Daily Archives: September 7, 2007

Cramer’s War & Defense Stock Pick (LMT, GD, LLL, NOC, LMT)

On tonight’s MAD MONEY on CNBC, Jim Cramer was visiting the USC Campus in Los Angeles and he said Northrup Grumman (NYSE:NOC) is a defense stock that is a growth stock that was sold off without the right reasons.  The analysts are almost all HOLD rated on this even though they like the sector.  13% growth and a 14 P/E ratio is better than good for Cramer.  Cramer likes all the other defense stocks, but he thinks Northrup is so darn cheap that it has to go higher.  This also traded higher today, along with Raytheon (NYSE:RTN).  He thinks it has been trading like a homebuilder or a lender.  He thinks it is very undervalued with the potential for accelerated growth.

Cramer did say he likes L-3 (NYSE:LLL), General Dynamics (NYSE:GD), Lockheed Martin (NYSE:LMT) and other defense sectors.  But "NOC" is his pick and he said "it’s so cheap, it has to go higher."

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 5:15 pm in Defense, , , , ,

Starbucks: Is The World Running Out Of Coffee?

The chairman of Starbucks (SBUX) says that there will be a shortage of the beans for very high end coffee.

Fear not. SBUX has already locked up supply due to it huge network of buyers. As for the competition, "At the very top of the market where Starbucks plays, I do not believe that others will have access to the quality of coffee that we are buying because we have secured those sources," Howard Shultz told Reuters. 

Odd comment. Does it mean that McDonald’s (MCD) and Dunkin Donuts will find that the best beans are scarce. Maybe they won’t be able to make money on gourmet coffee.

Schultz did say "If anyone believes that Starbucks is going to allow another company to take our leadership position away they are mistaken." Perhaps supply will be his advantage.

SBUX needs something. Its stock is down 22% this year.

Douglas A. McIntyre

Posted on: September 7, 2007 – 4:54 pm in Food, ,

52-Week Highs For September 7, 2007 (AEM, ABX, BDE, DRYS, GLD, GOLD, INSW, IVGN, JNPR, NWK, NYB, PDX, PLMD, RICK)

Usually we cover 52-week lows as many traders look for the bottom fishing opportunities in battered and tattered stocks.  But on big down days it is often important to look at which shares put in 52-WEEK HIGHS.  Some of these didn’t close above their prior yearly highs, but you get the idea.  Here is how crummy the market was today:

DJIA            13113.38     -249.97     -1.87%
NASDAQ    2565.7          -48.62       -1.86%
S&P500      1453.55       -25.00       -1.69%

The prevailing thought is that if stocks stay strong on a weak and crummy weak, imagine how well they’d do in an up-market.  With strong gold you’ll notice a few gold names on here.  Among others are a few tech names, and surprisingly a topless bar operator (not kidding). Here goes:

AGNICO Eagle Mines (NYSE:AEM) $49.19; 52-week $27.24-$48.35
Barrick Gold Corp. (NYSE:ABX) $36.36; 52-week $26.94-$36.46
Bois d’Arc Energy (NYSE:BDE) $18.83; 52-week $12.49- $18.75
DryShips, Inc. (NASDAQ:DRYS) $76.92; 52-week $12.63-$76.45
streetTRACKS Gold Shares (NYSE:GLD) $69.39; 52-week $55.55-$69.08
InsWeb Corp. (NASDAQ:INSW) $8.90; 52-week $1.96-$8.80
***Invitrogen (NASDAQ:IVGN) $80.00; $54.70-$80.56
***Juniper Networks (NASDAQ:JNPR) $34.58; 52-week $16.50-$35.09
Network Equipment Tech (NYSE:NWK) $11.54; 52-week $4.06-$11.54
***New York Community Bancorp (NYSE:NYB) $18.41; 52-week $15.69-$18.43
Pediatrix Medical Group (NYSE:PDX) $62.52; 52-week $43.85-$61.69
***PolyMedica (NASDAQ:PLMD) $51.86; 52-week $35.82-$51.97
Randgold Resources Ltd. (NASDAQ:GOLD) $28.48; 52-week $19.10-$27.42
Rick’s Cabaret (NASDAQ:RICK) $11.41; 52-week $5.02-$11.21

***denotes stocks that hit new highs intraday but didn’t hold them

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 4:47 pm in HI/LOW, , , , , , , , , , , , , ,

The 52-Week Low Club

Krispy Kreme (KKD) Down to $3.91 from 52-week high of $13.93. More bad earnings news.

Office Depot (ODP) Projects earnings decline. Drops to $19.68 from 52-week high of $44.69.

Circuit City Stores (CC) Electronics retail not getting better. Falls to $9.75 from 52-week high of $29.31.

Legg Mason (LM) Mutual fund business must not be so good. Down to $80.86 from 52-week high of $110.17.

Finisar (FNSR) Network equipment maker still falling after reporting bad numbers. Down to $2.70 from 52-week high of $4.25.

Coldwater Creek (CWTR) Women’s apparel posts bad numbers, keeps falling. Down to $11.39 from 52-weekhigh of $31.25.

Douglas A. McIntyre

Posted on: September 7, 2007 – 4:45 pm in HI/LOW, , , , , ,

Will Countrywide Make It? 12,000 More Job Cuts

Countrywide Financial (CFC) did what it could to keep the news out of the light. But late Friday The Wall Street Journal put out word that 12,000 more people would be fired at the firm. That means 20% of the company’s work force.

The news keeps getting worse.

Douglas A. McIntyre

Posted on: September 7, 2007 – 4:32 pm in Financial Stocks,

Defensive Stock Picks Better Than The Market (September 7, 2007)

We are frequently asked about how certain basket picks perform compared to the overall market.  It has been years since anyone has claimed their stocks should gain regardless of the market because most people have smartened up to that nonsense.  But "Defensive Stocks" do perform better in general on a relative basis in down markets.  That isn’t a guarantee and that isn’t an absolute, but at least they did today.

Out of the 30 DJIA components, only J&J was up on the day.  Out of the 17 defensive stocks we gave earlier this morning, 3 of the 17 closed up.  On average of the 17 defensive stocks, if you invested in each one equally the picks would have ‘only’ been down 0.85% out of the basket.  That is better than the DJIA, S&P 500, and NASDAQ. 

For whatever it is worth, it’s worth noting that ‘relative performance’ doesn’t necessarily pay bills if the market heads too far south.  Here is how the markets fared compared to the defensive stock picks:

                  CLOSE      CHANGE    PERCENT
DJIA         13113.38    -249.97     -1.87%
NASDAQ    2565.7      -48.62       -1.86%
S&P500    1453.55     -25.00       -1.69%

Tick     Close       Change   Percent
PEP     $67.98      $(0.58)    -0.85%
KO       $54.59      $(0.07)    -0.13%
BUD     $49.84      $0.14       0.28%
TAP      $89.24      $0.56        0.63%
KFT      $32.89      $(0.50)    -1.50%
CAG     $25.52      $(0.06)    -0.23%
CPB     $35.54      $(1.14)    -3.11%
HRL     $34.99      $(0.81)    -2.26%
MCD     $49.24      $(0.52)    -1.05%
MO        $67.39      $(0.88)    -1.29%
VGR     $22.98      $(0.09)    -0.39%
RAI       $63.77      $(0.36)    -0.56%
PG        $65.47      $(0.64)    -0.97%
CL        $65.43      $(0.57)    -0.86%
MRK     $49.57      $(0.90)    -1.78%
JNJ      $61.68      $0.02         0.04%
NVO     $113.00    $(0.47)     -0.40%

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 3:32 pm in Defensive Stocks, , , , , , , , , , , , , , , , ,

NVIDIA Set For Stock Split (NVDA, AMD)

On Tuesday morning, September 11, 2007, shares of NVIDIA Corp. (NASDAQ:NVDA) will trade on an ex-split basis to reflect its 3-for-2 stock split that it declared on August 9. 

Shares are down today with a crummy stock market and after National Semi numbers and Xilinx guidance.  But up until today shares had been on a tear and traded as high as $54.00 just on Wednesday.  On August 10, shares closed at $43.99 and they closed as low as $42.57 on August 16.  It also now has its earnings behind us as well.

Shares often trade up going into a stock split, but in less than one-month shares saw roughly a 30% gain in only three different weeks.  It was as if you just HAD to own it. The drop today takes it almost 7% off of highs and almost 4% off of the recent high close.

As a reminder, both NVIDIA and Advanced Micro Devices’ (NYSE:AMD) ATIunit are both within about 60 days of now for their graphic chipsets.There are mixed reports and this may just boil down to preference oropinion, but most have commented that NVIDIA still has the advantage.

NVIDIA now has a market cap of $18.4 Billion after shares have risen well over 300% in the last 5-years and are still up roughly 150% since the start of 2006.  This will mark its second stock split in the 5-years since splitting in early 2006.  This also split twice between 2000 and 2002.  Shares are also close to most analyst price targets, although official ratings remain positive.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 1:12 pm in Semiconductor, Stock Splits, Video Games, ,

Caribou Flirting With All-Time Lows On 52-Week Lows (CBOU, SBUX, PEET)

Caribou Coffee Company (NASDAQ:CBOU) is in a bit of a strange spot.  It is in the formerly-hot lounge and coffee destination.  They also have the ’sit and chill’ or ‘work on the free wi-fi’ environment that encourages spending for more than just one small cup to go.  Yet here the stock sits within flirting distance of post-IPO all time lows. 

Shares hit as low as $6.00 in July, 2006, but shares are at a 52-week low today of $6.09 and have traded as low as $6.05.  The 52-week trading range before today was $6.11 to $9.27.

Unfortunately when you go run a value scenario to compare to Starbucks (NASDAQ:PSBUX) or to Peet’s Coffee & Tea (NASDAQ:PEET), this one just stinks.  Starbucks has problems of its own that we have outlined if it wants to manage its major growth plans, and Jim Cramer just recently noted how Peet’s Coffee & Tea is a winner that can afford to go for slow growth.  There is also nothing wrong with the stores and nothing wrong with the coffee, which means that either other expenses are eating it alive or management can’t hit.  It is losing money and out of all the analysts that cover the stock none expect Caribou to be profitable for 2007 or for 2008.  That isn’t going to cut it, not one bit.

With a mere $118 million market cap, the good news is that the company trades at less than half of 2007 projected revenues.  This means that if management can figure out how to stop losing money that their valuations could actually start looking quite good.  But until they can prove it then they are just another boutique specialty coffee and food retailer that has a story they aren’t able to deliver on.   When you enter into a marketplace and can’t profitably compete against a $2.00 large cup of coffee with nothing in it, then it’s time to make some change.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 12:20 pm in Food, , ,

Nortel And Alcatel-Lucent: Dying Telecom Suppliers

Wall St. would think that providing enterprise solutions and infrastructure to the world’s largest telecom suppliers would be a good business. Nortel (NT) and Alcatel-Lucent (ALU) appear to have proved that wrong. ALU shares are down 25% this year and NT is off about 35%.

Great Caesar’s Ghost!

One of the things that has happened to both companies is Cisco (CSCO). The Armada of businesses that CSCO has put together in the network equipment business is spectacular and it has moved nicely in the voice and video over IP as well.  Nortel is also probably up against price pressure from CSCO, ALU, Ericsson and Nokia/Siemens. NT revenue is stuck around $11 billion and on that, it barely breaks even.

Alcatel-Lucent is more pathetic. The two companies have pushed the idea that merging the American and French companies would create economies of scale, a larger sales force, and a broader array of products. Instead, the company is having trouble sorting out overlapping offerings and integrating the two operations. Management may be able to fix this, but the process has taken too long and has caused a number of investors to hit the exits.

NT and ALU may be able to get some customers back to prove they are still relevant suppliers, but investors are likely to stay away much longer.

Douglas A. McIntyre

 

Posted on: September 7, 2007 – 12:15 pm in Telecom, , ,

“Time To Go Defensive, Again?” (PEP, KO, BUD, TAP, KFT, CAG, CPB, HRL, MCD, MO, VGR, RAI, PG, CL, MRK, JNJ, NVO)

If you ever heard the old saying "Be careful what you wish for, you may get it!" it sure seems like we are there.  It also makes you wonder if it is time to go back into Defensive Stocks.  The defensive stock plays are where investors plunk their money when they are less optimistic but still want exposure to stocks.  The DJIA is down over 150 points on the day so far, yet some of these defensive stock plays are barely down. 

Today and this week is the perfect storm for what the stock market was hoping for to deliver a rate cut:

  • Job creations negative for the first time in four years
  • Alan Greenspan says this is similar to 1987 and 1998
  • Weak as could be auto sales
  • Weak home sales
  • Credit woes and delinquencies spilling over
  • mixed retail picture 

These are the ones you eat, drink, and smoke,and they tend to be around medicines and personal products. Here are the basics for defensive stock plays:

  • You have to drink. Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) are usually a coin toss over performance versus relative value in the beverage plays.  Anheuser Busch (NYSE:BUD) is supposed to win because people drink more beer when they are miserable; or if you don’t mind crossing the northern border a tad you can always look at Molson Coors Brewing Company (NYSE:TAP). 
  • You have to eat.  Kraft (NYSE:KFT) maybe too tied to activists, Buffett, Phillip Morris, or whatever, but it’s monster play in the sector.  ConAgra (NYSE:CAG), a food giant that is fairly valued.  You can always look at Campbell Soup (NYSE:CPB) or even Spam-maker Hormel (NYSE:HRL).
  • McDonalds (NYSE:MCD) is deemed the best fast food play off the mid to lower income, as supposedly people will still eat out somewhere.
  • Smokers sometimes do rule.  Altria (NYSE:MO) is supposed to win since history has dictated that people don’t quit smoking when they are stressed out over job security and money.  Cramer had this as one of the TOP 2007 PICKS, but for different reasons.  You can always pick Vector Group (NYSE:VGR), or Reynolds American (NYSE:RAI) as well.
  • In personal products, Proctor & Gamble (NYSE:PG) and Colgate-Polmolive (NYSE:CL) tend to get into your pocketbook unless you stop shaving, washing hands, and brushing your teeth.  The choice of the two usually boils down to relative value and performance.
  • Go-to names in drug and medicine stocks are Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ).  A good runner up is Novo Nordisk (NYSE:NVO), even if it is and ADR lower in market cap and based in Denmark, as they are the major insulin play for diabetes treatments.

These are far from great exciting tech plays, but this is the strategy that traditional investors have used whenever it is time to go defensive.  As a reminder, if the stock market is going to really slide then almost everything falls with it.  Defensive stocks in theory are supposed to fall less and are the ones that traditional investors usually start tip-toeing back into first.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 9:46 am in Defensive Stocks, , , , , , , , , , , , , , , , ,

Krispy Kreme Sinks To The Bottom

In 2003, you could pick up shares of Krispy Kreme (KKD) for $49. This morning, the are down 19% to $5.10 on bad earnings. Revenues for the second quarter of fiscal 2008 decreased 7.5% to $104.1 million compared to $112.5 million in the second quarter of last year. Company Stores revenues decreased 4.7% to $75.3 million, Franchise revenues were flat at $5.1 million and KK Supply Chain revenues decreased 16.8% to $23.7 million.

KKD lost $27 million for the quarter including at $22 million impairment charge.

Analysts have been offering suggestions about how to turn the company around. Recently Prudential Equity Group suggested that the company get into the coffee business. If Starbucks (SBUX), McDonald’s (MCD), and Dunkin Donuts were not there, that might work.

KKD can now officially put itself on the list of dead end stocks. It does not have a future.

Douglas A. McIntyre

Posted on: September 7, 2007 – 8:56 am in Earnings, , ,

Hollis-Eden Jumps 30%

Hollis-Edent (HEPH) is a very small development-stage pharmaceutical company. It has no revenue as has lost about $7 million each of the last couple of years.

The stock has been a world class dog falling from a 52-week high of $7.49 to $1.42. But, some of that changed today. The shares are up 30% to $2.16 on news that "data from an animal study showed its cancer drug candidate, HE3235, continued to prevent breast cancer tumor growth even after dosing ended," according to Reuters. "The lasting anti-tumor effect of HE3235 reported in this animal model of breast cancer suggests the compound is causing tumor cells to undergo apoptosis, or die," said Richard B. Hollis, chairman and CEO of Hollis-Eden.

Is the company worth its current $153 million market cap? No way to tell. The development of the treatment is still early and there is no revenue attached to it.

Crap shoot.

Douglas A. McIntyre

Posted on: September 7, 2007 – 8:45 am in Biotech,

Microsoft Tries To Catch VMWare (VMW, MSFT)

Virtualization is the next big thing and Microsoft (MSFT) does not want to leave it to VMWare (VMW). 24/7 Wall St. has written a great deal about VMW, and it may be that the stock is getting fully valued, especially if MSFT is moving into the market.

Redmond has just released Systems Center Virtual Machine Manager 2007, and the new product may give VMW some real fits. According to CNET "Microsoft’s main weapon against VMware is expected to be a piece of software, code-named Viridian, that will be included as a feature of its next generation of Windows Server software. Viridian will act as a "hypervisor" or extra layer that sits between the hardware and the operating system."

MSFT also has the built-in advantage of size. Estimates are that "virtualization-enabled Windows Servers to surpass 10 million units by 2010." That gives the world’s largest software company a foot in the enterprise server door that no other firm can match.

Microsoft launched it new product with a challenge: "We think the impact of virtualization is much broader than how VMware is defining it," said David Greschler, a Microsoft director of integrated virtualization strategy.  We noted many companies would be making their news ahead of and at the VMWORLD Conference in San Francisco next week, and this seems to be along that assault.

VMW may already be vulnerable on a valuation basis. The shares trade at almost $67. That gives the company a 28x sales to market value. Microsoft trades at 5x.

Granted VMWare has better growth prospects, but Microsoft could step in the way of some of those.

Douglas A. McIntyre 

Posted on: September 7, 2007 – 8:36 am in Software, ,

G.M. Clipped By Goldman Sachs (GM, F)

Shares of General Motors are indicated down over 2% ahead of the open today at $30.40 on a negative research note out of Goldman Sachs.  Goldman trimmed GM’s estimates and the target on the US automaker. 

The research piece first and foremost has lowered the target stock price from $42.00 down to $37.00. 

As far as estimates being lowered: 2007 EPS cut to $2.85 from $4.25 (ouch); 2008 EPS cut to $3.00 from $3.75; and 2009 EPS cut to $3.25 from $3.75.

These cuts are to reflect the new North American sales and production estimates that Goldman Sachs revised in wake of the August sales results.  Shares of Ford (NYSE:F) are also trading lower in conjunction by 1.4% pre-market.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 8:29 am in Analyst Calls, Autos, ,

Goldman Sachs Note Hits EMC & VMware (EMC, VMW)

Goldman Sachs has removed EMC Corp. (NYSE:EMC) from its beloved Conviction Buy List this morning, although the firm is maintaining an official "Buy" rating.  The catalyst for the initial call was VMware (NYSE:VMW) and the research note says this has played out and investors are one step further in understanding the underappreciated value of core EMC.  The note does remain positive that EMC should continue to be bought as more balanced growth, multiple product cycles, and shareholder value initiatives after the partial spin-off of VMware are going to likely keep a bid under EMC shares.  Goldman Sachs also said the 5% gain since adding it on July 31 was higher than the 1.2% gain in the S&P 500; and on an annual basis that EMC has risen over 65% versus just over 12% for the S&P 500.

A lot of this sounds close to our "VMware Conundrum" from the end of August.  Our subscriber alert is no longer under embargo since the IPO is basically a month old now, and here is what we sent to paid subscribers as a way of profiting on the expected Downside in EMC stock right after the VMware opening.  This was where we compared it to a myriad of other major spin-offs, and gave some downside targets for a very short-term trade. Special Situation Investing Newsletter trials are available.

EMC shares are now down over 1% at $19.15 in pre-market trading, and this $19.89 to $20.00 top is starting to look like a harder and harder hurdle to overcome.  VMware shares are down almost 3% at $67.90 pre-market. As a reminder, we gave note about what to expect from other companies ahead of VMware’s VMWORLD 2007 CONFERENCE in San Francisco next week.

Investors still need to read all about VIRTUALIZATION as much as they can.  The underlying growth that is going to occur at VMware AND in the virtualization space, regardless of how that individual tracking stock reacts, is going to be large enough that everyone will want a larger and larger piece.  Citrix Systems (NASDAQ:CTXS) acquisition of XenSource is just one of many forrays where companies are going to do what they have to do to get in, although many companies will have to use the continued ‘partnership route’ rather than making acquisitions.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 8:01 am in Analyst Calls, Software, Technology Companies, , , , ,

Pre-Market Analyst Calls (September 7, 2007)

AER raised to Buy at Goldman Sachs.
AYR started as Buy at Goldman Sachs.
BSC cut to Neutral at B of A.
CHH started as Mkt Perform at Wachovia.
CLUB started as Sell at B of A.
CMC raised to Buy at Citigroup.
COO raised to Buy at Citigroup.
EMC removed from Goldman Sachs Conviction Buy List; stock down 0.4%.
FII raised to Neutral at JPMorgan.
FITB raised to Mkt Perform at Bernstein.
GCOm started as Buy at Needham.
GLNG started as Outperform at FBR.
GLS started as Neutral at Goldman Sachs.
ISRG started as Sector Perform at CIBC.
JDSU started as Buy at Stanford.
NBR raised to Outperform at Bernstein.
OXY raised to Buy at Deutsche Bank.
PMC started as Underperform at Bear Stearns.
PTEN raised to Outperform at Bernstein.
PRM started as Buy at Oppenheimer.
SWK started as Equal Weight at Morgan Stanley.
TGP started as Mkt Perform at FBR.
TPX raised to Outperform at CIBC.
WYE cut to Hold at Citigroup.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: September 7, 2007 – 7:14 am in Analyst Calls

Stating The Obvious: Fixing Software Piracy Could Take Years

Craig Mundie, Microsoft (MSFT) chief research and strategy officer, was good enough to point out to Reuters that fixing software piracy issues in the developing world could take decades.

"Most of the Asian countries have the laws, some of the regulations – they probably need tuning up – but the biggest weakness is very few of them have made the necessary investment on the enforcement side," Mundie said.

Based on that assessment, which is almost certainly accurate, there may never be a complete solution to the problems. Countries, especially India and China, have hundreds of millions of people who could eventually use PC-based software like Windows.  Big Brother cannot watch them all.

Douglas A. McIntyre

Posted on: September 7, 2007 – 6:15 am in Software,

Europe Markets 9/7/2007

Market in Europe were down slightly at 6.55 AM.

The FTSE fell a fraction. Barclays (BCS) fell 2.5% to 592.5. BHP Billiton (BHP) rose 1.4% to 1493.

The DAXX was off .5% to 7,582. Deutsche Bank (DB) was down 2.4% to 90.15. Siemens (SI) was down 1.3% to 91.31.

The CAC 40 was down .6% to 5,545. Alcatel-Lucent (ALU) was off 2.2% to 7.65. BNP Paribas was down 3% to 73.43.

Data from Reuters.

Douglas A. McIntyre

Posted on: September 7, 2007 – 5:57 am in International Markets, , , , ,

Where Does The Market Go If Credit Agencies Crater?

It was not that many years ago that a slew of investigations almost ruined the big players in the accounting industry. Arthur Andersen disappeared under the weight of a Justice Department investigation.

The process of  reviewing whether ratings agencies Moody’s (MCO), Standard & Poor’s, and Fitch did what they should not have done has begun. The SEC and the states attorneys general in NY and Ohio have begun to make the rounds. It will not end there.

The smoking gun is that, as The Wall Street Journal writes, that "from 2003 to 2006, the growth in the mortgage market helped Moody’s stock price triple, while its profit climbed 27% a year on average" The volume of coverage at the companies drives revenue and profits.If a company gives one of the agencies more revenue, do it favor that company with better ratings?

Greed being part of human nature as it is and with subpoenaed documents heading to legal enforcement officials in the government, the Vegas odds have to be that something turns up.

The sub-prime debacle needs a scape goat or two. Billions of dollars are likely to be lost, Investors want to know why there were no storm flags up until it was too late. How could Moody’s and its competitors have gotten it so wrong?

Moody’s began rating railroad debt over 100 years ago, but it is not a big company. It has less than $400 million in cash which is offset by $410 million in borrowing under a revolving credit facility.

It is not impossible to imagine that there will be liability suits against the ratings agencies. It could badly damage a small industry with only three real players.

So, the question becomes what if one or more of the companies fails? Who rates that bonds then? What happens to credit markets if outside advice on risk is lost?

Creating new credit rating firms overnight would be nearly impossible.

The problem is potentially a very big one, and it has no ready solution.

Douglas A. McIntyre

Posted on: September 7, 2007 – 5:43 am in Financial Stocks,

Could Japan’s Cellphone Price Wars Migrate To US?

NTT Docomo (DCM), which has over half of Japan’s $78 billion wireless market, is cutting its basic fees in half  Why? Smaller rivals KDDI and Softbank have brought down their charges. In a saturated market where consumers can keep their phone number as the move from carrier to carrier, price is the customer magnet.

Last month, Docomo lost almost 23,000 customers. Between them, KDDI and Softbank added almost 350,000. As the market leader, Docomo can’t let the shift go on for long.

The Japanese market may be mature now, but the US is getting there. The three largest cell carriers, Verizon Wireless, AT&T (T) and Sprint (S), have almost 180 million subscribers in country with 300 million people, many too young to have phones.

So far price cuts have not been a big part of how cell carriers pick up business. But, a smaller player like T-Mobile could decide that it is the only path to picking up market share. If so, customers could start switching more often and each one of these companies could take a hit on the bottom line.

Douglas A. McIntyre

Posted on: September 7, 2007 – 5:06 am in Wireless, , ,