Eleven people, including a U.S. Secret Service informant, have been charged in connection with the hacking of nine major retailers and the theft and sale of more than 41 million credit and debit card numbers, the Justice Department announced Tuesday.
The data breach is believed to be the largest hacking and identity theft case ever prosecuted by the Department of Justice, which said the suspects were charged with conspiracy, computer intrusion, fraud and identity theft.
Three of those charged are U.S. citizens while the others are from places such as Estonia, Ukraine, Belarus and China.
The indictment returned Tuesday by a federal grand jury in Boston alleges that the suspects hacked into the wireless computer networks of retailers including TJX Cos., BJ's Wholesale Club, OfficeMax, Boston Market, Barnes & Noble, Sports Authority, Forever 21 and DSW and set up programs that captured card numbers, passwords and account information.
"They used sophisticated computer hacking techniques that would allow them to breach security systems and install programs that gathered enormous quantities of personal financial data, which they then allegedly either sold to others or used themselves," Attorney General Michael Mukasey said at a news conference. "And in total, they caused widespread losses by banks, retailers, and consumers."
Mukasey called the total dollar amount of the alleged theft "impossible to quantify at this point." U.S. Attorney Michael J. Sullivan said that while most of the victims were in the United States, officials still haven't identified all the people who had a card number stolen.
"I suspect that a lot of people are unaware that their identifying information has been compromised," he said.
Sullivan said the alleged thieves weren't computer geniuses, just opportunists who used a technique called "wardriving," which involved cruising through different areas with a laptop and looking for accessible wireless Internet signals. Once they located a vulnerable network, they installed so-called "sniffer programs" that captured credit and debit card numbers as they moved through a retailer's processing networks.
The information was stored on two servers in Ukraine and Latvia -- one with more than 25 million credit and debit card numbers and another with more than 16 million numbers, Sullivan said.
The heist was a black eye for retailers like TJX. The company initially disclosed the data breach in January 2007 but said a few months later that at least 45.7 million cards were exposed to possible fraud in a breach of its computer systems that began in July 2005. Court filings by some banks that sued TJX put the number of cards affected at more than 100 million, based on estimates by officials with Visa and MasterCard, who were deposed in the suit.
In May, TJX said it won support from MasterCard-issuing banks for a settlement that will pay them as much as $24 million to cover costs from the breach. A similar agreement reached last November with Visa-card issuing banks set aside as much as $40.9 million to help banks cover costs including replacing customers' payment cards and covering fraudulent charges.
According to the indictments unsealed Tuesday, three of the defendants are U.S. citizens, one is from Estonia, three are from Ukraine, two are from China and one is from Belarus. One individual is known only by an alias online, and his place of origin is unknown.
At a press briefing in San Jose, Calif., Homeland Security Secretary Michael Chertoff said the non-U.S. citizens under indictment were part of an international stolen credit and debit card ring.
The ring operated in mainly in Eastern Europe, the Phillipines, China and Thailand, and the alleged foreign conspirators remained outside the U.S., Chertoff said.
The thefts were criminal actions committed for the personal gain of the defendants, who investigators did not consider a national security threat, Chertoff said.
Still, he said, their alleged crimes demonstrated the weaknesses of cybersecurity in the U.S.
"Today's indictments are a reminder of a growing threat that every American faces in the 21st century -- the fact that each individual's greatest asset is their names, their identity," Chertoff said.
In the Boston indictment, the alleged ringleader Albert "Segvec" Gonzalez of Miami was charged with computer fraud, wire fraud, access device fraud, aggravated identity theft and conspiracy. Gonzalez, who is in custody in New York, faces a maximum penalty of life in prison if he is convicted of all the charges.
Gonzalez was a U.S. Secret Service informant who helped the agency take over a Web site being used to transmit stolen identifiers and stolen credit card numbers, U.S. Secret Service Director Mark Sullivan said at the news conference.
"That was the first time ever that a computer system was wiretapped," he said.
But he said the Secret Service later found out that Gonzalez had also been feeding criminals information about ongoing investigations -- even warning off at least one person.
"Obviously, we weren't happy that a person working for us as an informant was double-dealing," Mark Sullivan said.
Indictments were also unsealed Tuesday in San Diego against Maksym "Maksik" Yastremskiy of Kharkov, Ukraine, and Aleksandr "Jonny Hell" Suvorov of Sillamae, Estonia. They are charged with crimes related to the sale of the stolen credit card data.
Yastremskiy was arrested when he traveled to Turkey on vacation in July 2007. He is facing related Turkish charges, and U.S. officials said they have requested his extradition.
Justice Department officials said Suvorov was arrested on the San Diego charges by German officials in March when he traveled there on vacation. He is in custody awaiting the resolution of extradition proceedings.
Indictments against Hung-Ming Chiu and Zhi Zhi Wang, both of China, and a person known only by the online nickname "Delpiero" were also unsealed in San Diego.
A Justice Department spokeswoman said those three suspects, together with five others, are still at large. Officials did not give an arraignment date for Gonzalez.
In May, federal prosecutors in New York indicted Yastremskiy, Suvorov and Gonzalez on 27 counts of fraud and identity theft. The charges stemmed from allegations that they hacked into a national restaurant chain's computerized cash registers and stole credit card information from customers. Eleven Dave & Buster's restaurants around the United States suffered at least $600,000 in losses, prosecutors said.
It was not immediately possible to reach Yastremskiy, Suvorov and Gonzalez for comment and it was not clear if they have legal representation.
WebMD Health expects October meeting on HLTH deal
WebMD Health Corp., an online health information provider, said Tuesday it expects to hold shareholder meetings in October to seek approval for a merger with its parent company, a $2.31 billion deal proposed in February.
New York-based WebMD did not specify a meeting date in October, but said the company and its parent, HLTH Corp., expect to hold meetings that month assuming they secure timely clearance from the Securities and Exchange Commission. Those meetings would also serve as the annual shareholder meetings for both HLTN and WebMd.
The companies said they expect to jointly file a preliminary proxy statement and prospectus about the merger shortly after they make their quarterly filings following WebMD's second-quarter earnings, which were also announced Tuesday.
Elmwood Park, N.J.-based HLTH Corp. said in February that it would merge into its WebMD subsidiary in a cash-and-stock transaction. HLTH already owns a majority stake in WebMD, and plans to become part of WebMD under the deal.
The merger will eliminate both the controlling class of WebMD stock held by HLTH and WebMD's existing dual-class stock structure.
New York-based WebMD did not specify a meeting date in October, but said the company and its parent, HLTH Corp., expect to hold meetings that month assuming they secure timely clearance from the Securities and Exchange Commission. Those meetings would also serve as the annual shareholder meetings for both HLTN and WebMd.
The companies said they expect to jointly file a preliminary proxy statement and prospectus about the merger shortly after they make their quarterly filings following WebMD's second-quarter earnings, which were also announced Tuesday.
Elmwood Park, N.J.-based HLTH Corp. said in February that it would merge into its WebMD subsidiary in a cash-and-stock transaction. HLTH already owns a majority stake in WebMD, and plans to become part of WebMD under the deal.
The merger will eliminate both the controlling class of WebMD stock held by HLTH and WebMD's existing dual-class stock structure.
Sotheby's says 3Q to be stronger than last year
Sotheby's said Tuesday it expects a stronger third quarter than it did last year, but the auction house didn't make a specific forecast.
Bill Ruprecht, president and chief executive officer said sales in the fall, including works by artist Damien Hirst, and strong results from sales in July, have caused the company to expected the third quarter will be strong.
The company's Old Masters sales in London brought in $117.3 million, above the pre-sale estimate of $105.5 million, and 32 percent above the previous year's total.
The sale of more than 200 new works by Hirst is expected to bring in more than $130 million.
Analysts predict third quarter revenue of $118.3 million and a loss of 17 cents per share, according to a poll by Thomson Financial.
The company lost 33 cents a share in the third quarter in 2007 and posted revenue of $85 million.
Sotheby's has previously said third quarters and first quarters typically post losses because of the seasonal nature of the art auction market.
Bill Ruprecht, president and chief executive officer said sales in the fall, including works by artist Damien Hirst, and strong results from sales in July, have caused the company to expected the third quarter will be strong.
The company's Old Masters sales in London brought in $117.3 million, above the pre-sale estimate of $105.5 million, and 32 percent above the previous year's total.
The sale of more than 200 new works by Hirst is expected to bring in more than $130 million.
Analysts predict third quarter revenue of $118.3 million and a loss of 17 cents per share, according to a poll by Thomson Financial.
The company lost 33 cents a share in the third quarter in 2007 and posted revenue of $85 million.
Sotheby's has previously said third quarters and first quarters typically post losses because of the seasonal nature of the art auction market.
Caribou 2Q loss narrows as commercial sales grow
Caribou Coffee Co. said Thursday its second-quarter loss narrowed as sales to commercial, franchise and Internet customers grew more than 68 percent.
But coffeehouse sales for the nation's second-largest coffee chain slipped 3.5 percent to nearly $57.3 million from $59.3 million in the three-month period ending in June.
The Brooklyn Center, Minn.-based company said it lost $2.4 million, or 13 cents a share, in the quarter, compared to a loss of nearly $3.9 million, or 20 cents a share, in the same period last year.
Revenue rose 0.5 percent to $63.2 million from $62.8 million.
The results beat the expectations of analysts. According to a poll by Thomson Financial, analysts expected a loss of 23 cents per share on revenue of $60.7 million.
Same-store coffeehouse sales dropped 1.7 percent. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance because it measures growth at existing stores rather than newly opened ones.
The company said it spent $1.3 million, up from $100,000 in the same quarter last year, to close stores and dispose of assets. The quarter marked the closure of six underperforming company-owned stores.
The increase in sales in Caribou's "other" category was due to higher sales from new and existing commercial customers, royalties and product sales for the 36 franchises opened in the last 12 months.
The earnings announcement came after the market closed Tuesday. Caribou's shares rose 8 cents, or 4.8 percent, to close at $1.74 before the results were announced. The company's shares have traded in a 52-week range of $1.34 to $7.03.
But coffeehouse sales for the nation's second-largest coffee chain slipped 3.5 percent to nearly $57.3 million from $59.3 million in the three-month period ending in June.
The Brooklyn Center, Minn.-based company said it lost $2.4 million, or 13 cents a share, in the quarter, compared to a loss of nearly $3.9 million, or 20 cents a share, in the same period last year.
Revenue rose 0.5 percent to $63.2 million from $62.8 million.
The results beat the expectations of analysts. According to a poll by Thomson Financial, analysts expected a loss of 23 cents per share on revenue of $60.7 million.
Same-store coffeehouse sales dropped 1.7 percent. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance because it measures growth at existing stores rather than newly opened ones.
The company said it spent $1.3 million, up from $100,000 in the same quarter last year, to close stores and dispose of assets. The quarter marked the closure of six underperforming company-owned stores.
The increase in sales in Caribou's "other" category was due to higher sales from new and existing commercial customers, royalties and product sales for the 36 franchises opened in the last 12 months.
The earnings announcement came after the market closed Tuesday. Caribou's shares rose 8 cents, or 4.8 percent, to close at $1.74 before the results were announced. The company's shares have traded in a 52-week range of $1.34 to $7.03.
Massey Energy plans to raise $850 million
Coal mine operator Massey Energy said Tuesday it plans to raise at least $850 million in fresh capital as it continues an ambitious plan to increase production.
The bulk of the money would come from the sale of $600 million in convertible notes, Massey said. The Richmond, Va.-based company also plans to sell $250 million worth of common stock. Both would be underwritten by UBS Investment Bank and J.P. Morgan Securities Inc.
Separately, Massey said it is offering to repurchase $335 million worth of notes.
The twin announcements come as Massey tries to increase annual production about 25 percent to 50 million tons, from 39.5 million tons in 2007. The expansion plan announced last October is designed to take advantage of soaring international coal demand and prices.
The weak U.S. dollar, high ocean shipping rates and other factors have driven the price of Appalachian coal sold to electricity generators up to $140 a ton, from $45.60 a year ago. Surging international steel production has pushed the price of Appalachian metallurgical coal used to fire blast furnaces as high as $250 a ton, from about $90 a ton last year.
A document filed with the Securities and Exchange Commission Tuesday indicates only that funds from any impending offerings would be used for general corporate purposes such as acquisitions, repaying debt or working capital.
But Massey figures to have plenty of uses for the money.
Besides a series of new mines, Massey is planning to build as many as six additional processing plants and considering opening up reserves beyond its traditional base of West Virginia, eastern Kentucky and Virginia. New mines are possible in Pennsylvania and western Kentucky, Chief Executive Don Blankenship said last Friday. Moving into western Kentucky would put Massey into the Illinois Basin coalfields.
So far, Massey has made the expansion pay off.
Excluding a $245.3 million charge related to a contract lawsuit, the company earned $92 million, or $1.15 per share, in the second quarter. That easily beat the 76 cents per share expected by analysts polled by Thomson Financial.
Massey has increased pricing expectations to $84 to $92 per ton for 2009, from an earlier range of $65 to $74 per ton. For 2010, Massey is projecting a range of $115 to $132 per ton, up from $75 to $87 per ton.
The strong quarter prompted securities analysts to raise their assessments of Massey.
"We expect similarly strong operating performance in the near term given our expectation that positive coal industry fundamentals will continue," Standard & Poor's Rating Services said Monday when it revised its Massey outlook to stable and affirmed its credit rating. "As a result, the company's financial profile is likely to remain at a level we would consider to be strong for the current rating."
Shares of Massey fell 1 cent to $65.90 Tuesday.
The bulk of the money would come from the sale of $600 million in convertible notes, Massey said. The Richmond, Va.-based company also plans to sell $250 million worth of common stock. Both would be underwritten by UBS Investment Bank and J.P. Morgan Securities Inc.
Separately, Massey said it is offering to repurchase $335 million worth of notes.
The twin announcements come as Massey tries to increase annual production about 25 percent to 50 million tons, from 39.5 million tons in 2007. The expansion plan announced last October is designed to take advantage of soaring international coal demand and prices.
The weak U.S. dollar, high ocean shipping rates and other factors have driven the price of Appalachian coal sold to electricity generators up to $140 a ton, from $45.60 a year ago. Surging international steel production has pushed the price of Appalachian metallurgical coal used to fire blast furnaces as high as $250 a ton, from about $90 a ton last year.
A document filed with the Securities and Exchange Commission Tuesday indicates only that funds from any impending offerings would be used for general corporate purposes such as acquisitions, repaying debt or working capital.
But Massey figures to have plenty of uses for the money.
Besides a series of new mines, Massey is planning to build as many as six additional processing plants and considering opening up reserves beyond its traditional base of West Virginia, eastern Kentucky and Virginia. New mines are possible in Pennsylvania and western Kentucky, Chief Executive Don Blankenship said last Friday. Moving into western Kentucky would put Massey into the Illinois Basin coalfields.
So far, Massey has made the expansion pay off.
Excluding a $245.3 million charge related to a contract lawsuit, the company earned $92 million, or $1.15 per share, in the second quarter. That easily beat the 76 cents per share expected by analysts polled by Thomson Financial.
Massey has increased pricing expectations to $84 to $92 per ton for 2009, from an earlier range of $65 to $74 per ton. For 2010, Massey is projecting a range of $115 to $132 per ton, up from $75 to $87 per ton.
The strong quarter prompted securities analysts to raise their assessments of Massey.
"We expect similarly strong operating performance in the near term given our expectation that positive coal industry fundamentals will continue," Standard & Poor's Rating Services said Monday when it revised its Massey outlook to stable and affirmed its credit rating. "As a result, the company's financial profile is likely to remain at a level we would consider to be strong for the current rating."
Shares of Massey fell 1 cent to $65.90 Tuesday.
Internap Network Services cuts 2008 sales outlook
Internap Network Services Corp., which manages data centers and routes Internet traffic, on Tuesday reduced its full-year revenue guidance mostly below Wall Street's estimates.
Internap shares tumbled in after-hours trading, shedding $1.08, or 24.7 percent, to $3.30. They ended the regular session down 12 cents, or 2.7 percent, at $4.38.
The company said it now expects revenue growth of between 9 percent and 13 percent in 2008, down from a prior forecast of 13 percent to 18 percent revenue growth. Based on 2007 revenue of $235.9 million, the estimate implies revenue of between $257.1 million and $266.6 million.
Analysts polled by Thomson Financial, on average, anticipated total sales of $266.3 million.
The company lowered its guidance due to on-going softness in the content delivery network services market.
Internap shares tumbled in after-hours trading, shedding $1.08, or 24.7 percent, to $3.30. They ended the regular session down 12 cents, or 2.7 percent, at $4.38.
The company said it now expects revenue growth of between 9 percent and 13 percent in 2008, down from a prior forecast of 13 percent to 18 percent revenue growth. Based on 2007 revenue of $235.9 million, the estimate implies revenue of between $257.1 million and $266.6 million.
Analysts polled by Thomson Financial, on average, anticipated total sales of $266.3 million.
The company lowered its guidance due to on-going softness in the content delivery network services market.
Aircraft parts manufacturer TransDigm pares jobs in wake of acquisition; more cuts planned
Aircraft parts manufacturer TransDigm Group Inc. said Tuesday it eliminated 16 percent of the CEF Industries workforce to reduce costs after it acquired the engineering component supply company during the third quarter.
Cleveland-based TransDigm executives also told analysts during a conference call that they are looking at reducing the company's overall workforce by less than 10 percent before the end of September to reduce costs.
Contacted later Tuesday, company spokesman Sean Maroney said they did not disclose the specifc number of jobs eliminated but CEF had about 130 employees when it was acquired. TransDigm has about 2,200.
The development came as TransDigm said its fiscal third-quarter profit surged 63 percent on a growth in net sales, productivity improvement and lower interest expense. It reported net income of $36 million, or 72 cents per share, in the third quarter of fiscal 2008, compared with $22.1 million, or 45 cents per share, in the year-ago quarter.
TransDigm's stock closed up 69 cents at $38.57 a share in Tuesday trading.
Cleveland-based TransDigm executives also told analysts during a conference call that they are looking at reducing the company's overall workforce by less than 10 percent before the end of September to reduce costs.
Contacted later Tuesday, company spokesman Sean Maroney said they did not disclose the specifc number of jobs eliminated but CEF had about 130 employees when it was acquired. TransDigm has about 2,200.
The development came as TransDigm said its fiscal third-quarter profit surged 63 percent on a growth in net sales, productivity improvement and lower interest expense. It reported net income of $36 million, or 72 cents per share, in the third quarter of fiscal 2008, compared with $22.1 million, or 45 cents per share, in the year-ago quarter.
TransDigm's stock closed up 69 cents at $38.57 a share in Tuesday trading.
Sony to buy Bertelsmann's Sony BMG stake for $900M
Sony Corp. said Tuesday it is buying Bertelsmann AG out of their 50-50 music venture Sony BMG for $900 million, giving it full ownership of a roster of artists including Alicia Keys and the increased ability to leverage music over an array of electronic devices.
In a filing with the Securities and Exchange Commission, the Japanese electronics and entertainment giant said it would pay Bertelsmann $600 million and give it all of the $600 million in cash holdings of the joint venture.
Since privately owned Bertelsmann already owns $300 million of that sum, the deal is valued at $900 million.
The move enables Sony to move more quickly as the No. 2 player in a U.S. music industry challenged by online piracy and declining album sales. It also allows the company to cut costs and make a further attempt to integrate its content on cell phones and its popular game console, the PlayStation 3.
The U.S. stock market cheered the announcement, sending Sony shares up $1.37, or 3.7 percent, to close at $38.39, slightly ahead of the 2.9 percent gain in the Dow Jones industrial average.
Analysts said it remains unclear if Sony will be able to turn around the joint venture, which has seen revenues tumble but profits improve due to cost cutting.
In 2007, it posted 278 million euros ($429 million) in operating earnings before interest, depreciation and amortization as revenue declined 28 percent to 2.9 billion euros ($4.5 billion), according to Bertelsmann's annual report.
Cost cutting, including a 5 percent staff cut between 2006 and 2007, helped boost earnings slightly from a year earlier, even as physical media sales slumped and the company sold off its BMG Music Publishing unit, the report said.
Pali Research analyst Richard Greenfield said the acquisition valued Sony BMG, to be renamed Sony Music Entertainment Inc., at $1.8 billion, just more than four times its annual earnings power.
"It's already a pretty low valuation," Greenfield said. "It shows you how the music business remains a very questionable business over the next couple of years."
Sony has made moves recently to merge its content with its electronic goods.
In June, the company said it would deliver movies and TV shows to Bravia TVs via the Internet before the content is released on DVD, starting with "Hancock" from Sony Pictures.
The company also launched a digital download service for its PlayStation 3 game console last month, and has previously sold the console with a free Blu-ray copy of the James Bond movie, "Casino Royale."
It has a further opportunity to leverage its music properties with its "Singstar" competitive karaoke game on the PlayStation 3. Other companies have profited handsomely from such breakaway music games as "Guitar Hero" and "Rock Band."
Soleil-Hudson Square Research analyst Daniel Ernst said an attempt to use its music properties in the high-margin games business was a step in the right direction.
"That's the future," he said, adding it was unclear if the decision to take over Sony BMG would be fruitful. "It remains to be seen if it could be valuable or not."
Music industry players are expecting cutbacks although not as drastic as those implemented when the joint venture was formed in August 2004.
Music lawyer Gary Stiffelman, whose Los Angeles-based firm Ziffren, Brittenham represents Sony BMG artists Justin Timberlake, Alicia Keys, Celine Dion and Yo-Yo Ma, said he feared lesser known artists might be hurt.
"At the top we don't feel the artists are much affected," he said. "The artists that are likely to suffer are going to be the ones on the margin."
Once the deal, which is subject to regulatory approvals, is complete, Sony Music Entertainment Inc. will be comprised of several music labels, including Arista Records, Columbia Records, Epic Records, J Records, Jive Records, RCA Records and Zomba.
Its artists will include Celine Dion, Bruce Springsteen, Justin Timberlake and Usher, among others.
The deal is not subject to approval by Sony shareholders and is expected to close before the end of the year.
Bertelsmann will take over a limited amount of selected European music catalog assets from Sony BMG, which represents about $20 million, or less than 1 percent of Sony BMG's revenue last year.
Sony BMG is the second-largest music company in the United States with a roughly 25 percent share of the market, according to Nielsen SoundScan, which tracks sales of albums, singles and digital downloads.
Universal Music Group, a unit of Vivendi SA, is No. 1 with 31 percent, while Warner Music Group Corp. is third with 21 percent and EMI Group PLC is in fourth with about 9 percent.
In a filing with the Securities and Exchange Commission, the Japanese electronics and entertainment giant said it would pay Bertelsmann $600 million and give it all of the $600 million in cash holdings of the joint venture.
Since privately owned Bertelsmann already owns $300 million of that sum, the deal is valued at $900 million.
The move enables Sony to move more quickly as the No. 2 player in a U.S. music industry challenged by online piracy and declining album sales. It also allows the company to cut costs and make a further attempt to integrate its content on cell phones and its popular game console, the PlayStation 3.
The U.S. stock market cheered the announcement, sending Sony shares up $1.37, or 3.7 percent, to close at $38.39, slightly ahead of the 2.9 percent gain in the Dow Jones industrial average.
Analysts said it remains unclear if Sony will be able to turn around the joint venture, which has seen revenues tumble but profits improve due to cost cutting.
In 2007, it posted 278 million euros ($429 million) in operating earnings before interest, depreciation and amortization as revenue declined 28 percent to 2.9 billion euros ($4.5 billion), according to Bertelsmann's annual report.
Cost cutting, including a 5 percent staff cut between 2006 and 2007, helped boost earnings slightly from a year earlier, even as physical media sales slumped and the company sold off its BMG Music Publishing unit, the report said.
Pali Research analyst Richard Greenfield said the acquisition valued Sony BMG, to be renamed Sony Music Entertainment Inc., at $1.8 billion, just more than four times its annual earnings power.
"It's already a pretty low valuation," Greenfield said. "It shows you how the music business remains a very questionable business over the next couple of years."
Sony has made moves recently to merge its content with its electronic goods.
In June, the company said it would deliver movies and TV shows to Bravia TVs via the Internet before the content is released on DVD, starting with "Hancock" from Sony Pictures.
The company also launched a digital download service for its PlayStation 3 game console last month, and has previously sold the console with a free Blu-ray copy of the James Bond movie, "Casino Royale."
It has a further opportunity to leverage its music properties with its "Singstar" competitive karaoke game on the PlayStation 3. Other companies have profited handsomely from such breakaway music games as "Guitar Hero" and "Rock Band."
Soleil-Hudson Square Research analyst Daniel Ernst said an attempt to use its music properties in the high-margin games business was a step in the right direction.
"That's the future," he said, adding it was unclear if the decision to take over Sony BMG would be fruitful. "It remains to be seen if it could be valuable or not."
Music industry players are expecting cutbacks although not as drastic as those implemented when the joint venture was formed in August 2004.
Music lawyer Gary Stiffelman, whose Los Angeles-based firm Ziffren, Brittenham represents Sony BMG artists Justin Timberlake, Alicia Keys, Celine Dion and Yo-Yo Ma, said he feared lesser known artists might be hurt.
"At the top we don't feel the artists are much affected," he said. "The artists that are likely to suffer are going to be the ones on the margin."
Once the deal, which is subject to regulatory approvals, is complete, Sony Music Entertainment Inc. will be comprised of several music labels, including Arista Records, Columbia Records, Epic Records, J Records, Jive Records, RCA Records and Zomba.
Its artists will include Celine Dion, Bruce Springsteen, Justin Timberlake and Usher, among others.
The deal is not subject to approval by Sony shareholders and is expected to close before the end of the year.
Bertelsmann will take over a limited amount of selected European music catalog assets from Sony BMG, which represents about $20 million, or less than 1 percent of Sony BMG's revenue last year.
Sony BMG is the second-largest music company in the United States with a roughly 25 percent share of the market, according to Nielsen SoundScan, which tracks sales of albums, singles and digital downloads.
Universal Music Group, a unit of Vivendi SA, is No. 1 with 31 percent, while Warner Music Group Corp. is third with 21 percent and EMI Group PLC is in fourth with about 9 percent.
Cablevision may spin off business units
Nine months after shareholders rejected the Dolan family's latest bid to take Cablevision Systems Corp. private, the cable operator said Tuesday it is considering several options to boost its stock price including spinning off some of its diverse holdings.
Chief Executive James Dolan, who has long argued the market undervalues Cablevision, said in a statement the company is "actively looking" at options to close the gap between the company's operating performance and the market value of its shares.
Cablevision said its board has also authorized it to explore making stock buybacks or pay quarterly dividends. The Bethpage, N.Y.-based company is considered one of the strongest cable franchises in the country and also owns several cable networks and Madison Square Garden.
Cablevision's market capitalization stood at around $8.5 billion and it had about $12 billion in debt as of the end of June, according to Moody's Investors Service.
The Dolan family controls Cablevision through a special class of shares and has tried to take the company private several times in the past few years. Those attempts have all failed, some amid family fighting between James Dolan and his father Charles, who at one point aired family grievances on the pages of New York tabloids.
The Dolan's most recent offer was worth $36.26 per share, but that was rejected by shareholders as too low in October 2007. Cablevision shares rose $2.27, or 8.8 percent, to close at $28.2 Tuesday.
Cablevision did not say which of its businesses it would consider selling. Analysts consider its cable franchise, which serves the affluent New York area, one of the best-run in the business. The unit is the country's fifth-largest cable system and accounts for 75 percent of company revenue. It includes high-speed Internet and phone services that have helped beat back competition from phone companies and satellite TV operators.
"They are trying to get the value they think is reasonably in its various parts," said Russell Solomon, a senior vice president in corporate finance at Moody's Investors Service.
Solomon said the cable franchise alone is worth $15 billion to $18 billion, but that investors have grown skeptical of the Dolan entrepreneurial streak that has left the company with a diverse portfolio of sometimes unrelated properties. Cablevision most recently spent $650 million to buy Newsday, a newspaper based in Cablevision's home turf of Long Island.
Cablevision has also made several public missteps. In 2006, the company admitted having awarded improperly dated stock options to a board member who had died, and a year earlier, Charles and James Dolan had a public spat about the future of a satellite venture called Voom.
In addition to Madison Square Garden, Cablevision also owns the three sports teams that play there: basketball's New York Knicks and New York Liberty, and hockey's New York Rangers.
Potential suitors may have trouble placing a value on the Knicks or Rangers because Cablevision has intertwined contracts among the teams, the arena and the regional sports network that airs their games.
"It will be next to impossible to assess the franchise values unless you know what the contracts are that they work under," said Andrew Zimbalist, a sports economist with Smith College.
Assuming the arena and cable contracts were broken, Zimbalist said the Knicks would be worth about $500 million and the Rangers about $300 million. He estimated average revenue for a National Basketball Association team is $150 million.
Forbes magazine ranked the Knicks as the most valuable franchise in the NBA at $608 million in its 2007 rankings, which includes an estimate for the arena deal. Cablevision paid $300 million for the Knicks in 1997, the magazine said.
Robert Johnson, the billionaire founder of Black Entertainment Television, paid $300 million for the Charlotte Bobcats expansion team in 2003, one of the last NBA teams to be sold. Hockey's Edmonton Oilers, a storied franchise in a small media market, recently sold for about $200 million.
"There's a very special media market in New York for sports teams," Zimbalist said. "There is significant value over and above the average franchise because of the market."
The company also runs several cable television networks, including AMC, IFC and WE tv, as part of its Rainbow Media Holdings LLC unit. Solomon said that unit is probably worth at least $4 billion on its own. The company considered selling or spinning off Rainbow several years ago, but didn't reach a deal.
The market for popular cable networks has been hot in recent months, with General Electric's NBC Universal paying $3.5 billion for The Weather Channel and $875 million for women's programming channel Oxygen. Cablevision paid about $500 million for the independent film channel Sundance in June.
Cablevision's other entertainment venues include Radio City Music Hall and the Beacon Theater, both in New York, and the Chicago Theater.
The company has paid a special dividend in past, returning $3 billion, or $10 per share, in cash to shareholders in 2006. The company took on debt to fund that dividend, which may not be an option now because of the credit crisis.
"We believe that Cablevision's options will be limited by the credit markets," said Goldman Sachs analyst Ingrid Chung in a note to clients.
Solomon said it is more likely that Cablevision would pay a regular dividend on the order of about $100 million a year, or roughly 30 cents per share. That would put the company on equal footing with Comcast Corp., the largest cable operator, which reinstated its dividend earlier this year.
Chief Executive James Dolan, who has long argued the market undervalues Cablevision, said in a statement the company is "actively looking" at options to close the gap between the company's operating performance and the market value of its shares.
Cablevision said its board has also authorized it to explore making stock buybacks or pay quarterly dividends. The Bethpage, N.Y.-based company is considered one of the strongest cable franchises in the country and also owns several cable networks and Madison Square Garden.
Cablevision's market capitalization stood at around $8.5 billion and it had about $12 billion in debt as of the end of June, according to Moody's Investors Service.
The Dolan family controls Cablevision through a special class of shares and has tried to take the company private several times in the past few years. Those attempts have all failed, some amid family fighting between James Dolan and his father Charles, who at one point aired family grievances on the pages of New York tabloids.
The Dolan's most recent offer was worth $36.26 per share, but that was rejected by shareholders as too low in October 2007. Cablevision shares rose $2.27, or 8.8 percent, to close at $28.2 Tuesday.
Cablevision did not say which of its businesses it would consider selling. Analysts consider its cable franchise, which serves the affluent New York area, one of the best-run in the business. The unit is the country's fifth-largest cable system and accounts for 75 percent of company revenue. It includes high-speed Internet and phone services that have helped beat back competition from phone companies and satellite TV operators.
"They are trying to get the value they think is reasonably in its various parts," said Russell Solomon, a senior vice president in corporate finance at Moody's Investors Service.
Solomon said the cable franchise alone is worth $15 billion to $18 billion, but that investors have grown skeptical of the Dolan entrepreneurial streak that has left the company with a diverse portfolio of sometimes unrelated properties. Cablevision most recently spent $650 million to buy Newsday, a newspaper based in Cablevision's home turf of Long Island.
Cablevision has also made several public missteps. In 2006, the company admitted having awarded improperly dated stock options to a board member who had died, and a year earlier, Charles and James Dolan had a public spat about the future of a satellite venture called Voom.
In addition to Madison Square Garden, Cablevision also owns the three sports teams that play there: basketball's New York Knicks and New York Liberty, and hockey's New York Rangers.
Potential suitors may have trouble placing a value on the Knicks or Rangers because Cablevision has intertwined contracts among the teams, the arena and the regional sports network that airs their games.
"It will be next to impossible to assess the franchise values unless you know what the contracts are that they work under," said Andrew Zimbalist, a sports economist with Smith College.
Assuming the arena and cable contracts were broken, Zimbalist said the Knicks would be worth about $500 million and the Rangers about $300 million. He estimated average revenue for a National Basketball Association team is $150 million.
Forbes magazine ranked the Knicks as the most valuable franchise in the NBA at $608 million in its 2007 rankings, which includes an estimate for the arena deal. Cablevision paid $300 million for the Knicks in 1997, the magazine said.
Robert Johnson, the billionaire founder of Black Entertainment Television, paid $300 million for the Charlotte Bobcats expansion team in 2003, one of the last NBA teams to be sold. Hockey's Edmonton Oilers, a storied franchise in a small media market, recently sold for about $200 million.
"There's a very special media market in New York for sports teams," Zimbalist said. "There is significant value over and above the average franchise because of the market."
The company also runs several cable television networks, including AMC, IFC and WE tv, as part of its Rainbow Media Holdings LLC unit. Solomon said that unit is probably worth at least $4 billion on its own. The company considered selling or spinning off Rainbow several years ago, but didn't reach a deal.
The market for popular cable networks has been hot in recent months, with General Electric's NBC Universal paying $3.5 billion for The Weather Channel and $875 million for women's programming channel Oxygen. Cablevision paid about $500 million for the independent film channel Sundance in June.
Cablevision's other entertainment venues include Radio City Music Hall and the Beacon Theater, both in New York, and the Chicago Theater.
The company has paid a special dividend in past, returning $3 billion, or $10 per share, in cash to shareholders in 2006. The company took on debt to fund that dividend, which may not be an option now because of the credit crisis.
"We believe that Cablevision's options will be limited by the credit markets," said Goldman Sachs analyst Ingrid Chung in a note to clients.
Solomon said it is more likely that Cablevision would pay a regular dividend on the order of about $100 million a year, or roughly 30 cents per share. That would put the company on equal footing with Comcast Corp., the largest cable operator, which reinstated its dividend earlier this year.
Treasury hires Morgan Stanley on Fannie, Freddie
The Treasury Department said Tuesday it had hired investment firm Morgan Stanley to help the government assess the risks facing mortgage giants Fannie Mae and Freddie Mac.
For $95,000 to cover the company's expenses, Morgan Stanley will assess the state of the mortgage market and give the government a financial profile of the two firms. The two mortgage firms received a promise of support from the federal government as part of a sweeping housing rescue bill passed by Congress and signed into law by President Bush last week.
Treasury spokeswoman Brookly McLaughlin said the contract would help ensure the Treasury Department had good advice to decide how to support the two mortgage firms, which together own or guarantee half of all U.S. mortgages.
While Congress gave Treasury the authority to extend an unlimited amount of loans to the two companies, Treasury Secretary Henry Paulson has stressed that the new authority is a back-up measure that will not be used unless market conditions worsen.
In a statement, Morgan Stanley Chairman John Mack said his company would help the government evaluate "various alternatives for Fannie Mae and Freddie Mac."
"We are pleased to be able to offer our services to the government and look forward to working with Secretary Paulson and his team as they work to restore stability to the global capital markets and confidence in the U.S. housing market," Mack said.
The contract will run until Jan. 17, three days before the next president is sworn into office. McLaughlin said that was a consideration in determining how long the contract would last.
The administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed for a period covering the next 18 months. Congress ultimately adopted those proposals as part of a broader bill that also seeks to help keep 400,000 households from losing their homes to foreclosure.
Critics charged that the open-ended nature of the support for Fannie and Freddie would expose taxpayers to billions of dollars of potential losses. Paulson has insisted that the package needed to be structured in this way to boost financial markets' confidence as the companies deal with mounting losses from mortgages that have gone bad.
Paulson said this assurance was critical not only for investors in this country but around the world. Of the $5 trillion in debt and mortgage-backed securities Fannie and Freddie have issued, more than $3 trillion is held by U.S. financial institutions and over $1.5 trillion is held by foreign institutions.
For $95,000 to cover the company's expenses, Morgan Stanley will assess the state of the mortgage market and give the government a financial profile of the two firms. The two mortgage firms received a promise of support from the federal government as part of a sweeping housing rescue bill passed by Congress and signed into law by President Bush last week.
Treasury spokeswoman Brookly McLaughlin said the contract would help ensure the Treasury Department had good advice to decide how to support the two mortgage firms, which together own or guarantee half of all U.S. mortgages.
While Congress gave Treasury the authority to extend an unlimited amount of loans to the two companies, Treasury Secretary Henry Paulson has stressed that the new authority is a back-up measure that will not be used unless market conditions worsen.
In a statement, Morgan Stanley Chairman John Mack said his company would help the government evaluate "various alternatives for Fannie Mae and Freddie Mac."
"We are pleased to be able to offer our services to the government and look forward to working with Secretary Paulson and his team as they work to restore stability to the global capital markets and confidence in the U.S. housing market," Mack said.
The contract will run until Jan. 17, three days before the next president is sworn into office. McLaughlin said that was a consideration in determining how long the contract would last.
The administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed for a period covering the next 18 months. Congress ultimately adopted those proposals as part of a broader bill that also seeks to help keep 400,000 households from losing their homes to foreclosure.
Critics charged that the open-ended nature of the support for Fannie and Freddie would expose taxpayers to billions of dollars of potential losses. Paulson has insisted that the package needed to be structured in this way to boost financial markets' confidence as the companies deal with mounting losses from mortgages that have gone bad.
Paulson said this assurance was critical not only for investors in this country but around the world. Of the $5 trillion in debt and mortgage-backed securities Fannie and Freddie have issued, more than $3 trillion is held by U.S. financial institutions and over $1.5 trillion is held by foreign institutions.
News Corp 4Q profit jumps 27 percent
News Corp.'s fiscal fourth-quarter earnings jumped 27 percent on profit from asset sales and higher operating earnings in most businesses, but the company faces slower growth in the current year.
Chairman and Chief Executive Rupert Murdoch said Tuesday he expects "somewhat less robust growth" in the fiscal year ending next June because consumers are being hurt by higher energy costs, the U.S. real estate crisis and the battered financial industry.
"We are in a much more difficult economic environment," Murdoch told analysts and reporters on a conference call.
News Corp. expects operating income to grow between 4 percent and 6 percent from a base of $5.13 billion in fiscal 2008.
Murdoch said there are "considerable financial challenges" in local advertising for the company's newspaper and television businesses, but that gains in cable networks, satellite television and online properties will more than offset that.
The New York-based media conglomerate, which also owns Twentieth Century Fox, Fox News Channel and Dow Jones & Co., publisher of The Wall Street Journal, rode those businesses to higher net income in the quarter ended June 30 of $1.13 billion, or 43 cents per share. A year ago, the result was $890 million, or 28 cents per share.
The sale of the company's stake in Fox Sports Bay Area and Gemstar-TV Guide International also boosted earnings. Excluding one-time items, earnings rose to 35 cents per share, from last year's adjusted result of 31 cents per share. That was a penny higher than the 34 cents per share analysts had been expecting, according to Thomson Financial.
Part of the per-share jump came because News Corp. had about 530 million fewer shares outstanding at the end of June than it did a year ago after executing a $10.1 billion share repurchase as part of its deal to sell its stake in satellite television operator DirecTV to John Malone's Liberty Media.
The 28 cents figure from a year ago is an aggregate of per-share results for each of the company's two classes of stock. The year-ago earnings were equivalent to 30 cents for each non-voting Class A share, and 25 cents for each Class B share. The company did not break out this year's result across share classes.
Revenue rose 17 percent to $8.59 billion from $7.37 billion last year, and beat Street estimates. Strong gains in film, newspapers and cable were partially offset by declines at its television and interactive units.
Lower ratings at the Fox broadcast network led to a drop in advertising revenue, which delivered a 28 percent slide in earnings at the television unit. Fox-affiliated stations also struggled as advertisers shift spending online.
News Corp. recently sold 8 TV stations for $1.1 billion, but said it had no plans to divest itself of additional stations, even as local advertising revenue dwindles.
Higher ratings and ad revenue at Fox News Channel lifted the cable networks unit to a 10 percent increase in profit. Fox Business Network, started last year, delivered a loss, but News Corp. did not say how much.
The company also said its Fox Interactive Media unit, which includes social-networking site MySpace.com, had lower operating income, blaming higher development and technical costs.
FIM's revenue rose 23 percent, with search revenue contributing half of the gain. The company said costs will rise again in fiscal 2009, but at a pace slower than it expects revenue will increase.
News Corp.'s newspaper publishing unit got a boost from the inclusion of Dow Jones, which it bought last December. The company, which also includes Dow Jones Newswires, the Factiva news database service and WSJ.com, added $24 million in operating income. Higher circulation and ad revenue at News Corp.'s Australian papers also pushed earnings higher.
Murdoch plans to increase the subscription price for WSJ.com, but did not say when or by how much. The site's 1.1 million subscribers pay "a healthy price, and one that will be increased," he said.
Murdoch had reportedly considered lifting the subscription fee on WSJ.com before reversing course earlier this year. Most newspapers support their online sites through ad sales.
DVD sales of the company's movies -- including "Juno" and "Alvin and the Chipmunks" -- helped the film unit's operating income more than double.
SKY Italia reported sharp increases in subscribers, which helped the satellite TV unit post a 37 percent increase in operating income.
Separately Tuesday, News Corp. announced it and private equity firm Permira Advisers LLP raised their offer to buy out public shareholders of News Corp.'s subsidiary NDS Group PLC. The British company, which makes technology for pay TV services, has agreed in principle to accept the new offer.
Chairman and Chief Executive Rupert Murdoch said Tuesday he expects "somewhat less robust growth" in the fiscal year ending next June because consumers are being hurt by higher energy costs, the U.S. real estate crisis and the battered financial industry.
"We are in a much more difficult economic environment," Murdoch told analysts and reporters on a conference call.
News Corp. expects operating income to grow between 4 percent and 6 percent from a base of $5.13 billion in fiscal 2008.
Murdoch said there are "considerable financial challenges" in local advertising for the company's newspaper and television businesses, but that gains in cable networks, satellite television and online properties will more than offset that.
The New York-based media conglomerate, which also owns Twentieth Century Fox, Fox News Channel and Dow Jones & Co., publisher of The Wall Street Journal, rode those businesses to higher net income in the quarter ended June 30 of $1.13 billion, or 43 cents per share. A year ago, the result was $890 million, or 28 cents per share.
The sale of the company's stake in Fox Sports Bay Area and Gemstar-TV Guide International also boosted earnings. Excluding one-time items, earnings rose to 35 cents per share, from last year's adjusted result of 31 cents per share. That was a penny higher than the 34 cents per share analysts had been expecting, according to Thomson Financial.
Part of the per-share jump came because News Corp. had about 530 million fewer shares outstanding at the end of June than it did a year ago after executing a $10.1 billion share repurchase as part of its deal to sell its stake in satellite television operator DirecTV to John Malone's Liberty Media.
The 28 cents figure from a year ago is an aggregate of per-share results for each of the company's two classes of stock. The year-ago earnings were equivalent to 30 cents for each non-voting Class A share, and 25 cents for each Class B share. The company did not break out this year's result across share classes.
Revenue rose 17 percent to $8.59 billion from $7.37 billion last year, and beat Street estimates. Strong gains in film, newspapers and cable were partially offset by declines at its television and interactive units.
Lower ratings at the Fox broadcast network led to a drop in advertising revenue, which delivered a 28 percent slide in earnings at the television unit. Fox-affiliated stations also struggled as advertisers shift spending online.
News Corp. recently sold 8 TV stations for $1.1 billion, but said it had no plans to divest itself of additional stations, even as local advertising revenue dwindles.
Higher ratings and ad revenue at Fox News Channel lifted the cable networks unit to a 10 percent increase in profit. Fox Business Network, started last year, delivered a loss, but News Corp. did not say how much.
The company also said its Fox Interactive Media unit, which includes social-networking site MySpace.com, had lower operating income, blaming higher development and technical costs.
FIM's revenue rose 23 percent, with search revenue contributing half of the gain. The company said costs will rise again in fiscal 2009, but at a pace slower than it expects revenue will increase.
News Corp.'s newspaper publishing unit got a boost from the inclusion of Dow Jones, which it bought last December. The company, which also includes Dow Jones Newswires, the Factiva news database service and WSJ.com, added $24 million in operating income. Higher circulation and ad revenue at News Corp.'s Australian papers also pushed earnings higher.
Murdoch plans to increase the subscription price for WSJ.com, but did not say when or by how much. The site's 1.1 million subscribers pay "a healthy price, and one that will be increased," he said.
Murdoch had reportedly considered lifting the subscription fee on WSJ.com before reversing course earlier this year. Most newspapers support their online sites through ad sales.
DVD sales of the company's movies -- including "Juno" and "Alvin and the Chipmunks" -- helped the film unit's operating income more than double.
SKY Italia reported sharp increases in subscribers, which helped the satellite TV unit post a 37 percent increase in operating income.
Separately Tuesday, News Corp. announced it and private equity firm Permira Advisers LLP raised their offer to buy out public shareholders of News Corp.'s subsidiary NDS Group PLC. The British company, which makes technology for pay TV services, has agreed in principle to accept the new offer.
Whole Foods 3Q misses estimates, lowers outlook
Whole Foods Market Inc. said Tuesday that its third-quarter net income dropped more than 30 percent due largely to costs associated with its acquisition of Wild Oats and a tough economy that hurt consumer spending.
Its shares sank in after-hours trading as the company also drastically lowered its outlook for 2009, suspended its dividend and said it would open fewer stores next year.
"We are committed to improving our financial results and believe these proactive steps are necessary to manage through the current challenging environment," CEO John Mackey said in a statement.
The natural foods grocer earned $33.9 million, or 24 cents a share, for the three months ending July 6, down from $49.1 million, or 35 cents a share, in the same quarter last year. It estimates that the purchase of Wild Oats was responsible for a $4.9 million, or 3 cents a share, impact on the net income.
Whole Foods reported revenue of $1.84 billion for the quarter, up from $1.51 billion in the previous year.
The results fell short of Wall Street's expectations, as analysts polled by Thomson Financial had expected a profit of 31 cents per share on revenue of $1.9 billion.
Whole Foods also sharply cut its outlook for 2009, saying it now expects sales growth of 6 percent to 10 percent for the year -- rather than the previously stated 25 percent to 30 percent growth. And it said its comparable-store sales are expected to grow 1 percent to 5 percent, down from the previously anticipated growth of 7.5 percent to 9.5 percent.
The company said it plans to update its guidance in November.
Whole Foods also said it is taking some cost-cutting steps as part of a more "conservative approach," such as reducing the number of stores it plans to open in 2009 and suspending its quarterly dividend for the foreseeable future.
"We remain very bullish on our growth prospects as the market for natural and organic products continues to grow and our company continues to evolve," Mackey said. "However, the challenging economic environment appears to be negatively impacting our sales."
Shares in Whole Foods, which had risen nearly 7 percent during regular trading ahead of the results, dropped almost 14 percent to $19.77 in after-hours trading.
Its shares sank in after-hours trading as the company also drastically lowered its outlook for 2009, suspended its dividend and said it would open fewer stores next year.
"We are committed to improving our financial results and believe these proactive steps are necessary to manage through the current challenging environment," CEO John Mackey said in a statement.
The natural foods grocer earned $33.9 million, or 24 cents a share, for the three months ending July 6, down from $49.1 million, or 35 cents a share, in the same quarter last year. It estimates that the purchase of Wild Oats was responsible for a $4.9 million, or 3 cents a share, impact on the net income.
Whole Foods reported revenue of $1.84 billion for the quarter, up from $1.51 billion in the previous year.
The results fell short of Wall Street's expectations, as analysts polled by Thomson Financial had expected a profit of 31 cents per share on revenue of $1.9 billion.
Whole Foods also sharply cut its outlook for 2009, saying it now expects sales growth of 6 percent to 10 percent for the year -- rather than the previously stated 25 percent to 30 percent growth. And it said its comparable-store sales are expected to grow 1 percent to 5 percent, down from the previously anticipated growth of 7.5 percent to 9.5 percent.
The company said it plans to update its guidance in November.
Whole Foods also said it is taking some cost-cutting steps as part of a more "conservative approach," such as reducing the number of stores it plans to open in 2009 and suspending its quarterly dividend for the foreseeable future.
"We remain very bullish on our growth prospects as the market for natural and organic products continues to grow and our company continues to evolve," Mackey said. "However, the challenging economic environment appears to be negatively impacting our sales."
Shares in Whole Foods, which had risen nearly 7 percent during regular trading ahead of the results, dropped almost 14 percent to $19.77 in after-hours trading.
Revised Yahoo vote reveals more disdain for board
Yahoo Inc. has revised the results of a closely watched shareholder vote on its much-maligned board after discovering an error by a tabulation firm grossly exaggerated the number of ballots backing the directors.
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The changes made Tuesday revealed that 200 million votes opposing the re-election of Yahoo Chief Executive Jerry Yang, Yahoo Chairman Roy Bostock and another director, Ron Burkle, were improperly registered as supportive at the company's annual meeting last week. The miscalculations also caused 100 million votes to be miscast in support of two other directors, Arthur Kern and Gary Wilson.
No mistakes were detected in the votes for Yahoo's four other incumbent directors -- Eric Hippeau, Vyomesh Josh, Mary Agnes Wilderotter and Robert Kotick, who is about to give up his seat to make room for dissident investor Carl Icahn.
The recount didn't alter the outcome of last week's election, which retained Yahoo's directors despite shareholder anger about the board's handling of a now-withdrawn $47.5 billion takeover bid from Microsoft Corp.
But the change adds more punch to the protest against the Yahoo board.
"It's important for Yahoo's board to understand there is still pressure on them," said Eric Jackson, a hedge fund manager who represents a group of stockholders with about 3.2 million Yahoo shares. "I thought Yahoo's board was kind of let off the hook last week when they didn't really deserve to be."
Nearly 40 percent of Yahoo shareholders voted against Bostock under the revised results, an unusually harsh rebuke of a board chairman. The original results listed 20 percent of Yahoo's shareholders opposing Bostock.
Yahoo named Bostock chairman in January even though more than 30 percent of Yahoo shareholders wanted him off the board in a vote held last year.
Nearly 34 percent of Yahoo shareholders expressed their displeasure with Yang, according to the recount, up from 15 percent in the original results.
The dissent indicates more shareholders are likely to call upon Yahoo's board to replace Yang as CEO unless he can prove the Internet company he co-founded is worth more than Microsoft offered to pay three months ago. Yahoo's market value is nearly $20 billion below Microsoft's last offer, which translated into $33 per share.
Yahoo shares gained 44 cents to $19.82 Tuesday.
Icahn already has made it clear that he believes Yahoo needs a more experienced CEO than the 39-year-old Yang.
Burkle, who became a billionaire running supermarkets, proved to be nearly as unpopular as Bostock. He was opposed by nearly 38 percent of Yahoo's voting shareholders, up from 19 percent in last week's tabulation. Kern was opposed by nearly 32 percent, up from 22 percent under last week's tally.
Burkle, Kern and Bostock sit on a compensation committee that approved a wide-ranging employee severance plan in February shortly after Microsoft made its unsolicited takeover bid. The costs of the severance plan could hurt shareholders by making Yahoo less valuable to Microsoft or the potential acquirers.
The miscounted votes might not have been detected if not for an inquiry lodged Monday by Capital Research Global Investors, which owns a 6.2 percent stake in Yahoo.
Convinced that its opposition to Yahoo's board wasn't reflected in last week's vote, Capital Research demanded an audit from Broadridge Financial Solutions, the processing firm responsible for casting the ballots for a wide range of institutional investors.
Broadridge acknowledged Tuesday that a printing mix-up caused it to understate the number of shares that intended to vote against Yahoo directors. The firm didn't elaborate on how many shareholders besides Capital Research were affected.
Broadridge processes votes in about 14,000 annual meetings each year, but hasn't found any similar mistakes in a review covering the past 18 months, said Chuck Callan, the Lake Success, N.Y.-based company's senior vice president of regulatory affairs. "This was a unique, isolated incident," he said.
Capital Research spokesman Chuck Freadhoff declined comment Tuesday.
Capital Research's fund manager, Gordon Crawford, has ridiculed Yang and Bostock for their tactics in the Microsoft talks. Microsoft withdrew its takeover offer, valued at $33 per share, three months ago after Yang demanded $37 per share with Bostock's backing.
Yahoo's board is about to be expanded to 11 people to include Icahn and two of his allies. Icahn still hopes to revive talks with Microsoft.
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The changes made Tuesday revealed that 200 million votes opposing the re-election of Yahoo Chief Executive Jerry Yang, Yahoo Chairman Roy Bostock and another director, Ron Burkle, were improperly registered as supportive at the company's annual meeting last week. The miscalculations also caused 100 million votes to be miscast in support of two other directors, Arthur Kern and Gary Wilson.
No mistakes were detected in the votes for Yahoo's four other incumbent directors -- Eric Hippeau, Vyomesh Josh, Mary Agnes Wilderotter and Robert Kotick, who is about to give up his seat to make room for dissident investor Carl Icahn.
The recount didn't alter the outcome of last week's election, which retained Yahoo's directors despite shareholder anger about the board's handling of a now-withdrawn $47.5 billion takeover bid from Microsoft Corp.
But the change adds more punch to the protest against the Yahoo board.
"It's important for Yahoo's board to understand there is still pressure on them," said Eric Jackson, a hedge fund manager who represents a group of stockholders with about 3.2 million Yahoo shares. "I thought Yahoo's board was kind of let off the hook last week when they didn't really deserve to be."
Nearly 40 percent of Yahoo shareholders voted against Bostock under the revised results, an unusually harsh rebuke of a board chairman. The original results listed 20 percent of Yahoo's shareholders opposing Bostock.
Yahoo named Bostock chairman in January even though more than 30 percent of Yahoo shareholders wanted him off the board in a vote held last year.
Nearly 34 percent of Yahoo shareholders expressed their displeasure with Yang, according to the recount, up from 15 percent in the original results.
The dissent indicates more shareholders are likely to call upon Yahoo's board to replace Yang as CEO unless he can prove the Internet company he co-founded is worth more than Microsoft offered to pay three months ago. Yahoo's market value is nearly $20 billion below Microsoft's last offer, which translated into $33 per share.
Yahoo shares gained 44 cents to $19.82 Tuesday.
Icahn already has made it clear that he believes Yahoo needs a more experienced CEO than the 39-year-old Yang.
Burkle, who became a billionaire running supermarkets, proved to be nearly as unpopular as Bostock. He was opposed by nearly 38 percent of Yahoo's voting shareholders, up from 19 percent in last week's tabulation. Kern was opposed by nearly 32 percent, up from 22 percent under last week's tally.
Burkle, Kern and Bostock sit on a compensation committee that approved a wide-ranging employee severance plan in February shortly after Microsoft made its unsolicited takeover bid. The costs of the severance plan could hurt shareholders by making Yahoo less valuable to Microsoft or the potential acquirers.
The miscounted votes might not have been detected if not for an inquiry lodged Monday by Capital Research Global Investors, which owns a 6.2 percent stake in Yahoo.
Convinced that its opposition to Yahoo's board wasn't reflected in last week's vote, Capital Research demanded an audit from Broadridge Financial Solutions, the processing firm responsible for casting the ballots for a wide range of institutional investors.
Broadridge acknowledged Tuesday that a printing mix-up caused it to understate the number of shares that intended to vote against Yahoo directors. The firm didn't elaborate on how many shareholders besides Capital Research were affected.
Broadridge processes votes in about 14,000 annual meetings each year, but hasn't found any similar mistakes in a review covering the past 18 months, said Chuck Callan, the Lake Success, N.Y.-based company's senior vice president of regulatory affairs. "This was a unique, isolated incident," he said.
Capital Research spokesman Chuck Freadhoff declined comment Tuesday.
Capital Research's fund manager, Gordon Crawford, has ridiculed Yang and Bostock for their tactics in the Microsoft talks. Microsoft withdrew its takeover offer, valued at $33 per share, three months ago after Yang demanded $37 per share with Bostock's backing.
Yahoo's board is about to be expanded to 11 people to include Icahn and two of his allies. Icahn still hopes to revive talks with Microsoft.
Cisco earnings up 4 percent, beating forecasts
Cisco Systems Inc. said Tuesday that sales would be weaker than analysts had forecast in the next few quarters, but investors who had expected worse were cheered.
The world's largest maker of computer networking gear said orders would grow 8 percent in the current quarter, as customers, particularly telecom carriers, pinch their money.
Investors had been expecting the weak economy to catch up to the company. It's the dominant player in an industry that has been growing dramatically, but at the same time, its routers and switches are capital investments, the kind that suffer in an economic downturn.
Cisco shares were up $1.58, or 7 percent, at $24.25 in extended trading after the release of the results. The stock has slid from the year's high of $27.72 set June 5 as investors prepared for a weak forecast.
For the fiscal fourth quarter that ended July 25, Cisco reported earnings of $2.01 billion, or 33 cents per share. In the same period last year, Cisco earned $1.93 billion, or 31 cents per share.
Sales rose 10 percent to $10.4 billion.
Excluding one-time items, earnings were 40 cents per share. Analysts had expected Cisco to report earnings of 39 cents per share on $10.3 billion in revenue, according to a Thomson Financial poll.
Chief Financial Officer Frank Calderoni said the results, coming in "a quarter of somewhat uncertain macroeconomic conditions," demonstrated the strength of the company's business model.
Analyst Paul Mansky said the fourth-quarter results appeared to be "reasonably solid, well-balanced."
But looking ahead, Chief Executive John Chambers said revenue for the current quarter, the fiscal first, would grow by 8 percent from a year ago, suggesting revenue of $10.3 billion. Analysts had been expecting revenue of $10.4 billion.
For the following quarter, which ends in January, Chambers predicted revenue growth of 8.5 percent, pointing to sales of $10.7 billion. Analysts had been looking for $10.8 billion.
Speaking on a conference call to discuss results for the fiscal fourth quarter, Chambers said uncertainty in the economy meant that the company would not provide a full-year outlook as it usually has.
The company's long-term goal is to grow revenue by 12 percent to 17 percent year-over-year, he said, but it was unclear when it could return to that level.
Chambers said order growth from telecom service providers, which account for almost a third of sales, was "moderating," but emphasized that this is coming after three years of rapidly growing spending.
On a brighter note, orders from large enterprise customers showed signs of a recovery.
"The large multinationals and financial institutions which were the first ones to decline almost a year ago, in terms of their spending with us now, are doing dramatically better," Chambers said.
U.S. enterprise sales growth was 13 percent in the fourth quarter, up from 6 percent in the third quarter.
In the just-ended fiscal year, Cisco's earnings were $8.1 billion, or $1.31 per share, on sales of $39.5 billion. In the previous fiscal year, net income was $7.3 billion on revenue of $34.9 billion.
The world's largest maker of computer networking gear said orders would grow 8 percent in the current quarter, as customers, particularly telecom carriers, pinch their money.
Investors had been expecting the weak economy to catch up to the company. It's the dominant player in an industry that has been growing dramatically, but at the same time, its routers and switches are capital investments, the kind that suffer in an economic downturn.
Cisco shares were up $1.58, or 7 percent, at $24.25 in extended trading after the release of the results. The stock has slid from the year's high of $27.72 set June 5 as investors prepared for a weak forecast.
For the fiscal fourth quarter that ended July 25, Cisco reported earnings of $2.01 billion, or 33 cents per share. In the same period last year, Cisco earned $1.93 billion, or 31 cents per share.
Sales rose 10 percent to $10.4 billion.
Excluding one-time items, earnings were 40 cents per share. Analysts had expected Cisco to report earnings of 39 cents per share on $10.3 billion in revenue, according to a Thomson Financial poll.
Chief Financial Officer Frank Calderoni said the results, coming in "a quarter of somewhat uncertain macroeconomic conditions," demonstrated the strength of the company's business model.
Analyst Paul Mansky said the fourth-quarter results appeared to be "reasonably solid, well-balanced."
But looking ahead, Chief Executive John Chambers said revenue for the current quarter, the fiscal first, would grow by 8 percent from a year ago, suggesting revenue of $10.3 billion. Analysts had been expecting revenue of $10.4 billion.
For the following quarter, which ends in January, Chambers predicted revenue growth of 8.5 percent, pointing to sales of $10.7 billion. Analysts had been looking for $10.8 billion.
Speaking on a conference call to discuss results for the fiscal fourth quarter, Chambers said uncertainty in the economy meant that the company would not provide a full-year outlook as it usually has.
The company's long-term goal is to grow revenue by 12 percent to 17 percent year-over-year, he said, but it was unclear when it could return to that level.
Chambers said order growth from telecom service providers, which account for almost a third of sales, was "moderating," but emphasized that this is coming after three years of rapidly growing spending.
On a brighter note, orders from large enterprise customers showed signs of a recovery.
"The large multinationals and financial institutions which were the first ones to decline almost a year ago, in terms of their spending with us now, are doing dramatically better," Chambers said.
U.S. enterprise sales growth was 13 percent in the fourth quarter, up from 6 percent in the third quarter.
In the just-ended fiscal year, Cisco's earnings were $8.1 billion, or $1.31 per share, on sales of $39.5 billion. In the previous fiscal year, net income was $7.3 billion on revenue of $34.9 billion.
Oil falls as low as $118 on demand concerns
Oil traders sent crude prices tumbling as low as $118 a barrel Tuesday on the growing belief that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products.
Crude oil finished the day just above $119 a barrel -- its lowest settlement price since early May.
Crude's decline is giving Americans more relief at the pump. A gallon of regular gasoline on average fell another penny overnight to $3.871, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen four straight weeks for the first time since December; prices are off 5.9 percent from their July high as U.S. motorists cut back on their driving to save money.
A day after plunging as much as $5 a barrel in a dramatic sell-off, crude continued its downward trend. Gasoline and heating oil prices also fell, while natural gas ended unchanged after Monday's steep drop.
Light, sweet crude for September delivery fell $2.24 to settle at $119.17 a barrel on the New York Mercantile Exchange, the lowest close since May 2. During trading, the contract dipped to $118 -- nearly $30 below the trading high of $147.27 reached July 11.
"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pa., adding that "$4-a-gallon gasoline has clearly killed demand."
Some analysts say oil has the potential to jump back up.
There are many factors that could keep oil from descending further, said Mike Fitzpatrick, vice president of energy and risk management at MF Global LLC. Those include political tensions in Nigeria and the Middle East, the potential for a big hurricane along the Gulf Coast, and global demand that is still growing -- just not at the same pace that it had been.
"Even if it seems as though China's economic demand run has slowed some, those changes at the margins still make them a huge consumer of crude products," Fitzpatrick said.
Still, the Federal Reserve, which issued an economic assessment statement along with its decision to keep interest rates stable, said that along with tight credit and the housing contraction, "elevated energy prices are likely to weigh on economic growth over the next few quarters."
The dollar's six-week highs against the euro also contributed to oil's decline Tuesday. The euro fell to $1.5464 from the $1.5587 it bought late in New York trading Monday, making oil and other commodities less attractive to investors seeking a hedge against inflation and dollar weakness.
Natural gas futures finished unchanged at $8.726 per 1,000 cubic feet, after swinging into positive and negative territory during trading. On Monday, natural gas plunged 66.3 cents, or 7 percent, to $8.726 per 1,000 cubic feet, its lowest level in nearly six months. Prices have closed lower in eight of the last 11 sessions and dropped 36 percent from the contract's all-time trading high of $13.752, reached July 2.
The pullback is double the size of crude's recent slide. That has fed speculation on Wall Street that a large hedge fund or something like it may be near collapse and has dumped a vast amount of natural gas contracts to free up cash. Last month, SemGroup LP, based in Tulsa, Okla., folded after losing $2.4 billion in bad bets on oil futures. SemGroup's collapse came amid a massive sell off in the oil market.
"Anytime you get that kind of violent price action in a short amount of time, it reeks of someone big being in trouble," Schork said.
Investors on Tuesday ignored continued tension over Iran's nuclear program. Representatives of the five permanent members of the U.N. Security Council and Germany agreed Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute, State Department spokesman Gonzalo Gallegos said.
In other Nymex trading, heating oil futures fell 6.81 cents to settle at $3.2820 a gallon, while gasoline prices dropped 4.38 cents to settle at $2.9564 a gallon.
In London, September Brent crude fell $2.98 to settle at $117.70 a barrel.
Crude oil finished the day just above $119 a barrel -- its lowest settlement price since early May.
Crude's decline is giving Americans more relief at the pump. A gallon of regular gasoline on average fell another penny overnight to $3.871, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen four straight weeks for the first time since December; prices are off 5.9 percent from their July high as U.S. motorists cut back on their driving to save money.
A day after plunging as much as $5 a barrel in a dramatic sell-off, crude continued its downward trend. Gasoline and heating oil prices also fell, while natural gas ended unchanged after Monday's steep drop.
Light, sweet crude for September delivery fell $2.24 to settle at $119.17 a barrel on the New York Mercantile Exchange, the lowest close since May 2. During trading, the contract dipped to $118 -- nearly $30 below the trading high of $147.27 reached July 11.
"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pa., adding that "$4-a-gallon gasoline has clearly killed demand."
Some analysts say oil has the potential to jump back up.
There are many factors that could keep oil from descending further, said Mike Fitzpatrick, vice president of energy and risk management at MF Global LLC. Those include political tensions in Nigeria and the Middle East, the potential for a big hurricane along the Gulf Coast, and global demand that is still growing -- just not at the same pace that it had been.
"Even if it seems as though China's economic demand run has slowed some, those changes at the margins still make them a huge consumer of crude products," Fitzpatrick said.
Still, the Federal Reserve, which issued an economic assessment statement along with its decision to keep interest rates stable, said that along with tight credit and the housing contraction, "elevated energy prices are likely to weigh on economic growth over the next few quarters."
The dollar's six-week highs against the euro also contributed to oil's decline Tuesday. The euro fell to $1.5464 from the $1.5587 it bought late in New York trading Monday, making oil and other commodities less attractive to investors seeking a hedge against inflation and dollar weakness.
Natural gas futures finished unchanged at $8.726 per 1,000 cubic feet, after swinging into positive and negative territory during trading. On Monday, natural gas plunged 66.3 cents, or 7 percent, to $8.726 per 1,000 cubic feet, its lowest level in nearly six months. Prices have closed lower in eight of the last 11 sessions and dropped 36 percent from the contract's all-time trading high of $13.752, reached July 2.
The pullback is double the size of crude's recent slide. That has fed speculation on Wall Street that a large hedge fund or something like it may be near collapse and has dumped a vast amount of natural gas contracts to free up cash. Last month, SemGroup LP, based in Tulsa, Okla., folded after losing $2.4 billion in bad bets on oil futures. SemGroup's collapse came amid a massive sell off in the oil market.
"Anytime you get that kind of violent price action in a short amount of time, it reeks of someone big being in trouble," Schork said.
Investors on Tuesday ignored continued tension over Iran's nuclear program. Representatives of the five permanent members of the U.N. Security Council and Germany agreed Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute, State Department spokesman Gonzalo Gallegos said.
In other Nymex trading, heating oil futures fell 6.81 cents to settle at $3.2820 a gallon, while gasoline prices dropped 4.38 cents to settle at $2.9564 a gallon.
In London, September Brent crude fell $2.98 to settle at $117.70 a barrel.
Fed holds rate steady on inflation, growth worries
Confronted by problems at every turn -- rising unemployment, shaky growth, credit troubles and creeping inflation -- the Federal Reserve left an important interest rate unchanged, taking a gamble that for now the best move was no move at all. The next direction for rates probably is up but that's not likely until next year.
Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed Tuesday to leave its key rate alone at 2 percent for the second straight meeting.
In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.
"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said. Policymakers are faced with dueling problems: weak economic growth and advancing inflation. To treat one, risks aggravating the other. The Fed indicated Tuesday that each problem poses about equal risks to the economy.
It was welcome news to Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1, when it kicked off the second quarter with a nearly 400 point rally.
Many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16 and through the rest of this year. This would give the fragile economy and crippled housing market more time to heal.
The Fed may start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven't ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed's next move will be up. Keeping rates at low levels for too long could worsen inflation.
"The inflation fight probably will have to wait until 2009," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Conditions at this point do not seem to dictate an immediate tightening."
Heightened concerns about inflation forced the Fed in June to halt a nearly yearlong series of rate reductions to shore up the wobbly economy. The campaign, which started last September, was one of the most aggressive in decades. The Fed slashed its key rate by 3.25 percentage points with the hope that lower rates would spur people and businesses to buy and invest more, energizing the economy.
A number of forces have blunted the Fed's bracing rate reductions, however. People are finding it harder to get credit to finance big-ticket purchases as banks have tightened up standards.
American consumers -- even armed with the government's tax rebates of up to $600 a person -- have turned more cautious. Falling home values and stock prices have eroded their net worth. On top of all that, high energy and food prices are whittling away at Americans' buying power.
To help, Democrats want a second stimulus package; the Bush administration, though, has been cool to what's been floated.
Bernanke's predecessor, Alan Greenspan called the current credit crisis a "once or twice a century event." Given the severity of the financial problems, the surprise is not that economic growth is slowing but that there is any growth at all, Greenspan wrote in an opinion piece in the Financial Times.
The Fed has taken a number of extraordinary steps to ease credit problems so that banks, investment houses and others will keep on lending.
Over time, those steps, along with the rate cuts, "should help promote moderate economic growth." Fed policymakers said.
But for now, the economy -- pounded by many negative forces -- is likely to be sluggish at best.
"Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters," the Fed warned.
The economy grew at a subpar 1.9 percent pace this spring -- even with the tax rebate checks. It shrank late last year.
And, the unemployment rate climbed to a four-year high of 5.7 percent in July as businesses clamped down on hiring. Nearly half a million jobs have disappeared so far this year. More losses are expected. The jobless rate could hit 6.5 percent by the middle of next year.
With employment deteriorating, hopes for a second-half rebound have largely fizzled.
"The Fed has got its hands full," said Stuart Hoffman, chief economist at PNC Financial Services Group.
On the inflation front, Fed policymakers said they expected improvements later this year and next year, but they acknowledged the outlook was difficult to predict.
Energy prices, which marched to a record high above $147 a barrel last month, have calmed down recently, giving the Fed more leeway to hold rates steady. Oil prices sank as low as $118 a barrel Tuesday.
"Inflation has been high," the Fed said. Consumer prices in June rose at the second-fastest pace in a quarter century. Those high prices are a double-edged sword: They can put another damper on growth as people have less money to spend on other things and they can force companies to raise prices for many other goods and services, spreading inflation.
One Fed member -- Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to raise rates Tuesday. Fisher, who has a reputation for being extra vigilant on inflation, was the sole opposition vote. It was the fifth time this year that he dissented.
New Fed board member Elizabeth Duke, who was just sworn in Tuesday before the meeting, voted with the majority.
Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed Tuesday to leave its key rate alone at 2 percent for the second straight meeting.
In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.
"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said. Policymakers are faced with dueling problems: weak economic growth and advancing inflation. To treat one, risks aggravating the other. The Fed indicated Tuesday that each problem poses about equal risks to the economy.
It was welcome news to Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1, when it kicked off the second quarter with a nearly 400 point rally.
Many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16 and through the rest of this year. This would give the fragile economy and crippled housing market more time to heal.
The Fed may start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven't ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed's next move will be up. Keeping rates at low levels for too long could worsen inflation.
"The inflation fight probably will have to wait until 2009," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Conditions at this point do not seem to dictate an immediate tightening."
Heightened concerns about inflation forced the Fed in June to halt a nearly yearlong series of rate reductions to shore up the wobbly economy. The campaign, which started last September, was one of the most aggressive in decades. The Fed slashed its key rate by 3.25 percentage points with the hope that lower rates would spur people and businesses to buy and invest more, energizing the economy.
A number of forces have blunted the Fed's bracing rate reductions, however. People are finding it harder to get credit to finance big-ticket purchases as banks have tightened up standards.
American consumers -- even armed with the government's tax rebates of up to $600 a person -- have turned more cautious. Falling home values and stock prices have eroded their net worth. On top of all that, high energy and food prices are whittling away at Americans' buying power.
To help, Democrats want a second stimulus package; the Bush administration, though, has been cool to what's been floated.
Bernanke's predecessor, Alan Greenspan called the current credit crisis a "once or twice a century event." Given the severity of the financial problems, the surprise is not that economic growth is slowing but that there is any growth at all, Greenspan wrote in an opinion piece in the Financial Times.
The Fed has taken a number of extraordinary steps to ease credit problems so that banks, investment houses and others will keep on lending.
Over time, those steps, along with the rate cuts, "should help promote moderate economic growth." Fed policymakers said.
But for now, the economy -- pounded by many negative forces -- is likely to be sluggish at best.
"Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters," the Fed warned.
The economy grew at a subpar 1.9 percent pace this spring -- even with the tax rebate checks. It shrank late last year.
And, the unemployment rate climbed to a four-year high of 5.7 percent in July as businesses clamped down on hiring. Nearly half a million jobs have disappeared so far this year. More losses are expected. The jobless rate could hit 6.5 percent by the middle of next year.
With employment deteriorating, hopes for a second-half rebound have largely fizzled.
"The Fed has got its hands full," said Stuart Hoffman, chief economist at PNC Financial Services Group.
On the inflation front, Fed policymakers said they expected improvements later this year and next year, but they acknowledged the outlook was difficult to predict.
Energy prices, which marched to a record high above $147 a barrel last month, have calmed down recently, giving the Fed more leeway to hold rates steady. Oil prices sank as low as $118 a barrel Tuesday.
"Inflation has been high," the Fed said. Consumer prices in June rose at the second-fastest pace in a quarter century. Those high prices are a double-edged sword: They can put another damper on growth as people have less money to spend on other things and they can force companies to raise prices for many other goods and services, spreading inflation.
One Fed member -- Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to raise rates Tuesday. Fisher, who has a reputation for being extra vigilant on inflation, was the sole opposition vote. It was the fifth time this year that he dissented.
New Fed board member Elizabeth Duke, who was just sworn in Tuesday before the meeting, voted with the majority.
Wall Street extends rally after Fed decision
An already soaring Wall Street extended its advance Tuesday after the Federal Reserve left interest rates unchanged and assuaged some of the market's fears about the economy. The Dow Jones industrial average shot up more than 330 points, and all the major indexes had gains approaching 3 percent.
The market was enjoying a big rally before the Fed meeting as investors responded to a report that services sector activity fell less than expected last month and to another drop in oil prices that took crude as low as $118 a barrel.
The Fed gave stocks another huge push higher in the last hours of trading. In a statement accompanying its widely expected rate decision, the central bank reported that "economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports." That assessment was welcome news to a market that has feared the economy was falling into recession because of weak consumer spending.
The Fed did have some darker news, stating that "inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities." But it also said it expected inflation to moderate later in the year.
"The wording is a little strong over inflation, but there's really no real change in policy," said Brian Gendreau, investment strategist for ING Investment Management. "I think they are trying to buy time to allow the economy to recover, and so that the financials can slowly repair."
Ryan Larson, senior equity trader at Voyageur Asset Management, said he believes the central bank will keep rates on hold until the early part of 2009. He said of Fed officials, "they seem more concerned about growth for the rest of this year, and I'd say right now they appear to be dovish for the short term."
The oil market also helped soothe some of Wall Street's worries -- crude fell as low as $118 a barrel before settling at $119.17, down $2.24 on the New York Mercantile Exchange. Oil has now fallen $28 from its July 11 high of $147.27 on widening expectations that the slumping U.S. economy will keep curbing consumer demand for gasoline and other petroleum products.
Stocks had plunged in June and early July as oil reached new heights; the fear on Wall Street was that higher prices for fuel would curtail consumer spending, which accounts for more than two-thirds of the economy. With oil falling, and the Fed citing economic growth in its statement Tuesday, investors were allowing themselves to again feel a little more optimistic after a year of financial crises and soaring commodities costs that have pummeled stocks.
The Dow rose 331.62, or 2.94 percent, to 11,615.77. It was up about 225 points shortly before the Fed's 2:15 p.m. EDT announcement.
Broader indexes also rose sharply. The Standard & Poor's 500 index added 35.87, or 2.87 percent, to 1,284.88, and the Nasdaq composite index rose 64.27, or 2.81 percent, to 2,349.83.
It was the Dow and S&P 500's biggest one-day gain since April 1, when the indexes kicked off the second quarter with a huge rally. This was also the Nasdaq's biggest point and percentage rise since mid-July.
Treasury bond prices fell after the Fed released its decision. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, rose to 4.02 percent from 3.97 percent late Monday.
The dollar traded mostly higher against other major currencies, while gold prices fell.
Early in the session, shares rose sharply after the Institute for Supply Management, the trade group of corporate purchasing executives, said its services sector index rose to 49.5 from 48.2 in June. Analysts surveyed by Thomson Financial/IFR predicted it would rise to 49.0.
Any reading below 50 signals contraction. The report is based on a survey of the institute's members and covers such indicators as new orders, employment, inventories, prices and exports and imports.
The notion that the sector might be in better shape than many investors feared gave Wall Street reason for optimism.
Earnings reports continued to stream in. Cisco Systems Inc. reported late Tuesday a 4.4 percent increase in net income for its latest quarter, beating analyst expectations by a penny per share. The world's largest maker of computer networking gear said sales spiked almost 10 percent. Shares closed up 66 cents, or 3 percent, at $22.65, then tacked on another 3 percent in after-hours trading.
Procter & Gamble Co., maker of Tide detergent and Gillette razors, said its fiscal fourth-quarter profit jumped 33 percent, boosted by price increases, overseas sales and tax benefits. Shares rose $2.09, or 3.2 percent, to $67.91.
Archer Daniels Midland Co. reported a 61 percent plunge in fourth-quarter profit, but said revenues soared amid higher prices for commodities like wheat and corn. The stock fell $1.53, or 6 percent, at $25.87.
D.R. Horton Inc., the nation's largest homebuilder, posted a narrower fiscal third-quarter loss as charges to write down the value of property declined. Shares fell 5 cents to $11.17.
Advancing issues led decliners by a 3 to 1 basis on the New York Stock Exchange, where consolidated volume came to 5.35 billion shares, up from 4.65 billion shares on Monday.
The Russell 2000 index of smaller companies rose 16.90, or 2.40 percent, at 721.04.
Overseas, Japan's Nikkei stock average fell 0.15 percent. Britain's FTSE 100 rose 2.52 percent, Germany's DAX index rose 2.66 percent, and France's CAC-40 rose 2.47 percent.
The market was enjoying a big rally before the Fed meeting as investors responded to a report that services sector activity fell less than expected last month and to another drop in oil prices that took crude as low as $118 a barrel.
The Fed gave stocks another huge push higher in the last hours of trading. In a statement accompanying its widely expected rate decision, the central bank reported that "economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports." That assessment was welcome news to a market that has feared the economy was falling into recession because of weak consumer spending.
The Fed did have some darker news, stating that "inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities." But it also said it expected inflation to moderate later in the year.
"The wording is a little strong over inflation, but there's really no real change in policy," said Brian Gendreau, investment strategist for ING Investment Management. "I think they are trying to buy time to allow the economy to recover, and so that the financials can slowly repair."
Ryan Larson, senior equity trader at Voyageur Asset Management, said he believes the central bank will keep rates on hold until the early part of 2009. He said of Fed officials, "they seem more concerned about growth for the rest of this year, and I'd say right now they appear to be dovish for the short term."
The oil market also helped soothe some of Wall Street's worries -- crude fell as low as $118 a barrel before settling at $119.17, down $2.24 on the New York Mercantile Exchange. Oil has now fallen $28 from its July 11 high of $147.27 on widening expectations that the slumping U.S. economy will keep curbing consumer demand for gasoline and other petroleum products.
Stocks had plunged in June and early July as oil reached new heights; the fear on Wall Street was that higher prices for fuel would curtail consumer spending, which accounts for more than two-thirds of the economy. With oil falling, and the Fed citing economic growth in its statement Tuesday, investors were allowing themselves to again feel a little more optimistic after a year of financial crises and soaring commodities costs that have pummeled stocks.
The Dow rose 331.62, or 2.94 percent, to 11,615.77. It was up about 225 points shortly before the Fed's 2:15 p.m. EDT announcement.
Broader indexes also rose sharply. The Standard & Poor's 500 index added 35.87, or 2.87 percent, to 1,284.88, and the Nasdaq composite index rose 64.27, or 2.81 percent, to 2,349.83.
It was the Dow and S&P 500's biggest one-day gain since April 1, when the indexes kicked off the second quarter with a huge rally. This was also the Nasdaq's biggest point and percentage rise since mid-July.
Treasury bond prices fell after the Fed released its decision. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, rose to 4.02 percent from 3.97 percent late Monday.
The dollar traded mostly higher against other major currencies, while gold prices fell.
Early in the session, shares rose sharply after the Institute for Supply Management, the trade group of corporate purchasing executives, said its services sector index rose to 49.5 from 48.2 in June. Analysts surveyed by Thomson Financial/IFR predicted it would rise to 49.0.
Any reading below 50 signals contraction. The report is based on a survey of the institute's members and covers such indicators as new orders, employment, inventories, prices and exports and imports.
The notion that the sector might be in better shape than many investors feared gave Wall Street reason for optimism.
Earnings reports continued to stream in. Cisco Systems Inc. reported late Tuesday a 4.4 percent increase in net income for its latest quarter, beating analyst expectations by a penny per share. The world's largest maker of computer networking gear said sales spiked almost 10 percent. Shares closed up 66 cents, or 3 percent, at $22.65, then tacked on another 3 percent in after-hours trading.
Procter & Gamble Co., maker of Tide detergent and Gillette razors, said its fiscal fourth-quarter profit jumped 33 percent, boosted by price increases, overseas sales and tax benefits. Shares rose $2.09, or 3.2 percent, to $67.91.
Archer Daniels Midland Co. reported a 61 percent plunge in fourth-quarter profit, but said revenues soared amid higher prices for commodities like wheat and corn. The stock fell $1.53, or 6 percent, at $25.87.
D.R. Horton Inc., the nation's largest homebuilder, posted a narrower fiscal third-quarter loss as charges to write down the value of property declined. Shares fell 5 cents to $11.17.
Advancing issues led decliners by a 3 to 1 basis on the New York Stock Exchange, where consolidated volume came to 5.35 billion shares, up from 4.65 billion shares on Monday.
The Russell 2000 index of smaller companies rose 16.90, or 2.40 percent, at 721.04.
Overseas, Japan's Nikkei stock average fell 0.15 percent. Britain's FTSE 100 rose 2.52 percent, Germany's DAX index rose 2.66 percent, and France's CAC-40 rose 2.47 percent.
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