Citibank To Write Off Another $8-11 Billion; Rubin Named Chair
Citigroup disclosed Sunday it will write off another $8-11 billion in subprime losses, a slide that could erase half the company's 2007 profit. It also announced that it has appointed Sir Win Bischoff, chairman of Citi's European operations, as interim CEO to replace outgoing Charles Prince. Senior adviser Robert Rubin, a former vice chairman of Goldman Sachs and Bill Clinton's Treasury Secretary, has been named chairman. The new losses are additional to $2.2 billion in trading losses and mortgage-related write-downs that Citi announced on October 15, the day it reported a 57% drop in Q3 earnings from the previous year. Citigroup, with $2.35 trillion under management, is one of the largest banks in the world, but Charles Prince was unable to fuse its myriad parts into a cohesive unit. "Chuck Prince took over with all the tools," said Peter Sorrentino of Huntington Asset Management. "Citigroup hasn't delivered." Unlike JPMorgan Chase, which compensated for heavy Q3 credit losses with gains in other areas, Citigroup performed poorly across the board -- in part, the WSJ asserts, because of Citigroup's fractured corporate structure. The appointment of Rubin is receiving mixed reviews. "He's slipped more punches than Muhammad Ali," said Robert Stovall, global strategist at Wood Asset Management. "He's got a pretty good reputation worldwide and has a knack for handling crises." Some look askance at his former role as "consigliere" to Prince and other Citigroup executives. "Even if he wasn't directly involved with the mess, he also hasn't criticized anything publicly, so he's guilty by association," said Manhattan College finance professor Charles Geisst.
Commentary: Citigroup to Have Emergency Board Meeting - WSJ • Citigroup's Weakness Drags Down Financials; Tech Continues Strong • Question of Solvency at Citigroup
Stocks to watch: C. Competitors: BAC, DB, JPM. ETFs: DHS, FDL, IYG
Earnings call transcript: Citigroup Q3 2007
Hank Greenberg Takes On AIG Management Via SEC Filing
Maurice "Hank" Greenberg, the 82-year-old former CEO of American International Group [AIG] who was ousted in 2005 over an accounting scandal, has begun a campaign against the company's management. AIG's stock has declined 18% this year. Greenberg, who holds a 12% stake in the company, submitted a 13D filing with the SEC on Friday addressing "opportunities to significantly improve [AIG's] performance and strategic direction." The WSJ notes that such filings are often preliminaries to proxy fights intended to overhaul company boards. According to the filing, Greenberg plans to talk with investors and "third parties" about AIG's business, including possible unit sales and other strategic alternatives. "If he finds enough allies, Mr. Greenberg's initiative may give him a way to reassert influence on the company he built," said Celent LLC analyst Donald Light. Over the summer, AIG sued Greenberg and another ex-executive for $1 billion in damages. Within days, Greenberg countersued AIG, accusing directors of "seriously damaging" the firm. "The company is pursuing the right strategies, and the board and management are united in their commitment to building shareholder value," said AIG spokesman Chris Winans Friday night. AIG shares rose 3.6% to $61.25 in AH trading Friday following news of the filing.
Commentary: AIG Tops Forecasts, Not Worried About Mortgage Exposure • Investors Jittery About AIG's Subprime Exposure • The Imminent Death of the Insurance Industry
Stocks to watch: AIG. Competitors: AZ, AXA. ETFs: IAK, KIE, IYF
Earnings call transcript: American International Group Q2 2007
MACRO AND HOUSING
Gramercy Capital to Acquire Fellow REIT American Financial for 31% Premium
Real Estate Investment Trust [REIT] Gramercy Capital Corp. announced Monday morning it will acquire fellow REIT American Financial Realty for $1.1 billion in cash and stock. Gramercy will also take on $2.3 billion of American Financial's debt. The deal is expected to close during the first quarter of 2008. The offer for $5.50 in cash and 0.12096 Gramercy shares for every share of American Financial (for a total per-share offer of $8.43) values American financial at a 31% premium to its closing price of $6.45 Friday. Its shares are down nearly 44% YTD. Gramercy CEO Marc Holliday had this to say: "In a single stroke, it will make the company a leading player in commercial real estate ownership, and further differentiate us from our current peers. We believe that the American Financial portfolio contains unrealized potential that we are uniquely qualified to extract." Gramercy's shares are down nearly 22% YTD. In other news, Morgan Stanley's Real Estate unit bought $100 million of Gramercy stock at an average price of $26.25 a share last week.
Commentary: Gramercy Capital Gains Momentum • A Quick Guide To High Yielding Commercial REITs
Stocks to watch: AFR, GKK, MS
ETFs: REM, RWR, VNQ
Drop in Japan PC Sales May Spell Trouble for Industry - AP
The role of the PC is shrinking in Japanese homes, as consumers increasingly turn to gadgets like smart-phones, pocket PCs, game consoles, and connected DVD recorders, AP reports. Slippage in Japan's PC market has analysts wondering this could be a warning of diminishing PC sales worldwide. "The household PC market is losing momentum to other electronics like flat-panel TVs and mobile phones," said IDC's Masahiro Katayama. PC shipments in Japan have dropped in each of the last five quarters, the first-ever extended decline in a key market, according to IDC. In Q2 2007, desktop sales were down 4.8% while laptops fell 3.1%. "In Japan, kids now grow up using mobile phones, not PCs. The future of PCs isn't bright," Katayama said. More than half of all Japanese use their mobile phones for email and web browsing, and Japan's fastest-growing social-networking site, Mobagay Town, is cell-phone exclusive. PC makers cite figures saying outside of Japan, PC shipments are expected to rise 11% in 2007, buoyed by booming emerging-market demand. Sub-$300 laptops released for the coming holiday season will also boost sales, they say. Hiroyuki Ishii, a sales official at Japan's top PC maker, NEC Corp., admits PCs are loosing favor in Japanese consumers' eyes. "The PC's value will fade unless the PC can offer some breakthrough functions," he said.
Commentary: Worldwide PC Unit Sales Up 13% • Changes in the Consumer PC Market • The Decline of the PC : Computers No Longer a Growth Industry
Stocks to watch: IBM, DELL, HPQ, GTW
Google's Mobile OS Imminent - Media
Google will unveil its much-awaited mobile phone plans as early as Monday, ending two years of speculation, according to recent media reports. Sprint and Deutsche Telekom's T-Mobile are likely to be the first two to sign-on to Google-powered phones. The new Google mobile OS will utilize the company's search, G-Mail, Google Maps, and YouTube, while allowing developers to build their own applications; a stark departure from the proprietary platforms that now rule the industry. Other rumored apps include location-aware services that automatically link users to reviews of nearby restaurants, instant photo sharing with a user's entire address book, and yet-unparalleled levels of customization. Multiplayer gaming and high-def TV are also potential apps which are currently scarce in the U.S. Google's plan includes opening cellphones' architecture "right down to the OS" in an effort to rally developers previously discouraged by the hassle of custom developing mobile apps for multiple carriers, sources say. Google's announcement is likely to ignite a race among software developers, long shut out of the wireless industry. Last week, Google announced an open source alliance for developing services for social networks (full story), prompting some developers to wonder if mobile apps were around the corner: "It seems like a natural progression," one developer said. A deal with Sprint will give Google access to its 50 million-plus user base, while giving Sprint, the number-three U.S. wireless provider, a much needed boost to help it increase stagnant subscription growth. "Any device Google brings would be a big positive for the entire wireless industry," said Robert Laikin, CEO of wireless distribution company Brightpoint.
Commentary: Sprint Needs Something Big: It's GPhone Or Bust • Google's Revolutionary Phone Nearing Reality • Where is All the Money Going?
Stocks to watch: GOOG, S, DT. Competitors: MSFT, RIMM, AAPL
Earnings call transcript: Google Q3 2007, Sprint Nextel Q3 2007, Deutsche Telekom AG Q2 2007
MySpace, Facebook to Introduce Enhanced Advertising Features
The race for social networking websites to develop the most relevant and lucrative advertising platforms is heating up, with News Corp.'s MySpace unveiling Monday a so-called "hyper targeting" advertising sales system, which uses members' personal information to allow advertisers to eventually offer focused advertising across 100 different user segments. MySpace data shows click through rates of its hyper-targeted ads are 300% higher than other advertisements currently shown on its site. MySpace's existing ads are served by Google. MySpace's new ad system comes ahead of rival Facebook's planned announcement of big changes to its system on Tuesday. Also, last Thursday MySpace joined Google's OpenSocial network initiative for creating standards for application developers across a number of leading social networking sites. (Full story). Over 50 advertisers have reportedly signed up for MySpace's new ad system, including Ford, Toyota, Microsoft, Sony and P&G. Meanwhile, Facebook is expected to announce a system for advertisers to interact with users, even when not on Facebook, according to a Wall Street Journal report. Separately, marketing technology firm BuzzLogic, said it will open its system to allow advertisers to place focused ads directly in blogs and forum discussions. News Corp. reports fiscal Q1 earnings on Wednesday.
Commentary: MySpace, Bebo Join Google's Facebook Challenge • Is Google's OpenSocial Really The Second Coming? • Microsoft to Take $240M Facebook Stake, Become Exclusive Ad Platform
Stocks to watch: NWS, GOOG, MSFT
Earnings call transcript: News Corporation F4Q07, Google Q3 2007, Microsoft F1Q08
Kraft Near Deal to Sell Cereal Business to Ralcorp -- WSJ
Kraft Foods is near a deal to sell its Post Cereals business to Ralcorp Holdings, a private-label maker of cereals and other foods, for about $2.8B, The Wall Street Journal reported Monday. The Journal reported in mid-August, that Kraft was exploring a sale of the Post business with sources indicating it could fetch up to $3B. Investor Nelson Peltz, who owns 3% of Kraft, has urged CEO Irene Rosenfeld to sell the stagnant Post operations. Citing market research data, the Journal noted that sales of Post cereals at food retailers excluding Wal-Mart fell 2% over the first nine months of 2007, while sales in the overall ready-to-eat cereal category were flat. According to people familiar with the deal, PepsiCo, General Mills, Kellogg and Del Monte Foods also considered bids for the business. The deal, which sources said could be announced within the next few weeks, would be done by spinning off Post and then merging it with Ralcorp, which would result in a tax-free transaction for both sides. The purchase would increase Ralcorp's revenue some 50% to $3.3B, the Journal said.
Commentary: Kraft Exploring Sale of Post Cereals -- WSJ • Independence From Altria Group Positive For Kraft Foods • Kraft Foods Jumps On Reports of Peltz's 3% Stake
Stocks to watch: KFT, RAH. Competitors: GIS, K, DLM, PEP,CAG, SLE. ETFs: XLE, PRFG, UGE
Earnings call transcript: Kraft Foods Q3 2007
TRANSPORT AND AEROSPACE
Ford, UAW Reach Deal
Ford Motor Co. and the United Auto Workers have reached a four-year labor agreement, averting the strikes that hit fellow automakers Chrysler and General Motors. Ford will establish an independent trust to manage retiree healthcare, and it also was expected to create a two-tier wage structure. People familiar with the talks said the agreement appears to make greater concessions regarding wages and retiree healthcare funding than did GM and Chrysler, in exchange for which Ford will keep open several plants it previously had intended to close as part of a restructuring. Ford posted a $12.6B loss last year. "Our goals for this contract were to win new product and investment, to enhance job security and protect seniority -- and we made progress in all these areas," the UAW negotiator said. Ford, meanwhile, said "Though we will not discuss the specifics of the tentative agreement until after it becomes final, we believe it is fair to our employees and retirees, and paves the way for Ford to increase its competitiveness in the U.S." Details of the pact, which covers some 54,000 workers and still must be approved by the union members, were withheld pending ratification.
Commentary: Goldman Lowers Estimates for GM, Ford; Raises Magna • Why Are Ford and Chrysler Letting GM Lead Negotiations With the UAW?
Stocks to watch: F. Competitors: GM, TM, HMC, OTC:NSANY
Earnings call transcript: Ford Q2 2007
New Lilly Blood Thinner Outperforms Plavix - Study
An experimental new blood thinner was shown to outperform the blockbuster Plavix, but it carries a risk of bleeding, according to a study published this weekend in The New England Journal of Medicine. The new drug, prasugrel, is manufactured by Eli Lilly and Japanese pharmaceutical Daiichi Sankyo, which surged 11% to an 18-month high in Tokyo on the report. Plavix is marketed by sanofi-aventis and Bristol-Myers Squibb. The study showed that patients given prasugrel experienced almost 20% fewer instances of heart attack, stroke or heart-related death than those who received Plavix (see full study). For every heart-related death that prasugrel prevented, however, almost one additional bleeding death occurred. Despite the risk, doctors are largely enthusiastic about prasugrel. "I'm encouraged by the results," said the Cleveland Clinic's Dr. Steven Nissen, a regular adviser to the FDA. Nissen said he supports FDA approval of the drug since it significantly cuts non-fatal heart attacks. Doctors in favor argue that it should not be difficult to identify at-risk patients, who include the elderly, the very thin and those with a history of strokes. Lilly and Daiichi Sankyo recently halted two small studies of prasugrel in order to adjust dosing for such patients. Worldwide sales of Plavix, which costs $4 a day, totaled almost $6 billion last year. "[If Plavix and prasugrel] start competing on price, it could be a boon for the health care system," said Yale cardiologist Dr. Harlan Krumholz.
Commentary: Lilly Suspends Two Trials of Blood-Thinner • Eli Lilly: It’s That We Were Told That’s Telling
Stocks to watch: LLY, Daiichi Sankyo [TYO:4568]. Competitors: SNY, BMY. ETFs: PPH, PJP, IHE
Earnings call transcript: Eli Lilly Q3 2007
WellCare to Conduct Own Probe; Raid Involved Fraud
WellCare Health Plans said the special committee of its board of directors formed in response to investigations by federal and state authorities will conduct its own independent probe of matters raised by those investigations. A separate panel was formed to work with the board's audit committee if any accounting matters are identified. On October 24, the company's Tampa headquarters were raided by the Florida Attorney General's Medicaid Fraud Control Unit and the FBI. The Company also has received information requests from the SEC. WellCare said it is cooperating with the authorities, but that it still had not been informed as to what the subject of the investigation is or what impact it might have on the company. However, a person familiar with the matter said the raid was prompted, at least in part, by allegations that WellCare inflated the amount it spent on mental-health care so it could keep funds that should have been refunded to Medicaid, allegedly costing the program more than $35M over a five-year period, the Wall Street Journal reported Saturday. WellCare shares, which were at $122.27 the day before the raid closed at $27.37 on Friday. Meanwhile, the company delayed issuing its form 10-Q and any future quarterly filings until the investigations are completed. It said, however, it will proceed with its planned webcast on Monday and release preliminary figures for the quarter ended September 30.
Commentary: WellCare Plummets After FBI Raid • WellCare Health Plans' Day of Reckoning May Have Arrived
Stocks to watch: WCG. Competitors: AGP, CNC. ETFs: PTJ, PIQ
Boston Scientific Sells Two Units for $750M
Medical device maker Boston Scientific Corp. announced the sale of its cardiac surgery and vascular surgery units to Swedish health-care equipment provider Getinge AB for $750 million. The all-cash deal is expected to close in between 45 and 90 days. According to Swedbank analyst Johan Unnerus, "The price seems fair, and this suits Getinge very well since they want to grow in the U.S." Boston Scientific acquired the units when it purchased Guidant Corp. in April 2006, taking on $8.3 billion in debt to finance the deal. The company reported a $272 million loss in its latest quarter, on a 22% drop in the sale of drug-coated stents (full story). Stent sales have suffered recently on an industry-wide basis as their efficacy has been called into question. Boston Scientific CEO and President Jim Tobin said these sales are part of "a previously announced element of our plan to divest non-strategic assets, focus on our core businesses and increase shareholder value." BSX shares are down 23% YTD as investors continue to worry about the firm's excessive debt, towards which it continutes to divest its non-core assets. Shares were unchanged in pre-market trading.
Commentary: Boston Scientific Unit Sale Digs It Out of Hole [Blogging Stocks] • Boston Scientific Up After Earnings Beat and Signs of Progress • Boston Scientific Puts More Units Up for Sale • Boston Scientific: A Buyout Waiting to Happen
Stocks/ETFs to watch: BSX. Competitors: JNJ, MDT, STJ. ETFs: IHI
Earnings call transcript: Boston Scientific Q3 2007
PetroChina Surges 160% in Shanghai Debut, Topping $1 Trillion
Extremely oversubscribed shares of PetroChina nearly tripled to 43.96 yuan in their Shanghai debut Monday, despite an 8.2% drop to HK$18 for its Hong Kong-listed shares, which perhaps signals overseas investors view PetroChina as overvalued. The better-than-expected rise in Shanghai catapulted PetroChina's global market capitalization to around $1 trillion, the largest in the world, exceeding the combined value of numbers two and three Exxon Mobil and GE, and larger than the entire value of many national exchanges. Before tripling in value this year, China's entire stock market was worth less than $1.1 trillion. PetroChina's Shanghai shares trade at a 154% premium to its Hong Kong listed shares -- higher than rival Sinopec's 145% premium. A Shanghai-based analyst says PetroChina's opening price is "really too high ... as far as corporate fundamentals are concerned." The analyst also warns if Beijing, which controls oil prices, doesn't raise them, high crude oil prices "will actually become a negative for PetroChina," since it also has large refining operations. PetroChina's Shanghai shares are valued at 54x analysts' 2007 earnings estimates, compared to 18x for global oil firms, but well below the 80-level of industry peers listed domestically. PetroChina's drop in Hong Kong can also be linked to China's premier throwing cold water on the Hang Seng's red hot rally -- sending the index down 5% -- by making it very difficult for a proposal to allow mainland investors to invest in Hong Kong to be approved in the near-term. PetroChina's ADRs rose 2.4% to $255.06 on Friday.
Commentary: Buffett's PetroChina Sale May Signal Anxiety Over Chinese Bubble - WSJ • It's More than Just Baidu: 51 Other Ways to Invest in China • Are Chinese Stocks Too Hot To Handle?
Stocks to watch: PTR. Competitors: SHI, CEO, XOM,CVX. ETFs: FXI, PGJ, FNI
THIS WEEK'S IPOS
• China IPOs: Agria Corp., AirMedia Group, China Nepstar Chain Drugstore
• Energy IPOs: Approach Resources, OSG America, Quest Energy Partners, SandRidge Energy
• Pharma IPO: ARYx Therapeutics
• Healthcare IPOs: BioForm Medical, The Ensign Group
ACTIONABLE BARRON'S CALLS
• Barron's semi-annual survey of Big Money managers found 46.8% bullish about stock markets, and 20.1% bearish. 29% foresee recession within the year. 64% say housing will bottom within the year. Strongest sectors are tech (66.3%) and energy (31.7%), while weakest are consumer cyclicals (60%) and financials (57.1%). Their favorite stocks (in order): Cisco (CSCO), Microsoft (MSFT), Amgen (AMGN), Apple (AAPL), Google (GOOG), Intel (INTC), Johnson & Johnson (JNJ), Corning (GLW), and GE (GE). Most overvalued stocks (in order): Google, Apple, Amazon (AMZN), Crocs (CROX), Research in Motion (RIMM), Baidu (BIDU), Goldman Sachs (GS), Sears (SHLD), and Starbucks (SBUX). (Full summary)
• Growth-stock investor B. Anthony Weber, founder of Veredus Asset Management, likes: (1) Internet stocks -- Cisco (CSCO) and Akamai (AKAM), who will benefit from the move to video and high-speed broadband. Amazon.com (AMZN) is the Wal-mart of the internet. (2) Mobile -- with 1% market share, Research In Motion's. (RIMM) Blackberry has room to grow. (3) Infrastructure -- oil and gas marine construction company McDermott (MDR). (4) Biotech: Gilead Sciences (GILD) -- the best HIV franchise out there. (Full summary)
• Shares of toymaker Mattel (MAT) trade around a 52-week low after a series of product recalls over the summer, leaving little, if any, downside risk. The company has taken steps to restore its image, and one PR expert says the company has avoided major consumer defections. Bulls say the stock could jump from its current $21 to $30 over the next year. (Full summary)
• High-end bank Northern Trust (NTRS) has emerged as the picture of stability; just 0.12% of its loans are classified as non-performing vs. 0.76% for banks as a whole. Though the stock isn't cheap at 19x earnings, the shares are trading at a discount to the company's long-term average P/E ratio of 24.5. Shares could easily add 10% or more annually. (Full summary)
• Investors eyeing Delta Petroleum (DPTR) as a way to profit from rising energy prices may want to explore elsewhere. Delta has missed initial production guidance in five of the past seven quarters, yet shares trade at a high valuation compared to peers as fans await good news on possible big natural-gas plays. A recent jump in dry-hole costs to $15M from $1.4M suggests Delta isn't finding as much as investors expect. Shares could slide 20% or more. (Full summary)
• Shares of fashion retailer Kenneth Cole (KCP) trade at near four-year lows. Same-store sales gained 8% during Q3, and Cole continues to shed weaker locations. "The stock and the company have endured much pain, but the stars are aligning," Esplanade Capital's Shawn Kravetz said. A new men's sportswear line and a 25th-anniversary ad drive could drive earnings beats, and with a debt-free balance sheet and 4% dividend, risk to investors is minimal. Kravetz thinks shares ($18) could hit $50. (Full summary)
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