Identifying The Market’s Next Takeover Targets

The task of identifying the market’s next takeover targets can be daunting. Literally thousands of potential targets exist, which is probably why most investors liken it to a crapshoot and in turn, shun such a strategy altogether.

But that’s a monumental mistake!

They’re passing up easy double-digit profits. Historical takeover premiums (the amount paid over the current share price for a target company) average 22%, according to a study in The Journal of Finance.

And that’s just the averages.

It’s common for many deal premiums to reach into the high double digits and even triple digits.

Investing in Takeover Targets – 3 Steps to Improving Your Odds

By following three simple steps when investing in takeover targets, we can dramatically improve our odds of success…

• Go where there is consolidation. Consolidation trends are a powerful predictive tool because they tend to persist. Think about it. When your biggest competitor goes out and doubles in size overnight, there’s only one way to respond – find a suitable acquisition of your own to remain competitive. Thus, by focusing on those industries and sectors undergoing the most rapid consolidation, we can isolate high probability targets.
• Focus on companies with valuable (and undervalued) assets. Whether it’s a new drug, a mammoth oil discovery, key market share, distribution channels, or a few promising patents, the real reason a company is acquired is because it owns a particular asset of value to the acquirer. Only invest in companies with such “must have” assets. And to reduce risk even further, I suggest buying clearly undervalued companies – ones trading at or near cash levels on the balance sheet. (Yes, they do exist.)
• Insist on improving fundamentals. Understand that takeovers take time. In fact, acquiring companies might spend as much as nine months conducting due diligence. Yet, even then, there’s nothing stopping them from walking away from a deal (Microsoft -NASDAQ:MSFT- and Yahoo! -NASDAQ:YHOO- ring a bell?). I recommend buying an “insurance policy” to protect against such unprofitable break-ups. By that I mean, only buy companies with improving fundamentals – whether it’s strong earnings growth, new product launches, increasing market share, etc. That way, you stand to profit even if a takeover never materializes.

You’ll recall in my previous article about the imminent takeover boom, I singled out three sectors that fit the first criteria above – health care (specifically drug makers), energy and technology.

3 Takeover Targets to Add to Your Portfolio Today

For those unwilling to expend the effort to carry out the next two steps… or just eager to get going immediately, here are three takeover targets to consider adding to your portfolio today:

• Crucell NV (Nasdaq: CRXL): Merck (NYSE:MRK) and Schering Plough (NYSE:SGP). Pfizer (NYSE:PFE) and Wyeth( NYSE:WYE). Roche and Genentech (NYSE:DNA). Now Gilead Sciences (NASDAQ:GILD) and CV Therapeutics. Crucell is likely next. It’s the largest independent vaccine maker, with products for treating influenza, childhood diseases and hepatitis B. Crucell’s PER.C6 cell line is its most valuable asset. The company already licenses out the technology to over 60 companies. And there’s no doubt management is accepting offers. In January, it was in friendly talks with Wyeth, before Pfizer swooped in and bought Wyeth and ended the discussions. Best of all, multiple suitors exist (Novartis -NYSE:NVS-, Sanofi-Aventis (NYSE:SNY), Merck and eventually Pfizer) so a bidding war could unfold, which translates into greater profit potential for us.

• Anadarko Petroleum, Corp. (NYSE: APC): As oil tycoon T. Boone Pickens famously observed, it’s often cheaper to drill for oil on the floor of the New York Stock Exchange than in the ground. Andarko proves it, as its reserves currently trade for less than $10 per barrel. Throw in a recent deep-sea discovery off Brazil, minimal political risk (80% of assets are located in North America) and high-quality, relatively untapped and undervalued natural gas assets and the takeover case here is an cinch. A multi-billion dollar stock repurchase program provides downside protection, too.

• Lawson Software (Nasdaq: LWSN): The company is a quickly growing niche vendor of enterprise resource planning (ERP) software for medium-sized businesses. Tech heavyweights like Oracle (NASDAQ:ORCL), Cisco (NASDAQ:CSCO)and Microsoft are in desperate need of new growth initiatives. They have little exposure to the middle-market. And they have the cash to afford to buy it. The $308 million in cash sitting on Lawson’s balance sheet reduces our risk and also represents a 32% instant rebate to any potential suitors.

Full disclosure: I have recommended all three of these companies to subscribers in recent months. And we’re sitting on gains of 8%, 25% and 59%, respectively, proving it pays to follow step 3 above.

So to echo Alex’s sentiments from Monday, if you haven’t added a handful of potential corporate takeover targets to your portfolio, what are you waiting for? The opportunities and potential profits will be historic.

Good investing,

Lou Basenese

Source:  Takeover Targets: 3 Steps to Finding Them & 3 Stocks for Any Portfolio

The problem, of course, is that if manufacturers can’t borrow to buy from suppliers, and wholesalers can’t borrow to buy from manufacturers, and retailers can’t borrow to buy from wholesalers, then consumers can’t get auto loans, credit cards, and mortgages.

The economy faces a serious headwind.

The companies in the toughest position, however, are those that are highly leveraged. Even though interest rates have fallen substantially, they aren’t able to access the credit markets (at reasonable rates) or increase their bank lines to get the liquidity they need.

And therein lies an enormous opportunity for investors like you and me – profiting from corporate takeovers.

Corporate Takeovers – Solid Companies vs. Weak Competition

Companies that have solid balance sheets and high levels of cash are now in a position to scoop up their weakened competitors through corporate takeovers. That allows them to purchase assets on the cheap and potentially increase their profit margins – by eliminating the competition – at the same time.

Let me give you a few examples.

• In the U.S. recently, drug giants Merck (NYSE:MRK) and Pfizer (NYSE:PFE) have unveiled deals to buy Wyeth (NYSE:WYE) and Shcering-Plough (NYSE:SGP), respectively.
• Chinese companies, backed by the dollar-flush Chinese government, have been on a shopping spree lately. Already this year, Chinese firms have announced more than 300 takeovers totaling nearly $68 billion.
• In the pharmaceutical industry, there is plenty of fair game. Many small biotechs, for example, are running out of capital. This dovetails nicely with Big Pharma’s shrinking drug pipelines.
• The gaming industry, too, is hurting bad. For instance, credit downgrades and potential bankruptcy hang over companies like MGM Mirage (NYSE:MGM) and Harrah’s. But Penn National (NASDAQ:PENN) is in a fine position to buy them or other weakened competitors.
• Look at the oil equipment leasing industry. Nabor Industries (NYSE:NBR) carries $4 billion in debt. (Earlier this year it had to pay 9.25% to raise $1.1 billion.)
• But Patterson UTI Energy (NASDAQ:PTEN) is laughing all the way to the bank. Its sound financial condition – and zero debt – are allowing it to invest millions in new equipment.

When the price of oil rebounds who will be in the best position to prosper? Clearly, it’s Patterson. That forces Nabor to at least consider the idea of putting itself up for sale.

This same corporate takeover scenario is playing out in multiple industries in markets all over the world.

How Many Potential Corporate Takeover Candidates Are In Your Portfolio?

Yet when I ask investors how many potential corporate takeover candidates they have in their portfolio, more often than not they simply shrug their shoulders and say “none.”

That’s unfortunate. Investor’s Business Daily recently reported a survey of institutional investors conducted by Boston Consulting. Over 80% of them agree that the current market represents a “once in a lifetime” opportunity for corporate takeovers.

My advice? Don’t rest on your laurels. Buy a handful of potential corporate takeover targets now – before all the new deals starting popping.

Good investing,

Alexander Green

Source: Corporate Takeovers: ‘Once in a Lifetime’ Investment Opportunities

Actually, it’s not fear. It’s pure irrationality, as top-quality stocks have been spanked down to bargain-basement levels, despite no discernable change in their businesses.

But business is still booming in the biotech sector…

Over that time, we’ve seen three huge buyouts occur in the Big Pharma/biotech area…

It started in January, with the news that Pfizer (NYSE: PFE) would shell out $68 billion to buy Wyeth (NYSE: WYE).

And things really got rolling this week, with the news that Merck (NYSE: MRK) will acquire Schering-Plough (NYSE: SGP) for $48 billion and that Roche and Genentech (NYSE: DNA) have finally concluded protracted negotiations that will see Roche buy the biotech superpower for $47 billion.

Total value of done deals: $163 billion. And in a market where access to capital has supposedly dried up.

The question is: Could these Big Pharma mergers signal a shift in sentiment and a bottom for the broader stock market?

If you’re looking for a simple, one-word answer… no.

But if you don’t take your investment advice from such in-depth, hard-hitting features as the “Lightning Round,” I invite you to keep reading…

The Credit Is There… But Only For The Right Deal

There’s no doubt that it’s tough to get credit these days. But as the merger deals above show, capital is clearly available for the right deals.

For example, in order to finance its deal with Genentech, Roche issued nearly $33 billion in notes. In addition, Pfizer received over $22 billion in loan commitments from various banks to complete its transaction. And similarly, J.P. Morgan (NYSE: JPM) slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

Again, this has occurred during one of the most fear and panic-ridden periods in stock market history. And it’s come despite frequent comparisons of the Depression Era. Listen to the media too much and you’d expect to see the world in a grainy, brown hue every time you look out the window.

Don’t get me wrong here: I’m keenly aware that the economy is in bad shape. No one has ever accused me of being a Polyanna. But my point is that it’s not necessarily all doom-and-gloom (as some would like you to believe).

These healthcare/biotech mergers indicate the beginning of a thaw in credit markets and hopefully the start of a healing process for the markets. Notice that I’m not calling it a “bottoming process” because as I said last week, I do believe we’ll see new stock market lows.

But as more deals get done, investor and lender confidence will slowly return to the market. And I do think more acquisitions are imminent – particularly within the biotech sector…

The Biotech Sector – A Wave of Consolidation

The biotech sector is likely in store for a wave of consolidation. While the above-mentioned Big Pharma companies have boosted their pipelines and created massive biopharma companies with their acquisitions, there are still many pharmaceutical companies that desperately need to fill their pipelines.

And that bodes well for biotech – particularly when you consider that the largest biotech company after Genentech is Amgen (Nasdaq: AMGN), which boasts a market cap of $48 billion.

After that, Gilead Sciences (Nasdaq: GILD), which just announced a $1.4 billion takeover of CV Therapeutics (Nasdaq: CVTX), is next at $40 billion. Then the market thins considerably, with only three companies that have market caps over $10 billion and 11 companies with market caps of $1 billion or more.

For example, Merck could buy Biogen (Nasdaq: BIIB) and Genzyme (Nasdaq: GENZ) for less than it cost the firm to buy Schering-Plough.

The point is: Even though the biotech sector has outperformed the S&P 500 during the bear market, many biotech stocks have become cheap.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin (Nasdaq: BMRN), or Xcelerated Profits Report portfolio member Medivation (Nasdaq: MDVN) and many others like them.

Our 2 Favorite Emotional Friends: Fear And Greed

When managements are scared they hunker down and hang on to capital. But when opportunistic executives add to their businesses – even during downturns – that kind of optimism and activity is healthy. They’re essentially expressing their confidence that conditions will improve.

Remember… emotions control the stock market as much as fundamentals. And as we’ve mentioned in previous columns, fear and greed are the two main players. So when investors see this kind of activity, they start to think about their own opportunities, rather than cowering in the corner in the fetal position like so many have for the past few months.

Big Pharma Falls For Attractive Biotech

As we’ve seen recently, Big Pharma has already fallen for some of the most attractive biotech names. And as some more choice companies begin to get snapped up, you might see a rush into the sector by other Big Pharma firms to grab the existing quality companies before someone else does.

Mix in this momentum with some speculation and that could kick prices higher, causing Big Pharma executives to pull the trigger before valuations get too expensive.

The economy is still bleeding, but these recent acquisitions indicate that the patient is no longer spurting blood all over the emergency room floor. Eventually, it will stabilize and walk on its own again.

When it does, the strongest drug companies will be the ones that took advantage of this unique opportunity to fill their pipelines with products from inexpensive biotech companies.

Source: The Biotech Sector: Big Mergers Could Mean Big Gains For Biotechnology

Investors use the “defensive” label to describe businesses that enjoy steady demand for their products – like food, cigarettes and electric utilities.

The thinking goes, you want to own these sectors when the economy stinks. Their sales and cash flows should hold up better than retailers and hotel chains when consumers are broke.

This from Rob Fannon, guest editor on Today’s Money Morning:

Considering we’ve just had the worst credit crisis in 80 years, and one of the worst-ever bear markets in stocks, the new “defensiveness” shown by biotechnology stocks is extraordinary.

Biotech is typically a wild sector. Most people don’t think of it as place to find safe stocks. But have a look at the accompanying chart, which tracks the SPDR S&P Biotech ETF (XBI) over the past two years. This fund has big holdings in the 10 or so large biotechnology companies that have viable products bringing cash in the door.

As the chart shows, the XBI ETF is actually higher today than it was back in 2007. You can’t say that about oil, real estate, retail stocks, food stocks, tech stocks, gold stocks, or financial stocks.

The strength in biotech shares is confirmation of something I’ve been predicting for the past few months: We’re due for huge rally in biotechnology stocks.

Biotech companies are much different than giant pharmaceutical companies like Pfizer Inc. (PFE) or Merck & Co. Inc. (MRK). Biotech firms make their drugs from living cells, rather than from mixtures of chemical compounds. Biotech drugs treat life-threatening diseases – so recessions barely dent sales growth. People can pass on the cholesterol-lowering effects of Lipitor for a while, but stopping a cancer treatment can kill a patient in weeks to months.

And because most biotech drugs are made from living cells, they’re hard to copy. Right now, the U.S. Food and Drug Administration (FDA) has no approved pathway for generic biotech drugs. While Big Pharma is struggling with dwindling pipelines, big biotech companies are profitable, have growing sales, are generating tons of cash, and face no generic competition in the near term. Biotech bull markets are often good for gains of 300% to 500% – across the entire sector.

That’s why I think you should become familiar with the sector immediately.

I recommend you start with three of the hottest areas of biotech. Each one has the potential to generate new “blockbuster” drugs (drugs with annual sales of more than $1 billion). Those three key areas are:

• Metabolic disorders: “Metabolic syndrome” is a politically correct term for patients who are obese, diabetic, and face increased risk of heart disease. There are good drugs to control diabetes and help prevent heart disease, but no good drugs to treat obesity. With half of the U.S. population technically obese or overweight, an effective diet pill is the Holy Grail of drugs. Right now, Americans spend more than $50 billion per year on over-the-counter diet remedies. An FDA-approved fat pill would be a monster seller.

• Vaccines: With new products to prevent cervical cancer, avian flu, and the common cold, vaccines are back in vogue. Big Pharma player Wyeth (WYE) has one of the biggest vaccines businesses in the drug world. It’s part of the reason the company recently fetched a $68 billion buyout offer from Pfizer. Dutch biopharma player Crucell NV (ADR: CRXL) is the top remaining independent vaccine players in biotech. I predict it’ll be acquired before 2009 is over.

• Infectious diseases: The transformation of HIV from a death sentence to a chronic disease has turned the infectious-disease-drug market into a multibillion-dollar industry. Gilead Sciences Inc. (GILD) is the top player in this space. The next frontier is an effective treatment for Hepatitis C. Current drugs have terrible side effects and only “cure” 50% of patients. A handful of biotech companies – Vertex Pharmaceuticals Inc. (VRTX), Human Genome Sciences Inc. (HGSI), and Pharmasset Inc. (VRUS) – are nearing pivotal clinical data for next-generation Hepatitis C drugs.

There’s never been a more exciting time to be a biotech investor. Big Pharma companies have nearly $100 billion in cash that will keep buyout offers large. We have plenty of “Holy Grail” areas to focus on. And, as you’ve seen, we have a strong trend on our side.

P.S. I expect the biggest opportunity in biotech (or the entire stock market for that matter) will arrive on March 30. By this day, one company will announce test results for a new drug that could create the single biggest return of any investment I’ve ever found. One drug expert calls the potential market for this drug the “biggest untapped goldmine in the industry” and speculates that it would be worth $10 billion per year. Click here for the full details of the situation.

Source: The Market’s Safest Sector Also Has Enormous Potential to Rise

For those rooting for a revival of buyout activity, the merger of the two companies shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.

But as Money Morning reported recently as part of its ongoing “Outlook 2009” economic forecasting series, the credit crisis has put the mergers-and-acquisitions (M&A) market into a deep freeze.  And not even the marriage of these two U.S. pharmaceutical giants will be enough to thaw out the deal-making market anytime soon.

Both the size of the deal and the players involved represent a unique combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate.

Pfizer, a company with strong cash flow and lots of cash on its balance sheet, did get $22.5 billion in financing for the Wyeth buyout, but others are unlikely to get the same terms. The drug company has a rare, stellar “AAA” credit rating from Standard & Poor’s Inc.

Furthermore, lenders are “favoring sectors where there is the most stability” in earnings and revenue outlooks, like health-care stocks as well as certain education and technology firms, Howard Lanser, an investment banker at R.W. Baird, told BusinessWeek.

Other sectors such as retail are currently out of favor and likely to stay that way, he said.

That makes a return to the heady days of the mid 2000s – when bountiful M&A activity lined the pockets of Wall Street investment bankers – an unlikely pipe dream.

The volume of global mergers and acquisitions could fall about 35% in 2009 from an expected volume of $3.1 trillion in 2008, investment bankers say. That would be less than half of last year’s record $4.4 trillion in deals.

“There are substantial headwinds facing M&A and the headwinds are not subsiding,” Cary Kochman, co-head for Mergers and Acquisitions for the Americas at UBS AG (UBS), told the Reuters.

The No. 1 issue is the lack of available credit. Banks and other lenders have pulled back from financing deals, making loans, especially for big deals, scarce and more expensive.

“You are less likely to see deal sizes beyond the $20 billion mark in 2009,” said Larry Slaughter, co-head of European M&A for JPMorgan Chase & Co (JPM). “The balance-sheet capacity of the banking system will make it tough to finance much-bigger transactions.”

And fear is playing a close second fiddle to financing as a barrier to any revival of M&A activity.  Most firms are holding onto any cash they have as insurance against a prolonged economic downturn.

“It takes a little courage to step forward and pursue M&A in this environment,” Lanser says. “To spend that cash can be a big psychological hurdle.”

Private Equity & Hedge Funds No Help

Even the so-called “masters of the M&A universe” – the leveraged buyout firms – are unlikely to ride to the rescue this time.

The Blackstone Group LP (BX), the No. 1 leveraged-buyout firm is staying on the sidelines searching for profits by advising companies in restructuring distressed debt.

The company that orchestrated a then record $34 billion acquisition of Equity Office Properties Trust in 2007 is playing a more modest role working consulting with AIG (AIG), as it sheds units worth about $60 billion to repay the government after its bailout last year.

Bankruptcies at investment banking’s most-hallowed companies like Bear Stearns and Lehman Bros Holdings Inc. (LEHMQ) obliterated the global financial system after buyout firms helped inflate the credit bubble.  Now the private equity and hedge funds may be next to go, as LBO deal making enters the gravest crisis in its 40-year history.

Buyout firms such as KKR & Co. (KKR) and the Carlyle Group went on a record-breaking shopping spree in 2006-07, saddling themselves with $1.5 trillion in assets that they intended to sell for a profit. Since then, they haven’t been able to find buyers so they can reap the 20% profits they get for such deals.

“This is part of the biggest bubble to burst in our history.” Roy Smith, a former Goldman, Sachs & Co. (GS) partner told Bloomberg News. As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report by Boston Consulting Group Inc.

“These guys had a sense they could do no wrong,” Paul Schaye, managing partner of New York-based Chestnut Hill Partners, told Bloomberg.. “ Now they’re going through a very sobering experience. They have to figure out how to survive this environment.”

So what will persuade dealmakers to take on added risk in such a gloomy environment? Turns out the the very things preventing consolidation now – the recession and credit crunch – could spark the revival Wall Street craves.

Only the Fit Survive

“There is going to be a need for a lot of companies to consolidate to survive,” Mark DeGennaro, managing director at investment bank Gruppo, Levey & Co. told Bloomberg. Firms with falling sales figures and credit trouble may have no choice but to find buyers – often at very low prices, he said.

Corporations with cash on their balance sheets or stronger share prices have been taking advantage of the drop in equity valuations among their rivals to do deals.

In fact, 2008 was marked by a jump in hostile or unsolicited deal activity, including InBev’s (ABI) planned acquisition of Anheuser-Busch Cos. Inc. (BUD) and Exelon Corp.’s (EXC) bid for NRG Energy Inc. (NRG).

And despite the obvious risks, some private equity firms will still dip their toes in the LBO waters.

“The best returns in private equity have come in a period like the one we’re just entering,” Blackstone founder Stephen A. Schwarzman said in a speech to investors and buyout firms in Dubai in October. “This is an absolute wonderful time.”

Another traditional provider of capital – sovereign wealth funds – may also step up to the plate.

“Even though the price of oil is volatile, they have substantial amounts of money…they need to get to work and generate a reasonable rate of return,” Alan Alpert Senior Partner of M&A Transaction Services at Deloitte Touche Tohmatsu told Boardmember.com. “I think you’ll see sovereign wealth funds come back into the U.S. market and make investments.”

Source: The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market

The question, raised in a new Reuters piece, is certainly a good one – and a fair one.

As the United States suffers through perhaps its worst financial crisis ever – a crisis caused by the combination of rampant greed and some ill-conceived financial engineering – Wall Street’s reputation has been badly tarnished, perhaps forever.

Moving forward, two results will be a tightening of financial regulation and an increase in government control of the financial markets. We’ll also end up with a federal government that more closely controls – and in some cases owns stakes in – banks and other financial institutions, a move that some regard as de facto nationalization.

Like a super hero arriving to save the day, in steps Washington, “home to a popular president and a Congress whose mood matches that of a public angry at Wall Street for losing people’s retirement savings while doling out executive bonuses and raking in billions from taxpayer-funded bailouts,” Reuters writer Daniel Trotta wrote.

“I was in London with Mayor (Michael) Bloomberg in October and we were complaining to them about the action shifting to Washington and the executives in London said they were just as worried about it shifting to Brussels,” Kathryn Wylde, president of the pro-business non-profit Partnership for New York City, told the journalist. “Private financial markets have collapsed and the government is absolutely in charge.”

Thanks to the ongoing financial crisis, an off shift has been taking place. Wall Street, was once revered as a creator of profits that was ruled over by the so-called “Masters of the Universe.” But no more.

In December, the jobless rate moved to its highest level in 16 years – and that’s certain to get worse, if last week’s “Monday Massacre” of corporate layoffs is any indication. Correct or not, most Americans directly link those troubles on Main Street to the missteps made on Wall Street. And it certainly can’t help that we’re all reading stories of big bonuses still being paid out, even in the face of this downturn.

While these displays of greed continue to escalate even as the pain workaday Americans continue to feel, Washington has been working on a two-pronged fix-it strategy for the U.S. economy:

• Prong One is focused on bailouts, spending billions in an effort to stop the financial leaks that are threatening to sink the country into Great Depression II.
• Prong Two has the government focused on efforts to then jump-start the economy with a series of stimulus plans, whose price tags continue to escalate.

Initially, the general public was highly critical of these efforts, viewing them as wasteful.

But an interesting shift has subsequently taken place: Americans began to view the federal government as a kind of “savior of the last resort,” and became thankful for the efforts the lawmakers were making.

Americans even grew irritable when news organizations criticized those bailout and stimulus efforts. There was clearly a feeling that, while the bailout and stimulus maybe weren’t perfectly designed, at least Washington was trying to do something.

“There is a shifting of power and influence at the moment from Manhattan to Washington. The same thing happened during other financial crises in our history but most especially in the 1930s,” Kenneth T. Jackson, a Columbia University historian, told Reuters.

Market Matters

What recession?  While much of the world has been pointing fingers at Wall Street for the global financial crisis, the major investment firms took a break from begging for distribution of that next round of Troubled Assets Relief Program (TARP) money in time to dole out $18.4 billion dollars in employee bonuses in 2008.  President Barack Obama called the move “outrageous,” although Wall Streeters pointed out that the pay represents a 44% reduction from last year’s level (though it still stands as the sixth-highest bonus pool on record).

Meanwhile, while energy companies cried “doom and gloom” over plunging oil prices, Exxon-Mobil Corp. (XOM) announced a record annual profit of $45.2 billion – despite a 33% decline in 4th quarter earnings).  Not to be outdone, while poor retailers panicked over the lack of consumer activity, Amazon.com Inc. (AMZN) called its holiday season “the best ever” and surpassed most analysts’ earnings estimates.

An oversight panel deemed the TARP plan a failure, thus far, as many of the major recipients of government funds actually reduced their lending activities during the prior three months.

Newly confirmed U.S. Treasury Secretary Timothy Geithner claimed that TARP (Part 2) will be overhauled to ensure enhanced lending and even hinted at the creation of a “bad bank” that would purchase toxic assets from financial institutions. An $819 billion economic stimulus package passed the House without any Republican support and Obama turned to the U.S. Senate where certain provisions on lower taxes and family planning may prove more acceptable to the opposition.

However, as Money Morning reported last week, those “acceptable” additions are likely to push the price tag of the stimulus package up over $1 billion. President Obama is hoping to have a bill he can sign on his desk by the middle of next month.

Earnings season moved into high gear and Thomson Reuters Corp. (TRI) projected that Standard & Poor’s 500 Index companies suffered a 34% drop in profits (losses), the 6th straight quarterly decline.  In addition to Exxon-Mobil and Amazon.com, a few other companies reminded investors that not everyone is losing money: Verizon Communications Inc. (VZ), United States Steel Corp. (X), Procter & Gamble Corp. (PG), and Colgate-Palmolive Co. (CL).

Wells Fargo & Co. (WFC), Starbucks, Corp. (SBUX) and Ford Motor Co. (F) were among those posting dismal reports, though the No. 2 U.S. automaker says it has no plans to tap into government bailout funds.

Pfizer Inc. (PFE) set out to prove that deals can still get done in this environment and announced its intent to purchase rival U.S. drugmaker Wyeth (WYE) for $68 billion [For two related stories in today’s issue of Money Morning, check out this analysis of the Pfizer/Wyeth deal itself; or click here to read our evaluation on the outlook for the overall U.S. market for mergers and acquisitions].

Crude oil fell again last week and was hovering around the $42-a-barrel level as weak economic data (see below) and higher inventory reports revealed that demand was continuing to wane. Despite a recent four-day winning streak for the S&P 500 Index – its first since November – the major indexes ended January with losses again.

According to the so-called January Barometer, when the market tumbles in the first month, it typically slides for the remainder of the year.  Investors took their cues from the weak economic and earnings reports and offered a collective yawn to the House’s partisan passage of the stimulus package.  The “bad bank” idea seemed to generate a bit of optimism, though no real details about how such a plan would work have been announced.

Economically Speaking

Companies across virtually every sector of the economy continued to play “follow the leader” as additional layoffs were announced daily. Last Monday alone, more than 75,000 hit the unemployment line as Pfizer (8,000), Sprint Nextel Corp. (S) (8,000), Home Depot Inc. (HD) (7,000), General Motors Corp. (GM) (2,000), and Caterpillar Inc. (CAT) (7,500) were among those issuing pink slips.

The weekly initial jobless claims data confirmed that more people than ever (or at least since 1967, when the statistics first started being kept) are receiving unemployment benefits.  Meanwhile, the housing sector showed few real signs of rebounding as new home sales fell for the fifth consecutive month and dropped to their lowest level since 1982.  While existing home sales actually climbed in December by 6.5%, the median sales price plummeted more than 15% and now stands at its lowest level since 1968.

Still, the optimists point out that the mere fact some homeowners have emerged to buy houses at these distressed levels is a positive sign that a recovery is inching closer.  Unfortunately, investors weren’t buying it.

The domestic economy contracted at its fastest pace in almost 27 years as U.S. gross domestic product (GDP) plunged by 3.8% in the fourth quarter.  Again, the eternal optimists claim that most analysts were expecting a decline in excess of 5%, and said that the negative results should actually be perceived as positive for the economy.  (Unfortunately, investors weren’t buying that, either).

U.S. Federal Reserve Chief Ben S. Bernanke and his policymaking brethren repeated their pledge to keep rates at record low levels and hinted that they stand prepared to begin buying Treasuries and other fixed-income securities to spur lending activity. According to the central bank policymaking statement issued at the close of Thursday’s Federal Open Market Committee (FOMC) policymaking meeting, “conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.”

Weekly Economic Calendar

Source: Is Washington Replacing Wall Street as the City That Drives America?

These days, the Obama Administration is putting together a plan to set up a so-called “bad bank” to clean up the many toxic loans eating through the American financial system. Doing this would effectively remove those loans from individual financial institutions’ balance sheets… and put them in the hands of the U.S. government instead.

Similar to the Resolution Trust Company that bought and disposed of failed savings and loans companies during the 1980s crisis, what the Obama administration hopes to do is put banks back in the position where they feel comfortable lending again. And once consumers are able to acquire loans, they’ll start spending and the economy can start growing once again.

It sounds like a solid idea, and if it works, some financial stocks could rebound.

So what should investors do?

The answer is: not a darned thing.

When A Bad Bank is Just A Bad Bank, And A Crisis Is Just A Crisis

While it’s true that crisis often brings opportunity, that doesn’t mean that you should blindly throw money at every catastrophe you hear of. Good investors understand both the risks and rewards of any venture they go into. In fact, the best investors focus more on the risk part of the equation than the reward.

And this is one crisis that bears careful scrutiny. Because right now, it’s impossible to understand the full risk in investing in the financial sector. There are simply too many questions that don’t have ready answers.

• Will the banks be nationalized?
• Which banks will emerge clean and ready to conduct business?
• Which ones won’t?
• Will they bear any responsibility for the garbage loans they underwrote?

Could financial stocks rip higher on any settlement of the issue? Of course they could! But prudent investors looking for real wealth-creating opportunities should stay as far away from the group as those families earning $50K per year should have stayed away from the interest-only $500,000 variable rate mortgages they can no longer pay.

Remember: If it sounds too good to be true, it probably is.

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Poor Statistics Continue Pouring In

The assault of statistics we’re bombarded with every day illustrates a picture-perfect, hindsight example of that… and they’re getting worse.

• More than 1.3 million Americans have lost their homes
• 6.9% of prime jumbo loans are at least 90 days delinquent, up from 2.6% a year ago
• 25% of prime jumbo loans are for more than the home is currently worth

I emphasize the word “prime” because it’s important to understand the specific kinds of loans that got us into this mess. Those prime loans weren’t mortgages handed out by reckless brokers to people with shaky credit and low incomes. The prevailing thought was that the mortgage crisis was a sub-prime problem.

Now it appears broader in scope.

If the Feds decide to set up this Bad Bank program as they seem likely to, I certainly hope it works. For that matter, I hope all of the other tactics we implement in the coming months work as well: stimulus packages,tax cuts, exorcisms, fire walking, and worshipping the Chinese God of Wealth, General Kuan Yu.

But while I’m hoping for good results in the future, I’m also keeping a wary eye on the here-and-now. I don’t believe that there are any “good banks” in this environment. Or at least there aren’t any good enough to offset the risk of all of the unknown factors facing the sector.

So for the time being, I highly recommend leaving playing around with the financial system to the Feds; find some other place to invest in the meantime.

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Forget Financials… Healthcare Is Looking Better Than Ever

If you’re looking for ideas, I believe healthcare will be the best performing sector in the market. We’re seeing consolidation in the group, which should garner higher profits as time goes on.

Pfizer (NYSE: PFE) recently announced a $68 billion acquisition of Wyeth (NYSE: WYE), while Swiss-based Roche Holdings is reportedly out talking to banks about obtaining a loan to complete its $44 billion buyout of Genentech (NYSE: DNA).

Additionally, you have biotech companies with rich pipelines that are starting to bring product to market, and an aging population that will require more medicines, procedures and services.

Look for companies that have lots of cash and little or no debt.  You don’t want to own companies that need to raise capital in this environment. Or, if you’re not sure which companies afford the best protection while simultaneously offering the highest returns, you can check out my service Access Research Group, which recommends small biotech companies with big potential.

Source: The Good Bank/Bad Bank And The Ugly

Monday began with several European companies, including electronics giant Philips (PHG) and insurance and banking conglomerate ING, announcing job cuts of 6,000 and 7,000 employees respectively.

The gloomy start to the workweek quickly turned into a bloodbath as more than 75,000 jobs were lost in a single day, when a who’s who of U.S. household names launched a gauntlet of layoffs:

● Sprint Nextel Corp. (S), the wireless phone carrier said it is eliminating about 8,000 positions in the first quarter.

● Caterpillar Inc. (CAT), the world’s largest maker of mining and construction equipment, is in the process of shedding about 20,000 jobs.

● Pharmaceutical company Pfizer Inc. (PFE), is buying rival drugmaker Wyeth (WYE) for $68 billion, and said it would cut 8,000 jobs as part of the merger strategy.

● Home Depot Inc. (HD) the home-improvement retailer said it was closing four small business units, trimming about 7,000 jobs in the process.

● General Motors Corp. (GM) said it will cut 2,000 jobs at plants in Michigan and Ohio.

● Texas Instruments Inc. (TXN), which makes chips for cell phones and other gadgets, said it will axe 3,400 jobs.

And the bad news continued yesterday (Tuesday) as Owens Corning (OC) said it is cutting 3,500 jobs, or 13% of its payroll.
It was a stark reminder of how rapidly the recession is claiming jobs. Already 170,000 jobs have been lost in January. The U.S. economy lost 2.6 million jobs in 2008.

Moreover, a growing number of economists say the U.S. has only reached the halfway mark of job losses expected for this recession.

“Some of the worst job losses are ahead of us, not behind us,” Wells Fargo & Co. (WFC) senior economist Scott Anderson told USA Today.

Anderson expects 3 million Americans to lose their jobs in 2009. Approximately 2.6 million were cut last year – the most since 1945, the final year of World War II. The layoffs are happening in “all industries in all areas of the world,” Anderson says.

The worst news, though may be that the U.S. economy is not just shedding jobs temporarily, but is undergoing a fundamental restructuring process that will eliminate some types of jobs for good.

“They [represent] structural, not cyclical, changes to the economy,” Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland told BusinessWeek. “We’re looking at a permanently smaller economy with prolonged unemployment at an unacceptable level.”

Morici says that housing, real estate, automobiles, finance, and retail sectors are resetting to “permanent lower levels” of employment.

Mike Montgomery, an economist with IHS Global Insight, asserts that many jobs in autos, manufacturing, apparel, and textiles aren’t coming back. Those industries “have been in a long-term decline, and the recession is knocking them out.”

Jobs began disappearing in home building and mortgage operations early in the recession, then across finance and banking more generally. Now the ax is falling across large swaths of manufacturing, retailing and information technology sectors.

The news ratchets up the pressure on the Obama administration and Congress as lawmakers debate an $825 billion stimulus package intended to save or create millions of jobs.

“These are not just numbers on a page,” President Obama said citing the layoff announcements in remarks Monday. “As with the millions of jobs lost in 2008, these are working men and women whose families have been disrupted and whose dreams have been put on hold.”

The House of Representatives will vote on its version of the bill today (Wednesday), and Senate committees will begin pulling together a companion bill this week.

But Obama’s stimulus package is based largely on an estimate that the unemployment rate will rise to between 8% and 9% this year, according to the proposal summary from the House Appropriations Committee. If unemployment soars into double digits, as some economists expect, the financing may not be enough.

Many economists see the nationwide jobless number rising to at least 9% this year, possibly reaching double digits in 2010. Thirteen states are already above the national average of 7.2%, with Michigan (9.6%), Rhode Island (9.3%), California (8.4%), and South Carolina (8.4%) topping the list.

But as Money Morning reported Monday, the government’s recently released official unemployment number of 7.2%, already vastly understates the number of jobless Americans because it fails to account for “discouraged” and “unattached” workers who have given up even looking for work.

Our research further indicates that if the number included unemployed farm and self-employed workers, “real” unemployment levels would approach 18%.  Whatever the unemployment number is, the new administration’s stimulus plan is the only glimmer of hope for newly laid-off workers.

While stimulus spending on public works may take some time to get going, some companies could bring back displaced workers quickly if the government initiative generates new orders.

And because many businesses were already operating with a lean workforce when the recession began, there is some hope they will fill vacated positions when the economy improves.

“The vast majority of the job loss is strictly short-term,” said Global Insight’s Montgomery. “When consumer demand and sales come back, the jobs will come back.”

But as Univeristy of Maryland’s Morici contends, many companies may not rush to increase staffs even if business begins to pick back up.  “We are very early in the cycle,” he said. “We are going to see the fury of the Old Testament for what we have done to the economy.”

Source: Black Monday Brings Massive Layoffs – Economists Say Some Jobs Could be Gone for Good

• Pfizer Inc. (PFE), the world’s No. 1 drug maker, said yesterday (Monday) that it would acquire U.S. rival Wyeth (WYE) for about $68 billion in a strategic buyout that diversifies its revenue base. To help finance the deal, Pfizer said it would cut its dividend and use about $22.5 billion in debt that it raised from a consortium of global banks. The deal is key because it will help Pfizer cope with a major revenue gap that will emerge in 2011, when its blockbuster cholesterol-treatment drug, Lipitor, will begin to face U.S. generic competition, Reuters reported. Next year, Wyeth loses patent protection on its own top drug, the anti-depressant Effexor XR.

• Two measures of U.S. economic performance unexpectedly turned positive in December Bloomberg reported.  The National Association of Realtors said sales of existing homes rose 6.5%, propelled by the biggest slump in prices since the Great Depression. Also, the index of leading economic indicators increased 0.3% reacting to an expansion of the money supply, the Conference Board said.  The positive numbers are a sharp contrast to the tens of thousands of layoffs announced yesterday (Monday) which may accelerate the pullback in consumer spending and deepen the longest recession since 1982.

• McDonald’s Corp. (MCD) reported softening in some overseas markets, but still managed to produce a quarterly profit that handily topped Wall Street estimates, Reuters reported. The company posted a 5.8% rise in worldwide sales in December at restaurants open at least 13 months, despite a U.S. recession that has spread to global economies.  The world’s biggest hamburger chain reported a slowdown in its German business due to price hikes and slower same-store sales in China, where growth has been red-hot. McDonald’s said it was also hit by a stronger dollar in foreign markets, including Canada, Europe, Britain and Australia.

• Plummeting metal prices led Freeport McMoran (FCX) to lower projected copper and molybdenum sales targets for both 2009 and 2010 as it posted a gigantic net loss of $13.9 billion, or $36.78 per share yesterday (Monday), Reuters reported.  But its shares rallied on Wall Street as the losses were primarily blamed on $14 billion in noncash charges, including writedowns of inventory values and goodwill from the acquisition of rival Phelps Dodge. Still, citing the worldwide construction slump, Freeport lowered its forecasts for copper sales by 9% and cut its outlook for molybdenum production by 25% for 2009.

• After posting five straight declines in quarterly profit, Lincoln National Corp. (LNC), the Philadelphia-based life insurer, said yesterday (Monday) that it is cutting 5% of staff, or about 540 jobs. North American insurers have announced more than 5,000 job cuts over the past two years as the industry reported at least $125 billion in losses and writedowns tied to the collapse of the U.S. mortgage market, Bloomberg reported. The insurer’s third-quarter net income plunged 55 percent to about $148.4 million. Fourth-quarter results are scheduled to be released Feb. 9.

• General Motors Corp. (GM) said it will eliminate shifts in the second quarter at Ohio and Michigan plants, a move that will shed about 2,000 jobs. The carmaker will also cut production at 13 other U.S. and Canadian plants, Bloomberg reported.

• Brazil’s state-controlled oil company, Petroleo Brazileiro SA (ADR:PBR), said it will seek to cut costs by as much as $4 billion annually. Officials said the move is necessary for its plans to double output and develop the Americas’ largest oil-field discovery in the past three decades, Bloomberg reported.

• Halliburton Co. (HAL) will pay $559 million – $382 million to the Department of Justice and $177 million to the Securities and Exchange Commission – to end an investigation into its KBR Inc. unit. The unit allegedly bribed Nigerian officials for as much as 20 years, Reuters reported.

Source: Global Investment News Briefs, Tuesday, January 27th, 2009

“Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don’t think it’s going to work,” Rep. Boehner said yesterday (Sunday) on NBC-TV’s “Meet the Press.” “And so if it’s the plan that I see today, put me down in the ‘No’ column.”

The plan – detailed in a Money Morning report last week – could potentially pass the Democrat-dominated House without Republican support, The New York Times reported. But the stimulus plan will face major opposition when it comes before the U.S. Senate, U.S. Sen. John McCain, R-Ariz., told “Fox News Sunday.”

If at least two Republicans don’t approve the bill, the proposal won’t be able to achieve the majority vote of 60 it needs to be filibuster-proof. McCain said he also plans to vote “No” unless the stimulus bill is changed.

“We need to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes,” McCain said. “We need to cut payroll taxes. We need to cut business taxes.”

Added McCain: “We need to have a commitment that after a couple of quarters of [gross domestic product] growth that we will embark on a path to reduce spending to get our budget in balance.”

McCain lost the November presidential election to Obama.

That’s not all that’s taking place in what figures to be a busy stretch this week.

The economic calendar will heat up this week as economists get their initial look at U.S. gross domestic product (GDP) data for the 2008 fourth quarter. Needless to say, the results are not expected to be pretty, with analysts predicting a 5% contraction during that final three months of the year.

The report is due out Friday.

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported in early December. This downturn – and the bigger-than-usual job cuts that have resulted – could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010, many economists fear.

The U.S. economy shrank 0.5% in the third quarter, marking the slowing pace since 2001 and continuing a still deepening recession that has wrung the markets since last year. GDP advanced 0.9% in the first quarter of last year and 2.8% in the second quarter, Bloomberg News reported.
Dana Saporta, an economist at Dresdner Kleinwort Ltd. in New York, told Bloomberg projects a 5.4% overall contraction in the fourth quarter. Analysts expect the malaise to carry over well into this year.

The stimulus packages – money spent by the newly departed Bush administration, as well as one planned by the newly installed President Barack Obama – will have a lot to say about how long the U.S. economy stays down. As the Republican opposition comments demonstrate, with Congress (the Democratic members, at least) promising a stimulus package by President’s Day (February 16th), Obama will have his hands full initiating some “give and take” from the dissenters of the current plan.

On Wednesday, U.S. Federal Reserve Chairman Ben S. Bernanke also leads the first Fed policy meeting of the Obama administration though he and his policymaking cohorts have no more wiggle room when it comes to cuts in the benchmark Federal Fed rate.

But the Fed statement should provide insight into the additional measures the central bank has in its arsenal to help jumpstart the economy.

Earnings season also moves forward with energy companies prepared to show the ill-effects of the drop in oil prices.  Exxon-Mobil Corp. (XOM) and Chevron Corp. (CVX) announce late in the week, as does consumer products giant Procter & Gamble Co. (PG).  Amazon.com Inc. (AMZN) also reports quarterly earnings during the week and analysts are speculating whether investors will cheer its results a la Google Inc. (GOOG) or frown along the lines of eBay Inc. (EBAY).

Market Matters

Last Tuesday, Barack Obama took the oath of office (for the first time) and became the 44th president of the United States.  In his inaugural address, President Obama called for “action, bold and swift – not only to create new jobs, but to lay a new foundation for growth.” He then acted “boldly and swiftly” by freezing the pay of high-ranking members of his administration.  One of those potential members, U.S. Treasury Secretary-nominee Tim Geithner, faced the wrath of Congress for his role in the mis-handling of the banking bailout plan and for his failure to pay a mere $34,000 in taxes.  Since the treasury secretary oversees the Internal Revenue Service, certain “rule sticklers” in Congress frowned upon his “careless mistakes.”  Still, he was approved by the Senate Finance Committee and is expected to be confirmed – just in time to oversee the distribution of that next round of Troubled Assets Relief Program (TARP) money.

While Obama begins a new job and tries to “faithfully execute the office” (rather “execute the office faithfully”), a few financial execs are headed for the unemployment line.  John Thain, formerly of Merrill Lynch & Co. Inc. fame/infamy, stepped down or was forced out from his role at Bank of America Corp. (BAC) after failing to disclose dramatic losses prior to the shareholder approved acquisition.

In an effort to stop the negativity – and no doubt to try and protect his own job – BofA Chief Executive Officer Kenneth D. Lewis and several cronies bought more than 500,000 company shares, a move that earned a collective yawn from investors.

Citigroup Inc. (C) will be replacing Chairman Win Bischoff with ex-Time Warner Inc. (TWX) CEO Richard Parsons, and also announced its intent to sell Japan’s Nikko Cordial Securities, a move that confirms that brokerage will no longer be considered a core business.  In other financial news, State Street Corp. (STT) reported a far-worse-than-expected quarter from its asset management business; U.S. Bancorp (USB) announced that profits fell to the lowest level since 2001; Capital One Financial Corp. (COF) posted a huge loss in the quarter and predicted that credit card defaults will only grow in 2009.

Across the pond, Royal Bank of Scotland Group PLC (ADR: RBS) forecast an annual loss above $40 billion which would be the largest ever reported in the United Kingdom.  On the heels of that news, the British government introduced new measures to its bailout plan, including a form of insurance to limit future loan losses.  Investors were hoping that earnings from non-financials would fare better, but Microsoft Corp. (MSFT), eBay, General Electric Co. (GE), Advanced Micro Devices Inc. (AMD) and Xerox Corp. (XRX), among others, disappointed with weak results as well (though Google and Apple offered some bright spots).  Time Warner, Intel Corp. (INTC), and Clear Channel (among others) announced layoffs, proving that most sectors of the economy are hurting.  Non-government arranged deals still exist as Pfizer Inc. (PFE) attempts to acquire pharmaceutical rival Wyeth (WYE) and Mexican billionaire Carlos Slim. Carlos Slim plans to invest $250 million into The New York Times Co. (NYT), The New York Times reported.

Economically Speaking

A rather slow week on the economic calendar last week allowed investors time to focus on the earnings data.  Housing starts fell for the sixth straight month and building permits, a predictor of future activity, dropped to the lowest level ever reported.

The never-ending layoff announcements continued to hinder the labor picture as jobless claims surged far more than expected.  In China, GDP rose by 6.8% in the fourth quarter, a number that would have prompted parades in this country. In China, however, those numbers confirm dramatic slowdowns in the world’s third-largest economy.

The “weak” report means that growth for all of 2008 came in as 9%, the first year since 2002 that China’s growth rate fell below double-digits.

Weekly Economic Calendar

Source: Financial Crisis Challenges Escalate as Republicans Announce Plans to Oppose $825 Billion Obama Stimulus