Merck falls on 4Q loss, sales questions

Merck & Co. shares fell Wednesday after the company said it swung to a loss in the fourth quarter, and investors wondered how strong future sales of Merck's cholesterol drugs will be.

The company reported its fourth-quarter results Wednesday, posting a larger-than-expected profit when one-time charges were excluded. Revenue came up slightly short of analyst estimates.

Including one-time expenses, primarily a large charge related to a settlement of lawsuits surrounding Merck's withdrawn painkiller Vioxx, the company lost $1.63 billion, or 75 cents per share.

The company reiterated its 2008 profit forecast of $3.28 to $3.38 per share, excluding one-time charges. However, analysts said questions remain about sales of Zetia and Vytorin, which brought Merck $538 million in revenue in the fourth quarter.

A recent study showed that Vytorin was no more effective than a generic drug at stopping plaque from accumulating in arteries, leading to government scrutiny and lawsuits against Merck and its partner on the drugs, Schering-Plough Corp.

On average, analysts polled by Thomson Financial estimate a profit of $3.36 per share for Merck.

Goldman Sachs analyst James Kelly, who rates the stock "Neutral," said Merck has not addressed the impact those developments might have on sales.

"Initial enthusiasm for the maintained guidance will likely wane as the recent analyst earnings per share reductions for the cholesterol joint venture are not reflected/addressed," he said.

Citing the same questions, Deutsche Bank analyst Barbara Ryan cut her price target to $62 per share from $70, and maintained a "Buy" rating.

Shares fell $1.32, or 2.8 percent, to $46.69 Wednesday.

Source : http://www.businessweek.com

Bond Insurers Under Assault

Monoline bond insurers are enduring increasing pressure with a renewed assault Wednesday by activist investor Bill Ackman and looming downgrades of their vaunted triple-A credit ratings.

In a widely distributed 20-page treatise targeting monoline firms MBIA (MBI - Cramer's Take - Stockpickr) and Ambac Financial (ABK - Cramer's Take - Stockpickr), Ackman argues that losses at the bond insurers have been underestimated.

Ackman, the head of hedge fund Pershing Square Capital Management, estimates that losses at Ambac related to its exposure to residential mortgage-backed securities and asset-backed collateralized debt obligations will be about $11.6 billion and that losses at MBIA could be as much as $12.6 billion.

"MBIA and Ambac's exposure to nearly the entire universe of CDOs also compounds their exposure to many other classes of [residential mortgage-backed] securities with MBIA and Ambac being exposed to 3,131 and 4,179 unique tranches of ABS respectively," Ackman writes in his letter, which was sent to members of the financial media, in addition to the Securities and Exchange Commission and other industry participants. "These larger numbers of exposures will likely cause MBIA and Ambac to experience losses similar to that of the entire residential mortgage backed securities market."

Ackman has been railing against the integrity of bond insures for nearly a decade and has billions to gain should shares of Ambac and MBIA continue to fall in value. The activist is believed to have short positions in both financial guarantors, which have seen tremendous volatility in trading over the past week as rating agencies including Fitch Ratings, Moody's Investors Service and Standard & Poor's threatened to strip the firms of their coveted triple-A ratings. The pristine ratings are a necessity for bond insurers, who rely on them to backstop potential losses on debt including municipal bonds and structured debt.

Fitch on Wednesday downgraded little-known guarantor firm Financial Guaranty Insurance Co. from triple-A to double. Fitch also stripped Ambac of its triple-A rating last week and now rates the company double-A as well.

Ackman also argues that monolines, which are usually structured with a holding entity and an operating company, should be forced to stop funneling money up to their parent company.

An Ambac spokesman in New York declined to comment and a call to MBIA in Armonk, N.Y., was not immediately returned

Shares of MBIA closed down 12.6% and Ambac fell 16.1% in Wednesday trading, following Ackman's report.
Bailout Plan Complicated

The flap surrounding monolines has compelled the New York Insurance Superintendent Eric Dinallo to try and orchestrate a bailout of the sector by encouraging investment banks to provide some support capital that could either bolster the insurers or be used to form a reinsurance pool to assume some of the liabilities on their books. An accord among some of the challenged banks, such as Merrill Lynch (MER - Cramer's Take - Stockpickr) and Citigroup (C - Cramer's Take - Stockpickr), might be difficult to achieve, especially since those banks have suffered their own massive writedowns on subprime-related bets.

Earlier Wednesday, Oppenheimer & Co. analyst Meredith Whitney added more fodder to the writedown fire speculating that banks Merrill, Citi and UBS (UBS - Cramer's Take - Stockpickr) may see further writedowns linked to monoline bond insurers. She estimates that monoline-inspired writedowns may hit as much as $75 billion.

Ackman's letter places added pressure on the industry and may inspire a further notching down of the monoline sector if his estimates are to be believed. In addition to the letter, Ackman also called for an "open source" forum in which Wall Street participants could calculate their own view of losses using publicly available data.

Estimates tied to how much capital monolines will need has been wide-ranging. Sean Egan, principal at independent rating agency Egan-Jones, estimated last Friday that monolines may need as much as $200 billion to shore up their balance sheets in anticipation of mounting defaults on the mortgage paper that has come to comprise much of the debt in question by the monolines.

Source : http://www.thestreet.com

Starbucks cautious on 2008, sees recession likely

Starbucks Corp (SBUX.O: Quote, Profile, Research) said on Wednesday it is closing 100 underperforming U.S. stores and slowing domestic openings in the face of a likely consumer recession and "cannibalization" from overbuilding.

The coffee chain, whose shares dropped about 2 percent after the news, also said it was pulling much-hyped hot breakfast sandwiches from stores, despite the cost of reducing sales, because customers complained that the smell was overwhelming the aroma of coffee.

Starbucks, which posted a higher quarterly profit, is turning its focus to international markets and revamping U.S. plans. It has been battered in recent months by slower consumer spending, higher milk and labor costs and concerns it may have saturated the U.S. market.

"There's a macroeconomic headwind that we're all facing that strongly suggests that the (U.S.) consumer is in a recession," Starbucks recently-returned Chief Executive Howard Schultz said in a telephone interview.

Starbucks cut its forecast for 2008 U.S. store openings to 1,175 from 1,600. Meanwhile, it plans to increase international store openings by 75 outlets to 975.

"We believe having less openings at this point in time, in addition to the economic environment, gives us an opportunity to have less cannibalization and better use of capital," Starbucks Chief Financial Officer Peter Bocian, said on a conference call.

Executives said they will discontinue guidance for fiscal 2009 and beyond and cease to issue same-store sales results, saying those will not be effective indicators of the business during the turn-around period.

Seattle-based Starbucks said it now expects earnings per share in fiscal 2008 to grow in the low double-digits by percentage. Starbucks' previous forecast was for earnings per share of between $1.02 and $1.05 in fiscal 2008, which would mark a 17 to 21 percent increase in earnings per share.

Source : http://www.reuters.com

Amazon profit margins squeezed

Amazon.com Inc posted a decline in profit margins on Wednesday as the cost of discounting overshadowed a robust rise in quarterly earnings and a bullish 2008 sales view above Wall Street targets.

Shares of the Internet retailer, which trade at a huge premium to peers, fell 11 percent on fears a potential recession could sap Amazon's earnings.

Margin contraction is a recurring worry among analysts who have watched the company spend on technology to attract new customers and discount shipping to keep buyers loyal.

But the fourth quarter was no exception to the worrying trend, with gross profit margin falling to 20.6 percent from 21.3 percent a year ago and 23.4 percent in the third quarter.

"That was disappointing," said Hamed Khorsand of BWS Financial. "It seems there was a lot of promotions, discounting in the quarter."

The operating income forecast range, largely below Wall Street targets, "doesn't look too great," he added.

Global Crown Capital's Martin Pyykkonen said the company had implied its operating margins would be 5.5 percent to 6.2 percent in 2008, in line with the previous two years and compared with 5.7 percent in 2007.

Chief Financial Officer Tom Szkutak said double-digit operating margins were "possible" but added: "If a high single-digit operating margin is the right thing to drive free cash flow, that's what we'll do."

Source : http://www.reuters.com

Wii Works Magic On Nintendo Results

Strong holiday sales of its Wii videogame console and Nintendo DS portable game device helped Nintendo Co. nearly double its nine-month net profit and raise its sales forecasts for the third time this business year.

The Japanese company said its net profit for the April to December period jumped 96% to ¥258.93 billion ($2.43 billion) from ¥131.92 billion a year earlier. Sales rose 85% to ¥1.316 trillion from ¥712.58 billion.

Nintendo doesn't break out its results for the latest October-December period.

Nintendo has benefited from the tremendous popularity of the Wii, which lets users intuitively play games like virtual tennis and bowling by swinging a controller. In the U.S., the console was in such high demand during the holidays that stores were sold out of them. In Japan, a new game launched in December called Wii Fit, which lets users play exercise games by standing on a board that can detect shifts in weight, saw strong sales.

The Wii, which launched in November 2006, has outsold both Sony Corp.'s PlayStation 3 and Microsoft Corp.'s Xbox 360 world-wide. Nintendo said it now expected to sell 18.5 million Wii consoles this business year, which ends March 31, compared with its forecast of 14 million at the beginning of the year.

Over the past few years, Nintendo has made a conscious effort to expand the videogame market by targeting new game players such as women and the elderly with easy-to-play casual games. In addition to the Wii, its Nintendo DS portable game machine, with its two screens including a touch screen that detects handwriting, has also been a huge hit. The company raised its full-year forecast for the DS to 29.5 million units from 28 million.

Nintendo has already achieved 94% of its full-year net profit forecast. Still, the company, known for its conservatism, kept its profit outlook unchanged even as it raised its operating profit forecast to ¥460 billion from its previous forecast made in October of ¥420 billion. In the year-earlier period, its operating profit was ¥226 billion. It also raised its sales forecast to ¥1.63 trillion from its previous forecast of ¥1.55 trillion. Sales in the year-earlier period were ¥966.5 billion.

The company, which records significant sales outside of Japan, typically adjusts its full-year net profit forecast in early April after it has accounted for the effect of foreign-exchange rates on its business.

Analysts say they believe that videogame sales will continue to be strong despite worries of an economic slowdown in the U.S. as consumers spend more time at home. Nintendo in particular is likely to continue to see strong momentum as highly-anticipated games like Wii Fit enter markets in the U.S. and Europe later this calendar year.

Nintendo raised its dividend forecast for the full year to ¥1,190 per share from ¥1,090 per share. Last year, it paid out ¥690 per share. Nintendo's results are based on Japanese accounting standards.
Source : http://online.wsj.com

Bank of France to open inquiry into Socgen fraud

The Bank of France said on Thursday it would open an inquiry into an alleged fraud at French bank Societe Generale which will have a 4.9 billion euros negative impact on the group.

The central bank said it had been immediately informed about the fraud and noted the bank had taken steps to reinforce its capital in the light of the news and the crisis in financial markets.

"In these conditions, the financial situation of the bank does not require any particular comment," the Bank of France said in a statement.

Bank of France Governor Christian Noyer, who is also a governing council member of the European Central Bank, will hold a news conference on SocGen at 1330 GMT.

Last Friday, Noyer said in an interview with the International Herald Tribune that he was not expecting any "strong shocks" from French banks' 2007 earnings.

He said he was reasonably confident that French banks were in a position to weather the turmoil in financial markets.

SocGen also announced on Thursday a 2.05 billion euros writedown related to the global credit crunch.

The IHT website reported Noyer as saying, without directly quoting him, that he had been assessing the balance sheets of banks like SocGen and BNP Paribas before they revealed their 2007 results.

However, the Bank of France later issued a statement saying: "In the interview that appeared today, Governor Christian Noyer at no moment mentioned the name of a bank."
Source : http://www.reuters.com

Bush Meets Democrats on Stimulus

President Bush met with leaders from both political parties in Congress to brief them on his trip to the Middle East last week. But it was concern about the U.S. economy that dominated Mr. Bush's session with lawmakers.

"I believe we can find common ground to get something done that is big enough and effective enough so that an economy that is inherently strong gets a boost to make sure that this uncertainty does not translate into more economic woes for our workers and small business people," said Mr. Bush.

President Bush says he has reasonable expectations about how quickly an economic stimulus plan can get through Congress, but he is optimistic that it will.

Mr. Bush says broad-based tax relief must be big enough to make a difference. So he is proposing an amount equal to about one percent of the value of all U.S. goods and services. That is between $140 billion and $150 billion.

Before their meeting at the White House, Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi met with Treasury Secretary Henry Paulson, who was named by President Bush as his lead negotiator on the stimulus plan.

Speaker Pelosi told reporters that congressional Democrats are ready to work with their Republican colleagues and the president.

"It's important that we have a stimulus package that is timely, that is temporary, and that is targeted," she said. "To that end, we are going to work in a bipartisan way in Congress and with the president to do just that."

President Bush wants tax incentives for businesses to make investments this year as well as direct and rapid income tax relief for individuals.

Democrats agree on the need to help individual taxpayers, but they also want to boost unemployment benefits and food aid in the stimulus package. That social spending may face opposition from a president who says the deal should not include spending projects with little immediate impact on the economy.

President Bush remains determined to make his record tax cuts permanent, but removed what would have been a big obstacle to any deal by agreeing not to include that demand in this request for temporary economic stimulus.

Stock markets around the world have declined recently as investors worry that a slowing U.S. economy could hurt businesses in the many nations that trade with the United States. Federal Reserve officials say they cut rates to 3.5 percent to ease tight credit.
Source : http://voanews.com

Emerging debt-Wary but resilient markets eye US recession risk

Emerging markets felt the heat but were not seriously burned on Tuesday after U.S. shares fell sharply on recession fears despite the U.S. Federal Reserve's largest cut in a key interest rate in 23 years.

Dollar-denominated sovereign bonds and a broad measure of emerging market stocks fell, albeit above earlier lows. On the positive side, Latin American stocks and currencies rallied.

In volatile trade, global markets recovered ground after the Fed's surprise cut in the federal funds rate by three-quarters of a percentage point.

Following Monday's carnage in international markets, brought on by U.S. recession concerns, the Fed brought the rate down to 3.5 percent. U.S. markets were closed on Monday for a holiday.

Historically, emerging markets are putting in strong performances given the volatile environment. In the past, their less mature economies and markets would have suffered bigger routs. This has led some investors to believe emerging markets have "de-coupled" from developed markets.

"On a trend basis, a multi-month or even multi-year basis, I would expect emerging markets will probably do fairly well, in that after this correction their growth is to hold up reasonably well, better than what we are seeing in the U.S. and Europe," said Nick Chamie, head of emerging market research at RBC Capital Markets in Toronto.

"Over the long term, that is going to be the case, but in the short term I think they are still quite vulnerable to significant sell-offs," he said.

"I think the whole de-coupling myth is well on its way to becoming debunked," Chamie added.
Source : http://www.reuters.com