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MACRO AND HOUSING

ARM Resets to Hit the Fan in 2008 - WSJ

In 2008 interest rates will be reset upward on $362 billion worth of adjustable-rate subprime mortgages [ARMs] -- a scenario that could significantly worsen the already serious subprime crisis, according to a report in Saturday's Wall Street Journal. While many believe rate resets have been the main culprit in the crisis to date, more than half of existing subprime delinquencies occurred in their mortgages' first year, before the rates changed. The "real crest of the reset wave" has yet to take place, which "promises more pain for borrowers, lenders and Wall Street." "The initial wave was largely driven by a higher frequency of fraudulent loans... and loose underwriting," said Larry Litton, CEO of Litton Loan Servicing. The reset surge will likely intensify political pressure to take the heat off borrowers caught by rate adjustments and unable to refinance or sell their homes in the current environment. FDIC Chairman Sheila Bair is urging lenders to find ways to help borrowers keep their homes, and the issue is becoming a talking point among presidential and congressional candidates. "Keep it at the starter rate," Bair said in October. "Convert it into a fixed rate. Make it permanent. And get on with it." In addition to the $362 billion of subprime ARMs, $152 billion of other adjustable-rate loans are scheduled to reset in 2008, including jumbo mortgages and Alt-A loans. The Mortgage Bankers Association estimates that 1.35 million homes will enter foreclosure in 2007 and another 1.44 million in 2008, up from 705,000 in 2005. The anticipated supply of foreclosed homes constitutes approximately 45% of existing home sales and could add four months to the existing homes inventory -- a "fundamental shift" in the housing supply, according to Bear Stearns senior MD Dale Westhoff.

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TECHNOLOGY

Sony Climbs on News of Dubai Investment; PS3 Tops Wii

Sony gained 4.6% to ¥5,500 in Tokyo following news a $2B fund of Dubai International Capital [DIC], a $13B investment company owned by the emirate's ruler, made a "substantial" investment in Sony. Neither party disclosed details of the size of the deal, but it is expected to be no more than a 5% stake, since an amount above that level requires disclosure with the Tokyo Stock Exchange. Bloomberg reports DIC said it planned a $500M investment in a Japanese company last week. In a statement, DIC said it invested in Sony because of management's "ongoing strategy of focusing on capital efficiency and cash generation." Sony Chairman Howard Stringer commented, "We are happy that DIC has recognized the strength of the Sony brand as well as our unique competitive advantage in having both entertainment and electronics assets to drive our businesses forward." At present, U.S. mutual fund Dodge & Cox is Sony's largest shareholder with an 8.3% stake, per Sony's annual filing in June with the SEC. An asset manager at Yasuda AM called DIC's investment "encouraging" for Japanese stocks. Separately, Sony's shares were also supported by a report from Enterbrain, Japan's leading game magazine publisher, that showed the PlayStation 3 topped Nintendo's Wii in weekly sales for the first time ever during the weeks ended Nov. 11 and Nov. 18. The recently introduced 40-gigabyte model is said to have driven sales. Although the PS3 is poised to outsell Wii in November, it still trails far behind the Wii and Microsoft's Xbox 360 year-to-date. Sony's ADRs gained 3.7% to $49.09 on Friday.

Koninklijke Philips Electronics Buys LED Maker Genlyte Group for $2.7B

Dutch electronics conglomerate Royal Philips Electronics announced Monday it was buying U.S. light-emitting diode [LED] maker Genlyte Group for $2.7 billion, its largest acquisition in dollar terms ever. That comes out to $95.50 a share in cash, representing a 52% premium to Friday's closing price of $62.67. According to the press release, the deal, which is expected to be completed in Q1 2008, will create the "#1 lighting company in North America." Philips Lighting's CEO Theo van Duerson believes that, "Besides growing our presence in North America, this deal deepens our contacts to end users, such as wholesalers, contractors, architects and lighting designers, helping us speed up the market rollout of more energy-efficient lighting and the introduction of new lighting technologies, like solid state lighting.” Genlyte's board unanimously approved the offer, and recommends shareholders vote in favor of the buyout. During the 12-month period ending Sept. 2007, Genlyte had sales of $1.6 billion with an EBITA margin of 14.9%. Genlyte's shares are down nearly 20% YTD; PHG's are up more than 12% YTD including a 6.9% gain in Friday trading. Earlier this year, Philips acquired North American LED maker Color Kinetics (full summary). Philips has as much as 20 billion euros ($29.7 billion) set aside for acquisitions, dividends and buybacks through 2010. The company has spent 6.5 billion euros on acquisitions since August 2005, including its latest announced purchase of Genlyte.

Alcatel-Lucent Announces $1.1B of China Deals

Shares of Alcatel-Lucent were last up 2.2% to €5.20, on an announcement the company has formally signed a package of agreements with China Mobile and China Unicom, worth a combined total of €750M ($1.1B). Some of the agreements were previously disclosed, but specific details were not provided. Alcatel-Lucent will supply network equipment valued at €600M to China Mobile and €150M to China Unicom. In May, Alcatel-Lucent said it signed a $340M deal with China Mobile and a $120M deal with China Unicom. China Mobile recently said it gained a record 6.6M new subscribers in the month of October (total 356.3M), while China Unicom added 1.5M subscribers for a total of 117.1M (full story). Chinese President Hu Jintao and French President Nicolas Sarkozy participated in a formal signing ceremony in Beijing. NYSE-listed Shares of Alcatel-Lucent gained 2.6% to $7.56 on Friday.

Intel, Microsoft Quash One Laptop Per Child; AMD Swapped Out - WSJ

Nicolas Negroponte's One Laptop Per Child project, intended to provide children in poorer countries with computers for education, is foundering in the face of higher costs and competition from Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). According to a Wall Street Journal report, Intel last year introduced a $230-300 laptop for developing countries called Classmate, while Microsoft began offering a $3 software package that includes Windows, a student version of Microsoft Office and educational programs. Mr. Negroponte's laptop, based on an AMD (NYSE:AMD) processor and open source software, also exceeded cost targets; it currently sells for $188 instead of the target $100. Negroponte criticised Intel for lobbying governments against his non-profit's laptop in May. Two months later, Intel joined the board of One Laptop Per Child, and a new design -- based on an Intel processor -- is due in January. However, most of Mr. Negroponte's informal agreements with world leaders to buy millions of laptops seem to be unravelling, with Egypt and Libya, for example, planning to buy the $3 Microsoft software suite. Seven months ago Negroponte forecast sales of 2.5 million laptops in 2007, but admitted in a recent interview that the Taiwan-based manufacturer, Quanta Computer Inc., is producing only 300,000 units this year. Emerging markets are critical to Microsoft and Intel's growth, and the companies are likely concerned that seeding children with AMD-based laptops and open source software could threaten their businesses.

RETAIL

Traffic Up, Spending Down Over Black Friday Weekend

American shoppers, lured by longer opening hours and deep discounts, turned out in greater numbers over the post-Thanksgiving weekend than they did last year -- but the average amount they spent decreased, according to the National Retail Federation's 2007 Black Friday Weekend Survey. The number of shoppers went up 4.8% to more than 147 million over the long weekend, but they spent an average $347.44, a 3.5% drop from 2006. Consumer spending is being affected by high food and energy costs as well as the housing slump (full story). Wal-Mart started its holiday discounting two weeks earlier than last year, while other retailers, including Macy's and J.C. Penney, slashed prices up to 60%. NRF spokeswoman Ellen Davis said this year's spending slip reflects a retailer focus on mid-priced merchandise like inexpensive laptops rather than costly high-definition televisions, which were last year's hot ticket. "It takes a lot of $400 laptops to reach the same level as the $1,300 high-definition TV," she said. Many stores changed their hours to get a jump on holiday shopping: some opened at 5:00 a.m., J.C. Penney opened at 4:00 a.m. and a few opened at midnight Thursday. November and December sales account for 20% of retailers' annual revenue, with Q4 representing nearly a third of annual profit. The NRF is expecting a 4% gain in total retail sales for November and December, a five-year low. Consumers are expected to decamp to the Internet for much of their holiday shopping: research firm ComScore forecasts that online spending could set a one-day record above $700 million on "Cyber Monday." Online purchases rose 29% on Thanksgiving Day and 22% on Black Friday.

TRANSPORT AND AEROSPACE

Airbus to Sell 160 Passenger Jets to China for $14.8B

In a major coup over rival commercial aircraft producer Boeing, Airbus SAS inked a deal to sell 160 passenger jets to China worth $14.8 billion. The deal follows an agreement between Airbus and its Chinese partners this past summer to produce the Airbus A320 in Tianjian, China in exchange for a large Chinese order. The deal includes 110 A320s and 50 of Airbus' larger A330s. Airbus and Boeing estimate China will become the world's second largest commercial aircraft market after the U.S. within two decades. Airbus recently secured $35 billion in orders from Dubai's emirates airline (full summary); its latest bookings should push its total number of orders received in FY2007 ahead of Boeing.

ENERGY AND MATERIALS

Rio Tinto Outlines Defense Against Billiton; Chinese Fund Denies Bid Plan

Mining company Rio Tinto will raise dividends 30% and is considering the sale of up to $30 billion in assets as it struggles to fend off a $128 billion hostile bid from BHP Billiton. The company layed out its plans at an investor meeting Monday morning at the London Stock Exchange. "We believe we have a better growth pipeline than our competitors, which puts Rio Tinto in a strong position to supply the metal-hungry world," said Rio Tinto CEO Tom Albanese. "We have the people, execution capability and resources to work smarter, faster and better than our competitors." Rio emphasized its iron ore assets, which are valued at an estimated $100 billion following its acquisition of Alcan. Ahead of the meeting, Rio issued a statement outlining a plan to increase iron ore output to 600 million metric tons per year and committing $2.4 billion to develop two deposits in Western Australia. Rio's insistence that BHP's offer does not sufficiently value its assets has stimulated speculation that other suitors might emerge, possibly including China Investment Corp. [CIC], China's sovereign wealth fund. Chinese steelmakers have objected strongly to a Rio/BHP tie-up, which they argue would create a near monopoly in iron ore. China Business, a news weekly, reported that CIC is considering joining Chinese steel manufacturers in a $200 billion bid, but a CIC official said "there's absolutely no such thing" in the works. A joint bid "would require a lot of cooperation, and so far there's no news in this regard," said Luo Bingsheng, associate chairman of the China Iron and Steel Association. Rio also said it is not considering turning the tables and bidding for BHP in a so-called Pac-Man defense. "The first time I heard about Pac-Man was reading about it in the newspaper and it is not something I have given serious consideration," Albanese said. BHP shares closed up 4.6% in Australia; Rio shares jumped 7.5%.

FINANCIAL

E*Trade Sale Faces Valuation, Regulatory Hurdles - WSJ

A possible sale of troubled online broker E*Trade Corp. (NASDAQ:ETFC) hinges on how to value its weakening mortgage portfolio, the Wall Street Journal reported Monday. As of Sept. 30, E*Trade's mortgage portfolio, was worth $29.3 billion. It also owns mortgage-backed securities worth about $12.4 billion. So far, it has announced $197 million in pretax writedowns on its securities, and has put aside $238 million in loan-loss provisions. Sources say rivals looking at its books, including TD Ameritrade (NYSE:AMTD) and Charles Schwab (NYSE:SCHW), are concerned current valuations don't reflect the assets' depressed values, and would insist on a revaluation at a mark-to-market basis, although they admit the mortgages and related securities aren't likely as 'imperiled' as the current market suggests. E*Trade shares are down 77% over the past half year after the company warned four times about the falling value of its mortgage-based portfolio. One unknown factor that may affect its sale is what role federal regulators that over see its bank might play. The Office of Thrift Supervision, its overseer, could demand that the proceeds of a sale go back into the bank, leaving little for shareholders; it could also insist E*Trade find a buyer that insulates the mortgage portfolio from bankers.

ACTIONABLE BARRON'S CALLS

Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries

• Arbitrage spreads on pending buyout deals are wide, offering traders willing to bet the deals will close a healthy return. Roy Behren of the Merger Fund, which specializes in takeover-arbitrage situations, likes: Clear Channel's (NYSE:CCU)$39.20-a-share buyout that trades at a significant discount ($34); arbs can make about 85% annualized. Shares of Harrah's (HET) trade at $87, a $3 discount to its scheduled $90, Jan. 31 closing price, or 18% annually. At $40, shares of BCE (NYSE:BCE) offer arbs a 28% return if the deal closes for $43.53 on March 31. And TD Bank's (NYSE:TD) scheduled acquisition of Commerce Bancorp (CBH) for $38/share offers investors a current 22% return. (Full summary)
• Computer game retailer GameStop (NYSE:GME) may pull off an estimate-beating holiday sales season even as spending on corporate IT and other areas of retail falters. "Kids aren't getting clothes this Christmas. They're going to get a Wii," one analyst says. He has a $68 target on the $50 shares. (Full summary)
• Bulls say Harley Davidson (NYSE:HOG) shares are oversold, and insist Harley's powerful brand name recognition will bring it back. Overseas sales, $1.2B last year, are already 20% of the firm's revenues, and its potential in Asia and Europe is practically untapped. Barron's thinks the stock deserves a 17x P/E (currently 12x), and could reach $60-$70 again, but only if investors are patient. (Full summary)
• Troubled mortgage lender Freddie Mac (FRE) said it wants to sell preferred shares to increase its liquidity. Thomson Financial says Freddie sold $194.7B of new debt in 2007 alone, and Fitch Ratings has threatened to cut Freddie's AA-rated preferred shares should the company sell off more securities. The firm's senior unsecured debt still rates AAA, based on the premise it is too important for the government to let it fail. One trader says the government backing was comforting, but "that doesn't mean prices won't move dramatically." (Full summary)
Hewlett Packard's (NYSE:HPQ) earnings-per-share and valuation may benefit from some unorthodox bookkeeping, in its exclusion of "intangibles amortization" expense from reported earnings. This means H-P's earnings fail to account for amortization on its acquisitions, such as recent purchases of Opsware and Mercury Interactive. Bernstein analyst A.M. Sacconaghi thinks it should book the expense, considering the firm spent $7.3 billion on ten acquisitions over the past year alone. Accounting for 'intangibles' would change H-P's peer comparisons from a current 14.7x 2008e profits vs. 13x for IBM (NYSE:IBM) and 15.8x for Dell (NASDAQ:DELL), to 15.6x earnings. (Full summary)

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: U.S./Emerging Market Decoupling
Housing: Deere Sees a Housing Bottom in 2008
Long Idea: The Four Best Single-Country ETFs
Short Idea: Atari: Time to Say Goodbye
Internet: BIDZ.com: An Attractive Bargain
Hardware: EMC Better Off Without VMware
Chips: Semiconductors Prepared to Knock Your SOX Off
Software: Adobe Has a New CEO
Gadgets: Disillusion with WiFi on Mobile Phones
Healthcare: A Bullish Diagnosis on Rochester Medical
Biotech: Onyx's Cancer Drug: Potential Blockbuster - But With Competition
Retail: uWink Inc.: Food, Drinks and Fun
Gold: Palladium: An Investable Metal That Defies Physics
Energy: Financial Times on Oil: Key Players and Movements
Financial: Ambac Needs Capital Infusion to Keep Its AAA Rating
Asia: 4 Great Chinese Stocks
ETFs: Investing in Water and Water ETFs
Jim Cramer: Latest stock picks

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