A Looming Corporate Tax Brawl
On May 4, President Barack Obama hauled out the heavy artillery to blaze away at the U.S. tax code, specifically the parts that allow companies and individuals to avoid paying up by investing or stashing money overseas. "It's a tax code," argued the President, "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York." Obama proposed changes that he said would net nearly $200 billion over 10 years, mostly by altering the rules governing how companies pay U.S. taxes on income earned abroad and by limiting their ability to lower levies by shifting funds between subsidiaries. Business immediately fired back, saying such changes would hamstring American companies abroad. A memorable brawl is certain when Congress takes up the plan, probably late this year.
Upbeat on the Street
As U.S. investors dared to hope that the economy had hit bottom, stocks continued their remarkable bounce. On May 4 the S&P 500 index fought back into positive territory for 2009, having risen 34% from its Mar. 9 bottom. Among the signs and portents inspiring the bulls: The Pending Home Sales index, which measures purchase contracts, rose 3.2% in March from a month earlier and 1.1% year-over-year. Crude oil prices hit $56 a barrel on May 6, a $22 jump from mid-December. Construction outlays inched up 0.3% in March, the best showing since September. And the Institute for Supply Management's services index rose more than economists expected, indicating that the sector, which constitutes almost 90% of the economy, is shrinking more slowly.
Stress Test Relief?
At press time, on the eve of the Treasury Dept.'s release of "stress test" results, the fearsome threat the tests once seemed to pose to the financial markets had largely evaporated. True, The Wall Street Journal reported on May 5 and 6 that about 10 of the 19 big banks being evaluated, including Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC), will have to raise tens of billions in capital—$34 billion in BofA's case. Other reports said Citi would try to land $10 billion from private sources rather than give Uncle Sam further control. But the leaks from Treasury suggested that the overall tenor of the test results would be reassuring, and investors acted accordingly, bidding up the financials as part of the broader market upswing. Regulators also appeared set to tell banks that they can't return TARP money unless they can raise capital without an FDIC guarantee.
TALF: Signs of Life
The third month may prove the charm for the Fed's bid to awaken consumer debt markets. On May 5 investors sought $10.6 billion in subsidized loans to buy securitized consumer debt, a nice jump from $4.7 billion in March and $1.7 billion in April. More than half would purchase credit-card debt, while most of the rest would be split between student loans and auto loans. Analysts said the rise could be a sign of investors warming to the TALF program. Some had feared making money on it would draw after-the-fact congressional meddling.
GE's Rx for Growth
At General Electric (GE), the doctor is in. Taking a page from its successful "eco" effort, the conglomerate was scheduled to announce a $6 billion health-care strategy on May 7. The goal is to shift its health-care business toward global markets and priorities championed by the White House, such as digitizing medical records. GE will channel $3 billion into R&D for new products aimed at cutting the cost of providing health care and broadening access to it. Several GE businesses will spend $1 billion setting up partnerships and creating health-oriented content and services, while its finance arm will offer $2 billion in funding, mostly for health-care IT.
Chrysler for Sale
So far the Chrysler bankruptcy hasn't hit any major potholes: On May 6 the judge overseeing the proceedings ruled that the company could start rolling toward a sale of most of its assets to Fiat (FIATY). In doing so, he overruled recalcitrant bondholders who object to the sale and the debt haircut the White House tried to force on them before the filing. The process is widely viewed as a template for a likely Chapter 11 filing by General Motors (GM). Meantime, Fiat stepped up its drive to buy GM's European division, Opel, winning a pledge of help from the German government. The combined acquisitions would push Fiat from 1.5 million annual vehicle sales to 5.5 million. Renault-Nissan CEO Carlos Ghosn on May 6 smacked down published reports that his companies were interested in acquiring GM's Saturn or Opel brands.
Have Apple (AAPL) and Google (GOOG) become too cozy for trustbusters' comfort? The New York Times revealed on May 4 that the FTC is examining ties between the tech superpowers. Genentech (DNA) CEO Arthur Levinson sits on both boards, and Google CEO Eric Schmidt joined Apple's board in 2006. A few weeks afterward, the search giant bought YouTube (GOOG), which competes with Apple's iTunes store. Later it introduced a Web browser that vies with Apple's Safari. Now phonemakers in search of an answer to the iPhone are making devices that run on Google's Android operating system. The Clayton Antitrust Act bars a person from serving on the boards of rival companies when that would restrain their competition.
Stories with Legs
Two problems first spotlighted by BusinessWeek were back in the news this week. Senator Christopher Bond (R-Mo.) on May 4 called the Federal Housing Administration home mortgage guarantee program a "powder keg that could explode," leaving taxpayers with an enormous bill. The FHA's woes were exposed in BusinessWeek 's Dec. 1 Cover Story, "The Subprime Wolves are Back." And on May 5 a 21-year-old Swede, Philip Pettersson, was charged with illegally hacking into computer systems at NASA and Cisco (CSCO). BusinessWeek revealed the NASA attacks in another Dec. 1 article, "The Taking of NASA's Secrets."
The McCafe Blitz
It's the most lavish launch in Mickey D's history, and this is a company not exactly shy about mass marketing. The campaign for the company's McCafé coffee lineup—cappuccinos, lattes, mochas, and the like—is expected to cost $100 million and to press into service virtually every medium imaginable, including TV, print, radio, billboards, the Web, giveaways with top prizes of $50,000, and, of course, Twitter. Why spend so much dough on an upscale brand shift during a severe downturn? Because McDonald's (MCD) figures McCafé eventually could add $1 billion annually to its bottom line. Take note, Starbucks (SBUX): Analysts estimate the McCafé gambit could cost the ur-coffee chain 5% of its revenues. (Advertising Age)
China's Dollar Dilemma
The People's Republic's growing aversion to dollar-denominated assets will likely rebalance the world economy, argues scholar Wenran Jiang. But the nation's economic mandarins know well that any sudden move to shrink the mountain of T-bills would wreak havoc on financial markets. So Beijing is slowly and methodically moving to ease itself out of what some call its dollar trap. One technique involves boosting use of its domestic currency in trade transactions. Since mid-2008, China has arranged more than $120 billion in currency swaps with its trading partners. And it's helping its national champions fund acquisitions abroad—with emphasis on energy and mining assets. (YaleGlobal)
It was the time of year when disciples from Bangkok to Baltimore make their annual pilgrimage to Omaha to hear the sage speak—even if Warren Buffett's clairvoyant credentials seem a tad tarnished, given Berkshire Hathaway's (BRK) 36% stock drop since its peak last year. On May 2 the 78-year-old zillionaire told shareholders that he remains outraged by CEO pay in the U.S. He said Wells Fargo, of which he owns a big chunk, is a solidly capitalized bank, and that derivatives aren't inherently "evil." But on one matter of intense concern to his acolytes, the question of succession, Buffett resembled the Oracle of Delphi—and shed zero light.
The Kindle Is Growing
Amazon's (AMZN) popular e-book reader just got a brother, but this one, unlike most newborns, is bigger than its siblings. On May 6 the company unveiled the Kindle DX, whose more generous proportions make it newspaper- and magazine-friendly. Although the price is steep, at $489, Amazon is partnering with papers such as The New York Times to lower the sticker shock by giving discounts on long-term subscriptions. Textbook publishers such as Pearson are also keen on the DX: They're hooking up with six universities to get Kindle coursework into the hands of students this Fall. CEO Jeff Bezos says Kindle books account for 35% of a title's Amazon sales when it's available in the format.
See "Amazon's New Kindle: Winners and Losers"
Like father, like son—at least in the eyes of the SEC. The agency filed securities fraud charges against the founder of Reserve Management, Bruce Bent, and his son Bruce II on May 5. The civil suit alleges that the Bents misled investors about the safety of Reserve's flagship money market fund. On the day Lehman Brothers filed for bankruptcy last September, the $62 billion fund held $785 million in Lehman securities. The fund "broke the buck" despite the Bents' pledges to maintain a $1-per-share value, the SEC alleges. In a statement, the elder Bent said he would fight the complaint.