Big Banks Mulling $100 Billion Fund to Limit Credit Crunch
A group of the world's biggest banks, including Citigroup, JPMorgan and Bank of America, is discussing pooling up to $100 billion for an emergency fund that would buy at-risk mortgage securities to take pressure off the credit markets. The talks began three weeks ago at the instigation of the Treasury Department. The object of the fund, tentatively called the Master-Liquidity Enhancement Conduit, or M-LEC, is to avert the necessity for bank-affiliated funds to dump huge portfolios of mortgage-backed securities onto the market, an event that could inflate borrowing costs, force more major write-offs at banks, trigger significant investor losses, and conceivably send the U.S. into recession. SIVs (structured investment vehicles), which buy mortgage securities assets from banks and finance the purchases with commercial paper, must sell the assets if they cannot sell the paper -- and investors, spooked by the implosion of the subprime mortgage market, have almost completely stopped buying SIV-affiliated paper. "This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities," said San Francisco Fed President Janet Yellen last Tuesday. The banks are faced with the prospect that about 30 SIVs will simultaneously unload billions of dollars' worth of mortgage-related assets and send prices into a downward spiral. "We are coming off the greatest lending bubble...in U.S. history. We will feel its impact for a very long time," said Robert Arnott, Chairman of Research Affiliates LLC.
Commentary: Why Bank Shares Rise on Write-Downs • U.S. Banks Still Need To Come Clean on Subprime • BofA and JPM to Write Down Total of $3 Billion - Analyst
Stocks to watch: C, JPM, BAC. ETFs: DHS, FDL, IYG, PRFF
Earnings call transcript: Citigroup Q2 2007, JPMorgan Chase Q2 2007, Bank of America Q2 2007
Philips Down 5% on Disappointing Medical Unit Results
Royal Philips Electronics NV reported third-quarter net income fell more than 90% to €331 million ($469), or €0.30/share, due to a €4.2B gain from the sale of a majority stake in its semiconductor division last year. The decline was mostly expected among analysts. However, earnings before interest, tax and amortization [Ebita] of €438M beat expectations of €423M. Net sales rose 3.3% to €6.52B, with operating margin coming in at 5.9%. Results from Philips' medical systems division were a disappointment, but were offset by strength in its other core businesses. Medical systems sales increased only 1.6% to €1.6B, while its operating profit fell 9% to €151M and margin of 9.4% missed analysts' average forecast of 11.2%. Operating profit jumped 40% at its domestic appliance and personal care [DAP] and lighting divisions (to €132M and €178M, respectively) and rose 26% to €34M at its consumer electronics unit. On a conference call, CFO Pierre-Jean Sivignon said the company will meet its target of overall operating profit growth of 7.5% for the year (check later for full transcript). Ordinary shares of Philips Electronics were last down 5% to €30.51 in late morning trading in Amsterdam..
Commentary: Philips To Book €500M Gain from LG.Philips Share Sale • Philips Electronics Hopes To Save Big With Reorganization • 17 Ways to Invest in The Netherlands
Stocks to watch: PHG. Competitors: GE, SNE, MC. ETFs: EWN
Related: Philips Q3 Results [pdf], Philips Q3 Results Presentation [pdf]
Danaher to Buy Tektronix for $2.8B -- WSJ
Danaher Corp. is set to announce a deal to buy Tektronix Inc. for $2.8B as early as Monday morning, the Wall Street Journal reported. Danaher, an industrial conglomerate, will pay $38 cash for each share of the electronic test and measurement company -- a 34% premium to its $28.34 closing price on the New York Stock Exchange on Friday. The price, according to the Journal, is about 18x Tektronix's annual cash flow of $152M. People close to the deal told the Journal they expect the purchase to add $0.08-$0.10/share to 2009 earnings, part of which will come from cost savings of some $40M in the first year. The addition of Tektronix would boost to 20% the portion of Danaher revenue attributable to test and measurement businesses, which it already operates through its Fluke and Fluke Networks divisions.
Commentary: Goldman Prefers Danaher Corp. To GE • Danaher's Solid Growth Continues
Stocks to watch: DHR, TEK. Competitors: EMR, JCI, ROK, A. ETFs: IYJ, XLI, VIS
Earnings call transcript: Danaher Q2 2007
Broadcom Says New Chip to Bring High-End Phone Prices Down
In a press release early Monday, Broadcom announced it has developed a multi-function "3G Phone on a Chip" solution, the world's first, and is over a year ahead of competitors. Broadcom's single-chip HSPA (high-speed packet access) processor provides the ability to use four different cellular networks, as well as allowing for sleek form factors and having "very long" battery life. The Wall Street Journal reports Yossi Cohen, Broadcom's senior VP and general manager of mobile platforms, said the new chip could allow high-end cellular phones to be made for around $100, or 30% to 40% less than the current cost of $150 to $175. "With this technology we are going to bring those products to the masses," said Cohen. Broadcom is said to be shipping samples now, but doesn't expect cellphone manufacturers to offer phones with its technology until 2009. HSPA networks will allow for download speeds up to 7.2 Mbps, compared to 200,000 bps for EDGE used with Apple's iPhone. Shares of Broadcom gained 1.3% to $40.03 on Friday.
Commentary: iPhone 3G Slated for Early 2008 - TheStreet • Qualcomm Wins Stay on Handset Import Ban • Cisco Systems’ Fear of a Broadcom Planet
Stocks to watch: BRCM. Competitors: QCOM, TXN, IFX. ETFs: BDH, IGW, XSD, PXQ
Earnings call transcript: Broadcom Q2 2007
Icahn May Take Aim at Motorola, Again -- FT
Shareholder activist Carl Icahn, who already this year made an unsuccessful bid for change at Motorola Inc., says he may retarget the company if he doesn't see improvement. "There is value there, and if that value doesn't manifest itself I, as an activist, would think very seriously about coming back," he told the Financial Times. Earlier this year, Icahn, who reportedly owns about 3% of the telecommunications equipment maker, pushed for a massive stock buyback and failed to gain a seat on the company's board after a bitter proxy fight. He also would like to see the handset division separated from the rest of the company. Despite efforts to revamp management and cut costs, the FT says analysts remain concerned about ongoing market share erosion and a lackluster product line. Motorola declined to comment on a possible new challenge from Icahn.
Commentary: Nokia Grabs More Market Share from Motorola • Something's Not Right About Motorola • Motorola: It's Time For Change
Stocks to watch: MOT. ETFs: BDH, WMH. Competitors: NOK, ERIC, RIMM, AAPL, PALM
Earnings call transcript: Motorola Q2 2007
BEA Systems Rejects Oracle Bid
BEA Systems turned down Oracle's $6.7B takeover bid (full story), saying the company was "worth substantially more." The move sparked speculation of a bidding war as BEA shares surged 38% to $18.82, their highest level in more than five years and nearly $2 above Oracle's $17 offer. "It is apparent to our board that BEA is worth substantially more to Oracle, to others, and, more importantly, to our shareholders than the price indicated in your letter," BEA said in rejecting the offer. Oracle, in response, said it remained committed to the $17 bid and was available to "proceed immediately with a process that would lead to a friendly transaction." BEA, meanwhile, denied that it had agreed to meet with Oracle to hammer out a definitive agreement by Monday morning, as Oracle had stated in a letter to BEA. Also weighing in, shareholder activist Carl Icahn, who disclosed in August that he held a stake in BEA and last month said he sought a sale of the company, suggested to BEA that it might want to proceed with an auction. SAP, however, said it would not participate in any fight for BEA, saying it was interested in "complementary deals" and not a "classic consolidating of markets."
Commentary: Oracle and BEA: Getting Uglier By The Minute • Oracle's Bid for BEA Systems Comes at the Perfect Time
Stocks to watch: ORCL, BEAS. ETFs: IGV, SWH, PSJ. Competitors: SAP, IBM, JAVA
Earnings call transcript: BEA Systems F2Q08
Shift to Online Advertising Should Benefit Internet Publishers and Ad Providers
The New York Times reports that starting in 2008 Intel will require companies participating in its "Intel Inside" co-op marketing program to spend at least 35% of Intel's advertising contribution on online marketing. Intel also plans to spend 50% of its own $300 million annual ad budget on online ads starting in 2009, versus about 15% in 2005. The "Intel Inside" program provides single-digit percentages of Intel's chip sales to a company as a subsidy for ads by that company that include the "Intel Inside" logo. The Intel cash can be used to pay for up to half the cost of the customer's ads. Intel customer Sony Electronics said that online media would account for over a third of its budget this year, and the percentage would rise in 2008. Sony is already buying click-to-play video ads from Google. An increase on online technology spending would benefit online tech publisher CNET, broad publishers Yahoo and Time Warner, shopping platform eBay, and ad provider Google.
Commentary: Riding the Internet Advertising Wave • Is Internet Advertising Really Worth Billions? • Online Ad Revenues: Display vs. Search Going Forward
Stocks to watch: CNET, YHOO, TWX, GOOG, EBAY
TRANSPORT AND AEROSPACE
Airbus Finally Delivers First A380
Nineteen months behind schedule and $6.8 billion over budget, Airbus is finally delivering its first A380 jumbo jet, the world's largest passenger aircraft, to Singapore Airlines. Though the A380 is supposed to revolutionize luxury long-haul air travel, with provisions such as private first class suites, offering a financial shot in the arm to Airbus parent EADS, delays in its completion have sent many long-time Airbus customers to rival Boeing for their jumbo jet orders, while spiraling costs have led to several straight quarters of losses at Airbus. Last week, Boeing was forced to announce a six-month delay in the production of its 787 Dreamliner (full story).
Commentary: Boeing 787 Delay Has Ripple Effect On Suppliers • Boeing Delays First Dreamliner Delivery by Six Months • Boeing Tops Airbus in Q3 Orders
Stocks/ETFs to watch: BA, EADS (Paris: 005730). ETFs: ITA, PPA
Citigroup Beats Estimates, Despite 57% Earnings Drop
Number-one U.S. bank Citigroup said Monday its Q3 earnings dropped 57% due to substantial write-downs of bad loans, which had been previously announced, but its numbers came in stronger than analysts were expecting. Net income was $2.38 billion ($0.47/share), vs. $5.51 billion ($1.10/share) a year ago. Revenue was up slightly to $22.66 billion from $21.42 billion. Analysts polled by Reuters were expecting earnings of $0.43/share on $20.8 billion in revenue, on average. Citigroup told investors at the beginning of the month that its Q3 net income would fall about 60%. "This was a disappointing quarter, even in the context of the dislocations in the sub-prime mortgage and credit markets. A significant amount of our income decline was in our fixed income business, where we have a long track record of strong earnings, and this quarter's performance was well below our expectations," CEO Chuck Prince said (see earnings call transcript later today). The bank's results included a $1.35 billion writedown for leveraged loans, $1.56 billion for subprime mortgages, and a $636 million charge for fixed income trading, as well as a $729 million gain from its stake sale in Brazilian credit card transaction processor Redecard. Credit costs included a $780 million increase in net credit losses and a $2.24 billion charge to increase reserves for bad loans. While there has been pressure on CEO Prince to boost results, S&P analyst Frank Braden says investors must give him time: "We're a ways away from seeing any real pressure for his ouster... It'll take a couple more quarters of results like this before people say that maybe it's getting away from him, and it's more than just this crisis." PNC's Mark Batty agreed: "I don't think you could point the finger at Prince and say that it's his fault the credit markets froze up." Shares are up 1.3% to $48.51 in pre-market trading.
Commentary: Citigroup's CEO Chuck Prince Is Safe • Shakeup at Citigroup
Stocks to watch: C. Competitors: BAC, DB, JPM, HBC, WB
Medtronic to Halt Sale of Defibrillation Leads
Medical device maker Medtronic announced early Monday morning it is voluntarily halting the sale of its Sprint Fidelis family of defibrillation leads, in consultation with the FDA. The leads, which connect defibrillator implants, responsible for jolting a patient's heart back into a proper rhythm during bouts of Arrhythmia, connect the implanted device directly to a patient's heart. But the leads, which Medtronic has used regularly since 2004, come with the risk of fracturing, and either ceasing to work effectively, or inappropriately jolting a patient's heart. The leads have cause as many as five deaths as a result of fracturing. It is believed 235,000 people currently have the faulty leads. For those who already have the leads, it is considered more dangerous to have them removed than to leave them implanted. Such patients are asked to consult with their physician immediately. Medtronic's decision to cease using Sprint Fidelis leads may cost the company millions of dollars in legal fees, as well as cut into its profits in the $6 billion a year defibrillator device market, of which it controls nearly 50%. Medtronic shares are up nearly 16% over the past year; they were down slightly on Friday.
Commentary: Medtronic, Wyeth, & Pfizer Plan On Revenue Growth in China • Medtronic Sales Fall Short • Jim Cramer on MDT
Stocks/ETFs to watch: MDT. Competitors: BSX, STJ. ETFs: IHI, IYH, XLV
Earnings call transcript: Medtronic F1Q08 (Qtr End 7/27/07)
Related: Wikipedia on defibrillator, Definition of Arrhythmia
Pfizer Joins Up With Medical Social-Networking Site
Pfizer has inked an agreement with Sermo Inc., a social-networking website for licensed physicians, that will allow Pfizer-affiliated doctors to talk online with the 31,000 members of the site. Financial terms were not disclosed. Serno, which does not charge a sign-up fee, adds 2,000 doctors a week. The arrangement will give Pfizer information on how doctors prescribe drugs and an opportunity to present data without having to visit doctors in person. Pfizer will have to be careful, because drug companies are monitored to be sure they are not offering financial incentives or pushing their drugs for unapproved uses. Doctors, too, are hesitant to appear unduly close to any individual company. "Often it's looked badly upon by other physicians when you are perceived to have a close relationship with a drug company," says Sermo member Richard Thrasher. Pfizer physicians will be able to ask questions of other doctors on the site and respond to posts. "It takes a lot of courage for Pfizer to do this, because the response isn't going to be universally positive," said Sermo CEO Dr. Daniel Palestrant. Dr Michael Berelowitz, Pfizer's global medical executive, said: "The way the Internet and other web-based media have transformed life is unprecedented. But it offers such advantages that we'd like to be part of that evolution." Pfizer laid off 20% of its U.S. sales force in 2006 and over 20% of its European sales force in January.
Commentary: Stalled Giants: MSFT, C, MRK, PFE, HD, GM • More Big Pharma Layoffs: What This May Mean
Stocks to watch: PFE. Competitors: MRK, NVS, GSK, LLY. ETFs: FDL, IYH, IHE
Earnings call transcript: Pfizer Q2 2007
Biogen Idec Considers Takeover, Shares Surge
Biogen Idec late Friday hung the "for sale" sign, authorizing management to evaluate a possible buyout of the company, including a sale to investor Carl Icahn, one of several parties from whom it said it had received an expression of interest. Despite reiterating that it believed its current strategy was "working and generating strong operating and financial performance," it said it also will determine whether potential interest from major pharmaceutical companies "might result in superior value in the current environment." Shares of the biotech giant surged 18% AH to $81.60 on the news, capping a 3.4% climb in the regular trading session, bringing the company's market cap to about $23.5B. People familiar with the matter say Icahn, who owns about 1% of Biogen, has been negotiating with Biogen for weeks and has offered at least $23B. Icahn told the Wall Street Journal, however, he believed the company would "do better with a synergistic buyer" such as a major drug maker. One analyst said a multiple similar to that received in the MedImmune/AstraZeneca deal earlier this year would mean a takeout price of about $200/share for Biogen, but didn't believe it would get that much. The Company retained Goldman Sachs and Merrill Lynch as financial advisers to assist in the process.
Commentary: Is Biogen Idec Icahn's Next Activist Target? • Is Biotech on the Verge of a Breakout?
Stocks to watch: BIIB, GS, MER. Competitors: AMGN, DNA, GENZ. ETFs: IBB, BBH, PBE
Earnings call transcript: Biogen Idec Q2 2007
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
- Although recommending stocks at 52-week highs is usually not a comfortable undertaking, Barron's has few hesitations when it comes to National Oilwell Varco (NYSE:NOV). Fueling its growth are strong new orders and backlog, and it's been decades since the industry has gone through a new rig-building cycle. Q3 numbers are due out October 24; Barron's says there could still be 20% upside to the stock from current levels. (Full summary)
- "Underdog catcher" George Putnam III of New Generation Research has averaged 17.1% returns for subscribers to his The Turnaround Letter by looking for companies with distressed shares ripe for a turnaround. Stocks he likes: Nortel (NT), JDS Uniphase (JDSU), Zhone (ZHNE), Conexant (NYSEARCA:CNXT), Mindspeed (NASDAQ:MSPD), Bookham (BKHM), Parker Drilling (NYSE:PKD), Newpark Resources (NYSE:NR), Grey Wolf (GW), Superior Industries International (NYSE:SUP), ArvinMeritor (ARM), American Axle & Manufacturing (NYSE:AXL), Hayes Lemmerz (HAYZ), Delphi (OTC:DPHIQ). Stocks he doesn't like: Washington Mutual (NYSE:WM), FirstFed Financial (FED), Downey Financial (NYSE:DSL), BankUnited Financial (BKUNA). (Full summary)
- CVS (NYSE:CVS), the largest drugstore chain in the U.S., is also the only pharmacy-benefits manager/drugstore combination in the country following its acquisition of Caremark. That combination makes CVS well-positioned to make it through a consumer-spending downturn or potential healthcare changes as a result of the upcoming 2008 presidential elections. Wall Street appears to be ignoring the transformation, as the shares still trade like a traditional drugstore at 17x 2008 estimates, about the same as rival Walgreen's (WAG) 17.4x. (Full summary)
- Fuel Tech's (NASDAQ:FTEK) clean air technologies cut nitrogen-oxide emissions from coal-burning plants and utilities by up to 85%. With $30M in cash, no debt, 40% gross margins and significant insider holdings, bulls see FTEK shares reaching $45 and higher. One analyst says signing up just one-third of U.S. coal-powered plants will push the stock to $100 by 2009-2010. (Full summary)
- Barron's says say the China bubble may not burst as soon as many think. "A" shares are up some 120% this year, but managers are still buying the likes of China Mobile (NYSE:CHL), Huaneng Power (NYSE:HNP), and Sinopec Shanghai Petrochemical (NYSE:SHI). One manager says the Mainland market "could theoretically double from these levels." Another says, "We're quite late in the day in the rally, but quite early in the bubble. Valuations aren't ludicrous, just expensive. They will get ludicrous before the correction." (Full summary)
MUST-READS ON SEEKING ALPHA TODAY
This Week's Key Earnings Reports
This Week's IPOs
NII Holdings: A Buy Ahead Of Earnings
Voltaire: Seamless Connectivity
4 Reasons For Sandisk's Recent Downgrades
Oracle's Bid for BEA: Perfect Timing
Direct TV: May Be A Buy
New Distribution Deal Bolsters AMDL's Growth
Citigroup Boosts Estimates For Barrick, Freeport, NovaGold
Could BP Mean Big Potential?
Citibank Earnings Preview
Ben Stein, Global ETFs and The Dollar
The Week in Sound Money Tips
|Jim Cramer:|| Latest stock picks
|Transcripts:||General Electric Q3 2007 • Bank of the Ozarks Q3 2007|
Have Wall Street Breakfast emailed to you every morning before the market opens.