Wall Street Breakfast: Must-Know News

• The "S" word. Stagflation, a lethal brew of simultaneous inflation and recession, may be hitting the U.S. for the first time since the 1970s. January's CPI jumped 0.4% (or 0.3% net of food and energy), bringing yearly inflation to 4.3%, close to a 16-year high. Meanwhile, the FOMC minutes revealed the Fed targets GDP growth of just 1.3-2% in 2008, down 0.5% from October's forecast.
• FOMC minutes and their impact. Lowered interest rates "appeared appropriate for a time to counter the factors that were restraining economic growth," FOMC minutes divulged. Still, the committee agreed that "downside risks to growth would remain even after this action." One unforeseen tidbit was a Jan. 9 conference call, following a surprise jump in unemployment, during which the Fed decided not to cut rates between meetings -- only to do so 12 days later. Futures traders now see a 92% chance of a 50 BP cut to 2.5% at the March 18 FOMC meeting (Tuesday a 50 BP cut was fully priced in), and 60% odds for another 25 BP cut to 2.25% on Apr. 30, down from 78%.
• AdSense joins forces with YuMe. Google (GOOG) will begin selling ads that appear in web videos through a deal announced today with online video ad network YuMe. YuMe will serve its InVideo contextually-relevant overlay ads within Google's AdSense, which has thus far worked with only a select group of advertisers and publishers. A Google spokesperson says ad rates will vary widely; some see the deal as a "landmark development for the monetization of online video."
• Price hikes boost pharma profits, daring stricter oversight. Drugmakers boosted prices for their 50 top-sellers by 7.82% in 2007, on the heels of 6.73% and 6.22% jumps in 2006 and 2005, in an effort to boost profits in the face of patent expirations and waning pipelines. The ploy could backfire by pushing government to beef-up its regulation of drug pricing.
• T-Mobile ups ante on VoIP. Deutsche Telekom's (DT) T-Mobile will introduce today a $10/month unlimited local and domestic long-distance VoIP calling plan, available to its wireless subscribers. The move will put further pressure on land-line carriers like AT&T (T), Verizon Communications (VZ), and Sprint (S), as well as VoIP incumbents Vonage (VG) and Comcast (CMCSA), who charge $25/month for a similar plan. While the pitfalls of VoIP calls are well known, T-Mobile may be in a better position than others because it controls many of the network components, and is less beholden to third parties.
• Issuers pulling out of auction-rate bonds. The $300B market for auction-rate securities -- long-term bonds whose rates reset frequently by auction, giving issuers the advantage of paying short-term interest rates -- has all but collapsed. Auctions on $80-85 billion of the debt failed last week, causing interest rates to soar. Issuers such as hospitals and schools are quickly moving to retire the debt with long-term bonds; an estimated $100-150 billion will disappear in coming months, a trend that could mean pain for closed-end fund marketers like BlackRock (BLK) and Eaton Vance (EV). Regulators may have dropped the ball on this one.
• TV ads losing effect; marketers move to internet. 62% of marketers believe TV ads have become less effective in the past two years, Forrester Research says, perhaps a byproduct of digital recordings, ad zappers, or our waning attention spans. Conversely, 87% plan to boost spending on internet advertising. A sign of increasing scrutiny, 66% said C-level executives are monitoring TV ad changes closely, up from 54% two years ago.
• SIV slippage. German #3 bank Dresdner, following in the footsteps of Citigroup (C) and HSBC (HBC), is pulling out of a $18.8 billion SIV (structured investment vehicle) by providing a credit line to its lenders. Banks used SIVs to borrow cheap short-term money which they used to invest in high-yield assets. The market for SIVs evaporated after the collapse of U.S. subprime mortgages saw investors shunning high-risk debt. SIV assets have dropped to $100B from a $400B peak in August.
• Reed buys ChoicePoint for $4.1B. Anglo-Dutch information giant Reed Elsevier announced plans to acquire risk-management business ChoicePoint (CPS) for $50/share, a 49% premium to CPS's Wednesday close of $33.66. Reed plans to combine ChoicePoint with its LexisNexis risk-information database and its Analytics group. "The market growth in risk information and analytics is highly attractive," Reed CEO Crispin Davis said. Hmm... wonder why.
• Hertz beats, outlook falls short. Car rental giant Hertz Global (HTZ) reported Q4 EPS of $0.29, beating consensus estimates of $0.26. Q4 revenue of $2.14B was better than analysts' consensus of $2.05B. Looking ahead, Hertz sees 2008 EPS of $1.38-$1.44 on revenue of $8.9-9 billion, short of consensus estimates of $1.46 on revenue of $9B. Hertz says it will cut jobs and costs in order to generate savings and boost margins.
• Sina, NetEase breeze past estimates. China's biggest internet portal, Sina (SINA), beat estimates by $0.01 with EPS of $0.34. Revenue was up 25.4% to $70.7M, vs. consensus of $69.1. Gross margin was flat at 62%. Ad revenue jumped 40% to $50.1M; non-ad revenue was off 0.5% to $20.6M. Looking ahead, Sina sees Q1 revenue of $66-68 million, just ahead of analysts' $65.9M consensus. ADRs of China online games developer NetEase (NTES) were up 8.5% on an $0.11 EPS beat of $0.41 on revenue of $85.3M vs. estimates of $75.9M. China added 73 million internet users in 2007 and trails only the U.S. in the total online users.
• 3Com deal collapses. Bain Capital and China-based Huawei pulled their $2.2B bid for 3Com (COMS) due to concerns government watchdog the Committee on Foreign Investment in the U.S [CFIUS] was ready to reject its application over fears Huawei's stake could put government secrets at risk. While the parties said they would work to find an alternative solution, a source told DJ newswires the deal is dead. Conversely, 3Com is now shopping its TippingPoint unit, which sells network-security software to the DoD, and has received bids that could value the unit at $150-250M. A failure could have serious implications for the M&A and financial markets, which have become increasingly dependent on foreign capital and SWFs, not to mention China-based U.S. businesses.
• MBIA rejects Ackman's latest proposal for bond insurers. MBIA Inc. (MBI) says Bill Ackman's recommendations for a restructuring of U.S. bond insurers, presented Tuesday to the New York State Insurance Department, are similar to his previously disclosed 'open-source' model, and would lead to a division of the firms' portfolios between high-risk and low-risk bonds, punishing holders of CDOs and other higher-risk instruments. "Our preference, like the regulators, continues to be finding a solution that would be in the best interest of all policyholders," MBIA said.
• KLAC buys semi tester ICOS for €316.9. Semiconductor equipment maker KLA-Tencor (KLAC) is buying Belgian ICOS Vision Systems for $466 million. ICOS designs and manufactures inspection equipment for semi packaging and interconnect application industries, giving the companies what KLAC calls "exceptional synergy."
• Research In Motion provides updated subscriber forecast
• Terex 4Q profit tops consensus outlook
• Analog Devices beats estimates
• Lending squeeze hits ailing firms

Today's Markets

• Japan's Nikkei posted a strong 2.84% gain Thursday. The Hang Seng was up 0.14%, while Shanghai fell 0.87%.
• In Europe, markets are higher across the board at midday. FTSE +1.5%. CAC +1.55%. DAX +1.31%.
• U.S. futures are up slightly from Wednesday's close. Dow +0.21%. S&P +0.33%. Nasdaq +0.52%.

Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.

Comments

[David V.]

COMS is another example of a failed leverage buyout. This is why it is important to stay away from these high risk/high return mergers. If you have a loss of 33%, you need to gain 50% after that to get your portfolio back to even. In this environment, I would recommend staying away from the higher risk mergers and focus your attention on the lower risk ones. If you are someone that is interested in investing in stock mergers, you should check out www.madmergers.com . You can view all the merger arbitrage returns for all pending stock mergers for free.

[Thomas Barta]

"Stagflation, a lethal brew of simultaneous inflation and recession, may be hitting the U.S. for the first time since the 1970s."

Blame the Bush Failed Presidency. Fiscal irresponsibility; military adventures (ineptly executed, at that); undirected tax cuts; lack of regulatory oversight of financial institutions.

[BC Wayne]

Mr. Barta wants to place blame, yet another time, on President Bush. Let's see now; we have the war, global warming, Katrina relief (3 years later we still are spending tax dollars out the ying yang), torture, Gitmo and baseball steroid use on Bush. How about if the earth is naturally warming, the war has kept the radical muslim morons too busy to plan effect assaults on our soil, water boarding is effective and doesn't harm anyone, and HGH is harmless. Boy, what would you have to talk about for the next month. The real pity is that Mr. Barta cannot bring himself to admit or accept that there are events that cannot and should not be controlled by more Federal Regulations. Regulations got us into the mortgage mess in the first place. Free market supply would have never permitted the financial institutions from lending beyond acceptable tolerances. Our banks were induced by the Fed to create all those vehicles by which they attracted huge numbers of unqualified buyers. Now the banks get to write down the loses, foreclose homes and have insurers (also regulated by the Fed) pay the short falls. You also forgot to mention that basic economics are prevailing in a bifurcated trough and that NAFTA has had a lot to do with it. Not to mention that we are still being taxed to death at the middle to high income levels which is curtailing spending. And can you imagine the price of oil if we had not stabilized the middle east. I hope you are not a financial advisor. You are so lopsided that you could not offer objective advice.

[Thomas Barta]

"And can you imagine the price of oil if we had not stabilized the middle east."

Stabilized? Did you mean to say that. You know,LESS oil is coming out of Iraq than before the war.

[BC Wayne]

Oh please!!! There is more oil coming out of the Middle East than ever. And what do you think would have happened if Saddam was allowed to continue on his path? Typical though. America sucks and it especially sucks if a Republican is in the White House.

[Long-Short Guy]

"Drugmakers boosted prices for their 50 top-sellers by 7.82% in 2007, on the heels of 6.73% and 6.22% jumps in 2006 and 2005, in an effort to boost profits in the face of patent expirations and waning pipelines. The ploy could backfire by pushing government to beef-up its regulation of drug pricing."

Doesn't this mean that the decline in profits when these drugs hit patent expiration will be even sharper?

[Thomas Barta]

"Doesn't this mean that the decline in profits when these drugs hit patent expiration will be even sharper?"

What it means is that I have already reduced my holdings in Big Pharma.

[lefty]

To All of the commentors! All that I really know is that when I retired, 1999, I could save $1000 per month. Today I run $500 per mo. negative. And I'm one of the fortunate ones.