Week in Review Part II: Street Bytes

We’re down to just four trading days left in the year and after a 3.6% gain for the week the Dow Jones is solidly in the black, up 6.2%, as stocks were helped by the ECB’s bank liquidity move across the pond. The S&P 500 rose 3.7% and is now back in positive territory for 2011, up 0.6%. But Nasdaq, despite its 2.5% advance, is still down 1.3%. As noted above Italy’s bond auctions this coming week could have an impact, either way, on our markets, but it’s all going to come down to the computers, who control the market action these days, especially when the human element is home enjoying the holidays.

U.S. Treasury Yields

6-mo. 0.03% 2-yr. 0.28% 10-yr. 2.02% 30-yr. 3.06%

Treasury yields rose on growing confidence the economy is improving, while some funds also exited bonds for equities.

The Wall Street Journal reports that the Federal Reserve is looking to tell the markets it will keep rates near zero into 2014, vs. the current policy of maintaining existing levels until some point in 2013. Of course this would mean savers would continue to take it up the butt. Among the leading economists, only my man Stephen Roach ever brings this up; the horrible policy mistake the Fed has made in killing the elderly, for one, who did the right thing – were conservative, didn’t take undue risk and simply asked for a modest return on their savings – only to get totally screwed.

AT&T abandoned its $39 billion bid for Deutsche Telekom’s T-Mobile USA arm, a huge setback for AT&T as it conceded it would not be able to overcome opposition from the Obama administration and U.S. regulators. The company will now have to pay Deutsche Telekom a breakup fee of $3 billion plus hand over spectrum worth another $1 billion, though DT has its own problems. What to do with an underperforming business in T-Mobile?

AT&T CEO Randall Stephenson, who took over in 2007 and now has major egg on his face, instead issued a warning to Washington.

“To meet the needs of our customers, we will continue to invest. However, adding capacity to meet these needs will require policymakers to do two things.

First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.”

In missing earnings and revenue estimates by a wide margin for its third quarter ended Nov. 30, Oracle Corp. said sales slowed significantly at the end of the period, though company executives didn’t blame the economy, nor predict an overall spending slowdown, because they just don’t know, which seems to be the tact taken by other tech outfits. Oracle did say, however, that the sales process has slowed, with more executives needing to sign off on purchases.

Online sales have been surging, up 15% over year ago levels according to ComScore Inc.,  and that has led to some problems, such as with Best Buy, the largest U.S. specialty electronics retailer, which was forced to report some of its customers will not receive their packages before Christmas due to overwhelming demand.

The U.S. Justice Department and Bank of America reached an agreement to resolve allegations its Countrywide Financial Corp. unit engaged in a widespread pattern of discrimination against minorities on home loans. BofA will pay $335 million. According to the complaint, Countrywide charged higher fees and interest rates on over 200,000 African-American and Hispanic borrowers.

Daniel Mudd, CEO of Fortress Investment Group, is taking a leave of absence to fight SEC charges related to his former role as CEO of Fannie Mae.

The unemployment rate fell in 43 states in November, the most to report lower rates in a single month in eight years. Nevada still has the highest rate, 13%, followed by California’s 11.3% (down from 11.7%), with North Dakota again the lowest at 3.4%. [Nebraska is at 4.1% and South Dakota, 4.3%.]
Michigan reported the biggest drop, from 10.6% in October to 9.8%.

Jim O’Neill / Financial Times

“While the financial and business world continue to hang on every twist and turn in eurozone politics, I think the biggest issue for the world in 2012 will be whether China can successfully manage a soft landing.

“In recent years, China has become crucial to the world economy: in 2011, it probably added around $1 trillion in U.S. dollar terms alone, equivalent to creating half of a new Italy. Since the 2008 global credit crisis, each subsequent year in China has had its particular theme: 2009 was about preventing a postcredit crisis collapse and recession; 2010 about controlling the power of the expansion; 2011 about stopping inflation from rising too much.

“2012 will be about trying to ensure a soft landing. Growth, under downward pressure from weakening exports and a fall in government-sponsored investment, will have to be led by stronger personal consumption if the economy is to grow by more than 8 percent.”

China is scaling back its investment in its railway network by a modest 15% to $63 billion. This comes after the deadly crash between two high-speed trains earlier in the year led to public protests and forced Beijing to slow its expansion plans. Railway construction accounts for 3% of China’s overall capital spending.

Uh oh…nothing can stop the global economy like bird flu has the potential to (save for a commercial jetliner being taken down by a shoulder-fired missile), and Hong Kong health officials were furiously at work this week after a chicken carcass at a poultry market was found to have a “highly pathogenic H5N1 avian influenza virus,” according to an official statement. 17,000 chickens were quickly slaughtered…for starters…as the government suspended the sale and import of live poultry for 21 days. It was in 2003 that H5N1 and SARS killed 299 Hong Kong residents, but thus far the world has been both lucky and smart in combating the spread of these viruses before they get totally out of control. Obviously, despite our best efforts, one day one of these will.

Coincidentally with the above, as the New York Times put it, “For the first time ever, a government advisory board is asking scientific journals not to publish details of certain biomedical experiments, for fear that the information could be used by terrorists to create deadly viruses and touch off epidemics.”

In experiments in the U.S. and the Netherlands, scientists created the H5N1 virus. The studies were paid for by the National Institutes of Health, to promote better understanding of the genetic changes that could make H5N1 easier to transmit.

But as Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, said, “I’m sure there will be some people who say these experiments never should have been done.”

Duh. It seems that as part of the research, scientists realized how easy it might be to transmit the virus via aerosols.

The Journal reports that the SEC is looking to shut down billionaire hedge-fund manager Philip Falcone, who is being investigated on a number of fronts, including market manipulation. Falcone’s Harbinger Capital has seen its assets slide from a peak of $26 billion in 2008 to less than $5 billion today.

Wendy’s is poised to become the number two fast food chain behind McDonald’s, which would be a first since its founding in 1969. Current number two Burger King has seen a decline in its same-store sales, while Wendy’s are inching up (and McDonald’s are on fire).

The U.S. International Trade Commission ruled that HTC Corp., a Taiwanese company, infringed on an Apple patent in employing Android software. HTC must stop importing handsets that infringe on the patent by April. HTC will remove the feature in question at little cost to its business, but it is significant nonetheless for Apple in its ongoing battle with Google’s Android operating system.

Saudi billionaire, Prince Alwaleed bin Talal, took down a $300 million stake in Twitter, buying shares from existing shareholders that gives him about 3% of the company.

Just one week after the first U.S. generic competition came on the market, Pfizer said sales of cholesterol blockbuster Lipitor plunged by half. Lipitor at its peak generated sales of $13 billion a year.

For the first time since it was launched in 1987, Bill Gross’ Total Return Fund is poised to see net outflows this year, owing in no small part to very poor relative performance vs. its benchmark. Hang in there, wholesalers!

Saab Automobile filed for bankruptcy on Monday after a nearly two-year effort to save the brand, including attempts to raise funds in China. But without the funding coming through, Saab called it a day after 65 years.

Former Citigroup chairman Sandy Weill sold his Central Park West penthouse in Manhattan for a staggering $88 million, the buyer being Russian billionaire Dmitry Ryboloviev, who purchased it for his 22-year-old daughter. Weill purchased the property in 2007 for $43.7 million. I’m too old for the daughter.

Finally, a word on my main China holding in Fujian, the biodiesel/specialty chemical outfit. Since it reported earnings in mid-November, the stock has nosedived for zero reason (though all Chinese stocks have taken a header). For those of you still playing along, understand I am in constant contact with management and this week had a chat with their investor relations people. At my suggestion, we are working on a conference call to update developments in early- to mid-January. I feel as if I’ve been consistent in the comments I’ve been comfortable making. If you believe the China economy is going to hell in a handbasket, well then the stock will continue to be dead money (or no more than a double from current levels). If you believe China will see a soft landing, this cyclical company will then get its fair share of future growth. Air Products is its biggest customer, about 20% of sales, so another way to look at it is, as Air Products goes, probably so we go.

That said, consider this. My holding trades at a P/E of about 1 [yes, one.] Compare that to Dow Chemical, DuPont and Huntsman, which trade at multiples between 11 and 13. I also have a much smaller position in a China food company, which I’ve described here as a mini Archer Daniels. This company has a current P/E of 1.2. ADM trades at about a 9 multiple.

That gives you an idea of how sentiment is shot when it comes to China small caps and concern over the books. I’m giving it one more year. Each China operation is going to have to make a far more concerted effort to prove its finances are real and the ones who do should be rewarded at some point.
That’s my longwinded way of saying, if you are still in the Fujian play, do not sell, at least for another few weeks. I’ll give you honest guidance once the call takes place. I may also formally reveal the name at that point.