Dollar Tanks Post-Cut
The U.S. dollar hit its lowest point in 15 years against a basket of six currencies Thursday, reflecting concerns that the recent half-point cut in the fed-funds rate could fuel inflation. The greenback was also under pressure from speculation that Saudi Arabia might cut its currency peg to the U.S. dollar, as Kuwait did earlier this year. "There is no end in sight for dollar selling," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon. On Thursday, the Canadian dollar reached parity with the U.S. dollar for the first time since 1976, and the euro hit an all-time high against the American currency. Government bond yields shot up and the oil price set a record at $84.10. Gold hit $738.30 an ounce, its highest level since 1980. The dollar's slide has been "rapid and disorderly," according to Tony Crescenzi, chief bond market strategist at Miller Tabak. The 30-year bond price dropped two points for the second day in a row, with the yield rising to 4.98%. The forward five-year Tips (Treasury inflation-protected securities) break-even rate rose to 2.63%, a high for the year. "The market is becoming more concerned about the Fed's inflation-fighting credibility," said Michael Pond, inflation-linked strategist at Barclays Capital. Fed Chair Ben Bernanke told Congress this week the rate cut was meant to "try to forestall potential effects of tighter credit conditions on the broader economy."
Sources: Financial Times, TheStreet.com, Bloomberg, Wall Street Journal
Commentary: Fears of Dollar Collapse? • Fed is Punishing Dollar Holders • Currency Analysts Expect Dollar To Strengthen
Stocks/ETFs to watch: DBV, UDN, UUP, FXC, FXE, FXY
Bernanke: It's Time to Tighten Controls on Subprime Market
Fed Chairman Ben S. Bernanke told a House Financial Services Committee hearing Thursday the Fed is "actively working" to toughen up consumer protection regulations in the subprime market. The Fed is being criticized by some members of Congress for failing to protect citizens caught in the subprime crunch. Barney Frank (D-MA), who chairs the House panel, said the Fed must use or lose its regulatory powers. "The recent problems in subprime lending have underscored the need not only for better disclosure and new rules but also for more uniform enforcement in the fragmented market structure of brokers and lenders," Bernanke said. Also testifying at the hearing was Alphonso Jackson, the secretary of housing and urban development, who said that of the 2 million subprime home loans scheduled to be reset by the end of 2008, about 500,000 would enter foreclosure. Fifteen percent of subprime loans were 90 or more days delinquent in July, triple the level of two years ago. Bernanke said measures like the granting of permission to Fannie Mae and Freddie Mac to buy bigger home mortgages to loosen liquidity in the credit markets should be "prompt" and "temporary," because after March, they will be "counter-productive." Beyond that point, interpreted Dresdner Kleinwort economist Kevin Logan, "[Bernanke] is saying, it will be way too late and won’t be necessary and may increase systemic risk." The Fed's half-point cut in the fed-funds rate this week was intended "to try to get out ahead of the situation, [to] try to forestall potential effects of tighter credit conditions," Bernanke said.
Sources: Wall Street Journal, New York Times, TimesOnline, Bloomberg, Reuters
Commentary: Bernanke Blinks - And Suffers Credibility Hit • Bernanke's Bold Move: Shades of Greenspan - WSJ • Bernanke Rips Off The Band-Aid
Stocks/ETFs to watch: DIA, SPY, AGG
Oracle Continues to Climb
Oracle Corp. said its FQ1 EPS climbed 28% and revenue climbed 26% on strong software license revenues, beating analyst estimates. GAAP earnings per share were $0.16 ($840 million) on revenue of $4.53 billion, compared to EPS of $0.13 ($670M) on revenue of $3.59 billion a year ago. Excluding items, EPS were $0.22. Analysts were forecasting EPS of $0.21 on revenue of $4.3 billion. "We continue to take applications market share from SAP," said president Charles Phillips. "Oracle passed IBM to become the number one database company a long time ago. If we continue to grow our middleware software business at the same rate we grew it this quarter, Oracle will challenge IBM for the number one position in middleware by the end of this year," CEO Larry Ellison added (see full earnings call transcript summary later). Retail-industry software spending rose 10% in 2006 as the sector looks for ways to streamline inventory management and marketing, making retailing the fastest-growing part of the business-software market, according to an AMR Research survey. Oracle's recent acquisitions of retail-geared software vendors like Retek have amplified its successes. "It was a gamble for Oracle to go after retailers," said AMR analyst Jim Shepherd. "But they recognized that this was a market about to take off." Shares climbed tacked on another 0.5% AH after gaining 1% during regular trading.
Sources: Press release, MarketWatch, Bloomberg
Commentary: Five Lingering Questions Oracle's Conference Call May Answer • What Will Oracle Buy Next?
Stocks/ETFs to watch: ORCL, SAP, IBM
3Com Guides Lower
3Com Corporation reported a fiscal Q1 net loss of $18.7 million, or $0.05/share, compared to a loss of $14.1M, or $0.04/share last year. Excluding items, EPS totaled $0.03 (vs. $0.01 last year), a penny better than analysts' average estimate. Revenue growth of 6.4% to $319.4M, came in slightly ahead of estimates of $318.3M. "Revenue in all three business units showed year-over-year growth, including our traditional data and voice business, which achieved positive growth for the first time in almost two years," commented CEO Edgar Masri. However, 3Com's Q2 adjusted EPS guidance of $0.01 to $0.03, disappointed investors, as analysts had forecasted $0.03 (Thomson) to $0.04 (Bloomberg), on average. CEO Masri said the integrating of now wholly-owned Chinese joint-venture Huawei-3Com has been a "distraction" (see full earnings call transcript summary later). Shares of 3Com rose 3.9% to $3.74 during normal trading Thursday, but fell 5.1% to $3.55 in after-hours activity following its earnings release.
Sources: Press release, Bloomberg
Commentary: 3Com, Sonus And Tellabs: Possible Nortel Targets • Nortel Has 3Com In Its Sites • 3Com Upgraded On Possible Sale Of The Company
Stocks/ETFs to watch: COMS. Competitors: CSCO, NTGR, NT, AV
KKR, Goldman Consider Backing Out of Harman Buyout - WSJ
Audio equipment maker Harman International Industries may be the latest leveraged buyout target to see its buyers attempt to use the current credit crunch as an excuse to renegotiate a lower price, or back out of the deal altogether, the Wall Street Journal reports. The buyers, private equity firm Kohlberg Kravis Roberts & Co., which is going public later this year, and Goldman Sachs Group Inc.'s private-equity arm, supposedly came upon "new information that makes them less sanguine about the deal," though it is unclear what that information is. Harman reported disappointing results during its last quarterly report. It will be especially difficult for KKR and Goldman to walk away due to a "material adverse effect" clause in the buyout agreement, which states the buyers may not break the deal over events "generally affecting the consumer or professional audio, automotive audio, information, entertainment or infotainment industries, or the economy or the financial, credit or securities markets." Should KKR and Goldman decide to terminate the deal without due cause, they will owe Harman $225 million dollars, slightly less than 3% of the deal's total value. Before the Journal report came out, Harman shares closed at $112.25 Thursday, well below the buyout price of $120-per-share.
Sources: Wall Street Journal, Reuters, CNNMoney.com
Commentary: KKR and Goldman Capital Take Out Harman International Industries For $8 Billion • CEO's Sense of Responsibility Bodes Well For Harman International
Stocks/ETFs to watch: HAR, GS, KKR. ETFs: RCD
Earnings call transcript: Harman F4Q07 (Qtr End 6/30/07)
DreamWorks Heads Might Leave; Viacom Chief Unfazed
Less than two years after Viacom's Paramount Pictures bought DreamWorks SKG, Steven Spielberg and David Geffen -- two of the founders of DreamWorks -- are hinting they might leave when their contracts expire in 2008, the WSJ reported Friday. In something of a departure from Hollywood decorum, Viacom CEO Philippe Dauman told a media conference this week the loss of the industry giants would be "completely immaterial" to Paramount's prospects. The remark irked DreamWorks CEO Jeffrey Katzenberg, who shot back that "[t]o suggest that not having Steven Spielberg is completely immaterial just seems ill-advised." The New York Times speculates that Dauman's use of the term "immaterial" in the financial sense was misconstrued by Katzenberg and others as a personal attack. Still, the relationship between DreamWorks and its corporate parent has been fraught for some time. The Journal suggests that the root of the trouble is a case of "seller's remorse" on the part of the DreamWorks crew, who produced a string of hits following their $1.6 billion sale of the company to Paramount in 2005. "We're happy being in the arms of a studio," Geffen said, but the founders of DreamWorks "want to function independently and get credit for our successes and failures."
Sources: Wall Street Journal, New York Times
Commentary: Coming to Terms With Dreamworks Animation • DreamWorks Animation Should Ride Shrek 3 To Growth
Stocks/ETFs to watch: DWA. Competitors: Pixar Animation Studios Inc. (private), Walt Disney Feature Animation (private), Blue Sky Studios Inc. (private). ETFs: PBS, PEJ
Earnings call transcript: DreamWorks Animation Q2 2007, Viacom Q2 2007
Nike Beats Street on Strong Demand from Asia, Europe
Nike reported a 51% jump in fiscal first-quarter profit to $569.7 million, or $1.12/share. Earnings were helped by a $0.20/share tax-related benefit and double-digit growth in Asia and Europe. Excluding one-time items, EPS totaled $0.92, a nickel ahead of analyst expectations. Sales were also better than expected, +11% to $4.66B vs. est. $4.58B. Sales climbed 22% to $630.8M in Asia, +16% to $1.48B in Europe and a more modest 2% to $1.64B in the U.S. Nike said orders for delivery from Sept.-Jan. increased 12% to $5.9B, led by a 20% rise in the Americas, 17% growth in both Asia and Europe and a 3% increase in the U.S. An analyst at Allegiant Asset Management Group, whose firm owns shares of Nike, commented, "Nike is a best-in-class company, and with its global exposure, it's a play on the weak dollar." Nike reported a positive forex impact on revenues of 3%. Gross margins rose 70 basis points to 44.8%. Shares of Nike were last up 0.8% to $58.78 in extended activity, after losing 0.4% to $58.32 during normal trading Thursday. Check back later for Nike's earnings conference call transcript.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Nike Gaps Up On Earnings: Usually Continues Higher For Rest of Day • 10 College Stocks to Study • Berkshire Hathaway Releases Latest 13F: Summary of Holdings
Stocks/ETFs to watch: NKE. Competitors: OTCQX:ADDYY, UA. Athletic/footwear retailers: FL, DKS, FINL. ETFs: PEZ
ENERGY AND MATERIALS
Shell, Saudi JV to Invest $7B on Texas Refinery
Shell Oil Co. announced its Motiva Enterprises joint venture with Saudi Arabia will invest $7 billion on a 325,000 barrel-per-day (b/d) expansion at Motiva's refinery in Port Arthur, Texas. The refinery's capacity will increase to 600,000 b/d by 2010, to become the largest in the U.S. and one of the largest worldwide. In a statement, Shell said, "The 325,000 b/d expansion at Port Arthur is equivalent to building the first new refinery in the U.S. in more than 30 years." A London-based Citigroup analyst said the expansion will cost $21,000 per b/d capacity, "consistent with recent industry estimates for refinery replacement costs." The estimated cost of the expansion has more than doubled in about the past year and half, due to the "upgrading of equipment to make higher-quality fuels from lower-quality crudes," according to a UBS analyst. A Bechtel/Jacobs JV has been contracted to manage the expansion project. Shares of Shell were down slightly in late morning trading in London. Shell's ADRs gained 1.7% to $84.20 on Thursday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: An Historic Look At Bull and Bear Markets for Oil ?What's Behind Crude Oil's Jump to $81? ?The Oil Scam Driving Crude Over $80
Stocks/ETFs to watch: RDS.A, XOM, CVX, MUR. ETFs: USO, XOP, DIG
Schumer on Nasdaq Sale: Not So Fast
Sen. Charles Schumer (D-NY) is urging Treasury Secretary Henry Paulson to scrutinize the proposed purchase by Borse Dubai of 20% of the Nasdaq Stock Market. The complex deal, which values the Nasdaq at $41.04 per share, would give Borse Dubai 5% voting rights. It allows the Nasdaq to purchase a controlling interest in Nordic exchange operator OMX, for which it has been battling with Borse Dubai, in exchange for the 20% stake in itself as well as almost its entire stake in the London Stock Exchange. Schumer, who considers Dubai a "nexus of terrorism," told Paulson he believes "the acquisition of such a large stake in a U.S. exchange by a foreign government raises some serious questions." President Bush recently signed a bill into law that toughens the review process for such transactions. "We're going to take a good look at [the Nasdaq deal], as to whether or not it has any national-security implications," Bush said Wednesday. Last year, the Treasury approved the purchase of several U.S. ports by Dubai Ports World, but the company ultimately withdrew in favor of a U.S. firm in the face of Congressional opposition. Following that experience, Dubai has hired two U.S. lobby firms and begun what the WSJ calls a "charm campaign" to sway members of Congress in favor of the Nasdaq sale.
Sources: Financial Times, Wall Street Journal, Reuters, Dow Jones
Commentary: Nasdaq Close to Selling LSE Stake to Borse Dubai - WSJ • Nasdaq and Borse Dubai May Form Joint Bid for OMX -- Daily Telegraph • Borse Dubai’s Dealings Found Illegal
Stocks/ETFs to watch: NDAQ. Competitors: CME, NYX, BOT, ICE, ISE. ETFs: EXB
Earnings call transcript: The Nasdaq Stock Market Q2 2007
First Data's Loan Deal Oversubscribed - Reuters
Electronic payments processor First Data Corp. has booked more than $7 billion in orders for a $5 billion leveraged buyout loan, a banker close to the deal told Reuters Thursday. The loan package, the total size of which is $13 billion, is the first chunk of a $24 billion debt financing intended to fund the company's $30 billion LBO by Kohlberg Kravis Roberts. The declining cost of protecting the loans, as reflected by when-issued loan credit default swaps, suggests investors perceive the deal as healthy: the swaps fell to $320,000 to protect $10 million of loans for five years on Thursday, a decline of almost $100,000 from a week ago. Interest in the high-yield debt market is reviving since the Fed cut the fed-funds rate a half-point, leading the bankers to contemplate speeding up the sale of other parts of the loan package, according to the source. They are even said to be considering bringing a portion of $9 billion in higher-risk unsecured bonds up for sale, although those are expected to be a harder sell. Investors have until Tuesday to place orders for the $5 billion loan at $0.96 and a spread of 275 basis points over the LIBOR. "The bank loan market overall has had a nice rally in here - and that's with the First Data deal in the market - so clearly the First Data deal is not dampening people's appetite for loans," said Paul Scanlon, portfolio manager at Putnam Investments.
Sources: Dow Jones I, II, Reuters
Commentary: Capital Access And The First Data Buyout • Takeover Targets Offer Less Of A Discount As Investors Get Comfortable With Risk • First Data Corporation: Mega Bucks M&A Coping with Liquidity Meltdown
Stocks/ETFs to watch: FDC. Competitors: FIS, FISV, TSS. ETFs: MTK
Earnings call transcript: First Data Q2 2007
Pfizer Considering Japan R&D Unit Spin Off
Pfizer Japan Inc. president Hiromitsu Iwasaki speaking at a press conference said parent Pfizer is now aiming to maintain its R&D operations in Japan, as opposed to earlier plans of discontinuing local operations. Pfizer is said to be talking with investors, which include banks and funds, about a spin off of the unit. Iwasaki said the outcome of talks will depend "significantly" on how Pfizer is involved in the lab's management. Iwasaki also said it is still undecided whether Pfizer will take an equity stake. The investors are interested in funding the lab with a reduced headcount to about 80 of the best researchers, according to Iwasaki. The laboratory employs around 380 and focuses on developing drugs for digestive disorders and pain. The previous plan to shutter the lab was part of a global cost-cutting effort by Pfizer. Shares of Pfizer lost 1.5% to $24.52 on Thursday.
Sources: Dow Jones, Reuters
Commentary: Stalled Giants: MSFT, C, MRK, PFE, HD, GM ?Medtronic, Wyeth, & Pfizer Plan On Revenue Growth in China ?Pfizer's Dividend Yield To Get Even Better; 'Patent Hole' Remains Huge Challenge
Stocks/ETFs to watch: PFE. ETFs: IHE, PPH, XLV, VHT
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