If the sale collapses, the buyback might be halved.
Sources: Wall Street Journal, Bloomberg, Reuters
Commentary: Home Depot Unit Sale in Last-Minute Peril -- FT • Home Depot: This Buyback Was Destined To Fail • Home Depot Sells Supply Unit for $10.3B, Boosts Share Buyback
Stocks/ETFs to watch: HD, LER, JPM, MER, GS. Competitors: LOW. ETFs: RTH, XLY
Earnings call transcripts: The Home Depot Q2 2007
Aeropostale Reports Higher Earnings But Lowers Outlook
Teen retailer Aeropostale reported sharply higher earnings, but said that it expects third quarter earnings to come in below analyst’s current expectations. The company’s second quarter net earnings of $14.7 million ($0.19/share) were a significant increase over last year’s $8.42 million ($0.10/share). Sales increased as well, rising to $311.2 million from $274.6 million. Same store sales dropped 4.1%. Analysts polled by Thomson Financial expected $0.18/share on $313 million in sales. Julian R. Geiger, Chairman and CEO, commented: “During the quarter we were able to generate strong increases in our gross margin and, as a result, deliver record second quarter earnings, which were at the high end of our previously issued guidance.” However, the company announced it expects third quarter earnings of $0.43 to $0.45 cents/share; analysts had been looking for $0.47 cents/share. Earlier this month, the company admitted that the pullback in consumer spending during back-to-school season would hurt sales. In a post-earnings note, Citigroup analysts wrote, "Although we are positive on the earlier BTS collection (shorts, printed tanks & babydoll ts), we are less constructive on the athletic, preppy styles (rugby shirts, athletic graphics), which we see downtrending on the teen market, as well as guy's wide leg denim, and girl's heavy/chunky sweaters. Dresses represent a missed opportunity in our view." Citigroup said it's cautions on H2 EPS "given our less favorable view of the Fall assortment, increasingly difficult comparisons over the next 4 quarters & uncertainty around the macroeconomic environment." Aeropostale traded down 2.7% in after-hours trading to $22.50.
Sources: Press Release, MarketWatch, Reuters
Commentary: Aeropostale's Sales Definitely Slowing • Select Retail Sales Slow in May: Sign of a Wider Consumer Slowdown? • July Same-Store Sales Roundup
Stocks/ETFs to watch: ARO. Competitors: AEO, GPS. ETFs: RXI, PBJ, RTH
Appeals Court: Whole Foods-Wild Oats Merger Can Go Ahead
A federal appeals court on Thursday denied the FTC's request for an emergency stay to block the purchase by natural grocer Whole Foods of its smaller rival Wild Oats. Last week, U.S. District Judge Paul L. Friedman refused to allow the FTC's request for an injunction and also refused to grant a stay of his decision. The FTC appealed, but a three-judge panel on the U.S. Court of Appeals for the District of Columbia Circuit, while granting that the FTC had "raised some questions" about the $565 million merger, rejected the Commission's claim that Friedman's decision was flawed. The FTC argued that the combination will result in constrained competition and higher prices, but Friedman noted that traditional grocers Safeway and Kroger are already selling organic foods and are redesigning stores to compete with Whole Foods. "To put it colloquially, this train has already left the station," Friedman wrote in his 93-page ruling. Whole Foods' tender offer for Wild Oats expires Monday night, and it has said it will close the deal as soon as possible. Once the merger is completed, the FTC will likely drop the case, according to King & Spalding antitrust lawyer Andrew Berg. "It's very difficult once the eggs are scrambled to unscramble them," he said.
Sources: Forbes, MarketWatch, Reuters, TheStreet.com, Bloomberg
Commentary: Judge to FTC: No Stay of Ruling on Whole Foods Merger • Judge Refuses to Block Whole Foods-Wild Oats Merger • Note To FTC: Time To Get New Lawyers
Stocks/ETFs to watch: WFMI, OATS. Competitors: KR, SVU, SWY. ETFs: XLP, VDC, PSL
Earnings call transcripts: Whole Foods Market F3Q07
GameStop Beats Estimates and Ups Outlook
Video game retailer GameStop reported strong second quarter earnings on Thursday and bumped its full-year earnings outlook. Net profit soared to $21.8 million ($0.13/share), up nearly sevenfold from $3.18 million ($0.02/share) a year ago. Analysts were expecting $0.09/share. Revenue came in at $1.34 billion, beating the average analyst forecast of $1.19 billion. Same store sales increased 29%. GameStop now estimates full-year profit to come in between $1.45 and $1.48; its previous guidance was from $1.42 to $1.46. The company expects same store sales to rise 15% to 17%, and sees revenue growing between 20% and 22%. "Our second quarter performance was very broad-based, with the U.S., Canada, Australia and Europe all exceeding expectations," CEO R. Richard Fontaine said (see full earnings call transcript). In a report, Credit Suisse analyst Gary Balter noted “The strength of these results points to a company very well-positioned and benefiting from the strongest momentum in retail today.” GameStop opened 150 new stores in the second quarter, and now controls 5,000 stores in 16 countries. It is now the only major chain in the $30 billion video game industry. Shares closed up 9.2% Thursday to $47.45.
Sources: Press release, Reuters, AP
Commentary: Profiting From the Love of Gaming • GameStop Flourishes From the Latest Video Game Cycle • GameStop: 'Compelling' Way to Get into Video Games
Stocks/ETFs to watch: GME. Competitors: BBY, AMZN
Nokia Grabs More Market Share from Motorola
A Gartner research report says Nokia gained another 3.2% global handset market share, up to 36.9%, during the second quarter of 2007. Motorola's share of the pie was sliced by 7.3% to 14.6%, still good enough for second best, but increasing the likelihood of being surpassed by Samsung, which actually shipped more handsets. Samsung's market share rose 2.2% to 13.4%, as it was said to have "aggressively" built inventory in order to exploit Motorola's woes. Gartner research director Carolina Milanesi said Nokia's market share could reach 40%, as it registered Q2 expansion in every region except North America. Overall industry sales increased 17% to 270.9 million units in Q2. Gartner lowered its full-year growth forecast to 14%, or 1.13B units, from 1.15B units previously. The arrival of the iPhone is expected to negatively impact Motorola. Gartner's Milansei says Sony Ericsson, which added 2.4% market share to 9.0%, is a "solid number four" ahead of LG. Separately, Matsushita Electric Industrial said it has agreed to cover the costs related to Nokia's Aug. 14 recall of 46 million Nokia-branded batteries, and predicts it will incur between ¥10B - ¥20B ($86M - $172M) in costs. Nokia says the batteries could overheat, and offered to replace them for free (full story).
Sources: Bloomberg, Red Herring, Wall Street Journal
Commentary: Nokia Seeks to Block U.S. Import of Qualcomm Chips • Nokia Issues Warning on 46M Batteries • Goodbye Moto, Hello Nokia
Stocks/ETFs to watch: NOK, MOT, MC. ETFs: MTK, WMH
Earnings call transcripts: Nokia Q2 2007, Motorola Q2 2007
FCC Spectrum Rules Favor New Entrants Over Incumbents -- Source
The rules of a federal government airwaves auction to be held in January 2008 are unfavorable to incumbent wireless companies, an unnamed "senior figure at a large wireless carrier" told Dow Jones. In an apparent attempt to broaden competition, the FCC is attaching two open-access conditions to 22 of 62 megahertz of airwaves to be sold. Incumbents will not be able to integrate that portion of the spectrum into their existing networks. Whoever wins that portion will have to build a network to access the frequencies -- an expected hurdle for a new entrant, but a burden for incumbents who will then have to operate two networks in parallel. The rules will also require the purchaser of the 22 megahertz portion to permit any handset, software or Web application to be usable on their network. (Providers usually keep strict control over which applications are used on their networks.) The auction is widely viewed as the last chance for new entrants to establish themselves in the wireless broadband market. Google, which has lobbied for open-access conditions, has expressed interest in buying a piece of spectrum. AT&T has said it accepts the new rules. Verizon has said that though it disagrees with them, it will comply.
Sources: Dow Jones
Commentary: FCC to Announce Rules for Wireless Spectrum Auction • Google Dangles $4.6 Billion Bid For FCC Wireless Platform • Can Google Convince Wireless Carriers That It Is A Partner And Not A Foe?
Stocks/ETFs to watch: GOOG, T, VZ, VOD. ETFs: PTE, WMH
Earnings call transcripts: Google Q2 2007, AT&T Q2 2007, Verizon Q2 2007
Brocade Posts Drop in Q3 Net, But Edges Expectations
Brocade Communications, the world's biggest manufacturer of data storage switches, reported Thursday that Q3 earnings dropped 56% on costs related to the purchase of McData Corp. and legal expenses. Net income fell to $10.7 million ($0.03/share) from $24.5 million ($0.09) in the year-ago period. Sales rose 73% to $327.5 million, below an average Street forecast of $333.2 million. EPS excluding items came in at $0.12, just ahead of analysts' $0.11 estimate. In January, Brocade bought McDATA for $973 million. Costs related to that purchase were $4.06 million, and Brocade paid another $18 million in legal fees. R&D expenditures rose 27% to $54.1 million, while marketing costs shot up 61% to $57.2 million. The company forecast Q4 revenue at $330-345 million, below analysts' prior estimate of $352.3 million. Q4 EPS is forecast at $0.12-0.13 against analyst expectations of $0.13. "The potential for continued softness in North American enterprise accounts gives us some caution in our guidance,'' said CFO Richard Deranleau (see full earnings call transcript) . This month, Brocade's former CEO, Gregory Reyes, became the first CEO to be convicted of options backdating. He faces a possible sentence of up to 20 years in prison and plans to appeal. In May, the company paid $7 million in a settlement to the SEC over the backdating scandal.
Sources: Press release, Reuters, TheStreet.com, Dow Jones, Bloomberg
Commentary: Brocade Communications Systems: There's Still Time To Get In • Winning Stock Picks for the CNBC Portfolio Challenge
Stocks/ETFs to watch: BRCD. Competitors: CSCO, ELX, QLGC. ETFs: IAH, ROM, XLK
Marvell Posts Loss Despite Strong Sales
Circuit board maker Marvell Technology Group Ltd. posted strong sales in the second quarter but experienced a net loss of $56.5 million ($0.10/share), compared to a profit of $44.9 million $0.07/share a year earlier. Sales increased 14% to $656.7 million. Excluding stock option compensation, the company’s earnings were right on Wall Street expectations of a profit of $0.06. Analysts expectation $645.5 million in sales. Marvell’s research and development jumped 55% to $236 million, and administrative expense increased 71% to $33.7 million. CEO Sehat Sutardja mentioned stronger-than-expected to sales of communications and wireless networking chips, and its application processors. “We currently believe this growth trend will continue in Q3,” he said (see full earnings call transcript later today). The company said that gross margins would be “slightly over" 48% for Q3. Margins fell to 48.9% this quarter compared to 51.3% last year. Marvell shares fell 8% to $16.35 in extending trading Thursday.
Sources: Press release, TheStreet.com, MarketWatch
Commentary: Why Marvell's Managers Will Deliberate Before Releasing Results • Marvell: iPhone Win Raises Visibility, But Profitability Still Challenging
Stocks/ETFs to watch: MRVL. Competitors: LSI, STM, TXN. ETFs: QQEW, SMH
Earnings call transcripts: Marvell Technology Group F1Q08
Dr Reddy's Bids for Bradley Pharm
Dr Reddy's Laboratories Ltd. has submitted a preliminary bid for Bradley Pharmaceuticals, news channel CNBC-TV18 said Friday, citing unnamed sources. A spokesperson for Dr Reddy's declined to comment. On Aug. 9, Bradley said it had received preliminary bids for the company, but stopped short of naming bidders.
Sources: Dow Jones
Commentary: Bradley Pharmaceuticals: Reality Check, Please • Bradley Pharmaceuticals Shares Soar on Buyout Offer
Stocks/ETFs to watch: BDY, RDY
TRANSPORT AND AEROSPACE
General Dynamics Subsidiary, US Navy Agree to $2.5B Ship Options Deal
General Dynamics' shipbuilding subsidiary NASSCO announced Thursday that it reached an agreement with the U.S. Navy for options to build five additional T-AKE dry cargo ammunitions ships, in a deal valued at approximately $2.5B, if all options are exercised. General Dynamics has received contracts to build nine T-AKE ships since October 2001 and has already delivered three, with a fourth scheduled for delivery in November. The new options deal has NASSCO delivering the fourteenth T-AKE ship in Q4 2014. Shares of General Dynamics lost 0.6% to $77.67 on Thursday.
Sources: Press release, MarketWatch
Commentary: Large-Cap Defense Stocks Poised For Strong Movement • Defense Stocks: P/E Isn't the Only Consideration • General Dynamics Wins Final Phase of $5 Billion Wireless Network
Stocks/ETFs to watch: GD. ETFs: ITA, PPA
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