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Economic thoughts 1-30-08

Today, the Federal Reserve reduced their targeted interest rate for the fed funds rate by 50 basis points to 3.00%.  This followed last week’s surprise reduction of 75 basis points and previous reductions during the fall of 2007.  Clearly the Fed is concerned about the slowing growth of the US economy and the contractions in the housing market.  More particularly, rising unemployment trends are a concern for everybody, and this also contributed to the Fed’s decision to lower rates.  On Friday, 2/1, job creation data will be released along with the unemployment rate for January.  This information will provide additional data for the Fed in its ongoing deliberations about interest rate levels.  However today, ADP Employer Services released their data for new job formation in January and the figures were much larger than expected.  While this data may not be corroborated on Friday when the federal government releases its figures,  ADP’s data supports the notion that our economy is continuing to grow.  While this singular data point won’t turn a tide, it does provide some encouragement.  Yet only time will tell, so stay tuned.

SKY News Summary 1-29-08

Tomorrow, Altria’s board is expected to split PMI from Philip Morris USA, which currently is a part of Altria Group Inc… The split is expected to relieve PMI from regulatory and public opinion pressures in the U.S. and allow it to produce and market products for foreign populations which will smoke about 5.2 trillion cigarettes this year. Smoking rates have risen in some developing countries, such as Pakistan (up 42% since 2001), Ukraine (up 36%) and Argentina (up 18%). As part of an agreement with the Chinese government, PMI will market in Europe and Latin America three brands produced by the China National Tobacco Corp. In exchange, PMI will produce Marlboro at state-owned Chinese factories and market the cigarettes in that country. WSJ
http://online.wsj.com/article/SB120156034185223519.html?mod=todays_us_page_one

In 2003, Deutsche Post, the parent of DHL, bought Airborne Express for $1 billion, entering the U.S. market and facing direct competition from the U.S. postal service, UPS and Federal Express. In five years, it tried to develop a U.S. network that took Fed Ex and UPS decades to build. Last week, Deutsche Post disclosed it is writing down $887 million of its fixed U.S. assets amidst almost $1 billion in annual losses and between 7% and 9% market share. It cannot close its U.S. operations entirely because too many foreign customers rely on the U.S. ground network for exports. The solution may be to partner more directly with UPS, the U.S. postal service or Fed Ex (it already partners with the U.S. postal service in some rural residential areas. WSJ
http://online.wsj.com/article/SB120155713965823319.html?mod=todays_us_page_one

GE agreed to buy, for $1.12 billion, a company called Hydril, that manufactures pressure-control equipment used in the oil-and-gas drilling industry. Hydril is expected to contribute about $400 million in sales this year. This purchase compliments the company’s purchase last year of Vetco, which specializes in products for deepwater drilling. According to Claudi Santiago, president and CEO of GE Oil & Gas,”This acquisition will expand our existing range of products and services and allows us to provide a broader offering of capital drilling equipment to the increasingly complex offshore industry.” WSJ
http://online.wsj.com/article/SB120157822719224469.html?mod=todays_us_money_and_investing

The Wall Street Journal reported today that, “Citigroup and Central China Securities Holdings Co. have agreed to form a share-underwriting joint venture and will apply to Chinese regulators for approval, according to people familiar with the matter. The venture would allow Citigroup to earn fees from underwriting the sale of yuan-denominated shares and bonds on the Shanghai and Shenzhen exchanges.” WSJ
http://online.wsj.com/article/SB120152369490621987.html?mod=todays_us_money_and_investing

Verizon Wireless, a joint venture with Vodafone Group, announced that it added 1.9 million additional wireless carriers last quarter, making it the second largest wireless carrier after AT&T. In total, Verizon now has 65.7 million wireless subscribers.

http://online.wsj.com/article/SB120152529364822013.html?mod=todays_us_marketplace

Sources: The Wall Street Journal, The Hartford Courant, USA Today, The Financial Times

SKY News Summary 1-28-08

Last year, for the first time, local advertisers spent more on sites like Google.com than on local newspaper ads. Internet ads accounted for 44% or $8.5 billion of the total spent on local ads. Next year, Internet ads are expected to rise to 48%, or $12.6 billion as car, job and real estate online ads increase. WSJ

Cisco is hoping to gain market share from IBM and Sun Microsystems, by addressing corporate data center issues such as redundancy and communication issues. Cisco, which entered this business in 2004 and currently is the leading supplier of networking gear to data centers, an $8 billion industry, expects its $250 million investment in Nexus to pay off in the next few years.
http://online.wsj.com/article/SB120148544199621249.html

Britain still hasn’t forgiven Russia for not extraditing Andrei Lugovoi, accused in the radioactive poisoning of Alexander Litvinenko in London in 2006. Yet, Russia has grand plans to grow its commercial and residential gas market in Britain by 14% within three years. It almost accomplished this in Italy by signing an agreement with Eni SpA, allowing Gazprom to sell 3 billion cubic meters of gas a year directly to Italian consumers. WSJ
http://online.wsj.com/article/SB120148439898021163.html

Sources: The Wall Street Journal, The Hartford Courant, USA Today, The Financial Times

SKY News Summary 1-25-08

AT&T reported robust earnings from its wireless business, but weaker results from its internet and landline business. AT&T added 2.7 million wireless customers, driven by sales of Apple’s iPhone. (Apple and AT&T sold 2 million iPhones and split sales between the two distribution centers). WSJ
http://online.wsj.com/article/SB120116233777213087.html

Fannie Mae and Freddie Mac currently own or guarantee $4.9 trillion of mortgages, or almost half of all mortgages outstanding. The proposed new stimulus package may add more risk to the private, yet established by Congress, companies, by raising the mortgages allowed to be purchased by the companies to up to $729,750. A spokeswoman for Freddie Mac acknowledged that, “ …this additional responsibility would create a significant challenge for Freddie Mac as we continue to operate under sever capital constraints.” These same capital restraints kept the companies out of the troubles that other mortgage lenders now face. WSJ
http://online.wsj.com/article/SB120123250591916143.html

The Wall Street Journal online-only subscription prices will increase from $20 to $119 a year as early as March. Print subscribers pay $49 a year for access to the Web site. The New York Times Web site still gets the most visitors (17.2 million unique visitors), with USAToday (9.9 million) and washingtonpost.com (8.5 million) coming in second and third. Newsday is fourth (6.5 million visitors) and the Wall Street Journal is fifth (5.4 million visitors). WSJ
http://online.wsj.com/article/SB120119406286813757.html

India’s domestic express-delivery service was $580 million in 2005, and its international express-delivery service was $390 million. UPS expects these markets to double by 2010, and is poised to take advantage of this growth as its alliance with local delivery firm, AFL Private takes effect this month. UPS’s collection and delivery network in India will be eight times as big as it is now. Unlike China, India has a relatively even balance of exports and imports, making the shipments more efficient. WSJ
http://online.wsj.com/article/SB120119406286813757.html

Sources: The Wall Street Journal, The Hartford Courant, USA Today, The Financial Times

SKY News Summary 1-24-08

Water in Lake Norman near Charlotte, N.C. is less than a foot above the Nuclear Regulatory Commission’s minimum level needed for nuclear power production at Duke Energy’s McGuire nuclear plant. The drought in the Southeast is getting to the point where nuclear plants may have to either power down and buy replacement power costing 10 times the $5 to $7 per-megawatt-hour cost of current production, or extend or lower intake pipes which, since the pipes are concrete and the NRC review of the change can take months or longer is also expensive. 3 million people in the southeast get their power from four reactors, including Duke’s McGuire, located within the drought area. Duke Energy spokeswoman, Rita Sipe was quoted in USA Today as saying, “We know we haven’t gotten enough rain, so we can’t rule out anything, but based on what we know now, we don’t believe we’ll have to shut down. USA Today
http://hosted.ap.org/dynamic/stories/D/DROUGHT_NUCLEAR_POWER?SITE=PASCR&SECTION=HOME&TEMPLATE=DEFAULT

IBM is changing the base pay for 7,600 technicians in response to a 2006 lawsuit over overtime pay. While these salaries will drop by 15%, overtime pay should make up the shortfall. In a PowerPoint presentation, IBM used the example of someone with a base salary of $80,000 who will now get a base salary of $68,000 plus overtime of $12,000. WSJ
http://online.wsj.com/article/SB120114728656212695.html

In a reversal of policy since Mr. Prince’s departure as CEO last month, Citibank will curb its efforts to expand branch banking. The company will focus on large metropolitan areas in which it already has a large presence. It is expected that branches around the Tampa and San Antonio will be the first to close. Citibank, the country’s third-largest bank, currently has 1,055 retail branches, up 18% since 2005. This compares with Bank of America, the largest bank, with 6,149 branches. During the years 2002 to 2007, the banking industry was focused on opening new branches, and the number of branches in the U.S. rose 12% to 97,272. WSJ
http://online.wsj.com/article/SB120114739155612723.html

Systems producing solar power are expected to grow 25-35% each year, but still account for one-thousandth of global energy consumption due mainly to cost issues. Retail prices for solar power (30 cents/kWh) are about double those of conventional power sources (15-18 cents/kWh). However this may change, according to Jeffrey Immelt, CEO of GE, who says that, “…the solar industry has the ability to take out half its (manufacturing) costs.” It is expected that the cost will rival the cost of conventional energy by 2012. The silicon itself accounts for one third of the cost of a solar module. This cost may go down as more producers of silicon enter the market. As many as fifty companies have plans to enter this industry, including Asia Silicon, in China, which expects to sell silicon for almost half the current price within five to seven year. Or, the price may go down as technology advances. For example, solar material may be painted on using “thin-film” technique. FT
http://www.ft.com/cms/s/0/1446e2ac-bffa-11dc-8052-0000779fd2ac.html

Sources: The Hartford Courant, The Financial Times, USA Today, The Wall Street Journal

SKY News Summary 1-22-08

Cisco will be opening a new regional headquarters in Dubai, investing $1.59 billion in the United Arab Emirates’ information and communications system, named du. The project means 650 in new jobs at Cisco by the end of 2010. WSJ and Cisco website
http://investor.cisco.com/phoenix.zhtml?c=81192&p=irol-newsArticle&ID=1098734&highlight=
“Cisco Plans Investment, New Center in Dubai”

According to Anheuser-Busch, more than 41% of all beer consumers watch the Super Bowl. Small wonder that they have bought four minutes of ad time, a minute less than last year, and renewed the deal which makes them the only beer advertiser during the game. USAToday
“Beer titan brews up batch of Bowl ads”

The National Venture Capital Association and PricewaterhouseCoopers reported that U.S. investments in companies in India and China reached an all-time high. U.S. venture capitalists invested $1.4 billion in 133 deals in China and $1.1 billion in 91 deals in India last year. USAToday
“Record venture capital flows abroad”

GE Real Estate may purchase Inmobiliaria Colonial, a Spanish real estate company that has suffered from the falling real estate market. The company’s market capitalization is about $3.8 billion. GE will be competing with another Spanish real estate company, Metrovacesa, which is also interested in Colonial. WSJ
“GE considers Bid for Spain’s Inmobiliaria Colonial as Real Estate Slows”

British consumers are experiencing increases in their home heating bills. U.K. customers of Centrica will see their natural gas bills increase 15%, while customers of EDF Energy will see their bills increase 12.9% for natural gas and 7.9% for electricity. WSJ
http://online.wsj.com/article/SB120097855711406021.html

Microsoft is investing more in a new field, called virtualization, as indicated by the purchase of Calista Technologies (terms of the purchase were not revealed). According to the Wall Street Journal, “virtualization isolates a computer’s hardware from key pieces of software, bringing such benefits as the ability to run multiple operating systems simultaneously on one computer.” WSJ
http://online.wsj.com/article/SB120093762351904643.html

Sources: The Hartford Courant, The Financial Times, USAToday, The Wall Street Journal, Cisco website

SKY News Summary 1-18-08

Warren Buffett and Berkshire Hathaway purchased 948,800 shares of Burlington Northern Santa Fe, the second-largest U.S. railroad, this week and now own 17.8% of the railroad. The company also owns 1.9 million shares of Norfolk Southern and 4.5 million shares of Union Pacific as of last November. USAToday
http://www.usatoday.com/money/industries/2008-01-17-berkshire-railroads_N.htm

Housing starts reached a 16-year low of 1.006 million in December, according to a report from the Commerce Department. Permits dropped 8.1% to 1.068 million. Data out of the Federal Reserve Bank of Philadelphia showed manufacturing in the Mid-Atlantic States slowed to the lowest level since October 2001. But a bit of good news, LIBOR has dropped to 3.93% from above 5% last year when banks were suspicious of lending to each other. LIBOR is the benchmark interest rate for most adjustable-rate mortgages. With an estimated $385 billion of ARMs due to reset this year, a drop in LIBOR would equate to a 5-10% reduction in the amount the monthly mortgage payment increases. WSJ http://online.wsj.com/article/SB120057592779297397.html
http://online.wsj.com/article/SB120062229410299565.html

30-year fixed-rate home mortgages fell to 5.69%, down from 5.87% the week before, and 5.98% a year before according to a Freddie Mac survey. This is the lowest level since July 2005. WSJ
“Mortgage Rates at a 2 1/2 –Year Low”

NYSE Euronext will buy the American Stock Exchange for $260 million in stock and proceeds for the sale of real estate. NYSE expects to save $100 million annually within two years, from an integration of technology and staff. WSJ
http://online.wsj.com/article/SB120060675290298637.html

Sources: The Wall Street Journal, The Hartford Courant, USAToday, The Financial Times

SKY News Summary 1-17-08

ALZA and Janssen-Cilag, both part of Johnson & Johnson, announced that their needle-free drug delivery system for post-operative pain management will be available in Germany, the UK and Ireland this week. The system is self-contained, preprogrammed and administered by the patient. The patient presses a button on the system to activate a low-intensity electrical field, transporting fentanyl through the skin and into the bloodstream through a process known as iontophoresis. Fentanyl is an opioid. J&J website
http://www.investor.jnj.com/releaseDetail.cfm?ReleaseID=287286&year=2008

P&G has decided to spin off Folgers instead of selling it off, avoiding a big tax bill while eliminating a slow-growth division. Folgers has annual sales of around $2 billion, growing between 2 and 3% annually. The brand follows the departure of other food businesses (Jif peanut butter, Crisco shortening and Sunny Delight orange drink) since A.G. Lafley became P&G’s CEO in 2000.
http://online.wsj.com/article/SB120050208872494913.html

UBS, under pressure from U.S. regulators, will be ending secret offshore private banking for its U.S. customers. While U.S. private banking results are not broken out, private banking in total accounted for $5.3 billion of UBS’s total pretax profit of $13 billion.
http://www.ft.com/cms/s/0/8dacc73e-c49f-11dc-a474-0000779fd2ac.html

A new study from Cambridge Energy Research Associates (CERA), headed by Daniel Yergin, asserts that output from global oil fields is declining at 4.5%, not at 8% as other studies have maintained. Optimistically, CERA also states that large projects underway in Brazil, Saudi Arabia, West Africa, the Caspian Sea and the Gulf of Mexico will more than make up for these declines. Also, nonconventional sources such as biofuels and natural-gas liquids will help to offset shortages. 

The International Energy Agency predicted that global demand for energy will grow by 2.3% this year which is lower than earlier predictions, due to the slowdown in the U.S. economy. The decline in U.S. consumption is more than offset by demand in emerging countries.
http://online.wsj.com/article/SB120054248700897011.html
http://www.ft.com/cms/s/0/29768918-c49e-11dc-a474-0000779fd2ac.html

Foreign demand for U.S. securities pushed foreign-capital inflow into the U.S. to its highest level since January 2006. The Treasury Department reported that net foreign-capital inflows into the U.S. rose 63% to $149.9 billion in November, reversing the sell off of almost the same amount ($150.5 billion) of securities last August.
WSJ “Net Foreign-Capital Inflows Surge”

Sources: The Hartford Courant, The Financial Times, USAToday, The Wall Street Journal, Johnson & Johnson website

SKY News Summary 1-15-08

Applied Materials announced 1,000 job cuts in its semiconductor equipment and services businesses. There will be a charge of $20 million in 1Q 2008 associated with the layoff, but 2008 expenses should be reduced by about $150 million. Applied Materials website
http://www.appliedmaterials.com/news/pr2007.html?menuID=6

Illinois Tool Works acquired Peerless Baking Equipment Company, based in Sidney, Ohio, earlier this month. Terms of the agreement were not disclosed. ITW website
http://investor.itw.com/phoenix.zhtml?c=71064&p=irol-news&nyo=0

Citigroup announced four steps to enhance its capital base:
o Raise $12.5 billion through the sale of convertible preferred securities in a private offering to a group of investors (Government of Singapore Investment Corporation for $6.88 billion, Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, The New Jersey Division of Investment, HRH Prince Alwaleed bin Talal bin Abdulaziz Alsaud, Sanford Weill and The Weill Family Foundation)
o Raise $2 billion through a sale of convertible preferred securities and straight preferred securities in a public offering
o Lower the quarterly dividend to $.32 per share
o Sell non-core assets. In the fourth quarter of 2007, the company reduced GAAP assets by $176 billion, or 7.4%.
Citibank website
http://www.citigroup.com/citigroup/press/2008/data/080115b.htm

IBM’s official announcement of earnings occurs on January 17th, but the company preannounced fourth quarter earnings yesterday to the delight of investors. Earnings of $2.80 per share were up 24% from the same time the year before. Quarterly revenue was $28.9 billion, up 10%, driven mostly by “strong operational performance in Asia, Europe, and emerging countries.” Currency translation represented about 6 percentage points of the gain. Cash increased to more than $16 billion from $15.3 billion at year end 2006, but some of this will go to the pending acquisition for $4.9 billion of Cognos, a software maker. WSJ
http://online.wsj.com/article/SB120031471466688313.html

On our December 17th blog, we reported that Merck and Schering-Plough were withholding results from a study of the effectiveness of Zocor and Zetia, compared to Zocor alone, in reducing bad cholesterol. The study was released yesterday and showed that Zocor alone is just as effective in lowering cholesterol as both drugs taken together, in a drug called Vytorin. However, Vytorin, a product of Merck and Schering-Plough costs $3 a pill, whereas a generic form of Zocor costs $1 a pill. The companies receive about $5 billion each year on Vytorin. WSJ
http://online.wsj.com/article/SB120031937098988415.html

Here we go again. Three months after Microsoft conceded defeat in its nine-year fight with the European Union and agreed to up to $1.49 billion in fines, the company finds itself under the EU’s investigation again. At issue, Microsoft’s Web browser, Internet Explorer, and its software package, Office. IBM leads the opposing group filing the complaint with the EU. WSJ
http://online.wsj.com/article/SB120032500339288555.html

Delta may announce a merger deal with either Northwest or United as early as February. United is the country’s second-largest carrier, Delta is the third, and Northwest is the fifth-largest. A merger with Northwest may be easiest to get past regulators, who have an eye on fares and competition. WSJ
http://online.wsj.com/article/SB120037278651790801.html

Virgin Atlantic will make history next month with a flight of its Boeing 747 from London to Amsterdam using biofuel. The trip has been a project of Virgin, Boeing and GE Aviation, a subsidiary of General Electric. Virgin will not disclose details of the source of the fuel, but Boeing has been studying algae as a biofuel source. WSJ
“Virgin Atlantic Sets Biofuel Test Flight”

Companies owned by aggressive buyout firms could be downgraded, as Moody’s gets tougher on companies which “allow equity owners to extract profits quickly and eliminate risk from a deal, while often leaving portfolio companies in a more precarious financial position.” FT
http://www.ft.com/cms/s/0/b5c7a44c-c2e1-11dc-b617-0000779fd2ac.html

Gold hit $900 an ounce for the first time as investors sought refuge from the weak dollar. Following gold, platinum reached a high of $1,590 an ounce and silver a 27-year-high of $16.58 an ounce. FT
http://www.ft.com/cms/s/0/28759f64-c30d-11dc-b617-0000779fd2ac.html

Sources: The Hartford Courant, The Financial Times, USAToday, The Wall Street Journal, Applied Materials website, ITW website.

SKY News Summary 1-14-08

The debate over the Kashagan oil reserve has been resolved. Under the agreement, the partners who hold operational control, EniSpA of Italy, ExxonMobil, Total SA of France, and Royal Dutch Shell will see their shares in the project reduced from 18.5% to 16.6%. The two additional shareholders, ConocoPhillips and Inpex Holdings of Japan will also see their stakes reduced. The consortium will pay Kazakhstan between $2.5 and $4.5 billion depending on the price of oil, as a bonus and royalties. Kazakhstan will pay $1.78 billion for the extra 8% shares it will receive, a price that is no where near the value of the shares, but indicates how much sway oil-rich countries have when oil prices are high. WSJ
http://online.wsj.com/article/SB120027088257887261.html

Apple will unveil its new wares at its annual Macworld conference tomorrow. It is supposed that the company will introduce a laptop that is 50% thinner than its existing laptops and uses a built-in flash memory rather than a traditional hard drive to accomplish this. Apple CEO Steven Jobs is also expected to announce movie rentals via iTunes. USAToday
“Apple fans hope Macworld brings subcompact computer”

In anticipation of Apple’s entry into the movie rental business, Netflix announced that it is removing limits it placed on downloading videos. Until now, Netflix customers could watch up to 17 hours of “streaming service” each month under the $16.99/mo plan. Now, to compete with Apple, the Netfix customer can download as many of the 6,000 movies. Apple is expected to charge $3.99 for movies that can be downloaded and played for up to 24 hours. HC
“Netflix Removes Web Limits”

General Motors says it invested an undisclosed sum in Coskata, an 18-month old ethanol maker that claims it can make ethanol from garbage, old tires, and wood waste using bacteria developed at the University of Oklahoma. USAToday
“Ethanol maker wins big financing”

Corn reached an 11-year high after U.S. government reports indicated production is failing to meet global demand for food and biofuel. Corn inventories will be 20% less than estimated a month ago. USAToday
“No Relief in sight at the grocery store”

PepsiCo’s Aquafina will no longer be sold at Burger King. The hamburger chain is switching to Nestlé’s Pure Life because it likes the curved shape of the bottle. WSJ
http://online.wsj.com/article/SB120028677840888075.html

An advisory group to the SEC voted to recommend accounting changes meant to standardize corporate results, eliminating different standards for different industries. The final recommendation will come this summer. According to The Wall Street
Journal, “ Among the changes unanimously backed by the advisory panel: base U.S. accounting rules on transactions and activities to avoid special treatment for various industries, limit corporate financial restatements to meaningful mistakes, and provide more protections from lawsuits or SEC enforcement actions for companies and auditors exercising ‘reasonable’ professional judgment.” WSJ
http://online.wsj.com/article/SB120028077747387831.html

Sources: The Wall Street Journal, The Hartford Courant, USAToday, The Financial Times