• The introduction of the new iPhone 3GS and a price cut for the 8-gigabyte iPhone 3G propelled Apple Inc. (Nasdaq: AAPL) to easily exceed Wall Street expectations for its third quarter ended June 30. The company reported a net income of $1.23 billion, or $1.35 a share, on revenue of $8.34 billion, compared to a net income of $1.07 billion, or $1.19 a share, on revenue of $7.46 billion in the same quarter last year. Analysts were expecting earnings of $1.17 a share on revenue of $8.20 billion. Apple, which could lead a second-half tech sector rebound, sold 5.2 million iPhones in the quarter, compared to a mere 717,000 in the same quarter in 2008. The company’s computer business edged up 4% year-on-year, with sales totaling 2.6 million Macintosh computers in the quarter. Apple sold 10.2 million units of its ubiquitous iPod, down 7% from the previous year’s quarter.

• The Coca-Cola Co. (NYSE: KO) yesterday (Tuesday) reported better-than-expected second-quarter profit, as growth in emerging markets such as India and China helped offset the impact of the stronger U.S. dollar. Second-quarter profit rose 43% from the same period last year to $2.04 billion, or 88 cents per share. Sales fell 9% from last year, to $8.27 billion, something the company attributed to a rise in the value of the dollar. But international sales volume gained 5% in the second quarter, even as U.S. sales fell 1%.

• The $3 billion bridge loan CIT Group Inc. (NYSE: CIT) may not be enough to keep the lender out of bankruptcy, according to a filing with the Securities and Exchange Commission SEC. With $1.7 billion in debt payments due by year’s end, and another $8 billion coming due in 2010, analysts at CreditSights have said the company may need about $6 billion to avoid bankruptcy protection, the Wall Street Journal reported.

• Neil Barofsky, the special inspector general overseeing the Troubled Asset Relief Program (TARP), said yesterday (Tuesday) that Treasury officials have not done enough to ensure American tax dollars are being used appropriately, CNNMoney reported. The TARP Czar said the Treasury should require banks to report exactly how they’re using their bailout dollars. Barofsky also wants Treasury to report the actual worth of the assets it has purchased via the bailout. The inspector general’s office has launched 35 criminal and civil investigations into a range of allegations from accounting and securities fraud to insider trading and public corruption.

• Caterpillar Inc. (NYSE: CAT) stock jumped more than 7.5% yesterday (Tuesday) after the company boosted its 2009 profit forecast. Second-quarter profit tumbled 66% to $371 million, or 60 cents per share, but the company said it saw evidence that government stimulus plans, particularly in China, are beginning to have an effect. Caterpillar stock surged $2.83 a share, or 7.72%, to close at $39.48.

• Investment management firms BlackRock Inc. (NYSE: BLK) andState Street Corp. (NYSE: STT) beat and missed Wall Street expectations in the second quarter. BlackRock reported a net income of $218 million on revenues of $1.03 billion, or $1.59 a share for the quarter ended June 30, down from last year’s net income of $274 million, or $2 a share. Analysts at FactSet Research were expecting BlackRock’s earnings to be $1.58 a share on revenues of $1.01 billion. Meanwhile, State Street posted a net loss of $3.18 billion, or $7.12 a share on revenues of $2.12 billion. That compares to a net income of $548 million, or $1.35 a share. Analysts were expecting earnings of 97 cents on revenues of $2.16 billion.

• Merck & Co. (NYSE: MRK) may consider partnering with another company to invest in the consumer-health operations it will inherit with its planned purchase of Schering-Plough Corp. (NYSE:SGP) Chief Executive Officer Richard Clark said in an analyst conference call yesterday (Tuesday). “Certainly there will have to be an investment in the consumer business,” Clark said, adding that the drug maker is now considering whether “we do it alone or can we do it with a partner?” Clark later said in an interview withThe Wall Street Journal that is was too early to say which direction Merck was leaning.

• A tough advertising market led to a decline in sales for Yahoo Inc. (Nasdaq: YHOO), but the search giant still managed to beat Wall Street estimates. For the quarter ended June 30, Yahoo reported a net income of $141 million, or 10 cents a share on revenues of $1.57 billion, compared to a net income of $131 million, or 9 cents a share on revenues of $1.79 billion. Wall Street estimates called for average earnings per share of 8 cents and revenues of $1.14 billion.

Source: Investment News Briefs Wednesday, July 22, 2009

Top financial officials from the Group of Eight (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.

The G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create “a set of common principles and standards governing the conduct of international business and finance,”The Washington Post reported.

In a communiqué called “the Lecce Framework” – which described the strategy for obtaining those goals – the finance ministers called on government leaders to fill in the regulatory gaps that led to the global financial crisis, including breakdowns caused by financial firms that operated in multiple economies.

Strikingly more rigorous initiatives already are being adopted in Europe, where new measures aimed at creating more-rigorous oversight of the credit-rating agencies – especially those involved with creating securitized securities, whose U.S. breakdowns have been identified as a key contributor to the credit crisis. The United States will offer its own broad proposals for “more conservative standards” when it unveils a much-anticipated reform plan to overhaul domestic financial regulation later this week, Geithner said in an interview after the meeting.

The U.S. will include tougher proposed capital standards and oversight for banks, better coordinated oversight of global financial institutions, and improve monitoring and transparency in global derivatives markets,The Post reported.

“Because risk does not respect borders, we will put forward several international proposals in our reform package to help raise standards globally,” Geithner told journalists after the meeting.

With recent rebound in stock markets and a flurry of upbeat economic reports, finance ministers said they were cautiously optimistic about the state of the world economy.

Market Matters

Despite some last minute drama at U.S. Supreme Court, Chrysler LLC closed on its deal with Fiat SpA (OTC ADR: FIATY) and effectively moved beyond bankruptcy.  While Supreme Court Justice Ruth Bader Ginsburg gave the would-be deal-breakers (Indiana pension funds) some false hope, the Supreme Court ultimately disallowed their objections andlet the transaction proceed.

General Motors Corp. (OTC: GMGMQ) announced the hiring of a formerAT&T Inc. (NYSE: T) exec to guide its rebirth and moved closer to selling its Saab unit as it “speeds” through its own restructuring.

In a “sign of financial repair,” the U.S. Treasury Department has granted its blessing to 10 major banks to repay $68 billion in Troubled Asset Relief Program (TARP) loans; JPMorgan Chase & Co. (NYSE: JPM) ($25 bln), Morgan Stanley (NYSE: MS)($10 bln), and American Express(NYSE: AXP) ($3.4 bln) expect to take the plunge in the next few days.

And in a sign of renewed economic strength, Texas Instruments Inc. (NYSE: TXN) raised its outlook for the second quarter amid growing demand for semiconductors.  Meanwhile, Bank of America Corp. (NYSE: BAC) and U.S. Federal Reserve officials took a grilling from (grandstanding) politicos as the “he said/he said” controversy over theMerrill Lynch (NYSE: SAR) acquisition continued.  The Obama administration ended its plan to limit compensation within financials and also is reevaluating prior proposals about consolidating regulatory bodies.

In transactional news, BlackRock Inc. (NYSE: BLK) acquired ETF-giantBarclays Global Investors to form the largest global asset manager.

Energy prices continued the upward trek as an International Energy Agency suggested that global demand for 2009 would be stronger than previously predicted.  On the supply side, a BP PLC (NYSE ADR: BP)report showed that global reserves fell in 2008, the first such decline in 10-years.  Crude surged past $72 a barrel for the first time this year as traders analyzed the supply/demand issues in conjunction with the ongoing prospects for an economic recovery.  Likewise, gas prices rose again (for 42 straight days) to above $2.60 per gallon nationally and consumers began to feel the pinch at the pumps as summer travel season arrives.  Inflation anyone?

Economically Speaking

Economists are at it again.  With little substantive data on the calendar,The Wall Street Journal announced results of its latest forecasting survey and a majority of respondents expect the recession to end by late summer (though the subsequent recovery may not be as swift as many had hoped).  About half even believe the Fed will be inclined to raise the benchmark Federal Funds rate (from virtually 0% today) by the middle of 2010.  Despite the potential for an economic rebound, the labor market is expected to remain weak as unemployment is projected to climb just below 10% by the end of the year.

On the inflation front, the rapid rise in oil prices does not seem to be worrying most economists surveyed (or they simply have not been paying attention), as they pegged the price of crude at $72 a barrel by December 2010, very close to today’s level.

Retail sales rose in May for the first time in three months, though much of the increase reflected rising gasoline prices which is bad news for a consumer-driven economy. Discretionary spending seems to be going to the gas pumps rather than for household or luxury items.  Still, consumer sentiment is improving as the latest Reuters/University of Michigan confidence index rose to its highest level in nine months.

The trade deficit jumped for the second month in a row as oil imports climbed, also the result of higher crude prices.  Home foreclosures actually declined in May, a positive sign for housing, though its elevated level was still the third highest ever reported.  The Fed “Beige Book“ was released during the week and the messages were mixed, at best.  While certain regions of the country have begun to experience resurgence in economic activity (or, at least, less contraction), others remained quite weak and ongoing challenges in the labor markets threaten to hinder any sustained recovery.  Despite the recent increase in interest rates, many Fed watchers do not expect the policymakers to commit to additional Treasury and mortgage-related securities purchases at the next open market committee meeting.

Weekly Economic Calendar

Source: G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

Ohh… and they’ve already got a great, devious name!

BlackRock (NYSE:BLK) announced a $13.5 billion merger with Barclays Global Investors today, making the former company the biggest money manager in the world. BlackRock will soon oversee $2.7 trillion in assets, making it roughly twice the size of State Street or Fidelity, its closest competitors. That’s $2.7 trillion under management… with a market cap of just $34 billion.

If that marriage of assets to equity wasn’t unnerving enough, BlackRock will also pick up iShares in the deal. That makes the new world’s biggest asset manager also the world’s biggest wielder of exchange-traded funds (ETFs) — the rabidly popular, complex derivatives (many of which track other complicated derivatives) that millions own, but very few truly understand. Hmmm…

Source: Too Big to Fail Version 2.0

Analysts said that traders were expressing doubt about the long-term staying power of the buck, despite its recent resurgence.

Bears argued that the greenback’s recent jump was largely a rebound from technically oversold levels and that fundamentals will favor a return to weakness in the U.S. currency in the near term.

There was, however, some level of support for the dollar, in the form of hesitancy among forex traders to be short the currency ahead of the Group of Eight meeting in Italy, which begins on Friday.

“The looming G8 meeting this weekend is no doubt cause for some squaring of (U.S. dollar-short positions) to protect against any comments from the sidelines to the effect that (the dollar’s) decline has been unreasonably rapid in recent weeks,” wrote Sue Trinh, of RBC Capital Markets,.

Technicians chimed in, noting that euro’s dip on Monday following Standard & Poor’s downgrade of Ireland’s credit rating failed to break below an important support level at $1.374.

Elsewhere, the Financial Times reported that BlackRock (NYSE:BLK) is close to an acquisition of Barclays Global Investors, in a deal that could reach $13 billion. The buyout would included BGI’s iShares, the exchange-traded fund business.

That would negate a $4.4 billion April agreement, in which Barclays agreed to sell iShares to private-equity group CVC Capital. But the deal included a “go-shop” clause, giving Barclays until June 18 to come up with a better offer.

Rumors also have Bank of New York Mellon, Vanguard Group and others in the running to buy iShares or BGI (NYSE:BGI), the world’s largest money manager with more than $1.5 trillion in assets under management. The stakes are high, and this could get very interesting.

Source: Dollar Skids Against Euro

Indeed, its largest first-quarter investments included:

• $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
• $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
• $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
• $877,700 into Van Eck’s Market Vector Russia ETF Trust (NYSE: RSX)
• $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
• $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)

Harvard’s fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).

Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States’ Standard & Poor’s 500 Index.

Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.

During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%.

And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.

Emerging Market Professors

One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.

“If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest,” Doll told Bloomberg News. “After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world.”

Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.

“Emerging markets, if they are going to do better than that, are going to do closer to 20%,” Doll said. “There are some that already have. Some have done better than that.”

A couple weeks before Doll’s vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.

“We are at the base-building period for the next bull market,” Mobius told Bloomberg while attending a conference in Indonesia. “What I see happening is perhaps this continuing till the end of the year, and then a breakout.”

Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said.

In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.

Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard’s portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.

Those four markets – Brazil, Russia, India and China – comprise the so-called “BRIC” economies of the world.

Emerging Market ETF Plays

How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.

Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn’t get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets.

And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund’s top-10 holdings, four are China-based, three Brazil and two India.

More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.

The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.

For more general plays on specific countries, Harvard’s list of new investments could be a good starting point.

Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular “Buy, Sell or Hold” column last October. It’s also one of the five emerging market ETFs that Money Morning’s Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS).

Source: Looking For the Next Global Profit Play? Take a Look at These Emerging Market ETFs

The Barack Obama administration yesterday (Monday) unveiled a detailed strategy for attacking that problem. The plan, which fleshes out a very broad strategy sketched out on Feb. 10, relies on a joint effort with private investors to rid banks of up to $1 trillion worth of the toxic assets that are clogging the financial system and blocking an economic recovery.

Labeled as the “Public-Private Investment Program,” the administration’s strategy is designed to finance purchases of devalued real-estate assets.  It will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

U.S. Treasury Secretary Timothy F. Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

U.S. stocks soared in a sign that investors like the aggressive nature and unique approach of the plan. The Standard & Poor’s 500 Index soared 7.08%, while the blue-chip-laden Dow-Jones Industrial Average advanced 6.84% in trading yesterday. The indices are still down about 10% since Geithner first outlined the Obama administration’s plans on Feb. 10.

This newfound investor confidence follows a week in which the Obama administration endured harsh rebukes for overspending, and for failing to block more than $165 million in bonuses awarded to employees by embattled insurer American International Group Inc. (AIG) – which has received more than $180 billion in taxpayer-provided bailout money.

Lawmakers on Capital Hill reacted last week by passing a bill to tax 90% of the bonuses, with some even calling for Geithner’s resignation.

But the administration stood by Geithner over the weekend and said the plan was the right solution for ridding the banking system of stubborn loans and assets – and involving private-sector investors, but without actually catering to Wall Street.

”This has never been about helping Wall Street or helping a firm that made mistakes,” Christina Romer, head of the Council of Economic Advisers, told The Associated Press. “It’s absolutely about helping a system so that people can get their student loans, and [so] that families can buy their house and buy their cars, and small businesses can get their loans.”

Private Funds Crucial

Government officials contend that they have found the right mix to attract private investors and make inroads on what could be more than $2 trillion in troubled assets on banks’ books.

The administration has stressed that the problems are so serious that the government cannot solve them alone, and Geithner emphasized that market participation is vital.

“For these programs to work investors have to be prepared to take some risk,” he told a pool of reporters.

But it may be some time before it’s clear whether his approach will work because officials still have to select private asset managers, and banks have to decide whether or not they will sell their illiquid investments.

“The big question is what is the incentive for the banks to sell?” Dino Kos, managing director at Portales Partners LLC in New York, and former executive vice president at the New York Fed, told Bloomberg News. “What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”

The backlash in Congress might mean private firms will be hesitant to take part in Geithner’s public-private partnership, even though government-backed financing will mean the private-sector investors face lower risks and enjoy heightened opportunities for profits.

To encourage private investors to be more supportive, the government will put up most of the money, shouldering more risk than the investors. Other enticements will come in the form of low-interest loans to purchasers, which could include hedge funds, private-equity firms, insurers and pension funds.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury Department said in a statement. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.”

Two-Pronged Approach

The plan calls for dividing funding from the Treasury equally between two programs to alleviate distinctly different problems hanging over the banking industry:

• Legacy Loans: Half of the capital will go to purchase a pool of troubled loans stuck on bank balance sheets that have made it difficult for banks to access private markets for new capital and limited their ability to lend. After private fund managers put up the other half, the FDIC will guarantee financing for the investors, up to a maximum of six times the capital provided.
• Legacy Securities: In order to generate prices for securities backed by mortgages that have become highly illiquid, the Treasury will provide up to 80% of the initial capital, with the rest of the investment coming from private funds. The FDIC would then offer financing for up to six times the pooled amount.

The Federal Reserve will also bump the Term Asset-Backed Securities Loan Facility, or TALF, from $200 billion up to $1 trillion and begin accepting mortgage-related securities as loan collateral.

Additionally, the Treasury will approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” and match their money one-for-one to buy securities banks want to unload.

Austan Goolsbee, a member of the White House Council of Economic Advisers, expressed confidence that private investors will step up.

Goolsbee said in an interview with Bloomberg Television that “you will start to see this buying up the assets” shortly after the private asset managers are chosen by May.

“The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae (FNM).”

Two of the largest U.S. money managers, BlackRock Inc. (BLK) and PIMCO Financial Inc., chimed in and expressed interest in participating.

“This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery,” Bill Gross, PIMCO’s co-chief investment officer, told Reuters.

More May be Needed

Despite yesterday’s near-euphoric jump in stock prices, some analysts said the need for further funding may temper the plan’s actual long-term results. The administration said the program has the capacity to purchase $500 billion – and possibly as much as $1 trillion – in troubled loans, much of which reaches all the way back to the initial declines in what’s become a total collapse of the housing market, as that’s led to a wave of foreclosures that continues to mount.

Mark Zandi, an economist with Moody’s Economy.com, estimated the government would need another $400 billion with the TARP bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG.

Current sentiment in Congress is hostile to another bailout, reflecting taxpayer frustration with Washington, and puts the possibility of further funding in serious doubt.

Source: Will Obama Administration’s Banking Sector Fix-It Plan Finally Break the Toxic-Asset Logjam?

Tomorrow morning the Factory Orders report for November is released, and things might get better. The report is expected to show a decline, but not as large of a decline as the previous month. Whether or not this means that factories are starting to get more orders on a consistent basis remains to be seen, but anytime a decline is shrinking, it seems like a small victory.

The final report I wanted to touch on this week is the December Non-Farm Payrolls report. This will be the final report for 2008, and will allow us to look at the overall loss for the year. As it stands, the country has lost just over 1.3 million jobs this year. The expected loss for December is another 475k jobs, which will put us over 1.8 million jobs lost for the year. The scary thing is that the job losses have increased every month for the last four months, so December may be worse than expected. I remember back in mid-summer when some of us were wondering if we would see one million jobs lost this year. Now we are looking to nearly double that amount.

Earnings:
Wed: BBBY, MON

Thurs: BLK, MER

Source: Employment Data Dominates Calendar, Earnings Season Starts Again

And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) – outbidding Citigroup Inc. (C) and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.

The deals are the latest examples of how billions of dollars in U.S. bank rescue funds are helping fuel buyouts worldwide, and not lending at home, as a Money Morning investigative report demonstrated.

By closing its buyout of Merrill Lynch, Bank of America reaches $2.7 trillion in assets, and bypasses both JPMorgan Chase & Co. Inc. (JPM) and Citigroup in size (as measured by assets). To finance the merger, BofA had expected to issue 1.71 billion common shares, equal to $24.1 billion, plus 359,100 preferred shares. Merrill Lynch shareholders received 0.8595 of a Bank of America common share for each of their Merrill common shares.

The transaction, originally valued at $50 billion, was announced in the early morning hours of Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. The deal ends more than 94 years of independence for Merrill, but very likely saved the investment bank from a fate similar to Lehman in a year in which five top Wall Street banks were bought, went bankrupt, or changed their business structures.

By acquiring Merrill, BofA’s Lewis is swallowing Merrill’s so-called “thundering herd” of 17,000 brokers, which he has labeled as the “crown jewel” of the buyout deal. The Charlotte, N.C.-based Bank of America also will absorb Merrill’s big investment bank, which by volume ranked fifth in debt and equity underwriting and third in merger advice in 2008, Thomson Reuters reported.

The combined company’s brokerage, credit card, investment banking, mortgage and wealth management operations, plus its deposit base, will make it the nation’s largest, or close to it.

Bank of America also takes over Merrill’s nearly 50% stake in the powerful money manager BlackRock Inc. (BLK).
“We are now uniquely positioned to win market share and expand our leadership position in markets around the world,” Lewis said in a statement on Thursday.

Big Challenges for the Big Bank

The Merrill Lynch transaction creates new challenges for Bank of America, whose shares fell 66% last year as the worsening economy led to soaring loan losses, including from Countrywide Financial Corp., which BofA bought in July. A big challenge: Lewis must find a way to stem defections of top performers and key executives even as he slashes at least 30,000 jobs in a cost-cutting initiative that should save the big bank $7 billion annually by 2012.

That won’t be enough, however. While Bank of America and Merrill together raised $25 billion of capital from the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program (TARP), and BofA halved its dividend, analysts believe another dividend reduction is inevitable. And it may have to raise additional capital, too.

BofA has managed to navigate the banking mess – and has tried to capitalize on it.

Before buying Merrill, Lewis had spent close to $110 billion to buy FleetBoston Financial Corp, credit card issuer MBNA Corp., LaSalle Bank Corp., the wealth-management business of U.S. Trust, and Countrywide Financial.

Now Bank of America is generally viewed as being “too big to fail.” For his efforts, American Banker, the banking industry trade journal, last month named Lewis “Banker of the Year” for the second straight year.

However, the competitive landscape Lewis faces going forward is changing radically – as is evidenced by Wells Fargo’s $12.7 billion buyout of Wachovia, a Charlotte-based rival of BofA.

John A. Thain, who became Merrill’s chief executive after losses in mortgage-related investments led to the October 2007 ouster of Stanley O’Neal, agreed to run the merged company’s global banking, securities and wealth management businesses. If he remains with the merged entity, Thain will be a prime candidate to eventually replace Lewis, who is 61 and became Bank of America’s CEO back in 2001.

Wachovia Closes Deal, Too

The Wells Fargo/Wachovia merger closed yesterday and more than doubles Wells Fargo’s size, making it the No. 4 U.S. bank as measured by assets. Wells Fargo now also has the nation’s largest retail brokerage operations, as well as its largest branch network, with more than 6,600 offices in 39 states and Washington, D.C.

The San Francisco-based Wells Fargo agreed on Oct. 3 to buy Wachovia, beating out a smaller bid by Citigroup, which was planning to only buy a portion of Wachovia. Citigroup’s bid included government backing, while Wells Fargo’s did not. Wells Fargo said Wachovia branches will keep their brand name – or they will at least for the “near future,” Reuters reported.

Regulators pushed Wachovia to find a buyer after it was pushed to near ruin by zooming losses from “option” adjustable-rate mortgages (ARMs) that it took on back in 2006 when it bought California lender Golden West Financial Corp.

In November, Wells Fargo announced that it expected it would have to write down $71.4 billion of Wachovia’s $482.4 billion loan portfolio, including $36 billion of option ARMs and $9.6 billion of commercial real estate.

According to Reuters, analysts have said Wells Fargo was cautious in its assessment of the risks Wachovia’s mortgage portfolio, but the U.S. economy and housing market have continued to deteriorate so quickly that those estimates might now be out of date.

“We’re not at the end” of the housing slump, Wells Fargo CEO John G. Stumpf said on Dec. 10 at a conference. “But we’re starting to see some early signs that maybe we’ve reached the bottom in housing or close to it.”

Wells Fargo is the nation’s No. 2 mortgage lender. It remained profitable by avoiding many of the risky loans that plagued Wachovia, caused the failures of Washington Mutual Inc. and IndyMac Bancorp Inc. and drove Countrywide Financial into the hands of BofA.

Wachovia shareholders received 0.1991 of a Wells Fargo share for each of their shares, valuing the bank at $5.87 per share. That’s down from $59.39 when the Golden West merger was announced in May 2006, a level never again reached. Wachovia shares closed Wednesday at $5.54, down 85.4% in 2008.

Shares of Wells Fargo closed Wednesday at $29.48, down just 2.4% for the year. The KBW Bank Index, which includes Wells Fargo, fell 50% last year, Reuters said.

Wells Fargo expects the merger to result in at least $5 billion of annual cost savings, and to boost earnings per share by 20% or more in 2011 and higher amounts thereafter.

Including Wachovia, Wells Fargo has about $1.4 trillion of assets.

Source: Bank of America, Wells Fargo End Year by Closing Major Buyout Deals

• South Africa’s central bank cut a half-percentage point from its benchmark interest rate, marking the country’s first interest rate reduction in more than three years, Bloomberg reported. The growing global crisis, rising unemployment and falling commodity prices are hampering growth for the emerging economy.

• Asset manager BlackRock Inc. (BLK) cut 500 jobs, Chief Executive Laurence Fink said Thursday. Many of the job losses were part-time employees, Reuters reported. BlackRock is the largest publicly traded U.S. asset manager.

• Second-quarter profit rose 13% for Empire Co., owner of Canada’s second-largest supermarket chain. Net income rose $53.6 million and revenue increased 7% for the three months through Nov. 1, Bloomberg reported.

• KB Toys Inc. yesterday (Thursday) filed for bankruptcy protection for the second time in four years and plans to hold going-out-of business sales at its stores immediately. The 86-year-old company said in a filing that its debt is “directly attributable to a sudden and sharp decline in consumer sales,” an indication of how poor this holiday season has been for many retailers.

• Light, sweet crude for January delivery yesterday (Thursday) rose $4.46 to settle at $47.98 a barrel on the New York Mercantile Exchange. Oil spiked 12% earlier in the day approaching $49 a barrel.

• Citigroup Inc. (C) and UBS AG (UBS) yesterday (Thursday) agreed to buy back a total of nearly $30 billion in risky auction-rate securities that the Securities and Exchange Commission said the banks marketed to customers as safe. Tens of thousands of the customers bought the auction-rate securities before the $330 billion market froze in mid-February, the SEC said.

• Bank of America Corp. (BAC) said yesterday (Thursday) that it plans to cut up to 35,000 jobs over the next three years. The bank said the reductions are aimed at eliminating redundancies resulting from its merger with Merrill Lynch & Co. Inc. (MER), as well as the recessionary environment.

Source: Global Investing Roundups Friday, December 12th, 2008

IBM, otherwise known as “Big Blue,” on Wednesday told Wall Street that it expects to post a better-than-expected adjusted profit of $2.05 a share for the third quarter. That compares with pro forma earnings of $1.68 in the year-ago period and is above the Wall Street consensus forecast of $2.01 a share. Sales for the quarter – which ended last month – were $25.3 billion, up from the $24.1 billion level last year, but below top-line expectations of $26.5 billion.

IBM, the world’s biggest computer-services company, said its service contract business remained solid and reaffirmed its full-year profit goal, Forbes reported.

The announcement was made after regular trading ended Wednesday. The shares were up 5% in after-hours trading.
But some investors remain concerned that the current financial crisis will force businesses buyers to scale back on their purchases of high-tech hardware. Tech-stock mavens of both the bullish and bearish persuasions will tune in next Thursday to see if IBM can fill in the blanks when it releases its full earnings report.

“IBM’s pre-announcement attempts to put out the fire sale,” since Wall Street has taken a highly pessimistic view of the U.S. tech sector, preferring instead to sell now rather than waiting out the credit-crisis storm, said Mark Moskowitz, an analyst who follows the high-tech sector for JPMorgan Chase & Co. (JPM), wrote in a research note yesterday (Thursday).

As one of the key beneficiaries of the so-called “outsourcing” trend in the information-technology-services sector, IBM has been somewhat insulated from the tech-spending swoon. But a new report released Wednesday from Forrester Research Inc. (FORR) suggests that there are more challenging times ahead.

According to Forrester, 43% of the firms it surveyed have already cut IT budgets in anticipation of an economic slowdown, and 70% are looking to spend even less. Recent shakeups in the insurance and financial-services industries are finally prompting potential customers to delay orders – or even to cancel them outright. And now some analysts see signs that the financial-sector-fallout is going to show up in IBM’s results.

Forrester analyst Andrew Bartels predicts that the third-quarter’s banking woes won’t materialize for tech companies until the fourth quarter.

“We’ve been expecting vendors would have a relatively solid third quarter,” he told Forbes. “There’s a lag when economic news hits. At the end of a quarter, companies look at their own earnings and realize they’re going to miss their numbers, and it’s only then that tech spending slows down.”

In a research note yesterday, Sanford Bernstein & Co. LLC analyst Toni Sacconaghi wrote that: “IBM’s revenue shortfall likely came late in the quarter due to increased purchasing hesitancy, and may have been concentrated in consulting and short-term services revenues, particularly in financial services.”

IBM isn’t alone among high-tech firms that have seen their shares tank: Even such highly profitable high-tech giants as Nokia Corp. (ADR: NOK), Dell Inc. (DELL) and Verizon Inc. (VZ) have seen their share prices drop so much that they each are now trading at a Revenue/Price ratio of less than 1.0 – one indicator of a possible bargain-stock play used by value investors.

For example, Nokia’s Wednesday closing price of $16.61 per share is considerably less than its Revenue/Share ratio of $19.19, based on the past 12 months of sales, Fortune reported, giving it a Price/Revenue ratio of 0.87.

Six years ago, Nokia’s Price/Revenue ratio was 2.1.

Nokia’s market value of $61.91 billion is below the cell-phone giant’s yearly revenue of $73.2 billion (creating a Market Value/Revenue ratio of 0.85).

Although a number of tech-sector firms have fallen into this potential bargain-basement realm, Fortune says that these four firms stand out for their “otherwise solid financial positions and leadership in their [respective market] segments,” or sectors.

And this huge “revaluation” has been somewhat indiscriminate. Nokia, for instance, has $10 billion in cash on its balance sheet and generates another $9.3 billion in operating cash flow each year, says CNNMoney.com.

“We are seeing values significantly lower than the last cycle, and the earnings are higher now,” Bay Bridge Capital’s Scot Labin told Fortune. “I don’t think it’s anything specific to these companies … I think it’s hedge funds dumping shares and people going to the sidelines.”

And the tech area isn’t the only market sector to be torpedoed. Media shops like CBS Corp. (CBS) and Time Warner Inc. (TWX) also are valued at less than their yearly sales level. It won’t stay that way forever, Labin says, insisting that reason will eventually return to the market. “Those companies, which stuck with financial discipline and made acquisitions that provided adequate returns on capital, will be significantly rewarded over the next few years,” he said.

Ironically, yesterday marked the six-year anniversary of the Nasdaq Composite Index’s most-recent low, when the tech-laden index fell to 1,114 – as the last bit of helium left the Internet bubble that reached its peak from 1998 to 2000. Even at yesterday’s closing of 1,645.12, after a drop for the day of 5.47%, the Nasdaq still trades well above that 2002 nadir, Fortune reported.

“There are problems out there, I know that, but stocks have completely overshot on the downside and are now discounting some bad economic conditions,” Kevin Rendino, who manages $10 billion at BlackRock Inc. (BLK) in Plainsboro, N.J., told CNNMoney.com. “There are a number of companies that offer unbelievable risk-reward potential.”

Source: Hot Stocks: IBM Bucks the Earnings Trend as Tech-Sector Stocks Trade Down to Bargain Levels

[“Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the inaugural installment of this new investment series.]