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Abreis, Re: IWA’s 2008 Q1 CC of May 1, 2008
Upon reviewing the CC, I did not find anything exciting or distressing...
IWA’s revenue and earnings were slightly down from the previous year. They are losing access lines, but growing DSL and CPE (Customer Premise voice and data Equipment) business. The loss of access lines and growth of DSL in part reflects customer conversion from dial-up to high-speed modem internet access, a good thing for IWA in the long run.
Basically, I view IWA’s market as mature and do not see substantial growth in the near future. However, their 9-10% dividend remains covered and is safe, so I continue to see this as a good high yield stock.
The only thing new that I saw of interest in the CC was that IWA obtained three of the FCC’s recently auctioned 700 MHz spectra. Combined with the AWS spectrum acquired last year, IWA now has spectrum which covers approximately 84% of their access lines. They claim to have no immediate plans to deploy this spectrum. If and when they do, they may need to reduce the dividend to meet the capital investment requirements. In any event, this spectrum is not available to competitors, a good thing in my estimation.
Wall Street: Sell what in May and go away?
In an unusual period on Wall Street, the old seasonal standby doesn't apply. But the opposite might.
http://money.cnn.com/2008/05/01/markets/sellmay_markets/index.htm?section=money_topstories
May 1, 2008: 4:08 AM EDT
NEW YORK (CNNMoney.com) -- As Wall Street comes to the end of what is often called the 'best six months' of the year, investors may be feeling cheated. And concerned. If that was the market at its best, what does the market at its worst look like?
April was a strong end to an otherwise wretched six months in which the Dow industrials lost 8%. That's the worst 'best six months' performance for stocks since 1973, when the Dow fell 12.5% between Nov. 1 and April 30, amid an OPEC oil embargo, according to the Stock Trader's Almanac.
And if market indicators hold up, May through October could be a tough period, as per the old Wall Street saw 'sell in May and go away.' But in an unusually difficult year in which the housing and credit crises have sent the economy into a tailspin, the old indicators may not apply.
"We might see gains in this traditionally tough period," said Douglas Altabef, managing director at Matrix Asset Advisors.
That's because the Federal Reserve's seven-month old campaign of cutting interest rates and injecting billions into the banking system has halted fears of the financial system seizing up, he said.
The Fed, on Wednesday, cut interest rates by a quarter-percentage point to 2% and signaled it may take a breather from its rate-cutting campaign.
Also, the forward-looking stock market may be on the verge of anticipating the start of an economic recovery, despite weak first-quarter growth.
Stocks typically start anticipating a recovery around halfway through an economic slowdown, Altabef said. If the current slowdown began sometime in the fourth quarter of last year, stocks could start turning up any time in the next few months.
"The calendar is reversed this year," said Donald Selkin, director of research at National Securities. "We're not going to see a runaway rally, but we could do better than usual."
Also working in the market's favor: 2008 is an election year and the Dow has risen in 9 of the last 11 election years, as per the Almanac. Election year rallies tend to start in the second half of the year, furthering the notion that you may not need to 'sell in May' this year after all.
Why sell in May?
The old 'sell in May' strategy says that if you invest in the S&P 500 or the Dow industrials during the 'best six months' (November through April) and then switch into bonds during the 'worst six months' (May through October), you'll end up with better returns than if you did the reverse. The strategy doesn't always work, but has been one of the more reliable indicators going back to 1950.
For example, $10,000 invested in the Dow during the 'best' period and switched to bonds during the 'worst' period in every year since 1950 would result in a compounded $578,413 return, according to the Almanac. The same $10,000 invested in reverse would leave you with a compounded $341.
The strategy works because of seasonal factors. End-of-the year bonuses and the so-called Santa Claus rally help boost November, December and January. February is mild and March sometimes suffers from end-of-quarter machinations. Anticipation about the soon-to-be-reported first-quarter reports typically lifts April.
May through October tend to be sketchy: first-quarter results are over, the summer doldrums have set in and fall generally brings a period of portfolio housekeeping.
This year is an anomaly. April was the only one of the 'best' months to see gains.
Because the stock market is forward looking, that means it was already pricing in the economic slowdown and the systemic risk to the financial system at the end of 2007.
Steady funds for unsteady times
The calendar flip-flopped five years ago, during another period of great uncertainty. October 2002 through March 2003 was bumpy at best, driven by questions over if and when there would be war in Iraq. As the war drew nearer, stocks began to rally. The Dow gained 15.6% in the 'worst six months' period eventually leading to a multi-year bull market.
Buyers biding time
A true rally may be a ways off but the markets are now starting to benefit from a lifting of some of that fog regarding the breadth of the crises, said Joe Clark, chief investment officer at Financial Enhancement Group. .
Months of monetary injections, the announcement of a $170 billion fiscal stimulus plan and the "rescue" of Bear Stearns have started reshaping that perception.
That's why stocks have performed better in April, despite more bleak housing market reports and big bank writedowns.
"There is a mind boggling amount of cash on the sidelines that at some point will flood the market," said Robert Loest, portfolio manager at Integrity Funds, "When that happens, it's Katie bar the door."
A good entry point might be summer, when the second-quarter earnings will be known and the impact of the fiscal and monetary stimulus will be clearer. The third quarter could also see some strong buying if the Federal Reserve signals it thinks the economy is stabilizing.
VTA – A loan participation fund...
I have decided to initiate a position in VTA (Van Kampen Dynamic Credit Opportunities). It is a closed end fund with close to a 5% discount to net asset value. At a current price of about $15.25 and a monthly distribution of $0.145/share it yields about 11% (fully taxable as ordinary income, unfortunately).
I believe that the loan participation market has stabilized and that now is a good time to start a position. Time will tell if I have guessed right. VTA is large enough to have good liquidity for the volumes that I will be buying and selling. Net assets are about $1,250M.
I have chosen VTA from the available loan participation funds largely because it is a new fund (established on 6/26/07) and I suspect that they have been able to purchase senior loans that others were forced to sell in the recent buyer’s market. Note that this logic should not be carried too far. In fact, they had deployed about $900M prior to July 31, 2007 (when the market was still strong); another $700M between July and Oct 2007, when discounts were not as serious as they are now; and then a final $150M between Oct 2007 and Jan 2008. At the end of January they had about $40M left to deploy and stay below the maximum 33% leverage allowable with borrowed funds (to my knowledge they have not issued preferred stock which would allow them to go to 50% leverage). These numbers have been obtained from their quarterly schedules of portfolio holdings.
Background
For those interested in a quick snapshot of VTA statistics, I recommend: http://www.etfconnect.com/select/fundpages/other.asp?MFID=178941
A list of similar loan participation funds can be obtained at: http://www.closed-endfunds.com/FundSelector/Classifications.fs#ClassDetailResults (Then going to the "Loan Participation Funds" hyperlink in the list.)
The VTA prospectus (Form 497,filed June 26, 2007; CIK 0001393662) can be obtained at: http://www.sec.gov/Archives/edgar/data/1393662/000095013707009322/c13889fe497.txt
US Stocks at a Glance/Stocks decline as Street examines quarterly reports
NEW YORK - Wall Street fell Tuesday as investors appeared unimpressed by a rush of quarterly results from bellwethers like AT&T Inc., DuPont and McDonald's Corp along with
the lack of news from PPHM on any collaborations, JV's,
or licensing agreements.
AT&T's earnings met Wall Street's forecast while McDonald's and DuPont reported stronger-than-expected numbers. But DuPont said a U.S. slowdown will offset growth abroad and McDonald's said an important metric of its sales showed a decline for March.
The comments kept some investors in a cautious posture. With hundreds of companies still to report results, investors are anxious over what the figures might say about the prospects for the economy.
As occurs with each earnings rush, investors are combing reports for insights into the health of the economy and the prospects for profits in the coming quarters. The shifts in market sentiment with each successive wave of reports, which is also typical of an earnings period, is perhaps a welcome dynamic following months of often disconcerting volatility.
Investors appeared little moved by news of continued weakness in the housing sector. Sales of existing homes fell 2 percent in March to a seasonally adjusted annual rate of 4.93 million units, while the median sales price dropped for a seventh straight month. The National Association of Realtors also said sales rose in the Northeast and West but fell in the Midwest and South.
In midmorning trading, the Dow Jones industrial average fell 41.93, or 0.33 percent, to 12,783.09. Broader stock indicators also declined. The Standard & Poor's 500 index fell 5.43, or 0.39 percent, to 1,382.74, and the Nasdaq composite index fell 11.85, or 0.49 percent, to 2,396.19.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.74 percent from 3.73 percent late Monday. The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude fell 21 cents to $117.27 in premarket electronic trading on the New York Mercantile Exchange. On Monday, oil touched an all-time high of $117.83 a barrel.
Investors were digesting a flurry of quarterly results and some appeared to confirm concerns about the economy.
Late Monday, Texas Instruments Inc. warned of a weak market for the chips it makes for high-end mobile phones. The company's results were nearly in line with Wall Street's expectations, however. The stock fell $1.52, or 5 percent, to $29.07.
In other corporate news, AT&T rose 21 cents to $37.80 after reporting that its first-quarter earnings rose 22 percent following growth in the company's wireless division and as its enterprise services business saw a reversal of an earlier decline.
DuPont said profits jumped 26 percent as the chemical company saw higher sales and benefits from the weak dollar. But the company's comments about the U.S. market appeared to weigh on the stock, which fell $2.11, or 4 percent, to $50.14.
McDonald's Corp. slipped 20 cents to $58.47 after saying its first-quarter earnings grew 24 percent. The fast food chain benefited from the weak U.S. dollar and strong global sales. However, it also said its same-stores sales, or sales at restaurants open at least a year, declined in March.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 223.3 million shares.
The Russell 2000 index of smaller companies 57.49, or 0.45 percent, to 12,767.53. Overseas, Japan's Nikkei stock average closed down 1.09 percent. In afternoon trading, Britain's FTSE 100 fell 0.27 percent, Germany's DAX index fell 0.21 percent, and France's CAC-40 lost 0.48 percent.
Forex - Dollar remains on back foot ahead of U.S. existing home sales data
LONDON - The dollar remained on the back foot against the euro ahead of U.S. existing home sales data, as attention continued to focus on interest rate differentials between the two areas.
Comments from governing council members Yves Mersch and Christian Noyer have raised speculation the European Central Bank (ECB) might consider increasing interest rates to keep inflation in check rather than simply keeping them on hold.
This is in stark contrast to the U.S. where the Federal Reserve has cut rates aggressively. "More hawkish lines have been thrown to the market from ECB policy makers, this time from Christian Noyer and Yves Mersch," said Peter Stoneham, an analyst at Thomson IFR Markets.
"With Klaus Liebscher and Axel Weber setting the rate tightening tone Monday, the stacking up of fresh hawkish rhetoric has helped to drive the euro" from the low of around 1.583 seen in Asian trade, said Stoneham.
Disappointing first-quarter earnings released Monday by major U.S. bank Bank of America also continued to add pressure on the dollar. Attention will turn later to economic data from the world's largest economy, with the release of U.S. existing home sales for March.
Existing home sales data are expected to have fallen to 4.950 million in March from 5.030 million the previous month.
Elsewhere, the pound bounced higher after a Monetary Policy Committee (MPC) member said the Bank of England's liquidity scheme announced Monday will help the rate setting committee to keep its focus on the job of keeping inflationary pressures in the UK economy in check.
Tim Besley, one of the four external members on the MPC, said the scheme should "allow the MPC to stay more focused on its task of using monetary policy to target inflation."
The pound had been under pressure on Monday following the announcement of the scheme as market players viewed the plan with skepticism and expressed concern over its expense. "The tone of the Besley remarks is hawkish but measured and should at least afford the struggling pound some room to pause ," said Thomson IFR Markets' Stoneham.
London 1235 GMT London 0849 GMT
U.S. dollar
yen 103.23 up from 103.13
Swiss franc 1.0089 up from 1.0073
Euro
U.S. dollar 1.5923 down from 1.5942
pound 0.7991 down from 0.8045
yen 164.40 up from 164.36
Swiss franc 1.6066 up from 1.6062
Pound
U.S. dollar 1.9923 up from 1.9815
yen 204.69 up from 204.28
Swiss franc 2.0101 up from 1.9960
Australian dollar
U.S. dollar 0.9447 up from 0.9440
pound 0.4740 down from 0.4764
yen 97.51 down from 97.34
Europe at a Glance
Euroshares open slightly lower, Tele Atlas, TomTom rally
At 9:19 a.m., the DJ STOXX 50 was 7.90 points or 0.25 percent lower at 3,157.63, while the STOXX 600 fell 0.48 points or 0.15 percent to 316.48. The technology sector, following a weaker start this morning, received a boost from newswire reports which said the EU Commission is to approve TomTom's acquisition of Tele Atlas unconditionally.
Shares in Tele Atlas rallied 2.83 percent, while TomTom gained 8.8 percent. Staying with M&A news, Air France-KLM led the CAC-gainers higher, up 3 percent, after the group said last night that the contract it signed regarding a takeover bid for ailing airline Alitalia Spa was no longer valid.
"The market is relieved they're giving up on this deal," said a dealer at a Paris-based brokerage. "People were expecting that, in the short-term, the deal would hamper margin and earnings growth at Air France, even if over the medium and long-term it was expected to provide a boost."
Meanwhile, OC Oerlikon added 1.80 percent, after Renova, the investment vehicle of Russian oligarch Viktor Vekselberg, confirmed rumours that it bought a further stake in OC Oerlikon from Victory Holdings.
The group said early on Tuesday that it now holds a 31.99 percent stake in the Swiss technology group after exercising a call option against Victory Industriebeteiligung for a share stake of over 7.6 percent. Staying in Switzerland, excellent first-quarter sales figures from agribusiness Syngenta resulted in profit taking this morning.
Shares were down 1.80 percent despite bullish comments and praise from analysts. Landsbanki Kepler reiterated its 'buy' rating and said the results were well above consensus, largely due to the weakness in the U.S. dollar.
"On the back of the strong figures, increased guidance which speaks for the company's operational excellence and strong agribusiness fundamentals, we remain bullish," Landsbanki said and raised the target for the stock to 360 Swiss francs from 333.
In Norway, aluminium producer Norsk Hydro released first quarter results which largely missed analyst forecasts, but impressed with its EBIT performance.
Nordic investment bank Carnegie said in a research note that Norsk Hydro's adjusted Q1 EBIT of 2.032 billion was 13 percent ahead of market consensus and 17 percent of its own forecasts.
Shares in Norsk Hydro were 1.91 percent higher at last check. In France, car maker Renault SA lost 2 percent as a disappointing sales publication for the first quarter of the year heightened concerns the group may miss its full-year guidance.
Finally, chip maker Infineon turned around during the morning, up 2.79 percent. Its U.S. unit Qimonda delivered another bad batch of numbers but that it raised investor hopes a sale of the division may be imminent. Other companies releasing earnings results today, include Associated British Foods, Saint Gobain, Acerinox, Actelion, Subsea 7 and Temenos, among others.
Asia at a Glance
Asian stocks fall as U.S. concerns return; Shanghai bucks trend
The S&P/ASX 200 closed down 0.6 percent at 5,564.6 and the All Ordinaries lost 0.6 percent to 5,628.4. Banks were mostly lower after Commonwealth Bank of Australia Ltd. (CBA) Chief Executive Ralph Norris said the credit crisis could last another 18 months and may impact bank earnings in the coming years.
Norris made the comments to the Australian Financial Review.
ANZ closed down 1.7 percent to A$21.14 ahead of its mid-year results. Australia's third-largest bank has already announced that it will set aside A$975 million in bad debt provisions, more than the A$576 million in provisions it made for the entire financial year ended September.
National Australia Bank ended down 0.2 percent to A$29.40, but Commonwealth Bank reversed earlier losses to close 0.2 percent higher at A$44.00. In Tokyo, the Nikkei finished down 1.1 percent at 13,547.82, while the broader Topix lost 1.5 percent to 1,311.46.
Mitsubishi UFJ Financial fell 2.2 percent to 1,022 yen. Nomura dipped 3.9 percent to 1,639 yen after it confirmed that regulators are probing alleged insider trading by an employee. The Shanghai Composite was last up 1 percent at 3,147.79, bouncing back from a one-year low of 2,990.79. The Hang Seng was down 0.2 percent at 24,672.76, well above its low of 24,413.25.
"The rebound in the Chinese market seems to have helped trim losses in Hong Kong," said Ben Kwong, head of research at KGI Asia. "Mainland investors are looking for bargains after sharp falls. In the near term, people are still hoping that the government will come up with more market-friendly measures like cutting the stamp duty," he said.
On Monday, Chinese shares failed to hold gains posted after the government announced restrictions on the sale of shares coming out of lockup.
Elsewhere, the Singapore Straits Times index was flat at 3,173.92, the Malaysian KLSE Composite was down 0.2 percent at 1,277.65 and the Philippines Composite lost 1.2 percent to 2,855.75. The South Korean Kospi fell 0.7 percent to 1,787.49.
Shares of the various units of the nation's biggest conglomerate, Samsung Group, fell after Chairman Lee Kun-hee said he would step down in the wake of an investigation and indictment for breach of trust and tax evasion. Special prosecutors last week concluded the probe of Lee, whose family owns Samsung through a series of cross-investments.
Samsung SDI was down 2.2 percent at 79,700 won and Samsung Securities was down 4.8 percent at 81,600 won. Samsung Fire & Marine fell 3.1 percent to 205,500 won and Samsung Climate lost 2.3 percent to 7,280 won. Samsung Corp. lost a full 9 percent to 70,700 won.
Santos was down 1.5 percent at A$16.64 after strong gains on Monday. Petrochina rose 5.3 percent to HK$10.68, Inpex rose 0.8 percent to 1.22 million yen.
Also in Japan, Nippon Steel lost 3.2 percent at 553 yen after the Nikkei newspaper reported that Japan's largest steelmaker will seek a 40 percent increase in prices it charges automakers and other customers because of soaring costs of materials.
Rival JFE Holdings lost 2.4 percent to 5,310 yen while another rival Sumitomo Metal Industries slipped 2.3 percent to 422 yen.
The Nikkei also reported that Matsushita Electric Industrial and Pioneer plan to merge their plasma display panel development and production operations by 2009, allowing Pioneer to focus on assembling flat televisions. Matsushita Electric Industrial lost 3.9 percent at 2,075 yen, while Pioneer lost 0.3 percent at 989 yen.
Commodities
Oil rises to record in New York, London on supply fears, Chinese demand
LONDON - Oil rallied to new record highs on both sides of the Atlantic as supply fears and strong Chinese demand sparked buying.
New York-traded West Texas Intermediate crude contracts for May delivery, which expire today, rose to a record $118.05, before easing back to trade at $117.67 by 10:33 a.m., up 19 cents from yesterday's close. The next forward month June WTI contract is now trading up 17 cents at $116.80 a barrel.
Meanwhile in London, Brent crude for June delivery was trading up 7 cents at $114.50, having earlier touched a new high of $115.03. "For the moment, there does not seem to be anything stopping the price juggernaut we are seeing in energy," said MF Global analyst Ed Meir.
Oil has rallied to a series of record highs in recent sessions. Supply fears have been stoked after a Royal Dutch Shell PLC joint venture in Nigeria said it may not be able to cover some April-May supply contracts totalling 169,000 barrels per day (bpd) of crude, following militant attacks on a pipeline last week.
The Movement for the Emancipation of the Niger Delta (MEND), who claimed responsibility for last Thursday's attack, yesterday hit a further two pipelines operated by Chevron Corp. and the Shell joint venture in southern Rivers state.
Further concerns have arisen as the 200,000 bpd Grangemouth refinery in Scotland has begun shutting down ahead of a two-day strike planned for this Sunday, which could see some North Sea supplies shut in.
Management and unions are due to meet at conciliation service Acas in London this afternoon in a bid to break the current negotiation deadlock over proposed changes to staff pension schemes.
Booming demand in China, which imported a record 4 million bpd of crude in March and quadrupled diesel imports to 494,192 tonnes ahead of the summer Olympics, has heightened fears over stretched supplies.
Short-term hopes for higher oil exports from the Organisation of Petroleum Exporting Countries (OPEC) to help cool record prices were dashed yesterday, with cartel members repeating the group's stance that there is no shortage of supplies in the market.
However, OPEC plans to increase production capacity by 5 million bpd by 2012, the cartel's secretary general Abdulla Salem El-Badri said at an international energy forum in Rome on Tuesday.
International Energy Agency chief Nobuo Tanaka has expressed concerns that recent price gains in crude could push the global economy into a recession. However, he has agreed with OPEC's stance that markets are currently well supplied, while attending the joint producers and consumers forum in Rome.
Big rally on Wall Street
Stocks jump over 250 points, as better-than-expected earnings reports from Intel and JP Morgan help soothe worries about poor first-quarter results.
By Alexandra Twin, CNNMoney.com senior writer
Last Updated: April 16, 2008: 5:09 PM EDT
http://money.cnn.com/2008/04/16/markets/markets_newyork/index.htm?section=money_topstories
NEW YORK (CNNMoney.com) -- Stocks spiked Wednesday, with the Dow rising almost 250 points, as better-than-expected profit reports from Intel, JP Morgan Chase and Coca-Cola reassured investors worried about the quarterly earnings reporting period.
The Dow Jones industrial average (INDU) climbed 2.1%, the broader Standard & Poor's 500 (SPX) index climbed 2.3% and the Nasdaq composite (COMP) jumped around 2.8%.
After the close of trade, IBM (IBM, Fortune 500) reported higher quarterly earnings that topped estimates thanks to strong U.S. sales.
Also after the close, eBay (EBAY, Fortune 500) reported higher quarterly sales and earnings that topped forecasts, due to more ad listings and strength in its global businesses, among other factors.
Merrill Lynch (MER, Fortune 500) and Pfizer (PFE, Fortune 500) are among the big companies reporting quarterly results before the start of trade on Thursday. Reports are also due on weekly jobless claims, the index of leading economic indicators and the Philadelphia Fed index, a regional reading on manufacturing.
Stocks managed gains Tuesday thanks to some upbeat earnings and a strong regional manufacturing report. That momentum seemed to carry over to Wednesday, as investors breathed a sigh of relief that some of the first-quarter earnings are defying grim expectations.
"The rally is largely in response to the better earnings reports today, especially in the financial sector," said Matt King, chief investment officer at Bell Investment Advisors.
Earnings are on track to have fallen about 14.5% from a year ago, according to the latest Thomson Financial estimates. That's a blended figure, combining expected and reported earnings. So far, just 10% of the S&P earnings are out.
But financial company earnings have been forecast to fall more than 50%, amid the ongoing fallout from the credit and housing market crises.
"Clearly, the market has priced in gloomy financial sector earnings and the year-over-year results have been ugly," said King, "but the key is that results so far have been coming in ahead of expectations."
JP Morgan Chase (JPM, Fortune 500) reported a smaller-than-expected drop in quarterly earnings Wednesday, on a slightly larger-than-expected drop in revenue. Although the company has been hit by the credit crisis and the housing market collapse, it has managed to hold up better than many of its peers. Shares gained 6.7%.
Other bank stocks rallied in tandem including Wells Fargo (WFC, Fortune 500), which reported lower earnings that were still above forecasts.
Chipmaker Intel (INTC, Fortune 500) reported lower first-quarter earnings that met estimates on higher sales that topped estimates late Tuesday. Intel also forecast second-quarter revenue in a range that could beat analysts' current estimates. Shares jumped 5.8% Wednesday.
More earnings. Dow stock Coca-Cola (KO, Fortune 500) reported higher sales and earnings that topped estimates Wednesday morning. Shares were little changed.
Washington Mutual (WM, Fortune 500) reported a $1.1 billion quarter loss late Tuesday, as it had warned it would a week earlier. The company also said it has concluded its plans to raise $7 billion in capital from private equity firm TPG.
Wells Fargo (WFC, Fortune 500) reported lower quarterly earnings that nonetheless topped analysts' forecasts.
The company's profit was hurt because it had to increase loss reserves, setting aside $2.03 billion to cover higher delinquencies and defaults on mortgages and other loans.
Market breadth was positive. On the New York Stock Exchange, losers topped winners four to one on volume of 890 million shares. On the Nasdaq, decliners beat advancers two to one on volume of 1.47 billion shares.
Economic news. In the latest troubling sign for the housing market, new home construction fell more than expected to a 17-year low. Building permits, a measure of builder confidence, also declined.
The Consumer Price Index (CPI) rose 0.3% in March, up from a flat reading in March, but in line with analysts' estimates. The so-called "core" CPI, which strips out volatile food and energy prices, rose 0.2%, up from a flat reading in March and also in line with forecasts.
March Industrial production rose 0.3%, surprising economists who were looking for a decline in the month. Capacity utilization held steady at 80.3% versus forecasts for a read of 80.4%.
In the afternoon, the Fed released its periodic "beige book" reading on the economy, which showed weaker economic conditions over the last few months and tepid consumer spending.
Commodity prices.
U.S. light crude oil for May delivery settled at $114.93 a barrel on the New York Mercantile Exchange, closing at a record for the third day in a row. Oil had spiked to a trading record of $115.07 earlier in the session after the government's weekly inventories report showed a surprise drop in crude supplies.
The national average price for a gallon of regular unleaded gas hit an all-time record of $3.399, AAA reported.
COMEX gold for June delivery rose $16.30 to settle at $948.30 an ounce.
Other markets. The dollar hit an all-time low versus the euro and rose against the yen.
Treasury prices fell, lowering the yield on the benchmark 10-year note to 3.68% from 3.60% late Tuesday. Bond prices and yields move in opposite directions.
A Fresh Look at the Apostle of Free Markets
By PETER S. GOODMAN
NYTimes April 13, 2008
Joblessness is growing. Millions of homes are sliding into foreclosure. The financial system continues to choke on the toxic leftovers of the mortgage crisis. The downward spiral of the economy is challenging a notion that has underpinned American economic policy for a quarter-century — the idea that prosperity springs from markets left free of government interference.
The modern-day godfather of that credo was Milton Friedman, who attributed the worst economic unraveling in American history to regulators, declaring in a 1976 essay that “the Great Depression was produced by government mismanagement.”
Five years later, Ronald Reagan entered the White House, elevating Mr. Friedman’s laissez-faire ideals into a veritable set of commandments. Taxes were cut, regulations slashed and public industries sold into private hands, all in the name of clearing government from the path to riches. As the economy expanded and inflation abated, Mr. Friedman played the role of chief evangelist in the mission to let loose the animal instincts of the market.
But with market forces now seemingly gone feral, disenchantment with regulation has given way to demands for fresh oversight, placing Mr. Friedman’s intellectual legacy under fresh scrutiny.
Just as the Depression remade government’s role in economic life, bringing jobs programs and an expanded welfare system, the current downturn has altered the balance. As Wall Street, Main Street and Pennsylvania Avenue seethe with recriminations, a bipartisan chorus has decided that unfettered markets are in need of fettering. Bailouts, stimulus spending and regulations dominate the conversation.
In short, the nation steeped in the thinking of a man who blamed government for the Depression now beseeches government to lift it to safety. If Mr. Friedman, who died in 2006, were still among us, he would surely be unhappy with this turn.
“What Milton Friedman said was that government should not interfere,” said Allen Sinai, chief global economist for Decision Economics Inc., a consulting group. “It didn’t work. We now are looking at one of the greatest real estate busts of all time. The free market is not geared to take care of the casualties, because there’s no profit motive. There’s no market incentive to deal with the unemployed or those who have lost their homes.”
To Mr. Friedman, such sentiments, when turned into policy, deprived the economy of the vibrancy of market forces.
Born in Brooklyn in 1912 to immigrant parents who worked briefly in sweatshops, Mr. Friedman retained a sense that America was a land of opportunity with ample rewards for the hard-working.
His intellectual bent was forged as a graduate student at the University of Chicago, a base for those who saw themselves as guardians of classical economics in a world then under the spell of woolly-headed revisionists.
The chief object of their scorn was John Maynard Keynes, and his message that government had to juice the economy with spending during times of duress. That notion dominated policy in the years after the Depression. Mr. Friedman would spend much of his career assailing it: He argued that government should simply manage the supply of money — to keep it growing with the economy — then step aside and let the market do its magic.
So firm was his regard for market forces, so deep his disdain for government, that Mr. Friedman once said: “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.”
This antagonism toward bureaucracy seemed to spring from Mr. Friedman’s conception of his country as a bastion of rugged individualism. During an interview on PBS in 2000, he noted that Adam Smith, the father of classical economics, published his canonical work, “The Wealth of Nations,” in 1776, “the same year as the American Revolution.”
He spoke in the interview of his concern at the end of World War II that socialism was gaining adherents because countries had been forced to organize collectively to produce armaments.
“You came out of the war with the widespread belief that the war had demonstrated that central planning would work,” Mr. Friedman said. “The left, in particular, ... interpreted Russia as a successful experiment in central planning.”
Mr. Friedman’s brand of libertarianism rested on the assumption that economic and political freedom were one and the same. It meshed with and fed the cold war thinking of his time, as the United States offered up capitalism as liberty itself in contrast to the authoritarian Soviet Union.
Among professional economists, Mr. Friedman’s analytical mastery was near-universally admired.
His first breakthrough came in the 1950s with his idea that people’s savings and spending were not a function of psychological factors, but based on rational estimations of wealth.
His greatest contribution came the following decade, when Mr. Friedman dismantled the consensus view that inflation was a tolerable byproduct of high employment. He demonstrated that high inflation would eventually cost jobs, as businesses were discouraged to invest by the higher wages they had to pay.
“This triumph, more than anything else, confirmed Milton Friedman’s status as a great economist’s economist, whatever one may think of his other roles,” Paul Krugman, an economist (and a New York Times columnist) wrote last year in The New York Review of Books.
Mr. Friedman captured the era with a new formulation known as monetarism: that the government should gradually and predictably inject cash into the financial system, and then let the market figure out where it should go.
“Any honest Democrat will admit that we are now all Friedmanites,” Lawrence H. Summers, the Harvard economist and former Clinton administration Treasury secretary, wrote in an appreciation published in this newspaper when Mr. Friedman died. “He has had more influence on economic policy as it is practiced around the world today than any other modern figure.”
But the reviews for Mr. Friedman’s work grow mixed when the subject moves to his role as chief proselytizer in the drive to reduce the role of government in public life.
He laid out a blueprint in his 1962 book, “Capitalism and Freedom,” calling for the end of the military draft, the abolition of the licensing of doctors and the creation of “education vouchers” that parents could use to send children to private schools, injecting competition into public education.
Two years later, Mr. Friedman put those principles to work as an economic adviser to the presidential campaign of Senator Barry Goldwater, a Republican from Arizona. The campaign called for the abolition of government oversight of the energy, telephone and airline industries and the dismantling of the Social Security system and national parks.
Mr. Goldwater took a drubbing at the hands of Lyndon Johnson. Mr. Friedman would remain in the policy wilderness until the rise of President Reagan. Then, his notions about rolling back government took on the force of dogma.
This was so not only in the United States, but also throughout much of the world. As former Iron Curtain countries embraced free markets, they did so with Mr. Friedman’s books in hand. The International Monetary Fund and the World Bank leaned heavily on his ideas in prescribing policies for countries from Asia to Latin America.
“Among the cognoscenti, he became the figure that represented the war against the overwhelming welfare state,” said Hernando de Soto, a prominent Peruvian economist. “The idea that people are responsible for progress far more than government. One should reserve most of the action for the private sector. From Brazil to Mexico, that idea is still in place.”
But Mr. De Soto faulted Mr. Friedman for failing to temper his admonitions with an understanding of poverty and income inequality.
“The problem with Milton Friedman and his fellow libertarians is they never took into consideration the importance of class,” Mr. De Soto said. “They ignored the way elites were able to distort the policies they prescribed for their own benefit.”
In much of Latin America, economic growth never reached the poor, laying ground for the socialist backlash now led by Venezuela’s president, Hugo Chávez.
In the United States, the reconsideration of the Friedman doctrine came via the global financial crisis that has resulted from the collapse of American real estate. Many economists blame regulators for ignoring warning signs that banks and investors were growing reckless. One Friedman acolyte has taken the brunt of such criticisms — Alan Greenspan, the former chairman of the Federal Reserve.
But as America reaches for regulation to tame the markets, the keepers of the Friedman flame remain resolute that government is no solution.
“Friedman taught some fundamental long-run truths and he was adept and skilled and almost brilliant at getting them into the public domain,” said Allan H. Meltzer, an economist at Carnegie Mellon. “Now we’ve come into a crisis that has dampened enthusiasm for those policies, and we’re headed back into a period of more regulations that will do the same bad things as in the past.”
Copyright 2008 The New York Times Company
WaMu to Get $5 Billion Equity Infusion
http://online.wsj.com/article/SB120753199958893909.html
>>
By MATTHEW KARNITSCHNIG, VALERIE BAUERLEIN and ROBIN SIDEL
April 7, 2008
Private-equity firm TPG and other investors are close to a deal to invest $5 billion in Washington Mutual Inc., people familiar with the matter said Sunday.
The injection of new capital would allow the country's largest savings and loan to ease its pressing capital requirements, the people said, amid punishing losses from the national mortgage crisis. But it would substantially dilute current WaMu shareholders, who have already lost 74% of their investment over the past year. WaMu's market capitalization on Friday was just under $9 billion, after its shares dropped 11% that day.
The planned investment marks a humbling hand-in-hat moment for the 119-year-old Seattle stalwart. Having parlayed the country's housing boom to a nationwide reputation and immense profits, it is now paying dearly for delving into subprime mortgages.
Much of the subprime focus has been trained on Wall Street's leading banks and brokerages. But the investment shows how troubles have hit such main street banks as WaMu and Cleveland's National City Corp.
TPG's effort could be viewed as an encouraging sign for the nation's ailing banking system, and Wall Street will be watching to see whether it is an indication that the worst is over. It comes as virtually every large mortgage company in the country has hit financial distress. Countrywide Financial Corp. had to seek an emergency sale to Bank of America Corp. earlier this year, while others have gone bust amid mortgage losses.
Still, an investment could expose TPG and its partners to a financial hit if the mortgage-market shakeout continues.
While banking regulators were likely apprised of WaMu's plans, the government was not directly involved in forging a deal as in the recent purchase of Bear Stearns Cos., say people familiar with the matter.
As currently envisioned, the $5 billion investment would be structured as both a common- and preferred-stock offering. The preferred stock could be converted into common shares in the future, subject to a shareholder vote. TPG -- formerly Texas Pacific Group -- is expected to maintain a "substantial minority holding" in WaMu, said one person familiar with the matter, though exact terms weren't clear. The amount is expected to fall under 25%, a threshold that would require TPG to register as a financial holding company under government rules.
TPG is also expected to get one seat on the company's current 14-member board. Other investors in the group include large current WaMu shareholders, and may also involve other buyout firms. Still, an agreement has yet to be finalized, and the talks could fall apart.
WaMu's latest plan would likely eliminate, at least for now, the potential that the thrift will be acquired by J.P. Morgan Chase & Co. or another large financial institution. J.P. Morgan executives have been poring over WaMu's books since March and made a preliminary offer, but discussions between the two firms ground to a halt last week, according to a person familiar with the situation.
As one of the nation's largest private-equity firms, TPG holds interests in everything from Harrah's casinos to phone company Alltel Corp. to the MGM movie studios. For such private investors, the current credit crisis provides a rare opportunity to pick up once-thriving financial institutions on the cheap. WaMu, for instance, trades at less than half of the book value stated in its year-end 2007 results. And unlike most independent mortgage providers, WaMu also has a nationwide, 2,500-branch banking system that allows it to gather deposits more efficiently.
But relatively cheap investments aren't a guarantee for success, either. For example, private-equity firm Warburg Pincus agreed in December to purchase $500 million of the stock of bond insurer MBIA Inc. at $31 a share. The stock closed Friday at $13.61.
And there is the remaining question of whether a $5 billion investment will be enough to cover all the thrift's capital requirements in the future, especially if the mortgage-backed-securities market continues to deteriorate.
Declines in those securities have hit WaMu hard. The thrift reported a $1.87 billion loss in the fourth quarter that was fueled by a sharp increase in the reserve for loan-related losses. The company has been exposed to some of the hardest-hit housing markets in the U.S., including California and Florida. Problems have also spread to credit cards and other types of loans, meaning WaMu has been bracing for a steep rise in loan chargeoffs.
WaMu Chief Executive Kerry Killinger, who joined the thrift in 1983 and has had the top job since 1990, is expected to remain in that position. Mr. Killinger has a close relationship with directors, who have largely brushed aside criticism of his performance and of a 2008 executive pay formula that would omit loan-loss provisions on mortgages, as well as foreclosure costs.
WaMu took steps in recent months to boost its capital by cutting its dividend, slashing 3,000 jobs and selling $3.7 billion in preferred shares. WaMu shares have been slammed by credit losses, foreclosures and bad bets in the subprime market. Shares fell $1.32 to $10.17 in New York Stock Exchange composite trading on Friday.
WaMu has made a series of strategic mistakes that put the company on increasingly shaky footing. Mr. Killinger's biggest bet was on the subprime market, as the savings and loan embraced products such as adjustable-rate mortgages and low-documentation loans for borrowers with relatively poor credit.
As recently as last year, Mr. Killinger said the subprime crisis could benefit the company, paring down competition and perhaps leading to acquisitions. But instead, losses have skyrocketed, leading WaMu to shutter much of its subprime-loan-origination business.
In 2004, when the mortgage business was booming, WaMu made bad bets in its mortgage-hedging operation that contributed to a 25% annual profit slide. Mr. Killinger shuffled the management ranks, with half of his top dozen executives joining the company in the past three years.
WaMu also pursued an unusually ambitious retail-bank expansion that fizzled in some markets, as WaMu saturated new cities with branches that were often in difficult-to-reach locations. WaMu has since closed dozens of branches it opened only two years before.
The deal also marks something of a homecoming for TPG founder David Bonderman. Mr. Bonderman was on WaMu's board between 1996 and 2002. He got there after WaMu purchased American Savings Bank, where he originally served as a director.
Mr. Bonderman's involvement with American Savings is instructive to the expected WaMu investment. Some 20 years ago, Mr. Bonderman, working for Texas billionaire Robert Bass, helped save American Savings via a special capital injection. The deal was one of the largest rescue plans of the savings-and-loan crisis then sweeping through America's banking system. With the aid of government backing, it also turned out to be incredibly lucrative. For an original $150 million equity investment, American Savings eventually returned about $910 million.
<<
Hi,
I hope eveyone is having "fun" in this roller coaster market.
I just recently purchased Willis Lease Finance Preferred Stock (Nasdaq: WLFCP) based on a recommendation of the High Yield ENewsletter edited by Carla Pasternack.
I use the newsletter for ideas and several have been good to me in the past. This looks like a winner for those seeking a fairly safe dividend.
"Yield: 9.0%
Annual Dividend: $0.90
Payment Frequency: Monthly
Tax Treatment: 15% dividend tax rate"
FWIW and INHO
Regards,
ABreis
Searching The Globe For Good Yields
Shlomo Reifman 04.02.08, 6:00 PM ET
http://www.forbes.com/2008/04/02/volvo-gannett-swisscom-biz-2000global08-cx_sr_0402goodyields.html?feed=rss_news
We screened the Forbes Global 2000 roster for companies with healthy dividend yields. We limited the list to companies where analysts expect a payout ratio (see table footnotes) of 51% or less. The average yield for the companies on the accompanying table is 6.7% vs. 2.3% for the S&P 500 and 3.4% for the MSCI Barra EAFE index of foreign stocks.
Svenska Handelsbanken
Banking
$26.54
8.5%
13%
Sweden
Barloworld
Conglomerates
13.24
8.1
10
South Africa
Telkom
Telecommunications Services
17.05
8.0
8
South Africa
Bluescope Steel
Materials
7.86
5.6
45
Australia
Swisscom
Telecommunications Services
327.46
5.5
51
Switzerland
Gannett
Media
30.25
5.3
38
United States
Fletcher Building
Construction
6.74
5.2
39
New Zealand
Volvo Group
Capital Goods
14.33
6.4
11
Sweden
Prices are in U.S. dollars as of March 20.
* Indicated annual dividend rate divided by 2008 estimated earnings per share.
Sources: FT Interactive Data, FactSet Estimates, Thomson IBES via FactSet Research Systems; Thomson One Analytics
US Stocks at a Glance //Stocks up on bank, manufacturing news
NEW YORK - Wall Street rallied Tuesday, the first day of the second quarter, on news that two banks slammed by the credit crisis are working to raise cash and that U.S. manufacturing is faring better than expected. The Dow Jones industrial average soared more than 200 points.
Investors were pleased to hear that Swiss bank UBS AG said it will issue up to $15 billion in new stock and that its chairman, Marcel Ospel, had quit. Investors chose to look past the bank's announcement that it will take a fresh $19 billion write-down due to additional declines in the value of its mortgage assets and other credit instruments, following an $18 billion write-down last year.
UBS's decision to issue new stock arrived on the heels of a similar announcement by Lehman Brothers Holdings Inc. late Monday. The U.S. investment bank said it would sell 3 million convertible preferred shares due to "investor interest."
The pair of announcements buttressed the view that financial services companies are taking aggressive action to improve their capital bases. Shares of both UBS and Lehman surged Tuesday along with the rest of the financial sector. UBS's U.S. shares rose $2.99, or 10 percent, to $31.79, and Lehman rose $3.47, or 9 percent, to $41.11.
Meanwhile, Wall Street got another boost when the Institute for Supply Management said its March index of national manufacturing activity rose to a reading of 48.6 -- indicating a contraction, but a slower one than in February and tamer than many analysts had predicted.
Government data on construction spending for February also came in better than expected. The average economist was anticipating a drop of about 1 percent; instead, construction spending fell 0.3 percent in February compared to January.
The Dow Jones industrial average rose 217.48, or 1.77 percent, to 12,480.37. Broader stock indicators also gained sharply.
The Standard & Poor's 500 index rose 21.96, or 1.66 percent,
to 1,344.66, and the Nasdaq composite index rose 40.57, or 1.78 percent, to 2,319.67.
Treasury bonds fell as investors pulled their money out of the safety of government securities and placed it into riskier assets. The 10-year Treasury note's yield, which moves opposite its price, rose to 3.52 percent from 3.43 percent late Monday.
On Monday, Wall Street had managed a moderate gain in the final session of a dismal first quarter. Stocks prices and the major indexes ended the first three months of 2008 with massive losses, the casualties of the still continuing credit crisis. It was the worst quarter for the major indexes since the third quarter of 2002, when Wall Street was approaching the lowest point of a protracted bear market.
The stock market appeared revived on Tuesday, however. In addition to optimism about the financial sector, Wall Street was relieved to see the feeble dollar regain some strength against the euro. The euro fell to $1.5596 from $1.5785 late Monday in New York.
Investors also found solace in retreating commodities prices. Crude oil fell by $1.45 to $100.13 a barrel on the New York Mercantile Exchange, while gold dropped back below $900 an ounce.
The Russell 2000 index of smaller companies rose 10.29, or 1.50 percent, to 698.26. Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange. In overseas trade, Tokyo's Nikkei closed up 1.04 percent. There were gains in Europe too, with London's FTSE rising 1.50 percent, Frankfurt's DAX gaining 2.02 percent and Paris' CAC 40 advancing 2.02 percent.
Forex - Euro continues to slip against U.S. dollar as market awaits ISM data
LONDON - The euro continued to slip against the U.S. dollar after figures earlier showed a slump in German retail sales, while market players awaited the release of the latest U.S. ISM manufacturing index this afternoon. The weak German data, combined with the announcement of writedowns from UBS A.G. and Deutsche Bank A.G., has undermined any lingering hopes that Europe will not be badly affected by the sharp slowdown in the U.S.
"Negative news from the financial sector and a further deterioration in European macroeconomic data support the view that the euro zone economy cannot decouple from the U.S., and this is weighing on the single currency," said Manuel Oliveri, currency analyst at UBS.
Data released this morning revealed that high street sales in Europe's largest economy tumbled by 1.6 percent month-on-month in February on a real, seasonally adjusted basis, way below the 0.5 percent increase forecast by analysts. "This gives the lie to any suggestion that internal demand is driving the euro zone's largest economy," said Steve Pearson at HBOS.
Meanwhile, the sharp falls in commodity prices has also been cited as indicating a possible reversal in fortunes for the U.S. dollar. Neil Mellor at the Bank of New York Mellon pointed out that the drop in the gold price suggests that the market's focus is switching back towards growth worries and away from inflation worries, which previously had provided support to both gold and the euro.
"The fall in gold overnight has been matched one-for-one by the single currency's retreat," he said. Attention this afternoon will now turn to the latest ISM report on U.S. manufacturing, but if investors' concerns have switched to growth then a negative reading would provide little support for the euro, he believes. "If the pendulum of investor concerns over inflation and growth has indeed tipped more towards the latter, then the aforementioned associations could well mean that we have seen the peak in euro/dollar," he said.
Elsewhere, the yen was weaker across the board, with the U.S. dollar settling well above the 100 yen mark on growing pessimism about the outlook on the Japanese economy, highlighted by the latest quarterly corporate survey by the Bank of Japan. The Tankan survey, released overnight, showed that the business sentiment index fell more than forecast to 11 in March from 19 in December. It was the worst reading since December 2003.
London 1148 GMT Hong Kong 1.00 p.m. (0500 GMT)
U.S. dollar
yen 100.49 up from 100.13
Swiss franc 1.0053 up from 1.0018
Euro
U.S. dollar 1.5652 down from 1.5675
pound 0.7894 down from 0.7935
yen 157.42 up from 157.01
Swiss franc 1.5741 up from 1.5704
Pound
U.S. dollar 1.9839 up from 1.9750
yen 199.39 up from 197.84
Swiss franc 1.9940 up from 1.9786
Australian dollar
U.S. dollar 0.9095 up from 0.9093
pound 0.4584 down from 0.4603
yen 91.44 up from 91.09
Financials
Europe at a Glance
Euroshares extend gains midday, NY seen up, hopes subprime crisis bottomed out
At 12.15 p.m., the DJ STOXX 50 was up 50.64 points or 1.68 percent to 3,068.62, while the DJ STOXX 600 gained 4.80 points or 1.57 percent to 310.76.
In Europe, investors took massive writedowns from Swiss banking giant UBS in their stride, hoping that the announced 19 billion Swiss francs write-off implies that the worst of the crisis may soon be over. Shares in the stock rose 6.79 percent, and peers Barclays and Credit Suisse also advanced among others, up 4.6 percent and 5.14 percent respectively.
Deutsche Bank, which announced that it expects write-downs of around 2.5 billion euros related to leveraged loans and loan commitments in the first quarter, gained 3.2 percent. Traders said that while the news from UBS and Deutsche Bank was not positive, it was not unexpected and confirmed to many that the banking sector may be oversold.
Traders also noted a short squeeze in technology stocks today, with the sector advancing 3.70 percent in aggregate according to the DJ STOXX 600 for the industry. Nokia rose 5.64 percent, while Infineon gained 6.7 percent and Arm Holdings added 3.13 percent. The two chip makers were also given a boost by persistent talk that a recovery of chip prices may be imminent.
In earnings-related news, French video games maker Ubisoft Entertainment S.A. rallied 6.25 percent as investors welcomed news the group has raised its sales and margin guidance for the current financial year. As Natixis Securities analysts pointed out, last night's statement from Ubisoft was the fourth consecutive increase in sales and margin guidance from the video games group, maker of the blockbuster Assassin's Creed.
Anglo-Swedish drug maker AstraZeneca added 5.10 percent after it announced that positive results for its Crestor statin were supported by a US cardiovascular conference last night that showed Crestor showed a small benefit in cutting arterial plaque while Schering-Plough and Merck & Co's Vytorin fared no better than a generic rival.
In a note to clients, analyst Peter Cartwright at Evolution Securities said that AstraZeneca was the obvious beneficiary to negative data over Vytorin. In Germany, Heidelberger Druck slumped 10 percent after the printing machine manufacturer said it no longer expects to reach its guidance for the full-year which ended on March 31, due to a difficult market environment.
Turning to M&A talk, Alitalia jumped 9.17 percent as its fate rests on the success of a meeting between Air France-KLM management and the stricken airline's unions, which is due to take place on Wednesday at noon according to news agency Radiocor. Among chemicals, rumours of a 99 euro bid from DuPont for Germany's BASF resurfaced and sent shares in the latter 2.23 percent higher.
Meanwhile, France's Pernod Ricard added 5.33 percent in midday trading as bullish comment on the Vin & Sprit acquisition from analysts such as Citigroup, Lehman and Cheuvreux, helped offset concerns about the group's high leverage.
In broker action, BP was one of the heaviest underperformers on the STOXX 50 on Tuesday, down 1.76 percent, following a target cut at JP Morgan to 600 pence from 650 pence. The broker reiterated its 'neutral' stance on the stock and said there is a possibility that BP will end up as a minority shareholder in TNK-BP, its Russian joint-venture, as recent events have raised speculation of an attempt at a takeover of the latter by a state-controlled group.
The March purchasing managers index for the euro zone manufacturing sector confirmed that growth slowed a touch from the previous month, although price pressures continued to grow. They said the final reading of the purchasing managers' index for March was 52.0, unchanged from the flash estimate released last month, and down on February's 52.3. It was also the lowest reading since October.
Asia at a Glance
Asian stocks track Wall Street's rise; Japan shrugs off weak Tankan
The Nikkei 225 closed up 1 percent at 12,656.42 and the Topix was up 1.5 percent at 1,230.49. The Bank of Japan's latest Tankan survey showed that business sentiment among large manufacturers deteriorated in the first quarter as executives worried about a stronger yen, a weakening U.S. economy and rising oil prices.
The diffusion index for big manufacturers fell to 11 in March from 19 in December. Economists polled by Thomson Financial News were expecting, on average, a reading of 13. "In addition, the exchange rates predicted by manufacturers look very optimistic, which may mean the downward revision later of earnings forecasts and capital spending," Shimamine said.
The Tankan found that large manufacturers are predicting that the dollar will buy, on average, 109.21 yen in the fiscal year ending March 2009. The dollar was last trading at 100.33 yen. Still, investors in Tokyo snapped up export stocks, including Canon, which was up 2.4 percent, Sony up 2.3 percent, and Toyota Motor, up 1 percent.
The Kospi closed 0.1 percent lower at 1,702.25 as investors turned cautious after UBS AG announced plans for a fresh capital hike of 15 billion Swiss francs to make up for a further $19 billion in writedowns on US real estate and related structured credit positions.
Meanwhile, chipmakers extended their heavy gains for a third day on reports that major global chipmakers will raise memory chip prices in April. Samsung Electronics climbed 2.1 percent to 636,000 won. "We're considering a plan to raise dynamic random access memory (DRAM) chip prices slightly," Internet service edaily quoted investor relations chief Cho Woo-Sik as saying.
Rival Hynix shares were 0.2 percent higher at 27,900 won. The Hang Seng index closed up 1.26 pct at 23,137.46, as institutional investors bought large-caps at the start of the second quarter, helping the market end on a positive note despite further falls on mainland bourses.
The Shanghai Composite closed down 4.13 percent at 3,329.16 after the People's Bank of China said Monday it will continue to tighten monetary policy because credit and liquidity are growing too quickly and fixed-asset investment is rebounding.
The Australian benchmarks turned around, with the S&P/ASX 200 closing higher by 0.1 percent at 5,361.2 and the All Ordinaries index finishing up 0.1 percent at 5,414.5, after investors sought out bargains in the resources sector. The Philippines Composite closed 0.5 percent lower at 2,969.83. Taiwan's weighted index closed down 1.78 percent at the day's low of 8,419.72.
The Singapore Straits Times Index closed 1.3 percent higher at 3,056.54, and the Kuala Lumpur Composite Index (KLCI) finished up 0.2 percent at 1,250.41. The Jakarta composite index closed down 2.2 percent at 2,393.25.
The Bombay Stock Exchange's (BSE) 30-share Sensitive Index, or Sensex, ended 17.82 points or 0.11 percent lower at 15,626.62 and the National Stock Exchange's (NSE) broader 50-share S&P CNX Nifty showed the a similar percentage movement on the other side, edging up 0.11 percent to close at 4,739.55 points.
Metals - Copper down amid firm dollar, commodity sell off.
LONDON - Copper fell as investors pulled out of the commodity sector amid dollar strength but falling stocks limited losses.
Sentiment was weak across the board as a firmer dollar made commodities priced in the greenback relatively more expensive for those trading in stronger currencies. The euro fell to a six-day low against the U.S. dollar after figures released earlier today showed an unexpected slump in German retail sales.
Enduring strong fears of weak demand ahead while the credit crunch persists also hammered copper's price. "It looks like the metals are starting on a weak note and that is likely to lead to consolidation possibly at lower numbers, but overall we would expect some bargain hunting before too long," said BaseMetals.Com analyst William Adams.
This morning, the LME reported copper stocks fell to a fresh eight-month low, which should go some way in limiting losses.
"LME inventory levels have fallen to just 3.5 days of global consumption. Copper prices should remain relatively high on this basis alone while further funding of commodity futures could pull prices higher," said John Meyer, Fairfax analyst. "Chinese traders staying out of market in anticipation of lower prices despite falling inventories in LME warehouses and official Shanghai warehouses."
At 11.20 a.m. BST, LME copper for three-month delivery was down at $8,200 per tonne against $8,390 at the close yesterday.
Looking ahead, players will track the dollar's movements and watch markets for any more bad news over the economy to gauge its impact on future metals demand. With the release later today of the ISM numbers and U.S. Fed chairman Ben Bernanke's testimony to Congress tomorrow, players are likely to sit on the sidelines until the data is released.
So far this year, commodity prices including copper have hit new records as investors favoured raw materials in the wake of an economic slowdown. "The run up in commodities in Q1 has seen volatility readings soar and as such some of the froth probably needs to come out of the market before investors see value again, while the relatively weak equities probably offer a better opportunity for a run to the upside in the short-term," said Adams at Basemetals.Com.
Elsewehere in other metals traded on the LME, lead for delivery in three months was down at $2,765 per tonne against $2,790, aluminium eased to $2,920 per tonne from $2,990 and zinc was down to $2,274 per tonne from $2,320 at the close on Monday. Three-month nickel dipped to $29,225 per tonne from $29,755, while tin fell to $20,150 per tonne from $20,550.
BKCC
This likely explains the dip today - but just a better buy at 10.77, IMO:
Commercial Finance Firms' Risk Rises
Wednesday March 19, 2:24 pm ET
Analyst: Commercial Finance Firms' Credit Risk Reflected in Current Valuations
NEW YORK (AP) -- Commercial financing firms are likely to face credit risk in 2008 as credit markets and the economy continue to worsen, but those risks are reflected in current valuations, Wachovia Capital Markets LLC analyst Jim Shanahan wrote in a research note Wednesday.
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"Business conditions have certainly moderated and a recession is admittedly likely to entail substantially higher percentages of non-performers," Shanahan wrote in the note. "However, we are closer to reaching a point where valuations fully reflect the pending credit problems, in our view, absent a complete collapse in business conditions."
Shanahan said commercial finance firms, which provide loans and invest in other companies, will be most affected by financing companies that provide services in the housing, real estate, financial, auto and consumer sectors.
Newstar Financial Inc. and CapitalSource Inc. have the greatest exposure to those markets, Shanahan said. CapitalSource is experiencing credit weakness in corporate finance and commercial real estate, Shanahan said.
CapitalSource shares fell 48 cents, or 4.3 percent, to $10.79 in afternoon trading.
Shares of Newstar Financial rose 9 cents to $4.84.
Shanahan said Ares Capital Corp. and BlackRock Kelso Capital Corp. have the least exposure to the troubled sectors. Despite its more limited exposure, Ares Capital in the fourth quarter increased the number of loans it categorizes as underperforming, Shanahan wrote in the note.
Ares Capital shares fell 3 cents to $12.74.
Shares of BlackRock Kelso Capital fell 77 cents, or 6.3 percent, to $11.47.
Shanahan did add that despite short-term problems the companies might face, the sector's long-term outlook is solid.
By Michael Liedtke, AP Business Writer
Visa IPO Charges Ahead Despite Economic Worries, Raising Nearly $18 Billion
http://biz.yahoo.com/ap/080319/visa_ipo.html
SAN FRANCISCO (AP) -- The credit crisis that has been haunting the stock market for months wasn't enough to scare investors away from the IPO of the world's largest credit card processor.
Overcoming the jitters that have battered many of the lenders that issue its cards, Visa Inc. sold 406 million shares at $44 apiece late Tuesday to raise nearly $18 billion and complete the most lucrative initial public offering in U.S. history.
The price topped the range of $37 to $42 per share that Visa set three weeks ago, reflecting high demand to own a piece of a company that's promising earnings growth of 20 percent despite a credit crunch that's choking the U.S. economy.
"This shows that all the recent financial turmoil obviously hasn't bothered a lot of people," said Nicholas Einhorn, an IPO analyst for Renaissance Capital of Greenwich, Conn.
Investment bankers could still exercise an option to buy another 40.6 million Visa shares during the next 30 days. If that happens, Visa's IPO will end up raising $19.7 billion before expenses.
Visa faces another litmus test Wednesday when its shares are scheduled to begin trading on the New York Stock Exchagnge under the "V" ticker symbol. The San Francisco-based company will make its debut with a market value of about $36 billion.
Based on the strong demand among money managers who wanted a piece of the IPO, Einhorn anticipates Visa shares will quickly soar above $50.
Visa has been touting its stock as a safe haven -- a message that apparently resonated with investors.
"In times like this, you generally see a flight to quality," said Joel Greenberg, a New York attorney who has advised on other IPOs.
Unlike credit card lenders, Visa doesn't carry any consumer debt on its books. The company makes its money from processing fees, which have been steadily rising for years, including the past two U.S. recessions in 1991 and 2001.
Since the last recession, Visa also has been able to entice consumers to use its credit and debit cards more frequently to pay for staples like groceries, gas and even utility bills. Visa estimates about 42 percent of its transactions fall into this "nondiscretionary" category, up from 27 percent in 2000.
Visa conceivably could benefit from tougher times if more cash-strapped consumers rely on their credit cards to make ends meet, said Aite Group analyst Gwenn Bezard. "And even if people can't pay back the debt, Visa still makes money. It's a very attractive company."
The IPO should help bolster the wobbly financial services industry as banks write off billions of dollars in loans that have soured amid the worst housing slump since the 1930s.
More than $10 billion of the IPO proceeds are being used to buy back some of the shares owned by the banks that have helped build Visa during the past 50 years.
JPMorgan Chase & Co., Visa's biggest customer and shareholder, is in line for the biggest payoff from Tuesday's IPO -- about $1.25 billion, based on figures provided in Securities and Exchange Commission documents.
That's five times more than New York-based JPMorgan has agreed to pay in a proposed takeover of investment bank Bear Stearns Co., a major casualty of the credit crisis.
Other big winners in Visa's IPO include: Bank of America Corp., expected to receive roughly $625 million; National City Corp., about $435 million; Citigroup Inc., about $300 million; and U.S. Bancorp and Wells Fargo & Co., both getting more than $270 million.
All the banks will remain major Visa shareholders.
The IPO also is expected to generate more than $500 million in fees for Visa's team of investment bankers, led by JPMorgan and Goldman Sachs & Co.
Besides paying banks, Visa is depositing $3 billion in an escrow account to insulate its shareholders from lawsuits alleging the company profited by stifling competition.
Those legal headaches are one of the chief reasons that Visa decided to go public and pose the biggest investment risk in the IPO, Bezard said.
The IPO gives investors a chance to profit from the rise of electronic payments as more people eschew cash. The trend is expected to accelerate in the years ahead as an entire generation weaned online grow up to enter the job market and begin buying more merchandise and services on the Web, where electronic payments are standard.
Visa already dwarfs its closest competitor, MasterCard Inc., whose stock has more than quintupled since that company went public less than two years ago.
But analysts say Visa priced its IPO more aggressively than MasterCard, making it less likely that its stock will appreciate as dramatically in the months ahead.
Visa processed 44 billion transactions totaling $3.2 trillion in 2006, according to the Nilson Report, an industry newsletter. MasterCard handled 23.4 billion transactions totaling $1.9 trillion in the same year.
Hurt by legal expenses, Visa suffered an $861 million loss on revenue of $5.2 billion in its last fiscal year ended Sept. 30. Visa bounced back in its fiscal first quarter with a $424 million profit, a 70 percent increase from the previous year.
Fed delivers 3/4 point cut
Tue Mar 18, 2008 8:21pm EDT
http://www.reuters.com/article/newsOne/idUSN1762124220080319?sp=true
WASHINGTON/NEW YORK (Reuters) - The Federal Reserve slashed U.S. interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings.
Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration.
"A lot of people were hoping for a full percentage point, so a lot of people are probably disappointed," said Robert MacIntosh, chief economist at Eaton Vance Management, in Boston. "I don't think they should be. Inflation is an issue."
Global stock markets were up early in the day in anticipation of the Fed's move and on stronger-than-expected earnings news from Goldman Sachs Group Inc and Lehman Brothers Holdings Inc. By the end of U.S. trading, the Dow Jones industrial average jumped 420 points, or 3.5 percent, while the Nasdaq and S&P 500 indices rose more than 4 percent.
The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut.
But U.S. Treasuries fell as investors poured into stocks.
The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 percent, the lowest since February 2005.
"The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy," said Arun Raha, a senior economist with Swiss Re, in New York.
"It clearly does not believe that the action it took last week to expand its securities lending program, or its emergency measures over the weekend to increase market liquidity, are enough. The economy is in, or close to, a recession, but increasing oil prices have kept inflationary pressures from abating, complicating the Fed's task."
MARKET, ECONOMIC STRESS
The central bank has now cut rates by an aggressive 3 percentage points since mid-September, including 2 points since the start of the year. In addition, it has said in recent days it would provide around $400 billion worth of liquidity to thaw frozen credit markets.
"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the central bank said.
"There's been tremendous panic, people throwing the baby out with the bath water, preparing for a Category 5 hurricane, and that presents a buying opportunity," said Chip Hanlon, president of Delta Global Advisors Inc in Huntington Beach, California.
Goldman Sachs, which has largely avoided the mortgage-related losses that have plagued much of Wall Street, said first-quarter earnings fell by half as it recorded steep losses on corporate loans and other assets. Yet the results at the largest U.S. investment bank exceeded expectations.
Lehman Brothers, whose shares have been pummeled in recent days on concern it is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns, suffered a sharp fall in bond trading revenue but benefited from rising merger advisory revenue.
RISKS REMAIN, READY TO ACT
In a statement outlining its rate move, the Fed said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to lowering borrowing costs further if needed.
However, in the first double-dissent since September 2002, two officials -- Philadelphia Federal Reserve Bank President Charles Plosser and Dallas Fed chief Richard Fisher -- voted against the decision. They preferred less-aggressive action out of a concern sharp rate cuts could further fuel inflation.
Still, the Fed said it expected inflation to ease, partly because unemployment looked set to rise.
"The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," said K. Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in Greenwich, Connecticut.
The rate action came two days after the central bank announced up to $30 billion in financing to facilitate the sale of cash-strapped investment bank Bear Stearns, an unusual intervention bank officials said was necessary to prevent cascading defaults in the financial system.
Its backing for JPMorgan Chase and Cos agreement to buy Bears Stearns was one of a number of emergency steps the Fed announced on Sunday.
It also said it would extend loans to a wider array of Wall Street firms, not just commercial banks, for the first time since the Great Depression.
In addition, the Fed lowered the interest rate on "discount window" lending by a quarter-point on Sunday. On Tuesday, in concert with its decision to cut its target for overnight interbank lending by three-quarters of a point, it lowered the discount rate again by a matching amount, to 2.5 percent.
"The Fed is not only providing low-cost oxygen to the markets at a critical point in the business and credit cycle, it has also increased the flow of this oxygen quite significantly," said Brian Bethune, an economist for Global Insight in Lexington, Massachusetts.
Markets set for big Fed rate cut as turmoil persists.
Tue Mar 18, 2008 7:31am EDT
http://www.reuters.com/article/newsOne/idUSN1762124220080318?sp=true
WASHINGTON/LONDON (Reuters) - The U.S. Federal Reserve is expected to slash interest rates by as much as a whole percentage point at its policy meeting later on Tuesday as investors warily await investment bank results that could aggravate fears of a full-blown markets crisis.
Traders expect the Fed to cut rates aggressively in an effort to stop hemorrhaging in financial markets and boost the flagging economy. The Fed is expected to announce its decision around 2:15 p.m..
The Fed has cut overnight rates by 2.25 percentage points to 3 percent since mid-September as a rise in defaults on subprime mortgages has escalated into a financial crisis that this weekend claimed one of Wall Street's most venerable firms, investment bank Bear Stearns, as a victim.
In the midst of what many analysts say is the worst financial crisis in decades, economists and traders expect the Fed to deliver its biggest rate cut since 1982.
In mid-morning trade in London, Fed funds futures contracts were fully discounting a one percentage point cut and indicated a one-in-five chance the Fed will slash benchmark borrowing costs by as much as 125 basis points.
Before the market open, however, investors will focus on the quarterly results from Goldman Sachs Group Inc, the most profitable U.S. investment bank, and Lehman Brothers Holdings Inc, the fourth-largest.
Lehman's stock closed down almost 20 percent on Monday, meaning it has lost some 50 percent of its value this year, as speculation mounts that it might be facing similar mortgage- and leveraged loan-related problems that led to Bear's demise.
Lehman and Goldman are expected to show how badly they were hit by the credit crunch in the three months ended February 29 -- and any major shocks could send markets into another tailspin, especially given the vulnerability of the financial sector exposed by the firesale of Bear Stearns to JPMorgan Chase.
In this environment, markets expect aggressive Fed action.
"Just because we're in uncharted waters doesn't mean the situation can't get worse," Kenneth Broux, financial markets economist at Lloyds TSB in London, said.
"You've got to get rates as low as possible and leave them there. There aren't many alternatives," he said, acknowledging that there were inflationary risks involved in adopting such expansionary policies.
The Fed has already taken a series of radical steps in an attempt to stabilize the financial system.
It narrowed the gap between the discount rate -- the rate at which it lends directly to banks -- and the federal funds rate, the overnight rate banks charge each other for loans and the Fed's main policy tool, from three-quarters of a percentage point to a quarter point.
The U.S. central bank also unleashed a barrage of other unorthodox steps to provide liquidity, including $30 billion in financing to enable JPMorgan to buy Bear Stearns. In addition, it set up a new program to provide cash to a wider range of big financial firms through loans at the Fed's discount window.
Stability returned on Tuesday to European banking shares which have been battered by growing investor concern about the global financial sector's security.
Banks by mid-morning were pushing the broad market higher as the biggest gainers on the FTSEurofirst 300 index of leading European shares, following days of heavy losses.
INFLATION ON BACK BURNER
Against the market upheaval, fears that a seizing up of the financial system could plunge the U.S. economy into deep recession have overtaken worries about inflation fueled by high oil and commodity prices.
"With the recent market turbulence, those inflation concerns are now taking a backseat, and the (Fed) has to think about the action that not only is appropriately aligned with the forecast but that also supports financial markets at a time of extraordinary turbulence and systemic risk," Laurence Meyer, a former fed governor now with forecasting firm Macroeconomic Advisers, said in a note to clients.
The Fed has focused efforts in recent days on surprise steps to make funds available to banks and Wall Street firms, offering hundreds of billions of dollars in auctions and credit to thaw frozen credit markets.
Policy-makers may have hoped that recently announced emergency actions, such as expanded cash auctions for banks and the extension of credit to a wider array of Wall Street firms, would remove the need for a deep interest rate cut. But officials will have to take stock of gloomy data on hiring, factory output and retail sales.
Lehman, which many observers believe is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns, is expected to report its quarterly earnings tumbled 63 percent, according to Reuters Estimates.
Goldman Sachs, which in previous quarters succeeded in escaping the worst of the subprime mortgage crisis thanks to some well-timed short bets on subprime debt, is also expected to have run into tougher times over the past few months.
Goldman, Wall Street's top brokerage by market capitalization, is expected to report earnings fell by more than half from the year-ago quarter, and one UK press report over the weekend said it could unveil writedowns of some $3 billion.
And if Goldman and Lehman earnings weren't enough drama for one day, the market will have another major event to chew on late in the day: Visa Inc's initial public offering, the largest U.S. stock flotation ever.
How to turn a Billion into millions, a trick that can
happen overnight or two
http://online.wsj.com/article/SB120571021671940207.html
A DEAL FOR BEAR STEARNS
A Stake Through the Heart/Bear's Biggest Holders May Have Little Choice But to Cut Their Losses
By CASSELL BRYAN-LOW and KATE KELLY
March 17, 2008
British billionaire Joseph Lewis made his fortune gambling on currencies. His recent investment in Bear Stearns Cos. has turned out to be a disastrous bet.
The elusive septuagenarian is one the biggest losers from the New York investment bank's problems. In just a few months, he has paper losses of about $800 million on his roughly 9.6% stake in Bear, whose share price has cratered in recent days.
A small cadre of investors, often considered some of the best in the business, own big stakes in Bear that aren't looking good. A number of these shareholders are the type of investors who ordinarily would take a hard line in a sale, demanding a higher price. But with Bear on the brink, they may have little choice....{Fear and Greed, bad things man, bad things}
Among the stakeholders: James Barrow, a Dallas money manager who runs the firm Barrow, Hanley, Mewhinney & Strauss Inc., is the single biggest investor, with a 9.95% stake, according to recent regulatory filings. Bear Stearns Chairman James Cayne, who stepped down as chief executive in January amid criticisms by some investors that he was too hands-off when the mortgage mess unfolded, holds a stake just under 5%. So does activist investor Bruce Sherman, the CEO of Naples, Fla., money-manager Private Capital Management Inc., a unit of Legg Mason Inc., recent regulatory filings show.
Sherman, who persuaded the media company Knight Ridder Inc. to put itself up for sale in 2005, has taken a more active stance with Bear in recent months, say people familiar with the matter. He closely questioned Bear lead director Vincent Tese about the investment bank's problems last summer and made his dissatisfaction with Mr. Cayne clear to Bear officials in the weeks preceding Mr. Cayne's early-January resignation as CEO, these people said. Mr. Sherman's firm held 5.5 million Bear shares as of Dec. 31, 2007, or a 4.8% stake. Those 5.5 million shares at Friday's close were valued roughly at about $166.5 million, down 80% from a year ago.
Mr. Sherman was unavailable to comment, a spokesman said yesterday. Mr. Lewis was unavailable to comment, a spokesman said. An assistant in Mr. Cayne's Bear office said he was in a meeting and unavailable for comment. Mr. Barrow didn't respond to a request for comment.{{They have him strapped down on a gurney, while he still tries to give everyone the finger}}
Mr. Lewis made his fortune as a currency trader, once amassing a 30% stake in auctioneer Christie's International PLC, and has spent the past decade investing in an array of businesses, including real estate, oil and gas, and sports.
He now lives in the tony Lyford Cay development in the Bahamas. He got involved with Bear first as a client and became a major investor last year.{{He will be moving to downtown Detroit soon, and is now eating caviar helper it has been reported}}
Mr. Lewis long has been a client of Kurt Butenhoff, one of Bear Stearns's heavy hitters in private-client services. Mr. Butenhoff brought the relationship with him to Bear from Salomon Bros., where Mr. Butenhoff was a high-net-worth broker in the early 1990s.
Mr. Lewis began rapidly building his stake in Bear Stearns last summer, shortly after the bank announced that two internal hedge funds had imploded. In December, his stake rose to just under 10% from about 7% when Bear's stock price fell below $110, forcing him to make good on an options trade he had made with another party.
Mr. Lewis could have sold his obligation to buy and washed his hands of an unlucky trade. Instead, he chose to exercise his options, filings show, acquiring hundreds of thousands of new shares. He owns more than 11 million Bear Stearns shares, according to a December regulatory filing. {{OUCH}}
Friday, Bear's shares fell 47% to a nine-year low of $30 in New York Stock Exchange composite trading after the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep the firm afloat following a severe cash crunch. It doesn't appear from reviews of regulatory filings that Messrs. Sherman, Cayne, Barrow and Lewis have sold shares in recent weeks.
The son of a cafe owner in London's East End, Mr. Lewis started work there and later expanded the family business to create a small empire of theme restaurants. He acquired the nickname "the boxer" in part because his name is similar to boxing legend Joe Louis and also because of his shrewd approach to business.
Mr. Lewis's recent endeavors have included developments in central Florida, where he owns Isleworth and another gated community. About six years ago, Mr. Lewis purchased a stake in Tottenham Hotspur PLC, a soccer club based in northeast London. A keen golfer, Mr. Lewis hosts the Tavistock Cup tournament and has befriended golf star Tiger Woods.
JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount
______________________________________________________________
By ANDREW ROSS SORKIN and LANDON THOMAS Jr.
THE NEW YORK TIMES
March 16, 2008
Bear Stearns, facing collapse because of the mortgage crisis, agreed Sunday evening to be bought by JPMorgan Chase for a bargain-basement price of less than $250 million, the two companies announced.
The all-stock deal values Bear Stearns at about $2 a share, based on JPMorgan’s closing stock price on Friday, the companies said. In contrast, shares of Bear Stearns, which fell $27 on Friday, closed at $30.
A deal for Bear Stearns would end the independence of one of Wall Street’s most storied firms and help halt a sweeping panic that set in at the end of last week, causing Bear Stearns’s stock to swoon 47 percent on Friday.
The talks between the companies, which were overseen by the Federal Reserve and the Treasury Department because of their potential effect on financial markets, were rushed in an effort to reach a deal before stock markets open in Asia at 8 p.m. Eastern time.
Bear Stearns’s chief executive, Alan D. Schwartz, and other top Bear executives huddled in all-day meetings at the firm’s Madison Avenue headquarters, trying desperately to persuade skeptical potential suitors that the firm was worth buying for a price that would likely represent a steep discount to its book value, considered the truest measure of the financial health of a banking institution.
JPMorgan was working with the Federal Reserve on Sunday afternoon to hash out exactly what liabilities would be guaranteed, said people involved in the talks, who insisted on anonymity because they were not authorized to speak publicly about the negotiations.
On Friday, JPMorgan, with the backing of the Federal Reserve Bank of New York, said it would provide financing in order to keep Bear Stearns solvent as lenders and clients rushed to pull their money out.
Bear Stearns’s stock price of $30 on Friday represented a yawning 62 percent discount to the $80 book value that the firm has reported, reflecting the broad view among investors that the fallout from the credit crunch has permanently devastated Bear’s core mortgage operations. JPMorgan’s bid of $2 a share, however, represents a 97.5 percent discount.
JPMorgan appears to have concluded that the business of one of Wall Street’s oldest investment banks is worth far less than the value of the firm’s Midtown Manhattan skyscraper, which is probably worth at least $1 billion.
Wall Street analysts say the sudden collapse of Bear Stearns is not likely to set off a wave of consolidation in the beleaguered financial services industry.
That is because the same fear that has paralyzed the markets has paralyzed buyers.
There is little faith in the assigned or “marked” value of so many assets, including but not limited to mortgage-related securities. In fact, the experience of Bear Stearns proves that it is confidence, not capital, that topples even the savviest financial institutions.
“Once you have a run on the bank you are in a death spiral and your assets become worthless,” said David Trone, a brokerage analyst at Fox Pitt Kelton. “If JPMorgan can pull off a rescue, the assets can be saved,” he argued. But if not, the assets may lose their value.
Bear Stearns’s hedge fund servicing business and its clearing operations have traditionally been profitable operations, though they have suffered in recent months as investors and lenders have lost confidence in Bear.
JPMorgan, the private equity investor J.C. Flowers and others have been poring through Bear Stearns’s books since Friday, with the assistance of Samuel Molinaro, Bear’s chief financial officer, and senior members from the firm’s bond and mortgage operations.
Throughout much of its history, Bear Stearns has masterfully persuaded the market that its business — narrowly focused on mortgage finance — was worth more than it actually was. To some degree this trick has been a testament to the coy gamesmanship of two of its past leaders, Alan “Ace” Greenberg and James E. Cayne.
Both men are devout bridge players, and Mr. Greenberg is an amateur magician to boot, so they are well schooled in the art of not showing their hand. Mr. Cayne’s hint eight years back — that he would sell the firm only for four times its book value — was even then a flight of financial fancy.
Wall Street investment banks rarely command such a premium to their book value, given the inherent and unpredictable risks of their business. Nevertheless, Mr. Cayne and Mr. Greenberg were adept at spreading the view that Bear Stearns was constantly being pursued by buyers as varied as European commercial banks and even banks like JPMorgan, though it was never clear that any of these talks reached a serious level.
But Bear Stearns’s quirky culture and the high pay it awarded its senior executives made it a difficult fit for larger, more staid institutions, and it always seemed that Mr. Greenberg and Mr. Cayne were having too much fun running their business to sell it to an outsider.
Now Mr. Schwartz, a longtime investment banker whose approach to deal-making is more pragmatic and results-oriented than his predecessor, raced against the clock to seal a deal that salvages some measure of value for shellshocked Bear Stearns employees, who own more than 30 percent of the firm, and its investors.
“Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties,” Mr. Trone said. “If you take chunks out of that confidence, things can go awry pretty quickly. It could happen to any one of the brokers.”
Copyright 2008 The New York Times Company
AP/After Bear Stearns, Who May Be Next?
Friday March 14, 9:00 pm ET
By Madlen Read, AP Business Writer
Bear Stearns' S.O.S. to Fed Raises Worries About Which Bank Might Be Next
http://biz.yahoo.com/ap/080314/bear_stearns_q_a.html
NEW YORK (AP) -- After Bear Stearns Cos. said Friday it will have to borrow money through JPMorgan Chase & Co., backed by the New York Federal Reserve, investors are curious: What does this mean for other banks, and who might be next?
Q:Is this going to happen to other investment banks?
A: Nobody knows for sure, but it could. Until proven otherwise, the market will probably act as if there are more near-collapses to come -- just as it did on Friday, when investors sold off their bank holdings and sent the Dow Jones industrial average down 200 points.
"Even though Bear was probably on the fringe, pushing the envelope anyway, traders are saying that because it happened, it could happen to somebody else," said Brandon Thomas, chief investment officer for Portfolio Management Consultants, the investment arm of Envestnet.
Q: Which other institutions might need funding?
A: Bear Stearns has been the weakling among the five reigning Wall Street investment banks: Bear, Merrill Lynch, Morgan Stanley, Lehman Brothers and Goldman Sachs. Many market watchers will recall that last spring, Bear was the first of these institutions to reveal big problems with mortgage-linked debt when it had to pump cash into two hemorrhaging hedge funds.
Also, Bear is the smallest of the five big investment banks, the least diversified, and the biggest issuer of mortgage-backed securities.
But Lehman Brothers Holdings Inc. appears to be an investment bank that investors are very worried about right now -- mainly because it is the investment bank that is most similar to Bear in structure and exposure. Its stock dropped more than 14 percent on Friday.
Banks gave Lehman a vote of confidence of sorts, however, on Friday -- Lehman Brothers said its new credit facility was "substantially oversubscribed," and that some of world's largest banks participated.
Other banks certainly have their own troubles -- Merrill Lynch, for one, wrote down more than $14 billion in the fourth quarter as the value of bonds and debt backed by souring mortgages fell.
However, "there's not the same questioning of their franchise. It's not anyone saying, what are they going to do for a living next year," said Tanya Azarchs, S&P banking analyst.
"At the same time, though ... the markets are very nervous, very skittish. Asset prices are very volatile. The repo markets are very tight, very illiquid. When the repo markets are illiquid, things can get very unpredictable."
The repo, or repurchase, markets are temporary loan markets that are relied upon by banks, hedge funds and other investors to invest their extra money or borrow against collateral.
Q: What will happen to Bear Stearns?
A: Few industry experts believe the 28-day loan will be enough for Bear to become liquid on its own again -- most are viewing it as delaying tactic as Bear and the Fed figure out how to proceed.
It is possible Bear will be bought, perhaps by JPMorgan.
If that happens, the buyer would have take over Bear Stearns' $176 billion worth of distressed securities and its $42 billion in loans -- not a rosy prospect for even a healthy bank. Furthermore, there are regulatory issues that may arise if a commercial bank wants to buy Bear's troubled assets.
Another scenario is that the Fed attempts to organize an orderly winding down of Bear Stearns into a much smaller company by selling off its assets.
Q: How is Bear's loan different than other steps troubled financial institutions have taken?
A: Bear Stearns is not the first company to seek out cash -- Citigroup Inc., Merrill Lynch and Morgan Stanley have pulled in several billion dollars by selling stakes to outside investors, including foreign governments, while the bond insurer MBIA Inc. sold a significant stake in itself to JPMorgan, Lehman Brothers and other investors.
But Bear Stearns' agreement with JPMorgan is not a stake sale -- it's financing planned and backed by the U.S. government.
Q: Why can't the Fed just let Bear Stearns collapse?
A: Typically the Federal Reserve bails out struggling commercial banks, but because Bear Stearns is inextricably linked to a huge number of institutions, a failure could cause "a ripple effect," said Ali Samad-Khan, head of operational risk management consulting for the Enterprise Risk Management practice at Towers Perrin.
"They probably fall into the too-big-to-fail category," he said. "The fact is, they recognized that this is an important enough issue for them to get involved in."
Bear Stearns is interconnected with other banks, hedge funds and investors that are its "counterparties." Essentially, if Bear can't meet obligations to these counterparties, those counterparties will lose their money.
Big banks like Citigroup Inc. could see big losses but are probably large and diversified enough to survive them.
But smaller players on the edges -- particularly hedge funds -- are at risk of going under if Bear can't repay them.
A Carlyle Group fund has already said it is near collapse. Failing hedge funds could be another hit to major banks, who have lent huge amounts of money to the funds.
Hi DofA,
Thanks for your concerns. I greatly appreciate your comments.
In this case they are using the money to expand their market share which I think will ultimately payoff for investors. While the market is in the tubes my feeling is that management seems to know what they're doing and I think their dividend should be safe for a while.
FWIW and in IMHO
Abreis
This is from the the newswire:
Medical Properties Trust Inc., a health care facility real estate investment trust, said Friday it will buy some health care facilities from HCP Inc. for about $371 million.
Medical Properties Trust said the acquisition will significantly expand its holdings and broaden its geographic range.
This is from someone who follows the company from the Yahoo board:
Quick and Dirty First Take on HCP deal 14-Mar-08 09:26 am Here are a few quick and dirty calculations, based on the announced deal parameters of 21 new hospitals for $371mm, financed via $300mm in new debt and the sale of 11mm new common shares. The 21 hospitals generated $33.4mm in cash rents in 2007, which would presumably continue.
(1) In 2007, MPW generated $96.9mm in revenues, or $2.01 per share on 52.1mm in outstanding shares. Post HCP deal, MPW will presumably generate $130.3mm in revenues, or $2.07 per share on $63.1mm in outstanding shares.
(2) If the 11 million shares are sold for as little as $11 per share (I dunno how they'll be priced, but I think this is pretty conservative), MPW would be bringing in $421 in cash, including new debt, and spending $371 million. So the company's cash would go up by $50mm, from $94mm at present to $144mm, or from $1.80 per share to $2.35 per share.
(3) Debt service on the $300 million in new debt should be adequately covered by the $33.4mm in additional revenue, certainly leaving enough "left over" to fund about $1.2mm in divvys on the 11mm new shares at the current $1.08 annual dividend rate.
More important considerations include how MPW management will fare with these new hospitals (whether they will be more or less efficient that HCP's management team), and how this acquisition and the previously announced Vibra deal work together. (I have simply ignored the impacts of the Vibra deal on revenues and cash in the above quick and dirty.)
So all in all, a quick first glance indicates the deal wilt not be dilutive of a couple of key per share financial measures, and is therefore at least OK, and maybe better than that, for us existing MPW shareholders. I'll add a few more MPW shares if we get a knee-jerk market reaction to the newly introduced uncertainties and the share dilution that the HCP deal entails.
MPW Exchangeable Senior Notes...
Abreis, you might find the prospectus regarding a new share issuance by MPW of importance with respect to your recent purchase...
see: http://www.sec.gov/Archives/edgar/data/1287865/000095014408001923/g12259e424b5.htm
I'm not a financial expert (just a retired anatomist), but I worry when a company makes a private placement of exchangeable notes concurrent with a public offering of stock... It opens up a possible short opportunity for those who receive the private placement. Often the stock price drops dramatically in such situations when the float is relatively small.
The risk factors in the prospectus are explicit.. They detail how the dividend might be jeopardized by the companies current acquisition plans.
Picked up some MPW today. I like the chart, low amount of shares outstanding and track record. Best of all it's paying over 9%. See below from some recent analyst comments. IMHO -FWIW
ABreis
PMedical Properties Trust Inc. (NYSE: MPW) operates as a real estate company that acquires and provides funds for healthcare facilities. MPW meets the requirements for this profit track with a dividend yield of 9.09%. The company's fourth quarter net income increased by 16% and the annual income amounted to $41.2 million, compared to $30.2 million. On Feb 28, MPW declared a quarterly dividend of 27 cents, which will be paid on Apr 11.
______________________________________________________
Known as a defensive stock pick, health care real estate investment trusts could prove to be a shot in the arm for investors.
As most REIT stocks plunged last year, health care REITs -- which invest in nursing homes, medical office properties and assisted living communities -- stayed above water, posting 2.1 percent in annual returns. Usually publicly traded, REITs invest in real estate or lend to building developers and distribute most of their earnings to shareholders annually.
Drake's rocky passage/Once a golden child of the hedge fund industry, a former high-flyer's management faces some brutal choices.
By Roddy Boyd, writer
http://money.cnn.com/2008/03/12/news/companies/boyd_drake.fortune/index.htm?section=money_topstories
NEW YORK (Fortune) -- A high-profile New York hedge fund has notified its investors that it is pondering shutting several of its key portfolios because of a brutal combination of poor performance and lack of liquidity in key markets.
Drake Management, a once-high-flying bond fund manager whose flagship fund returned an astounding 41% in 2005, has been in hot water for several months as a series of large trades moved against the fund.
Last year, the once-$3 billion Global Opportunities fund dropped around 25%, leading investors to flood Drake with $1 billion in redemption requests in early January. On February 29, fund management suspended withdrawals from another series of its funds, the Low Volatility Fund group.
In a letter to Drake's investors sent last night - which Fortune obtained - fund management laid the out the stark choices management is pondering for its investors: Wind down its Global Opportunities funds, invest in a new fund or hold on, hoping the markets turn around. The wording of the letter implies that fund management hopes that investors will seek to invest in a new Drake fund.
The fund restructuring, if its investors allow it, represents a massive reversal of fortune for the Fifth Avenue-based investment manager, which had nearly $7 billion in hedge fund assets under management as recently as last year, and $10 billion firm-wide.
That Drake's Global Opportunities fund finds itself in these dire straits is odd, given that it is a macro-fund, with a charter allowing it to invest in most asset classes.
Many of its peers in the macro strategy have had a good start to the year, at least according to the CS/Tremont index, posting an average gain in January of 4.44%.
Many funds in this sector continue to post outsize gains on bets against the dollar and on the rising price of oil.
While it is not clear how precisely Drake wound up in such trouble, hedge fund-of-fund managers who have monitored the Global Opportunities fund and its performance told Fortune that Drake put on a series of trades last fall that did not work out. These included betting on the decline of the price of the dollar versus the yen, a drop in long-dated Treasury bond prices and a rally in U.S. stock-market prices.
All three bets failed. When the trades did not pan out, Drake's Global Opportunity was forced to book a 14% loss and then suffered another 10% decline in November.
Soon after, the fund was forced into an all-too typical scenario: Increased margin requirements and requests for additional collateral. Drake's letter also references "predatory trading" with respect to its counter-parties, the big brokers. This means that dealers are no longer risking their own capital, or even providing narrow bond bid-ask spreads, to Drake in a bid to win the fund's trading business. In essence, the brokers know that the fund is weak and have little risk in trading against it.
Also, its large fixed-income holdings in its other hedge funds suffered from a decline in prices and liquidity as the credit crisis spread across the bond spectrum.
An outside spokesman for Drake declined comment
Credit Crunch/The Fed's Fix
Liz Moyer, 03.10.08, 6:00 AM ET
http://www.forbes.com/2008/03/07/fed-bernanke-banking-biz-wall-cx_lm_0310subprime.html?feed=rss_news
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The Fed said on Friday it would increase its March term auction program by $40 billion in an effort to flood the banking system with cash and reignite lending between banks that are keeping the world's financial system stalled. The response on trading floors? Ho-hum.
The Fed is working overtime trying to fix the banking system. The problem: It can't. Only the market can do that now.
"Liquidity is good, but that was more of the August story," says Michael Feroli, an economist at JPMorgan Chase (nyse: JPM - news - people ). "Now the deeper, more chronic problem has set in, and that's the capital problem."
Banks are busy reducing leverage and shoring up their capital, and the effects of both are cascading through the financial markets. Hedge funds and mortgage lenders are faltering on margin calls by skittish lenders. Banks aren't picking up the slack in demand in the auction rate market. Borrowing terms for even the most creditworthy of companies and individuals are getting more onerous.
Estimates about the magnitude of the financial system's losses keep going up. Last week, UBS (nyse: UBS - news - people ) put it at $600 billion. On Friday, a team of analysts from Friedman Billings Ramsey said the financial industry needed to raise $1 trillion in permanent capital.
Regulators, including a Fed governor, were out talking this week about their desire for banks to raise additional capital from private investors. Banks have already raised more than $50 billion, mostly from overseas investment funds.
The most recent term auction, at which the Fed lent $30 billion, was oversubscribed by more than 2-to-1. Joseph Mason, a finance professor at Drexel University, says, "This is not a liquidity crisis, it's a credit crisis."
Mason thinks there's a better way out. "Some value-destroying firms and even banks, themselves, can and should fail through the process of improving financial market transparency and liquidity," he said in a presentation last month.
A Fed spokesman had no comment Friday.
One of the problems is the limited number of things the Fed can do to get banks to lend again. As Fed Chairman Ben Bernanke has acknowledged, the Fed is good at slowing down an economy, but not so good at prodding it back to life. The most recent Fed data on lending shows it is going up, but there is a debate about how voluntary that lending is. Much of it could be from previously extended credit lines that are now being drawn down.
But hope springs eternal. There were rumors this week that the federal government would step in and explicitly guarantee the debt of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), a rumor the government quickly denied. But the fact that the rumor was going around shows just how much the banking sector wants to see some form of a bailout.
Regulators are anticipating a surge in bank failures after a period of unprecedented calm.
There will be other changes coming that will make a more lasting impact on the financial sector.
Banks are shying away from the securitization model that got so popular in the last few years, and which led to the lending bubble. More assets will be held on balance sheet, and banks will likely hold more reserves against them.
On Thursday, Citigroup (nyse: C - news - people ), which itself has written down more than $20 billion in exposures to mortgage securities, derivatives and leveraged loans, said it would contract its mortgage lending by $45 billion this year and wouldn't make certain types of riskier mortgages it once made, all the better to cut its losses.
Prince Alwaleed Bin Talal must be rather perturbed with Citi's precipitous drop and his billions in paper losses...camel meat helper anyone?
Thornburg Mortgage (nyse: TMA - news - people ), a major originator of jumbo adjustable-rate loans, is faltering after missing margin calls on its mortgage securities holdings. On Friday, it said it couldn't make $610 million in margin calls and that has "raised substantial doubt" about its ability to survive.
The company restated 2007 results and took a $429 million charge to adjust the value of its mortgage holdings.
Merrill Lynch (nyse: MER - news - people ) said Wednesday it was shutting down the First Franklin (nasdaq: FFHS - news - people ) mortgage unit it bought for more than $1 billion from National City (nyse: NCC - news - people ) in December 2006. Lehman Brothers (nyse: LEH - news - people ) has also shut down mortgage units.
Commercial real estate is the next big worry.
In Senate testimony earlier this week, the comptroller of the currency's office, which regulates nationally chartered banks, said one-quarter of community banks under its oversight have commercial real estate concentrations that exceed thresholds recommended by a group of financial regulators.
Analyst Brad Hintz of Sanford C. Bernstein reckons that it's only the early stages of the de-leveraging and that the peak of the pressure will happen sometime over the next six months. "Buy your ammo and canned goods," he likes to joke.
The markets won't come back until the relentless selling is over, and investors standing awash in cash return to the market.
IWA’s management presented at the Raymond James Annual Institutional Investor Conference on March 4.
The 30 minute presentation provides a good overview of the company and its competitive position. A major theme of the presentation was that free cash flow (hence, dividend coverage) is stable and predictable. As to be expected, there was no breaking news; most of the essential information presented can be found in the recent 10K. However, I did learn for the first time that their debt is rated Ba3 (Moody’s) and BB- (S&P).
By focusing upon predictability as an outcome, the CEO and CFO have turned some lemons into lemonade. In particular, IWA has been adversely affected by regulatory constraints that were imposed upon GTE Midwest Inc (as a large interstate telecom) prior to the divestiture of its Iowa rural operations in 1999. IWA’s management argues that two of the constraints have a favorable impact, i.e. they make cash flow predictable because of reduced exposure to negative regulatory change. These constraints are the price caps placed upon GTE Midwest as a consequence of the CALLS Order and the limited ability to obtain subsidies through the Universal Service Fund.
The audio portion of the presentation can be found at: http://ir.iowatelecom.com/phoenix.zhtml?p=irol-eventDetails&c=182669&eventID=1782158#
--------------------
Background related to the CALLS Order:
The FCC places price caps on interstate access charges made by large incumbent local exchange carriers (ILECs). IWA’s ILEC, although small, has been subject to the price caps because it assumed GTE’s obligations when it was formed from the divestiture of GTE Midwest in 1999.
The FCC price caps reflect a proposal put forth by The Coalition for Affordable Local and Long Distance Service (“CALLS Order”). The CALLS Order reduces rates for switched access services to meet specific target levels that more closely approximate the cost of providing those services. On the other hand, the CALLS Order permits recovery of a greater proportion of local costs by increasing the subscriber line charge levied on end users.
As a related issue, IWA is currently a party to an industry intercarrier compensation reform proposal under consideration by the FCC—the proposal known as the Missoula Plan, filed with the FCC on July 24, 2006. The outcome of the FCC’s proceedings is uncertain, but it could result in significant changes to the way in which IWA receives compensation from other carriers and end users.
--------------------
Background related to Universal Service:
The FCC maintains a “Universal Service” program, to ensure that affordable, quality telecommunications services are available to all citizens. The Universal Service program pays support to rural local exchange carriers for which the costs of providing basic telephone service are significantly higher than the national average.
Although IWA’s ILEC is certified as an eligible communications carrier by the Iowa Utilities Board, it does not receive high-cost Universal Service support because the historical cost of relevant portions of the IWA network are lower than the national average. This historical cost is largely based on the recorded amounts that transferred with IWA’s acquisition of exchanges from GTE Midwest Incorporated.
The CALLS Order provided for a phase-out of implicit Universal Service support mechanisms (which had, in part, relied on setting rates for interstate access above cost). In order to be have more explicit subsidy mechanisms, the CALLS Order created an Interstate Access Support fund as part of the Universal Service Fund. In 2007, IWA’s ILEC received approximately $4.7 million in Universal Service support from this portion of the fund.
IWA’s CLECs are certified to offer service in all Iowa exchanges served by Qwest. Qwest receives no high cost support and no Interstate Switched Access Support for the exchanges served IWA’s CLECs, therefore IWA CLECs also do not receive Universal Service support.
Hi DofA,
I was out of town on business and just read you post. Yes, I'm still invested in IWA. I appreciate your report of the CC as it confirms my feeling that their management seems to know what they're doing. While not a high growth stock, I'm happy that they confirmed their dividend payouts, especially in this lousy market. FWIW and IMHO.
Abreis
rfj1862, if you invest in IWA for its dividend..
I would suggest that you put it in a taxed account. That is because a substantial portion of the dividend is tax deferred as a return of capital. There are some headaches associated with record keeping and tax forms related to the reduction of your original basis by these capital returns, but they are not that onerous.
The return of capital status is driven by IWA’s continued amortization of goodwill (approximately 40 million per year through 2014). At least that was a statement Craig Knock, the CFO, made in the Q4 2005 Earnings Call.
To date, the percentage of the distribution that was return of capital has been 2005 (100%), 2006 (69.65%), and 2007 (54.72%).
You should also be aware that the credit facility generally restricts the amount of dividends to the amount of “available cash,” generally defined as Adjusted EBITDA minus (to the extent not deducted in the determination of Adjusted EBITDA) interest expense, capital expenditures (unless funded by permitted debt or equity or asset sales), repayments of indebtedness, cash taxes and certain other permitted expenses. In addition, it is expected that the credit facilities will suspend the ability to pay dividends if the leverage ratio exceeds 4.80.
To date, leverage ratios have ranged between 3.5 and 3.8. As debt is being paid off, the leverage ratio has been decreasing.
New recession worry: Bank failures
Construction loan problems threaten spike in smaller bank failures and add to worry over credit crunch.
http://money.cnn.com/2008/03/03/news/economy/bank_failures/index.htm?section=money_topstories
NEW YORK (CNNMoney.com) -- As if the economy wasn't already fighting enough strong headwinds, the risk of capital shortfalls and outright failure of the nation's banks is rising.
The Federal Deposit Insurance Corp., the federal agency that backs bank deposits, last week reported the biggest jump in "problem institutions" it has seen since the savings and loan crisis of the late 1980s. While the extent of the problem is still low by historic standards, it identified 76 banks as in trouble - a 52% increase from a year ago.
FDIC Commissioner Sheila Bair among regulators set to testify Tuesday at a Senate Banking Committee hearing on the state of the banking industry.
Experts say the 76 banks now under scrutiny are likely only a small part of the problems now looming over the banking sector.
Jaret Seiberg, the financial services analyst for policy research firm Stanford Group, said it appears that regulators are expecting about 200 bank failures in the coming year or two. If that occurs, it could rival the flood of bank failures seen during the S&L crisis. In 1989, the nation saw a post-Depression era record of 206 bank failures.
And Seiberg says even more than 200 troubled banks are likely to be purchased before they reach the point of failure.
"Many of these banks are highly dependent on construction lending, and that's the area of lending that is likely to come under the most stress," he said.
The FDIC stresses that not all those banks will fail. In fact in 2007 only three banks failed, even though 50 were on the watch list at the end of the previous year.
So far this year, one bank - Douglass National Bank in Kansas City, Mo. - has failed.
Still, the head of the FDIC is looking to hire 25 staffers to deal with an anticipated increase in failures, a move that would increase its staff by 11%. Among those it hopes to hire are recent retirees who worked through the S&L crisis.
The banks most at risk for failure are generally smaller ones, not the huge global banks hit by billions in writedowns from subprime mortgage problems.
Smaller banks are big players in the business of construction loans made to homebuilders - loans that were backed by new homes now worth a fraction of the original estimated value.
In the past six months, the number of construction loans that are 30 days or more delinquent has spiked, according to Foresight Analytics, an Oakland, Calif., economic- and real-estate-research company. Its figures show 7.5% of single-family construction loans were delinquent in the fourth quarter of 2007, more than double the 3.1% rate as recently as the second quarter.
Matt Anderson, a partner with Foresight Analytics, said that it is the small- and mid-size banks, those with assets of $10 billion or less, that find themselves most at risk. Their construction loans outstanding equaled about 115% of their primary supply of capital as of Dec. 31, compared to the big banks for which construction spending represents only 43% of capital.
Anderson said even non-residential developers who have not been hurt by the downturn in housing could see their funding spigot turned off.
"The demise of smaller lenders probably won't have as noticeable impact on the national level, but in a lot of local markets around the U.S. it will be felt," Anderson said. "In the short-run, for folks that may have a viable projects, it could mean those projects will go under as well."
Dean Baker, co-director of the Center for Economic and Policy Research, agreed that it will be the smaller banks in markets with the greatest economic weakness that will fail, and that will only compound the troubles in those areas, even if customers don't lose their deposits.
"It's one more downdraft," he said. "For certain areas, Detroit, Cleveland, some of the areas where the housing bubble burst, it could be real bad news. I don't see the bigger banks rushing into those areas to provide credit."
Bernanke's high-wire act
But even if the big banks are somewhat protected from problems with construction loans and the risk of failure, it doesn't mean their balance sheet problems don't pose a threat to the economy.
In fact, Seiberg and some others say that tighter capital among the nation's major banks poses an even greater economic threat than hundreds of small bank failures.
Huge writedowns have caused losses at No. 1 bank Citigroup (C, Fortune 500), No. 1 thrift Washington Mutual (WM, Fortune 500) and leading mortgage lender Countrywide Financial (CFC, Fortune 500) in the fourth quarter.
Federal Reserve Chairman Ben Bernanke told a Senate panel last week that while he doesn't expect the rising tide of bank failures to reach the major banks, he is worried about the need they face to raise additional outside capital.
"They have enough now certainly to remain solvent, and to remain well above their minimum capital levels," he testified. "But I'm concerned that banks will be pulling back and not making new loans and providing the credit which is the life blood of the economy."
Seiberg agreed that potential tightening of capital among the major banks is a far more serious threat to the economy than even hundreds of small bank failures.
"This economy lives and dies on credit," he said. "If the megabanks are stuck with billions in leveraged loans eating up precious space on their balance sheet, they won't be able to originate new loans. That's bad for everybody."
What do you have to do to keep that 34.9% return? Does the repayment of capital go down at 2x change in the bottom five, or something leveraged like that?
Jon
From barrons (the reference to fun made me think of posting here):
Double or Nothing
By ANDREW BARY
BLACKSTONE GROUP, APOLLO MANAGEMENT and the rest of the private-equity crowd may be sidelined by the mess in the credit markets, but investors still can play at their game by purchasing shares of debt-laden companies in the public markets.
Buying shares in financially leveraged companies isn't the standard investment advice that's being tossed out these days -- and for good reason. Given the tough economic and financial environment, investors generally are being told to stick with blue-chip stocks. Why mess with dicey investments when quality companies ranging from General Electric to Merck, Cisco Systems and Procter & Gamble carry reasonable valuations?
It's hard to argue with a prudent approach, but some investors see opportunity in debt-heavy companies whose shares have been pummeled in recent months. This depressed group includes stocks like Bon-Ton Stores (ticker: BONT), Idearc (IAR), Libbey (LBY), McClatchy (MNI), Carmike Cinemas (CKEC), FelCor Lodging Trust (FCH) and Gray Television (GTN).
Bon-Ton: A badly fitting purchase raises doubts, but cash flow is good.
If the economy stabilizes and the credit markets start returning to normal by midyear, these stocks could shine because of the very financial leverage that has hurt them lately. Given the modest market capitalizations of these "levered" equities, it doesn't take much change in sentiment or valuations to produce a big move in their prices. The success of the private-equity business has been based on this premise. A little bit of equity and a lot of debt can produce huge returns in a favorable market. It's like buying a house with a down payment of 5% or less. Expect volatility with these stocks.
Given the risks, levered equities aren't for the timid and diversification probably is a good idea. The ultimate danger is bankruptcy, which typically is death for common shareholders. The bankruptcies in the airline and auto-parts industries are testament to the risks in leveraged companies.
"The best time to buy these is when credit spreads peak," says Carney Hawks, a partner at Brigade Capital Management, a New York fixed-income firm that also invests in levered equities. "A basket of levered equities will dramatically outperform the market once spreads peak. Since you don't know when that will happen, you may want to start buying them now. Many stocks are pricing in very negative outlooks."
Yields on junk bonds have risen sharply since last summer with the average issue now carrying a 10% yield, versus 7% a year ago. The spread of junk debt above risk-free Treasuries has widened to about seven percentage points from three points. When looking at levered equities, it helps to understand something about credit. That's why this game is easier played by professionals than retail investors. If a company has debt yielding 15% or more, it pays to be careful about the equity because bond investors are signaling concern.
Hawks is partial to FelCor, a hotel owner, and Libbey, a maker of glass tableware, which he says are well run with manageable debt loads. Carmike Cinemas, a movie-theater operator, and Bon-Ton Stores, a regional department-store chain, are riskier given their high debt and tough industry trends.
McClatchey: An ill-advised acquisition has made it a cheap play on an economic and advertising recovery.
WHAT ARE LEVERED EQUITIES? There is no established definition, but we'll call them shares of companies whose debt exceeds their equity market values. Most public companies don't intentionally create debt-heavy balance sheets. Debt usually gets large relative to equity market value because of a declining stock price. Many levered equities are in out-of-favor industries.
This highlights a difference between public levered equities and leveraged buyouts. Private-equity shops usually operate by putting lots of debt on solid companies in what they believe are stable industries like casinos and media, while levered equities often are fallen angels.
One plus with levered equities is that investors can potentially earn similar returns to those of LBO specialists and avoid paying the steep fees levied by private equity on their funds. With limited ability to finance LBOs, private-equity shops may consider putting money into levered equities because they amount to public LBOs. The valuations on FelCor, McClatchy and Gray Television are below what private-equity firms paid for similar companies last year. Skeptics may say this simply reflects the outrageous prices paid by private equity in 2007.
We're not going to ignore the risks. If the newspaper industry continues its decline, the shares of McClatchy could go toward zero from the current 10, which is down from 50 when McClatchy took on $3 billion of debt for its ill-fated purchase of Knight Ridder in 2006. One leveraged newspaper operator, Journal Register (JRC), has already seen its shares drop to $1 from $7 a year ago. AbitibiBowater (ABH), a leveraged newsprint producer favorably profiled1 by Barron's last year, has been a disaster, with its shares down 70% since then.
When investors sour on an industry, levered equities get punished. Look at Charter Communications (CHTR), whose shares are down 80% to $1 from their June 2007 high of $4.80 as Wall Street cooled on cable TV. Charter has fallen much more than Comcast (CMCSA), whose stock is down 30% to 20. Why? Charter has a sliver of equity that's now worth under $1 billion and debt of $20 billion, while Comcast has an equity market value of $62 billion and debt of $30 billion. Small changes in cable TV valuations have a big impact on Charter's share price.
Gray Television: This year's surge in political advertising on TV will help pay down its debt.
Not all levered equities look attractive. Charter still appears richly priced based on its high debt and onerous interest expense. Revlon (REV) and Six Flags (SIX), the amusement-park operator, also seem pricey.
An alternative -- and lower-risk -- way to play levered equities is to buy corporate bonds issued by these companies. They often yield 10% or more. Yellow-pages publisher Idearc has bonds now yielding more than 15% while McClatchy debt yields 11%. Reflecting its precarious situation, Bon-Ton has bonds yielding 20%.
There aren't many mutual funds that specialize in debt-heavy companies. One of the few is the Fidelity Leveraged Company Stock2 fund (FLVCX) that has handily beaten the S&P 500 over the past one, three and five years. Its success shows the benefits of levered equities. It was up 17.9% last year, ahead of the 5.5% gain in the S&P 500 index. Some of its strong performance reflects a heavy weighting in energy and commodity stocks like Freeport McMoRan Copper & Gold (FCX), Forest Oil (FST) and Celanese (CE). Freeport took on debt in its 2007 purchase of Phelps Dodge, but it's not heavily indebted any more. It has a market value of $39 billion and debt of $7 billion.
Table: Taking a Calculated Risk3We've shown a sampling of levered equities but there are many more out there. Those with market values of more than $5 billion are scarce. Some larger outfits include Hertz Global Holdings (HTZ), Virgin Media (VMED), Rite Aid (RAD), Dean Foods (DF) and Level 3 Communications (LVLT). Virtually every major airline besides Southwest Airlines amounts to a levered equity, thanks to high and widespread levels of debt and airplane leases in the industry. The same is true for most public operators of radio and TV stations, including Emmis Communications (EMMS), Entercom Communications (ETM) in radio, and Gray Television and Lin TV (TVL). General Motors (GM) and Ford Motor (F) probably are the most prominent levered equities because their market values are dwarfed by their debt and health-care obligations.
If the $26 billion buyout of Clear Channel Communication (CCU) is completed, investors will have an opportunity to invest alongside the private-equity buyers Bain Capital and Thomas H. Lee Partners. Some 30 million Clear Channel shares will remain outstanding, representing a super-levered bet on the radio and billboard company.
When evaluating levered equities, investors use a vocabulary that goes beyond price/earnings ratios and market capitalizations. Among terms thrown around are "option" values, enterprise value and a cash-flow measure known as Ebitda, or earnings before interest, taxes, depreciation and amortization. Option value doesn't refer to a standard call or put option, but to the idea that even troubled companies can retain equity value because of the chance they will survive. Investors often will say a depressed stock represents an "option" on the company. The better a company's balance sheet and the longer a firm's staying power, the more valuable its equity becomes.
Enterprise value refers to the combined value of a company's equity and net debt. With the ability to shoulder interest payments critical for a leveraged company, investors often focus on pretax earnings, and one key measure of that is Ebitda.
Here's a closer look at some potential winners and losers among levered equities. We've also included a safer choice in the same industry when there is one:
Winners
FelCor: Its portfolio of mostly upscale hotels includes Embassy Suites and Doubletree properties. The stock, now below 13, is down from a July peak of 29 and carries a dividend yield of 11%. Despite the company's good financial results, FelCor stock is depressed because of concerns about the impact of a weaker economy on the lodging business. FelCor, however, should benefit this year from extensive renovations of its hotels in 2007. An optimistic management increased the company's dividend by 16% in December. FelCor is valued at a modest five times estimated 2008 funds from operations, a cash-flow measure used to value real-estate investment trusts. FelCor's enterprise value is equal to nine times projected 2008 cash flow of $300 million. That's a big discount to the price paid by Blackstone Group for Hilton Hotels last year. One reason that Hawks of Brigade Capital is bullish on FelCor is that growth in the supply of hotels is very limited. "FelCor's dividend is being paid out of free cash flow. Where else can you find a sustainable 11% dividend yield." Safer choice: Starwood Hotels & Resorts Worldwide (HOT).
FelCor: An attractive dividend yield and renovated hotels enhance its value.
Bon-Ton: With Bon-Ton's share price down to under $6 from $57 last spring, Wall Street is worried whether the York, Pa., retail chain will make it. Bon-Ton now has a market value of just $100 million, versus estimated debt of $1.2 billion at the end of January -- fourth-quarter financial results haven't been released yet. Bon-Ton bet the company on a $1 billion debt-financed purchase in 2006 of Carson Pirie Scott and other chains from Saks, and that deal looks like a loser. The bad news is that Bon-Ton's same-store sales have been weak, including an 11% drop in December. Bon-Ton earned nearly $3 a share in 2006, but it may have operated close to breakeven last year. The good news is that cash flow is comfortably above interest payments and Bon-Ton isn't burning cash. Assuming vendors continue to allow Bon-Ton to finance its inventories, there appear to be no near-term risks to its survival. Given a sizable base of short sellers, Bon-Ton stock could rally on any hint of good news. Safer choice: J.C. Penney.
Libbey: As the leading manufacturer of glass tableware in the Western Hemisphere, Libbey has exposure to the faltering U.S. restaurant industry, which has depressed its shares. The stock, around 16, trades for about 27 times projected 2008 profits, a rich-looking valuation. The high P/E, however, reflects a steep 13% interest rate on its debt that eats into earnings. Once the credit markets thaw, Libbey may be able to refinance debt, cutting interest expense by perhaps three percentage points and boosting earnings. Libbey is valued at a modest six times estimated 2008 pretax cash flow and has few direct competitors. Profits this year are expected to rise despite the economic slowdown. "There's a cost-reduction and interest-reduction story, as well as a significant moat around Libbey's business," says Hawks. If Libbey can hit its 2008 financial projections, the stock could be up 50%. Safer Choice: None.
Idearc: Any stock trading with a P/E ratio of two and a dividend yield of 25% is worth a closer look. Verizon Communications spun off its yellow-pages business as Idearc to its shareholders in 2006 rather than sell to private-equity buyers. Because it viewed the yellow pages as a stable business, Verizon put $9 billion of debt on Idearc, effectively creating a public LBO. That debt is proving a millstone amid a sudden weakening in phone-directory industry trends. The company's CEO resigned for health reasons last week, just a week into the job. Idearc's shares, which hit $38 last spring, now fetch under $5, valuing the company at less than $1 billion. At issue is whether recent troubles merely reflect a weak economy or a permanent shift by advertisers away from print directories. Despite its heavy debt, Idearc isn't going away anytime soon. This year's cash flow is expected to cover interest payments by a factor of two to one. Even with revenue declines in 2008, Idearc should have ample earnings to pay the annual $1.37 dividend. If revenue declines persist, Idearc could cut the dividend in order to focus on debt repayment. With its stock down 75% this year, Idearc could surge on any signs its business is stabilizing. No Safer Choice: Rival R.H. Donnelley (RHD) also has a lot of debt and similar business problems.
Carmike: More popcorn sales and a few more Hollywood blockbusters in 2008 would brighten its books -- and lighten its debt.
McClatchy: The California newspaper publisher's 2006 purchase of Knight Ridder -- largely financed with debt -- has been a killer because it came just before industry advertising trends took a sharp turn for the worse. Compounding the problem is McClatchy's exposure to tough California and Florida markets. Wall Street has punished McClatchy, whose shares are down to 10 from 50 when the Knight Ridder deal was announced. Investor Thomas Russo, a partner at Gardner, Russo & Gardner, a Pennsylvania money manager, has been on board McClatchy all the way down and isn't giving up. He calls McClatchy "a cheap option on an economic and advertising recovery, its Yahoo! alliance and its Internet assets." McClatchy now is valued at just eight times projected 2008 earnings per share. Equity market value is just $800 million, versus debt of $2.4 billion. The dividend yield is 7%. Management is focused on debt repayment, but Russo argues that with the stock so depressed, the company should consider a buyback. McClatchy is valued at less than six times estimated 2008 cash flow, versus more than 10 times cash flow for the private Tribune. Safer Choice: Gannett (GCI).
Gray Television: The well-run TV operator owns a slew of top-rated CBS and NBC stations in small to mid-sized markets around the country. It focuses on state capitals and college towns, including Lexington, Ky.; Madison, Wis.; and Tallahassee, Fla. Gray shares ran up as high as 11 last year on LBO hopes, but they've fallen back to 6 as private equity has faded. Gray is highly leveraged with a market cap of $300 million, against debt of $900 million. "Our stock is extremely undervalued," says Gray President Bob Prather, who lately bought 11,500 shares in the open market. "Wall Street is down on Old Media and we've been dragged down by newspapers and radio. TV has some issues, but they're nothing like those industries." Thanks to political ads, Gray should enjoy a strong 2008 and it plans to use that windfall to pay down debt. If TV can hold its own in the face of the Internet advertising threat, Gray should do well. Safer Choice: Hearst-Argyle Television (HTV).
Carmike: Movie-theater operators have had to contend with fickle audiences, and Carmike, the country's No. 3 exhibitor, has done worse than its peers. Attendance per screen was down 0.7% in the third quarter while the industry showed an 8% gain, as Carmike's small-town audiences didn't cotton to what Hollywood churned out. With its shares down to 7 from 27, Carmike has seen its equity value shrink to $100 million. There's over $400 million of debt. Unless Americans stop going to the movies, Carmike looks like a survivor, and its stock offers a good bet on rising attendance or higher theater valuations. The company may seek to cut debt by selling $175 million of real estate. The theater business is still pretty good, especially pop corn and other concessions, which produce 90% margins. If Hollywood has a good 2008, Carmike shares could double. Safer Choice: Regal Entertainment (RGC).
Losers
Charter Communications: When looking at levered equities, it's important to compare them with financially stronger peers. If cash-flow valuations are out of whack, it probably pays to avoid the levered equity. Charter, the country's No. 3 cable operator, looks unappealing relative to rival cable companies. Its shares may seem tempting at just $1, but Charter is valued at nearly 10 times projected 2008 pre-tax cash flow, versus six to seven for Comcast and Time Warner Cable (TWC), which have far stronger balance sheets. Charter has $20 billion of debt. Lehman Brothers analyst James Ratcliffe, who carries an Underweight rating on the stock, last week cut his price target to $1 from $2, saying the stock is "still too expensive." Charter continues to bleed cash after capital expenditures and some of its debt yields more than 20%. Safer Choice: Cablevision Systems (CVC).
Libbey: Pricey debt should get refinanced as markets improve.
Revlon: The cosmetics company remains Ron Perelman's baby. The billionaire, who owns more than half the stock, continues to prop up Revlon, recently agreeing to refinance $167 million of maturing bonds. Revlon shares, at around $1, appear to be no bargain. Financial results did improve in 2007, but the company is still losing market share to financially stronger rivals L'Oreal and Procter & Gamble, maker of Cover Girl. Interest costs, capital expenditures and outlays for displays in drugstores and other retailers continue to chew up the bulk of Revlon's cash flow, making it tough for it to reduce debt. The company has lost money for 10 straight years. Valued at about nine times annual cash flow, the stock doesn't look cheap. Safer Choice: L'Oreal (OR.France).
Six Flags: The amusement-park operator is in an even bigger bind than Revlon after a tough 2007, when attendance was weak and estimated pretax cash flow of $190 million wasn't enough to cover its interest costs of $200 million. That's a bad situation for equity holders, considering the company spends $100 million annually on capital expenditures to maintain existing rides and build new ones to keep patrons coming back. New roller coasters are expensive. Six Flags also is hostage to the weather during the critical summer season. Even assuming a better 2008, the company probably will still burn cash, while debt and preferred stock is equal to a stiff 10 times annual cash flow. Six Flags stock, now trading around 2, looks like an out-of-the-money option on the company's revival. Reflecting the risks, Six Flags debt yields over 20%. Safer Choice: Cedar Fair (FUN).
Levered equities aren't for everyone. But investors who choose carefully and do their credit homework could earn high returns if the economy and markets revive later this year.
Thanks DoA--I'm watching IWA. Impressive yield, stable business.
I think the market has a ways to go before it reaches bottom; I'm keeping a significant amount of powder dry. For the income investor, I can hardly think of a better opportunity than the next 6 months represent.
Abreis, Re: IWA 2008 Q4 ....
Presuming that you are still invested in IWA, this is my take-home from yesterday’s CC and 10-K.
1. Dividends are fully covered and not at risk. Revenues are growing, albeit modestly. Net operating cash flow is strong. Debt is being paid down even while capital expenditures continue at the historical rate. Note, however, new debt ($44M) will be used to purchase Bishop Communications during the next fiscal year. But, absent any other purchases, this debt can be paid down quickly at the historical debt-reduction rate of about $20M/yr from free cash flow.
2. My biggest surprise was that the new competition, VoIP entrant Mediacom, has been a non-event. Mediacom initiated service using an interconnection agreement between IWA and Sprint in Q2 of 2007. IWA is contesting this usage in state and federal courts. In the interim, IWA’s preemptive counter-measures have been effective. These counter-measures have included aggressive roll-out of a bundled DSL-Video-Phone package and aggressive courtship of business accounts through CLEC subsidiaries. IWA is CLEC certified in all markets served by Qwest in Iowa; the current agreement expires in 2011 (which, coincidentally, is when IWAs long-term debt comes due).
3. I’m keeping a watchful eye on the Iowa Communications Network (ICN). The ICN is fiber optic cable system extending throughout Iowa that currently provides voice and video communications to educational and governmental institutions. Current law prevents use of the ICN for commerical use. The Iowa legislature has considered modifying state law to allow sale of the ICN to a private party, but so far it has not done so.
A hearty welcome to you marthambles, and feel free to
post any information here releveant to the economy,
economics, and high yield opportunities.
Appreciate your coming by and posting here....
Have an awesome day,
PL1
Portfolio
Up 4.15% thus far this year (excluding dividends). Not an impressive return, but:
Beating the Dow by 8.5 percentage points
Beating the S&P 500 by 10 percentage points
Beating Nasdaq composite by 14.4 percentage points
…and up today
Aggregate yield is about 15-16%. The yield is this high because I went on a major shopping spree in late January. It's skewed up in part by my positions in Canroys, of which I bought a ton when they were severely depressed, as well as a 34.9% RC note.
AAV
AINV
ARCC
BFK
BGF
BVF
CVP
FLY
IAF
IFN
MIC
ONAV
PGH
PWE
ARCC misses by .01 (pretty impressive given economic conditions).
Stock is down ~4.0%, might represent an opportunity to buy. Yield is around 12.5%.
Just found this board, so sorry if you guys are already all over this.
I've owned FUN since 1995 and it has paid excellent dividends the entire time. The price is a little beaten down now, so, if you think there's a future in regional amusement parks, it might be worth looking at.
Special report: Eyes on the Fed Full coverage
Ben Bernanke's high-wire act
http://money.cnn.com/2008/02/27/news/economy/bernanke_house/index.htm?section=money_topstories
Fed chief, in first of two days of testimony on Capitol Hill, acknowledges troubling signs about economic growth but also raises concerns about inflation.
EM
WASHINGTON (CNNMoney.com) -- For Federal Reserve Chairman Ben Bernanke, running the central bank has become an increasingly challenging high-wire balancing act.
All of Wall Street was watching the Fed chairman on Wednesday when he headed to Capitol Hill to outline the trio of challenges facing the Fed: an economy at risk of falling into a recession, topsy-turvy financial markets and the rising risk of inflation.
"We do face a difficult situation," Bernanke told members of the House Financial Services Committee, marking the first day of his two-day semi-annual hearing on the Fed's monetary policy. "The challenge for us is to balance those risks and decide at any given time which is more serious."
Bernanke's prepared testimony and his comments to lawmakers, however, stressed that the economy remained the central bank's primary concern saying that "downside risks to growth remain."
Markets initially turned higher following the release of his testimony as investors read signals that the Fed was prepared to continue cutting rates, if necessary, to stimulate the economy.
But Bernanke's comments were in line with the Fed's latest economic outlook and remarks he delivered alongside Treasury Secretary Henry Paulson before a Senate panel nearly two weeks ago.
At the time, the two policymakers warned of slower economic growth in the coming year but said they believed the U.S. economy would avoid tipping into a recession, helped in part by the $170 billion economic stimulus package signed by President Bush on Feb. 13 and the most recent interest rate cuts by the Federal Reserve.
"I don't think he broke a lot of new ground," said Scott Anderson, senior economist at Wells Fargo. "He stuck very close the Fed's forecast and outlook for the economy."
Among Bernanke's biggest concerns recently has been the embattled housing sector. On Wednesday he again said that he expected it to continue to weigh on economic activity in the months ahead.
"Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries," Bernanke said.
Fresh economic data seems to support the view that housing remains troubled. Sales of new homes fell to a nearly 13-year low in January, the Census Bureau reported Wednesday, just a day after a survey on residential real estate revealed that the decline in home prices picked up at the end of 2007
Eye on the consumer
One particularly important issue that the Fed chairman touched on Wednesday was the health of the consumer.
Bernanke acknowledged a significant slowdown in consumer spending as 2007 came to a close, and suggested that with home prices continuing to decline, a falling dollar and rising prices on a wide variety of consumer goods, the consumer could feel an even greater pinch.
"Any tendency of inflation expectations to become unmoored could reduce the flexibility of the [Fed] to counter shortfalls in growth in the future," he said. The Fed will continue to monitor inflation closely in the months ahead, he added.
Bernanke's remarks about inflation, however, marked a key divergence from his most recent remarks, noted Jane Caron, chief economic strategist at Dwight Asset Management, which manages about $70 billion in fixed-income assets.
"He did highlight that inflation pressures have increased," said Caron. "But as investors, is the Fed going to completely take their foot off the gas? How will they manage inflation risks?"
Perhaps the biggest inflation concern for Bernanke was high oil prices, which soared last year and continue to hover near record highs around $100 a barrel. While he said he did not expect such a similar increase in the price of crude during 2008, if oil prices did not moderate that could pose a serious problem for the U.S. economy, Bernanke said.
"If that happens, it will be a very tough situation," he said.
Bernanke also waded into the ongoing credit crisis, urging banks to continue to raise capital so they can continue to be able to lend and provide liquidity to the credit markets. A number of major U.S. financial institutions, for example, have been forced to look to large state-run foreign funds, or sovereign wealth funds, after suffering billions of dollars of losses.
The moves have raised protectionist fears on Capitol Hill, but Bernanke called the investments "constructive."
"I urge banks and financial institution to look to wherever they may find capitalization," Bernanke said.
Economy's warning signs
To help keep the economy from tipping into a recession, the Fed has steadily cut the federal funds rate, which affects a variety of consumer loans, since September. It slashed interest rates twice by 1.25 percentage points in just under a week last month.
Now the growing consensus among economists is that the Fed will cut interest rates by another half a percentage point when policymakers meet again on March 18 and possibly at least once more later this year.
But Bernanke stressed that the Fed would take the wait-and-see approach, saying that policymakers would carefully evaluate "incoming information on the economy outlook."
Plenty of economic reports are due out before the next Fed meeting, including next week's February employment report. The central bank will also get another reading on consumer inflation on March 14.
Lawmakers pressed Bernanke on what other actions he might consider if the economy were to worsen. He responded by suggesting that the central bank's current efforts - including the use of its "discount window" to make direct loans to commercial banks - are working.
"At the moment I'm satisfied with the general approach we are currently taking," said Bernanke.
Toll Posts Loss Amid New-Home Slowdown
http://online.wsj.com/article/SB120410739489596505.html
>>
By MICHAEL CORKERY and JEFF BATER
February 28, 2008
Bad news mounted in the housing sector as the Commerce Department reported weak new-home sales and Toll Brothers Inc., a large luxury-home builder, announced dismal first-quarter earnings.
New-home sales in January declined for the third month in a row, sinking to the slowest rate since early 1995, the Commerce Department reported. Toll reported a loss of $96 million, or 61 cents a share, for the quarter ended Jan. 31, saying "ceaseless talk" about a recession and falling prices were damping home-buyer confidence as the spring selling season kicked off.
"This drumbeat, coupled with concerns over mortgages and foreclosures, has kept pent-up demand on the sidelines," Robert Toll, the builder's chief executive, said during a conference call yesterday.
The bad news came just one day after the S&P/Case-Shiller national home-price index showed an 8.9% decline for the fourth quarter compared with a year earlier, the largest drop in its 20 years of data.
Toll's loss for the quarter was driven largely by its $153.3 million write-down of the value of its land inventory. The company earned $54.3 million, or 33 cents a share, in the first quarter of fiscal 2007.
Mr. Toll saw a glimmer of improvement in sales from a year ago in the markets of Naples, Fla., and Washington, D.C. But he warned that he didn't want to give the impression that "we're on the comeback trail," because many other markets remain weak.
One of the biggest challenges to builders is the glut of unsold vacant homes, which is driving down prices and weakening consumer confidence. Nationally, the inventory of new unsold homes fell to an estimated 482,000 homes at the end of January, down slightly from December, according to the Commerce Department. But, due to the slower sales rate, it would take 9.9 months to sell off the houses, up from 9.5 in December. The 9.9 months' supply is the largest in more than 26 years. A normal supply is five to six months.
Sales of new single-family homes decreased 2.8% last month to a seasonally adjusted annual rate of 588,000, the Commerce Department said. Sales tumbled 4% in December and 13.1% in November.
Regionally, new-home sales decreased 2.4% in the South, 7.6% in the Midwest and 10.3% in the Northeast. Sales rose 2.2% in the West.
<<
From a spam. Which fund is this? I'm guessing KF.
Sorry for the crappy formatting.
High Yields -- This fund's 22.1% average five-year dividend yield is one of the highest available on the market.
*
Growing Dividend Payments -- Our "Income Security of the Month" has paid regular dividends like clockwork since its inception in 1984. And thanks to outstanding growth in its core portfolio holdings, the fund's dividend payments have jumped an average of +35.9% per year over the past five years alone. In 2006, this fund paid $7.12 per share in dividends, and in 2007 that figure jumped to an astounding $15.94 per share.
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Solid Track Record -- The downside to most funds that pay big distributions is often slow growth. However, the good news is that our "Income Security of the Month" is growing at a solid clip. The fund has returned an average of +31.5% per year over the past three years, and +16.1% annually since inception.
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Discounted Share Price -- Many foreign funds are generating record returns, but only a handful are still trading at a discount to their net asset value (NAV). Our "Income Security of the Month" is one of those rare undiscovered gems. The fund is now trading at a 4.4% discount to the value of its assets. That means you can scoop up a dollar's worth of portfolio securities for less than 96 cents -- one of the best bargains on Wall Street!
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Diversified Portfolio -- The fund profits from a basket of nearly 50 different stocks that operate in a wide variety of industries. This helps smooth out the fund's annual returns, allowing our "Income Security of the Month" to deliver stable dividends in almost any environment.
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Exclusive International Opportunity -- Our "Income Security of the Month" invests in a fast-growing overseas market that doesn't get much exposure in the mainstream financial press. As a result, the nation is still largely untapped by foreign investors. Not surprisingly, the country's stocks are among the most undervalued in the developed world, sporting an average P/E multiple that is 30% lower than U.S. stocks (as measured by the S&P 500).
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Easy to Buy and Sell -- Because it trades right here on the NYSE, this foreign fund can be bought and sold throughout the day just as easily as a regular U.S. common stock. In addition, you won't be burdened with front/back-end loads or minimum investment requirements -- you can purchase shares in this fund for as little as $50, and you can buy or sell the fund whenever you choose.
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Low Expense Ratio -- With a bargain-basement expense ratio of just 0.96%, our "Income Security of the Month" is one of the highest-yielding, lowest-cost funds around.
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DRIP Plan Available -- This fund's dividend reinvestment plan (DRIP) lets you automatically reinvest your dividends at no extra charge, helping you compound your returns over time.
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Reduced 15% Tax Rate -- Last year, the vast majority of the fund's $15.94 distribution qualified for the reduced 15% tax rate. That makes the fund ideal for taxable accounts and keeps its after-tax yield extremely high.
High-yield index
I haven't come across one yet, so I'm thinking of creating my own. Here are the parameters I'm thinking about.
1) Trades on major US exchange
2) Yield >7.5%
3) Market cap >$500 million
4) Share price >$5
5) Payout ratio <100% (I don't want to include companies and funds like BIF that are essentially high-priced capital return mechanisms)
The payout ratio is the data point that will be a pain to calculate every quarter.
Anyone want to provide input?
I'm actually buying ONAV right now. I don't understand why it's going down, but since I'm buying in small aliquots I don't mind at all.
Thanks, and we do too read it!
IAF and other stuff
Anyone interested in diversifying with a high-yielding Australian closed-end fund? I picked this up in the sub-15 range, but it is still yielding >8% even at the current $17 level.
Also (not that anyone reads this) but has anyone investigated EverBank’s Icelandic 3-month CDs? They’re paying close to 10% for your money to sit in a bank in a very safe country. I’m a little hesitant because I’m not sure how the Icelandic Krona will do relative to the dollar.
Stocks we love: 5 big dividends
http://money.cnn.com/galleries/2008/news/0802/gallery.dividend_stocks/index.html
Sometimes it just feels good to get a little something back. Consider these five consistent dividend-paying stocks for your portfolio.
How we chose the stocks Bond yields are relatively low right now. So if you're looking for something that pays you a steady income stream, you might be better off with a stock that offers a high dividend.
We sifted through thousands of stocks to bring you five that will pay a healthy dividend over the long haul and should also post steady, if not spectacular, earnings growth.
Each company has the potential to stand up reasonably well in this rocky market. Plus, all five companies have consistently increased their dividends over the past five years. What's more, they all have strong balance sheets...so they are likely to keep boosting their dividends in the years to come.
PepsiCo Pepsi is your classic safe haven stock for a weak economy.
With brands such as its flagship Pepsi soft drinks as well as Gatorade and Quaker under its wing, the company is a leader in the North American food and beverage market. But it is also well-positioned to expand internationally.
"Long-term international opportunities coupled with its dominant market positions in North America strengthen the company's already best-in-class position," wrote analyst Jonathan Feeney of Wachovia in a report.
The company's steady cash flow has allowed it to invest heavily in overseas growth, Feeney said.
Shares of Pepsi trade at about 19 times 2008 year-end estimates, in line with the valuation for its top rival Coca Cola. But Pepsi's earnings are expected to grow at a faster clip over the next few years.
Pepsi pays a dividend that yields an attractive 2.1%. That's a tad lower than Coke's 2.3% yield, but Pepsi's dividend payout has increased 20% a year, on average, over the past five years, compared to annual dividend growth of 11% for Coke.
Abbott Laboratories The drug and medical device maker recently received FDA approval for cholesterol drug Simcor, which could be a worthy contender for Vytorin, a drug created by rivals Merck and Schering-Plough.
And sales of Abbott's important Humira arthritis drug grew 42% over the fourth quarter, a good sign for the company. JPMorgan analyst Michael Weinstein thinks Abbott is worth buying. He expects earnings to grow 14% in 2008.
Abbott currently trades at about 17 times 2008 estimates and offers a dividend yield of 2.6%. And Abbott's dividend has increased 7% annually, on average, over the past five years. To put that in perspective, rivals such as Merck, Wyeth have boosted their payouts to investors by just 1% and 4% on average over the past few years.
Federated Investors controls about $302 billion in client assets, mostly in money market funds. At a time of such market uncertainty, more and more investors are likely to shift money into Federated's low-risk funds.
Citigroup analyst Prashant Bhatia thinks Federated is well-positioned to capitalize on a general shift of savings investments to money markets.
And even though Federated has reported that people have been pulling money out of the company's fixed income funds for the past 18 quarters, Bhatia maintains that the firm is "close to turning the corner" in its fixed-income business and could soon start posting net inflows into its bond funds.
Federated currently offers a dividend yield of 2%, and the dividend has increased at an average rate of 27% over the past five years. So like its money market funds, Federated's stock also offers some nice stability in a volatile market.
Emerson Electric/ As demand for industrial equipment in the U.S. and Europe begin to slow, Emerson Electric's diversification is, uh, paying dividends.
Sales grew 9% overseas in the last quarter compared to 5% in North America. Revenues were up 16% in Asia alone. Citigroup's Jeffrey Sprague predicts that high-growth emerging markets could account for 30% of total sales this year, helping to offset any domestic sales declines.
And the company is positioned to capitalize on the growing demand for energy efficient products worldwide. "Many of [Emerson's] businesses sit at the cross roads of the need for power and energy efficiency," wrote Sprague in a report.
Emerson currently offers a dividend yield of 2.3% and the dividend has increased at an average rate of 8% over the past five years.
Wm. Wrigley Jr./ For years, Wrigley enjoyed a near-monopoly on the gum market in the U.S. And even now, as it struggles with new competition from candy juggernaut Cadbury in North America, Wrigley is still benefiting from strong demand overseas.
The company may be losing market share domestically, but the Middle East, Europe, and Asia (especially China) is where the growth is. Domestic sales were flat in the last quarter, but sales to Europe and the Middle East grew 26% in 2007, while Asian sales grew 20%. International markets accounted for 68% of Wrigley's total sales.
Analyst Alexia Howard of Sanford C. Bernstein & Co. said she's worried about the increased competition from Cadbury. But she also said Wrigley consistently produces a steady stream of cash. So it should be able to comfortably pay a dividend -- and increase it -- for the foreseeable future.
As such, Wrigley's dividend yield of 2.3% is as refreshing as a stick of Doublemint. Plus, the dividend has grown by an average of about 13% over the past five years. Now that's some juicy fruit for investors.
Just purchased a small position in 34.9% Least of the Dow Exchangeable Notes Due Feb. 27, 2009.
Yes, that's right, it pays 34.9%.
I only added a small position because the offer closed at noon today and I didn't have time to weigh the risk:benefit adequately. There are other similar offerings out there if anyone is interested. Think one of them is called "Dogs of the Dow."
Inflation Trap Looms For Fed
Paul Maidment, 02.20.08, 10:14 PM ET
http://www.forbes.com/2008/02/20/fed-inflation-notn-oped-cx_pm_0220fed.html?feed=rss_news
Those who feared the Federal Reserve was showing a reckless disregard of the risk of inflation in cutting interest rates to stave off a potential recession had their I-told-you-so moment Wednesday.
January's monthly inflation data showed consumer prices up 4.3% from the same month a year earlier, with core inflation-- which excludes volatile food and energy prices, and is one of the Fed's most closely watched indicators--up to 2.5%, a 10-month high. Both numbers are too high for the Fed's liking.
The question is whether beggars can be choosers. Fed Chairman Ben Bernanke has repeatedly said he stands ready to cut rates again if that is necessary to stop a slowing economy from becoming a shrinking one. But if he does cut rates again, up will go inflation.
If he doesn't cut, up goes the risk of recession.
While the economy is still growing, for all the widespread bantering about of the "R" word, Bernanke's margin of error around getting the decision wrong is shrinking.
The Fed made public Wednesday that it had lowered its quarterly forecast for full-year GDP growth, presented
at its rate-setting meeting in January, to 1.3%-2%, down from 1.8%- 2.5% at its October meeting.
So far Bernanke and his colleagues have cut and be damned, trusting that inflation will moderate over time thanks to soft demand and rising job losses. They have confounded the skeptics before with their inflation forecasting, but that was before the credit crunch and housing market's troubles produced the economy's current ailment.
At their January meeting, they upped their core inflation forecast for 2008 to 2%-2.2% from October’s 1.7%-1.9%. So they might just get away with it again.
The trap waiting for them is that if inflation expectations rise--and Bernanke has alluded before to the need to keep these in check--investors in the U.S. government's longer-date debt are going to expect higher yields, steepening the yield curve. With mortgages and other loans priced off such long-term debt, that would do little to shore up already fragile consumer confidence.
The betting must still be that at next month's interest-rate setting meeting, the Fed will continue to put more weight on boosting growth than reining in inflation, trusting its inflation forecast for the year is right, that it can manage public expectations and that it is on the money with some of its recent internal research that suggests the cost of getting it wrong is less expensive than once thought.
But surprises like Wednesday's inflation numbers only reinforce how loosely anchored inflation expectations are--and the risks of them slipping their moorings.
The Fed/The Ben Bernanke Show
Brian Wingfield 02.26.08, 6:00 AM ET
http://www.forbes.com/2008/02/25/bernanke-fed-congress-biz-beltway-cx_lm_0226bernanke.html?feed=rss_news
Washington, D.C. - Federal Reserve Chairman Ben Bernanke spends so much time testifying before Congress these days, it might seem he barely has time for his day job as the central bank's top regulator.
Wednesday, Bernanke heads back to Capitol Hill, where he'll give his mandatory, semi-annual report on monetary policy to the House Financial Services Committee. He'll repeat those remarks to the Senate Banking Committee on Thursday.
They'll be the 12th and 13th times he's faced Congressional panels since January 2007. In all probability, he'll parrot much of what he has said in the three appearances he's made on the Hill since September: The economy is growing more slowly than usual, it will rebound later this year, recession isn't likely, more rate cuts are possible, inflation remains a concern, etc., etc.
Tedious? Absolutely. But lawmakers can't seem to get enough of Bernanke. So far this year, he's appeared before the Senate Banking Committee and the House Budget Committee for routine oversight hearings. Committee chairmen are well aware that Bernanke is a big draw, especially in an election year, when the economy is ailing. Of course, every time he's speaks publicly, he might hint at a further rate cut.
Rep. Paul Ryan, Wisc., the top Republican on the House Budget Committee, says that when a Fed chairman testifies before his committee in early January, he is simply trying to get a better understanding of how the Fed is deriving its monetary policy decisions.
Allan Meltzer, a professor of political economy at Carnegie Mellon University who has written a history of the Federal Reserve, says it doesn't necessarily sully Bernanke's reputation to repeat the same mantra every time he visits the Hill.
"What will hurt him is the fact that he's not saying things like 'I have to watch both inflation and the unemployment rate,'" he adds.
And surprising as it may seem, Bernanke actually appears before Congress less than his predecessor Alan Greenspan did. Not counting his re-nomination hearings, Greenspan testified an average of more than 10 times per year between 2000 and 2005. In 2005, his last year at the central bank's helm, Greenspan saw a Congressional panel 12 times. The year before that, he was there 11 times. Bernanke, by contrast, appeared before lawmakers 9 times in 2007 and 6 times in 2006.
The figures for both men include the Fed chairman's semi-annual reports to Congress, which account for four separate hearings each year (two each for the House and Senate). In addition to the House Financial Services and Senate Banking Committees, where the semi-annual remarks are delivered, Fed chairmen often face the Joint Economic Committee and the budget panels of both chambers.
Every one of Bernanke's appearances before Congress has focused on the general economic outlook, the subprime mortgage mess or fiscal challenges for the United States--often a combination the three issues. No surprise there, given the state of the economy in recent months.
Congress summoned Greenspan for his wisdom on a range of topics outside the overall health of the U.S. economy. Examples: China's exchange-rate policy (June 2005), education (March 2004), the nation's natural-gas supply (twice--in June 2003 and again the next month), the aging global population (also 2003), U.S. trade policy (April 2001) and commodity futures trading (June 2000).
"What Greenspan did was somewhat on the unusual side," says Meltzer. "He had a view and he wanted it to be heard." Bernanke, on the other hand, has deliberately stayed relatively far from the policy debate.
Markets generally don’t like the Fed chairman’s remarks.
On the dates coinciding with Bernanke’s four most recent appearances before Congressional panels, the Dow Jones industrial average closed slightly down. The most severe example was on Jan. 17, 2008, when it closed at 12,159.21 from an opening of 12,467.05--a 2.5% slide. During his semi-annual testimony on July 19, 2007, the Dow closed just half a percentage point higher. The day before, down 0.2%.
The Wall Street barometer treated Greenspan in much the same way. On the day of his final testimony as Fed chairman, the market closed up 0.5%. During his last semi-annual address, it ended the first day of testimony up 0.6%, the second day down 0.5%. But a month earlier, when Greenspan addressed the Senate Finance Committee on China’s exchange rate, the Dow dropped 1.6%, from 10,587.09 at the start of the day to a close of 10,421.44.
Nonetheless, markets and policymakers will be paying close attention to what he says this week. During his semi-annual report last July, Bernanke made this pronouncement: "Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend."
"Moderate" growth isn't exactly what happened. The economy grew at a 4.9% rate during the third quarter of 2007 before dropping sharply to 0.6% growth for the final three months of the year.
Amid a deluge of economic data to be released this week are revised figures for growth in the fourth quarter, due out Thursday. If the update is worse than the previous estimate and the economy continues to falter, expect the Ben Bernanke Show to become a running feature this year on Capitol Hill.
Here come more financiers' writedowns
Another day, another prediction of red ink for banks and financial firms. But some analysts caution against taking these numbers at face value.
By Colin Barr, senior writer
http://money.cnn.com/2008/02/25/markets/barr_writedowns.fortune/index.htm?section=money_topstories
NEW YORK (Fortune) -- Another winter writedown storm hit Wall Street Monday. Shares in Citi, Fannie Mae and Freddie Mac sank after analysts predicted another round of multibillion-dollar losses at the struggling financial firms.
The expected writedowns, which reflect rising loan defaults and sharp declines in indexes tracking debt-related securities, come as falling house prices and a slow economy weigh on U.S. consumers. Shares in Citi (C, Fortune 500) dropped 2% after Oppenheimer analyst Meredith Whitney slashed her full-year earnings forecast to 75 cents a share from $2.70 previously.
Whitney, who made headlines late last year by being the first analyst to predict Citi would cut its dividend - which it soon did - said the bank's profits will be hammered by Citi's need to reduce the value of loans and bonds on its balance sheet. The analyst, who rates the stock the equivalent of sell, predicts "further writedowns to their carrying values of [collateralized debt obligations] related to sub-prime mortgages, further writedowns from leverage lending commitments, and further writedowns associated with on balance sheet consumer loans."
That's a lot of writedowns, but Citi isn't alone in facing big hits to its earnings. Goldman Sachs downgraded Fannie (FNM) and Freddie (FRE, Fortune 500) to sell from neutral, saying it expects $4.2 billion of writedowns at Freddie and $2.6 billion worth at Fannie when the government-sponsored enterprises report fourth-quarter earnings this week. The downgrade comes on the heels of a similar move Friday by analysts at Merrill Lynch. Goldman even recommended that investors short Freddie Mac shares ahead of Thursday morning's expected earnings release. And it also significantly reduced earnings predictions for other Wall Street giants, including Bear Stearns, Morgan Stanley, Merrill Lynch and Lehman Brothers.
By now, huge writedowns are old hat for investors in the financial sector. In just the past two months, Citi took an $8.1 billion writedown of its mortgage-securities holdings, UBS (UBS) took $13.7 billion in mortgage-related writedowns and AIG (AIG, Fortune 500) took a $4.9 billion hit to its credit derivatives portfolio. The river of red ink comes as no surprise, as banks and brokerage firms find themselves carrying billions of dollars of loans and mortgage-related securities whose value has declined along with a sharp slowdown in the debt markets.
The mysteries of 'mark-to-market'
But some skeptics say writedowns may in some cases overstate the extent of problems at financial firms. Many writedowns result from the need to "mark-to-market" the value of illiquid securities - such as CDOs and leveraged loans - or the debt that banks took on to finance the recent private equity buyout boom. Because many of these securities rarely trade, managers are left looking to market indexes for guidance on the size of the appropriate writedown - as Whitney noted Monday in a discussion of the recent 6% drop in the leveraged loan index, or LCDX.
"The decline of the price of the LCDX reflects the markets' priced perception of increased credit risk of leveraged loans, causing a sharp pullback in investors' demand for these types of loans and has caused a backup of the leveraged loan pipeline and assets to build up on balance sheets of banks," she wrote in Monday's report on Citi. "As banks and brokers are required to use these indexes and other market data to 'mark to market' their outstanding loan commitments, we expect banks to be forced to reflect such market declines in their 1st quarter 2008 results further hampering results already hampered from the most challenging market environment most have ever seen."
While no one doubts that the market environment is challenging, some observers say the mark-to-market writedowns don't always help investors seeking to accurately assess a firm's health. For one thing, the writedowns generally don't reflect actual cash losses. In the case of Fannie and Freddie, Goldman sees more writedowns ahead in part because declining interest rates reduce the value of the hedges the firms use to protect the value of their mortgage portfolios - even though the declining rates don't cause Fannie and Freddie to lose actual money during the period.
Similarly, many of the leveraged loans now trading at a discount continue to perform; the drop in the index partly reflects investors' fear that debt-burdened companies will go bankrupt if the economy heads into recession. Similarly, the bonds underlying many illiquid securities such as CDOs continue to pay interest on time, even as related indexes show readings that would suggest widespread default.
Assessing management
That's why Christopher Whalen, managing director of Institutional Risk Analytics, calls fair-value markdowns "madness," saying they tell investors nothing about the economic value of a business. Jeffrey Miller, CEO of investment adviser NewArc Investments in Naperville, Ill., tells investors to delve into the details of writedowns rather than being scared away from possibly attractive investing situations by scary headlines. He says the fact that the banks are keeping loans and bonds on their books rather than selling at fire-sale prices indicates the value of the underlying assets may well climb.
A case in point comes from bond insurers Ambac and MBIA. Back on Jan. 16, Ambac posted a fourth-quarter loss of more than $32 a share, reflecting a $5.4 billion writedown of its CDO holdings. Ambac said about $1.1 billion of the writedown reflected credit impairment, but the rest was a mark-to-market loss tied to the declining value of its bond insurance contracts. "Ambac continues to believe that the balance of the mark-to-market losses taken to date are not predictive of future claims," its press release read, "and that, in the absence of further credit impairment, the cumulative marks would be expected to reverse over the remaining life of the insured transactions."
Similarly, MBIA last month posted a fourth-quarter loss of more than $18 a share, after a $3.5 billion writedown of its CDO holdings. The actual credit loss reflected in that giant writedown, the company said, was $200 million. If other financial firms have been involved in overstating potential losses out of a sense of diligence, that could lead to increased profits once markets stabilize.
The financial guarantors' situation illustrates the questions confronting investors in writedown-riddled companies: Is it fair to believe the portfolio will avoid further credit losses even as the economy slides toward recession? Is it reasonable to assume that the company is presenting a full and fair accounting of its situation?
David Merkel, chief economist at broker-dealer Finacorp Securities, urges caution. "It comes down to assessing management," says Merkel, not referring to any particular company. Though most execs surely make what they believe to be appropriate judgments, he says, "some are prone to fear and greed."
Not at all I sold it on x dividend day for more than I bought it!
will keep watching it. I flip in and out of two or three dividend stocks with the same money each month.
Sometimes I take a little hit on the equity if my dividend is more than the equity hit!
This has been working out good for me.. I like getting
monthly dividends!
Sandy
Are you sorry you bought ONAV? Just curious if you're going to hold it.
AP/Wall Street Braces for More Volatility
Monday February 18, 7:43 am ET
By Madlen Read, AP Business Writer
Wall Street Not Expecting New Data on Housing, Inflaction, Manufacturing to Give Assurance
http://biz.yahoo.com/ap/080218/wall_street_week_ahead.html
NEW YORK (AP) -- February's stock market so far has displayed more stability than January's, but Wall Street wants to see a stronger economy on the horizon before it trades confidently again.
Investors are not counting on this week's readings on housing, inflation and manufacturing to give them that assurance. As a result, they are bracing for more volatility.
The market has been swinging higher and lower as traders sell off when disappointing economic data rolls in and then drive the market up when they snap up stocks that look like bargains. The pattern is indicative of a market that has underlying demand holding it up, but one that could have a bit further to fall if more bad news comes along.
After rallying early last week and then losing steam toward the end, the Dow rose 1.36 percent for the week, the Standard & Poor's 500 index gained 1.40 percent, and the Nasdaq composite index advanced 0.74 percent. All three indexes remain down sharply for the year, particularly the Nasdaq, which is 12.5 percent lower than it was at the end of 2007.
"We may not have hit the bottom, but people seem to be looking for things to buy rather than things to dump," said Alexander Paris, economist and market analyst for Barrington Research in Chicago. "Things might get worse before they get better, but you've got to buy stock when things look worst."
The question is whether there's any data coming in the near future that will have the power to reinvigorate the stock market back -- or whether the market is doomed to a holding pattern until the economy starts to recover.
One overriding concern is the weak housing market.
Though investors have come to terms with falling prices, there's uncertainty over how long the downturn will last and how much it will affect homeowners' spending patterns.
And there are worries about the financial well-being of companies with investments in mortgage-backed assets.
All U.S. financial markets are closed Monday for the Presidents Day holiday.
On Tuesday, the National Association of Home Builders releases its housing industry index, which economists surveyed by Thomson Financial/IFR expect to show a decline for February. Then Wednesday, the Commerce Department reports on housing starts and building permits -- both are expected to be weak.
Because of the housing market's deterioration, many businesses are suffering. The Institute for Supply Management's January manufacturing report showed modest growth, but economists predict that the Philadelphia Fed's regional manufacturing index will register another contraction. The decline is not expected to be as dismal as the December report, which caused the Dow to tumble more than 300 points a month ago, but if it is, it could send stocks reeling again.
Another worry is the inflation that is occurring alongside the economic slowdown. The dollar's recent tumble appears to have plateaued, but it is still weak, while food and energy costs are staying high. Consumers are finding themselves unable to spend money on discretionary items because the bulk of their wages is going toward necessities like meals, transportation and health care.
The Labor Department reports Wednesday on consumer prices, which economists predict ticked up 0.3 percent in January, the same rate as in December. Core consumer prices, which exclude food and energy costs, are anticipated to have risen by 0.2 percent.
Also Wednesday, the Federal Reserve releases the minutes from its Jan. 29-30 meeting. At that meeting, the central bank lowered the key interest rate by a half point to 3.00 percent and stated that the financial markets are still under considerable stress. The Fed also said credit is tightening for businesses and households alike, the housing contraction appears to be deepening, and the job market seems to be weakening.
"It seems to be, as the data unfolds, they'll have no choice but to cut further," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He added, though, that given how much policy makers have already slashed rates and their persistent worries about inflation, "they don't have much more to go."
The Jan. 30 move followed an emergency three-quarter-point reduction a week earlier, and three cuts in the latter part of 2007. Rate changes tend to take at least six months to affect the economy. The Fed meets next on March 18.
For clues about how the Fed is feeling about the economy and its monetary policy going forward, investors will listen to speeches by Minneapolis Fed President Gary Stern, who is scheduled to speak Tuesday in Golden Valley, Minn., on the economy, and by St. Louis Fed President William Poole, who is speaking Wednesday in Kirksville, Mo., on inflation dynamics.
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