Oil Plus Food Plus Floods Equals Trouble
Central bankers spooked by costly oil have a new bugaboo: rain falling in the wrong breadbaskets (soppy Iowa instead of parched Australia). On June 18 severe floods in the Midwest sent corn for July delivery to $7.46 a bushel on the Chicago Board of Trade, a record for the contract. And the oil-food double whammy is putting pressure on prices all over. Eurostat announced on June 16 that inflation in the 15-nation euro zone hit 3.7% for the year ended in May, raising the likelihood that the European Central Bank will raise its key short-term rate in July. But hiking the cost of money could harm slow-growing countries like Italy and Spain. Ditto for the U.S., where inflation is uncomfortably high (4.2% for the year ended in May). Still, a June 17 report showed that U.S. housing starts fell in May to the lowest level since March, 1991.
AIG Makes a Change
Yet another financial-services chief departs. On June 15 the board of insurer American International Group (AIG) replaced CEO Martin Sullivan with Robert Willumstad. But investors, desperate for change since AIG has racked up $13 billion in losses in the past two quarters, were far from wowed. Willumstad, 62, has been AIG's chairman for nearly two years after leaving as president and COO of Citigroup (C) in July, 2005, so he was present for those big losses. AIG stock fell 7% in three days.
The Saudi Spigot
A week before the June 22 powwow it called to discuss oil prices gone wild, Saudi Arabia told U.N. Secretary-General Ban Ki-moon that it plans another production boost. The Saudis, who hiked output by 300,000 barrels a day in June, now propose to add 200,000 a day in July, for a total output of 9.7 million barrels a day. The kingdom responding to political pressure from the U.S. and Asian customers, but the move seems unlikely to bring down prices much from the $130-plus level. In light of that, President George W. Bush on June 18 said it's time for Congress to end the federal ban on offshore oil drilling. Meanwhile, Big Oil may soon sign contracts to operate in Iraq for the first time since the fall of Saddam.
On the heels of Lehman Brothers (LEH) earnings disaster last week, Wall Street fearfully anticipated results from Goldman Sachs (GS) and Morgan Stanley (MS). But on June 17, Goldman posted profits of $2.09 billion, down 11% but handily topping analyst estimates. Morgan, down 57%, also beat expectations, with earnings of $1.03 billion. That's where the similarities ended. Goldman traders capitalized on soaring commodities prices. Morgan made contrarian bets against commodities—and paid for them. Its profits were boosted by asset sales.
See "Goldman's Profit Prowess"
The aerospace giant is back in the dogfight. On June 18 a federal arbiter sustained Boeing's (BA) formal complaint that the Air Force unfairly chose to order 179 refueling tankers from Northrop Grumman (NOC) and European Aeronautic Defence & Space. That revives Boeing's hopes to land the $35 billion contract. Now the Air Force must ponder whether to hold a new competition, giving Boeing another chance to bid—or divvy up the deal among all three companies. And Boeing's supporters in Congress can try to use the findings to block tanker financing or force the Air Force to change planes.
Bear Stearns Fallout
Ex-Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin may be the first Wall Street executives to face criminal charges from the mortgage market meltdown. As of press time, a federal grand jury in Brooklyn, N.Y., was nearing a decision to indict the two on charges stemming from last summer's collapse of two Bear funds. In early 2007 the managers told investors that the funds were performing well even as the pair scrambled to keep them afloat.
See "Indictment Looms for Bear Fund Managers"
Satellite Green Light?
The static over a planned merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) may finally be clearing. FCC Chairman Kevin Martin on June 16 said he would approve the deal if the companies make eight concessions. Among them: allowing anyone to make satellite radio gear and opening some channels to noncommercial and minority-owned broadcasters. Martin needs at least two other commissioners to vote for the deal, and sources at the FCC say he hasn't yet lined up those votes.
See "Sirius-XM Deal: The Pace Quickens"
The Battle for Bud
It looks as if Anheuser-Busch (BUD) won't go gently into the sudsy embrace of Belgian giant InBev, which made a $46 billion bid for the maker of Budweiser on June 10. Anheuser executives met with Grupo Modelo, the Mexican brewer of Corona beer, to discuss buying the 49.8% of the company it doesn't already own as a deterrent to InBev. But InBev CEO Carlos Brito has also met with Modelo to head off such a deal, and on June 17 he visited Washington in an effort to soothe lawmakers worried about Budweiser—right up there with Mom and apple pie—falling into foreign hands.
Finance in China
Global investors hungry for a bigger slice of China's financial-services market may soon have something to chew on. Beijing is pondering raising the cap on foreign participation in joint trusts to 49%, from the 20% to 25% set last year. Barclays (BCS), National Australia Bank, and Ashmore Investment Management have just won approval to establish joint trusts in partnership with Chinese firms. Morgan Stanley and Royal Bank of Scotland (RBS) are negotiating. Through a trust, investors can indirectly hold controlling stakes in a wide assortment of financial outfits. (Caijing Magazine)
Will U.S. Jobs Come Home?
The economics of trade are starting to tilt back in favor of American manufacturing. The dollar has plunged, Chinese wages are soaring, and transpacific shipping rates are taking off thanks to the spike in oil prices. Some U.S. industries already are showing more life—but a mass repatriation of factory jobs from China seems unlikely anytime soon.
Hearst's CEO Falls
"Irreconciliable differences." That's how Hearst explained the surprise resignation of CEO Victor Ganzi on June 18. Insiders say the board tired of Ganzi's tendency to make minority investments in new ventures rather than bigger bets on outright ownership. Last year, Hearst threw off well above $1.5 billion in cash flow on revenues topping $8 billion. Ganzi was only Hearst's sixth CEO, and he will be replaced temporarily by his predecessor, Frank Bennack Jr., vice-chairman of the board. Bennack's nearly 24-year tenure as CEO ended in 2002.
See "Hearst CEO Steps Down"
Forget About Bidding
You think eBay (EBAY), you think auctions, right? Not necessarily. The convenience of one-click shopping and the plethora of price information online are luring shoppers away from auctions. So instead of focusing on bidding wars for one-of-a-kind items, eBay is fostering the sale of goodies in sealed boxes for set prices. Will the retail strategy work for the site whose raison d'être was online auctions?
DreamWork's New Pal
Who ever imagined that Bollywood money might free Steven Spielberg and David Geffen from their chains? Their DreamWorks SKG studio has long had a thorny relationship with its owner, Viacom's (VIA) Paramount Pictures, but The Wall Street Journal said on June 18 that Reliance ADA Group, one of India's largest entertainment conglomerates, may kick in up to $600 million in capital, which would allow DreamWorks to leave Paramount later this year.
Ireland: Thumbs Down
The European Union's reform plans lie in shambles after 53% of Irish voters torpedoed the Lisbon Treaty on June 13, fearing it would hand Brussels too much power. The treaty aims to streamline the EU's inefficient decision-making process, among other things naming a full-time president. Ireland is the only one of 27 EU members to put the treaty to a vote, but consent has to be unanimous. European leaders will convene on June 19-20 to strategize.
No Trial for Milberg
The shrinking shareholder law firm with a shrinking name (it was once Milberg Weiss Bershad Hynes & Lerach) now has a shrinking bank account. On June 17, Milberg agreed to pay $75 million to avoid a criminal trial on charges it paid kickbacks to lead plaintiffs in securities class actions. The deal caps a seven-year investigation that produced guilty pleas from name partners William Lerach and Melvyn Weiss, both of whom were sentenced to prison. By avoiding a possible conviction at trial, Milberg can stay in business.
Higher Health Costs
It's a widespread assumption—health-care costs always go up. Yet according to a new report, the rate of growth in U.S. medical outlays by companies and workers is set to level off after falling for five years. The study predicts that costs will climb by 9.8% in 2008 and 9.6% in 2009. (PricewaterhouseCoopers)
A Handshake in Asia
China and Japan, at loggerheads for years over gas fields in a disputed region of the East China Sea, have reached a meeting of the minds. On June 18, Beijing and Tokyo said they'll co-develop one field and jointly explore for others. Sino-Japanese ties have been on the mend since Junichiro Koizumi, whom Chinese leaders distrusted for his visits to a shrine memorializing war criminals, stepped down as Prime Minister in 2006. Chinese President Hu Jintao traveled to Tokyo in May, the first such visit in a decade.