Well let's try and finish off the week's collection of newsclippings by putting up the excerpts from the business side of the house. There was, as usual, a host of interesting and relvent info for you to skim ranging over a large sample from the Finance industry to some major stories regarding some of the traditional industries undergoing their own huge changes to equally large currents building up in the Tech industries. Before we try and summarzie and explain those a little bit let's set the stage with the following excerpt which puts a context around all of the news.
'Headwind' Blows as CEOs Navigate Trouble America's captains of industry are starting to talk like, well, sailors. As the U.S. economy slows, chief executives and chief financial officers have taken to slinging around a word more commonly heard on the decks of ships. To hear executives tell it, headwinds are to blame for the weak sales of cars, tires, paint and books. Just what are these headwinds? Everything from high fuel prices to slow foot traffic in handbag stores to rising newsprint costs. Weather terms appeal to economists and corporate executives because the market sometimes seems to behave like a force of nature. These days, Mr. Lakoff says, citing headwinds seems to be a way to duck blame for all kinds of business problems related to the subprime mortgage crisis, the credit crunch, even simple bad business decisions. Some economists say the metaphorical wind only blows in one direction. Although executives are quick to blame headwinds for their woes, they are less likely to cite tailwinds for their good fortunes.
If you re-phrase "Headwinds" to what they're really saying it's look about below the fecal matter is going to hit the rotary impeller. The stories start with a review of Buffett's bond insurere offer which points out what he really tried to do was cherry-pick the only part worth something; confirmed by Fri's announcement from Ambac that they're looking to breakup as well as parallet public comments from Spitzer and Dinello. What everybody may have missed is that Warren, true to his roots, also bought into Kraft and GlaxoSmithKline. Though even he conceeds that in general it's too early until more clarity is established on the markets.
Meanwhile the Finance industry's turmoil is widening and accelerating with Hedge funds shutting down, major Street firms having gone public experience losses with Other People's Money that they would never have risked as partnerships and PIMCO beginning to cherry pick certain bonds, e.g. Citi. Then we have both the railroad and the airline industries starting major re-structurings. The latter because they've never made their cost of capital (Warren btw is a charter member of Airlines Anonymous) and the former beginning to re-invest in expanding their trackage and capital investments for the first time in nearly a century, i.e. when they first crossed the threshold in terms of over-capacity that the airlines are at now. Then there's GM who's "surprise" positive earnings announcement was actually a major operating loss offset by tax manuvers; i.e. the Auto industry like the airlines is fighting a rearguard action to avoid the major downsizing, re-structuring and re-thinking they've been avoiding for two decades. On this time the bear is running faster than they are. There are also interesting stories on WMT and Cardinal Health; the latter in case you didn't know beginning to crawl away from some abysmal years after being one of the great service and value-innovators of the '90s.
And there's the Tech - wow, what a surprise (NOT if you've been reading along with us). In the last few weeks every major tech analyst shop (Gartner, Forrester, et.al.) has rapidly and significantly downgraded their outlook for tech spending. Which is of course entirely consistent with our analysis of the outlook for capex spending from the business cycle analysis we've been doing for several months. It's just taken a while for it to show up in the industry level analysis.
That's supplemented by more interesting tidbits on Yahoo as it continues to publically twist in the wind in a problem it created for itself thru a lack of innovation. On the other hand the Telecom industry has just discovered that the iPhone hath triggerred another revolution - paraphrased as "it's the user interface, dummy". In other words if you provide a lot of functionality that's both easy to use/understand and is integrated, reliable and appealing people will start making major use of it. Oddly while the iPhone is generating all sorts of new network traffic and forcing competitors to re-think their product and service strategies the industry still doesn't get it. What a surprise.
Bon Appetit'
Business
Buffett's an opportunist, not a hero The stock market seemed to hail the Oracle of Omaha as a savior for his offer to reinsure bonds, but the billionaire's proposal wasn't based on altruism. When Warren Buffett announced his solution for the beleaguered bond insurance industry earlier this week, you half-expected him to end his statement with a hearty "Yo, ho, ho!" and wave the Jolly Roger. His offer to reinsure the low-risk municipal bonds backed by Ambac Financial Group and MBIA but not their problematic, low-rated obligations in structured finance, was about as piratical as you can get and stay on this side of the law. You almost have to admire the old buzzard's devious but brilliant gambit, as it was the equivalent of a rich man walking into the parlor of a family about to lose its home to foreclosure and offering to buy all the good furniture, tapestries and china at pennies on the dollar. As much as I want to empathize with the monoline insurers in their season of humiliation, I can't help but wonder whether they are making the wrong move. After all, the bond insurers' executives have already made one boneheaded move after another in order to get to this point, deviating in the past decade from the business of guaranteeing supersafe municipal bonds to expand into the risk-mad world of guaranteeing securities larded with subprime mortgages. And now they are showing a sort of complacency about their weakened position that's reminiscent of a novice investor who just can't seem to sell a position that's down 80%.
Buffett's Berkshire Becomes Largest Shareholder in Kraft Foods Billionaire Warren Buffett's Berkshire Hathaway Inc. became the largest shareholder in Kraft Foods Inc., the world's second-biggest foodmaker. ``Kraft's a portfolio of iconic brands in a company that was undermanaged for quite a long time,'' said Tom Russo, who helps manage $3 billion, including shares of Berkshire and Kraft, at Gardner Russo & Gardner in Lancaster, Pennsylvania. ``The brands have the ability to carry the returns, once they're properly managed, which you're seeing under way now.'' Berkshire, based in Omaha, Nebraska, also disclosed a stake in drugmaker GlaxoSmithKline Plc, with 1.51 million American depositary receipts. The company increased holdings in Wells Fargo & Co., the nation's second-largest home lender, by 3.4 percent since Sept. 30 to 289.3 million shares. ``Warren Buffett is having a field day,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``He's always looking, but now he's seeing things that meet his standards'' at reduced prices. Kraft has declined about 15 percent during the past 12 months in New York Stock Exchange composite trading. The ADRs of London-based GlaxoSmithKline, the world's second-largest pharmaceutical company, have lost 26 percent in the past year, and San Francisco-based Wells Fargo dropped 18 percent.
Hedge funds put up shutters to weather storm Hedge funds are beginning to close their doors or lay off teams of traders in response to the unprecedented gridlock in the debt markets which has led to losses and significantly reduced the amount of money banks are willing to lend their hedge fund clients. Many players, both at hedge funds and the proprietary desks of Wall Street firms, have taken bets on the likelihood of buy-out deals getting done through private negotiations even if the public debt markets remain closed. Speculation in recent weeks has been particularly intense around whether two private equity firms would go through with their commitment to buy Clear Channel Communications. Market prices indicate the deal will not happen. But there is a new sense of caution among many market participants as a result of the volatility in the market, and acting on such expectations is more difficult. Credit hedge funds and so-called relative value funds are also having a hard time. To make profits from small discrepancies among prices, these funds use massive amounts of borrowed money. In the past they could borrow up to four times their own money. Now most are fortunate to get twice as much from banks.
Wall Street's Shareholders Suffer Losses Partnerships Could Never Envision -- Less than a decade after Wall Street's last major partnership went public, stockholders are paying the price for bankrolling the industry's expanding risk appetite. Four of the five biggest U.S. securities firms lost about $83 billion of market value last year, almost 90 percent of their net income since 1999, data compiled by Bloomberg show. That cut the annual average return for Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. during those nine years to 9.7 percent from 16.8 percent. The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers, said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs Group Inc. Since raising money from the public, many of the biggest firms have abandoned that caution. Shareholders, stung by the securities industry's losses last year on subprime mortgage-backed bonds and leveraged loans, may be in for more pain.
Pimco Proves Prince Alwaleed Isn't Only One in Love With Sullied Citigroup Citigroup Inc. has never been held in such low esteem by debt investors, and that's why Prince Alwaleed bin Talal isn't the only one in love with the bank whose looks are deceiving. Pacific Investment Management Co., manager of the world's largest fixed-income fund, and Calvert Asset Management Co. said Citigroup and Bank of America Corp. are attractive because yields on U.S. bank bonds are near record highs relative to Treasuries. Alwaleed, the biggest shareholder in New York-based Citigroup, bought more of the bank's stock even as the Standard & Poor's 500 Financials Index fell 9.1 percent this year. ``The fact that the banking sector has attracted fresh capital in the last couple of months is huge,'' said Mark Kiesel, an executive vice president at Pimco who oversees $158 billion of corporate bonds from Newport Beach, California. ``We've been playing defense for the better part of two years, and the question we've been asking ourselves is when to go on offense. In the banking sector, we've started to do that.'' Pimco has been buying new issues from financial firms because the market is ``too bearish,'' Kiesel said in an interview Feb. 5. Relative to benchmark indexes, bank bonds represent a bigger portion of Pimco's holdings, he said. On Jan. 22, Bill Gross, manager of the Pimco Total Return Fund, said Citigroup, Bank of America and Wachovia Corp. were appealing.
The need to shrink IT HAS been a long haul. In the past 18 months America's biggest airlines have shown signs of life after a near-death experience in the aftermath of the attacks on September 11th 2001. At one time or another, four out of the “big six” network carriers succumbed to Chapter 11 bankruptcy protection and as late as 2006 nearly half the seating capacity in America belonged to airlines in Chapter 11. But since then booming demand for travel, along with the painful cost and capacity reductions of the past few years, have given America's airlines surging profits and the fastest-improving yields in the industry. Now, led by merger talks between Delta and Northwest, the third- and fifth-largest airlines, it suddenly looks as if an often predicted, but never realised, wave of consolidation is about to hit American aviation—but only if competition regulators allow it.
New Era Dawns for Rail Building The upgrade is part of a railroad renaissance under way across much of the U.S. For the first time in nearly a century, railroads are making large investments in their networks -- adding sets of tracks, straightening curves that force engines to slow and expanding tunnels for bigger trains. Their campaign is altering the corridors of American commerce, more so than any other development since interstate highways spread to the interior. For decades, railroads spent little on expansion, even tore up surplus track and shrank routes. But since 2000 they've spent $10 billion to expand tracks, build freight yards and buy locomotives, and they have $12 billion more in upgrades planned. The buildout comes as the industry transitions away from its chief role in recent decades of hauling coal, timber and other raw materials in manufacturing regions. Now, increasingly, railroads are moving finished consumer goods, often made in Asia, from ports to major cities. Their new higher-volume routes, called corridors, often serve the South, where the rail system is less developed and the population is rising. Railroad operators are pressing for advantage over their main competitor, long-haul trucking, which has struggled with rising fuel prices, driver shortages and highway congestion. Railroads say a load can be moved by rail using about a third as much fuel as it takes to haul it by truck. And rail transport is becoming more efficient still, they say, as operators speed their lines and logistics companies build huge warehouse areas along routes. Demand for rail service increased sharply when the U.S. economy and Asian imports surged starting in 2003.
GM Has Loss of $722 Million, Will Offer Buyouts to All 74,000 UAW Workers General Motors Corp. posted a fourth- quarter loss on a mounting deficit in North America and will offer buyouts to all of its 74,000 United Auto Workers employees to further trim labor costs. GM, the world's largest automaker, lost $722 million after a year-earlier profit of $950 million. The deficit in its home market was more than double analysts' estimates and failed to make up for rising profit overseas. The shares rose as much as 2.6 percent because Detroit-based GM recorded a profit after excluding one-time costs.
Wal-Mart Revives Sales With Lower Prices on More Items, Challenging Target Wal-Mart Stores Inc.'s renewed focus on low prices amid a slowing U.S. economy may have revived sales at the world's largest retailer. Wal-Mart will probably say on Feb. 19 that fourth-quarter sales at stores open at least a year increased 1.5 percent, said Deborah Weinswig, a Citigroup Inc. analyst. For the first time in 3 1/2 years, the Bentonville, Arkansas-based company's sales growth may have outpaced that of Target Corp., the second- biggest U.S. discount chain. Chief Executive Officer H. Lee Scott discounted prices sooner and on more items than rivals to lure consumers coping with a depressed housing market as well as higher food and fuel costs. After a failed attempt to boost profit by attracting fashion-conscious shoppers with silk lingerie and velvet jackets in 2005 and 2006, Wal-Mart returned to emphasizing food and household merchandise at cut-rate prices at its more than 4,100 U.S. stores. The company marked down 20 percent more items going into the holiday season compared with 2006, and kept prices low into January. Target said last week that its fourth-quarter same-store sales rose 0.2 percent. That would mark the first time since August 2004 that Wal-Mart's growth outpaced Target's.
Cardinal Health Could Be Regaining Its Strength After three years of instability, Cardinal Health Inc. appears to be getting back on its feet -- and that could give a shot to its ailing share price. Investors have been ambivalent about the drug-wholesale and medical-supply company's stock, taking occasional nibbles but showing no sustained appetite since a 2004 inquiry by the Securities and Exchange Commission and subsequent financial restatements. The situation worsened in the past year with the exit of a key executive, a product recall and government action against some Cardinal distribution centers. Drug wholesaling is dominated by Cardinal, AmerisourceBergen Corp. and McKesson Corp. The trio distributes some 90% of drugs in the U.S., a volume game with razor-thin margins. Cardinal -- the most diversified of the three, with 45% of its profitability coming from nondistribution ventures -- had $87 billion of revenue last year and $1.9 billion of profit. The problem is that the Dublin, Ohio, company has never had solid equilibrium because of its three divisions.
IT spending forecasts cut on recession fears Forecasts for global IT spending in 2008 have been cut, as fears of a recession in the US puts the brakes on growth. Global spending on IT goods and services is expected to grow to just $1,695bn in 2008, a 6 per cent increase on last year, according to Forrester Research, the market research group. This represents a significant slowdown from 12 per cent growth last year. Only two months ago, Forrester predicted IT spending would grow 9 per cent to $1,7580bn this year, but the group has pared this forecast back after a series of poor reports on the US economy. These include news last month that the US economy grew at just 0.6 per cent in the fourth quarter, its slowest pace since 2002, and figures this month showing a fall in employment. The hardest-hit sectors will be computer and communications equipment, with software and services seeing stronger growth. Mr Bartels stressed that the technology slowdown would not be as severe as in 2001, when spending actually declined. “The tech sector will still grow marginally better than the overall economy. This is not a technology bust, it is a slowdown in growth,” he said.
· Outlook for tech spending worsens The technology industry's outlook for 2008 looks worse than it did just two months ago, when fears of a U.S. recession already were leading analysts to predict a slowdown in purchases of computers, software and tech services. A report being released Monday by Forrester Research Inc. says U.S. companies and government agencies are expected to increase their spending on information technology by just 2.8% this year. That is a substantial downward revision from the 4.6% growth that Forrester was predicting in December.
· Microsoft Record-Low P/E Pushes Technology Stocks to Market-Valuation Hell Microsoft Corp. shares haven't been as cheap since 1986, the year Bill Gates took what would become the world's largest software maker public. Nokia Oyj is trading at its least expensive level since surpassing Motorola Inc. as the biggest producer of mobile phones in 1998. Despite the fastest estimated earnings growth of any U.S. group except banks, technology stocks were hurt the most in the global stock market tumble that sent shares to their worst January in at least three decades. Computer and software-related companies in the MSCI World Index were valued at 20.8 times profit on Feb. 6, the lowest ever and down from 91.1 at the start of the decade. Earnings from more than two-thirds of technology stocks in the Standard & Poor's 500 Index that have reported fourth- quarter results exceeded projections. Analysts forecast profits at companies from Dell Inc. to Intel Corp. will grow 24 percent this year, even as the U.S. economic slowdown threatens to curb demand.
Was a Private Equity Bid for Yahoo Thwarted by Microsoft ? Last week, before the Microsoft (MSFT) deal was rejected by Yahoo's Board, some interesting chatter was bouncing around NYC. The latest rumor to make the rounds was that Yahoo (YHOO) was just about to announce a negotiated transaction for the sale of the company to an East Coast private equity firm. Then Microsoft stepped in the way. We first heard this story sometime between Mister Softee's $31/share, $44 billion hostile bid, and this weekend's rejection of that offer by Yahoo as an insufficient valuation for all of Yahoo's properties. The rumors of this now pre-empted private bid include the following:
· Yahoo May Sidestep Microsoft Takeover by Forging Alliance With News Corp.
Nokia, Google Add Features to Compete With Apple's IPhone After only eight months on the market, the iPhone from Apple Inc. is prompting competitors including market leader Nokia Oyj to introduce mobile phones with competitive, and sometimes better, features. At the Mobile World Congress in Barcelona, Spain, Nokia, based in Espoo, Finland, unveiled the N96, a top-of-the-line model that comes with features the iPhone lacks, including faster third-generation mobile data connections, video recording, a slot for additional memory and the ability to watch live TV in parts of Europe and Asia. Chipmakers including ARM Holdings Plc, headquartered in Cambridge, England; Qualcomm Inc., based in San Diego; and Texas Instruments Inc., based in Dallas, showed off their prototypes running on Google Inc.'s Android mobile operating system. This is a free, open platform created by Mountain View, California- based Google and more than 30 partners, who have formed a group called the Open Handset Alliance. Based on prototypes shown in Barcelona this week, I can see Android competing with the iPhone's user interface and ease of use once phone makers and carriers decide to adopt it. While the iPhone has driven companies to innovate, no handset yet trumps its style, simplicity and integration of applications. The latest handsets are minor upgrades of existing phones, with a few interesting add-ons. Vendors need to do more.