Aetna Inc. (NYSE: AET) Reiterated Buy with $51 target at Argus.
Aixtron SE (NASDAQ: AIXG) Raised to Buy at Goldman Sachs.
Cognizant Technology Solutions (NASDAQ: CTSH) Removed from Conviction Buy List at Goldman Sachs.
F5 Networks, Inc. (NASDAQ: FFIV) Raised to Neutral at Goldman Sachs.
Green Dot Corporation (NYSE: GDOT) Raised to Buy at Goldman Sachs.
HollyFrontier Corporation (NYSE: HFC) Reiterated Buy as Value at Zacks.
Illinois Tool Works Inc. (NYSE: ITW) Cut to Underperform at BofA/ML.
International Business Machines Corporation (NYSE: IBM) Raised to Buy at Goldman Sachs.
Lexmark International Inc. (NYSE: LXK) Cut to Sell at Goldman Sachs.
MeadWestvaco Corporation (NYSE: MWV) Raised to Buy at BofA/ML.
NetApp, Inc. (NASDAQ: NTAP) Raised to Overweight at Piper Jaffray.
Optimer Pharmaceuticals (NASDAQ: OPTR) Maintained Outperform as Bull of the Day at Zacks.
Oracle Corporation (NASDAQ: ORCL) Raised to Top Pick at FBR.
Pier 1 Imports, Inc. (NYSE: PIR) Cut to Equal-Weight at Barclays.
Tyco International Ltd. (NYSE: TYC) Raised to Buy at BofA/ML.
Under Armour, Inc. (NYSE: UA) Raised to Outperform at FBR.
Unisys Corporation (NYSE: UIS) Cut to Underperform as Bear of the Day at Zacks.
Visa, Inc. (NYSE: V) Raised to Conviction Buy List at Goldman Sachs.
VMware Inc. (NYSE: VMW) Raised to Outperform at Credit Suisse.
W.W. Grainger Inc. (NYSE: GWW) Raised to Buy at BofA/ML.

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JON C. OGG

The fresh buybacks we have featured are only the big buybacks which are large in size or large in percentages of the market capitalization of the underlying companies.  The best buyback announcements in August have come from the following: Ace Ltd. (NYSE: ACE); Akamai Technologies Inc. (NASDAQ: AKAM); AmerisourceBergen Corporation (NYSE: ABC); AOL Inc. (NYSE: AOL); Avnet Inc. (NYSE: AVT); CBOE Holdings, Inc. (NASDAQ: CBOE); Charter Communications Inc. (NASDAQ: CHTR); Cisco Systems, Inc. (NASDAQ: CSCO); Covidien plc (NYSE: COV); Discovery Communications, Inc. (NASDAQ: DISCA); Dolby Laboratories, Inc. (NYSE: DLB); Exxon Mobil Corporation (NYSE: XOM); Chevron Corporation (NYSE: CVX); Harris Corporation (NYSE: HRS); Huntsman Corporation (NYSE: HUN); JA Solar Holdings Co., Ltd. (NASDAQ: JASO); Jarden Corporation (NYSE: JAH); News Corp. (NASDAQ: NWSA); Rowan Companies, Inc. (NYSE: RDC); Southwest Airlines Co. (NYSE: LUV); and St. Jude Medical Inc. (NYSE: STJ).

We also saw some large and interesting buybacks in the last week of July from the likes of Boston Scientific Corporation (NYSE: BSX); Motorola Solutions, Inc. (NYSE: MSI); Visa, Inc. (NYSE: V); and Hewlett-Packard Company (NYSE: HPQ).

The companies are using their balance sheets to take advantage of distressed situations.  Ultimately, this could even signal M&A opportunities arising.  As a reminder, companies are not under any obligation to spend a single dollar to repurchase stocks.  These buybacks actually look real, and many have a solid history of buying back shares.  Who needs activist investors when you see these billions and billions being made available to purchase stock.

Here are the companies buying billions in their own stock.

No money was injured while filming

The floor for interest rates is ZERO.  Right?  Apparently not when extreme conditions arise.  Those extreme conditions came today as investors moved solidly into the safety of very short-dated T-bills and the bidding was so intense for a while the real rate was actually a negative yield.  The rate technically went to -0.01% on the 1-month bills and this came on the same day that both the S&P and DJIA went into formal correction territory.

While the Swiss have taken rates to zero, and while there has been a huge move to cash, The Bank of New York Mellon Corp. (NYSE: BK) went on to start charging some large depositors just to hold their cash.  Effectively, this takes overnight and extremely short-term rates to a negative yield.  This will begin next week for customers who have sharply increased their deposit values in recent weeks.  We have yet to hear of any rate changes like this at State Street Corporation (NYSE: STT), but if there is not a revolt from customers then it seems a shoe in that State Street would follow BNY Mellon’s lead.

The fee charged by Bank of New York is going to be set at 13 basis-points, or 0.13%, but there will be an additional fee if the 1-month Treasury yield dips under zero on $50 million deposits.  If you do not understand this fee, it is not just because custodial banks are trying to force risk-taking nor just because they are the “greedy bankers” we all like to accuse them of being.  Custodial banks pay close to 0.1% to insure accounts with the Federal Deposit Insurance Corporation (FDIC).  If the rate on T-bills dips too low, as its situation shows now, it actually costs the banks for customers to deposit overnight cash.

What happened is that investors rapidly bought up short-dated Treasury bills, driving down the yields into the negative territory today.  There was a time in 2010 where yields in the inflation-adjusting TIPS went negative in yield because of the prices and the conversion adjustments at the time.  If this explanation is a bit off, we have some other sources that gave their explanations as well:

• TheStreet.com
• ZeroHedge
• Bloomberg

Any time you see a 500-point sell-off that coincides with a crazy rate situation like you saw today, you know what the fear is… The next recession.

The markets are looking at the global austerity measures that have been piled on top of all of the other woes of the world and the risk trade and the growth expectation is being repriced.  Most economists have been trimming the expectations so far for Q3 and Q4 in GDP growth.

What you haven’t seen is where the economists start predicting that GDP will not only slow, but the predictions are very near that the economists will be calling for GDP to back under the red-line.  A lot is riding on Friday’s unemployment and non-farm payrolls data.  If anyone is expecting those numbers to be good they have not been watching the news over the last few weeks.

JON C. OGG

The statement noted as commensurate with a “AAA” rating, …”the risk of sovereign default remains extremely low. While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic back drop if the budget deficit and government debt is to be cut to safer levels over the medium term.”

Fitch goes on to note that there is the political will and capacity to ultimately do the right thing.  Unfortunately, this is referred to as the first step and NOT THE END of a process of putting in plan to cut the budget deficit to a rate that will secure the “AAA” status over the medium-term.

The time for the review decision over our “AAA” rating is by the end of August.  The things noted that need continued improvement are revisions to taxation and spending policies that will act to cut the deficit.

The most sad part of this is the truth that no one in Washington wants to deal with: The U.S. government debt, including federal and state and local, will reach 100% of GDP by the end of 2012 at the current rate.  Even worse, Fitch says that this will continue rise over the medium term.

While the current “AAA” was called consistent earlier and while the decision over “AAA” seems likely to remain at the rating agency’s decision by the end of August, that does not mean that the rating of “AAA” is safe forever.  Fitch concluded that this rising debt profile over 100% of GDP is a “profile that is not consistent with the United States retaining its ‘AAA’ sovereign rating.”

In short, it looks like the United States will keep at least Fitch’s ‘AAA’ rating… for now.  After 2011, that is not assured and the writing is on the wall.

JON C. OGG

The news today is that Eastman Kodak has adopted a Net Operating Loss Shareholder Rights Agreement that is designed to preserve its substantial tax assets.  In short, its loss carry-forward assets get locked up.  The problem is that this shareholder rights plan is effectively a poison-pill provision that is aimed to prevent a change of control in the company.

At the end of 2010 the value of Kodak’s net operating losses and tax credit carry-forwards of about $2.9 billion before taxes.  That sounds great for a company worth under $650 million in market capitalization.  Doesn’t it?  Kodak can utilize these tax attributes in certain circumstances to offset future U.S. taxable income that includes gains that may come from the exploring strategic alternatives effort regarding its digital imaging patent portfolios.

Kodak hired the firm of Wachtell, Lipton, Rosen & Katz as its legal counsel and it hired Lazard LLC as financial advisor. The company did bother to note that this preferred share purchase rights will not affect Kodak’s reported earnings per share and is not taxable to Kodak or its stockholders.  Why it even bothered to mention this is not of any concern.  We have recently covered the company wondering if it can even survive much beyond 2012.

The problem is a complex yet simple one… Kodak is assuming it will have patents again.  There is no assurance whatsoever that the digital imaging patents will generate any real income.  Kodak has been successful in patent aspirations before and it has been able to use those patent royalties to fund its move into printing and elsewhere.  The problem is that companies may choose to fight Kodak to the end of time over any patents now that there may be some holes in other patent enforcement measures.  Our take is that this is more or less a scenario of mirage versus reality.

Kodak has a long history of disappointment.  Much of the fault is not of current management, but a slower lead time into digital photography, printing, and more has been the final straw.  It is obvious that management here is not going to be able to fix the problem.  We previously listed Antonio Perez as a CEO that needs to be let go.  He is one of the few who has managed to hang on, and our take is that the reason is only because the company faces clear challenges to its business model that will be present if a new CEO comes in or not.

A “change of control” was called an “ownership change” by Kodak, and this pertains to an IRS ruling that would be triggered if Kodak’s holders owning 5% or more were to collectively double their ownership in Kodak over a three-year term that the NOL Rights Agreement is in effect.

Kodak did say that its board of directors has determined to review the plan periodically in light of developments at the company, which it says is “including in connection with the use and value of the NOLs and the status of the patent portfolio strategic initiative.”

The end result is that Kodak has declared a non-taxable dividend of one preferred share purchase right for each outstanding share of its common stock that will be distributed to its shareholders of record as of August 11, 2011.  The catch is that these would only be activated if triggered by the Rights Agreement.

As the new program goes, if any person or outside group acquires 4.9% or more of the outstanding shares of common stock, a significant dilution is triggered under the poison-pill (or Rights Agreement).  Holders who already own 4.9% or higher of the common shares will not trigger the preferred share purchase rights unless they acquire additional shares.

So, we have gone on and on about this rights offering being a poison-pill provision.  About all that shareholders today can hope for is that a buyer would come along.  What today’s effort does is kill any hope that Kodak could find another KKR-type of investment that was taken in 2009.  Realistically, it is hard to imagine that another financier would even bother stepping forward as this point.  Kodak’s stock was above $6.00 back then and shares are at $2.36 today with a 52-week trading range of $2.20 to $5.95.

Last year we awarded Kodak as being one of the brands that lost the most in the last decade.  The good news is that the honor cannot be repeated over the next decade.  That is a sad situation, because the brand just isn’t worth enough anymore to even be counted in the years ahead.  There is one positive aspect for Kodak’s legacy film business: if the earth’s poles ever do flip in our lifetime, the company will be able to show how no one would have lost their photos had they used standard film.

Before you think that 24/7 Wall St. is being too tough on a battered company, why don’t you go look at the NYSE short interest data.  The short interest has grown for seven consecutive reporting periods which now come twice a month.  The short interest is now a whopping 73.6 million shares.

Eastman Kodak did not do its investors any favors today even if Mr. Perez thinks differently.  We are not even positive that this company can return to significant profitable levels for loss carry-forwards to even matter.  The company looks more and more as though it is in what Star Trek fans would call the Kobayashi Maru.

JON C. OGG

The Centers for Medicare & Medicaid Services has issued a final rule that cuts Medicare skilled nursing facility Prospective Payment System payments by 11.1% in FY 2012 by $3.87 billion. The cuts are listed as being to “correct for an unintended spike in payment levels and better align Medicare payments with costs.”

The 2012 recalibration will result in a reduction of 12.6% to skilled nursing facility payments of $4.47 billion, but this would be partially offset by the FY 2012 update with an increase of 1.7% to Medicare payments to skilled nursing facilities.  This reflects a market basket of goods and services reduced by a 1% multi-factor productivity adjustment mandated by the Affordable Care Act.

A 2.5% increase for hospice reimbursement is not going to be anywhere close to offsetting the losses here.

Kindred Healthcare Inc. (NYSE: KND) is in three segments of hospitals, health services, and rehabilitation.  It gets somewhere close to 30% of its revenues from this segment being cut.  Its stock opened down at $14.06 and shares are down almost 27% at $13.77 versus a 52-week range of $11.52 to $28.99.

Sun Healthcare Group Inc. (NASDAQ: SUNH) may have its entire profits gone or at risk now as it has awful exposure here.  Its shares opened down at $3.21 versus a $7.00 close.  Shares are now down a total of 55% at $3.13 and its shares hit a low so far of $3.10 (52-week low) versus a 52-week high of $15.01.

Skilled Healthcare Group Inc. (NYSE: SKH) operates skilled nursing facilities, as well as assisted living facilities, hospice service providers, home health providers, and a rehabilitation therapy business. Its stock is down a sharp 37% at $5.44 after opening at $6.61 this morning.  Its 52-week trading range is $2.33 to $15.93.

Five Star Quality Care Inc. (NYSE: FVE) operates senior living communities via independent living or congregate care communities, assisted living communities, and nursing facilities, is down “only” about 8% at $4.55 versus a 52-week trading range of $3.50 to $8.95.

Sunrise Senior Living Inc. (NYSE: SRZ), which offers senior living services and independent living services, is down only 3% at $8.53 against a 52-week range of $2.18 to $12.44.

National Healthcare Corporation (NYSE: NHC) operates and manages long-term health care centers, and associated assisted living and independent living centers.  Its stock is down 12% at $41.78 against a 52-week range of $33.51 to $53.08.

Amedisys Inc. (NASDAQ: AMED) is in home health and hospice services and its shares are down 3% at $25.08. Almost Family Inc. (NASDAQ: AFAM), a home health provider, is down 3.7% at $24.33.

Senior Housing Properties Trust (NYSE: SNH) is a REIT in hospitals, nursing homes, senior apartments, independent living properties, and assisted living centers.  Its shares are also down today by 2.4% at $23.37 versus a 52-week range of $20.42 to $25.28.

Here is what is interesting about this move… This was “pre-budget deal.”  If you think that Medicare and Medicaid payments are the only ones at risk in the weeks, months, and years ahead, you might want to think again.  Cuts will be coming for a myriad of reasons and from many angles.  Companies which rely heavily or solely on government contracts for goods and services are all under more scrutiny.

JON C. OGG

S&P lays out three scenarios for whether and how the debt ceiling will be raised by August 2 deadline and the outcomes of each.

The most perilous:

Scenario 3–The White House and Congress cannot agree to raise the debt ceiling by their Aug. 2 deadline, and the Treasury begins to sharply reduce spending to preserve cash for debt service and to try to keep within the debt ceiling. Such measures could conclude, if the standoff persisted for just a short while, with the Treasury missing an interest payment or failing to pay off maturing debt, i.e. a default.

A fair assessment? Perhaps not. No one can say for sure how long the US can pay its debt service if it cuts back on other obligations.The two paths that would lead to better results?

Scenario 1–The White House and Congress agree to raise the debt ceiling and collaborate on a long-term framework for fiscal consolidation;

Scenario 2–The White House and Congress agree to raise the debt ceiling to avoid potential default but are not able to formulate what we consider to be a realistic and credible fiscal consolidation plan;

In reality, S&P is only guessing.

Douglas A. McIntyre
Let us know what you think about this article.  douglasamcintyre@247wallst.com

It is difficult to keep track of the contagion spreading among the Chinese solar PV makers, all pointing back to auditing issues. JA Solar Holdings Co., Ltd. (NASDAQ: JASO) replaced its CFO last week. Trina Solar Ltd. (NYSE: TSL) also had an independent director and head of its audit committee resign on July 10th. In that case, the director had recently resigned as the CFO of a Chinese battery maker, A-Power Energy Generation Systems, Ltd. (NASDAQ: APWR) following the resignation of A-Power’s outside auditing firm.

Other bad news, like a downward revision on revenues such as the one about a week ago delivered by ReneSola Ltd. (NYSE: SOL), adds more fuel to a flaming pyre. Apparently well-run solar makers are also getting punished. Suntech Power Holdings Co. Ltd. (NYSE: STP), Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), and JinkoSolar Holding Co. Ltd. (NYSE: JKS) get burned as well. US-based First Solar Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWRA) are getting caught as well.

The operative word in that last sentence is “apparently,” because every new revelation of suspected hanky-panky in a company’s accounting shakes investors’ faith in the solar makers that have so far escaped the flames. Coupled with low expectations for shipments and revenues for the rest of this year and into next, solar stocks are withering.

LDK’s announcement has sent the company’s shares down nearly -6.5%, before they recovered a bit to around -6% at noon, trading at $6.13, barely within the 52-week range of $5.73-$15.10.

JA Solar’s shares are down more than -3%, to $4.45 after having come within two pennies of the bottom of the stock’s 52-week range, $4.34-$10.24.

Trina’s shares are down nearly -5%, to $17.54, within a 52-week range of $16.60-$31.89. Yingli shares are down more than -4.25%, at $6.89, after falling to a new 52-week low giving the shares a 52-week range of $6.77-$14.29.

Suntech shares are off about -1.3%, at $7.25, in a 52-week range of $7.05-$11.18. Shares in JinkoSolar are off less than -0.1%, at $23.93, in a 52-week range of $12.41-$41.75.

It is worth mentioning that so far none of the Chinese solar makers has restated revenues or earnings. But it’s very likely that most observers think that will be the next thing to happen. What was already a shaky summer for the solar stocks is turning into a nightmare.

Paul Ausick

The bank’s settlement over its mortgage fiasco was supposed to be a major help.  Supposed to be is about all shareholders can hang their hat on as shares are close to 15% lower now.  The $8.5 billion settlement from June is effectively going to be recognized all at once in the earnings for the report this week pertaining to the Countrywide mortgage repurchase and servicing claims.

We expect a drop in book value from the $13.21 per share at the end of the quarter first quarter versus the 2010-end book value of $12.98 per share in its January report.

From 2009 to 2010, Bank of America cut its “Goodwill” down to $73.861 billion from $86.314 billion.

Citigroup Inc. (NYSE: C) was trading closer to a 20% discount to book value after earnings and J.P. Morgan Chase & Co. (NYSE: JPM) was trading at close to 0.9-times book value.  Does BofA deserve the same discounts as these two?  It seems not, but the real reading will be when we see the numbers.

If we simply take a near-15% drop in book value from last quarter based upon the settlement’s post-market reaction and then take a 25% discount to that new book value for an implied market price ‘acceptability’ level we get closer to $8.50 per share.  The problem is that this is just straight line assumption and there is no way to know the bank has or has not done to sustain its book value outside of what it has forecast and what its peers have reported.

Ditto for “goodwill” on the balance sheet.  Maybe Bank of America will be the first bank to record ‘ill-will’ in a report.  That is how traders and investors are treating it.

BofA shares are down 4.2% at $9.58 in mid-day trading as investors are bailing out of the way ahead of earnings. Thomson Reuters is now looking for -$0.90 EPS on $12.34 billion in sales.  The bank had previously said it wants to boost its dividend as soon as it is cleared to do so.  Now that seems less and less possible.

JON C. OGG

A recent article from Bloomberg highlights the central issue.  And that is, many of these loans are “backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn’t exist.” If this sounds familiar, think “Lehman” back in 2008.  Virtually all of China’s major banks are holding this paper, and many US ETFs and funds hold stock in these banks. One analyst cited by Bloomberg assumes that as much as $900 billion or so will not be repaid.

We’ve taken a look at some ETFs and mutual funds that hold shares in major Chinese banks. These funds include iShares FTSE China 25 Index Fund (NYSE: FXI), SPDR S&P China ETF (NYSE: GXC), PowerShares Golden Dragon Halter USX China ETF (NYSE: PGJ), Matthews China Investor (MCHFX), Fidelity Advisor China Region A (FHKAX), and Templeton China World A (TCWAX). All data on the funds is taken from Morningstar.

The iShares FTSE China 25 Index Fund (NYSE: FXI) holds 100% of its $6.7 billion in assets in Chinese equities. Just over 50% of the fund’s holdings are in financials, with more than half that invested in China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Ltd., and Ping An Insurance Group, all Hong Kong-traded equities. The fund holds no real estate stocks. The ETF gets a 2-star rating from Morningstar.

The SPDR S&P China ETF (NYSE: GXC) holds more than 99% of its $772 million in assets in Chinese equities, and about 27% in financials. Its investments. Two-thirds of these holdings are in the same three banks, with China Life Insurance Co. Ltd. replacing Ping An. The fund holds about 3.8% of assets in real estate stocks. The ETF holds a 3-star rating from Morningstar.

The PowerShares Golden Dragon Halter USX China ETF (NYSE: PGJ) holds about 97% of total assets of $370 million in Chinese equities, but only about 5% in financials. Only China Life is included in its top ten holdings at 4.4% of assets. The fund holds less than 1% of assets in real estate stocks. The ETF holds a 2-star rating from Morningstar.

The Matthews China Investor (MCHFX) tracks the MSCI China Index and holds 100% of its $2.8 billion total assets in Chinese equities. About 18% are invested in financials, approximately half the exposure to the financial sector as the Index itself. Only Ping An is included in the fund’s top ten holdings. The fund’s largest investment sector is the consumer discretionary sector, at nearly 27% of assets, more than 4 times the Index holdings. Real estate holdings total about 4.75% of assets. The fund holds a 5-star rating from Morningstar.

The Fidelity Advisor China Region A (FHKAX) holds nearly 98% of its $2 billion total assets in Chinese equities. Financials make up about 30% of the holdings, with the three large banks accounting for almost 10% of holdings. The fund holds about 7.5% of its assets in real estate stocks. The fund holds a 3-star rating from Morningstar.

The Templeton China World A (TCWAX) holds about 99% of its total assets of $1.2 billion in Chinese equities. About 12.5% of holdings are financials and about 3.7% are real estate stocks. About 6.4% of holdings are shares in Bank of China and China Construction Bank. The fund holds a 5-star rating from Morningstar.

The three ETFs we’ve noted have done no better than stay flat since the beginning of the year. Of the mutual funds only TCWAX is showing a gain for the year.

Accounting issues and bad loans are not new to China. In 2003, when China Life issued shares on the NYSE, the company admitted accounting irregularities totaling $650 million. In the same year China’s biggest banks held an estimated $500 billion in bad loans, most of which the government covered in a massive recapitalization program. Even then the big problem was soaring real estate prices.

The difference was the real estate in question. In 2003, the boom in property was occurring in Shanghai and Beijing. Now, it has moved out to the sticks into cities few people outside of China have ever heard of.

It is pretty unlikely that the Chinese government will let its biggest banks fail. But to rescue them could put the brakes on China’s economic growth. The country’s financial, consumer, and real estate sectors could all suffer significant damage, with the effects rippling through the entire economy.

What happened in the US following the Lehman implosion is on the brink of happening in China. When (not if) it does, the best the country can hope for is that the government has taken the proper steps to ensure a soft landing. So far, there’s not a lot of evidence for that.

Paul Ausick