Dark Days for Equity Investors
It's official: The bears are loose on the Street. The Dow Jones industrial average briefly dipped into bear market territory, down 20% from its October high, as the second quarter came to an end, and closed there on July 2. The Nasdaq was also off 20% and the S&P 500 came perilously close. June was particularly brutal, with the Dow posting its worst performance in that month since the Great Depression. It wasn't too long ago that many market pundits were predicting a second-half bounce for stocks. Some of those prognosticators are back-pedaling fast, humbled by the continuing fallout from the credit crunch, mounting job losses, and a still-sickly housing sector. And let's not forget those irksome oil prices, rocketing through the $140 barrier and closing at $143.57 on July 2.
Join the Club, Chrysler
On June 30 the carmaker copied its Detroit rivals in hitting the brakes as economic potholes continued to rattle the industry. Chrysler will chop production in two St. Louis plants, closing a minivan factory and halting a line that makes the Dodge Ram pickup. It's easy to see why. Chrysler sales fell 36% in June, Ford's (F) 28%, and General Motors (GM) 18%. GM's stock got plastered on July 2 after a Merrill Lynch (MER) analyst downgraded it from "buy" to "underperform" and said bankruptcy was "not impossible." The shares closed that day at 9.98, a 54-year low.
Swiss Bank Blues
Financial giant UBS (UBS) is still caught in an avalanche of bad news. A Miami judge on July 1 ordered the secretive bank to turn over the names of wealthy clients as part of a U.S. Justice Dept. investigation into a multimillion-dollar tax evasion scheme. On the same day, UBS announced plans to limit its chairman's powers, while four directors resigned in the wake of nearly $38 billion in subprime-related writedowns.
eBay: Zapped in France
Could this decision play havoc with eBay's (EBAY) business model? A French court on June 30 ordered the online marketplace to fork over more than $61 million to Paris luxury giant LVMH for allowing fake Louis Vuitton and Christian Dior items to be sold on its site. EBay says it will appeal the ruling, which also calls for $78,000 a day in fines if it continues to permit online sales of LVMH (LVMVY) perfume brands such as Dior and Givenchy. LVMH wants the scents sold only by approved retailers.
See "eBay Gets Buffeted in Europe"
The world's biggest retailer tends to rack up big numbers, and here's another one: 2 million labor-law violations. A Minnesota judge on June 30 ruled that Wal-Mart (WMT)forced employees to work off the clock and to cut short their breaks, and he tallied 2 million separate instances. The judge granted $6.5 million in back pay, but more important, he ordered a jury trial in October to ponder punitive damages. Since each violation carries a possible penalty of $1,000, the total theoretically could come to a cool $2 billion, though it probably won't. Wal-Mart says it may appeal its third major loss in a wage-related class action. Separately, it launched a new logo, dropping the hyphen and adding a yellow starburst, as part of a bid to shed its stodgy image.
See "Wal-Mart's Forthcoming Logo Makeover: A Good Move?"
India: What Happened?
Suddenly the country has joined the global wounded. After years of 9% growth, surging profits, and a stock market that levitated 50% last year, India is suffering 11.4% inflation, fat government deficits, and rising rates. Foreign investment is fleeing, the rupee is plunging, and stocks are down more than 40% from the year's highs. Most forecasts see growth slowing to 7%—a big drop for a nation that needs to accelerate, not slow down. Has the glorious growth story come to an end?
See "India's Economy Hits the Wall"
Kent Is It at Coke
As a young Coca-Cola (KO) executive, Muhtar Kent was known for his ingenuity. When he was head of operations in his native Turkey, Kent was negotiating to buy an independent bottler—but got word that a rival had swooped in. Learning the bottler was flying to London, Kent bought a ticket, sidled up to the man on the flight—and had a handshake deal before the plane landed. That moxie paid off: On July 1, in a long-telegraphed succession, the 55-year-old son of a Turkish diplomat took the reins from Neville Isdell as CEO.
Last Laugh for Grasso
Start spending, Dick. A week after New York's top court tossed four of six counts against Richard Grasso, a different state appellate court ruled on July 1 he can keep every penny of the $187.5 million he pocketed during his eight years as chief of the New York Stock Exchange (NYX). The decision amounts to a dramatic reversal of fortune for Grasso, who was pilloried as a symbol of piggish executive pay. Former New York Attorney General Eliot Spitzer sued him in 2004, seeking return of more than $100 million in what he alleged was too-rich compensation for the head of a nonprofit. But the NYSE has since gone public and for-profit, putting such claims beyond the reach of the attorney general, said the court.
Baby boomers are retiring at the rate of 10,000 every 24 hours, a new and lucrative market for financial advisers. Within two decades, a record $17 trillion will change hands from corporate pension funds and 401(k) retirement plans into the hands of retirees. Yet the experience of boomers who began collecting retirement checks in the 1990s shows that many are naive about how to manage withdrawal rates. Sometimes they are misled by advice given at what are billed as "free financial seminars" promising high returns and fat withdrawals. Regulators who police the brokerage industry say such claims are often fraudulent—and they're beginning to crack down.
$1 Trillion in Red Ink?
"Dear President Obama: You have inherited a mess." So begins bond guru Bill Gross in his latest newsletter to his PIMCO fund investors. Addressing Senator Barack Obama as if he were President-elect, Gross lays out some math predicting that the cost of health-care reform, a housing rescue, and desperately needed fiscal stimulus will leave Obama presiding over the nation's first trillion-dollar budget deficit—even after undoing some of President George W. Bush's tax cuts for the wealthy. (pimco.com)
Bruised by a bribery scandal and laboring under bloated costs, Siemens (SI) seems determined to work itself back into shape. On June 28, The Wall Street Journal said the company plans to lose 4% of its workforce, or 17,200 jobs, most of them white-collar staff who'll be offered packages to leave. Such management-slashing makes sense partly because CEO Peter Löscher has lumped Siemens' diverse businesses into three divisions and reduced its 70 regional groups to 20.
It must leave a bitter aftertaste in Howard Schultz's mouth. Starbucks (SBUX) on July 1 said it plans to shutter some 600 U.S. stores where profits are just too watery. The move, which could eliminate as many as 12,000 jobs, is the toughest one so far by founder and reinstated CEO Schultz to perk up the sluggish stock. Others include better espresso machines, a new Web site, and smoothies. Consumers looking for a Starbucks latte will have to find one of the chain's 10,834 other U.S. storefronts.
A Con Man Surrenders
Apparently, tooling around in an RV just wasn't that much fun. Hedge fund crook Samuel Israel III, who faked his death and fled on the eve of his incarceration, surrendered to federal authorities on July 2 after a month on the lam. The former Bayou Group manager took a powder on June 9, the day he was supposed to start serving a 20-year prison sentence on charges he defrauded investors in the $400 million hedge fund. Israel's lady friend, Debra Ryan, who was charged on June 19 with helping him flee, told authorities she helped him load his stuff into an RV, according to court filings. Israel gave up the chase in Southwick, Mass.
You wouldn't think these announcements would exactly cause investors to heave a sigh of relief, but they did. UnitedHealth Group (UNH) on July 2 said it was cutting its 2008 earnings estimate by 16%, to $2.95 to $3.05 a share. The managed care provider is also lopping 4,000 jobs and still faces obstacles to raising its premiums for employee health plans. On top of that, it's coughing up $912 million to settle two class actions related to backdating of stock options. So why did the stock tick up at first, before closing 2% down? The removal of litigation uncertainty is a big plus, and the low valuation now looks like a buying opportunity.
See "Little Relief for UnitedHealth"
Also-Rans from China
Chinese carmakers aren't anywhere near ready to join the race for global auto markets. True, China over the past decade has stormed past Germany and Japan to become the world's No. 2 car producer behind the U.S. But most of that growth has come at home. Quality problems and poor marketing have kept the Chinese in the slow lane abroad, and that's not likely to change soon. (The McKinsey Quarterly)
Suspense in Hollywood
Just hours before their contract with TV and film actors was to expire on June 30, the studios submitted a 43-page "final offer" featuring the same terms—including residual hikes for online content—that writers and directors had already O.K.'d. With stars like George Clooney pushing to put off a strike, the Screen Actors Guild said it would ponder the proposal. It will be tougher to strike if the smaller American Federation of Television & Radio Artists, whose members include one-third of the SAG roster, approves a similar deal in a vote expected on July 8.
A Future for Coal?
Pumping massive amounts of carbon dioxide emissions into the ground doesn't sound like a great idea, but it may hold the key to the coal-fired power plants of the future. This week, Continental Europe's first "carbon sequestration" experiment will begin at a plant outside Berlin built by energy giant Vattenfall. The big questions are whether the technique will work—and whether it's safe, because leaks could prove deadly. (spiegel.de)
Israel and Election 2008
It's not just Americans who have a lot riding on the U.S. Presidential race. Israeli investors, too, have their eyes trained on the contest between Senators Barack Obama and John McCain, reports BusinessWeek Israel in its June 26- July 10 edition. Because of the political and economic ties between the two countries, their stock markets tend to move in tandem, and dual-listed stocks account for one-third of the weighting of the Tel Aviv 25 index. Local traders say there's more upside potential for Israeli stocks from an Obama victory over the long term, since they see him as more likely to rein in military spending, which would cut the U.S. budget deficit and boost the dollar.