U.S. Recession More Likely, Greenspan Says
The odds of the U.S. moving into a recession are now about equal, according to former Federal Reserve Chairman Alan Greenspan. "The probabilities of a recession have moved up to close to 50 percent -- whether it's above or below is really extraordinarily difficult to tell. I think that's correct," he said on ABC's "This Week" program. In early November, Greenspan had said the chances of recession were less than 50-50 and on Dec. 13 he said the economy was "getting close to stall speed." And Greenspan isn't alone. "The economy is weakening rapidly. I'm at 45% probability of recession and it is rising," said Kurt Karl, chief U.S. economist for Swiss Re.
Greenspan also said he favored a government bail out for homeowners who could lose their homes because they can't make their mortgage payments. "Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said. "It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely." It's better, he said, that the selling exhaust itself, saying that preventing the selling "just merely prolongs the agony." Treasury Secretary Henry Paulson has pledged no government funds, but rather has negotiated an interest rate freeze on some subprime mortgages in an attempt to help as many as 1.2M homeowners avoid foreclosure. More bad news on the housing sector is expected this week, as economists expect November housing starts to fall 3.3%.
Additional Reading: Recession Odds: Greenspan 50%, Merrill 100%
Bond Investors to Table LBO-Protection White Paper
The Wall Street Journal said Monday a group of about 50 large debt investors have formed a consortium called the Credit Roundtable, and plans to publish a white paper Monday detailing problems and proposed fixes related to protection in contracts of investment-grade bonds. The Roundtable consists of pension funds, insurance companies, mutual funds and other money managers, including AIG, BlackRock Financial Management, Dodge & Cox, Fidelity Investments, Loomis Sayles & Co. and MetLife. The Roundtable is primarily concerned with the negative impact leveraged buyouts and large stock repurchases have on bond prices.
Earlier this year some corporate bonds fell as much as 10% overnight due to fear of credit downgrades because of increased debt burden following announcements of LBOs and stock buybacks. Debt investors were unprotected since many high-grade bonds lacked covenants for recovery of full value in the event of a takeover or recapitalization. Protective covenants were not in place because debt issues were modeled at a time when large-scale buyouts were uncommon. Although LBOs and recaps have dried up since summer, the Roundtable is not taking any chances. Key proposals include a "change-of-control put" and "step-up coupon."
Additional Reading: Bond ETF Offerings Explode in 2007 • Junk Bond Default Rate to Quadruple - Moody's • Primer on Broad U.S. Bond ETFs and U.S. Govt. Bond ETFs
Ericsson, XMSR Leave Nasdaq; Focus Media, Hansen Among Joiners
The Nasdaq said late Friday it is removing Ericsson (ERIC), XM Satellite (XMSR), Ross Stores (ROST), Patterson-UTI Energy (PTEN) and Sepracor (SEPR) from its Nasdaq-100 index in its annual re-ranking. Taking their places are Hologic (HOLX), Focus Media Holding (FMCN), Hansen Natural (HANS), Steel Dynamics (STLD) and Stericycle (SRCL).
Membership in a major U.S. index is generally considered a positive for the stock, as mutual funds and ETFs that mimic the index, such as the NASDAQ 100 Trust Shares ETF (QQQQ), must buy the constituent stocks and sell those exiting in order to keep their funds in line with the underlying. The Nasdaq-100 is composed of the 100 largest nonfinancial stocks on the Nasdaq Stock Market.
Loews to Spin Off Cigarette Unit
Diversified holding company Loews Corp. (LTR) said Monday it will spin off its Lorillard cigarette unit, maker of Newport menthol cigarettes, in a tax-free transaction. After the spinoff, wholly-owned Lorillard will become a separate, publicly-traded company.
Loews currently has two classes of common stock: Carolina Group shares, which reflect the economic performance of a group of assets called the Carolina Group (principally Lorillard and its subsidiaries); and Loews common stock, which tracks Loews' entire portfolio, including the interest in the Carolina Group not represented by Carolina Group stock.
Loews said it will first redeem all outstanding Carolina Group shares in exchange for Lorillard shares, which will constitute about 62% of the new company. The remaining 38% will go to Loews common shareholders. "A spin-off of Lorillard will benefit both companies as well as the holders of Loews common stock and Carolina Group stock," CEO James Tisch said. The transaction is conditional on a favorable IRS ruling among other contingencies. The spinoff is expected to go through by mid-2008.
On Sunday, Barron's cover story said investors in Warren Buffett's Berkshire Hathaway (BRK.A (BRK.B might do better in the smaller Loews, which boasts stellar performance and management combined with a more manageable cap size (Barron's Pans Berkshire).
On Dec. 7, Morningstar research told investors, "Lorillard is a standout in the U.S. cigarette market, generating positive volume growth in an industry that is in decline." It noted, however, that, "the level of disclosure from Loews about crucial aspects of Lorillard's financial performance is poor, making it more difficult to evaluate the tobacco firm's operations and financial worth," a problem the spinoff will likely address.
Ingersoll-Rand to Buy Trane for $10.1B
Ingersoll-Rand (IR) agreed early Monday to buy Trane Inc. (TT) for a combination of cash and stock valued at about $10.1B, including fees and the assumption of $150M of debt. Trane, formerly known as American Standard Companies, makes indoor climate control systems, services and solutions. Under the agreement, each of Trane's approximately 200M common shares will be exchanged for $36.50 in cash and 0.23 of an Ingersoll-Rand share for a total value of $47.81 per Trane share. The purchase price is 29% above Trane's Dec. 29 closing price of $37.20. The addition of Trane, which has expected 2007 revenues of $7.4B, would create a combined company with pro-forma 2008 revenue of $17B, and earnings of $4/share.
"As a result of expected revenue and cost synergies, we are confident that this acquisition will improve Ingersoll Rand’s future earnings growth potential. We believe the new Ingersoll Rand will be capable of sustaining annual organic revenue growth averaging 5-7% and EPS growth exceeding 15% per year, both in excess of our former growth guidance," said Ingersoll-Rand CEO Herbert Henkel. Completion is expected late in the first quarter or early in the second quarter of 2008, subject to, among other things, shareholder and regulatory approvals. If the deal proceeds, it would be the biggest industrial merger since the $15B combination of AlliedSignal and Honeywell in 1999.
Aon Sells Two Units, One to ACE, for $2.75B
ACE Ltd. (ACE) said Monday it would acquire Aon Corp.'s (AOC) Combined Insurance Co. unit and some other subsidiaries for $2.4 billion in cash. Combined provides specialty individual accident and supplemental health insurance to more than 4 million middle-income consumers in North America, Europe and Asia. The deal doubles ACE's personal-accident and supplemental-health offerings. ACE plans to finance the deal with cash on hand and "modest" new debt. Aon plans to extract a one-time cash dividend of $325 million from Combined before closing the deal. The companies hope to close the deal by the end of Q2.
"Combined’s sales force of nearly 7,000 agents will diversify our distribution for this class of business," ACE CEO Evan Greenberg said. "ACE has relied predominantly on direct response and brokerage, while Combined is a leader in captive agency distribution. We will export Combined’s franchise to the developing markets of Latin America, Asia Pacific and other promising regions of the world where we already have an established presence and where a growing middle class presents favorable conditions."
Separately, Aon also said it is selling its Sterling Life Insurance unit to Munich Re for $352 million. Sterling is a healthcare benefits provider to U.S. senior citizens. Its 2007 estimated revenue is $805 million in 2007. Its 155,000 members will complement Munich Re's existing U.S. life and health business, it said.
Aon CEO Gregory Case has been selling or shutting down units in order to simplify its business and underwrite less insurance, following previous CEO Patrick Ryan's more than 400 acquisitions. "Our core assets will now be more strategically aligned as we expand our capabilities to better serve our risk brokerage and consulting clients," CEO Greg Case said. ACE shares closed Friday at $59.51; Aon shares closed at $48.94.
Lehman Faces Possible CDO-Related Litigation in Australia
Lehman Brothers (LEH) faces potential litigation by municipal councils in Australia, due to a local subsidiary's sales of high-risk collateralized debt obligations (CDOs), according to a report by the Financial Times. Lehman is said to have marketed CDOs to dozens of councils and even to charities and a public hospital provider. The company has reportedly repurchased some CDOs that "in very few cases" breached councils' rules because of the duration of CDO maturity dates. Lehman argues the councils were regarded as "sophisticated wholesale investors who have responsibility for their own investment decisions and due diligence." Lehman also says it believes everything it sold conformed to councils' investment guidelines. Still, the paper losses hurt, as one Lehman-originated CDO with U.S. subprime exposure was marked down to just 16 cents on the dollar in November.
Last Thursday Lehman reported a smaller-than-expected fiscal Q4 profit decline (full story). Shares of Lehman rose 1.4% to $62.24 on Friday. Lehman Brothers is a more than 6% component of the U.S. broker dealers ETF IAI and capital markets ETF KCE.
Additional Reading: Despite a Good Quarter, Lehman Shares Fall • Lehman Profits From Earlier Write-Downs
Glaxo's Cervarix Delayed by FDA
British drugmaker GlaxoSmithKline (GSK) received a "complete response" from the FDA in regard to approval of its cervical cancer vaccine, Cervarix. A complete response is issued when the FDA has finished reviewing a product but still has outstanding questions. Glaxo plans to address the FDA’s concerns as soon as possible; the delay places Glaxo squarely behind the team of Merck & Co. (MRK) and Sanofi-Aventis SA (SNY), who already have their cervical cancer vaccine, Gardasil, on the market in both the U.S. and the EU. European regulators approved Cervarix in September.
Trying to put a positive face on the latest news, Glaxo’s VP and Director of North American Vaccine Development, Dr. Barbara Howe said: "We have already started addressing the questions and will be engaged in discussions with the FDA to finalize our responses. Our discussions with the agency continue to be positive and constructive, and we are working diligently to resolve any outstanding questions to bring CERVARIX to the U.S. market.” The U.S. is the largest drug market in the world. Glaxo is trying to increase its share of the global cancer drug market, which is expected to jump from its current $35 billion to $66 billion by 2010. Analysts feel the delay will set back Cevarix’s entry to the U.S. market by as much as a year.
Additional Reading: GlaxoSmithKline Q3 2007 Earnings Call Transcript
Asian Markets Drop Sharply Monday
Asian markets were down sharply Monday.
The Nikkei dropped -1.71%. Yahoo Japan (YHOO) dived 6%. Mizuho Financial (MFG) fell 5%. Mitsubishi UFJ (MTU) dropped 4.3%.
The Hang Seng plunged -3.51%. CNOOC (CEO) fell 4.8%. China Petroleum (SNP) was down 4.5%. China Life (LFC) was off 4.3%. China Mobile (CHL) slipped 2.8%.
China's Shanghai Composite index fell -2.62%.
Financial stocks were among the hardest hit, after recent data showed U.S. inflation was higher than expected, reducing the likelihood the Fed will move to further cut interest rates in the near future. The drop accelerated in the afternoon, but traders said thin volume and volatility moved stocks more than any particular change in economic outlook. "I don't think fundamentals have deteriorated that much. The market is moved by speculative trades in the absence of buyers," T&D Asset Management's Akihide Kinugawa said.
European Markets Down 1.3% Monday After Asia Selloff
European markets were uniformly down Monday morning on the heels of a substantial drop in Asia (Asian Markets Drop Sharply Monday).
London's FTSE 100 was down 1.25% as of 6:25 ET. Home Retail dropped almost 6%. Prudential (PRU) was off 3.3%. Miners BHP Billiton (BHP -2.65%), Anglo American (AAUK -2.7%) and Rio Tinto (RTP -2.1%) were heavy losers.
The CAC 40 was off 1.29%. Big losers included Alcatel-Lucent (ALU -4.8%) and AXA (AXA -2.5%).
The Dax fell 1.39%. Infineon (IFX) fell 3.5%, Siemens (SI) was off 1.7% and Deutsche Bank (DB) slipped 1.5%.
"It looks like the Christmas rally that we were hoping for is not going to materialize," City Index Markets chief strategist Tom Hougaard said. "There is a lot more selling pressure in the U.S. than I had thought. I don't think the UK stock market wants to sell off but I don't think it has much of a choice. The Dow fell out of bed (Friday) and Asia really took it on the chin overnight... If we had not seen such a weak Asian market, we would have been OK."
ACTIONABLE BARRON'S CALLS
Hyperlinks are to our full Annotated Barron's Summaries
Barron's Pans Berkshire
Investors looking for a sound financial bet may be better off avoiding Warren Buffett's Berkshire Hathaway and looking elsewhere.
A Smorgasbord of Tech Bargains
The drop that followed Cisco's warning last month was likely overdone. Barron's notes some bargains in what promises to be a 2008 of "solid but uninspiring" tech sector growth.
American Dairy is Spoiled
On the heels of an SEC probe and steep competition, last week's 12% drop may not be the end.
J.C. Penney Poised to Revive
Despite a rough 2007, JCP should rebound at least 20% on strong management initiatives.
Citizens Communication Is a Market Hedge
A hefty dividend and healthy cash flow could see CZN outperforming shunned telecom stocks.
THIS WEEK'S IPOS
• Clean Energy IPO Orion Energy Systems Competes With Johnson Controls, Honeywell
• Software IPO NetSuite Competes With Microsoft, salesforce.com
• Alternative Energy IPO Gushan Ltd. Competes With CNOOC, PetroChina
• Biotech IPO: BG Medicine Competes With Abbott Laboratories, JNJ In Molecular Diagnostics
• Retail IPO: Milestone AV Technologies
MUST-READS ON SEEKING ALPHA TODAY
|U.S. Market:||Triumph of Bearish Pundits|
|Housing:||Greenspan: Throw Cash At Mortgage Crisis|
|Long Idea:||15 Stocks Ben Graham Would Like|
|Short Idea:||Sell These Three Stocks Before Everyone Else Does|
|Internet:||Google Knol: Not Setting the World On Fire|
|Chips:||Semiconductor Pick: Sigma Designs|
|Software:||Video Games are Red Hot|
|Gadgets:||GameStop: Recession-Proofing Your Portfolio?|
|Media:||NY Times Online Jumps Back Into Top 100 Sites|
|Biotech:||A Triple Catalyst Biotech Play|
|Retail:||American Apparel Set to Double|
|Gold:||Going for Gold? It's Overrated|
|Energy:||AXT Inc.: The Next Solar Pick|
|Financial:||Extrapolating Downey's Option ARM Problems To WaMu|
|Asia:||Baidu's Dynamics Mirror Google|
|ETFs:||Bond ETF Offerings Explode in 2007|
|Hedge Funds:||It's the Driver That Matters|
|IPO Analysis:||Xinyuan Real Estate IPO Analysis: Poised for a Strong 2008|
|Jim Cramer:|| Latest stock picks|
|Transcripts:||Virtek Vision International Q3 2008 • Cosan Limited F2Q08|
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