• Toyota Motor Corp. (ADR:TM) yesterday (Tuesday) named Akio Toyoda, the grandson of the company’s founder, as the new company president. The announcement car the same day Toyota announced 2008 sales figures, down 5% in Japan and down 4% worldwide.

• Constellation Energy Group Inc. (CEG) said it agreed to sell the majority of its London commodities unit to Goldman Sachs Group Inc. (GS), a move to boost the power company’s liquidity, Reuters reported. A dollar amount of the deal was not released. Constellation is also trying to sell its Houston-based gas trading operation.

• For the first time in 6 years, China’s urban unemployment rate rose, climbing from 4% to 4.2% in the three months ended Dec. 31. “Growth has fallen off a cliff in China in recent months. It does already feel like a recession for a lot of people,” Paul Cavey, chief China economist at Macquarie Securities Ltd. in Hong Kong, told Bloomberg.

• Kingdom Holding Co., the investment company owned by Saudi Arabia’s Prince Alwaleed bin Talal, reported a massive $8.26 billion fourth-quarter loss. “The loss is phenomenal. This is the biggest corporate story for Saudi Arabia in many years,” John Sfakianakis, chief economist at Saudi British Bank, told Bloomberg.

• Warner Bros. Entertainment Inc. said yesterday (Tuesday) that it plans to cut 800 jobs, or 10%, of its global workforce, as the company struggles with the current recession. “We are very sad to announce that based on the global economic situation and current business forecasts, the studio will have to make staff reductions in the coming weeks in order to control costs,” Barry Meyer, chairman and chief executive, and Alan Horn, president of the studio said in a statement.

• Johnson & Johnson (JNJ) yesterday (Tuesday) reported a 14% increase in fourth-quarter profit. The company earned $2.71 billion, or 97 cents per share, up from $2.37 billion, or 82 cents per share, in the year-ago quarter. However, revenue fell 4.9% to $15.18 billion from $15.96 billion — the first drop since 2004. Excluding charges and gains, J&J earned 94 cents a share.

• Rohm and Haas Co. (ROH) yesterday (Tuesday) said it would cut 900 jobs, or 5.5% of its workforce. The company plans to adjust production schedules in certain manufacturing facilities, reducing sales and marketing positions and freezing discretionary spending and employee salaries, Reuters reported.

• Google Inc. (GOOG) said yesterday (Tuesday) that it would end its Print Ads program on February 28, Reuters reported. The program was intended to create a new revenue stream for newspapers, but was not having the desired impact and fell by the wayside as Google retrenched amid the current global downturn.

Source: Global Investment News Briefs Wednesday, January 21st, 2009

Wall Street stumbled on Monday after a joint venture between Kuwait and Dow Chemical fell through, threatening one of the larger merger deals of the year and adding to fears about a faltering global economy.

Dow shares tumbled to their lowest since 1991 after Kuwait decided to end a $17.4 billion petrochemical joint venture amid slumping petrochemical sales and the global financial crisis.

The news ignited worries that the largest U.S. chemical company would not be able to buy rival Rohm & Haas , which Dow agreed to acquire for about $15.3 billion in July. Rohm & Haas (ROH) shares fell as much as 25 percent.

These declines were also exacerbated by light volume, analysts said. Trading is expected to be light throughout the week, abbreviated by the New Year’s holiday on Thursday.

The increasingly anemic economic data and company news has prevented a hoped-for year-end rally.

What investors “are grappling with is how long and how deep of a recession this is going to be and when the sun is going to go up again,” said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland.

The Dow Jones industrial average was down 129.99 points, or 1.53 percent, at 8,385.56. The Standard & Poor’s 500 Index was down 14.10 points, or 1.62 percent, at 858.70. The Nasdaq Composite Index was down 34.94 points, or 2.28 percent, at 1,495.30.

The Nasdaq outpaced the other major indexes, dragged by large-cap tech companies including Research In Motion , which fell 4.7 percent to $38.94 and Microsoft Corp , which shed 1.8 percent to $18.79.

Dow Chemicals and Rohm & Haas were among the biggest losers by percent on the New York Stock Exchange. Dow was down nearly 20 percent to $15.18, while Rohm & Haas was off about 15 percent to $54.03.

The collapsed joint venture added to concerns about the chemicals industry, which has been struggling because of recessions in most developed countries and a sharp slowdown in emerging economies.

Economic worries overshadowed gains in the energy sector as oil climbed on concerns that crude supplies could be threatened by tensions between Israel and the Hamas-ruled Gaza Strip.

Oil prices rose to more than $38 a barrel as Israeli warplanes hit the Gaza Strip for a third day and Israel prepared to launch a possible invasion. The offensive has killed more than 300 Palestinians in the deadliest violence in the territory in decades.

Chevron and Exxon Mobil topped the Dow, while the S&P 500 index of energy stocks rose more than 1 percent. Chevron rose 1.3 percent to $71.28 and Exxon Mobil edged up 0.5 percent to $77.62.

Analysts noted the rise in energy prices did not bode well for cash-strapped consumers.

As 2008 winds to a close, investors are looking to the incoming White House administration to offer another stimulus package and help usher the country out of a year-long recession. The broad S&P 500 is down about 40 percent for the year, putting it behind 1931’s 47.1 percent record drop.

President-elect Barack Obama has said signing a major economic stimulus package will be his priority when he takes over the presidency on Jan. 20.

Over the weekend, one of Obama’s top economic advisors said financial policy should address both immediate job creation and longer-term investment needs.

Lawrence Summers, Obama’s pick to head the White House National Economic Council, said spending government money solely to stimulate consumer spending would be a short-sighted mistake.

Deepa Seetharaman  NEW YORK, Dec 29 (Reuters)

The price of fuel now makes up 35 percent of airline costs compared with 13 percent a decade ago. Capital and Crisis editor Chris Mayer says if oil prices stay where they are and nothing else changes, the airline industry will lose about $6 billion this year, compared with a profit of $5.6 billion last year.

This creates a great ‘hidden’ opportunity for investors. More fuel-efficient engines will require the use of exotic metals that can cope with higher-then-normal engine temperatures – metals like cobalt…

The industry is trying – and will try – lots of different tactics to fend off elimination. One of these is to push for more fuel-efficient aircraft. And that is the opportunity for investors to cash in on this crisis.

It starts with the jet engine. Recently, the Wall Street Journal published “Jet Engine Makers Launch New War” – all about the drive for new fuel-efficient engines. The piece notes that airlines worldwide want to replace their existing fleets with next-generation planes, not the current oil-guzzling models. The goal of the jet engine makers – or rather, the mandate put to them by their customers – is to deliver at least double-digit gains in fuel-efficiency.

As the WSJ reports: “Developing fuel-efficient engines requires the use of exotic alloys and ceramic coatings that can cope with internal engine temperatures that would be above the melting points of untreated metal components.”

Enter cobalt. It’s a tough metal with a high melting point of 2,700 degrees Fahrenheit. This higher melting point allows it to maintain its strength at higher temperatures than other metals can. Cobalt alloys have higher melting points than either nickel or iron alloys.

As a result, one of the main uses of cobalt is in superalloys such as those that jet engine makers need. In fact, the making of superalloys consumed about a quarter of global cobalt production, of which about 75 percent wound up in aircraft.

Cobalt would seem to have a nice backdrop of long-term demand. But it doesn’t stop there. Defense spending is also on the rise globally. A Financial Times report on aerospace notes that India, China, Brazil and certain Middle Eastern countries are all upping their defense spending. India alone may spend $40 billion in 2009.

Cobalt is an important part of all that, too. In fact, the U.S. and the Soviet Union used to stockpile cobalt for defense purposes. Those stockpiles are long gone, but the role cobalt plays in defense still exists.

As exciting as the aerospace angle is, a potentially bigger market could be batteries for hybrid cars. As I pointed out in the last issue, there are 5-10 pounds of cobalt in a typical hybrid car battery. Hybrid car sales will probably hit 500,000 cars this year. And that is growing rapidly.

Kitco recently noted that cobalt holds an electric charge better than almost any other metal. That makes it hard to replace, even at $50 per pound. “And the current electric batteries work so well,” Kitco notes, “[that] there is little incentive to change their structure (and other metal prices have skyrocketed, as well as cobalt — nothing is cheap anymore).”

With the failure of banks and the troubles of big financials such as Fannie Mae (NYSE:FNM), cobalt seems a nice place to be. A while ago, I recommended a “cobalt play” to the readers of my investment service, Mayer’s Special Situations. The name of the stock is OM Group (NYSE:OMG). I should warn you that the stock is a bit speculative. But let me share a few of the particulars…

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OMG carries a seemingly absurd valuation. It’s not often that you find profitable and growing companies with no net debt trading for big discounts to book value. The specialty chemical industry – a tribe to which OMG belongs – is undergoing heavy consolidation. Companies are getting bought out left and right. Dow Chemical (NYSE:DOW) bought Rohm and Haas (NYSE:ROH) for a 74 percent premium. And then Ashland (NYSE:ASH) came along and bought Hercules (NYSE:HPC) for a 38 percent premium.

Companies that make low-margin chemicals are looking to beef up on companies that make high-margin, or specialty, chemicals. Because OMG is cheap and very profitable, it has to be on someone’s radar. I hope that it doesn’t get bought out. I think we’ll do better holding the stock. But the deal-happy scene in the chemical business is another potential backstop of value here.

Hard to believe that anyone could buy all of OMG for anything less than at least book – which is $36 per share. And even that would bring howls of protest. After all, the stock was in the $50s for much of the past year. We will see.

In any event, let’s bring this back around to the aviation crisis. A familiar theme in the pages of my letters over the years has been this Templetonian notion of focusing on the opportunities that problems present. The late great John Templeton made this idea a key component of his investment — and life – philosophy.

The high price of oil is a big problem for many industries.

So if you have a good way to mitigate the high price of oil, you have a business. I think the big winners over the next few years are going to be those companies that have a solution to the high price of oil. Those companies have products that other people will pay up for, because fuel-efficiency is a must. The aerospace industry must become more fuel-efficient.

Cobalt alloys will be a big part of that trend.

Source: Fuel Friendly Skies

Again just recently, after several big banks announced yet another round of major write-offs – all of them related to the subprime crisis, albeit indirectly – analysts, and even some banking-industry executives, said the write-downs were coming to an end.

Once again, we advised readers to avoid losing their heads over such heady optimism. And again, we were right.

The latest victims of the subprime crisis – mortgage giants Fannie Mae (FNM) Freddie Mac (FRE) – will be in the spotlight this week as investors, economists, bankers, mortgage brokers, homeowners, and politicos alike monitor the fate of these institutions. And here are the questions that will be asked – and hopefully answered – in the process:

• Are these government-sponsored enterprises (GSEs) too big to fail?
• Are their capital positions not as dire as some claim?
• Will the government nationalize them (at the taxpayers’ expense)?
• Will residential borrowing costs shoot through the roof?

The answers will go a long way toward determining how much longer we have to tell you “don’t you believe it” each time some analyst says the subprime crisis is over.

And some of those answers could well come today (Monday), especially after reports surfaced yesterday (Sunday) morning, stating that the U.S. Treasury was working on a rescue plan for the two government-sponsored mortgage firms. [For a related story detailing the Fannie and Freddie debacle in today’s issue of Money Morning, please click here].

Investors also will have to turn at least some of their attention to earnings season (remember that?) as some key financial companies report: US Bancorp (USB.L) (Tuesday), State Street Corp. (STT) (Tuesday), Wells Fargo & Co. (WFC) (Wednesday), Merrill Lynch & Co. Inc. (MER) (Thursday), JP Morgan Chase & Co. (JPM) (Thursday), and Citigroup Inc. (C) (Friday).

Even earnings season poses some questions related to the subprime crisis:

• Will these results lead to more write-downs and additional capital infusions – further fueling the subprime crisis?
• Are those foreign sovereign wealth funds still looking for more American investments?
• Will the high-tech sector be able to offset some of the financial-sector pain, as it has so many times over the past couple of years?

Technology also takes center stage as Intel Corp. (INTC) (Tuesday) and Microsoft Corp. (MSFT) (Thursday) report quarterly results.

In other tech news, Yahoo! Inc. (YHOO) continues to make for interesting news, and yesterday (Sunday) rejected a new takeover/breakup offer from Microsoft and corporate raider/investor Carl Icahn.

Investors get another look into the inflation picture as both June Producer Price Index (PPI) and Consumer Price Index (CPI) are released. Have the higher energy costs started to work their ways into other sectors of the economy? Are companies passing along these costs to the ultimate consumer? (Remember, the so-called “core” data – which excludes volatile food-and-energy prices – is useful, but check out the full inflation picture for a change).

Finally, June retail sales may look promising as those government checks will be reflected in the data, but don’t be fooled. This month, consumers are back out on their own.

Market Matters

And then panic set in. It’s one thing for The Bear Stearns Cos. Inc. (BSC) with all of its interconnected relationships to be close to failing and require a “bailout.” But what about two government sponsored entities (GSE) which own or guarantee $5 trillion in mortgages and serve as the backbone of that entire industry?

Surely, Freddie Mac and Fannie Mae have made news in the past (accounting irregularities, ineffective management) and have long been targets of certain politicos who have warned about a “too big to fail” mentality. Well, after losing a combined $11 billion (as of March 31) and raising $20 billion to shore up balance sheets, both entities face another major liquidity crunch and are in dire need of new infusions.

Lehman Brothers Holdings Inc. (LEH) analysts (like they have room to talk) and St. Louis Fed President William Poole were among the “experts” who implied both GSEs were on the verge of collapse without an immediate capital investment. Fannie and Freddie shares plunged to their lowest levels in more than 16 years and firms with significant mortgage holdings (investment-related and REITs) fell in lockstep. Though the Office of Federal Housing Enterprise Oversight (OFHEO) and Treasury Secretary Henry Paulson offered their best political spin by claiming the GSEs are “adequately capitalized,” investors were not buying (literally) as some awaited news of a government “bailout.” A lonely, optimistic voice in the crowd emerged Friday as Citigroup (as if it doesn’t have its own problems) stepped forward and made the statement that “we expect cooler heads to prevail…we believe the recent sell-off in the shares of Freddie and Fannie is overdone.”

The Freddie-Fannie news overshadowed virtually every other business story of the week. Staying within financials, Merrill Lynch is close to raising more capital of its own (possibly new write-downs on the horizon?) as it looks to reduce its investments in BlackRock Inc. (BLK) and Bloomberg LP. Likewise, Citi is selling its German banking unit to France’s Compagnie Financiere du Credit Mutuel SA for more than $7.5 billion.

Outside of financials, Dow Chemical Co. (DOW) is acquiring Rohm and Haas Co. (ROH) for $15 billion in a cash deal, and General Motors Corp. (GM) will be handing out more pink slips (so what else is new?) as it reevaluates most of its brands. Oh yeah, earnings season kicked off last week with Alcoa Inc. (AA) beating estimates and General Electric Co. (GE) affirming its profit forecast for the year. Thomson Reuters predicts that Standard & Poor’s 500 companies lost 13% in the 2nd quarter, with financials leading the slide with related earnings falling by more than 65%.

Oil prices ended a highly volatile week on a very negative note. After tumbling more than $9 a barrel in two days, crude once again soared to record levels as Iran threatened the world (or, at least, Israel) by test-launching a few missiles. After starting the week around $145, prices plunged to $136 on Tuesday before rallying again (to $147 at one point Friday).

The Dow Jones Industrial Average and the S&P 500 struggled as negative news from financials and the late week oil-price spike brought out the bears (again). The Dow even fell below 11,000 for the first time in two years before closing slightly above that level. Meanwhile, the S&P 500 hobbled into “bear” territory, as the index has reached a point that was down 20% from its October 2007 highs. As the weekend began, some investors speculated that U.S. Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Paulson and others might participate in more “round the clock” meetings over this Freddie-Fannie fiasco.

Is it time to panic yet?

Economically Speaking

No rest for the weary. Just because the economic calendar was light last week doesn’t mean the Fed officials were taking any time off. Instead, a “power-hungry” Bernanke was pushing for the central bank to get more regulatory authority over the financial markets. He believes that such a move would help ensure damage control in case of future potential failures (as we saw with Bear Stearns, and may soon see with the dynamic duo of Freddie and Fannie).

In congressional testimony, Bernanke spoke of the Fed’s continued creative moves to assist in the current financial crisis (this entire mess stems from the subprime crisis); he suggested that investment firms should be able to borrow from the discount window beyond the mid-September deadline (and into 2009). Late into the week last week, the week, reports claimed that Freddie and Fannie likewise would have access to the Fed’s discount window. Whether that will be part of the rumored Treasury Department bailout we mentioned remains to be seen.

Across the pond, European Central Bank President Jean-Claude Trichet implied that his policymakers stand prepared to raise rates further should threats of inflation continue to rise across Europe.

Last week, retailers reported “same-store” sales data (stores open at least a year) for June and the results were not half bad (at least, not for discounters). Wal-Mart Stores Inc. (WMT), Costco Wholesale Corp. (COST), and BJ’s Wholesale Club Inc. (BJ) each reported better-than-expected sales as consumers went “crazy” with those government rebate checks (or as crazy as a $300 to $600 refund will allow).

Children’s Place Retail Stores Inc. (PLCE) also reaped the benefits of the government’s generosity, though traditional mall-based stores like Limited Brands Inc. (LTD) and The Gap Inc. (GPS) failed to capitalize.

After struggling through a poor June, Nordstrom Inc. (JWN) warned that its 2nd quarter results might not meet prior forecasts. Analysts have grown concerned that the rebate checks were like a tailwind that temporarily filled the sails of some of the big store chains, enabling them to navigate some of this slowdown – but that these checks will ultimately leave the store chains becalmed going forward.

On that note, Morgan Stanley (MS) reduced its earnings forecast for the entire retail sector for 2009.

Weekly Economic Calendar

Source: Subprime Crisis Again in the Spotlight as the Meltdowns of Fannie Mae and Freddie Mac Fuel Fears of a Deeper Downturn

“The transaction delivers on the promises we have made to our shareholders about transforming our earnings profile to one of high-growth and less cyclicality,” Dow Chief Executive Officer Andrew Liveris told a conference call regarding the Rohm and Haas offer, Reuters reported.

Some analysts felt the $78 per share bid – a 74% premium to Wednesday’s closing price of $44.83 – for Rohm and Haas shares was too steep a price for Dow to pay.

BB&T Capital Markets (BBT) downgraded Dow shares to “hold” from “buy” after the announcement.

“We’ve been negative on Rohm & Haas’s fundamentals for some time now, as its largest feedstock, propylene, has been on a tear and its major end market, coatings, has been under pressure,” said BB&T analyst Frank Mitsch in a note, MarketWatch reported.

But Dow management defended the deal as the company looks to expand its chemical-product line and diversify away from commodities.

“While it’s hard to put a price on a company’s culture and people, this premium recognizes the fact that Rohm and Haas is a highly-coveted asset in terms of both of these critical attributes, as well as the quality and reputation of its businesses, brands, products, and technologies,” Dow Chief Financial Officer Geoffrey Merszei explained via conference call.

Investors should take comfort in Berkshire Hathaway’s $3 billion endorsement of the deal. Studies have shown that following Warren Buffett’s investment track record can lead to profits. Another $1 billion in equity to back the deal is coming from sovereign wealth fund Kuwait Investment Authority.

Dow has struggled lately as soaring oil costs have eaten away at the chemical company’s margins, spurring double-digit price increases in both June and July. Just over 30% of Rohm and Haas revenues come from materials used to make electronic components, a nice complement to Dow’s current line-up, which is heavy on petroleum-based products.

“This deal uses up much of Dow’s firepower,” Martin Evans, an analyst at Cazenove in London, said in a report, Bloomberg News reported. “The premium is high — as is often the case when chemical assets are acquired — and is a necessary part of their transformation away from commodity exposures.”

Source: Dow Makes $18.8 Billion Offer for Rohm and Haas