Investors Lose Taste for Large Mutinationals
Investors have grown disenchanted with large-cap U.S. multinationals over the past month, with more bad news still ahead, the Financial Times reported Friday. "Large-cap US multinationals, the darlings of the investment world for most of this year, have been roughed up over the past few weeks. More trouble lies ahead," Bank of America analyst Joseph Quinlan told clients in a note this week. "U.S. corporate earnings, supported earlier by strong global growth and a weak U.S. dollar, succumbed to... deteriorating economic conditions at home." During the first half of 2007 international profits outpaced domestic earnings, and investors turned to multinationals as a hedge against a U.S. slowdown. But over the past month, shares of global firms such as GE (GE -7.5%), UPS (UPS -6.6%), ExxonMobil (XOM -4.3%) and Intel (INTC -7.5%) have suffered significant downturns on the heels of warnings and weak outlooks from companies like Caterpillar (NYSE:CAT), Cisco (NASDAQ:CSCO) and FedEx (NYSE:FDX). As late as the beginning of October, analysts were expecting 11% Q4 growth from S&P 500 companies; they now forecast growth of just 3.1%.
OECD Predicts up to $300B in Mortgage-Based Losses Globally
The Organization for Economic Cooperation and Development [OECD] believes total global losses stemming from the U.S. subprime crisis could reach as much as $300 billion. The view contradicts recent estimates by the likes of Citigroup, Merrill Lynch and Swiss Re for total global losses of about $50 billion. According to the Paris-based OECD, "As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn." Most of the losses will occur not in the form of mortgages themselves, but rather in the form of writedowns and fire sales of mortgage-backed securities repackaged within Collateralized Debt Obligations [CDOs]. The OECD believes the losses may not peak until March 2008.
Commentary: ACA Capital Credit Rating Downgrade Could Spark New Round of Massive Writedowns • The Writedown Leaderboard: Merrill Now in First
ETFs: IXG, IYF, IAI, XLF, DRF
Consumer Sentiment Sinks In November
A survey released Wednesday showed that consumer sentiment hit a two-year low in November on high fuel prices, the poor housing market and concerns about inflation. The Reuters/University of Michigan Consumer Sentiment index fell to 76.1 in November, above a forecast 75 but below October's reading of 80.9 and last November's reading of 92.1. "Rising prices for fuel and food had a devastating impact on household budgets, and falling home prices have diminished consumers' sense of financial security," said Richard Curtin, director of the survey. With the exception of one reading following Hurricane Katrina in 2005, the index is at its lowest point since 1992. "The data points to slowing growth in the U.S. economy and the big issue is what's the Federal Reserve going to do about it," said Meg Browne, senior currency strategist at Brown Brothers Harriman. The survey also said holiday spending will likely drop 4.0% to its lowest in five years. Plans to buy homes, vehicles, and large household durables all fell in November. Ninety percent of consumers polled listed "unfavorable economic developments" as the reason for their pessimism. Consumers are forecasting that inflation will be 3.4% over the next year, up from 3.1% last month. In another sign of potential weakness, the Conference Board's index of leading economic indicators fell 0.5% in October.
Commentary: Consumer Sentiment Hits ‘Danger Zone’ • The Dow’s 361-Point Decline: Is the Writing on the Wall?
Stocks to watch: AGG, DIA, SPY
Luxury Retailers Immune to Holiday Spending Slowdown - Reuters
Luxury retailers are poised to have a more profitable holiday shopping season compared to lower-end retail and discounters, because high-end shoppers are better able to manage record fuel prices and housing market weakness, according to a report by Reuters. However even among luxury retailers, only the "upper crust will escape unscathed," while the lower end is "starting to crack under the economic pressures," say industry experts and retailers. "There is a group of consumers who are relatively immune to ... gas prices, rising interest rates, price of heating or cooling their homes ... layoffs -- the retailers that serve them are relatively immune," commented Fred Crawford, managing director of AlixPartners, a consulting and financial advisory firm. Saks Inc. and Polo Ralph Lauren Corp. both commented recently on sustained demand for their products and do not expect a slowdown this season. Tiffany & Co. and online jeweler Blue Nile Inc., also expect to do well, with both having raised their outlook. Milton Pedraza, CEO of the Luxury Institute distinguished between "affluent" and "wealthy" consumers, with the former having $100,000 to $300,000 in annual income, compared to $1M to $10M for the latter. Pedraza cites Coach Inc., as an example where affluent customers will curtail spending in favor of lower-end stores. One positive factor among all levels of luxury retail is strong demand from tourists due to the weak dollar, especially at flagship stores in Manhattan.
Commentary: Recession Watch: 39% of Consumers Expect to Spend Less Than Last Year • Holiday Sales 2007: Understanding the True Story • High Energy Costs Could Rein In Holiday Spending - Survey
Stocks to watch: SKS, RL, TIF, NILE, COH. ETFs: RTH, XRT, ROB
TRANSPORT AND AEROSPACE
United Airlines Seeking Merger - Business Week
UAL Corp., the parent of number-two U.S. carrier United Airlines, is actively seeking a merger for the airline, according to a new report by Business Week. The hedge fund Pardus Capital Management, which holds stakes in both UAL and Delta, is urging the two to pursue a linkup (full story). The other leading contender is believed to be Northwest Airlines. UAL's CEO Glenn Tilton has "been perfuming United for sale" ever since it came out of bankruptcy in 2006, industry consultant Michael Boyd said. United is contending with relatively high debt, and its 2% profit margin over the last 12 months is "one of the thinnest in the industry," the article said. "They didn't push as hard in bankruptcy to transform the business model, and they've been playing catch-up ever since," said industry consultant Stuart A. Klaskin. "It's clear that Tilton now believes a merger is the road home." He and others cite as evidence of Tilton's intentions the airline's "pause" in fleet purchases and its exploration of asset sales to lower its debt. United is considering spinning off its Mileage Plus frequent-flier program, which is valued at $7.5 billion, as well as selling its maintenance operations and cargo unit to private equity as a means of raising billions in cash and stripping down to "core assets -— planes and routes." "I think Tilton is determined to make sure United isn't left standing on the street corner," said airline consultant Robert W. Mann. "If he can't sell off the airline whole, he can do it in pieces."
Commentary: Hedge Fund Pushes Delta-United Merger; Delta Denies Talks • United Airlines and Delta: A Match Made In Heaven? • Delta's Q3 Profit Soars, Beats Estimates
Stocks to watch: UAUA, DAL, NWA. ETFs: IYT
Earnings call transcript: UAL Corporation Q3 2007, Delta Air Lines Q3 2007, Northwest Airlines Q3 2007
ENERGY AND MATERIALS
UK Water Utility Kelda Gets $6.2B Offer From Citi, HSBC Group
Shares in UK water utility Kelda Group jumped 17% in London trading Thursday after the company said it had received a £3 billion ($6.18 billion) buyout offer from a consortium including Citigroup (NYSE:C) and HSBC (HBC). Water utilities provide "safe, steady, regulated returns," Pali analyst Angelos Anastasiou said. "There are people there who are totally willing to pay the premiums." He said the bid may boost share prices for other water companies: "It looks good for the sector," he said. "You'd be mad to go against the trend." Last month J.P. Morgan Chase (NYSE:JPM) and a group of investors agreed to buy Southern Water Capital for £4.2 billion from Royal Bank of Scotland (NYSE:RBS). The proposed premium on Kelda's asset base, called by some a "best-in-class" utility, was in line with that payed for Southern Water, analysts said. Kelda's (KLDGF.PF) shares trade over the counter in the U.S. ETFs that allow U.S. investors to capitalize on global water strength include PowerShares Water Resources ETF (NYSEARCA:PHO), PowerShares Global Water (NYSEARCA:PIO), Claymore S&P Global Water (NYSEARCA:CGW) and First Trust ISE Water Index Fund (NYSEARCA:FIW). See also Dan Pritch's Investing in the Looming Worldwide Water Shortage.
Bond Insurer CIFG Gets $1.5 Billion Lifeline; Others Likely to Follow
Financial guarantor CIFG Holding announced Thursday it will receive a $1.5 billion capital injection -- effectively doubling its capital -- from the controlling shareholders of Natixis, a French investment bank, in order to protect its triple-A credit rating. A month ago, Fitch cited CIFG and much-larger FGIC as "the most likely to experience contraction in their capital cushions," a condition that could precipitate a downgrade. If bond insurers were to lose their AAA ratings, a domino effect could ensue with downgrades on the hundreds of billions of dollars' worth of debt securities they guarantee. Ultimately, bond investors like mutual-fund holders and retirees would be hurt. As of October 5, CIFG's direct exposure to residential mortgage-backed securities was $1.9 billion, most backed by subprime mortgages, plus another $9.2 billion in CDOs. Fitch confirmed that the capital infusion will permit it to reaffirm CIFG's rating. Natixis's rescue plan offers what may become a "road map" for other bond insurers, including FGIC -- in which PMI group has a 42% stake, Blackstone holds a 23% stake, and former owner GE retains a 5% stake -- Ambac, MBIA and Security Capital Assurance. FGIC, which insures $315 billion in bonds, including $30B in mortgage-backed bonds and $25B in CDOs, has at most three weeks to retain its AAA rating. "They'll do whatever is necessary to protect their ratings and their franchise," Fitch Ratings' Thomas Abruzzo said of the group. "What Natixis has done makes an awful lot of sense," said Karl Bergqwist of Gartmore Investment Management plc. "There is systemic incentive to ensure that large monoline insurers don't get downgraded and don't go bust."
Commentary: A Long/Short Play on Monoline Insurers • MBIA, Ambac and Pandora's Box • Monoline Insurers: More Trouble Ahead
Stocks to watch: PMI, BX, GE, ABK, MBI, SCA
SIV Superfund to Begin Soliciting Investors - WSJ
Bank of America (NYSE:BAC), Citigroup (C) and J.P. Morgan Chase (JPM) will next week begin looking for partner banks to invest in their SIV-saving superfund, the Wall Street Journal reported Friday. The fund, which aims to create a potential buyer for the assets of off-balance-sheet investments known as SIVs [structured investment vehicles], has been in the making since September (full story). SIVs, which sell short-term debt and use the proceeds to buy higher-yielding assets, ran into trouble when credit markets dried up over the summer after traditional debt buyers were spooked by the illiquid vehicles' lack of transparency and valuation difficulties. The so-called superfund will only buy high-quality assets, a move it hopes will bolster investor confidence. Blackrock (NYSE:BLK) is expected to be named the $75-100 billion fund's manager, sources say. It is not expected to invest in the fund, perhaps in an effort to enhance its transparency as a neutral party. Some banks have shown informal interest in the fund, the Journal says, though "the real test will come as they assess the financial terms." Bankers say they hope to have the superfund running by January. Potential investors include Wachovia (NASDAQ:WB), Goldman Sachs (NYSE:GS), Merrill Lynch (MER), Federated Investors (NYSE:FII) and Bear Stears (NYSE:BSC). The participation of European banks such as HSBC (HBC), Barclays (BSC), Deutsche Bank (NYSE:DB), UBS (NYSE:UBS) and Credit Suisse (NYSE:CS) is considered critical due to their track-records in structured finanace (full story).
GMAC to Bail Out Struggling Home Lending Unit with $750M Debt Purchase
GMAC Financial Services, owner of Residential Capital LLC (ResCap), disclosed it would buy as much as $750 million of ResCap's debt securities at above-market prices in an attempt to save the residential lending unit's asset value from slipping below $5.4 billion. Such a fall in value would cause ResCap to break covenants on several credit facilities. ResCap was valued at $6.2 billion at Q3's end, versus a net value of $8.4 billion a year earlier. GMAC reported a loss of $1.6 billion in Q3, largely a result of ResCap's losses amid the worst housing market in at least two decades. The loss caused 49% GMAC stakeholder General Motors to report an additional loss of $757 million in Q3, part of the worst quarterly loss ($39 billion) in GM's history (full summary). Last year, GM sold a 51% stake in GMAC to Cerberus Capital Management. GMAC and majority owner Cerberus have taken a long-term view of the mortgage business, and are bidding hard to acquire the struggling U.K.-based Northern Rock plc, as a compliment to ResCap's secondary-loan business in the U.K. Despite its struggles, Cerberus Chairman John Snow has reiterated his support for GMAC: "We think GMAC is a terrific property. It will reward our investors over time." GM, meanwhile, saw its shares gain for the first time in over a week Wednesday after stating it had no further obligation to fund GMAC, following a $1 billion capital injection in Q1. GM closed at $26.39 Wednesday, well off its multi-year highs of $43.20 just a month earlier.
Commentary: Citi Ups GMAC's Credit Line • Subprime Fallout Hits General Motors • GM Restructuring Positives May Outweigh Rescap Risks
Stocks to watch: GM
Earnings call transcript: General Motors Q3 2007
Japanese Investors 'Quitting America' for Emerging Markets
The New York Times reports on a growing trend in Japan among individual investors of reallocating funds invested in the U.S. to faster growing emerging markets. Japanese investors have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months. Meanwhile, investment inflows in overseas-oriented funds have consistently grown at a higher clip than the outflow from U.S. funds. An estimated half of Japan's $14 trillion in personal savings is believed to be invested overseas in search of higher returns, especially in terms of yield, given Japan's extraordinarily low returns on deposits and bonds. At the same time, Japanese investors are gradually beginning to diversify their holdings, after having only embraced mutual fund investing about a decade ago. According to data from Daiwa Fund Consulting, Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B. Fund management companies have taken notice, resulting in a 36% increase in the number of emerging market mutual funds to 183 in total (vs. 137 U.S.-focused funds). While the subprime mess has certainly hurt the attractiveness of U.S. funds, the U.S. dollar is said to offer greater familiarity. A local JP Morgan strategist says a lot of dollar-buyers are on the "sidelines," but will "be back once currency markets settle down." Some analysts are cautious over the popularity of emerging markets, warning they may prove to be a fad, especially in a down market.
Commentary: More Yen Repatriation Follows Financial Earnings Recession • Japan on the Verge of a Rally - Barron's • Yen Carry Trade: Dire Threat or Poltergeist?
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