MarketView for July 14

It was another trying day on Wall Street on Monday as the Street tried to come to grips with both the latest moves by the Federal Reserve and the Treasury Department to shore up Fannie Mae and Freddie Mac, while at the same time trying to ascertain whether the takeover of IndyMac will have any lasting effect on the mortgage market and the banking industry.

 

On Sunday, the Treasury Department and the Federal Reserve said they would lend money and buy equity if needed to rescue Fannie and Freddie, the two pillars of the housing market, sending shares soaring early on Monday. Unfortunately, the gains soon fell apart as analysts were quick to note that any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares.

 

Regional banks were also under fire as investors fretted about the possibility of more bank failures after regulators seized the mortgage lender IndyMac late Friday, following withdrawals by panicked clients.

 

National City, responding to market rumors, said in a statement it was "experiencing no usual depositor or credit activity." But National City's share price still came under pressure, falling $0.65, or 14.71 percent, to $3.77 after the statement. Shares of other regional banks such as Washington Mutual and M&T fell, with Washington Mutual down $1.72, or 34.75 percent at $3.23, and M&T Bank down $10.81, or 15.61 percent, closing at $58.82.

 

After the closing bell, General Motors saw its share price rise as much as 5 percent on news that Chief Executive Rick Wagoner will announce the automaker's second restructuring package in six weeks, in an attempt to cut costs and shore up investor confidence in the company.

 

Meanwhile, the drop in the Dow Jones industrial average was cushioned by the performance of defensive stocks like McDonald's and Coca-Cola, which tend to weather economic downturns because consumers still buy their products even in tough times. McDonald's ended the day up $0.77, or 1.34 percent, to close at $58.09, while Coca-Cola closed up $0.69, or 1.37 percent, at $50.96.

 

Apple saw its share price gain ground on Monday after the company announced that it had sold 1 million of its new iPhone mobile telephones worldwide in its initial weekend. Apple ended the day up $1.30, or 0.75percent, to close at $173.88.

 

Carl Icahn came down hard on Yahoo for rejecting his joint proposal with Microsoft, stating that Yahoo’s management was more focused on who would run the company than on the details of the offer.

 

Bank Stocks Feel The Heat

 

The country’s major banks felt the heat on Wall Street on Monday amid fears about the sector's stability following Friday's seizure by regulators of IndyMac Bancorp, once one of the nation's largest mortgage lenders. As a result, the share prices of both Washington and National City, both of which have significant exposure to the mortgage market, dropped sharply and led both institutions to issue statements intended to reassure investors and depositors.

 

Also hurting Washington Mutual were comments from Lehman analyst Bruce Harting, who wrote to clients that the currently largest savings and loan could face $26 billion in losses, with $21 billion from mortgages. In his report Harting wrote that the thrift will be unprofitable until credit costs normalize, around the second half of 2009.

 

Harting said write-downs on bad loans could force the thrift to set aside another $4 billion for the second quarter, creating a loss for the period of $1.48 per share. Washington Mutual, in a statement following the market close, said its capital level "significantly exceeds" regulator minimums, and that it has more than $40 billion excess liquidity.

 

Monday's declines in financial stocks occurred despite strong action by the Fed and the Treasury Department to engage in emergency support for Fannie Mae and Freddie Mac. Meanwhile, the collapse of IndyMac was particularly sobering as hundreds of worried customers lined up outside IndyMac branches on Monday to withdraw their money. National City, meanwhile, said it was experiencing no unusual activity by depositors or creditors.

 

National City, a large U.S. Midwest regional bank and one of the nation's 10 largest banks, no longer offers many kinds of home loans now considered too risky, but has been saddled with billions of dollars of such loans on its balance sheet.

 

Adding to concerns about the banking sector, mid-Atlantic regional bank M&T Bank said on Monday that rising credit losses from residential real estate pulled second-quarter profit down by 25 percent.

 

Bud Knows When To Fold

 

You have to know when to hold’em and when to fold’em, and Anheuser-Busch knew it was time to fold and accept a sweetened $52 billion takeover bid from Belgium-based InBev, thereby creating the world's largest beer brewing and marketing company. The downfall, if there is one, is that one more iconic company is now in foreign hands. 

 

Now before you shed a tear please keep in mind that we bring these actions upon ourselves. A basic theorem of economics is that the most efficient companies will remain in business, while the less efficient will not. Guess who was not the most efficient.

 

Ending a month-long standoff, InBev, which makes Stella Artois and Beck's, agreed to pay $70 per share in cash for Anheuser, up from its original unsolicited bid of $65 per share. The improved offer was a 27 percent premium to Anheuser's record-high stock price in October 2002.

 

The deal, which should gain regulatory approval, will be the largest cash transaction in history, according to research firm Dealogic and the second- largest ever foreign takeover of a U.S. company after Vodafone Group Plc's $60.3 billion acquisition of AirTouch Communications in 1999, according to Thomson Reuters data.

 

The Anheuser-Busch-InBev combination will have about $36.4 billion in annual net sales, with 40 percent coming from the United States, and would brew about a quarter of the world's beer.

 

InBev Chief Executive Carlos Brito will be CEO of the new company, while Anheuser will get two seats on its board. One will go to Anheuser CEO August Busch IV, who will have no executive or managerial responsibilities, while the other has yet to be named.

 

Brito indicated that the beauty of the deal was in acquiring Anheuser's near 50 percent share of the U.S. market and in taking its Budweiser brand global. "It's all about complementarity and not overlap," he said. Anheuser's home town of St. Louis, Missouri will be the headquarters for the North American region. The companies said all 12 of Anheuser's U.S. breweries would remain open.

 

The deal brings an amicable resolution to a month-long saga that was becoming increasingly hostile as the companies traded lawsuits and InBev set the stage to replace Anheuser's board.

 

The two companies stated that the combined corporation would yield cost synergies of at least $1.5 billion annually by 2011, to be phased in equally over three years. InBev plans to finance its purchase with $45 billion in debt, including $7 billion in bridge financing for divestitures. It will also issue $9.8 billion of new shares. Chief Financial Officer Felipe Dutra said a rights issue would be the 'natural way' to raise capital.

 

The transaction, due to be completed at the end of the year, should have a neutral effect on normalized earnings per share in 2009 and boost earnings from 2010, the companies said. Meanwhile, there is the consideration that Mexico's largest brewer, Grupo Modelo, is half-owned by Anheuser. Brito said InBev was in talks with Grupo Modelo and believed the two companies could be "great partners." The talks were taking a "positive" tone, he said.

 

After the merger, InBev will regain the top spot for world brewing that it lost last year to SABMiller, which had strong growth in China and through the purchase of Grolsch.

 

the fast consolidating beer industry has recently seen Scottish & Newcastle agree to be broken up by Carlsberg and Heineken and SABMiller and Molson Coors Brewing combining their U.S. operations. Next, it is likely that SABMiller will look at possible deals with  Modelo or FEMSA, Foster's or Molson Coors.

 

InBev, known for fierce cost-cutting, must now deliver on its financial promises, while dampening the concerns of workers and politicians, including democratic presidential candidate Barack Obama, who said it would be a shame if Bud were foreign owned.

 

Brito tried to calm some concerns on Monday by saying there were no plans yet to cut spending on marketing. The company has said it would seek to unload non-core assets, but declined to specify which. A likely candidate is Anheuser's theme park business.

 

The Stock Market Should Suit Warren Buffett’s Tastes

 

Warren Buffett has said in the past that he likes a bear market for its buying opportunities. Well, today’s market should suit his tastes because not only are the major equity indexes in what is officially called a “bear market,” but his own stock is in the same morass. The shares of the Berkshire Hathaway have dropped more than 20 percent from their most recent peak, the first time that has happened since February 2003.

 

Berkshire Class A shares down approximately 22.5 percent from their December 11, 2007 record high of $151,650. On Monday they ended the day down $1,500, or 1.28 percent, at $116,000, while the Class B closed down $52.00, or 1.33 percent, at $3857.00.

 

At Berkshire's May 3 annual meeting in Omaha, Buffett said there was "absolutely no question" the company's returns would decline. Shareholders who expected performance to replicate the past should sell their stock, he said.

 

Berkshire generates about half its profits from insurance. The Standard & Poor's insurance index had from Dec. 11 through last Friday, taken a hit of 32 percent. Buffett owns about 27 percent of Berkshire, whose market value was about $182 billion on Friday. Berkshire owns some 76 business that sell such things as car insurance, carpeting, corporate jet leases, ice cream, manufactured homes, paint and underwear.

 

It also ended March with some $111 billion of stock and bond investments, including in such brand-name companies as American Express, Coca-Cola, Procter & Gamble and Wells Fargo. Many stock holdings have lost value as equity markets declined. On Monday, the shares of M&T Bank, in which Berkshire has reported a 6.1 percent stake, fell to a 7-1/2-year low after the mid-Atlantic regional bank said credit losses contributed to a 25 percent drop in quarterly profit.

 

Yet, Berkshire has become something of a banker, ready to finance transactions as tight capital markets make it harder to get mergers and acquisitions done. Last week, Buffett put up $3 billion to help finance Dow Chemical's purchase of rival Rohm and Haas. This past April, he committed $6.5 billion to help Mars buy chewing gum maker Wm Wrigley Jr.

 

Berkshire ended March with $35.6 billion of cash and has long held "triple-A" credit ratings. Its new municipal bond insurance unit is also winning business after rivals MBIA and Ambac Financial faltered by insuring securities linked to soured subprime mortgages.

 

Buffett has long told shareholders to ignore short-term performance bumps. He has also projected volatile quarterly results because of derivatives contracts designed to make Berkshire money over the long term if stock indexes rise and junk bonds stay out of default. In May, Buffett traveled to Europe to scout out investment opportunities, including acquisitions.