MarketView for July 21

Stock prices fell a bit on Monday, as oil turned higher after last week's sharp drop, while Merck and Schering-Plough hurt the pharmaceuticals sector. However, the markets could well have a difficult day on Tuesday based on dismal results after the bell from American Express, Apple and Texas Instruments. Technology companies, which were already weak in the regular session, took another leg down in after hours trading as Apple, SanDisk and Texas Instruments all posted disappointing results.

 

The price of oil dampened the day’s mood as it rose more than $2 to end above $131 a barrel, adding to concerns about the impact of higher fuel costs on consumer spending.

 

Yahoo fell 3.5 percent to $21.67 after the company agreed to appoint investor Carl Icahn and two of his nominees to its board. The move settles a proxy battle and makes prospects for an immediate transaction with Microsoft less likely.

 

Shares of American International Group rose after Bank of America raised its rating on the insurer to "buy" from "neutral," stating that the risk-to-reward ratio has become "very attractive."

Vytorin, sold by Merck and Schering-Plough, failed to meet the main goal of improving outcomes in a closely watched heart study. Slightly higher incidents of cancer deaths were also seen in those taking the drug, 39 versus 23 on placebo, although the lead researcher said those could have occurred as a result of chance.

 

Weather and Iran Send Crude Prices Higher

 

The price of crude rose on Monday as Tropical Storm Dolly barreled into the Gulf of Mexico, increasing concerns of disruptions to offshore oil and gas rigs. August futures settled up $2.16 per barrel at $131.04, while London Brent crude settled up $2.42 per barrel at $132.61.

 

The National Hurricane Center warned that Dolly could reach hurricane strength on Tuesday. At the same time, the Energy Information Administration said on its current path, Dolly was likely to miss major oil producing areas but could threaten some coastal refineries later in the week.

 

Shell Oil Co began flying workers from offshore platforms as a precaution, while many other oil companies with installations in the Gulf of Mexico said they were closely watching the storm. The Mineral Management Service said four production platforms and one drilling rig had been shut, but that no output had been affected yet.

 

Crude prices were also pushed higher by the ongoing tensions over Iran's nuclear program. Iran has two weeks to answer calls to rein in its nuclear program or face tougher sanctions after talks ended in a stalemate. Secretary of State Condoleezza Rice warned Iran on Monday that it faced more sanctions if it defied the two-week deadline. Concerns that the standoff could lead to a disruption of oil supplies from the OPEC nation have supported crude in its climb to new highs this month.

 

Surging demand from emerging economies in Asia have fueled a six fold increase in the price of crude oil since 2002, but concerns over falling have helped temper gains.

 

Leading Indicators Statistic Falls

 

The Conference Board reported on Monday that the economy contracted in June as factories cut workers' hours and stocks tumbled, a private business group said Monday. It also revised its May figure to show a decline instead of slight growth.

 

According to the Conference Board's forecast, future economic activity fell 0.1 percent.

The group also revised its May number downward to a 0.2 percent decrease, from a 0.1 percent increase. The index is down  0.9 percent for the six months ending in June, but the rate of decline has improved since the first quarter.

 

Downturns in the auto and housing industries have been devastating for the manufacturers that produce everything from spark plugs to vinyl siding. And more job cuts are almost certain: General Motors Corp. said Friday more factories likely will close as it slashes production of trucks and sport utility vehicles by 300,000 by the end of the year.

 

Merck Cops Out

 

Merck said after the closing bell that it was not providing long-time financial forecasts as it assesses the impact of another failed study result for its Vytorin cholesterol fighter. Merck has previously targeted double-digit compound annual earnings-per-share growth from 2005 through 2010, excluding certain items.

 

For the second quarter, Merck reported that it earned $1.77 billion, or 82 cents per share, as compared to $1.68 billion, or 77 cents per share, a year ago. Excluding special items, the company earned 86 cents per share.

 

Bank of America Exceeds Expectations

 

Bank of America reported better than expected earnings on record revenues, Nonetheless, earnings still fell 41 percent, the fourth straight quarterly decline, as the bank more than tripled its reserve for loan losses because of falling home prices and a weak economy. Offsetting this was a higher lending margin, near-record investment banking income and a $357 million trading profit, following $8.55 billion of trading losses in the prior three quarters.

 

Second-quarter net income came in at $3.41 billion, or 72 cents per share, down from $5.76 billion, or $1.28 per share, a year ago. Excluding merger costs, earnings were 75 cents per share. Revenue increased 4 percent to $20.32 billion, topping the average $18.26 billion forecast.

 

Bank of America also said its July 1 purchase of Countrywide Financial will add to profit in 2008, sooner than expected, and result in $900 million of cost savings, $230 million more than expected.

 

Countrywide lost $2.33 billion in the quarter, including about $3.7 billion of credit-related write-downs and losses, Bank of America said. About 7,500 jobs, or 3 percent, will be eliminated from the combined companies, the bank has said.

 

Bank of America set aside $5.83 billion for bad loans, up from $1.81 billion a year earlier, largely for home equity, residential mortgage and homebuilding exposure. The provision was nearly as large as the first quarter's $6.01 billion. Net charge-offs more than doubled from a year earlier to $3.62 billion from $1.5 billion.

 

Chief Executive Kenneth Lewis said on a conference call: "We do not yet see the economy slipping into prolonged recession," but "sluggishness" will likely persist through year-end.

 

"We are not in denial," he said. "Credit losses are still going up."

 

He plans to maintain the bank's 64 cent per share quarterly dividend, dampening fears of a cut, but ending 30 straight years of increases.

 

Chief Financial Officer Joe Price said credit losses tied to the Countrywide loan book are "on the higher side" of the range the bank originally expected, mainly because of "the continued economic weakness and decline in housing prices."

 

Price also said Bank of America does not now intend to guarantee billions of dollars of public Countrywide debt, although in an interview he said: "Our current thinking is susceptible to change all the way through payoff."

 

The cost to insure Countrywide Home Loans debt rose to 2.35 percentage points, or $235,000 per year for five years to insure $10 million in debt, from 2.2 percentage points, according to Phoenix Partners Group.

 

Bank of America's corporate and investment bank saw profit rise 3 percent to $1.75 billion, helped by the improved trading, and as write-downs on collateralized debt obligations fell to $645 million from the first quarter's $1.47 billion.

 

Profit in consumer and small business banking fell 66 percent to $812 million, although net interest margin rose to 2.92 percent from the first quarter's 2.73 percent. Wealth and investment management profit fell 1 percent to $573 million.

 

Bank of America's Tier-1 capital ratio, a measure of its ability to cover losses, rose to 8.25 percent from the first quarter's 7.51 percent. Regulators deem 6 percent sufficient.

 

Roche offers to buy out Genentech for $43.7 billion

 

Roche Holding AG offered to acquire all outstanding shares in its U.S. partner Genentech Inc for $43.7 billion in cash to reinforce its position in cancer medicines. Roche, which already owns 55.9 percent of Genentech, said it would offer $89 per share to buy up the remaining stake, but Wall Street is betting that a higher offer will be forthcoming. Roche is currently offering an 8.8 percent premium to the previous closing share price.

 

The modest premium offered by Roche compares with an average of 63 percent for recent deals in the pharmaceutical industry. Roche also said its first-half net profit fell 2 percent to $5.62 billion, hit by a loss of sales of influenza drug Tamiflu and the weak dollar.

 

Roche's last major U.S. acquisition, was Ventana Medical Systems earlier this year, was only secured with a sweetened offer worth 19 percent more than its initial bid.

 

It is essential for Roche "to have a stronger and more effective market presence, if we are to not only maintain but extend out position in the face of growing challenges and pressure on prices," Roche Chairman Franz Humer said.

 

Genentech said it expected that a special committee of its independent directors to determine what action to take with respect to the Roche proposal. The Genentech bid is the latest in a string of acquisitions of promising biotech assets as large pharmaceutical companies snap up new drugs to fill sparse new product pipelines.

 

It is the third major deal for biotech assets in the last month alone, after Novartis AG's buyout of research partner Speedel and GlaxoSmithKline Plc's insomnia licensing deal with Actelion.

 

Roche would gain control of all revenues for big-selling Genentech cancer drugs Avastin and Herceptin, as well as absorbing an attractive portfolio of new medicines. Roche expects the combination to generate annual pretax cost synergy benefits of about $750-$850 million and to add to earnings per share in the first year after closing.

 

The company confirmed its full-year forecast and said it was still committed to increasing its dividend pay-out ratio for the next three years.

 

It will fund from its large cash pile plus debt. According to Chief Financial Officer Erich Hunziker, Roche is talking to several banks and saw no problems in putting together "attractive" financing for the deal.

 

Earnings Fall At American Express

 

American Express reported after the close of regular trading that its earnings for the quarter fell 38 percent as it set aside more money to cover credit losses. According to the company, it is no longer on track to boost earnings per share by 4 to 6 percent this year due, it said, to a slowing economy.

 

"While we have been able to generate substantial earnings and returns relative to many in the financial sector, we do not expect to meet or exceed our long-term financial targets until we see improvements in the economy," Kenneth Cheanult, chairman and chief executive, said in a statement.

 

According to the company, second-quarter earnings came in at $653 million or 56 cents per share, as compared to $1.057 billion, or 88 cents per share a year ago. Net income was hurt by a $600 million pre-tax addition to domestic lending credit reserves, reflecting a deterioration of credit beyond what American Express had expected.

 

American Express is often seen as catering to higher-end consumers compared to most other credit card issuers. But delinquencies on its cards have crept higher as the credit crisis has weighed on the ability of some wealthy consumers to pay their bills. American Express' shares have fallen about 21 percent so far this year, compared with a roughly 14 percent decline in the Standard & Poor's 500 index.