AMR (AMR) falls after saying it will cut service to save money. Down to $6 from 52-week high of $29.32.
US Air (LLC) drops as oil spikes and investors fear huge losses in airline sector. Falls to $5.60 from 52-week high of $36.81.
Continental (CAL) Falls to $14.06 from 52-week high of $40.91.
Delta (DAL) Sells down to $5.95 from 52-week high of $21.80.
Northwest (NWA) Slips to $6.59 from 52-week high of $26.50.
United (UAUA) Dives to $6.47 from 52-week high of $51.60.
Douglas A. McIntyre
If you are hoping for already-low interest rates in the U.S. to go lower, you better look at the FOMC minutes from the last meeting.
In the minutes, even though the FOMC noted that the decision to cut rates in April was a close call as financial conditions were better but still fragile. They noted a bleak housing market and a dead U.S. consumer. They also noted a higher unemployment forecast for 2008 and 2009, with the old forecast of 5.2% to 5.3% going to 5.5% to 5.7% for 2008.
Interestingly enough, the FOMC now sees 2008 GDP in a range of +0.3% to +1.2%, down from +1.3% to 2%. It is still maintaining a +2$% to +3% range for 2009 and 2010. Do they already know who won the presidential election? They do at least note that there are greater downside risks to their growth forecasts.
On the inflation front, the FOMC noted that inflation expectations are a key upside risk, and food and energy will continue to drive inflation.
The Fed has signaled that the rate cutting cycle is over, or so it would seem. If you want an economic term that describes the above scenario, that is called STAGFLATION.
Jon C. Ogg
May 21, 2008
CVS Caremark Corp. (NYSE: CVS) has announced that the company will buy back up to $2 Billion worth of common stock from time to time in the open markets during 2008 and 2009. The company believes this will enhance shareholder returns.
While some buybacks are great, this one seems so odd that it may even be counterintuitive. The company has been the darling of pharmacy stocks compared to Walgreen Co. (NYSE: WAG), and Rite Aid Corp. (NYSE: RAD) has been left so far behind that it hasn’t ever been able to mount an effective turnaround this entire decade. It scored a huge win with its acquisition of Caremark Rx to become a huge pharmacy benefit manager. The stock is also within sniffing distance of its 52-week highs and shares are up close to 200% over the last 5-years.
Is there a significant slowdown happening on the retail side there in pharmacies? The answer is yes or at least some, but pharmacies have the benefit of being located close to many homes in neighborhoods and they have the benefit that many consumers go there for their pharmaceutical and general healthcare and personal hygiene products. While people may spend less during hard times, many of those products still have to sell regardless of the economy. These aren’t recession-proof, but they should hold up better than mid-tier purses and mid-tier clothing retailers.
But this could also be a signal from the company that the bulk of its post-merger benefits have been realized. Unfortunately, we won’t know about that until more time passes. We don’t want to speculate on whether or not CVS thinks its growth is going to peter out in 2008 and 2009, but the timing of this $2 Billion cushion just seems odd. This would represent about 3 and a half days worth of trading volume.
Shares of CVS have gained to be up 0.5% at $42.90 today after the news. Its 52-week trading range is $34.80 to $43.75, and its market cap is roughly $61 Billion.
Jon C. Ogg
May 21, 2008
Ladenburg did nothing to spare the feelings of management and employees at Lehman (LEH). It cut its price target on the brokerages stock to $38 from $48.
According to Reuters, the research firm said "the company’s hedges which worked so well to blunt the impact of markdowns in the first quarter may not be working so well now."
The news adds to a number of recent downgrades and lowered price targets for US money center banks and investment houses. It is beginning to dawn on Wall St. that the troubles from the credit crisis could easily extend into the later quarters of this year, and perhaps to the early part of 2009.
The arctic night just got longer.
Douglas A. McIntyre
AMR Corp. (NYSE: AMR), the parent of American Airlines, has announced some sweeping changes at its annual meeting of shareholders today. More importantly than just how this affects AMR, these changes will likely set the trend of what investors and passengers may expect to come from the legacy carriers in the U.S. under the current environment.
For starters, AMR was already going to lower its flight capacity but the new plan will be flight capacity cuts of 11% to 12% in its mainline domestic flights. That means that empty plane routes and unprofitable routes will be cut off at the head.
The company is also hiking its fees for telephone service centers, extra luggage fees, and even higher fees for taking your pet Fido or Fifi on trips. The first checked bag fee will now go to $15.00.
It will retire 75 regional and mainline aircraft as well.
All of these actions are likely to create facility closures and will create the opportunity for more layoffs and less new hires.
The truth is that all major airlines are in real trouble now. The old "value stock" screens that were picking these up for "valuation" at the end of 2007 and start of 2008 were nothing more than value traps. As far as guidance, it really doesn’t matter at all now for 2008. It’s already losing money and that will be something to get used to. These airlines are going to all be at-risk with the flight trends of a weak economy and the incredibly higher fuel costs.
A few suggestions for airlines now to regain profitability from 247WallSt.com is as follows:
And by the way, if airlines choose to implement these they better go ahead and include a mandatory Air Marshall on each flight. As passengers are going to become significantly more irate and suffer from more air rage, someone will be needed to keep the peace and maintain order in the skies.
If you think that airlines are going to be more well-received after this, the actions so far speak differently. AMR shares reopened for trading and are now down 12% to $7.20. Its 52-week trading range is $6.81 to $29.32. At the start of 2007, the stock was as high as $40.00.
May Day!
Jon C. Ogg
May 21, 2008
The housing market in Brazil operates in a what which is beyond the wildest dreams of US homebuilders. The sector has very little leverage. A number of government programs help people obtain mortgages. The number of homes being sold is increasing by about two million a year.
Gafisa (GFA), the largest company in the industry, has watched its shares rise 70% this year. The stock trades at $42. Analyst target prices range from $43 to $57. For purposes of contrast, DH Horton (DHI) is off over 45% during the last 52 weeks and Pulte (PHM) is down over 55%.
Gafisa benefits from falling interest rates in a country where they have been high for years. In 2005, the rate set by the central bank for lending was 19%. That has fallen to 11.75%.
The government in Brazil has also set up a system that drives commercial banks to fund mortgages. They must take 65% of the savings in personal accounts and put that out in the form of residential loans.
In the first quarter of 2008, Gafisa’s revenue was up 42% to R$319.5 million. Project launches for the quarter totaled R$577.9 million, an increase of 91%. EBITDA increased 51% to R$50.8 million from R$33.8 million.
In an interview with the company’s CEO Wilson Amaral, he explained why Gafisa has some unusual advantages for building its housing complexes, many that US builders envy. The company does not begin a project until 70% of the residences are under contract. A typical buyer puts down 25% to 30% of the total purchase price in cash.
During the last year, over twenty homebuilders went public in Brazil. Many have floundered because they are too small and some of them trade near liquidation value. That may give Gafisa some bottom-fishing M&A opportunities. The company might raise more equity toward the end of this year to fund expansion, but the opportunity to pick up land and inventory from troubled players may be too great to resist. There is already a lot of US smart money in the company, including Sam Zell.
Gafisa looks like US homebuilders did in the 1950s and 1960s before leverage became the core of most home loans and the bubble began.
Douglas A. McIntyre
These are ten of the analyst calls we are focusing on this morning:
Jon C. Ogg
May 21, 2008
Soleil has downgraded the airlines industry from "outperform" from "neutral". The call is not only about six months late, the downgrade should be to "sell".
The firm did have the sense to downgrade AMR (AMR) to "sell" along with United (UAUA). Continental (CAL) was only dropped to "hold".
It is the worst research call of the month.
Douglas A. McIntyre
If Microsoft (MSFT) can’t make up ground on Google (GOOG) the old fashion way, they can pay people to use their search product.
Redmond will give consumers who use its search products to find goods and services they can buy a little piece of that money back.
Like airline miles.
Douglas A. McIntyre
Introducing new car models is now all about the environment. Too much gas is bad for the ozone, global warming, and Al Gore. The race to create hybrids and vehicles which use ethanol is on. Ethanol has become a bit of a problem as the price of corn has spiked up.
Honda (HMC) is the latest company to come to market with a car which uses both gas and electricity. It will be sold in the US, Europe, and several other markets starting next year. According to the AP, “In addition to the new hybrid, Honda will introduce several other hybrids: a Civic, a new sporty model based on the CR-Z and a Fit subcompact, sold as the Jazz in Europe.”
The only real trouble with hybrids is that they cost more than gas cars. The additional engineering and electric engine add to cost. The “green” machines may have price tags several thousand dollars higher than the older models that they replace.
Selling more expensive cars in the current environment is a hard road. No matter how much people want to be good citizens, paying extra money while the developed world is moving into recession is not going to happen.
Hybrids may have their day, but that day will not come while the consumer is looking through his pocket and finding nothing but lint.
Douglas A. McIntyre
Barnes & Noble (BKS), the No.1 bricks and mortar bookseller, is looking at a buy-out of No.2 player Borders (BGP). Neither company has done especially well as readers have turned to Amazon (AMZN) and other places to buy books online. While both of the book chains have web sales operations, they are not large enough to offset the trend to stay out of stores. Adding to their troubles is the fact that younger Americans do not read, perhaps because they don’t know how.
According to The Wall Street Journal, “Barnes & Noble has about 20% to 22% of the retail book market, while Borders controls 10% to 12%.” Since the companies are taking a shellacking from online rivals, The Justice Department may show them some mercy.
A merger won’t solve any problems. It may allow for some management and distribution costs to be pulled out. Weak stores can be closed. But, the market is wise. Over the last two years, Amazon’s shares are up about 130%. BKS is off close to 20% and BGP is down closer to 70%.
Mergers of the weak rarely make the new party stronger. A new book company may hold off the last day of reckoning, but, books, like newspapers, cannot reclaim their place in the world of media.
Douglas A. McIntyre
Carl Icahn is known as much for his mistakes as his successes. His process for making money is based on forcing management to do the right thing. He cannot, however, control the forces of the fates and furies, the trends which wreck businesses or old decisions which can come back to haunt the living.
Most notable among Icahn’s recent errors are Blockbuster (BBI), a movie rental chain which is part of the Stone Age of media, and Motorola (MOT), where the handset operation died so quickly that it did not even make it to the door of an emergency room.
Now, Icahn’s latest gambit, a play to get Yahoo! (YHOO) to sell-out to Microsoft (MSFT) for $33, may have gone off track. Microsoft is no longer interested. So says Steve Ballmer, the Genghis Khan of the software world.
Yesterday, Ballmer told reporters he did not want Yahoo!. He only wants a deal to put his search engine business together with theirs. Reuters writes "We are not bidding to buy Yahoo," Ballmer said
Many will say that Ballmer’s comments are simply a negotiating tactic to talk the price down. He will try to get Yahoo! For something less than the $33 he offered. But, Microsoft maintains the arrogance which has been its hallmark for years, and Ballmer may believe that his engineers and marketing machine will allow him to mount and assault on search market leader Google without any outside help.
Icahn’s approach to investing is based on the logic that all investors, boards, and managements will eventually come around to the program which will make the most money, even if he has to force the issue.
But, his sense of where the pay-off is may not mesh with the motivations of the odd and sometimes perverse thinking of his prey. Microsoft is a predator which has lost its appetite and that may leave Icahn owning a company that no one wants.
Douglas A. McIntyre
Time Warner (TWX) plans to spin-off its cable company, Time Warner Cable (TWC), to shareholders. In the process, the parent will get a payment of $9.25 billion as part of a one-time dividend. It will also let most of its debt go to the cable company, improving the balance sheet by a factor which should matter to shareholders.
According to The Wall Street Journal, “Time Warner could use its windfall to cut its debt further, buy back shares or make an investment.”
Leaving aside the big debt which the cable company will have to handle, well over $23 billion, Time Warner will be left with cash and an odd assortment of businesses.
One of the key legs will be the magazine operations, which are not growing due to movement of advertising dollars out of print. The company will have its cable programming businesses like CNN and Turner. They have done well, and there is no reason to believe that the trend will change. The TWX studio operations run in a cycle, depending, at least to some extent on whether the movies produced do well.
AOL will also stay with TWX. It content business is doing well as it gains visitors and page views. Its ad network business, which had the odd name of Platform A, is in trouble now. Integration of several acquisitions has not worked well. If that can be fixed, AOL will have the largest online ad network in the US, something which should have substantial value, and could lift the company to the upper tier of internet advertising sales
What new CEO Jeff Bewkes has not done, at least yet, is make the case about why he is better off without the cable company. To say it has too much debt is to say that shareholders are getting a bad deal by holding it after the spin-off. Keeping cable means keeping cash-flow. TWC mints money.
The first judgment of the spin-off decision will come from the market’s reaction to the announcement. The second judgment may take some time. Having money in the pocket has often been of no benefit to managements of big companies. One visits to the track, they often back the wrong horse.
Douglas A. McIntyre
It turns out that Moody’s (MCO) may be more than incompetent. After missing most of the risks in subprime paper and keeping “Aaa” ratings on the municipal bond ratings agencies for too long, the firm also had computer problems which caused some debt to be rated too high.
According to the FT, “Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models.” Moody’s did not seem to want to come clean about the matter. Some members of Moody’s management appear to have known about the trouble for some time.
Errors that could cost a company money, or its reputation, are often followed by mendacious behavior and Moody’s has fallen right into that pattern. The matter of liability is now squarely on the table. When Moody’s missed on its analysis of the subprime market, it could at least conclude that its analyst were dump as a box of rocks.
Computer errors which Moody’s knew about are another matter.
The Inquisition over all the hundreds of billions of dollars lost in the credit meltdown may go on for years. Just sorting out how the subprime paper actually worked and why it failed will take a building filled with math PhDs scholars.
But, what Moody’s did seems to be more clear-cut. A dodge is a dodge, no matter what name it is given.
Douglas A. McIntyre
According to Reuters, Microsoft’s (MSFT) Steve Ballmber said his company will not bid for Yahoo! (YHOO).
Reuters writes that HP’s (HPQ) operating margin rose to 10% in the last quarter.
Reuters writes that Lehman (LEH) will cut 1,300 jobs.
Reuters reports that GM (GM) reaced a deal with striking worker in Kansas.
Reuters reports that another hedge fund joined Carl Icahn’s bid to controll Yahoo!.
The Wall Street Journal writes that AIG (AIG) ex-CEO Hank Greenberg may face SEC charges.
The Wall Street Journal writes that Time Warner (TWX) plans to spin-out Time Warner Cable (TWC) and get a $9.25 billion dividend in the process.
The Wall Street Journal writes that its new editor will be Robert Thomson, the paper’s former publisher.
The Wall Street Journal writes that Barnes & Noble (BKS) is considering a bid for Borders (BGP).
The vice-chairman of the Fed said that the economy is still in rough shape.
The Wall Street Journal writes the the slowdown has taken its toll on Target’s (TGT) earnings.
The Wall Street Journal writes that CBS (CBS) will stream more of its shows on the internet.
The New York Times writes that several forecasts say the worst is ahead for the US economy.
The New York Times writes that Merck (MRK) has agreed to a settlement over its Vioxx advertising.
The New York Times writes that shoppers are sticking to buying only basics.
The New York Times reports that Honda (HMC) will sell a new gas-electric car next year.
The FT writes that a bug in a computer model caused Moody’s (MCO) to rate certain debt with its top ratings.
The FT writes that AIG (AIG) plans to raise $20 billion.
Bloomberg reports that hedge funds using swaps are facing a four-fold rise in junk bond defaults.
Douglas A. McIntyre
Markets in Asia were mixed.
The Nikkei fell 1.7% to 13,926. Honda (HMC) fell 2.1% to 3350. KDDI fell 3.2% to 668000.
The Hang Seng improved .8% to 25,371. China Petroleum (SNP) was up 4.6% to 7.59. CNOOC was up 5.6% to 15.86.
Data from Reuters
Douglas A. McIntyre
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