Filed under: Management, Amer Intl Group (AIG), Politics

An op-ed in today’s Wall Street Journal wonders (subscription required) whether Eliot Spitzer’s high-profile demands for change at AIG (NYSE: AIG) and Marsh & McLennan (NYSE: MMC) did more harm than good:

“In both cases, Mr. Spitzer issued ultimatums to the company boards that they had to replace their CEOs, or else he’d indict the company,” the paper says. “Both companies have struggled ever since.”

Before we get on Spitzer too hard, it’s worth noting that almost all companies see their stock prices go down following the announcement of investigations and charges. News items like this generally reflect serious problems at the company — and mark the first time investors become aware of certain issues that the company hadn’t previously disclosed. If regulators worried about driving down share prices by launching investigations, they wouldn’t be able to launch any investigations! Ultimately, investors are protected by zealous enforcement of the law.

However the notion of an Attorney General essentially installing at executives at public companies is frightening one and hopefully the failure of Mr. Cherkasky — his resignation as CEO prompted a 5% run-up in the stock — will put an end to experiments like this one for a long time to come.

Ideally institutional shareholders would lobby for strong upper management replacements in the face of scandal.

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Filed under: Bad news, Economic data, Housing, Recession

U.S. construction spending declined 1.7% in January 2008, as private builders continued to pull-back amid the housing slump, the U.S. Commerce Department announced Monday.

Economists surveyed by Bloomberg News had expected construction spending to decline 0.7% in January 2008. Construction spending is down 3.3% on a year-over-year basis.

Meanwhile, the December 2007 construction spending statistic was revised downward, to a 1.3% decline, from the earlier announced 1.1% decline, the Commerce Department said.

In January 2008, private residential construction declined 2.9%, public construction dropped 0.2%

Spending on private construction totaled a seasonally-adjusted annual rate of $827.4 billion, 2.2% (plus/minus 1.1%) below the revised December 2007 estimate of $845.7 billion. The estimated seasonally-adjusted annual rate of public construction spending was $294.1 billion, 0.2% (plus/minus 0.8%) below the revised December 2007 estimate of $294.7 billion.

Economic Analysis: Another negative data point for the U.S. economy. The telling stat: a 3.3% year-over-year decline in construction spending. Further, the January 2008 private construction statistic contained declines in almost every category, which suggests that building continues to contract across-the-board. Further, the 2.9% decline in private residential construction indicates that builders continue to retreat from the housing sector, a statistic that’s consistent with other recent data indicating slowing home sales and rising inventories.

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Filed under: Analyst reports, Analyst initiations

MOST NOTEWORTHY: Nvidia, Entropic Comm and Cleveland Cliffs were today’s noteworthy initiations:

• Piper initiated Nvidia (NASDAQ: NVDA) with a Neutral rating and $23 target and believes the rate at which the company gained market share over the past two years is unsustainable. The firm expects EPS deceleration over the next few years.
• Piper believes Entropic Comm (NASDAQ: ENTR) is a key benefactor from the general adoption of high definition video consumer goods, as well as from growth in multi-room DVRs. The firm assumed shares with a Buy rating and $10 target.
• Cleveland Cliffs (NYSE: CLF) was started with a Buy rating and $135 target at Deutsche Bank. The firm believes CLF is a leveraged play on bulk commodities’ momentum.

OTHER INITIATIONS:

• Merrill initiated Allied Capital (NYSE: ALD) with a Neutral rating.
• Stifel initiated Blue Nile (NASDAQ: NILE) with a Buy rating and $54 target, and initiated Bank of Florida (NASDAQ: BOFL) with a Buy rating.

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Filed under: Forecasts, Deals, Competitive strategy, United Technologies (UTX), Initial public offerings

Maker of Otis elevators and Chubb security systems, United Technologies Corp. (NYSE: UTX), announced Sunday that it had made an unsolicited $2.63 billion offer for Diebold Inc. (NYSE: DBD). Diebold is one of the largest makers of automated teller machines and voting machines, and United Tech’s move comes as a part of its plan to extend its security business and presence in China.

United Technologies announced it first approached Diebold about a possible deal two years ago but nothing had materialized thus far. United Tech announced that its current bid amounts to $40 a share, a 66% premium to Diebold’s closing price of $24.12 on Friday. The company also said a it may increase its offer if it is sees more detailed information.

George David, United Technologies’ chairman and chief executive, stated that the “transaction creates significant and immediate value for Diebold shareholders with no operational risk, while creating long term value for UTC shareholders.”

Continue reading United Technologies offers $2.63 billion for Diebold

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Filed under: Analyst reports, Analyst upgrades and downgrades, Ford Motor (F)

MOST NOTEWORTHY: Ford, DealerTrack and Omnicare were today’s noteworthy downgrades:

• Citigroup downgraded shares of Ford (NYSE: F) to Sell from Hold, as they see a number of rising headwinds in the company’s turnaround, including a low likelihood of Ford’s relatively older product lineup holding U.S. share in the first half of 2008.
• Lehman downgraded DealerTrack (NASDAQ: TRAK) to Equal Weight from Overweight citing near-term headwinds from economic uncertainty, declining auto sales, declining growth, and non-prime transaction risk.
• Oppenheimer downgraded shares of Omnicare (NYSE: OCR) to Perform from Outperform to reflect concerns over the timing and pace of a potential recovery.

OTHER DOWNGRADES:

• Banco Bilbao Vizcaya Argentaria (NYSE: BBV) was lowered to Hold from Buy at Deutsche Bank.
• Mediaset SpA (OTC: MDIUY) was downgraded to Sell from Neutral at UBS.
• Western Digital (NYSE: WDC) was cut to Underweight from Neutral at JP Morgan.

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Filed under: Analyst reports, Analyst upgrades and downgrades, Boeing Co (BA), Northrop Grumman (NOC)

MOST NOTEWORTHY: Northrop Grumman, Groupe Danone and MercadoLibre were today’s noteworthy upgrades:

• Oppenheimer upgraded shares of Northrop Grumman (NYSE: NOC) to Outperform from Perform after the Pentagon selected the company over Boeing (NYSE: BA) for the newly designated KC-45A Aerial Refueling Tanker with a potential value of $35B.
• Citigroup upgraded shares of Groupe Danone (OTC: GDNNY) to Buy from Hold on valuation, as they believe the sell-off on commodity cost concerns is overdone.
• MercadoLibre (NASDAQ: MELI) was raised to Outperform from Sector Perform at RBC Capital, as they believe MELI’s long-term thesis is more compelling now vs. six months ago and notes favorable reaction to Mercado Pago v2.0.

OTHER UPGRADES:

• Goldman upgraded Societe Generale (OTC: SCGLY) to Neutral from Sell.
• Jefferies upgraded Exelon (NYSE: EXC) to Buy from Hold.
• Deutsche Telekom (NYSE: DT) was raised to Neutral from Underweight at JP Morgan.

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Filed under: Berkshire Hathaway (BRK.A), Citigroup Inc. (C), Merrill Lynch (MER), Federal Natl Mtge (FNM), Southwest Airlines (LUV), Washington Mutual (WM), AMR Corp (AMR), UAL Corp (UAUA), JetBlue Airways (JBLU), Delta Air Lines (DAL)

As you can tell from this post on my blog, I am no fan of value investing. While I believe investors, especially smaller investors, should partake in more aggressive strategies, I do respect its high priest, Warren Buffett. Since its release late Friday last week, his annual letter to Berkshire Hathaway (NYSE: BRK.A) shareholders has already been dissected here, here and here by those much smarter than me, but I offer my take on four important passages in his remarkable letter:

“You only learn who has been swimming naked when the tides goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Hmm, could he be referring to troubled companies like Washington Mutual (NYSE: WM), Citigroup (NYSE: C) Merrill Lynch (NYSE: MER), Ambac Financial (NYSE: ABK) and Fannie Mae (NYSE: FNM)? Too late to do anything about it this cycle, but in the future we need greater industry transparency!

Continue reading Buffett letter offers great lessons for investors

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Filed under: Bad news, Industry, Economic data

The Institute for Supply Management Manufacturing Index for February 2008 fell to 48.3 from 50.7 in January 2008, the institute announced Monday.

Readings above 50 indicate economic growth; readings below 50, economic contraction. Economists surveyed by Bloomberg News had expected the index to drop to 48.1 in February 2008.

The index registered declines in 11 of 18 categories and hit a 5-year low. New orders decreased to 49.1 from 49.5; production dropped to 50.7 from 55.2; prices paid declined to 75.5 from 76; employment fell to 46 from 47.1, and supplier deliveries dropped to 50.1 from 52.8.

“The manufacturing sector failed to grow during the month as the PMI fell below 50%, which indicates weaker performance in February when compared to January,” Norbert J. Ore, ISM chairman said, in a statement. “Manufacturers’ order backlogs continue to erode as the New Orders Index remained below 50% for the third consecutive month.” Ore added that with manufacturing inventories at reasonable levels, the primary concern is rising prices and falling volume.

Economic Analysis: A decidedly bearish data point for the U.S economy. Now below 50, the reading indicates a clear contraction, and a significant deceleration in the GDP growth rate. The U.S. economy is clearly feeling the impact of the housing / residential construction market’s slowdown, as it ripples through the economy, lowering demand for furniture, appliances, building materials, and home supplies.

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Filed under: Options

Assured Guaranty (NYSE: AGO) closed at $25.65 Friday.

Wilbur Ross announced on Feb. 29 the agreement to purchase $250 million of AGO common stock as well as a commitment to purchase up to $750 million additional shares at AGO’s option for one year after the closing of the initial investment at 97% of the volume weighted average price of the common shares for the 15 days prior to the notice of investment.

AGO is a Bermuda-based holding company that provides credit enhancement products.

AGO overall option implied volatility of 54 is below its 26-week average of 64 according to Track Data, suggesting decreasing risk.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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Filed under: Deals, Management, Private equity

E*Trade (NASDAQ:ETFC) did something odd. It made a former vice chairman of JP Morgan (NYSE:JPM) its new CEO. It would be hard to imagine that he has much experience in the discount brokerage industry. Donald Layton has been non-executive chairman of the company since Citadel Investment Group put $1.75 billion into the brokerage firm last November.

According to The Wall Street Journal “Citadel has nearly a 20% stake, and tapping Mr. Layton is a sign Citadel is getting antsy for results.” The brokerage firm still have $12 billion of home loans on its books. It is hard to assign them a value while real estate prices are still dropping and default rates are rising.

Citadel may want to sell the discount brokerage firm but that would cause potential problems with other E*Trade investors. What would be left over is a company with a large pool of mortgages which are still falling in value. Getting a return on the discount brokerage operation might be a good idea on paper but separating it from the balance of the company is no “slam dunk”. Shareholders don’t want to be left holding that mortgage bag.

Douglas A. McIntyre is an editor at 247wallst.com.

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