Regulator Seeks Legal Action Against Fannie Mae Ex-Officials

The Office of Federal Housing Enterprise Oversight yesterday filed suit against three former Fannie Mae top executives to recover more than $115 million in pay they received because the company's earnings were misstated. The complaint alleges the three executives "improperly manipulated earnings to maximize their bonuses." The three executives maintain they have done nothing wrong and plan to fight. (In 2003, OFHEO filed similar charges against former top officials of Freddie Mac.)

Milton Friedman, R.I.P.

http://www.ajc.com/business/content/shared-gen/ap/Finance_General/Obit_Friedman.html

Home prices plunge by most in 35 years

The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7% from September 2005.

New Ford CEO

CNN Money...

Ford Motor Company surprised the auto industry by tapping senior Boeing executive Alan Mulally as its new CEO, succeeding current CEO Bill Ford, who will stay on as chairman.

ABC News...

When Bill Ford decided that his family's company needed more leadership than he could offer, he started looking for someone who had successfully fixed a large but troubled manufacturing company. He wasn't sure there was such a person, but as he asked around in and out of the auto industry, one name kept popping up: Alan Mulally, EVP of The Boeing Company [and President and CEO of Boeing Commercial Airplanes]. [...] Mulally was widely praised for being a key architect of the resurgence of Boeing's commercial airplanes unit over the past couple of years.

Ford - August was a bad month

Toyota Surpasses Ford

Toyota Motor surpassed struggling Ford Motor in July to rank as the second-biggest-selling auto company in the United States, behind General Motors, sales figures showed. Toyota's victory over Ford was slim, just 487 vehicles. Toyota sold 241,826, up 16.2%, while Ford's sales dropped 32% to 241,339. Three months ago, Toyota passed DaimlerChrysler to rank as the third-biggest company in terms of American sales.

Note: The story has a huge error. It says that Toyota's sales in July gave it 16.2% of the American market compared with 15.9% for Ford. That is absolutely not correct; the margin of 487 vehicles represents a gap of 0.03% not 0.3%.

Ford Cuts Production

If you’re a major automobile manufacturer and you are struggling to sell all the cars you make, what do you do? Do you try new incentives, aggressive marketing, or actually making cars people want? If you’re Ford, you don’t do any of that. Instead, you just make fewer cars. Ford has cut production levels of their vehicles in the fourth quarter of this year by 21% compared to last year. It means that Ford will make 3.048 million vehicles in North America in 2006, that represents a drop of 9% from last year.

Rubin Resigns Board

Robert Rubin has resigned from the board of Ford Motor Company, citing a potential conflict of interest with his duties as a member of the chairman’s office at Citigroup. One analyst said the move may be a sign that the Ford family will need financing for an alliance with another company or to take the struggling automaker private. Another said Citigroup may also advise Ford or a buyer on the sale of the company’s credit arm. In a letter dated Thursday to Ford Chairman and Chief Executive William Ford, Rubin said he needed to step down as the board begins a review of the automaker’s strategic options.

Haven't we already been down this path?

AT&T Launches Its Cable Foray With TV Service

The new AT&T made its new television service available to thousands of San Antonio consumers, kicking off a battle against cable rivals that could result in lower prices for TV, Internet and phone services.

With prices starting at $59 a month, AT&T's initial packages are roughly on par with those of cable, but the phone company says it offers more services for that price, including faster channel surfing, three set-top boxes, an interactive program guide and digital video recorder. Until this week AT&T offered its TV service to only a few hundred consumers in San Antonio. The wider rollout in that area is the precursor to offering the service in 15 to 20 markets by year's end. Eventually the service will be available to 19 million homes. For consumers, increased competition could mean better TV deals, especially if they buy the service packaged with phone or Internet service. Time Warner, AT&T's main cable competitor in San Antonio, says it has no plans to change its prices.

Analysts predict cable companies will lower the cost of their service if they see AT&T begin to win over their customers. Still, other experts say AT&T's television service may consistently be priced a bit higher than cable TV because the very few customers for the nascent service drive up its programming costs. "It'll hasten the advent of bundling as the way to get the best price for a consumer, but is it going to be transformative to your cable bill? Probably not," said Craig Moffett, an analyst with Sanford Bernstein. AT&T's pricing for San Antonio is similar to that of its main cable competitor for the most part but cable offers more general channels and more features such as high-definition television.

AT&T's midrange plan for its TV service, which it calls U-Verse, offers 150 channels plus 31 premium movie channels such as Starz, Showtime and Encore for $79 a month. AT&T's marketing materials promote TV bundled with high-speed Internet, and customers who sign up for both are eligible to receive both services for $10 to $25 a month for the first three months of service, depending on which package they choose. Next month AT&T plans to launch Homezone, which will combine satellite TV from EchoStar with videos and movies from the Internet, according to people familiar with the new offering.

Foreclosure rates up

The foreclosure rate national average is 1.1%, with the following states having above average rates.

Georgia 3.1%
Colorado 2.9%
Indiana 2.4%
Nevada 2.3%
Michigan 2.2%
Texas 2.0%
Ohio 1.9%
Tennessee 1.9%
Utah 1.9%
Florida 1.6%
New Jersey 1.3%
Oklahoma 1.3%
Arkansas 1.3%
Arizona 1.1%
Illinois 1.1%

Delinquency rates up

The national average is 4.41%, so states in white have delinquency rates at or below the national average.

Laborers International Union leaving AFL-CIO

The Laborers International Union of North America announced that it will be leaving the AFL-CIO as of June 1. The union represents about 700,000 workers in the construction industry and is already part of the Change to Win coalition, which has attracted a number of breakaway unions that cite the AFL-CIO's heavy emphasis on electoral politics and not enough emphasis on attracting more people to the labor movement.

Burger King IPO

Burger King's long-awaited IPO (there's a 2000 BusinessWeek story talking about it) has finally arrived. Today's IPO consisted of 25 million shares priced at $17, which represents a 19% stake in the company.

Wachovia to acquire Golden West

Wachovia (#4 commercial bank in terms of assets, #5 in terms of revenue) agreed to buy California thrift Golden West Financial (the #2 Savings & Loan) for $25.5 billion, a 15% premium. Wachovia says the purchase will help the bank expand in affluent, fast-growing markets in the West. Golden West is an adjustable-rate mortgage specialist but will also give Wachovia 285 new branches, including 123 in California and 26 in Texas.

Shares of Wachovia fell fell 6.7%, the biggest decline since October 2002. Investors worried that Wachovia may have overpaid for Golden West, amid signs of weakness in the mortgage industry as interest rates rise. Wachovia also said the purchase will cut earnings per share by 11 cents in 2007 and seven cents in 2008.

Stories:
Wachovia CEO defends surprise Golden West deal
Wachovia to Acquire Golden West Bank for $26 Billion
Wachovia sees deal as fortification
Wachovia acquires Golden West

GM to sell Isuzu stake

GM said it will sell its 7.9% stake in Isuzu Motors for $300 million, unraveling a 35-year equity alliance to raise much-needed cash to revive its ailing business. In the widely expected move, Japanese trading houses Mitsubishi and Itochu will each take a 3.5% stake and Mizuho Corporate Bank (a unit of Mizuho Financial Group) will buy the remaining 0.9%.

Burger King CEO Resigns

Burger King Chairman and CEO Greg Brenneman resigned today.

John Chidsey, the company's president and CFO, will immediately take over as Burger King's CEO. He's the company's ninth CEO in 11 years.

Brian Swette, a current independent director, will serve as non-executive chairman. SVP and Treasurer Ben Wells will fill Chidsey's spot as CFO.

More Bad News from GM and Delphi

Delphi
Officials of Delphi's two largest unions (UAW and IUE-CWA) rejected the company's latest proposed wage and benefit cuts. Officials of both unions said there was nothing in the proposal to even warrant taking it to union members for a vote. The proposal included a pay cut from $27 to $22 an hour in July 2006 and to $16.50 an hour in September 2007. The proposal also included new, larger health care premiums. As a result of the rejection, Delphi is likely to file Friday in bankruptcy court to void labor agreements covering over 33,000 union members.

GM
General Motors laid off 500 salaried employees at facilities across the country. The layoffs are the first wave of job eliminations in a program aimed at reducing the number of salaried and contract workers 7%.

Housing Banks May Be Forced To Cut Dividends

The Federal Housing Finance Board proposed rules this month that would require the banks to retain more of their earnings as capital to build up a bigger cushion against potential losses. The move comes in the wake of embarrassing stumbles by some of the 12 regional home-loan banks. The proposed rule probably will force most of the home-loan banks to slash their dividends, a big source of income for many of the more than 8100 commercial banks, thrifts, credit unions and insurers that own the banks. The proposal may also discourage the home-loan banks from purchasing mortgage loans made by their members, drying up a small but important source of housing finance and marginally increasing mortgage costs for consumers.

Source: WSJ

Lucent and Alcatel Merging

Lucent and Alcatel announced that they were in talks to effect a "merger of equals."

Here are some financial publications' take on the merger:
http://www.businessweek.com/technology/content/mar2006/tc20060324_429614.htm
http://www.forbes.com/2006/03/24/lucent-alcatel-merger-0324markets03.html

Google Settles Suit

Google agreed to pay $90 million in legal fees and advertising credits to settle a lawsuit filed against it and other Internet companies last year alleging that the companies knowingly overcharged for online advertisements and conspired to continue doing so.

As of this writing, the stock is at $347.76, down 1.73%.

Source: Wall Street Journal

GOOG

Google had a couple of good days Thursday and Friday of last week, but it's been beat up pretty bad this week. After a 2.9% drop today, it is trading at $353.88, down over 25% from its high of $475.11 in January.

AT&T-BellSouth Merger

Two of my four predictions in February 2005 (#1, #2) after the SBC-ATT merger was announced has already come true, as MCI was swallowed up by Verizon.

Now, it looks like a third one is being confirmed as BellSouth gets swallowed up too, by the new AT&T.

The short story:

• AT&T is offering 1.325 shares for each share of BellSouth, which amounts to a 17.9% premium, $37.09 a share at Friday's AT&T closing price, or $67 billion for all outstanding shares. AT&T will also take on BellSouth's debt of $22 billion, putting the total price of the deal at $89 billion. (Compare that with the paltry $16 billion SBC paid for the old AT&T.)
• Current BellSouth shareholders will own 38% of the new company.
• AT&T will own all of Cingular Wireless after the deal. (Will they change the name of the company to AT&T Wireless?)
• About 10,000 jobs will be eliminated after the merger. This is in addition to the job cuts already announced after the SBC-AT&T deal.
• Although the boards of both companies have already approved the deal, there could be regulatory hurdles due to the size of the combined company. (It would constitute a very large portion of the Ma Bell of olden days.)

Google sell-off

Google CFO George Reyes today said advertising revenue growth is bound to slow, sparking a sell-off in their stock. Google shares dropped as much 13%, or more than $50 in heavy trading, before recovering to close down $27.76 at around $362.62, a decline of 7.1%.

Wait a second. Google points out the obvious fact that a $6 billion dollar company is not going to grow 90% this year, and this causes a 7% plunge in the stock price. Sounds like a case of inflated expectations to me.

Burger King IPO

Number-two fast-food chain Burger King filed documents for an initial public offering. Its stock-market debut is likely within six months. Shooting for maximum proceeds of $400 million, the IPO - which touts the fast-food chain's turnaround tale - would top the $391 million raised by Domino's Pizza in 2004. Burger King, which owns or franchises 11,141 restaurants in 67 countries, holds a 12% share of the fast-food-restaurant category, which is expected to grow by 4.2% over the next five years. Burger King's share is less than half of #1 McDonald's and just microscopically ahead of #3 Wendy's, which has been making steady progress to overtake Burger King in the last few years.

Founded in 1954, Burger King has amazingly enough never been a public company. It was sold by its founders to Pillsbury in 1967. Pillsbury was then acquired by Grand Met PLC in 1988, which in turn merged with Guiness in 1991 to form Diageo. "As a result, Burger King Corporation became a small, non-core subsidiary of a large conglomerate, making it difficult for the brand to prosper," the company said in an IPO document.

From 1989 to 2002, the company ran through eight CEOs before being acquired by private-equity firms Texas Pacific and Bain Capital Partners for about $1.5 billion. Since then, the company says, it's been "focused on turning a great brand into a great business." It boasts of its seven consecutive quarters of same-store-sales growth and a rise of 11% in average per-restaurant sales over the past two fiscal years. In the six months ended December 31, Burger King reported net income of $49 million on revenue of $1.02 billion(*).

In its third fiscal quarter, now underway, Burger King said it'll record an expense of $367 million for a cash dividend paid to shareholders, prominently including Texas Pacific and Bain. The company also agreed to pay a one-time $30 million fee to terminate its management agreement with the private-equity firms upon completion of the IPO. Meanwhile, the strong stock-market debut of Chipotle - a spinoff of Burger King archrival McDonald's - and the hefty $2.43 billion price fetched by the private sale of Dunkin' Donuts provide evidence of strong investor interest in fast-food-chain operators.

Source: CBS MarketWatch, Chicago Tribune

(*) Note: I have seen many websites (including WikiPedia) that advertise Burger King's revenue as $11 billion a year. That figure is not correct. That is the total sales at Burger King restaurants whether company owned or franchised, not the revenues of Burger King Corporation.

More Trouble at the AFL-CIO

Two of the nation's biggest construction unions - the Laborers International Union of North America and the International Union of Operating Engineers - announced they are leaving the Building and Construction Trades Department of the AFL-CIO and may soon leave the AFL-CIO altogether. The two unions plan to create a rival building trades group, the National Construction Alliance. Joining the alliance will be the bricklayers, iron workers, and the Teamsters. Together, the alliance will have 1.5 million members. Leaders of the Laborers and Operating Engineers called the AFL-CIO Building Trade Department bureaucratic and out of touch with the new realities of the labor market.

Source: The Wall Street Journal

More on Google

A follow-up on my previous post...

Google has a superb balance sheet:

• $10.3 billion in assets, with an incredible $8 billion of that in cash and marketable securities, and very little in bogus goodwill
• almost no debt, resulting in stockholder equity of $9.4 billion

They also had a very good income statement in 2005:

• Revenue of $6.14 billion, an increase of 92.5% over last year's $3.19 billion
• Net income of $1.47 billion even with coming in under expectations

However, it is trading at $381.50 (down a further 3.7% from yesterday's price as of the time I'm posting this). That's 76x earnings. Does anyone really expect that Google is going to double in revenue and income again next year as it did from 03 to 04 to 05? Price seems a little bit high to me, although let me stress that I am NOT expecting a dotcom-like meltdown since this is a company with a clearly proven business model.

Google's Problems not all tax-related

Taxes were a problem for Google's fourth-quarter earnings, but not as much as investors may have been led to believe. Google's fourth-quarter net income of $1.54 a share, excluding items, missed expectations by 22 cents. (In response, Google shares dropped 12% in after-hours trading Tuesday, 7% Wednesday and 1.4% yesterday.) Google executives stressed that most of the earnings shortfall was attributable to the company having a higher U.S. tax bill than anticipated.

But a closer look at Google's results show that only half of the earnings shortfall - 11 cents a share - may be related to taxes. Google had to record more taxes than expected in the fourth quarter because more of its expenses were allocated to its international operations than it had expected, compared with its U.S. operations. That, in turn, raised U.S. pretax profit as a proportion of Google's total, and a greater percentage of Google's profit was taxed at a higher domestic tax rate. The company's effective tax rate for the fourth quarter was 41.8%; the rate for the full year was 31.6%, compared with Google's projection of about 30%.

Google recorded about $2.14 billion in pretax profit for the year. Applying Google's prior estimate of a 30% effective tax rate to that gets a tax bill of $642.6 million. Google had an actual tax of $676.3 million, the upshot being that the company paid $33.7 million more in taxes than it expected, a figure all attributable to the fourth quarter. However, this equates to only 11 cents a share, using Google's diluted share count of about 304 million. Scott Devitt, an analyst with Stifel Nicolaus, uses different numbers to arrive at a similar conclusion and says the company is off base in blaming most or all of its shortfall on the tax issue. The analyst, who has a "sell" rating on Google shares, stresses that whatever the particular reason for the shortfall, the stock is vulnerable to the market's ever-rising expectations.

Source: Wall Street Journal

Response to Comment

The problem is, that everyone has been saying the end of real estate boom is near for 3 or so years from now. Eventually the predictors of doom will be proven right.

Yes, but there's one additional thing to consider. In 1996 the "predictors of doom" were saying that the market was overvalued and prices would crash. They were not proven correct until 2000, but when the market did hit bottom in 2002 prices were in fact lower than in 1996. So it's not just a matter of time, but an actual price consideration.

Note that the real-estate bubble will not burst a-la the dot com stock bubble.

I agree it will never be as bad as the dot com stock bubble. The reason for the difference is clear - unlike stocks, homes are physical assets.

I think prices will only stagnate or wane slowly over the years...

Here I disagree. Current prices are sustainable only because of very low interest rates and absurdly generous financing options. I see prices dropping as much as 20% in a relatively short period.

Chipotle IPO

Investors piled into the initial public offering of Chipotle Mexican Grill today. After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald's, sold 1.8 million shares. After the offering, McDonald's will have an 88% voting interest in Chipotle and a 69% economic interest.

Chipotle debut marked the biggest opening-day gain for a U.S. IPO since late 2000 and the biggest opening-day percentage gain on the New York Stock Exchange since Martha Stewart Living Omnimedia went public in 1999. Investors are excited about the chain's growth potential as its CEO, Steven Ells, said he plans to use the bulk of the proceeds from the IPO to open 80 to 90 stores this year. Part will be used to pay down a $30 million line of credit with Chipotle's parent.

At $44, shares of Chipotle are trading at roughly 80 times earnings.

Disney acquiring Pixar

Disney agreed today to buy Pixar in a stock deal valued at $7.5 billion based on Disney's closing price of $26. They expect the deal to close this summer.

Disney is offering 2.3 shares of its stock for each Pixar share. That's a 3.8% premium on Pixar's closing price of $57.57, which already is up 8% since January 3 on investor anticipation of a deal. There's no collar on the agreement, which means the value will rise or fall with Disney's stock price. Disney is issuing new stock but says it will buy back shares to return to the current float in 2007.

This deal will make Jobs, who owns about half of Pixar, Disney's #1 shareholder with 6.6%. He will join the Disney board.

Chipotle IPO

Chipotle Mexican Grill, a fast-growing 489-store U.S. restaurant chain and pioneer in the "fast- casual" dining segment, is being spun off by parent corporation McDonald's. In a filing with the SEC, Chipotle raised its forecast price range to $18 to $20. That raises the expected value of the 7.9-million-share offer to $150.1 million, based on the midpoint of the forecast. The shares are expected to price on Wednesday evening and make their market debut on the New York Stock Exchange under the symbol "CMG" on Thursday. Chipotle aims to use the proceeds of the offering to drive an aggressive growth plan to fund restaurant openings and to pay back debt to McDonald's. It plans to open 80 to 90 new stores this year.

Happy New Year?

One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable.

[...]

No one wants to hear that. It's almost irresistible to believe that after all we investors have endured--the hellish bear market, the recession, the scandals--we've emerged from the crucible sadder but wiser, finally willing to face the truth about stock values. But it isn't so. The amazing reality is that we haven't learned our lesson even yet.