The Fed Stands Pat, Wall Street Cheers
Ben Bernanke and his band still fear inflation, but they sounded a bit more dovish on Aug. 5 as they left the benchmark rate at 2%. The carefully worded statement said "labor markets have softened further and financial markets remain under considerable stress." No argument there: On Aug. 1 the Labor Dept. said the country lost 51,000 jobs in July as unemployment rose to a four-year high of 5.7%. A day earlier, the Commerce Dept. estimated the economy grew at an annual rate of just 1.9% in the second quarter. On the happier side, a plunge in oil prices, which by Aug. 6 had sunk more than 18% from their peak in July, soothed the Fed and wowed investors, who pushed up the Dow 331 points on Aug. 5.
Oil isn't the only item tumbling from extreme heights. As of Aug. 6, corn was off 33% from its 2008 high, orange juice 33%, soybeans 26%, platinum 30%, and nickel 47%. The slide gathered speed on Aug. 5 and helped fuel Wall Street's celebration. Look out, though: One factor behind the commodity crush is slowing economic growth around the globe and the prospect of more weakness to come.
Massive Identity Theft
It was a simple and wildly successful ploy—until the baddies got caught, that is. On Aug. 5 federal authorities said they'd busted an international ring responsible for hacking into retailers' computer systems and absconding with 40 million credit- and debit-card numbers. The feds said ring members sat in cars outside shopping centers and, with laptops, cracked into the systems of stores using unsecured wireless networks. They then sold the numbers on the black market or used them to withdraw large sums from ATMs. Among the targets: Barnes & Noble (BKS), BJ's Wholesale Club (BJ), OfficeMax (OMX), and TJX (TJX), not to mention their customers. The crooks' take, according to the government: tens of millions of dollars. A lawyer for one of the men arrested said he's planning to fight the charges.
Activist investor Carl Icahn popped up all over the news this week, a testament to the breadth of his activities. First, he's balking at Bristol-Myers Squibb's (BMY) July 31 offer to pay $4.5 billion for the 83% of ImClone Systems (IMCL) it doesn't already own. Icahn, ImClone's chairman, says the July 31 offer short-changes the biotech, which makes the cancer drug Erbitux and became famous a few years back for the insider-trading scandal that sent both Martha Stewart and former CEO Sam Waksal to jail. The bid, worth $60 a share, shot adrenaline into ImClone stock, which leaped 40%, to $64. Despite Icahn's disdain, the deal is far from dead: ImClone's board appointed a special committee to look into it further.
See "Bristol-Myers Squibb's Big Bet on ImClone"
...And Takes His Lumps
Funny, this is one investment Icahn has omitted on his new I'm-the-shareholder-champion blog, The Icahn Report. Florida homebuilder WCI Communities (WCI)—in which Icahn took a big stake in early 2007 before becoming chairman the following September—filed for Chapter 11 bankruptcy on Aug. 4. The builder blamed its woes on the housing bust and credit crunch, which left the company unable to refinance its lofty $1.8 billion debt load. Icahn lost roughly $110 million, and other shareholders some $620 million during the same period.
Recount at Yahoo
Yahoo!'s (YHOO) critics have long complained that Jerry Yang counted out Microsoft's (MSFT) offer too soon. Now they say the firm it hired to tabulate shareholder votes simply can't count. On Aug. 5, Broadridge Financial Solutions (BR), the company that tallied votes in favor of Yang & Co.'s reelection to the board, said it made a mistake. Instead of 85.4% approving Yang's reelection, fewer than two-thirds backed him—a steep protest by corporate standards. The recount was requested by Yahoo's largest shareholder, Capital Research Global Investors, on the belief that its decision to withhold votes in favor of Yang was not reflected in the initial results.
No, You Can't Borrow
That nice home equity line of credit you've got? Forget about it. So said Morgan Stanley (MS), the No. 2 U.S. securities firm, to thousands of its clients recently, according to a person familiar with the situation. The clients, most of them occupying houses whose value had tumbled, won't be able to tap their credit lines, and the firm plans to review such lines monthly from now on. A spokesman confirmed that "a segment of clients was recently notified of a change in the status" of their line of credit. (Bloomberg)
Wall Street banks, reeling from the subprime mess they had a big hand in creating, are eyeing a new money-making venture: taking on troubled pension plans from companies that want to unload them. For nearly a year, a group of banks, insurers, private equity firms, and other players have lobbied regulators about the idea, which is being called pension buyouts on the Street. Those lobbying efforts are starting to pay off. The Treasury Dept. on Aug. 6 issued a series of legislative guidelines that would permit pension buyouts under certain circumstances. The edict from Treasury now pushes the matter to Capitol Hill, where, not surprisingly, many elected officials are skeptical of letting Wall Street lay its hands on any more of retirees' nest eggs.
Unwinding Sony BMG
Figuring that a rush of digital initiatives can overcome perpetually withering CD sales, Sony (SNE) paid $900 million to buy the half of music company Sony BMG it doesn't own. Sony got it for a song, paying on the low end to Bertelsmann, which wants to beat a retreat from the music biz. The joint venture dates from 2004. Sony forked over $600 million in cash plus $300 million, half the money on the music company's balance sheet. For that, it gets a roster that includes Bruce Springsteen, Justin Timberlake, and Alicia Keys.
See "Sony Buys the Rest of Ailing Sony BMG"
Motorola Reaches Out
The star-crossed mobile-phone maker is betting big that an industry veteran can change its luck. On Aug. 4, Motorola (MOT) lured former Qualcomm (QCOM) COO Sanjay Jha to be co-chief executive and leader of the handset biz. Jha received a fat pay package, including $3.6 million in salary and bonus this year and a boatload of stock options, to bring his vast experience to Motorola. He'll focus on executing a spinoff of the phone division by next summer and spiffing up a stale product portfolio.
See "Motorola: The New CEO's Real Challenge".
New Woes at Citi
Citigroup (C) suffered more dents to its reputational armor. David Markowitz, head of New York State's Investor Protection Bureau, accused the bank on July 31 of destroying records subpoenaed by New York Attorney General Andrew Cuomo, who plans to sue the bank for its role in the collapsed auction-rate securities market. Citi said it recycled tapes related to the securities by accident and that most could be recovered. Citi is also shuttering a $400 million convertible arbitrage hedge fund, more evidence of its failure to reach the lofty goal of building a $20 billion alternative assets group, Tribeca Global Investments. Meanwhile, another giant is hurting: Insurer American International Group (AIG) lost $5.4 billion in the second quarter.
Freddie: More Red Ink
Freddie Mac (FRE) CEO Richard Syron had cheery news for investors on Aug 6: The government-sponsored enterprise continues to fulfill its mission to provide financing to American homebuyers. After that, however, the negatives predominated. The company announced a net loss of $821 million, three times the expected amount and the fourth straight quarter of red ink. Freddie also doubled reserves to cover its growing number of mortgage losses and cut its common stock dividend from 25 cents to at least 5 cents—or even lower. Alarmed investors sent shares cascading 19%, as the announcement renewed questions about Freddie's solvency and threatened to force it to turn to federal largesse to prop it up.
A Dark Day for GM
If General Motors (GM) is any indication, the U.S. auto industry will be in a ditch for a while. GM on Aug. 1 reported a $15.5 billion second-quarter loss, its third-largest ever. Even disregarding special items and restructuring charges, the company bled $6.3 billion. GMAC, the finance company 49% owned by GM, lost $2.5 billion because of its troubled mortgage business and SUVs coming off lease with lower-than-expected values. But here's the scariest number: GM's revenue dropped almost $10 billion, to $19.8 billion for the quarter.
See "GM Staggers Under Losses"
Go East, Young European
When a flock of Eastern European nations joined the EU in 2004, millions of residents of those nations promptly decamped for the more promising economic climes to the west. Now it appears many are packing up and heading home. A recent study by a British think tank discovered that some 50% of migrants to Britain from new member states of the EU have returned to their native lands. What's drawing them back? In a word, jobs. The Eastern European economies are growing, while Britain's is not. (Institute for Public Policy Research)
Merger Talk in Japan
Would growing even larger help two Japanese finance giants weather an economic slowdown? Executives at Orix, the country's largest leasing company, and Credit Saison, a credit-card firm, seem to think so. The daily Nikkei said on Aug. 5 that the two are in talks to create Japan's largest financing group outside the banking sector, with $106 billion in assets. A merger would boost both sides, but they must first persuade Credit Saison's largest investor, Mizuho Financial Group, to sell its 12% stake. The deal could set off a new bout of consolidation in Japan's consumer finance industry, which has struggled since recent Japanese Supreme Court rulings capped rates on consumer loans at 20% and forced companies to repay some borrowers.
Thailand Goes Vroom!
The world's 14th-ranking auto manufacturer, Thailand, has long dreamed of becoming the Detroit of Asia. And auto investment there has picked up this year thanks to new tax incentives, reports the August edition of BusinessWeek Thailand. Indian giant Tata Motors (TTM) plowed $39 million into a pickup truck assembly plant, while Toyota (TM) sank $162 million into a diesel engine facility. Still, experts say the industry has a long way to motor before arriving at global player status—not to mention the competition it faces from China and India.