Greenspan: Yes, Virginia, There Was a Housing Bubble
In an interview prior to the Monday release of his memoir, The Age of Turbulence: Adventures in a New World, former Fed Chairman Alan Greenspan admitted to the Financial Times that there was indeed a housing bubble, and compared investor thirst for asset-backed securities to a cocaine addiction. Both Greenspan and his successor Ben Bernanke have avoided the term "bubble" when discussing the housing sector. Greenspan predicted the fall in housing prices will probably be "larger than most people expect," pegging it at a minimum "large single-digit" percentage decline that could hit double digits. Greenspan told the Wall Street Journal in an interview he previously thought the odds of a national decline in housing prices was less than 50/50, but says he is less optimistic since his book was finished, after it became clear the construction industry was unable to reduce housing starts below rapidly falling home sales. Price declines, he said, will reduce home equity, leading to more subprime mortgage defaults, and pressure on consumer spending. The probability of a recession is now "slightly more than a [previously predicted] third." He cautioned that the Fed should not cut lending rates too sharply because of the risk of an "inflationary resurgence." Greenspan said the investment vehicles that issued much asset-backed commercial paper were a "savings and loan disaster waiting to happen," and forecasts CDOs "will never get back to the levels and structures that they were, because now everybody knows you cannot price them."
Sources: Financial Times, Wall Street Journal I, II
Commentary: Checking Greenspan’s Book Against Historical Record [WSJ blog] • Greenspan's Legacy • No Mr. Greenspan, Conditions Aren't Like 1998 • Greenspan Seemingly Suffers From Acute Amnesia
Stocks/ETFs to watch: SPY, DIA, AGG, SHY, IEF, TLT, TIP
Microsoft Loses Key EU Court Appeal
In a landmark decision, the European Union's second-highest court Monday upheld a March 2004 antitrust decisions against software giant Microsoft, including a €497 million ($689 million) fine. The EU Court of First Instance ruled that by bundling Windows Media Player with the Windows operating system, Microsoft is using its desktop presence to muscle its way into other markets. It also said Microsoft abuses its dominance by not making its products compatible with those of rivals, and by refusing to supply competitors with interoperability information. Microsoft has said it has begun compiling open protocols, which it will make available to rivals, and that it will continue to do so regardless of the court's ruling. The European Committee for Interoperable Systems -- which represents Sun, Oracle, and other Microsoft rivals -- has said it is skeptical Microsoft would continue a move towards greater compatibility had it received a favorable ruling. Microsoft said in an August SEC filing the order would enable competitors to "better mimic the functionality of Microsoft's own products," and says its rivals don't need access to many of its protocols. It also said the EU has no right to force it to make its products compatible with those of rivals. European regulators are now considering a new probe to examine whether Microsoft has likewise abused its dominance in marketing Word and Excel. The court gave Microsoft 120 days to issue interoperability information; 90 days to unbundle Media Player; and 30 days to submit a proposal as to how the court can monitor its compliance. Microsoft has allocated funds for the fine, and is already marketing a Media Player free version of Windows in Europe. Microsoft can still appeal the decision at the EU's highest court, the European Court of Justice. Other U.S. companies under EU antitrust scrutiny include Intel (accused of illegal rebates to thwart AMD competition) and Rambus (accused of illegally obtaining chip patents).
Sources: Court judgement, AP, MarketWatch, Bloomberg
Commentary: In Euros We Trust • Why The EU's Fines Against Microsoft Aren't So Significant
Stocks/ETFs to watch: MSFT, INTC, RMBS, ORCL, JAVA
Leap Wireless Rejects MetroPCS Bid
Leap Wireless on Sunday rejected an unsolicited $4.7B buyout bid from MetroPCS saying it "dramatically undervalues" the company's business. In a letter to MetroPCS CEO Roger Linquist, Leap CEO Douglas Hutcheson said the surprise offer was "completely inadequate" in critical areas such as failing to account for Leap's growth prospects and how well positioned it is for future build-outs. In contrast, he wrote, MetroPCS faces delays in launching in Los Angeles, and has a tough roll-out ahead in New York. The offer of 2.75 MetroPCS shares per Leap share values Leap at $69.03/share, which Hutcheson noted represents a 14.4% discount to Leap's 60-day average trading price prior to the offer on September 4. Leap shares were at $74.32 Friday, indicating expectations of a higher bid. One analyst said MetroPCS may have to offer as much as 3.3 shares to be successful. The offer, at 8.5 time Leap's estimated Ebitda, lags the nine-times multiple of other recent deals. MetroPCS said it was "disappointed" with Leap's response, that it continued to believe the offer was fair, and that it would review its options.
Sources: Press release, Wall Street Journal, Bloomberg, Reuters
Commentary: MetroPCS Bids for Rival Leap Wireless • Best and Worst Performing Stocks, Labor Day 2007
Stocks/ETFs to watch: LEAP, PCS. Competitors: S. ETFs: PTE, WMH
Earnings call transcript: Leap Wireless Q2 2007
Business Objects Looks to Sell Itself - Le Figaro
French Paper Le Figaro reported Saturday that French-American enterprise-software developer Business Objects has asked Goldman Sachs to put it on the block. Sources say there are five interested parties, with SAP AG leading the pack. Both Business Objects and SAP declined to comment on the story. The paper said IBM and Oracle have been named as possible buyers in past speculation, though neither has been confirmed to be interested currently. But some analysts believe Business Objects will be a hard sell, with shares trading near a five-year high, and after the company offered weak guidance during last quarter's earnings. Shares are up 6.2% in pre-market action Monday morning.
Sources: Reuters, Thomson Financial, Dow Jones Newswires
Commentary: Business Objects Goes On the Block [24/7 Wall Street] • Business Objects Adopts The “Best-of-Breed” Approach • Business Objects Looks Great
Stocks/ETFs to watch: BOBJ, SAP, ORCL, IBM. Competitors: COGN
Earnings call transcript: Business Objects Q2 2007
Baidu, Sina Expand Online Ad Initiatives
Internet advertising in China is heating up after Baidu.com said it has started an online video advertising service called Baidu TV, and rival Sina said it will offer bloggers 50% of ad revenue with its new platform from Oct. 1. Sina's blog page view inventory exceeds 200 million a day, putting it in competition with Baidu's "Ad Alliance" advertising platform, says Paul Waide in his latest "This Week in China" report. Sina-registered bloggers can earn the equivalent of $2.66/10,000 page views. Sina's new platform will initially be available to 3,000 of the company's top bloggers, and opened to everyone by year's end. Meanwhile, Waide says Baidu is reportedly preparing to take on Sohu.com's 17173.com, one of the leading online game portals in China. Baidu is expected to have its game channel live within two months. Separately, Baidu TV will allow ads to be placed on 160,000 web sites currently displaying text ads with Baidu, giving advertisers a reach of more than 140 million internet users in China.
Sources: MarketWatch, Wall Street Journal
Commentary: Is Baidu's Biggest Competitor In China? • The 'Made in China' Sale is Over: Ways To Profit • Google and Sina to Take on Baidu
Stocks/ETFs to watch: BIDU, SINA, SOHU, GOOG, YHOO. ETFs: PGJ
Earnings call transcript: Baidu.com Q2 2007, SINA Q2 2007, Sohu.com Q2 2007
TRANSPORT AND AEROSPACE
Boeing Claims It Can Deliver 787 Dreamliner On Time
Boeing has said that despite a four-month delay caused by insufficient supply of aerospace fasteners, it can deliver the first 787 Dreamliner on schedule in May. This assertion raised eyebrows among industry experts, including some of Boeing's suppliers. "We looked at each other and said, 'Are they kidding?'" said a supplier who heard the conference call at which Boeing made the claim. Boeing has booked over 700 orders with 48 airlines for the Dreamliner. For the company to deliver the first plane on time, every step of the manufacturing process will have to go according to plan -- a rare event in airplane construction. Hundreds of parts have yet to be installed, including instruments that require elaborate code. The "power-on" phase, at which wiring and equipment are checked to see they work together properly, is not forecast before mid-October. That will allow only one to two months for safety engineers to declare the plane fit for transport. That stage took three months when Boeing debuted the 777. "We're down to the program having to go by the book," said Boeing CEO Jim McNerney. International Lease Finance Corp. [ILFC] and All Nippon Airlines, the Dreamliner's biggest customers, are unfazed at the prospect of a reasonable delay. "Nobody's going to care if the plane turns out to be two or three months late as long as it does everything Boeing has promised," said ILFC President and COO John Plueger.
Sources: Wall Street Journal
Commentary: Boeing's White Knuckle Approach • Boeing 787 Test Flight Delayed; First Delivery Still on Schedule • Boeing’s 787 Premiers On 7-8-07
Stocks/ETFs to watch: BA, HON, GE. Competitors: LMT, NOC. ETFs: ITA, PPA, DDM
Earnings call transcript: Boeing Q2 2007
GM Closing in on Deal with UAW
General Motors and the United Auto Workers union made progress towards a labor deal over the weekend, but issues remained outstanding before a new contract can be signed to replace the four year pact that expired Friday. In the interim, the contract is being extended on an hour by hour basis. "The two sides have made progress, but a number of issues remain that we have to close the gap on," said one person familiar with the negotiations. The largest U.S. automaker was chosen by the union as its "strike target" last week; the UAW hopes to reach an agreement with GM and then adapt it to Ford and Chrysler. The three are hoping to cap costs to help make them more competitive with Asian carmakers. The contracts cover 180,681 active workers and 419,621 retirees and surviving spouses at the three. Retiree costs have been a key issue, and GM and the union reportedly have agreed to take some $50B in retiree healthcare obligations, which GM claims add as much as $1,200-$1,500 to a cost of the car, off the company books, but other terms still need to be hammered out. Ford agreed to healthcare concessions in 2005.
Sources: Wall Street Journal, Financial Times, Bloomberg
Commentary: Why Are Ford and Chrysler Letting GM Lead Negotiations With the UAW • Wagoner is King in GM/ UAW Talks • What Would a Successful Negotiation With the UAW Look Like
Stocks/ETFs to watch: GM, DCX, F. ETFs: IYT, IYJ, XLI
Earnings call transcript: General Motors Q2 2007
ENERGY AND MATERIALS
Power Utilities Subpoenaed By NY Attorney General
NY Attorney General Andrew Cuomo has subpoenaed five power companies to establish whether they disclosed sufficient information to investors about the financial risks involved in their plans to construct coal-fired power plants. Cuomo is using the Martin Act -- the same securities law Eliot Spitzer used to probe corruption on Wall Street -- to compel responses from AES Corp., Dominion, Dynegy, Peabody and Xcel. They received letters from the AG dated September 14 that said carbon dioxide emissions, a byproduct of coal production, will likely be subject to greater and more costly regulation. An environmental coalition is spearheading a national campaign to oppose over 100 proposed coal-fired power plants; the NY Times notes this might be the only time securities law has ever been employed for an environmental cause. "Selective disclosure of favorable information or omission of unfavorable information concerning climate change is misleading," the AG's letter said. Peabody spokesman Vic Svec called the letter "inaccurate" and "outrageous." "The legal system was designed to protect — not harass — those such as Peabody who are providing clean energy solutions for America," he said. Xcel Energy said in an email to Bloomberg News, "Our financial disclosures are adequate...We look forward to discussing this matter further with the New York attorney general."
Sources: AP, MarketWatch, New York Times, Bloomberg
Commentary: AES: A Deeper Dig In The Accounting House • MIT Coal Study: U.S. Must Take Lead in Carbon Emission Storage • Coal Cost Reduction Saves Big for Utilities
Stocks/ETFs to watch: AES, D, DYN, BTU, XEL. ETFs: UTH, XLU, PUI
Earnings call transcripts: Dominion Resources Q2 2007, Xcel Energy Q2 2007
ABN Amro Board Calls RBS Bid Superior, But Won't Back It
The ABN Amro board told shareholders Sunday that although it is formally recommending neither a bid from Barclays nor a bid from a consortium led by Royal Bank of Scotland, it acknowledges the financial superiority of the latter offer. ABN CEO Rijkman Groenink told a Dutch news show he expects the consortium bid to win the day. The board said it views Barclays' all-share offer as more congruent with ABN's strategy but cannot recommend it over the consortium's €70.2 billion ($97.4 billion) bid, which is 19% richer at current prices and contains a cash component. Nor can it back the higher bid -- though it is "clearly superior...from a financial point of view" -- since the consortium's object is to break up ABN. The board said it considers the "post-acquisition business and integration risks" of the Barclays deal " ... manageable and acceptable," and pointed out that "the amount of...capital raisings yet to be completed by the consortium members...to fund the cash component of [its] offer is high in absolute and relative terms, and market circumstances are volatile." The board also noted that the consortium's bid -- unlike that of Barclays -- has yet to be approved by EC and Dutch regulators. Barclays shareholders overwhelmingly approved the prospective takeover Friday. In related news, U.S. Senators Barack Obama and Dick Durbin are seeking assurances from Bank of America about possible layoffs that could result from its purchase of LaSalle Bank from ABN -- a transaction on which the Barclays offer is contingent.
Sources: AP I, II, Wall Street Journal, MarketWatch, Reuters
Commentary: RBS Consortium Could Lower Bid for ABN -- Times of London • ABN Amro Takes Neutral Position Toward Bidders • ABN Amro Acquisition: Too Many Chefs Wearing the I-Bank Advisor Hat
Stocks/ETFs to watch: ABN, RBSPY, BCS, FORSY, BAC. Competitors: HBC, DB, UBS. ETFs: RKH, MOT
Earnings call transcript: ABN Amro Q2 2007
Swedish Regulators Probe HSBC over Dubai OMX Bid -- Observer
Financial regulators in Sweden are having a look at investment bank HSBC over its role in Borse Dubai's bid for the OMX, Britain's Observer reported. Last week Swedish financial regulators censured Borse Dubai for not following best-practice rules while building up its holdings in OMX prior to launching its takeover bid, but HSBC, which was responsible for bookbuilding, was left alone. According to the Observer, regulators are probing how London-based HSBC was able to stay within Sweden's strict takeover rules while also working to build up Borse Dubai's position, ahead of the 27.7B kroner offer that topped a 25.5B kroner bid from the Nasdaq. Borse Dubai is appealing the censure, claiming it did nothing wrong. Securities authorities in London also may get involved, the Observer reported. HSBC didn't respond to the paper's request for comment. In late August, Sweden's Financial Supervisory Authority said the Borse Dubai breached the Act on Takeovers because its press release was a public takeover bid and it did not fully provide information to the market.
Sources: The Observer
Commentary: Borse Dubai's Dealings Found Illegal • Nasdaq OMX Bid Aided by Swedish Politics
Stocks/ETFs to watch: HBC. Competitors: MER, DB, LEH, BSC, C. ETFs: IAI
Earnings call transcript: HSBC Holdings PLC Q2 2007
Earnings Quality Issues for NYSE China Listings
A report by independent research firm RateFinancials says the ten-largest Chinese companies with American Depositary Shares listed on the New York Stock Exchange have poor earnings quality, although no accounting or listing rules are being broken. Problems vary by firm, but include such items as insufficient reserve provisions and negative working capital, in addition to signs of possible earnings management via "cookie jar" accounting, where companies report lower reserves in order to show higher revenues. The 10 top companies are: PetroChina, China Mobile, China Petroleum & Chemical, ChinaTelecom, China Life Insurance, China Unicom, Huaneng Power International, Yanzhou Coal Mining, Suntech Power Holdings and Sinopec Shanghai Petrochemical. "These companies are government-controlled enterprises masquerading as independent public companies, and it is virtually impossible to assess their financial condition given their poor level of disclosures," the report said. RateFinancial was critical of the NYSE for allowing the listings. The NYSE declined to comment, but sources say the NYSE's listing criteria are stricter than other's, the Financial Times reports.
Sources: Financial Times
Commentary: Investing in China, The Non-ETF Way • Fed Rate Cut Boon for Hong Kong, China Stocks • Beyond The U.S.: Currencies, China and India
Stocks/ETFs to watch: PTR, CHL, SNP, CHA, LFC, CHU, HNP, YZC, STP, SHI. ETFs: FXI, PGJ, CAF
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
• Despite shares that are up 65% over the past two years, Barron's says Nokia (NOK) is still cheap at 17.5x 2007 earnings vs. rivals Research in Motion (RIMM) (43x) and Apple (AAPL) (37x). Bernstein analyst Paul Sagawa says investors have not yet realized Nokia's market dominance, and the untapped potential of the wireless market. He looks for Nokia to post "double-digit unit growth without any price declines for some time to come." Charter Equity's Ed Snyder says the market has underestimated Nokia's new music phones, which unlike Apple's iPhone, have no "expensive, low-reliability touch-screen and copious data features that have historically found little traction with the vast majority of consumers." (full summary)
• Smart Balance (SMBL), maker of a trans-fat-free margarine and similar products, has sales that are growing at over 30%. It got a big boost in January 2006 when the FDA required the listing of trans-fat percentages on food labels. Investor interest has caught on only recently, after the shares moved to the Nasdaq in early August. Over the past few weeks, shares have jumped 20% as management undertook a road show to introduce the company to Wall Street. One portfolio manager claims the stock could reach $15-$22 over the next 12-18 months and could even be $30-$40 longer-term. (full summary)
• Investors pushed Radian Group's (RDN) shares up last week on a chipper forecast, hoping its troubles have bottomed after some heavy writeoffs, and after MGIC Investment retracted its buyout offer. But Barron's doubts Radian's growth projections, which depend upon flat housing prices, since many economists expect dramatic housing price declines, which could mean steep losses for the insurer. Additional credit rating downgrades could curtail its ability to insure government-backed mortgages, and adversely impact its $110B financial guaranty portfolio. (full summary)
• Barron's believes Altria's (MO) planned split into separate domestic and international tobacco companies will be a profitable move for shareholders. Among the potential positive developments will be large share repurchases, substantial cost cuts, better pricing and stronger execution. Shares, at $67, are about 16x 2007 estimates -- a discount to the 20x average of most major food and household products companies. One analyst believes the stock could reach $87 12 months out. (full summary)
• Stock buybacks could push Regional carrier Pinnacle Airlines (PNCL) shares well above their current price of around $15, which is about 25% below their peak. Pinnacle can offer major carriers smaller-gauge aircraft at a cost structure the majors can't replicate. One fund manager thinks it could hit $22 if it uses its leverage to buy back stock. (full summary)
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