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What's Spooking The Markets


The depression in housing isn't as well-contained as many once hoped. On July 10 bond raters Standard & Poor's (MHP) said it would probably downgrade billions of dollars' worth of paper backed by subprime mortgages, and Moody's (MCI) did downgrade some. An executive at S&P—like BusinessWeek, a unit of The McGraw-Hill Companies (MHP)—said "the level of losses continues to exceed historical precedents and our expectations." Meanwhile, builder D.R. Horton (DHI) and retailers Home Depot (HD) and Sears (SHLD) slashed their earnings forecasts.

Investors sent the Dow down 148 points on July 10, though some hedge funds are making huge money betting subprime-based securities would fall. Traders pushed the dollar to a new low against the euro, $1.37, sensing the Federal Reserve would have to cut rates. But with the U.S. creating 132,000 jobs in June and oil prices stirring inflation fears, Fed chief Ben Bernanke gave no hint of a cut in a July 10 speech.

See "Bear Stearns' Collateral Damage" and "Consumers: Tightening the Purse Strings?"

Just as News Corp. (NWS) Chairman Rupert Murdoch appears to have his $5 billion acquisition of Dow Jones (DJ) lined up, he seems to be building a war chest for more deals. His 41%-owned Gemstar-TV Guide International (GMST), valued at around $3 billion, is on the block. He's hired Allen & Co. to sell nine Fox (NWS) affiliates, which could be worth $1 billion. And he's said to be sounding out private equity investors to raise $400 million to expand his Russian billboard company.

He's known as a turnaround ace, but Michael Capellas is getting a chance to run a company that's not in trouble. Private equity giant Kohlberg Kravis Roberts on July 10 tapped the ex-CEO of MCI and Compaq Computer (HPQ) to steer First Data (FDC) when KKR's $26 billion buyout of the transaction processor takes effect later this year. Says Capellas: "It's the healthiest business I'll have run."

See "Capellas to Captain First Data"

Petroleum prices have surged to $72 per barrel, and they could well be headed upward. Refining bottlenecks in the U.S. have helped power the rise, with gasoline inventories at near-record lows. Crude supplies look less pinched, but unrest in Nigeria is keeping traders awake nights. In the background loom longer-term concerns. The Paris watchdog International Energy Agency warned on July 9 of a "supply crunch" beyond 2010, partly because OPEC will have scant spare capacity past 2012.

It took more than a century, but two scrappy futures exchanges—the Chicago Board of Trade and the Chicago Mercantile Exchange (CME)—on July 9 finally agreed to merge in an $11.9 billion deal. CME Group, as the new outfit will be called, will rule the futures world. The Merc had to hike its original $8 billion cash-and-stock offer for the CBOT to counter bids by upstart IntercontinentalExchange (ICE).

UBS (UBS) plays rough. CEO Peter Wuffli was ousted on July 6 after setbacks at the bank including a humdrum first quarter and the decision to shut down an internal hedge fund, Dillon Read Capital Management, following $120 million of losses in the U.S. subprime market. Taking Wuffli's place: 42-year-old Marcel Rohner, deputy CEO. The other big winner: Chairman Marcel Ospel, who was granted a new three-year term.

See "UBS: After Wuffli, What? "

French giant Danone, pushing into higher-margin specialty products, will spend $16.8 billion to buy Europe's biggest baby-food maker, Royal Numico. Danone shares slid almost 5% after the deal was announced on July 9, reflecting fears that it is overpaying for the Dutch company. But Danone itself has long been seen as a takeover target, and bulking up could help fend off potential buyers such as PepsiCo (PEP).

Like a damsel in distress, Alcan (AL) may have found a knightly rescuer. Trying to thwart a $27.5 billion takeover by Alcoa (AA), the Montreal aluminum maker disclosed in a July 9 filing that it's in confidential talks with another buyer. Alcan didn't name names, but analysts figure it's one of two mining giants, Rio Tinto (RTP) or BHP Billiton (BHP).

Who's got more game? With Nintendo's (NTDOY) Wii winning momentum in the $30 billion game biz by capturing casual gamers in record numbers, both Microsoft (MSFT) and Sony (SNE) are picking up the pace. Microsoft on July 10 announced a slew of family-friendly games, hoping to restore some luster to its Xbox 360 a week after saying defects would lead to a charge of more than $1 billion to cover potential repairs. Sony on July 9 cut the price of its high-end PlayStation 3 console by $100, to $499, and geared up to release its own slate of Wii-like games.

See "Sony's Surprising PS3 Price Cut" and "Microsoft's Billion-Dollar Fix"

General Electric (GE) and Abbott Labs (ABT) on July 11 called off their January deal under which GE would have paid $8.13 billion for much of Abbott's diagnostics business. While the buy would have expanded GE's reach in the hospital-equipment market, the two couldn't agree on final terms.

Beijing on July 10 reported yet another record monthly trade surplus for June. The June surplus soared more than 85% over the previous year, to $26.9 billion. Since the U.S. rang up a trade deficit of $232.5 billion with China last year, expect members of Congress to cry more loudly for tariffs and demand that Beijing let the yuan float more freely.

Could that be schadenfreude washing over boardrooms and Wall Street? On July 6 securities lawyer David Bershad pleaded guilty as part of a seven-year federal investigation of powerhouse plaintiff firm Milberg Weiss & Bershad. The plea deal and 20-count indictment filed in U.S. District Court in Los Angeles claim that Bershad helped manage a cash stash the firm used to pay some $11 million in kickbacks to three men. The three served as lead plaintiffs in scores of class actions brought against companies with falling share prices. One of them, Steven Cooperman, pleaded guilty on July 11 to accepting $6.1 million in kickbacks. Bershad will forfeit $7.75 million in gains and pay up to $250,000 in fines. His deal with prosecutors puts more heat on name partner Melvyn Weiss and on William Lerach, who split with the firm in 2004. On July 9, Milberg Weiss & Bershad dropped "Bershad" from the nameplate. Founding partner Lawrence Milberg died in 1989.


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