Moody's Reviewing Ratings on Over $100 Billion in SIV Debt
Moody's Investors Service has downgraded or put on review $119 billion of debt sold by SIVs in the most sweeping downgrade since subprime mortgages caused the bond market to seize up. The review includes top-rated notes held by money markets and local government investment pools. "In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios," the agency said in a statement. "The situation has not yet stabilized and further rating actions could follow." The NAV, or net asset value, of an SIV is the amount investors would be left with if the SIV was forced to dump assets in order to repay debt. Moody's said Friday the NAVs of 20 SIVs have fallen to 55% from 71% a month ago and 102% in June. The agency accordingly slashed ratings on $14 billion of SIV debt, mainly commercial paper and medium-term notes, and placed another $105 billion on review. Six Citigroup SIVs with $64.9 billion of debt, the values of which fell to 56%, were either downgraded or put on review, as were the ratings of Bank of Montreal's $19 billion SIV. The NAV of Orion Finance Corp., managed by Eiger Capital and sponsored by ING, is down to 54%. "We need to see the purging process result in a cleaning up of the bad debt," said Scott MacDonald, head of research at Aladdin Capital Management. "This is a painful but necessary healing process." In related news, the Florida State Board of Administration, in an effort to prevent a run on the Local Government Investment Pool, halted withdrawals from the fund, effectively denying school districts, towns and cities in the state access to their money. The fund had $2 billion in SIVs and other debt exposed to the subprime collapse.
Commentary: Ratings Agencies: Villians or Scapegoats? • The Abysmal Track Records of Moody's, Fitch and S&P • SIV Superfund to Begin Soliciting Investors - WSJ
Stocks to watch: MCO, C, ING, BMO. ETFs: IYG, KBE, VFH
Earnings call transcripts: Citigroup Q3 2007, Moody's Corp. Q3 2007
Vivendi to Take Controlling Stake in Activision, Rival Electronic Arts
French entertainment company Vivendi SA is purchasing a controlling stake in Activision for $9.8 billion, forming a combination that will rival Electronic Arts for the position of world-leading independent video game manufacturer. Vivendi will pay $27.50/share in addition to $1.7 billion in cash to acquire 52% of Activision, valuing the combined company at $18.9 billion. The new entity, to be called Activision Blizzard, will then repurchase $4 billion worth of its shares for $27.50 each, boosting Vivendi's stake to an estimated 68%. The purchase price represents a 24% premium over Activision's Friday close. The entity will merge Activision -- which excels at making games for consoles like Xbox 360 and Playstation -- with Vivendi's Blizzard Entertainment, which dominates the online game market. Blizzard produces World of Warcraft, which, with 9.3 million users, has become what the NY Times calls a "worldwide phenomenon." "We looked every which way to figure out how to participate in what Blizzard had created," said Activision CEO Robert A. Kotick. "We couldn’t find a way to duplicate it, but we could acquire the expertise." Vivendi CEO Jean-Bernard Levy said, "Gaming is now a core business for Vivendi. The match of the two companies is amazingly powerful, and it will immediately create a new leader in videogaming world-wide." Activision is a hot property: its Guitar Hero III sold 1.3 million copies in the first week after its release and it had three of the eight best-selling games in the U.S. through October. Activision's sales hit $1.5 billion in 2007, a 74% increase over 2003, well ahead of the 25% increase over the period seen by Electronic Arts. Activision's and Vivendi's combined revenue for 2007 is estimated at $3.8 billion; Electronic Arts is forecasting 2007 revenue at $3.7 billion. Wedbush Morgan Securities analyst Michael Pachter: "There is a competitor now to Electronic Arts... There are now two guys that are dominant."
Commentary: Activision Boosts Q3, Full Year Outlook After Strong Thanksgiving • Citigroup, Credit Suisse Get Bullish On Video Games • Best and Worst Performers of the Last Two Days
Stocks to watch: ATVI, VIV [Paris]. Competitors: ERTS, SNE, TTWO. ETFs: EMG, EMM, IJK
Earnings call transcript: Activision F2Q08
Dell Awards Exclusive Ad Account to WPP
PC manufacturer Dell Inc. has awarded a $4.5 billion, three-year advertising contract to London agency WPP Group plc. WPP's rival for the account was Interpublic Group. WPP will be responsible for all Dell's advertising, direct marketing and public relations. Previously, over 800 agencies around the world were working for Dell, but global marketing VP Casey Jones ultimately deemed it wisest to "marry one instead of dating many." "We are evolving the processes of marketing along the same lines as Michael Dell did the supply chain processes, by looking at the fundamental DNA and ways to improve inefficiencies," he said. "By partnering with WPP, we eliminate competition for a share of the marketing pie and we can invite the agency into our business meetings to help us with a long-term plan." WPP has a challenge before it: Dell lost its leading share of the PC market to Hewlett-Packard this year, and last week, it reported a profit miss that sent its shares tumbling 13%. WPP plans to set up a new agency, to be called Project DaVinci, that will integrate TV and print ad creation with market research and Web ad design, responsibilities that were previously decentralized at Dell. "We think with Dell there is a big opportunity to develop a fully integrated approach that goes across all the marketing and advertising disciplines," said WPP CEO Sir Martin Sorrell. WPP and Dell plan to hire at least 1,000 people over three to six months to work on overhauling Dell's image. The company suffers from a perception that it is "the cheap computer company," said Dell's Chief Marketing Officer Mark Jarvis. "We've started to move to much more of a cool brand," he said, by introducing PCs in vibrant colors and adding features designed to appeal to more sophisticated users. WPP shares were up 1.6% in London trading Monday.
Commentary: Looking to Buy More Dell • Dell's Turnaround Not as Smooth as Wall Street Hoped • Dell Hopes To Create 'Product Lust' Following Mixed Earnings
Stocks to watch: DELL, WPPGY. Competitors: HPQ, AAPL, OTCPK:LNVGY. ETFs: IAH, PHW, OTR
Earnings call transcript: Dell F3Q08
NBC to Bring Docudrama to Prime-Time
In an attempt to contain costs while sustaining viewership, NBC has entered an unprecedented deal with a partnership consisting of TV/media heavyweights Gail Berman (former president of Fox Entertainment and Paramount Pictures), Lloyd Braun (former top executive at ABC and Yahoo!) and Thom Beers (creator of popular adventure documentaries), to bring the poplar "docudrama" to two-hour or longer blocks of prime-time programming. On Sunday, NBC confirmed it had ordered three docudramas from the BermanBraun and Beers partnership, with the first two expected to be ready around Q3-2008. NBC also reportedly plans to buy at least three more docudramas. The terms of the deal include a single-night of prime-time airing of at least a two-hour block, and guarantee the partnership 30 hours of programming on NBC, or three 10-episode series. Mr. Beers' most popular shows this year include "Deadliest Catch" (Discovery Channel) and "Ice Road Truckers" (History Channel), the latter which attracted nearly 5 million viewers of its season finale. Docudramas offer significant cost savings of up to 75% or more compared to the high-range $3M cost for an hour-long prime-time drama, according to sources cited in an LA Times report. Mr. Braun commented, "This is a totally unique deal with tons of potential. We love the docudrama format. It's a form of television that hasn't been actively explored on the network level." Shares of NBC's parent company General Electric rose 0.4% to $38.29 on Friday.
Commentary: NBC First to Buy TiVo Demographic Data to Improve Ad Effectiveness • DreamWorks In Talks With NBC Universal - NY Times • Investors Lose Taste for Large Mutinationals
Stocks to watch: GE. Competitors: CBS, DIS, NWS
Earnings call transcript: General Electric Q3 2007
JP Morgan to Invest in Entertainment
J.P. Morgan, looking to pick up the pace of its principal investments and expand its Hollywood presence, is expected to announce plans Monday to invest $200 million of its capital in the entertainment industry, according to The Wall Street Journal. The company and its predecessor companies have long been involved in debt financing in Hollywood. However, J.P. Morgan is a latecomer as a principal investor and is arriving as other firms are slowing down investment activity, says veteran J.P. Morgan film industry banker John Miller, who sees the earmarked funds as a plus, "significantly broadening" the firm's competitiveness "... especially at a time when capital is running away." The Journal reports that in addition to entertainment, J.P. Morgan has been quietly investing in real estate and energy, in which most investments are for stakes in projects but not a controlling position. Patrik Edsparr, J.P. Morgan's global head of principal-investments: "If you look at the full range of activities, we are probably a lot bigger than you think, but we are clearly smaller than some of our competitors. The vision is to broaden our capabilities and fill in the gaps while we pursue a very balanced and diversified approach." Shares of J.P. Morgan gained 4.5% to $45.62 on Friday.
Commentary: Why The Safest Banks Saw the Biggest Losses • SIV Superfund to Begin Soliciting Investors - WSJ • JPM: What Kind of a Deal Could Jamie Dimon Get for Capital One?
Stocks to watch: JPM. Competitors: GS, MS, MER
Earnings call transcript: JP Morgan Q3 2007
Online Sales Grow as Holiday Shoppers Seek Bargains
Online purchases jumped 18% to $4.1 billion last week led by Yahoo (NASDAQ:YHOO), Target (NYSE:TGT), Apple (NASDAQ:AAPL), Circuit City (NYSE:CC) and Toy "R" Us, according to data released Sunday by comScore. The research firm estimates online spending may climb 20% to about $29.5 billion in November and December. "Online sales growth continues to be very strong," Ernst & Young analyst Jay McIntosh said. Internet shopping currently accounts for about 3% of all retail sales. Separately, a Reuters survey released Monday said many U.S. shoppers are delaying serious holiday shopping until a "second wave of major promotions" rolls out later this month. The results indicate shoppers have adapted a "bargain-hunting mentality" this year, said Britt Beemer, chairman of the consumer-behavior marketing firm America's Research Group, who conducted the survey. About 23% of shoppers said they would spend less this year, which Beemer said was an "all-time high," and well above the 16% percent seen in 2006 and 2005. In one salient datapoint, Wal-Mart (NYSE:WMT)-owned bulk warehouse Sam's Club outranked Toys "R" Us for holiday shopping. "In the years I've been doing research I've never seen Sam's Club ahead of Toys "R" Us -- ever," Beemer said. "I think it's a reflection of how much a bargain hunter the shopper is today."
ENERGY AND MATERIALS
OPEC Not Expected To Boost Supply Dec. 5
OPEC will consider a supply increase at its meeting this Wednesday, but the recent $10 decline in the oil price from a record $99.29 in November is expected to factor against a boost. "We will not increase output unless there is a need in the market," said Algerian Oil Minister Chakib Khelil. "For the moment there is no need. Stocks are high." In September, the cartel consented to increase output by 500,000 barrels a day in response to American and European concerns about the oil price. It is being pressed once again to boost supply to ease prices, which have tripled in four years and are up 47% on the year. Saudi Arabian Oil Minister Ali al-Naimi, considered to be the most influential member of OPEC, said Saturday that inventories are "very comfortable," with levels "still in the five-year range." Last week's 9.7% drop in the crude price -- the steepest weekly drop since April 2005 -- is believed to be attributable to the U.S. economic slowdown, which is affecting demand for energy. Qatari Oil Minister Abdullah al-Attiyah said the price of crude is not the reason for the U.S. downturn, and advised against "creat[ing] a big glut in the market." Venezuela's Minister of Energy and Oil Rafael Ramirez laid the blame for the oil run-up on speculators. OPEC estimates Q1 demand for crude at 31.35 million bpd, up from October production of 31 million bpd for 12 members minus Ecuador. "When prices were near $100, OPEC may have been prompted to increase but prices have dropped about $10 since the record in late November," said Tetsu Emori of Astmax Futures Ltd. Deutsche Bank AG oil analyst Adam Sieminski: "Now that pricing momentum has turned negative, it'll be the specter of a price collapse that haunts their deliberations. If oil looked like it was going under $80 they would probably cut quotas."
Commentary: Will Saudi Arabia Boost Its Oil Output on Dec 5th? • Crude Falls on Surprising Increase in Inventories • IEA Cuts Oil Demand Outlook
Stocks to watch: USO, OIL, DBO
E*Trade's Deflated Debt Sale Could Set Mark for Citi, Merrill - WSJ
Citadel Investment Group's purchase from E*Trade (NASDAQ:ETFC) of $3 billion in high-risk mortgage-backed securities for $800 million -- or about $0.27 on the dollar (full story) -- may set the scene for other firms looking to sell off deflated assets, the Wall Street Journal reports. While the exceedingly low valuation may not be carried over to debt held by large investment banks such as Citigroup (NYSE:C) and Merrill Lynch (MER), it might emerge as a price floor for a worst-case scenario, as well as an indication investors are readying themselves to make a market for the previously illiquid securities. Were Citi to be forced to sell off its $55 billion CDO portfolio at similar conditions, analysts say it could take a $26 billion hit, including previously announced Q4 writedowns of $5-7 billion. At Merrill, a Citadel-like sale would cause it to take a $9 billion writedown. While Credit Suisse analysts admit a straight-on comparison to Citadel/E*Trade is simplistic, they note it is also the "best benchmark for a worst-case scenario. The portfolio sale, one of the few observable trades of such assets, has very clear, generally negative, implications for the valuation of like assets on brokers' balance sheets," they said. Also noteworthy is E*Trade's October filing stating that nearly 60% of the assets in the $3B portfolio were AA or higher. "We were surprised at the large discount given the quality of the assets," Goldman Sachs said in a report.
THIS WEEK'S IPOS
• Insurance IPO: Triple-S Management
• Industrials IPO Titan Machinery To Compete With John Deere, Caterpillar
• Cardtronics Makes A Second IPO Attempt
• China IPO: VisionChina Media
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
• "Once in a while, you stumble across a company with technical claims so outrageously false or stupid," ParkerVision (NASDAQ:PRKR) short Mike Farmwald says, "that you feel you have to do something about it." Barron's says Farmwald's bearishness may be well-founded; shares ($10) have traded as high as $50 and as low as $5. Barron's says they may be worthless. (Full story)
• Languishing shares of global money-transfer company Western Union (NYSE:WU) may be due for a healthy boost as the company addresses key issues and rolls out new platforms aimed at capitalizing on an ever-expanding global marketplace. A senior portfolio manager calls the shares a "temporary steal." He and others think they're worth $35. (Full story)
• While some investors see Citigroup's (C) $7.5 billion Abu Dhabi capital injection, Freddie Mac's (FRE) $6B preferred shares issuance and possible double-pronged federal help (rate cut and a solution for defaulting loans) as bullish indicators for financials, Barron's says we're only at the beginning of the downturn. The one-month Libor rate jumped from 4.82% Wednesday to 5.22% Thursday; a Libor spike generally indicates trouble in the sector. On Friday, Moody's Investor Service placed $64.9B of Citi SIV debt on downgrade watch. (Full story)
• Stock advisor Don Hays recently turned 100% bullish toward based on a number of converging bullish indicators. He likes Cisco (NASDAQ:CSCO), Coca-Cola (NYSE:KO), Bucyrus International (NASDAQ:BUCY), Nvidia (NASDAQ:NVDA), General Cable (NYSE:BGC) and EMC (NYSE:EMC). (Full story)
• Discount airlines like Ryanair (NASDAQ:RYAAY) and Southwest (NYSE:LUV), as well as Continental (NYSE:CAL), Delta (NYSEMKT:DLA) and US Airways (LCC), stand to gain from the upcoming "Open Skies" trans-Atlantic aviation agreement that will offer them new inroads into Europe. British Airways' (OTC:BAIRY) exclusive Terminal 5 opens in March, which should more-than counteract any loss of business to new competitors. United's (UAUA) Heathrow losses could be offset by its buyout potential. But Heathrow incumbent AMR (AMR) has no serious counter-measure; shares could be headed lower. Northwest (NWA, $18), a likely seller, could also hit $30. (Full story)
MUST-READS ON SEEKING ALPHA TODAY
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