MarketView for April 28

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, April 28, 2008

 

 

 

 

 

Summary 

 

It was another uneventful day on Wall Street on Monday, with the Street turning cautious ahead of the Federal Reserve's meeting on Tuesday and Wednesday. The resulting announcement, due out at about 2:00 PM on Wednesday, is expected to include a quarter-point cut in rates and will likely mark the end of a cycle of rate cuts that have taken place since mid-September. While it is not given a high probability of success, it is possible that the Fed will keep interest rates where they are in order to head off what is obviously a situation of rising inflation.

 

Meanwhile, share prices were relatively unchanged on Monday after the largest domestic merger proposed this year helped offset the comments by influential investor Warren Buffett, who is also an investor in that deal, that the country could face a long and deep recession. Buffett said publicly on CNBC that the United States could be mired in a longer and deeper recession than most people think.

 

Mars, the manufacturer of M&Ms candy, has agreed to acquire Wm Wrigley Jr., the world's largest chewing gum manufacturer. Buffett's Berkshire Hathaway will help to finance the $23 billion acquisition.

 

The deal underscored the notion that stocks are relatively cheap, with valuations hovering near their lowest in more than a dozen years. That helped financial stocks overcome a report from Morgan Stanley that predicted more profit headwinds for several of the major banks, including Bank of America.

 

On the NASDAQ, Microsoft ended the day down 84 cents, or 2.82 percent, to close at $28.99 after Yahoo let the deadline for it to respond to the software maker's threat to take its takeover bid for Yahoo directly to shareholders pass with no new development. Yahoo ended the day down 37 cents, or 1.38 percent, to close at $26.43.

 

Shares of Hershey, a major competitor to Mars, ended the regular trading day up $1.61, or 4.63 percent, to close at $36.35 on speculation that the Wrigley/Mars deal will compel a serious look at some type of an arrangement between it and Cadbury Schweppes.

 

Kirk Kerkorian's Tracinda Corp helped to send Ford’s shares higher for the day after Tracinda indicated that it intends to make a cash tender offer for up to 20 million shares of Ford’s common stock at $8.50 per share, thereby giving Tracinda a 5.6 percent stake in Ford. Ford’s shares ended the day up 71 cents, or 9.47 percent, to close at $8.21.

 

No Let Up In The Price Of Crude

 

The price of crude oil reached a new high on Monday pushing its way towards $120 per barrel on Monday as supply outages in Nigeria and Britain shut down nearly 2 million barrels per day (bpd) of output in the Atlantic Basin.

 

Domestic sweet crude for May delivery settled up 23 cents per barrel at $118.75 after earlier hitting a record of $119.93. London Brent crude settled up 40 cents per barrel at $116.74.

 

Crude prices are up almost 25 percent since January as global supplies struggle to keep pace with rising demand in emerging economies. A weak U.S. dollar has also attracted investors into commodities markets, analysts have said.

 

Exxon Mobil said on Monday it has had to shut nearly all of its Nigerian oil production, totaling around 770,000 barrels per day, due to a strike. Niger Delta rebels are boasting that an April 24 pipeline attack had shut down an additional 350,000 barrels per day of production by Royal Dutch Shell. A previous bombing raid had hit 169,000 bpd of Shell's Nigeria output, the company said last week.

 

In Britain, the 700,000 bpd Forties North Sea crude oil pipeline remained closed on Monday due to a strike at the 210,000 bpd Grangemouth refinery over pensions. the Grangemouth refinery, expects striking employees to return to work on Tuesday. BP has said the Forties pipeline could then be back in operation within 24 hours but might take a few more days to get back to full flow.

 

Between the Nigeria and North Sea outages more than 2 percent of the world’s crude oil supply has been taken off the market. OPEC, which produces more than a third of the world's oil, has refused to pump more, saying the market is adequately supplied. OPEC President Chakib Khelil blamed high prices on the fall in the dollar and said he could not rule out prices rising to $200 per barrel.

 

"Without geopolitical problems and the fall in the dollar, the prices of oil would not be at this level," he was quoted saying in Algerian government newspaper El Moudhajid.

 

Mars and Buffett Buying Wrigley

 

The most positive event driving the trading activity on Wall Street on Monday was the announcement by Mars that it has partnered with Warren Buffett to acquire the Wm Wrigley Jr. Company for $23 billion, thereby creating the world's largest confectionery company, thereby giving Berkshire Hathaway additional overseas exposure as Buffett's Berkshire Hathaway receives a 10 percent minority position in Wrigley, which will become a separate Mars subsidiary.

 

Wrigley has brands such as Extra and Eclipse, while privately held Mars is known for its M&M's, Snickers, Starburst and Twix. Combined, Wrigley and Mars controlled 14.4 percent of the global confectionery market in 2006, compared with 10.1 percent for Cadbury, according to the most recent market share data from Euromonitor International.

 

Buffett will also provide a portion of the overall financing package. The Street’s first reaction was that the deal could force Hershey and Cadbury Schweppes into a deal of their own as they will be faced by a competitor with a stronger geographic base and portfolio of products. However, the Hershey Trust, which controls about 78 percent of Hershey's voting shares, has said Pennsylvania law requires it to maintain control of Hershey. Nonetheless, Cadbury and Hershey are reported to have held talks in the past.

 

Aside from Berkshire, financing for the Wrigley deal is being provided by Goldman Sachs and JPMorgan Chase, Mars said in a press statement. At $80 a share, the deal represents a 28 percent premium over Wrigley's closing stock price of $62.45 on Friday. Wrigley closed up 23 percent on the New York Stock Exchange on Monday.

 

The acquisition, an unusual move in the confectionery business for Mars, will help the company expand its business into places where Wrigley has been strong, including Eastern Europe as Wrigley works to expand its marketing horizon outside its core chewing gum business. Although e Wrigley is the largest manufacturer of chewing gum, it has faced increasing competition from Cadbury's gum business, which includes Dentyne and Trident.

 

With regard to the question of whether Buffett's funding was required to make up a shortfall in the financing of the deal, Bill Wrigley said, "There's no question that financial markets are very challenging right now, and coming up with the capital basically to make this deal was a challenge.

 

While publicly traded, a large portion of Wrigley's shares are controlled by the Wrigley family, a Chicago presence whose name is on the Chicago Cubs baseball stadium and a well-known Michigan Avenue landmark building. The Mars family approached Wrigley with the deal on April 11, said Bill Wrigley, who would be executive chairman of the stand-alone Wrigley unit after the deal closes.

 

The deal is designed to help build Wrigley's sales, marketing and distribution infrastructure, Bill Wrigley said, adding that Mars' non-chocolate candy brands like Starburst and Skittles would be moved to the Wrigley candy portfolio, which includes Life Savers.

 

The deal is subject to Wrigley shareholder and U.S. government approval and is expected to close within six to 12 months, Bill Wrigley said. Despite the size of the combined company, Wall Street is of the opinion that their products are diverse enough that the deal should have little difficulty in being approved.

 

Buffett Thinks Things Are Worse Than Most Realize

 

Buffett told CNBC television that the United States could be mired in a longer and deeper recession than most people think. According to Buffett, the economy is in a recession that will be more severe than most people expect.

 

Buffett made his comments on CNBC television after his company, Berkshire Hathaway, agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr. in a $23 billion transaction. Berkshire is a $197 billion conglomerate best known for its insurance holdings, such as auto insurer Geico Corp, but it owns more than 70 businesses. Many of those businesses are tied to the housing market, including Acme Brick Co, insulation maker Johns Manville, and the real estate brokerage HomeServices of America. Others depend on consumers to spend more on discretionary items, such as Ben Bridge Jeweler and Borsheims Fine Jewelry.

 

"In the retail businesses...if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no up tick at all. Jewelry had a bad Christmas...and it stayed that way." Buffett sees no respite from the housing slump. "I think this is going to be fairly long and fairly deep, but who knows," he said.

 

"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.

 

"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."

 

Known for his frugality, the 77-year-old Buffett has lived in the same 10-room Omaha, Nebraska, house for a half-century, despite being worth an estimated $62 billion.