Unitedhealth Group (UNH) Lay-offs and lowered forecast. Down to $22.72 from 52-week high of $59.46.
Freddie Mac (FRE). Concern that market conditions will make firm raise more money. Drops to $14.35 from 52-week high of $67.20.
Coeur d’Alene Mines (CDE) No news. Drops to $2.46 from 52-week high of $5.18.
Nvidia (NVDA) Big cut in revenue forecast. Down to $12.40 from 52-week high of $39.67.
Douglas A. McIntyre
There were two ghastly research calls this week from separate firms on separate companies. While one is more severe than the other, these two analyst downgrades are essentially a tie for the severity of tardiness. In fact they are such late calls and so far behind the pack that it is a real wonder as to just how much the research teams that just discovered these issues actually get paid. It’s hard to imagine being an institutional portfolio manager and receiving the call for these downgrades on Wednesday this week. The answer was probably, "OK, well thanks I guess. Did your analyst just start reading the newspapers from February or something? These calls might have had worth then…. urgh… Yeah, you too… have a great long weekend."
The first horrific call goes to Merrill Lynch (NYSE: MER) for the downgrading of General Motors (NYSE: GM) all the way to an UNDERPERFORM rating from a BUY rating and a target slash from $28.00 down to $7.00. We do not disagree with the logic at all and we also made our own odds about the chances of bankruptcy protection being in the realm. But the timing of this call was out of the land of "Duh!" and so far behind. It also had a severe impact on already battered GM shares. Technically analyst calls are not chart issues, but this was already near 50-year lows and went even lower. GM closed down at $9.98 after the downgrade. It seems that a pinched consumer, high gas prices affecting SUV sales, credit-pinched consumers, high materials costs, and the company’s losses are all somehow a new event for this analyst call. Once again, the problems are real and we concur that issues will persist (including liquidity) into 2009… But the poor timing of this call was extremely severe.
The second call that was just as bad was the Goldman Sachs (NYSE: GS) call where the firm downgraded UAL Corp. (NYSE: UAUA). Yes this one just stunk and its timeliness would lead one to believe that the research team was hanging out in smoking jackets with Jimmy Cayne behind the building too long. UAL’s rating was downgraded from a BUY to a NEUTRAL and the $16.00 Target Price was taken all the way down to $4.60. Maybe the analyst had to wait for the last brokerage client to sell this stock. Maybe the analyst had to wait for the trading department to get on all the trades. We don’t argue with the problems posed, but this was on the "America’s Buy List" for almost the entire way down. We ourselves have issued our own odds that UAL’s parent could file for protection under bankruptcy. But this analyst call is so late that we think the team must be still counting ballots from 2000 and determining what a hanging chad is.
We wanted to award these two calls the same award yesterday, but with another half-day to go we had to see if any similar calls could have even been worse than these.
Jon C. Ogg
July 3, 2008
BMW has the Mini Cooper. Now GM (GM) plans to bring its own brand of mini into the US.
GM will probably import its Chevrolet Beat to America to offer a car which gets higher miles-per-gallon than any other vehicle the auto company markets here.
According to Bloomberg, "Besides the Beat, GM is weighing a list of options for refocusing its auto lineup on fuel efficiency rather than performance. They include the U.S. introduction of a small pickup popular in Latin America."
GM still faces the extremely difficult question of whether it will run out of time and money before it can overhaul most of its product line to make it attractive in the environment of $4 gas. It is unlikely. GM probably faces cash issues by the middle of next year.
It will take longer than a year to get the Beat and other fuel-efficient cars distributed throughout the US. The factories that make the products will also have to increase capacity, which could take several quarters.
Douglas A. McIntyre
Penn National Gaming Inc. (NASDAQ: PENN) has been considered a dead merger for quite some time, yet it only officially became a dead merger this morning. This was the last of the big multi-billion deals still officially on the books that was put together back before we had a full blown credit crunch.
PNG Acquisition Company Inc. was the entity that was going to do the acquisition, and that was an entity indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (NYSE: FIG) and Centerbridge Partners, L.P.
The buyout price of $67.00 per share was older than Methuselah. Since January, this stock slid steadily from over $60.00 down to under $30.00. The deal was a known to be dead by everyone. But there is actually a silver lining here for the company. Penn National will get $1.475 Billion in cash out of this. The breakdown is a $225 million deal termination fee, and the rest will be a $1.25 Billion redeemable preferred equity due 2015. Affiliates of Fortress, affiliates of Centerbridge, affiliates of Wachovia, and affiliates of Deutsche Bank will all be holders of those notes. To top it off, Fortress Investment Group’s Chairman & CEO, Wesley Edens, will join the Penn National Gaming Board of Directors.
Penn National has also issued preliminary 2008 guidance of $2.5388 Billion in revenues, with $682.3 million in EBITDA, and $487.2 million in income from operations. It will also repurchase $200 million in shares.
Wall Street is actually applauding this somewhat. Shares are up 1.4% at $28.97 shortly after the open. Penn National Gaming has a $2.5 Billion market cap as of today. Penn isn’t a pure casino play as it also hold raceways. But that sector has also seen a 50% drop (or worse) in many of the key names from last year’s highs, so the share price drop here is actually in-line performance.
Penn had $2.9+ Billion in long-term debt and total liabilities stood at $3.85+ Billion in total liabilities. This looks like it is going to bolster the company’s books more than any hurt an already-known dead merger was going to do. It is always possible you’ll see a selling response, but after looking it over the company is going to have a better operating structure with far less leverage than it would have been under that merger.
Jon C. Ogg
July 3, 2008
While NVIDIA (NASDAQ: NVDA) is being battered and tattered in trading, one analyst has decided that today’s fire sale in the stock is creating an opportunity. American Technology Research has decided to Reiterate its BUY rating on NVIDIA and the buy target was taken down only $1.00 to $26.00.
The report thesis is essentially, "We are buyers of the stock on the dip following the negative pre-announcement. We believe the fundamental outlook remains positive on GPU leadership….."
It takes guts to make this statement and they may be rewarded for their work. We have seen at least four downgrades in the stock today with key downgrades from Longbow, Needham & Co., Kaufman Bros., and even from JPMorgan.
We’d rather see analysts come in with their call to arms when prices are on sale rather than after a huge run. That is the case here. The problem is that it may fall on deaf ears because the severity of the issues inside with defects and material issues being lopped on top of the already known sell-through rate issues.
Add in a bear market and the summer doldrums, and it seems like this analyst call may need to be revisited in a week or two. It’s still a very gutsy call.
Shares of NVIDIA are down 26% pre-market at $13.23, which is a 2-year low.
Jon C. Ogg
July 3, 2008
If you look at today’s jobless numbers and loss of jobs, it really looks OK on the surface. The numbers are close enough when you consider how the calculations (which we are expected to believe) get made and get delivered. But going one layer down into the data and adding in the caveat that Labor Department is habitually wrong on its data, and this just isn’t getting any better. Dr. Pangloss would say that this is resemblant of a light recession climate rather than a deep one.
A drop of 62,000 non-farm payrolls was reported for June, and this number is only about 7,000 worse than the 55,000 consensus estimates that was being used. The unemployment rate came in flat at 5.5% for June (same as May), yet economists had somehow expected 5.4%. May’s non-farm payrolls were also revised lower as well by 13,000 to show a drop of 62,000 jobs for that month too (prior 49,000).
These numbers aren’t good and are still going the wrong way for the Dollar and for the hopes of a recovery. But on the surface they would actually be "close enough." The issue is that there is a real problem. When you begin parceling out the job creations and looking at the break-down of jobs lost this is really bad. We are back to manufacturing being a steady loss sector as it posted a loss of 33,000 jobs. Construction, which could have been assumed as bad, lost 43,000 jobs. While the service sector added 7,000 jobs, the professional and business services sector lost a massive 51,000 jobs.
The other gaining sectors are outright keeping the numbers from looking much worse. The government added 29,000 jobs, and many economists and traders will discount this and determine the 62,000 would really be 91,000 since so many estimates leave government jobs on the sidelines. Also, health care employment added 15,000 jobs. Many count that as a near government sample, and that is three months of government jobs creation.
So what we are sitting on is a number that would really be far worse if you exclude government and health care workers. Add that Doubting Thomas review of this month’s numbers in with the revisions where the Labor Department just can’t seem to get it accurate and the picture would really be far worse.
Jon C. Ogg
July 3, 2008
These are ten of the individual analyst calls seen out there this Thursday morning ahead of a 3-day weekend:
We also saw RBC raise the Communication Towers Sector.
Jon C. Ogg
July 3, 2008
This morning we have seen an upgrade in the communications towers sector.
RBC Capital Markets took the entire group from a Sector Perform rating to a higher Outperform rating.
Among the stocks raised were American Tower (NYSE: AMT), Crown Castle (NYSE: CCI), and SBA Communications (NASDAQ: SBAC).
Jon C. Ogg
July 3, 2008
In a fit of desperation not rivaled since the Grande Armee retreated from Moscow, Yahoo! is trying to find a refuge from onslaughts by Carl Icahn, Microsoft (MSFT), and its own employees who check out of the company by the score.
Yahoo! management’s latest idea is to go back to Time Warner (TWX) and see if it can get a deal to buy AOL. What would happen, according to The Wall Street Journal, is "an arrangement whereby Time Warner would fold AOL into Yahoo and take a minority stake in the combined venture."
It looks nice on paper. AOL combined with Yahoo! would have a larger audience of users than any other internet company in the US. Because of AOL’s Advertising.com network, a new merged company would also have the biggest display ad platform. And, Yahoo! could push its search products to AOL’s users.
Because the Yahoo! shareholder base wants the company to be sold, a deal with AOL would probably drive the portal company’s stock down below $20. It sits there now, off from being well over $30 after Microsoft’s takeover offer.
Yahoo!’s market cap is down to $28 billion. That could fall to $20 billion if the market becomes unhappy with an AOL deal. Time Warner management knows that, and cannot afford to be viewed as fools who took bad paper. And, Yahoo!’s shares would qualify.
Yahoo! suffers from the fact that any deal it does now, short of selling the company, will devalue its shares. In other words, there is no transaction that does its shareholder any favors.
Douglas A. McIntyre
The distance from Detroit to Dallas is about 1,200 miles, but the two towns might as well be twin cities.
Yesterday, a prediction that GM (GM) could go bankrupt set off panic among the company’s shareholders and helped drop the Dow once again. GM traded below $10 for the first time since 1954.
AMR, once of the largest companies in Dallas, is plagued by the same thing that has put GM in the critical care ward. Gas prices have killed the company’s margins and caused it to eat through cash like a boll weevil does cotton.
Management at AMR recently presented its case for being OK to Wall St. It showed that it had multiple sources for more capital, if it is needed. It will be needed. But, the AMR calculations are unlikely to be based on oil sitting at $160 for several quarters. Putting that in the spreadsheet is too depressing.
The stock market says, based on one-year share price, that AMR and UAL (UAUA) are in the worst shape among the airlines. AMR shares may be off so much because of its out-sized debt load.
Since this time last year, AMR’s stock is down more than GM’s. Maybe that does not mean anything, but it does not mean anything good.
Some slick analyst is going to hit the market with a call that AMR could move to Chapter 11. It is just a question of how many days from now that will be.
Douglas A. McIntyre
The solution to gas prices is almost right under the noses of those looking for solutions. A fourteen hour plane ride to India or China will do it.
The retail price of gas in China is about $2.60. In a month or two, the price of a gallon in the US could be twice that.
The reason for low gas prices in China is simple. The government takes care of it by giving financial aid to oil companies in the country. They buy crude at $130 a barrel and sell the by-products well below the rate at which they can make a profit. The national treasury underwrites the rest.
In the United States, gas is taxed at both the federal and state level. A big part of the $4 a gallon goes into the pockets of the government. That is not a bad idea. The cash probably does a lot of good for a lot of people. It also lets some state senators buy a new Cadillac every year. Dishonestly is always part of the system.
The American government has an extremely difficult choice now. It can let the economy run into a deep and prolonged recession, one driven to a very large extent by rising commodities prices, or it can make an investment that may run into the hundreds of billions of dollars to cut gas, diesel, and heating oil prices. This cannot be done thought tax credits. It would take too long. The help has to go directly to refiners so that prices can be cut immediately and across the board.
Congress and state officials have to ask what it will cost them if their tax bases are riven by job losses, lower property values, and business failures.
Billionaire Eli Broad recently said the economy is the worst it has been since WW II. That may be true. The price of oil is above $140, and the head of OPEC says to look for that to move to $170.
In the US, the devastation has already begun.
The government has to ask itself a simple question. Why does China write a check to keep energy costs low? And, why is its GDP rising at 9%. They are related. Bring down the price of gas is a form of socialism, but so is Social Security.
Douglas A. McIntyre
Anyone who wants to waste the money to take a sledge hammer and break apart a PC will likely find a Nvidia (NVDA) graphics chip in among the rubble.Yesterday, Nvidia warned it would miss its earnings. It would miss them by a mile. The company now expects revenue to be from $875 million to $950 million. Wall St. expected $1.1 billion for the period ending in July.
The stock promptly dropped 25%.
NVDA has been a very good investment. Over the last two years, it has outperformed both the Nasdaq and larger rival Intel (INTC). Over that period, the firm’s stock was up 160% at one point late last year. With the 25% drop it will have done no better than the broader market averages.
The critical part about the NVDA warning is that the company blamed."end-market weakness around the world, the delayed ramp of a next generation MCP, and price adjustments of our GPU products to respond to competitive products." The delay problems is specific to Nvidia. The weakness in demand and price are market issues which are likely to be the earliest signal that chip and PC sales have slowed considerably.
The blind and the optimists will say that the Nvidia numbers are an isolated case. But, it is not true. The company has too many chips in too many computers for that to be a fair assessment.
The downward revision in earnings should frighten holders of Intel, AMD (AMD), Dell (DELL) and Microsoft (MSFT). At least.
Tech was seen as a potential bright spot for Q2 earnings. That just went out the window.
Douglas A. McIntyre
According to Reuters, US stock indices entered a bear market phase.
Reuters writes that Yahoo! (YHOO) and Microsoft (MSFT) are exploring media tie-ups with other internet companies..
Reuters reports that The Weather Channel may be sold within the next few days.
Reuters reports that Lehman (LEH) will pay mid-year bonuses to employees in stock.
Reuters reports that Chevron (CVX) says supply worries are drving oil prices
The Wall Street Journal writes that Abbott’s (ABT) drug coated stent has been approved.
The Wall Street Journal writes that Nvidia (NVDA) warned on profits.
The Wall Street Journal writes that United Health (UNH) will pay $912 million to settle suits.
The Wall Street Journal reports that Microsoft (MSFT) began to offer a subscrition based version of Office.
The New York Times reports that AMR (AMR) announced big job cuts.
The New York Times writes that more firms are pulling Asian IPOs as the market weakens.
The FT writes that the Nikkei’s run of losses is the longest in 40 years.
Bloomberg writes that an interest rate rise in Europe could drive oil prices higher.
Douglas A. McIntyre
Most markets in Asia fell modestly.
The Nikkei was off .2% to 13,265. Sony (SNE) was up .8% to 4600.Toyota (TM) was down .8% to 4900.
The Hang Seng fell .6% to 21,567. China Life (LFC) was down 2.5% to 25.70. China Petroleum (SNP) was off 2.9% to 6.91.
The Shanghai Composite rose 2% to 2,703.
Data from Reuters.
Douglas A. McIntyre
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