Busy week. Here are the top headlines in business.
10) Art of Record: Auction houses Christie's and Sotheby's took in a record $1billion in proceeds from two weeks of art auctions. Christie's auction on Thursday set new records for nineteen artists and capped a new record for Andy Warhol's work whose 1972 portrait of China's Chairman Mao sold for $17.4 million. Two other portraits of classic Warhol subjects --Marilyn Monroe and Jackie Kennedy -- sold for a combined $30 million. Read the story.
9) Oil Down: Oil prices fell 4% to their lowest point in over a year. The predicted mild winter has led traders to sell off oil. Thursday's Energy Department report also showed that the U.S.'s inventory of natural gas had grown again (pushing prices down). The oil producer's cartel, Opec, is expected to further cut output but it won't have much effect as the slowing U.S. economy has weakened demand. Oil fell as low as $2.50 -- dropping to $56.26 a barrel.
8) Delta Takeover: US Airways Group, Inc. (NYSE:LCC) launched an $8 billion hostile takeover bid for bankrupt Delta Air Lines, Inc. US Airways' plan includes cutting the combined airlines' capacity by 10% -- this could cause prices to rise nationally. The acquisition faces major challenges because Delta's chief executive, Gerald Grinstein, is against the merger and wants Delta to emerge from Chapter 11 bankruptcy protection as a "stand-alone carrier." If the merger goes through, an airline consolidation trend could be sparked. Read the story.
7) The Italian Touch: Italian locals "Cash in" on the Tom Cruise and Katie Holmes wedding. The marriage, expected to take place in the town of Bracciano, 25 miles outside of Rome, at the 15th century Castello Odescalchi, has sparked widespread entrepreneurialism. A private terrace overlooking the route into the castle and the parking lot was offered to a TV news channel for $120,000 while the town's City Hall is renting windows of a nearby building that view the castle entrance for $1,300. Holmes and Cruise have been engaged since June 2005 and have a 7-month-old daughter Suri. Read the story.
6) High Mark: The S&P 500 closed at a 6-year high and the Dow hit a record 12,325.91. The Standard & Poor's 500 index hit a six-year high spurred on by a surge in merger & acquisition activity and upside profits at major retailers such as Wal-Mart and Target exceeded forecasts and the Fed suggested that interest rates will stay unchanged. The S&P 500 hit a trading high of 1,394.49, the first time it has surpassed 1,394 since November 2000. Stocks are up for the seventh week out of the past eight. However, the Nasdaq index remains more than 50 percent below the record it reached in 2000.
5) Money Maker: Halliburton Co.'s subsidiary KBR -- the center of controversy for its role in reconstructing Iraq -- sees its IPO shares soar. KBR's shares rose to $20.80 from the initial listing price of $17 on the NYSE. KBR is the subject of a U.S. probe for alleged bribery in the 1990s. It has also been accused of overcharging the U.S. government in Iraq and failing to provide adequate information. Rental car company, Hertz, also went public this week but the shares rose less 1% on its first day of trading. Read the story.
4) Dell Down: Shares in computer giant Dell Inc. (NASDAQ:DELL) fell more than 4% after delaying the publication of its latest quarterly earnings results. Dell said that 3rd quarter earnings -- which had been scheduled for Thursday -- -would be published later in the month. The delay was blamed on the "level of complexity" in the preparation of its preliminary results. Dell said the delay of its earnings release was unrelated to a current probe being carried out by the SEC. Meanwhile, Dell's rival, Hewlett-Packard Company (NYSE:HPQ), reported a quadrupling of net profit. Read the story.
3) The Reader's Digest Association, Inc. (NYSE: RDA) is sold for $1.6 billion. Published in 21 languages, Reader's Digest has a circulation of 18 million and an estimated 80 million readers. However, it is seen as a publication for older readers -- not the 18 to 49 year-olds sought by advertisers. Reader's Digest also does direct marketing and book sales which have been battling against online retailers such as Amazon.com. Ripplewood Holdings is leading the investment group which offered $17 a share -- a relatively small premium for such a famous brand name. Read the story.
2) Conservative Buy: Clear Channel Communications, Inc. (NYSE:CCU) is acquired for $18.7 billion. Clear Channel, which owns and operates more than 1,200 radio stations, agreed to be bought by Bain Capital and Thomas H Lee Partners for $37.60 a share. Clear Channel also owns Premiere Radio Networks -- which syndicates radio shows such as Rush Limbaugh and Ryan Seacrest to more than 5,000 stations across the U.S. Clear Channel was a small San Antonio-based 36-station radio chain until deregulation in 1996 spurred a massive spending spree. Read the story.
1) Friedman Passes: Nobel prize-winning U.S. economist Milton Friedman died. Mr. Friedman, 94, coined the phrase "There's no such thing as a free lunch." He was awarded the Nobel Prize for economics in 1976. His ideas gained popularity in the 1980s when they influenced the policies of Margaret Thatcher and Ronald Reagan. Mr. Friedman believed that the supply of money was the key factor in determining economic growth and the rate of inflation. Read the story.
Hilary Kramer is a financial editor and money coach for AOL and an authority on investing. Visit her at www.hilarykramer.com
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Reader Comments (Page 1 of 1)
11-17-2006 @ 10:25PM
~rick said...
Falling oils price, hints of lower interest rates, and new Dow highs...Life is good!~rick
11-18-2006 @ 2:56PM
Kip Ryan said...
Hillary Kramer:
Here's a story you should research.
The NYMEX IPO was a complete fraud, in my opinion, and this was completely missed by the pundits at CNBC and elsewhere, who were busy falling all over themselves about how great an event this was.
The total number of shares offered was approximately 6.5 million at a price of 59. The first trade when the stock opened was a block trade of 3.7 million shares at a price of 120.
So what happened? It's impossible to know for sure, but here's an educated guess. The lead underwriters (JP Morgan and Merrill Lynch) kept the shares for themselves (i.e., purchased them from NYMEX and selling shareholders at the offer price, less their 6% underwriting commission (equals $55.40/share), and then turned around and sold them in a block to a secondary purchaser at the first "public" offering price of $120/share.
They can do this because it was a firm commitment underwriting (as opposed to a best efforts underwriting). They are obligated to buy all the shares at the offer price, less their commission. So what they do is circle around and line up investors for this overheated offering, they buy them and then turn around and unload them to a pre-arranged buyer (or possibly there were two or three bidders for this initial block of shares). The likely buyer could have been a trading desk at one of the major investment banks or a hedge fund. This buyer, in turn, would have already lined up dozens of smaller investors, and they would frantically sell the blocks of shares (in 10k increments or so) to retail investors (that's you and me) at prices between 125 and 150.
So the lead underwriters made more on the offering (on these shares) than NYMEX did. They pocketed the difference between $55.40 and $120 on 3.7 million shares, and they did it with virtually no risk. The IPO was simply a marketing vehicle to generate interest and line up thousands of retail buyers so they could unload the shares at a huge profit. The secondary buyer of this block of stock took a bigger risk. That buyer bought at 120 and then frantically unloaded the shares (probably by day's end) for a smaller slice of profits equal to $10-20/share.
So instead of allocating the shares to retail investors' accounts and letting them have the benefit of the opening day pop in the price, the underwriters took the lion's share of the profits for themselves.
A good price target for the stock is anywhere between $59/share and possibly $72/share. The company earned approximately $1.35/share through 9 months in '06. It's on track to earn $1.80/share. At a P/E of 30-40, you get a price of $54 to $72. At $135, the stock is selling for 75 times earnings, and already has a market cap that is bigger than the NYSE and 70% of the CME's market cap. So the upside (in the near term) does not really exist.
The underwriters are allowed to engage in market stabilization (by buying shares in the market) for a period of time after the IPO (to keep the price level). Once they stop supporting the price, and once the lock-up periods expire with respect to the remaining 93% of the stock owned by NYMEX members (6, 12, 18 months), I expect the stock will drift lower (probably below 100). There's not going to be a merger for at least a year. To qualify for a stock for stock tax free exchange, I believe that the company has to be public for a year (i.e., you can't avoid tax on the sale of a company by going public and turning around and swapping stock for stock in a short period of time thereafter).
Some might argue that the u/w's did the NYMEX a favor by getting the price up to $120. (In a fair auction process with full participation of retail investors I think the price would have settled in the $85-90 range, where I expect it will be in six months). After all, the remaining 93% of the shares become that much more valuable. But the reality is that the u/w's received the profits, not the NYMEX; and when the lock-ups expire the price of the stock will have found its equilibrium at a lower price.
The NYMEX has a great business. It's a great stock. But it's not without risk. If energy prices stabilize, trading volumes may fall a bit. We've just had record years of trading volumes. And the ability of the exchange to raise prices is not unlimited. There is competition among the exchanges, and there are alternative electronic trading platforms. If prices get too high, traders will look for alternate trading platforms. For example, a group of investment banks has just announced that they will establish a new electronic exchange for European stocks. This is direct competition for Euronext, the LSE and Deutsch Bourse.
Did you see the faces of the two heads of the NYMEX just minutes after the IPO? Instead of being thrilled with the offering, they looked shell-shocked. They were realizing that they had just been had. They sold to the u/w's at $55 and watched them turn around and sell at 120. They also were panicked that they were going to have to generate profit numbers that would justify such a price (and their words in this regard showed real hesitation).
My point is ... this was not really a public offering. It was a private sale between NYMEX and JPMorgan and Merril Lynch, and then another private sale between the underwriters and the "retail distributor" of the shares (a trading desk or hedge fund). Finally, after two handoffs, the retail distributor of the shares sold the shares to the general public at a ridiculously inflated price (which essentially had been privately negotiated before trading even began).
My evidence for this ... the initial 3.7 million share block trade at the open ... and trading volume: when last I checked, volume was more than 19.5 million shares on a 6.5 million share float. Funny how this works out ... almost exactly 3 trades per available share.
If those brain surgeons at CNBC and elsewhere in the financial press want to do a real story, they should show a behind the scenes look at how "hot" IPO shares get allocated and sold and who makes the real money. They need to provide information that the general public can actually use, and not simply act as the unwitting "shills" for investment banks.
And what I really want to know is ... after their $240 million payday ... ($65/share profit on 3.7 million shares) ... where did the equity desks at JP Morgan and Merrill go to dinner last night ... and how many thousand-dollar bottles of wine did they order?
Anyway, this is one person's opinion. Best of luck.