Another wild week in the markets and the economy. We’re just beginning to see the excesses of mis-priced liquidities surface and have a long-way to go to sort it out in EVERY asset market, though almost everyone is in denial. Meanwhile the real economy is slowing and there are major changes in business operations going on out of sight. The article on the shift of major blue-chips to slow-growing blue chips is a harbinger as is the equally valuable article on retailing in India (which should be read in light of last week’s articles on WMT’s worldwide inability to adjust it’s model to new markets). We’ve also crossed the five-year anniversary of Sarbox – which to my mind is best understand as ISO standards for good business practice, even though the enforcement mechanisms have left a lot to be desired. But the worldwide spread of credit problems starting with structured & leveraged products based in the sub-prime market is spreading rapidly. The key problem is that almost everybody is still in denial – both about the extent of the real estate problems but much more importantly on the extent to which a similar lack of diligence and fundamentals is likely to ripple thru ALL other markets. This may just be the tip of the iceberg. More unfortunately we just don’t know and the bottom is completely invisible to us because of the total lack of transparencies in these complex instruments. Two posts this week btw look at long-term Employment trends and long-term market trends which are worth reviewing. It might also be worth your while to refresh yourself on the slowing economy with two earlier posts (here and here) because, all of a sudden in the last 2-3 weeks it's beginning to dawn on folks that the outlook is not what they thought it might be. A little "told-you-so" might be in order if so many weren't still so far in denials. Sigh... Meanwhile please enjoy the sumaries and links in the Special, Investment/Markets, Economy and Business sections. Some very interesting stuff.
General & Special
(**) Intel, Cisco, Johnson & Johnson Lure Value Investors -- Intel Corp., Cisco Systems Inc. and Johnson & Johnson, perennial favorites of money managers seeking U.S. stocks with the fastest profit growth, are becoming staples for so-called value investors. Shares of growth companies in the Standard & Poor's 500 Index trade at an average 16.3 times estimated earnings, while value stocks, those priced at a discount to the market or their historical average, trade at 14 times profits. The gap between them, now 2.3 points, has narrowed from 25.5 at the beginning of the decade, data compiled by Bloomberg show. Stock valuations are converging as markets tumble worldwide, turning technology and health-care companies, whose shares haven't kept up with profit gains this decade, into relative bargains. Rendino is buying shares of Intel, International Business Machines Corp., Johnson & Johnson and Wyeth, and is ``overweight'' shares of drugmakers for the first time since 1994. New York-based BlackRock Inc. is the largest publicly traded U.S. money manager. The S&P 500/Citigroup Growth Index's 2007 performance trailed the S&P 500/Citigroup Value Index until last month, when banks, brokerages and homebuilders led a global decline that wiped out $2.1 trillion in a week. On Aug. 3, as the S&P 500 completed its steepest three-week retreat since 2003, the value index erased its gains for the year.
Sarbox Was the Right Medicine As Sarbanes-Oxley turns five this summer, the controversial act is once again being put under a high-powered microscope. Has it been the transformative law that supporters -- prominently including Treasury Secretary Henry Paulson -- claim has restored investor confidence and helped corporate America move out from the ugly shadow of Enron, WorldCom and other epic-sized scandals? Or, as detractors argue, is it a roadblock to the competitiveness of the U.S. capital markets by virtue of its outsized cost of compliance? The last five years have made it irrefutably clear. Sarbanes-Oxley (Sarbox) is a textbook case of how regulation should ideally work in a democracy: A scandal is addressed through strong legislative reaction, followed by fine-tuning by relevant agencies (in this case, the SEC and the Public Company Accounting Oversight Board). Is it any wonder that variations of Sarbox and its rigorous internal controls are being adopted in Japan, France, China, Canada and other countries around the world?
· Five years under the thumb
The Trouble With Economists The WSJ Op-Ed pages remains a fertile ground for debate. Up today is Brian Wesbury -- a very nice gentleman I've met on various shows, and had a terrific (dare I call it lovely?) debate at the WSJ's econoblog (Reasons to Pout?) early last year. Like Brian, I believe the global economy is booming. Unlike Brian, I see the U.S. economy as significantly weaker than the rest of the world. But that's not my main gripe with his piece: Its the concept that the CNBC and Fox are remotely close to offering a balanced perspective on anything.
Paul Krugman: Very Scary Things In September 1998, the collapse of Long Term Capital Management, a giant hedge fund, led to a meltdown in the financial markets similar, in some ways, to what’s happening now. ... The Fed coordinated a rescue..., while Robert Rubin, the Treasury secretary..., and Alan Greenspan,... the Fed chairman, assured investors that everything would be all right. And the panic subsided...What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in ... financial instruments backed by home mortgages ... have shut down because there are no buyers. This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults. The origins of the current crunch lie in the financial follies of the last few years... The housing bubble was only part of it; across the board, people began acting as if risk had disappeared. Everyone knows now about the explosion in subprime loans ... and the eagerness with which investors bought securities backed by these loans. But investors also snapped up ... junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows. Then reality hit... First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds...
What Happens in Sub-prime…Gets to Spain Really Quickly “How does this happen?” somebody asked me this weekend. That somebody was my wife, and she was wondering out loud how a financial institution such as Bear Stearns could get caught in a sub-prime debt crisis that pretty much everybody in America, including my dog Lucy, knew was coming. It’s a great question. On the one hand, it’s inexplicable. How could grownups decide that buying paper written by unscrupulous mortgage brokers with no documentary evidence that income or assets or creditworthiness are as stated would be a good way to invest their client's money? What makes a well educated veteran who lived through the Long Term Capital melt-down ten years ago think nothing of leveraging forty-to-one a portfolio of sub-prime paper backed by overpriced houses next to Interstate 80 in Sacramento? How does a wise-guy bond maven who as recently as April 12th got a fawning article (“Prospering in an Implosion; Subprime Market's Fall Plays to the Strengths Of a Bold Contrarian”) and his photo alongside his wife, his children and his yacht, in the New York Times, hit the wall in June, freezing investor redemptions and putting the yacht up for sale? The complex answer involves newer age MBA-type concepts such as alpha and beta coefficients and bond strategies beyond my comprehension, along with older-fashioned realities such as leverage and margin calls. The simpler answer, however, is the fact that these markets of ours vacillate—over seconds and minutes and hours and days and weeks and months and years and decades—from greed to fear and back to greed again
Why Surge in Buybacks May Ease As Credit Gets Tighter, Many Firms May Tread With Greater Caution. If credit-market troubles make it harder for companies to borrow, the raft of share buybacks that has been helping to buoy the stock market could become a thing of the past. Companies have been buying back shares at a breakneck pace, repurchasing a record $122 billion of stock in the second quarter alone, according to Standard & Poor's estimates. Those buybacks have helped propel the stock market higher because they have reduced the supply of shares available to invest in and, in doing so, have also raised per-share earnings. Last Friday, Procter & Gamble Co. said it plans to buy back $24 billion to $30 billion of its shares over the next three years, and yesterday Wells Fargo & Co. said its board had authorized it to buy back as many as 50 million shares of its stock. But with the trouble in subprime mortgages spreading to the bond market, fewer companies may be buying back shares in the months to come. Corporate bond prices have fallen sharply in recent weeks, sending their yields, which go in the opposite direction, higher. Although corporate borrowing costs are relatively low, historically speaking, companies have cut back sharply on debt issuance. In July, companies issued just $29 billion of corporate bonds, down from $128 billion in June.
Investment & Markets
It ain't easy Despite the recent turbulence in the credit markets, the Federal Reserve holds fire on interest rates.The Fed acknowledged in a statement that financial markets had been volatile, that credit conditions had tightened (if only for “some” households and businesses) and that core inflation had “improved modestly”. But it stressed that America's economy was still on course for moderate growth, albeit with greater downside risks, and that inflation remains the main policy concern. Hopes of a bigger shift in tone, paving the way for a cut in interest rates later this year, were firmly dashed. Before the Fed's statement, a cut by the end of the year had been fully priced into financial markets, with another expected by March. Once the market had digested the Fed's stance, it was only marginally less optimistic about the likelihood of lower rates. But by stressing that policy will respond to economic developments, the Fed seemed at pains to quash any notion that it would ease policy to shore up financial markets.
The mandarins of money Central banks in the rich world no longer determine global monetary conditions. EXACTLY 30 years ago, in August 1977, The Economist published an article by Alan Greenspan, the former chairman of America's Federal Reserve, who was then a private-sector economist. It listed five economic “don'ts”. One of these was: “Don't allow money-supply growth to spiral out of hand.” Yet that is exactly what central bankers have done in recent years. The bubble in credit markets that now seems to be bursting and the frothiness of so many asset prices was encouraged by loose monetary policies which pumped liquidity into financial markets. The real short-term interest rate is now above its long-term average for the first time since 2001, suggesting that global monetary policy is no longer loose. So why did financial markets remain exuberant for so long? One reason is that the world's two most important central banks, the Fed and the ECB, have not been the main sources of global monetary liquidity. Many economists in investment banks and international institutions mistakenly assume that “global” monetary conditions are set by the central banks of the rich economies. Yet over the past year, a staggering three-fifths of the world's broad money-supply growth has flowed from emerging economies.
LBO `Freeze' Shuts Wall Street Pipeline; $1.3 Billion Dries Up While no one's predicting a Biblical seven-year drought, the pace of buyouts has slowed more than 33 percent since June, data compiled by Bloomberg show. Investors are cutting back on riskier assets such as the loans and bonds that fund LBOs after being burned by losses from U.S. subprime mortgages. At that rate, banks would miss out on at least $1.3 billion of fees in the second half. JPMorgan Chase & Co., the third-biggest U.S. bank, has the most at stake after earning more than anyone else from arranging leveraged loans in the first half. Together with Credit Suisse Group and Deutsche Bank AG, it made a combined $919 million from loans in period, data compiled by New York-based Freeman & Co. and Thomson Financial show. The three also got $426 million for advising LBO firms on takeovers and $190 million from bond sales. Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. Companies such as London-based Cadbury Schweppes Plc, the world's biggest candy maker, have delayed asset sales, and banks including New York-based JPMorgan and Frankfurt-based Deutsche Bank have been left on the hook for as much as $300 billion of debt they've agreed to provide for LBOs. A 50 percent drop in income from arranging buyouts and other ``higher-risk credit,'' together with a 10 percent decline in other investment-banking revenue would slash earnings at Zurich- based Credit Suisse by 19 percent, London-based Deutsche Bank analyst Matt Spick said in a July 26 note to investors. Credit Suisse spokeswoman Rebecca O'Neill declined to comment. Private-equity firms announced a record $616 billion of buyouts in the first half, capping four lucrative years of deals, according to Bloomberg data. New York-based Morgan Stanley, the second-biggest U.S. securities firm, is set to earn $45 million from New York-based Kohlberg Kravis Roberts & Co. for the $25.6 billion buyout of First Data Corp., the world's largest processor of credit-card payments.
LBO shops circle ravaged loan desks Sensing opportunity amid the credit markets' woes, several private equity firms are angling to purchase buyout-related loans and bonds at steep discounts from banks' trading desks, sources said.
Ironically, these are often the same private equity firms that have forced the banks to honor loan and bridge financing commitments that the banks now seek to unload by selling them at a discount.
'Great Unwind' May Be Here The problems have been gathering for months, beginning with subprime loans and spreading outward. Now Wall Street firms face the risk of a broad bond-market unwind, leaving vulnerable five years of record earnings and stock run-ups. Investors are worrying about more than just reduced earnings growth. It's the overall uncertainty, they say: The unintended risks of "bridge" loans stuck on balance sheets or even how to value a new set of exotic securities that can't find buyers. This could weigh on Wall Street stocks -- be it Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. -- for months to come. The worries stretch across a number of areas. In the past few weeks, trading has fallen off to a trickle in some asset-backed bonds, issued at double-A or triple-A ratings. With no bidders lining up, valuations and ratings have been left uncertain. Investors are also finding it harder to trade some risky high-yield, or "junk," bonds and leveraged loans for borrowers with high debt levels. The pullback in liquidity has been made worse by the usually slow summer-vacation season. That has hurt the chances Wall Street securities firms can offload their bridge-financing commitments for pending private-equity deals, which have soared this year. For months, analysts and bankers had predicted that rising debt levels for hedge funds, buyouts and Wall Street dealers might eventually snap, leading to a "great unwind" of lower prices and forced selling. Now, some say, the process has begun.
BNP Paribas Freezes Funds as Loan Losses Roil Markets BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.
· ECB Lends 94.8 Billion Euros as Money Rates Surge -- The European Central Bank loaned an unprecedented 94.8 billion euros ($130.2 billion) after demand for cash in the European money markets drove interest rates higher. A reluctance to lend money after concern over U.S. subprime mortgage losses roiled credit markets pushed overnight euro rates to as high as 4.7 percent today, compared with the ECB's benchmark refinancing rate of 4 percent. The rate for borrowing dollars overnight jumped to 5.86 percent from 5.35 percent yesterday. Borrowing rates are rising on concern banks face growing losses on investments linked to U.S. mortgages. BNP Paribas, France's biggest bank, today halted withdrawals from three investment funds, saying a lack of liquidity meant it couldn't ``fairly'' value the holdings.
Why the private equity bubble is bursting Loans will go bad, deals will be canceled, fortunes will be lost. The sudden end of cheap financing is wreaking havoc on the buyout market, says Fortune's Shawn Tully. It's looking more and more as if the private equity phenomenon was a classic Wall Street bubble. It brought unprecedented riches to investment banks, minted a flashy new generation of billionaire Masters of the Universe, and bestowed a magical aura on leveraged-buyout specialists like Carlyle and Kohlberg Kravis Roberts. And now the bubble's bursting. Loans will go bad, deals will be canceled, fortunes will be lost. We're witnessing the unwinding of the whole dynamic that propelled the stock market (not to mention Manhattan real estate prices) to record highs. Alarm bells are ringing. Since mid-July, worries about risky debt have helped drive the S&P 500 down by 6%, wiping out about two-thirds of this year's gains. At least one big hedge fund, Sowood Capital Management, run by a former member of the team that steered Harvard's endowment, has gone bust. And banks have been unable to syndicate loans financing several high-profile buyouts, including those of Chrysler, First Data and ServiceMaster. The bursting of the bubble will inflict broad damage. The cascade of private equity deals will slow to a trickle - and the firms that vastly overpaid for their targets at the peak of the frenzy in the past two years - when, by the way, most of the deals were done - will deliver extremely low returns to the pension funds, university endowments, and wealthy families that invested in them in recent years.
· Morgan Stanley Vs. Carlyle: A Credit Market Dust-Up The credit-market meltdown is claiming victims worldwide. Next on the chopping block: The profitable harmony between buyout firms and the investment banks that serve them.
Economy
Chicken-and-Egg Economics Shows Serious Cracks: There's something counterintuitive about that proposition, and repeating it often enough (it's one of economists' favorite palliatives) doesn't make it true. I mean, businesses don't hire out of the goodness of their heart or to earn humanitarian awards. Quite simply, they hire people to produce the goods and services consumers want to buy, hopefully turning a profit in the process. The problem with this line of reasoning is that business executives don't wake up one morning and arbitrarily decide to lay off 10 percent of the work force. They take their cues from something else, and that something else is demand. Relying on business hiring to support consumer spending is one of those chicken-and-egg issues, except in this case, the egg (demand) clearly comes before the chicken (hiring).
The Myth of Deindustrialization It's been a quarter-century since author John Naisbitt blithely described manufacturing as a "declining sport" that Americans could easily offshore to Asia. Since then obituaries for U.S. manufacturing, both mournful and enraged, have been written many times. The reports of death are premature. Many of the most vibrant economic regions in this country -- from the deep South to the Pacific Northwest -- are still making and transporting real goods. The success of America's "material boys" suggests that the old economy and its blue-collar workers -- so often patronized and pitied -- can still more than hold their own in today's global economy. Manufacturing's role in promoting job and income growth is often understated. Although overall industrial jobs have diminished by almost five million since the late 1970s, the loss has been concentrated largely in lower-skilled positions. The number of higher-skilled positions, with a median hourly wage of $24, jumped by more than 36% between 1983 and 2002 to nearly 4.5 million, according to a 2006 study by the Federal Reserve Bank of New York. These skilled workers remain in great demand across much of the country -- 80% of manufacturers in a recent survey conducted by Deloitte consulting expected a shortfall in their numbers over the next three years. Construction, logistics management and trucking are particularly important in part because they provide a path to upward mobility for people with less than four-year college degrees. The jobs include welders, machinists and tool-and-die makers.
Business
How Small Firms Can Weather a Credit Crunch A credit crunch could be on the way for small businesses -- and it is crucial that they prepare themselves for the possibility. Banks, nervous about the prospect of more borrowers defaulting on loans, have been tightening their purse strings when it comes to lending money to consumers and major corporations. And industry experts say lending jitters may soon extend to small firms as well, making it harder for them to find loans. In recent years, credit has been relatively easy to come by as banks aggressively pursued entrepreneurs, offering larger loans at cheap rates to untested companies. Most bank executives say that for now, they have neither toughened lending standards nor raised interest rates on loans to small businesses.But banks say some businesses that received loans in recent years are falling behind on payments -- and default rates are expected to accelerate. As a result, experts say some lenders are already tightening their lending criteria and they expect more to follow suit.
Chrysler Picks Ex-Home Depot Chief Nardelli to Lead Automaker Chrysler LLC named former Home Depot Inc. Chief Executive Officer Robert Nardelli as CEO, demoting Tom LaSorda, as new owner Cerberus Capital Management LP takes control of the automaker. Nardelli, 59, a Cerberus adviser, also will become chairman, Auburn Hills, Michigan-based Chrysler said yesterday in a statement. LaSorda becomes president, while Chief Operating Officer Eric Ridenour will leave Chrysler and won't be replaced. The leadership shift puts Cerberus's stamp on Chrysler as it begins operating the third-largest U.S.-based automaker as a private company. Nardelli will have to lead Chrysler back to profit while battling Asian rivals led by Toyota Motor Corp. that are grabbing U.S. sales and market share. ``This is a bit of a surprise,'' David Healy, a Burnham Securities analyst in Sierra Vista, Arizona, said in an interview. ``But I think it shows that Cerberus is going to be tough because of Nardelli's tough reputation.'' Nardelli's selection comes three days after Cerberus closed a deal to buy an 80.1 percent stake in Chrysler from DaimlerChrysler AG for $7.4 billion. Nardelli joined Cerberus after being ousted at Home Depot in January amid investor criticism for earning $225 million while the company's stock fell 7.9 percent in his six-year tenure.
· Cerberus: With the closing of the Chrysler deal, the (very) private equity shop is poised to succeed or fail very publicly, say Fortune's Katie Benner and Geoff Colvin.
Rupert gets his trophy NEWS reports suggested that the result was in doubt right up to the end, but Rupert Murdoch's admirers were certain that he would prevail. Mr Murdoch has played a difficult hand brilliantly. He read the internal politics of the sprawling Bancroft clan, which owns a controlling stake in Dow Jones, perfectly—perhaps better than he reads his own family. His $5 billion offer was just high enough to swing the intergenerational politics of the Bancrofts his way, by enticing enough of the younger members of the clan to put money before the continuation of the family's long stewardship of the company. And when some members of the family tried to get Mr Murdoch to raise his offer, his refusal to do so and his threat to walk away were convincing enough to get them to agree to his original offer.
Bear Stearns Caymans Filing May Hurt Bankrupt Funds' Creditors -- Bear Stearns Cos.' decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors' and investors' ability to get their money back. While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings. The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the islands.
(***)CHAOS THEORY In India, a Retailer Finds Key to Success Is Clutter
Consumers Like Noise, Bins, Mr. Biyani Says;Narrowing the Aisles
On a tour of one of his supermarkets, Kishore Biyani notes that shopping carts are getting stuck in the narrow aisles, wheat and lentils have spilled onto the floor, black spots cover the onions and it's difficult to hear above the constant in-store announcements. He grins and congratulates the store manager. Mr. Biyani, 45 years old, has built a large business and a family fortune on the simple premise that, in India, chaos sells. Americans and Europeans might like to shop in pristine and quiet stores where products are carefully arranged. But when Mr. Biyani tried that in Western-style supermarkets he opened in India six years ago, too many customers walked down the wide aisles, past neatly stocked shelves and out the door without buying. Mr. Biyani says he soon figured out what he was doing wrong. Shopping in such a sterile environment didn't appeal to the lower middle-class shoppers he was targeting. They were more comfortable in the tiny, cramped stores -- often filled with haggling customers -- that typify Indian shopping. Most Indians buy their fresh produce from vendors who keep vegetables under burlap sacks. So Mr. Biyani redesigned his stores to make them messier, noisier and more cramped. Mr. Biyani divides India's 1.1 billion people into three types of consumers. "India One," as he calls them, are those with good educations, good jobs, and much disposable income. They also are the target audience for many foreign companies seeking to sell their wares here. Mr. Biyani estimates that such customers comprise about 14% of the total population. Where he sees the greatest sales potential is among consumers he calls India Two: the drivers, maids, cooks, nannies, farmers and others who serve India One. He estimates that 55% of Indians -- roughly 550 million people -- fall into this category. They are seeing their wages rise and their children frequently pursue further education and careers that will vault them up the social ladder. India Three, he says, is the rest of the nation -- those at, or slightly above, subsistence level, who don't represent much of a market for modern retailers. He thinks any retailer that tries to re-create a Western store in India will miss most potential customers. "People like to do what they think works in the West," but India is different, he says.
Banks Whistle Past the Credit-Ratings Graveyard: If a guy with a herd of cows described the milk market as the worst for 22 years, you might expect the creditworthiness of dairy producers to decline. In the worst air- travel market in more than two decades, you could reasonably anticipate that the credit ratings of airlines would suffer. So when Bear Stearns Cos. Chief Financial Officer Samuel Molinaro said last week that conditions in the fixed-income markets are as bad as he has ever seen in his 22 years in the securities industry, guess what Moody's Investors Service said? While banks are whistling past the credit-rating graveyard, stock-market investors seem less than convinced that lenders will emerge with creditworthiness and earnings unscathed. As of Aug. 7, the 92 members of the Standard & Poor's 500 Financials Index had a total return of minus 7 percent in the past month, compared with a 3.4 percent decline in the benchmark S&P 500 Index. The Dow Jones U.S. Financials Index had dropped 8 percent. The UltraShort Financials Proshares, an exchange-traded fund that aims to deliver double the inverse performance of the Dow Financials index, gained 18 percent in July.
Deutsche Post Faces `Bloodbath' as Mail Monopoly Set to End Deutsche Post AG may be defenseless against invaders into its lucrative home turf as the rest of Europe backtracks on promises to throw open national mail markets. A two-year delay in opening most of the region is thwarting plans by Europe's biggest postal service to expand. That leaves Deutsche Post little room to improve margins when its letter- delivery monopoly in Germany, its most profitable business, ends Jan. 1. The shares have dropped 18 percent since April, after more than doubling in four years as Deutsche Post shed workers and boosted profit.
Why iPod's slide may not matter Still, for those paying attention to the nitty-gritty of Apple's numbers, the iPod part of the rumor may not have seemed entirely far-fetched. Simmering beneath the surface of Apple's recent banner fiscal third-quarter financial results the highest revenue and profit in Apple's history is an iPod warning sign.
Time Warner May Have to Suppress Cable Buyout Urge Time Warner Inc. Chief Executive Officer Richard Parsons may be forced to suppress his urge to buy more cable systems for the company's Time Warner Cable Inc. unit. That's good for shareholders.The obstacles to Parsons' hunt remove distractions and will allow him to address the lagging performance of cable systems he acquired in 2006 from Adelphia Communications Corp. and Comcast Corp. Time Warner is just starting to offer telephone service, a key to expanding profit, in new markets such as Dallas and Los Angeles, where the company has 90,000 digital phone subscribers and expects more than twice as many by year's end.