Financial update

12/8/2008


The $700 billion financial-industry bailout, shocking in size when it was debated in Congress, suddenly seems quaint. Try the latest number: $8.5 trillion dollars, the total U.S. commitment for financial-recovery efforts, of which $3.2 trillion has already been tapped. The Federal Reserve is on the hook for up to $5.5 trillion, Federal Deposit Insurance Corp. (FDIC) for $1.5 trillion, the Treasury Department for $1.1 trillion, and the Federal Housing Administration for $300 billion. The money is primarily pledged to make loans, back loans, buy assets, and invest in troubled companies.


The U.S. Treasury has pumped another $40 billion into American International Group ($2; NYSE: AIG). The loan comes in exchange for 4 million shares of preferred stock that pay a 10% dividend and a 10-year warrant exercisable for up to nearly 54 million shares of common stock, or about 2% of shares outstanding. Starting off on the long road to repay the government, AIG sold its private-banking business to Aabar Investments PJSC of Abu Dhabi for $253 million. AIG is rated Neutral.


J.P. Morgan Chase ($29; NYSE: JPM) will cut about 9,200 jobs in 2009, or more than 21% of the staff at the former Washington Mutual, acquired for $1.9 billion in September. J.P. Morgan Chase is rated Neutral.


Goldman Sachs ($65; NYSE: GS) could post a loss of $2 billion, or about $5 per share, in the November quarter as it unwinds large trades during the process of becoming a commercial bank. The expected loss, five times worse than the consensus, would be Goldman’s first since going public in 1999. Goldman Sachs is rated Neutral.


Citigroup ($7; NYSE: C) will issue $5.5 billion in bonds backed by the FDIC. In other news, Citi Infrastructure Partners, a fund 15%-owned by Citigroup, agreed to buy a Spanish highway operator for $3.65 billion, plus the assumption of about $6 billion in debt. Citigroup is rated Neutral.


Bank of America ($14; NYSE: BAC) could begin shedding at least 10,000 jobs this year, though cuts could ultimately reach 30,000 as the bank tucks Merrill Lynch ($12; NYSE: MER) into its operations. Bank of America and Merrill Lynch are rated Neutral.


Citing problems at its finance business, General Electric ($18; NYSE: GE) cut its target for December-quarter profits and laid out plans to operate a smaller and more focused GE Capital unit. General Electric is rated Neutral.

News roundup
Job losses and decelerating growth pushed the U.S. into a recession in December 2007, according to the National Bureau of Economic Research. The nonprofit group defines a recession differently than the traditional economic model of two consecutive quarters of lower gross domestic product. NBER considers indicators including industrial production, employment, retail sales, and personal income, as well as GDP. While the criteria used to establish recessionary conditions are bad for stocks, some companies should perform well regardless of economic conditions. In any case, investors should maintain exposure to stocks, because the most dependable indicator that the recession is ending will be a strong rebound in stocks . . . St. Jude Medical ($29; NYSE: STJ) lowered per-share-profit guidance for the December quarter to account for currency losses. In 2009, the company anticipates per-share profits between $2.47 and $2.52, below the $2.60 consensus but representing at least 7% growth. St. Jude is a Focus List Buy and a Long-Term Buy . . . Schlumberger ($44; NYSE: SLB) cautioned that 2008 earnings will fall below consensus estimates of $4.76 per share because of a global slowdown in spending on oil-and-gas exploration. Schlumberger is a Long-Term Buy . . . The U.S. Food and Drug Administration’s requests for more information about AstraZeneca’s ($37; NYSE: AZN) new drug Motavizumab could delay an expected 2009 launch for the medication, which prevents a type of lung infection in babies. AstraZeneca is a Buy and a Long-Term Buy . . . Johnson & Johnson ($57; NYSE: JNJ) agreed to buy breast-implant maker Mentor ($31; NYSE: MNT) for $1.07 billion. The acquisition would buy J&J a large stake in market for cosmetic and reconstructive surgical products. J&J is a Focus List Buy and a Long-Term Buy . . . Deere’s ($32; NYSE: DE) profits dropped 14% to $0.81 per share in the October quarter, $0.18 below Wall Street’s expectations. Deere cautioned that fiscal 2009 profits could slide 6% to $4.45 per share, 13% below the consensus. Deere is rated Neutral . . . Time Warner Inc. ($9; NYSE: TWX) plans to seek shareholder approval for a 1-for-2 or 1-for-3 reverse stock split to counter the expected price decline from the pending cable spin-off. Time Warner is rated Neutral . . . A London newspaper reported that Microsoft ($19; NASDAQ: MSFT) and Yahoo ($12; NASDAQ: YHOO) discussed a $20 billion merger over Thanksgiving weekend, although executives reportedly involved with the alleged deal said no such talks took place. In related news, former AOL chief Jonathan Miller is reported to be seeking private-equity investors to fund a bid of at least $28 billion. Microsoft is a Buy and a Long-Term Buy. Yahoo is rated Neutral . . . Lockheed Martin ($74; NYSE: LMT) won a contract worth up to $1.09 billion to build at least two U.S. weather satellites. Lockheed is a Long-Term Buy . . . In response to declining copper and molybdenum prices, Freeport-McMoRan ($22; NYSE: FCX) trimmed its 2009 production targets and cut the capital-spending budget in half. The company also suspended its dividend, potentially saving $755 million a year. Freeport is rated Neutral.

Automakers go begging
Less than a week after Congress refused to bail out the U.S. auto industry, the Big Three automakers submitted new recovery plans in an effort to wring money from the government. Ford Motor ($3; NYSE: F) requested up to $9 billion in bridge financing. The automaker remains confident in its liquidity through 2009, unless a domestic rival goes bankrupt. But the credit line would provide a backstop against deteriorating market conditions. Under the plan, which includes canceling most employee bonuses and investing heavily in advanced technology, Ford expects to break even by 2011.

General Motors ($5; NYSE: GM) says it needs $4 billion immediately and a total of $12 billion in government
loans to keep operating. The automaker also asked for a $6 billion credit line. GM plans to cut at least 20,000 jobs, idle nine plants, and eliminate about 1,750 dealerships by 2012. The company will focus on the Chevrolet, GMC, Buick, and Cadillac brands, with Pontiac becoming a specialty brand. Burdened by annual interest payments of $2.9 billion on $43.9 billion in debt, GM is also developing a plan for bondholders to swap their securities for equity. Ford and GM are rated Underperform.


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