Oracle reported revenue for the three months ended Aug. 31 fell 5%, to $5.05 billion. Analysts were expecting $5.2 billion of sales.

Net income rose 4% to $1.1 billion, or 22 cents a share, by Generally Accepted Accounting Principles (GAAP), but the company leaned heavily on support contracts and cost cutting to maintain profitability. The world’s second-largest software maker blamed the drop on declining overseas sales and a stronger U.S. dollar.

“Oracle’s results were impacted by the reduced value of foreign currencies when compared to U.S. dollars, reducing Q1 GAAP earnings by $0.02 per share,” the company said. “Without this impact, Oracle’s Q1 GAAP and non-GAAP earnings per share would have been $0.24 and $0.32, respectively.”

Oracle issued a more positive outlook for its fiscal second quarter, which ends in November. The summer is traditionally a slow period for the company which typically sees business pick up as its fiscal year moves forward. Additionally, the global economy is showing signs of improvement.

Oracle President Safra Catz said profit would be 35 cents to 36 cents per share in the second quarter. The company forecast revenue of about $5.6 billion to $5.8 billion for the period.

However, analysts remain skeptical that a fledgling economic recovery will necessarily lead to an increase in earnings.

“Just because people are starting to feel better about the economy doesn’t mean they’re ready to spend money on software,” said Partrick Walravens, an analyst at JMP Securities Inc. (NYSE: JMP), told BusinessWeek.

Sales of new software licenses – a key indicator of future revenue – fell 17% to $1.03 billion. Sales of database and middleware licenses plunged 21.5%. Middleware is software that helps different kinds of programs share information.

Additionally, Oracle’s $7.4 billion acquisition of Sun Microsystems has not gone as smoothly as planned.

Sun Setbacks

In April, Oracle announced it would takeover Sun in a move that gives it control of the database market as well as Sun’s coveted Java programming language. Java-based software is not operating system-dependent and runs on over 1 billion devices worldwide, from cell phones to supercomputers.

JMP’s Walravens believes the buyout is partly responsible for Oracle’s lackluster first-quarter earnings.

“There’s a ton of pre-merger planning you want to do before an acquisition, and [first-quarter sales decline] shows management were probably distracted by the Sun purchase,” he told Bloomberg in an interview. Walravens rates Oracle’s shares “market perform” and doesn’t own them.

Of course, the bigger threat to Oracle’s business is an ongoing antitrust investigation that has been launched by the European Commission (EC). While, the U.S. Justice Department approved the deal last month, the EC is worried that by acquiring Sun, Oracle will be too strong a presence in the database market.

“Databases are a key element of company IT systems,” said Neelie Kroes, The EC’s competition commissioner. “In the current economic context, all companies are looking for cost-effective IT solutions, and systems based on open-source software are increasingly emerging as viable alternatives to proprietary solutions. The Commission has to ensure that such alternatives would continue to be available.”

It’s possible that Oracle will have to spin off Sun’s MySQL open-source database to accommodate the EC. The commission has until January 19 to reach a verdict on the merger. But as the commission deliberates, former Sun customers are defecting to Oracle’s biggest competitors.

Hewlett-Packard Co. (Nasdaq: HPQ) says it signed deals with more than 100 Sun customers between February and July, BusinessWeek reported. Meanwhile, International Business Machines Corp. (NYSE: IBM) has lured 250 customers from Sun to its own computer systems since January, and is adding about two accounts a week, according to Inna Kuznetsova, IBM’s director of Linux strategy.

“The longer [the closing process] wears on, the more Sun’s business deteriorates, and the more market share IBM and Hewlett-Packard take away,” said Walravens.

Faced with an exodus of Sun clients, Oracle has taken some small steps to inspire more confidence in its fleeing customer base.

Earlier this month the company unveiled the Sun-Oracle Exadata Database Machine V2, a co-developed co-branded system that is meant to show that close engineering cooperation between the two companies is already underway.

The databased server is “a perfect example of what we can do together,” said Oracle’s Catz. “We continue to do what we can at arm’s length.

Oracle and Sun don’t have to be merged to make a product together. However, the first version of the machine was manufactured with Hewlett Packard.

“While the first version was built in partnership with H-P, this version leverages Sun’s hardware, clearly signaling the company’s intentions for Sun’s hardware division under the pending acquisition,” Tom Klasell, an analyst with Thomas Weisel Partners, wrote in a note to clients.

Oracle also took out an advertisement in The Wall Street Journal that said it plans to spend more money on Sun’s Solaris and SPARC development. That ad was meant to stem the tide of defections from Sun’s computer systems, as it made specific reference to increased competition with IBM. On its Web site, IBM describes Sun’s hardware business as “highly uncertain” and having an “undefined future.”

“I think someone at Oracle suddenly realized that Sun was bleeding so badly that what would be left when Oracle finally got control would be worth a small fraction of what they paid and no one would buy the hardware unit,” Rob Enderle, an independent analyst, told ComputerWorld.

The ad was a positive step for many Sun customers, but if Oracle is going to stop the bleeding it’s going to have to keep the pressure on until the merger is finally approved.

“A lot of our clients are nervous, and they want to know what’s going to happen,” Irene Griffith, Sun customer and owner of PetroSys Solutions Inc. in Houston, told ComputerWorld.

“IBM is very good at creating FUD” – fear, uncertainty and doubt, she said. Adding to her anxiety, Griffith said that she has been unsuccessful at getting information from Sun. “They’re not talking to us, they’re not reaching out to us,” she said.

Source: Oracle’s Future Clouded by Sun Takeover Complications

Source: Investment News Briefs Friday, September 4, 2009

The identity of the bank that is alleged to have failed the bank stress test was not revealed.

The bank-stress-test findings were reported yesterday (Sunday) by CNBC.com, which said it obtained the information from a source that it did not identify. The source did not identify the company, CNBC.com reported.

“At least one firm – under the [bank] stress test assumptions – will require more capital,” the source said.

The bank-stress-test results were contained in a two-dozen-page report that the government released Friday. But the results had already been “conveyed” to the firms, meaning the bank in question is aware of the U.S. central bank’s assessment, according to the published report.

This round of bank stress tests was essentially a two-step process. The first step – outlining how the banks have been analyzed – was taken care of with the report released over the weekend.  The second step – releasing the results to the public – will be taken care of when the actual results are released May 4, which is one week from today (Monday).

Neither the U.S. Federal Reserve nor the U.S. Treasury Department would comment.

The bank stress tests have a very specific purpose. Financial institutions that are found to have inadequate capital will have six months to raise the money via the private sector. If that doesn’t work, the government has said the financial institutions will be eligible for an infusion of capital via the federal government’s so-called “Capital Access Program.”

U.S. Treasury Secretary Timothy F. Geithner said he would be open to banks repaying their Troubled Asset Relief Program (TARP) loans, as long as the availability of credit (borrowing) was not adversely affected.  As a Money Morning special report detailed last week, the credit markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite initiatives to encourage such activity.

According to the conclusion of the report released over the weekend, “most banks currently have capital levels well in excess of the amounts needed to be well capitalized.”

However, as Money Morning has reported, the tests have become a “no-win” situation for the Obama administration.

“There are two things that are terribly wrong,” William M. Isaac, the Secura Group chairman who served as head of the Federal Deposit Insurance Corp. (FDIC) from 1981 to 1985, told CNBC.com. The first problem – and a big one – is the fact that the details were announced at all.

“I can’t imagine what Treasury was thinking when it made that move. It has been causing incredible angst in the markets,” said Isaac. “The second big problem is that the Treasury is directing the stress testing, apparently with direct involvement of the White House at the highest levels. Bank regulation by law is supposed to be carried out by the independent banking agencies without any political interference.”

Market Matters

As Money Morning reported Friday – in a Wall Street version of the old “he said/(s)he said” drama, Bank of America Corp. (BAC) Chairman and Chief Executive Officer Kenneth Lewis claimed that ex-U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and central bank Chairman Ben S. Bernanke threatened to remove him from office if he backed out of the Merrill Lynch & Co. Inc. (SQD) merger or (publicly) discussed the mounting losses.

Paulson had previously testified that Lewis must have misinterpreted their comments, but then seemed to blame Bernanke for the threat (Translation: Paulson tried to throw Bernanke “under the bus.”).

New York Attorney General Andrew M. Cuomo has been investigating the activities surrounding the merger to determine why shareholders were kept in the dark about the financial “challenges.”

Shifting to autos, Italy’s Fiat SpA (OTC ADR FIATY) emerged as a potential major global player as it attempts to forge a partnership with (soon-to-be-bankrupt?) Chrysler LLC, and also has interest in buying General Motors Corp.’s (GM) Opel unit. Meanwhile, GM will be closing 13 production plants over the summer to trim inventory and seems likely to miss a $1 billion debt payment due June 1 as it too moves closer to bankruptcy protection.

How bad is GM’s plight: GM may close its Pontiac division after 82 years of operation, The Wall Street Journal and MarketWatch.com reported over the weekend.

While the earnings news of the week found plenty of winners and losers, ultimately analysts perceived a bit of “cautious optimism.”  Bank of America and Morgan Stanley (MS) failed to live up to the favorable showings by Wells Fargo & Co. (WFC) and other financials, though techs like Texas Instruments Inc. (TXN), Apple Inc. (AAPL) and International Business Machines Corp. (IBM), beat Wall Street expectations, and brought new hope that the downturn was nearing an end. (Watch for an updated “Hot Stocks” feature on IBM here in Money Morning later this week).

Unfortunately, Microsoft Corp. (MSFT) posted the first quarterly revenue decline in its 23-year history, though investors still cheered its ability to reduce costs during these challenging times for PC sales. McDonald’s Corp. (MCD), AT&T Inc. (T), and Ford Motor Co. (F) were among the diverse group of companies reporting better-than-expected results, while United Parcel Service Inc. (UPS), Caterpillar Inc. (CAT), and Continental Airlines Inc. (CAL) issued disappointing numbers.

Amazon.com Inc. (AMZN), the subject of a recent “Buy, Sell or Hold” feature here in Money Morning, bucked the negative trend facing many retailers and posted higher quarterly earnings and revenue.

Additionally, U.S. retailers J.C. Penney Co. Inc. (JCP) and Coach Inc. (COH) each expressed positive sentiment that sales activity seems to picking up.  Oracle Corp. (ORCL) snapped up Sun Microsystems Inc. (JAVA) for $7.4 billion after IBM chose to pass, and PepsiCo Inc. (PEP) is attempting to purchase two related bottling companies as corporate execs seek favorable deals in this environment.  Such merger-and-acquisition (M&A) transactions often signal boardroom confidence and also indicate that the “worst” part of a downturn may be over.

Oil prices surged above the $51-a-barrel level late in the week as traders overlooked the higher inventory levels and instead focused on some favorable signs that the economy may be closing in on turnaround mode.

With a six-week winning streak on the line, investors offered their best “clutch hitting” late Friday, pushing all major indexes to higher levels. Early in the week, after investors digested negative news from the likes of Bank of America and GM, prognosticators said the weekly stock-market winning streak was all but over. However, some better-than-expected earnings and economic reports brought out the “bulls” for one final run.  The Nasdaq Composite Index ended the week in positive territory, and the other equity indexes were virtually flat from last week’s closing levels (with the Dow Jones Industrial Average suffering a slight decline).

Economically Speaking

According to the International Monetary Fund (IMF), the global downturn will be far worse than previously expected.  For 2009, the IMF expects the world economy to contract by 1.3%, its first such decline in 60-years, with over 10 million employees losing their jobs.  Unfortunately, its projections for the United States are even more dire (-2.8% for the year), with domestic financial institutions suffering $2.7 trillion in losses, almost twice the IMF’s prior estimates from just six months ago.

While much of the economic data of the week confirmed the IMF’s weak projection, analysts found a few positive signs that the downturn very well may have bottomed out.  While both new home sales and durable goods orders declined in March, the results beat the weaker Street expectations and came in the aftermath of some (relatively) strong February numbers.

In another promising sign of stability within the housing sector, the median price of an existing home sold in March actually rose for the second straight month.  Still, the record unemployment filings last week revealed the ongoing difficulties facing job seekers amid these tight labor conditions.  Likewise, leading economic indicators, a predictive report, dropped for the third consecutive month and many economists expect the recession to last at least until late third quarter.

Weekly Economic Calendar

Source: Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain

Bank of America Corp. (BAC), which reports today (Monday), remains among the last financials of note that has yet to announce its first-quarter performance, and the big bank figures to get a lot of attention as investors look to see how well Merrill Lynch & Co. Inc. (formerly known as “The Bull”) and Countrywide Financial Corp. have fit into the BofA family fold.

International Business Machines Corp. (IBM) (today) and Apple Inc. (AAPL) (Wednesday) will give investors a better idea of just how well the tech sector – which up to now has been quite hot – is really doing. Amazon.com Inc. (AMZN) (Thursday) will give investors an inside look at the health of the retail sector – especially the online variety.

Coca-Cola Inc. (KO), which reports tomorrow (Tuesday) and McDonalds Corp. (MCD) (Wednesday) should help us see whether consumers are so gassed that they can  even afford dollar sodas and burgers (or are buying more in lieu of dining at more-expensive restaurants).

Several economic reports will be worth a look, too. Home sales data for March highlight the economic calendar and analysts are eager to see whether February’s enhanced activity was the start of a trend or just an anomaly.  Interest rates are down; home prices are low, first-time buyers have tax incentives to buy.  Could the February and March numbers represent the start (continuation) of a housing rebound?  It’s going to happen at some point, and don’t forget that housing expert Andrew Waite, the publisher of the Personal Real Estate Investor magazine, recently told Money Morning that the recovery is already under way.

Market Matters

Strike up the band; let the good times roll; banks are making money again (or not losing quite as much). Earnings season moved along and financials led the charge with (somewhat) favorable reports.  Both Goldman Sachs Group Inc. (GS) and JP Morgan-Chase & Co. Inc. (JPM) announced better-than-expected quarters and key execs insisted they will pay back those TARP (Troubled Asset Relief Plan) dollars sooner than later.  While Goldman appears set to raise funds through a new stock offering (which will dilute current shareholders), JP Morgan insisted no similar issuance will be necessary.  With its $1.5 billion profit, Citigroup Inc. (C) looked quite promising relative to its $5 billion shortfall a year ago.  Still, some analysts claim the recent results reek of income-statement “shINTCenanigans” (and unsustainable bond trading gains), which is why they say that they will await the results of the independent stress tests in a few weeks, figuring that these  results will paint a more accurate picture of these banks’ operations.

Turning to techs, Intel Corp. (INTC) and Google Inc. (GOOG) reported stronger-than-anticipated quarters, but with caveats.  Despite claiming that the ailing computer industry may be “bottoming,” Intel refused to offer an outlook for the current quarter.  Google, on the other hand, enjoyed net-income growth, although the company experienced a decline in revenue (from the fourth-quarter 2008) for the first time in it five-year history as a public company.  While cell phone giant Nokia Inc. (ADR: NOK) suffered a drop in earnings, management reported optimistic signs of greater stability in the industry.  Conglomerate General Electric Co. (GE) posted a 35% decline in earnings, but still beat the Street outlook.  Airlines did not fare quite as well as both American Airlines parent AMR Corp. (AMR) and Southwest Airlines Co. (LUV) posted troubling losses, and warned of more turbulence to come.

In non-earnings news, The Procter & Gamble Co. (PG) bucked the recent cost-cutting trend and announced a dividend increase.  Mall owner General Growth Properties Inc. (GGP) filed for the biggest bankruptcy-protection case in the history of the real estate industry as the Chicago-based company attempts to restructure its debt positions, a move that underscores the concerns Money Morning recently raised as part of an investigation into the looming problems in the commercial real estate sector.

International Business Machines Corp. (IBM) moved beyond new Sun Microsystems Inc. (JAVA) overtures, claiming a reluctance to be drawn into a long antitrust battle.  Despite that failed deal, the boardrooms appear a bit more active these days as transactions highlighted the business news of the week.

American International Group Inc. (AIG) is selling its personal auto insurance line to Zurich Financial Services (OTC ADR: ZFSVY) for slightly less than $2 billion, the first of many such moves for the bailed-out insurer.

Express-Scripts Inc. (ESRX) will acquire WellPoint Inc. (WLP) for $4.68 billion to better compete with industry leader Medco Health Solutions Inc. (MHS) in the pharmaceutical-benefits-management space.

Rosetta Stone Inc., a language-education specialist, underwent an initial public stock offering (IPO) that reminded some of the “Go-Go” dot-com days as its stock soared about 40% on the first day of trading, the most successful offering in a year.

After five straight weeks of positive stock returns, U.S. stock experienced an early-week pullback, before charging ahead on the financials’ earnings reports.  “Six weeks and counting” have investors surmising that the rise may actually be more than a short-lived bear market rally (though the Nasdaq Composite Index remains the only key index in positive territory for the year).

Economically Speaking

Perhaps taking advice from spin-doctors, both U.S. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke last week put a more optimistic (though realistic) face on the current state of the economy.

Said Bernanke: “Today’s economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence.”

Said President Obama: “By no means are we out of the woods just yet, but from where we stand, for the very first time, we are beginning to see glimmers of hope.”

Additionally, the Fed Beige Book reported an ongoing contraction throughout the country, but implied that certain regions “saw signs that activity in some sectors was stabilizing at a low level”

President Obama also welcomed Cuba back into the global economy (to a limited degree) by lifting trade restrictions (telecommunications-related) and allowing increased travel and additional financial payments from Cuban-Americans to family members.

A hectic week on the economic calendar brought some mixed – and confusing – results, as usual. After a few stronger months of consumer activity, retailers struggled again in March as sales took a surprising tumble across most categories. Industrial production fell for the fifth straight month, revealing that manufacturers have a long way to go before declaring recovery.

On the other hand, while housing starts declined in March, the losses were attributed to apartment construction, and single-family residential activity was reported flat (similar to February); some optimistic analysts – like magazine publisher Waite – predicted the worst had ended for the housing sector.

Both the retail and wholesale inflation gauges dropped in March with the consumer price index (CPI) experiencing its first consecutive 12-month decline in prices since mid-1955.  While some pessimists in the bunch were quick to play the deflation card again, most seemed content to proclaim that price pressures are simply one aspect of the economy that warrants little to no worry in the present environment.

Weekly Economic Calendar

Source: Earnings Reports Will Play a Key Role This Week

The industry has enabled socio-economic development, enhanced economic growth and productivity, reduced poverty, and improved standards of living across the board. It’s even helped develop nuclear power in India.

And the company standing at the top of India’s IT mountain is not Infosys Technologies Ltd (INFY) or Tata Consultancy Services. And it’s certainly not Satyam Computer Services (ADR: SAY).

It’s Armonk, N.Y.-based International Business Machines Corp. (IBM).

“They’ve beaten their competition relatively handily,” Kaufman Bros.’s Karl Keirstead told Bloomberg, who pointed to IBM’s brand name and experience as draws for potential clients. “There’s a cachet in using IBM.”

IBM’s model is the anti-model. Whichever country the company is working in, it has a game plan exclusively catered to it. It encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing.

And financing is crucial these days. IBM’s long history in the world’s markets has given the company a recognition and credibility abroad, helping to mitigate competitive threats from unproven newcomers.

Its presence in India will yield dividends as India’s economy emerges from the global financial crisis.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

At the beginning of 2009, 71% of IBM’s nearly 400,000 employees are working overseas – a 65% increase from two years prior.

In fact, IBM incorporates the words “global” or “world” in nearly every sentence of the business strategy outlined in its annual earnings report of 2008.

“The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world,” the report said.

It continues: “At the same time, the current economic crisis increases the pressure on both businesses and governments around the world to adapt…. Given these opportunities and economic challenges, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape.”

IBM Boosts Profits with Business Overhaul

In addition to global diversification, IBM has also successfully employed a versatile and aggressive business model. Between 2000 and 2008, IBM acquired more than 100 companies and poured more than $50 billion into research and development.

In 2000, the distribution of IBM’s business model was: Hardware (24%), software (25%), financing (10%) and services (40%).

But by the end of last year, the model had evolved to: Hardware (9%), software (40%), financing (9%) and services (42%).

The result was a 130% increase in annual earnings per share (EPS) on more than 22% annual revenue growth in that span.

For 2008 – by far one of the worst years for companies around the world – IBM posted an 18.4% increase in net income and 23.9% increase in earnings per share.

And IBM blew away analysts’ estimates with a fourth-quarter net income of  $4.4 billion, or $3.38 a share – a 12% increase from 2007. Analysts had expected IBM to earn only $3.03 per share.

What’s more is that the first quarter of 2009 is shaping up to be much better.

IBM said it expects a $9.20 EPS in fiscal 2009, up from the $8.93 it posted in 2008. It’s also forecasting an EPS in the range of $10 and $11 in 2010.

But more than anything else right now, investors want to first see the company’s first-quarter results, due Monday.

IBM’s Eventful First Quarter

IBM’s biggest news came in March, when the company made a $6.5 billion, or about $10 per share, bid for Sun Mircosystems Inc. (JAVA). IBM subsequently lowered its offer to $9 per share and talks fell apart.

According to a recent report by CNBC, Sun has attempted to restart negotiations, but IBM is wary of the government scrutiny that may result. A combined IBM-Sun business would dominate the server market with a near 50% share – something that could set anti-trust alarm bells ringing.

However, if IBM did move ahead with the Sun acquisition, the company would not only build on its hardware business and take control in the server market, it would further expand its software portfolio, which is the company’s most profitable business.

Regardless of whether or not it reaches a deal with Sun IBM has plenty of business to build on.

Big Blue is teaming up with tech giants to build 28-nanometer (nm) chips, a little more than a generation ahead of 45nm technologies used by industry leaders Intel Corp. (INTC) and Advanced Micro Devices (AMD), CNET reported.

It also recently inked a seven-year, $372 million deal to manage IT infrastructure of Canada’s National Financial Group (NA). That came three days after IBM announced a similar deal with of one India’s largest banks, Kurmanchal Nagar Sahakari Bank, which is planning to double the number of its branches in the next two years.

Finally, last week, IBM won an eight-year, $873 million contract with the state of Georgia to provide mainframes, servers, printers, service desk, end-user computing and disaster recovery.

Elliott Gue, editor of Personal Finance newsletter, wrote that IBM’s IT services are a steady revenue stream, and are a product of its long-established relationships with the world’s biggest companies.

And now – with spending tightening around the world – is the time they especially turn to IBM.

“Many of IBM’s key software and service offerings are designed to cut costs for companies and improve the efficiency of their IT infrastructure,” Gue wrote. “And during downturns, companies are always looking for ways to cut costs.”

Analysts polled by Thomson Reuters forecast first-quarter earnings of $1.65 a share on revenue of $22.6 billion. IBM earned $1.65 a share on revenue of $24.5 billion a year earlier.

Source: Hot Stocks: IBM’s Diverse Business and Global Presence Should Boost First Quarter Earnings

• U.S. factory orders rose in February, reversing six months of consecutive declines, the Commerce Department said. New factory orders rose 1.8% in February after dropping a revised 3.5% in January, Reuters reported.

• The 30-year fixed-mortgage rate dropped to 4.78%, a 30-year low, as the U.S. Federal Reserve increases its purchases of mortgage-backed bonds, Bloomberg reported. “Lower rates will help increase demand for homes. We need to see stronger demand for homes to help end the housing correction,” Celia Chen, senior director at Moody’s Economy.com told Bloomberg.

• Seeking funding to develop three new hybrid vehicles, General Motors Corp. (GM) asked the U.S. Treasury for a low-interest $2.6 billion loan, Reuters reported. If received, the loans would help the company develops two spinoffs from its all-electric Chevrolet Volt.

• Copper’s December price of $1.25 a pound is “in the past,” said Chile’s Mining Minister Santiago Gonzalez. December’s price was a four-year low, a result of tapering demand from China. Now,  “China is buying large amounts of copper,” Gonzalez said to Bloomberg. “That’s part of copper’s recovery.”

• International Business Machines Corp. (IBM) cut its offer for Sun Microsystems Inc. (JAVA) to $9 from $10 per share, The Wall Street Journal reported. Sun has agreed to accept a lower price in return for stronger commitments from IBM that it will complete the deal even if it faces intense regulatory scrutiny, according to The Journal.

• Oil prices surged nearly 9% yesterday (Thursday), as light, sweet crude for May delivery rose $4.25 to settle at $52.64 a barrel on the New York Mercantile Exchange. Natural gas for May delivery added 8.7 cents to settle at $3.782 per 1,000 cubic feet.

Source: Global Investment News Briefs Friday, April 3, 2009

No matter how strongly you feel that a stock is going to go up, the minute you put the words to paper, your performance as a stock-picker is there for the entire world to see.

Over the last few months, this has been painfully obvious. The market has gone down the toilet, and our picks and recommendations that we all made a few months ago have likely taken it on the chin, unless it was a bearish recommendation.

I wrote a piece for our sister publication Early to Rise back in early December that suggested it was time to buy shares in some household names that were at the time trading at very low prices. With the absolute carnage in the markets since then, I was sure that the picks I gave were probably down at least as much as the market over that time, maybe a little worse, given some of the names on the list (such as AIG, which took a third government handout on Monday).

Sure enough, there are some ugly numbers on the list. Alcoa (NYSE:AA) is down 32 percent since I made the list, Citigroup (NYSE:C) is down 68 percent, and AIG is down 71%. By comparison, the Dow is down 14.98 percent over this same time period.

Happily, some names on the list have made large jumps since then. Yahoo (NASDAQ:YHOO) is up 34 percent, Sun Microsystems (NASDAQ:JAVA) is up a little over 47 percent, and the big mover is Sprint (NYSE:S), which is up almost 90 percent since then.

To get an overall idea of how you would have done had you invested in the picks, I totaled the share prices for all 16 picks that day and compared them to prices on March 2. You would have spent $84.03 to buy one share of all 16 picks (excluding commissions). Had you sold them this past Monday, you would have gotten roughly $84.54. That’s a small profit, but remember the overall market is down 14.98 percent in the mean time.

Not only would you have beaten the market, but you would have managed to make a small gain. Not too bad in this market.

Looking back at the list, I wouldn’t really change anything. I mentioned that they were speculative plays, and with that, large losses can occur. I would still encourage buying these names, as almost all are still viable companies (AIG is questionable) and still have tremendous upside. Those that have dropped further have even less downside assuming they manage to survive (AIG).

As I mentioned in the original piece, I don’t suggest buying huge amounts of shares, but perhaps picking 10 of the companies and investing $500 into each one. You will only have $5000 invested, and the upside could be huge.

Source: Looking Back

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar

The situation is dire. GM is burning through cash at a pace that could mean bankruptcy, and all three players are struggling with high costs, weak vehicle sales, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. The answer, of course, is that they probably can’t.

But it’s here that the debate turns political, the Detroit Free Press reports. Congressional Democrats are pushing for some form of auto-sector bailout – even an extension of the deal U.S. banks received as part of the $700 billion rescue plan crafted by the U.S. Treasury Department. But Republican lawmakers claim their Democratic counterparts are “pandering” to their own voter base, which includes widespread support of American unions.

Expect the debate to become heated and emotional as some lawmakers and other policymakers spotlight the massive job losses that a failure of one – or all three – of the carmakers would cause. And there would be massive ramifications beyond the Big Three themselves. As Money Morning has reported, the three automakers – all told – employ more than 200,000 Americans, and support millions of additional indirect workers employed by suppliers and dealerships.

The collapse of the automakers could ultimately cost the economy more than 2 million jobs. And the pain that would cause doesn’t even factor in the additional estimated 1 million Americans who rely on the U.S. auto companies for pension and healthcare benefits – chiefly retired autoworkers and their families.

Reaching a bailout agreement probably would require automakers and their supporters depends on the automakers and their supporters convincing skittish lawmakers that such a deal is critical for the health of the overall economy and that the U.S. government won’t be throwing good money after bad, the Free Press reported.

GM spokesman Tony Cervone even tried to spin it that way: “It’s a loan, it’s a bridge loan,” he said. “The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan.”

Second, Freddie Mac (FRE), seized by the government two months ago, asked the Treasury for $13.8 billion, after a record quarterly loss caused its net worth to fall below zero. More on this momentarily.

And third, the struggles also continue abroad. Foundering Asian economies came away from a weekend Group of 20 meeting in Washington on the worldwide financial crisis with the promise they’d have expanded access to financing programs from such sources as the International Monetary Fund (IMF).

Exporters throughout Asia that depend on credit to pay for raw materials and to finance shipments say business has plunged as access to needed credit has dried up, the International Herald Tribune reports. Access to IMF loans could help governments in South Korea, India, Indonesia and other economies where investor anxiety about a possible scarcity of foreign currency has driven down exchange rates, said Citigroup Inc. (C) economist Yiping Huang.

Leaders of the world’s top industrialized nations also pledged to give developing countries a bigger role in global financial bodies — a move long sought by China’s leadership. And while Beijing welcomed the step, China’s leaders gave no indication whether the country might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve fund.

Target Corp. (TGT), Home Depot Inc. (HD), and AnnTaylor Stores Corp. (ANN) (among others) report earnings, though poor results are already forgone conclusions.  A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy.  (Just a few months ago, such releases were feared…How quickly things can change.)

Market Matters

Looks like the Feds could use a mulligan (do-over).  When the $700 billion bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets.  Additionally, direct government investments were supposed to encourage bank-lending activity that would help thaw out the frozen credit markets.

Well, just a few weeks after its creation, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced that the government will not buy troubled assets (that no one seems to know how to value), meaning the plan will instead focus on enhancing consumer lending.  Meanwhile, as a Money Morning investigative report demonstrated, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending in a way that would stimulate economic growth.  Non-banks also have been recipients of the government’s generosity, as insurance giant American International Group Inc. (AIG) received $40 billion in new capital from this package, under the terms of its newly structured bailout. All told the deal’s worth more than $150 billion.

American Express Co. (AXP) applied for (and received) approval to become a commercial bank in order to tap into the government resources.  While certain tweaks should have been expected to ensure that the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence. President-elect Barack Obama is asking a Congressional lame-duck session to approve $25 billion to $50 billion in rescue aid for Detroit’s crumbling auto industry. He also wants to appoint a czar or board to oversee the auto industry’s rescue and reconstruction, both Money Morning and Bloomberg News reported.

With foreclosures soaring by a full 25% in October from last year’s level, Fannie Mae (FNM) and Freddie Mac (FRE) [now literally part of “the government” – somewhat ironic given that it was the pressure from foreign-government bondholders that forced the federal government to put the two mortgage giants into conservatorship, a Money Morning investigative story demonstrated] announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principal.

Freddie, the mortgage-finance giant that had a negative net worth of $13.7 billion at the end of the third quarter, asked the Treasury Department for $13.8 billion and says it expects to receive the money by Nov. 29. The net loss widened to $25.3 billion after the company wrote down tax assets and providing for bad mortgages and securities, Bloomberg News reported Friday.

As the government tries to avert a financial-market collapse spurred by the worst housing slump since the Great Depression, Freddie’s demand adds to the government’s growing burden as it tries to avert a collapse in financial markets, Bloomberg said. The U.S. pledged $100 billion each to Freddie and larger rival Fannie Mae when it placed them into conservatorship in September. Fannie said this week it may need more money at the end of the year.

“You could very well get losses north of $100 billion on both of these companies,” Paul Miller, an analyst at FBR Capital Markets (FBR) in Arlington, Va.

Freddie Chief Executive Officer David M. Moffett, 56, named in September when the government seized control of the company, increased write-downs for bad mortgages and securities and took a charge against most of Freddie’s so-called deferred tax credits. Fannie CEO Herbert M. Allison Jr., 65, took similar steps earlier this week, causing the Washington-based company to record a $29 billion loss.

Like Fannie and Freddie, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers by streamlining and modifying its loans.  Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25%, or up to 60,000 jobs. And rumors have its chairman among those to be given his walking papers (A Reuters report Saturday stated that Citi would cut 10% of its 352,000-person work force).  Not to be outdone, Morgan Stanley (MS) will be cutting close to 10% of its institutional securities and asset management units.  In non-financial news, Sun Microsystems Inc. (JAVA) plans to reduce its workforce more than 5,000 jobs; Intel Corp. (INTC) and Best Buy Co. Inc. (BBY) offered pessimistic outlooks; Circuit City Stores Inc. (CC) filed for bankruptcy protection (just in time for the holidays), and retailers J.C. Penney Co. Inc. (JCP) and Macy’s Inc. (M) issued weak earnings reports.

In fact, after posting a $44 million loss for the third quarter, Macy’s may be looking to consolidate down to two divisions from its current four, Womens Wear Daily reported Friday. Sources told the trade journal that plans were calling for Macy’s Florida in Miami and Macy’s Central in Atlanta into the New York-based Macy’s East and San Francisco-based Macy’s West division, the industry trade journal reported.

Wal-Mart Stores Inc. (WMT) fared better than many competitors, the company also warned of a challenging quarter ahead.

Early last week, as was reported in this column a week ago today (Monday), China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets.  Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan.  Three days of intense selling meant $1 trillion of lost shareholder wealth.  With the Dow Jones Industrial Average plunging below the 8,000 level, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session).  Oil prices fell below $60 a barrel to a 20-month low; gasoline pushed closer to a national average of $2 a gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75.  At least, that’s good news for those “gloom-and-doom” retailers.   (Maybe they should tap into the bailout fund as well?)

Economic Matters

How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended.  Remember, last summer, most U.S. Federal Reserve watchers also expected the next rate move to be higher as Federal Reserve Chairman Ben S. Bernanke and friends seemed more concerned about threats of inflation (with oil at a record of $145 a barrel) than any domestic (or global) recession.  Fast-forward to the present, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).

By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter.  (No shortage of contradictory predictions from “experts” these days.)  These same economists overwhelmingly believe that President Obama should reappoint Bernanke as the central bank chairman in 2010.  Late in the week, Bernanke stated that the world’s central bankers have pledged to work together to resolve the global financial crisis and even opened the door to another rate cut (below the current 1.0% target level for the benchmark Federal Funds rate).  U.S. President George W. Bush welcomed world leaders to the G20 economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).

[Editor’s Note: For Money Morning’s take on the U.S. economy, U.S. stock market and such other key 2009 topics as the state of economies in China, Latin America and Japan, and the outlooks for the prices of gold, oil and food, check out our “Money Morning Outlook 2009” series, which is just under way. We’ll also be looking at sovereign wealth funds, retail sales, alternative energy, IPOs, mergers and acquisitions, and more.]

A light week in the economic calendar brought little stress relief to investors (not to mention retailers).  Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record.  While U.S. auto lots have been transformed into veritable ghost towns these days, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else.

However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months.  Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cash-flow positions (without suffering foreclosure).

Weekly Economic Calendar

Source:U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts

Although not quite in the pantheon of Intel, Apple and Seagate, Sun has been braving its own path in technology since its founding in 1982. The paradox is that a company which professed a radical departure in business computing has itself been too slow to adapt to rapid change, and now finds itself as takeover prey.

With assets far exceeding its current valuation, investors stand to make modest gains if the company decides to break itself up, or if it finally succumbs to the takeover rumors circulating for years.

The alarm sounded louder than ever when the company report Q1 2008 earnings. A $1.68 billion loss was attributed to a slowdown in technology, but for us Sun followers it’s more of a classic case of arrogance and ineptitude.

For those of you unfamiliar with Sun, the company started out making proprietary computer server systems – meaning that you had to buy the whole kit-and-kaboodle versus giving customers the opportunity to mix-and-match products in a so-called open platform.

Sun was a super-star of the dot-com era. It supplied the underpinnings for the thousands of new companies pioneering the Internet. Its reputation for reliable systems and technical innovation trumped the premium prices it had charged.

But Sun ignored two irreversible trends that would bring the company to its knees: cheaper hardware and open-source software.

Facing immense pressure from companies that ultimately adopted open platforms such as IBM and Hewlett-Packard, Sun jumped into the fray. But in the end, it couldn’t compete against these true heavyweights.

The company’s corporate culture certainly didn’t help. Former CEO Scott McNealy (who remains as chairman) had been a media darling during the tech bubble for his anti-Bill Gates quips. But now we know who got the last laugh.

In the meantime, current CEO, Jonathan Schwartz, hasn’t been able to turn around Sun during his nearly three years in the corner office. It may be that his experience is insufficient to tackle such a thorny problem, with his background rooted in start-ups and Sun’s management ranks. (Hint: maybe it’s not such a good idea to bring in a CEO with ponytail unless he has a tough track record to back up his affectation.)

For the quarter ended Sept. 28, Sun’s net loss of $1.68 billion amounted to a loss of $2.24 cents a share, compared with net income of $89 million, or 10 cents a share, during the same period the year before. Revenue declined 7.1% to $2.99 billion from $3.22 billion a year earlier.

In addition to products and marketing, a couple of Sun’s core markets are telecommunications and financial – both of which are suffering mightily these days.

Last November, Sun tried to polish its image through a one-for-four reverse stock split. As it stands, Sun shares have dropped to pre-split prices.

Sun’s shares currently trade at $5 and change, giving it a market value of about $4 billion. At the same time, the company’s annual sales came in at approximately $14 billion. Combined with the company’s intellectual property portfolio valued at about $2 billion, it’s lackluster acquisition of StorageTek and a roster of blue-chip customers, Sun is ripe for the pickin’.