S&P 500 Sets Record On Jobs Data
The S&P 500 hit a record last week as newly released employment figures relieved concerns that troubles in the mortgage market will spark a recession. Homebuilder stocks, helped by a Citi Investment Research report that said their prices are cheap, rose 12%, their biggest gain since November 2000. The rally was sparked by a report from the Labor Department that said American payrolls increased by 110,000 jobs in September. Also, August's 4,000-job decrease was revised to a gain of 89,000. "The jobs report suggests continued economic growth, which should translate to continued profit growth and good market performance," said John Lynch, chief market analyst at Evergreen Investments LLC. The S&P 500, which gained 2% over the past week, has bounced back 11% since mid-August, erasing $1 trillion of losses, Bloomberg reports. Financial stocks gained a collective 4.5%, with Fannie Mae rising 11% and Morgan Stanley 9.4%. The DJIA added 1.2% to close the week at 14,066.01, while the Nasdaq gained 2.9% to 2,780.32, its highest in almost six years. "Stocks are cheap relative to bonds," said Legg Mason Inc.'s Bill Miller. "I don't know why anyone would buy a 10-year Treasury." In related news, the dollar had its biggest weekly gain against the yen in over a year, and against the euro since August, on signs the economy will make it through the housing downturn. "People overstated the downside risk to the U.S. economy, and we're seeing the adjustment to the dollar," said Robert Sinche, global currency strategist at Bank of America.
Sources: Bloomberg I, II
Commentary: Employment Rebound Drives Stocks Upward - Economic Week in Review • The Jobs Report: 'Never Mind' • Strong Payrolls Number: Good Sign For U.S. Equities
Stocks/ETFs to watch: SPY, QQQQ, DIA
SAP to Acquire Business Objects for $6.78 Billion
German enterprise software manufacturer SAP AG said Sunday that it has agreed to purchase Business Objects SA, a French manufacturer of software that tracks corporate databases, for €4.8 billion ($6.78 billion). This will be SAP's biggest-ever acquisition. SAP will pay €42.00 ($59.35) in cash per share of Business Objects, a 20% premium to the shares' Friday close. "Together, SAP and Business Objects intend to offer high-value solutions for process- and business-oriented professionals," the companies said in a joint statement. The transaction has been approved by the Business Objects board and is expected to close in Q1 2008. The acquisition marks a strategic shift for SAP, which had previously opted for organic growth while rival Oracle went on a buying spree: Oracle has spent $25 billion on acquisitions since 2004. "The acquisition of Business Objects is in keeping with SAP's stated strategy to double our addressable market by 2010" to reach 100,000 clients, said SAP CEO Henning Kagermann. "It's the unique combination of two market leaders." In related news, SAP shares fell in early morning trading Monday after Business Objects issued a profit warning. The company is forecasting a Q3 profit of $0.36-0.39 per share, below prior analyst expectations of $0.51. Q3 revenue is now projected at $366-370 million, shy of analyst estimates of $385.1 million.
Sources: Bloomberg, Dow Jones, Reuters, Wall Street Journal, Forbes
Commentary: Business Objects Looks to Sell Itself - Le Figaro • Business Objects Adopts The “Best-of-Breed” Approach • Business Objects Looks Great
Stocks/ETFs to watch: SAP, BOBJ. Competitors: COGN, MSTR, ORCL, MSFT. ETFs: SWH, DBT, EWG
Earnings call transcripts: SAP Q2 2007, Business Objects Q2 2007
Research in Motion Soars to New High On Q2 Report, Q3 Guidance
Shares of Blackberry smartphone manufacturer Research in Motion gained 12.8% to close at $113.37 Friday following the company's strong Q2 earnings report late Thursday and a higher-than-expected Q3 forecast. The shares traded as high as $114.76 during the session. RIM posted Q2 EPS of $0.50 on revenue of $1.37 billion, ahead of analyst expectations. For Q3, the company is projecting EPS in the $0.59-0.63 range on revenue of $1.6-1.67 billion. RIM also crossed the 10-million subscriber mark during the quarter. On Friday, Pacific Crest analyst James Faucette raised his price target for RIM shares to $120 from $115 and increased his shipped handset forecast for the company to 13.5 million in fiscal 2008 from 12.8 million. He also boosted his EPS outlook for fiscal 2008 to $2.25 from $2.07. "We believe there is more room for upside to estimates driven by an improving outlook for device upgrades and continued acceleration in subscription growth," he wrote in a note. In related news, RIM has settled with the Ironworkers Ontario Pension Fund, which sued over its method of granting options. The company will take on an independent governance expert, and co-CEOs Jim Balsillie and Mike Lazaridis will each pay $2.5 million to the Fund for legal costs.
Sources: Forbes, SmartMoney, Reuters
Commentary: RIM Trails Manulife For Second Place in Canadian Market Cap • Research In Motion Doubles Bottom Line, Shares Fall • Research in Motion Higher Ahead of Earnings; Touch Screen Blackberry Coming?
Stocks/ETFs to watch: RIMM. Competitors: AAPL, PALM, NOK. ETFs: WMH, EWC
Earnings call transcript: Research In Motion F2Q08
TRANSPORT AND AEROSPACE
Auto Workers Set Deadline for Chrysler Talks
Chrysler LLC faces a possible strike by the United Auto Workers if it does not reach a deal on a new contract with the union by Tuesday. After reaching a tentative agreement with General Motors last month that was to have served as a blueprint for the other automakers, the union is now focusing on Chrysler before tackling Ford Motor Co. Chrysler's previous contract with the union had been extended since September 14 during the GM talks, but on October 6 the UAW said it was terminating the extensions and gave Chrysler 72 hours to negotiate a deal, according to people familiar with the talks. No specific hour was set, and the move appeared to be an effort to avert the dragging out of talks as took place with GM before workers struck for two days. The union is seeking job guarantees similar to those granted by GM. The GM pact also included concessions on health care costs, which the automakers claim make them uncompetitive. GM workers will vote on their agreement Wednesday.
Sources: Bloomberg, Reuters, NY Times
Commentary: Analysts Doubt Advertised Savings in GM Deal • Why Are Ford and Chrysler Letting GM Lead Negotiations With the UAW?
Stocks/ETFs to watch: DAI, F, GM. ETFs: IYT. Competitors: OTCPK:NSANY, HMC, TM. Related: Cerberus Web Site • DaimlerChrysler News
ENERGY AND MATERIALS
Alcoa to Take $845 Million in Q3 Charges
Aluminum giant Alcoa, which will kick off earnings season on October 9, announced last Thursday it will take $845 million in charges in Q3 as it prepares to sell its packaging and auto-related businesses. The company said it has received "strong indications from strategic buyers" for the packaging unit, which manufactures Reynolds Wrap, and expects to sell it by the end of this year or early 2008. Alcoa also said it is close to a "definitive agreement" to sell its automotive castings business and should complete the sale by the end of 2007. The company has not managed to find a buyer for its electric and electronics business, but plans to restructure the unit "to improve returns and profitability." The restructuring is expected to involve job cuts at the unit, which employs 116,000 people in the Americas and Europe. Alcoa will take a $600 million charge associated with the sale of the packaging unit, a $195 million charge from the restructuring of the electrical business, and a $50 million charge connected to its auto casting unit. Analysts are expecting Alcoa to post EPS of $0.65 when it reports on Tuesday, up almost 5% from the year-ago quarter. They have forecast a 3% revenue decline to $7.4 billion.
Sources: MarketWatch I, II, Wall Street Journal
Commentary: A Preview of Q3 Earnings: Alcoa Kicks Things Off • Six Ways to Invest in Aluminum: The Most Abundant Metal in the World
Stocks/ETFs to watch: AA. Competitors: AL. ETFs: XLB, PRFM, IYM
Earnings call transcript: Alcoa Q2 2007
Wamu Expects Net Income to Drop 75%
Washington Mutual said Friday that its third-quarter profits are expected to fall 75% compared to last year's numbers. The worst housing slump in 16 years combined with the late summer's market disruptions caused Washington Mutual to lose and write-down $410 million and to set aside another $975 million for future loan losses. The company is the US's largest savings and loan bank. "You're going to find a lot of companies having to come clean with these assets on their balance sheets," said Terry Wakefield, a mortgage-industry consultant. "There's still somewhere between $75 billion and $150 billion of write-offs that have not yet occurred, and they're going to surface as the quarterly earnings process unfolds." Washington Mutual said it still has the funds necessary to keep expanding business and paying dividends. Shares of the company were up 1.8% to $35.93 midday on Friday. Investors have responded positively to banks giving warnings on quarterly results, instead of waiting until they announce earnings. Banks seem to be writing off as much as possible now to clean up their books for future quarters.
Sources: Press Release, WSJ, Bloomberg
Commentary: Merrill Takes $5.5 Billion Write-Down • 'Near Perfect Storm' Brewing in Housing -- WaMu
Stocks/ETFs to watch: WM. Competitors: BAC, WB. ETFs: KRE, RKH
Earnings call transcript: Washington Mutual Q2 2007
Merrill Takes $5.5 Billion Write-Down
Merrill Lynch announced it would be writing down about $5.5 billion when it posts third quarter results. About $4.5 billion of the write-down is a result of the company marking to market the value of its collateralized debt and subprime mortgages. Much of the rest comes from losses on loans related to leveraged buyouts. "Despite solid underlying performances in most of our businesses in the third quarter, the impact of this difficult market was much more severe in certain of our FICC [fixed income, currencies and commodities] businesses than we expected earlier in the quarter," said CEO Stan O'Neal. Because of the large write-down, Merrill said that it would report a third-quarter net loss of $0.50/share. Analysts had been predicting this move, especially after Citigroup and UBS both announced they would take multi-billion dollar write-downs on Monday (full story).
Sources: MarketWatch, WSJ
Commentary: Goldman Analyst Slashes Targets for Merrill • Merrill Lynch, Bear Stearns Hardly Out Of the Woods
Stocks/ETFs to watch: MER, C, UBS. ETFs: IAI, KCE
Earnings call transcript: Merrill Lynch Q2 2007 Earnings Call Transcript
Vodafone Expands in Italy and Spain
Vodafone Group PLC agreed Saturday to pay £537M to buy the Italian and Spanish assets of Sweden's Tele2 AB, adding some 2.6M customers to its base including 550,000 customers in Spain and 400,000 broadband users in Italy. "This acquisition ... will generate substantial time to market benefits in Italy and Spain, where low broadband penetration and the market structure make ownership of fixed broadband assets attractive," said CEO Arun Sarin. "We have now established a clear route to delivering fixed broadband services in each of our major European markets." Mobile-phone operator Vodafone currently has no broadband operations in either country. One analyst, however, called the deal "more short-term tactical than long-term strategic" for the company, as it already controls Hutchison Essar, which has a huge market share; he said it was "like buying an extra candy bar at the grocery store." The acquisition was expected to be "broadly neutral" to earnings in the first year following the purchase. Vodafone beat out Fastweb SPA, Tiscali SPA and WindSpA, who reportedly were interested in the assets.
Sources: Wall Street Journal, MarketWatch, Financial Times
Commentary: Vodafone UK: No Niche Left Unturned • Vodafone Activists Should Show More Patience - Barron's
Stocks/ETFs to watch: VOD. ETFs: IYZ, TTH, BDH. Competitors: FTE, DT, NTT
Earnings call transcript: Vodafone Group FY 2006
Citigroup To Lend Northern Rock Up To $20.4 Billion
Shares of British bank Northern Rock plc were up 8.2% by 9:01 a.m. Monday in London trading on news that Citigroup will lend it up to £10 billion ($20.4 billion), Bloomberg reported. Northern Rock received a bailout from the Bank of England in September after depositors, alarmed that the bank had sought emergency funding, descended on it to withdraw their money in the first run on a British bank in over a century. Northern Rock has to refinance approximately £14 billion in H2 and up to £30 billion over the next year, according to an unsourced Sunday Times report cited by Bloomberg. The report indicates that the Citigroup loan will be linked to the LIBOR (London Interbank Offered Rate). Northern Rock's stock price has plummeted 73% since September 14, the day surging credit costs forced it to request emergency funding. In related news, the WSJ reported Monday that several private equity firms, including Blackstone, Cerberus, Apollo Management and J.C. Flowers & Co., have expressed interest in buying the bank.
Sources: Bloomberg, Wall Street Journal
Commentary: Northern Rock's Deposits Guaranteed by U.K. Government; Shares Rise • The Northern Rock Bailout: Sign of a Much Bigger Problem? • Northern Rock Depositors Panic
Stocks/ETFs to watch: OTC:NHRKF, C. Competitors: BAC, DB, JPM. ETFs: PJB, KBE, IYG, PRFF
China Mobile, Netcom Delay Mainland IPO Until 2008
China Mobile and China Netcom, both mainland Chinese companies and listed on the Hong Kong Stock Exchange (a.k.a "red chips"), are reportedly delaying plans for a domestic IPO until 2008, according to sources. Both telecommunications operators had planned US$300 million to US$400 million IPOs, but are being held up by a delay in regulations for domestic listings of overseas incorporated companies. The regulations were expected to be introduced during Q3. A source cited in coverage by MarketWatch comments, "The rules were supposed to come out in July, but the Hong Kong government didn't want red chips to 'return' to the A-share market so soon. So they've been delayed to take care of the Hong Kong market." The source says the amounts to be raised will ultimately depend on market conditions. ADRs of China Mobile gained 3.4% to $84.96 on Friday. China Netcom climbed 4.8% to $60.41. In Monday trading in Hong Kong, China Mobile shares lost 1.3% to HK$128.60, while China Netcom rose 3.1% to HK$23.50.
Sources: Bloomberg, MarketWatch
Commentary: The Secret to Choosing Chinese Stocks • Earnings Quality Issues for NYSE China Listings • China Mobile Q2 Net Up 29% on Rural Growth
Stocks/ETFs to watch: CHL, CN. ETFs: FXI, PGJ, GXC, FNI, EEB, ADRE
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
• The market may have robbed prison companies like GEO Group (GEO), Corrections Corp. of America (CXW) and Cornell Co. (CRN) after a US Census report said the prison population was growing at an annual rate of 4% rather than the 13% predicted by the Pew Charitable Trusts earlier this year, but Barron's says opportunities exist if you go directly to jail to make your investments (full summary).
• Paychex (PAYX) has no debt, regularly raises dividends (75% of this year's income will go to investors) and buys back shares (a new $1 billion buyback is planned for 2008). But shares have recently faltered from a high of $46 to $41 because of the buyback's impact on investment income, Fed rate cuts diminishing profits from client funds held for payroll, an FQ1'08 miss of some overeager analyst projections, and a slightly lowered 2008 profit projection (from 15% growth to 13%) (full summary).
• A weak jobs market has taken a toll on providers of uniforms for civilian workers such as Cintas (CTAS), G&K (GKSR) and Unifirst (UNF), but Barron's says long-term prospects for the group are good amid projections their ranks could grow by some 1M annually. While uniform providers make their money mainly through rentals, laundry and repair, some have branched out to provide other items needed by those businesses such as fire extinguishers, welcome mats and document shredders -- something one money manager called a big plus (full summary).
• CEO Kerry Clark revived Cardinal Health (CAH) by shedding money-losing drug manufacturing businesses and settling an accounting scandal. He streamlined operations, set new corporate performance metrics and focused on money-making drug distribution and medical supply/technology businesses. Heightened hospital safety trends have benefited sales of Cardinal's CMP division products like automated drug dispensers, thereby growing earnings 20% annually. Clark expects CMP to contribute 40% of overall sales by 2010 (full summary).
MUST-READS ON SEEKING ALPHA TODAY
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