Although the reaction in USD/JPY may be consistent with a weak number, the dollar’s performance against the Euro and British pound could be more erratic. If non-farm payrolls fall by more than -375k, it would be initially negative for the US dollar, but when the US stock market opens, we could see the dollar rally. Traders need to remember that the dollar is appreciating not because of the strength of the US economy, but because money flocks into low yielding currencies during a global recession. In a very short period of time, the US dollar has become the second lowest yielding G7 currency. A weak labor market number will mean two things – more weakness for US equities and the possibility of the Federal Reserve taking interest rates to zero. By extension, it will lead to weakness in USD/JPY, EUR/USD, GBP/USD and all of the Japanese Yen Crosses. The only way to avoid another round of selling would be if non-farm payrolls dropped by less than 300k.

Of the 70 analysts surveyed by Bloomberg, 9 expect Non-Farm Payrolls to drop by 400k or more. The most pessimistic is the Bank of Tokyo Mitsubishi who is calling for a mind boggling decline of 470k. The most optimistic is Landesbank in Berlin who is only calling for a decline of -220k.

Why Unemployment Could Hit a 15 Year High

All of the leading indicators for non-farm payrolls point to a very weak number. The employment component of service sector ISM, which is one of the strongest leading indicators for payrolls dropped to a record low. The same was true for the ADP private sector employment report which fell 250k – remember that ADP has historically undershot non-farm payrolls. Layoffs have jumped 148 percent, the 4 week average of jobless claims hit a 26 year high while consumer confidence plunged to a 28 year low. There is some good news though. Continuing claims have fallen, but unfortunately that was off of the highest level since December 1982. These numbers suggest that the unemployment rate could hit a 15 year high - it is currently at 6.5%, a 14 year high.

If the relationship shown in the following chart between non-farm payrolls and service sector ISM hold, then we would expect non-farm payrolls to drop 375k to 400k.

Here’s how the leading indicators for non-farm payrolls stack up:

1. Employment Component of Service Sector ISM Dropped to Lowest Level on Record
2. Employment Component of Manufacturing Sector ISM Falls to 34.2, a Record Low
3. ADP Report Private Sector Job Losses at 250,000, Record Low
4. Challenger Layoffs Skyrocket 148%, Highest Since January 2002
5. University of Michigan Consumer Confidence Index Hits 28 Year Low
6. 4 Week Average Claims Reaches Highest Level in 26 Years
7. Monster.com Index Drops 7 Points, Down 22% YoY
8. Continuing Claims Shows 109K Increase

Large Job Losses to Continue Beyond November

Don’t expect the job losses to end in November either. More layoffs have been announced this past week by companies like JPMorgan and AT&T. The current recession is the closest to the 1980s recession, when job losses continued for 17 consecutive months. Even the recession in 2001, which was shallower than the current recession had 15 consecutive months of job losses. Therefore non-farm payrolls should continue to remain negative into the first half of 2009. Furthermore, a large drop in non-farm payrolls does not mean that we have hit a bottom.

In analyzing non-farm payrolls data during past recessions, we see that at the beginning of an official recession, as defined by the National Bureau of Economic Research, non-farm payrolls start to decline rapidly. However after falling between 200k and 300k, job cuts stall and then pick up once again. We saw this trend in the 1981 to 1982 recession, the 1990 to 1991 recession and during the 2001 recession. It should happen again in 2009.

The following chart illustrates the double dip trend of non-farm payrolls during the 2001 and recession.

Here are the charts for 1991 and 1981

Two consecutive quarterly declines in gross domestic product is not what the NBER uses to judge a recession. They instead look at 4 key monthly economic indicators, including employment, industrial output and sales.

In the fourth quarter of 2007, GDP shrank by 0.2 percent while retail sales dropped by 0.4 percent in December. Non-farm payrolls started printing negative numbers in January with Friday’s November data expected to mark the tenth consecutive month of negative job losses.

Risk of 8% Unemployment in the US

In the month of October, the unemployment rate jumped from 6.1 to 6.5 percent. Although this is the highest since 1994, it is expected to climb. Many economists have now increased their forecast for unemployment to 8 percent, which would be the highest level in a quarter of a century. The last major peak that we saw in unemployment that was higher than current levels was in 1992, when the jobless rate hit 7.8 percent. In the 1982, it was as high as 10.8 percent. Given that this downturn is widely described as the worst since the Great Depression, an 8 percent unemployment rate, which is 2 full percentage points less than the unemployment rate in 1982, would not be out of the question. Near the end of the Great Depression, the unemployment rate hit a high of 25 percent in 1933. Since the structure of the labor market has changed a lot in the past 75 years, a 25 percent unemployment rate is far-fetched, but what all of these historical instances indicate is we have yet to see the bottom in the US labor market. Finding new jobs has become extremely difficult in the current market environment, but thankfully President Elect Obama has promised to work on extending unemployment benefits to those who are out of work once he takes office on January 20th.

Source: WSJ

US Automakers Seek Government Bailout

The non-farm payrolls report and Barack Obama’s first press conference as the new President Elect would have been enough to create fireworks in the financial markets, but big news also came out of General Motors and Ford. Two of the country’s largest automakers have reported sharp losses – General Motors posted a $2.5 billion quarterly loss while Ford reported $129 million loss. Both companies have been forced to seek government aid as they are quickly running out of cash. Ford burned through $7.7 billion, leaving them with only $18.9 billion in available cash while General Motors used up $6.9 billion, leaving them with only $16.2 billion in cash. GM even declared that they would be forced bankruptcy next year if they did not receive any government intervention. Job cuts are expected at both automakers as they try to cut costs and preserve cash. GM employs approximately 263k workers while Ford employs 246k workers. If they were allowed to fail, it would lead to another half million job losses. Barack Obama’s comment today about the importance of the automakers suggests that he will back some sort of rescue package. However more bailouts using public funds will lead to more questions about how Americans will pay for it.

From Marketwatch

The Case for a Bounce Next Week

Even though the economy could still be in for more trouble over the coming months, there is a case for a major bounce next week. Many people are arguing that this week’s sell-off in stocks is tied to the need to raise cash to settle the Lehman Brothers’ credit default swaps. For those who bought protection against a bankruptcy on Lehman brothers, they are set to get 91.375 cents on the dollar. The sellers of the protection will now have to make cash payments of more than $270 billion to the buyers. As the money changes hands, those who have bought protection could now put their payments to work in the equity markets which could pave the way for a serious bounce.

A Look at P/E Ratios: Are Stocks Becoming Good Values?

The Dow Jones Industrial Average has fallen more than 40 percent over the past year, leaving many investors wondering whether stocks have finally become cheap. Price to Earnings or P/E ratios has fallen to the lowest level in 23 years. With the S&P 500 trading at 860, the estimated P/E ratio according to the NY Times was just below 12. Over the past century, the average P/E ratio was approximately 15.5. According to a study by Yale Economics Professor Robert Shiller,

the P/E ratios in the UK and Germany have fallen to levels that have only been seen 4 or 5 times in 150 years. From that perspective, P/E levels have fallen significantly but it is important to remember that earnings are expected to decline and P/E ratios always fall below the average in recessions. If economic conditions are as bad as the stagflationary period of the 1970s, then P/E levels could still fall to single digits. USD/JPY is due for a bounce, but in the long run, the prospect of further rate cuts from the US should continue to drive the currency pair lower.

LIBOR Rates Jump, TED Spread Widens

Other investors on the other hand are more skeptical. Three month LIBOR rates jumped 26 basis points to 3.47 percent, which is the highest level since January. The TED spread, which measures the difference between the interest rates of the 3 month LIBOR and the 3 month Treasury bill hit an intraday high of 311 basis points. Not only is this only the second time in 2 decades that the TED spread has gone above 300bp, but the premium is far above its pre-credit crunch levels of 20 to 30 basis points. The greater the TED spread, the greater the degree of risk aversion and the fear of default in the market. Therefore the jump in the LIBOR and the widening of the TED spread suggests that investors are still hoarding their cash and they are skeptical of whether the government’s efforts will actually restore stability in the financial markets and improve risk appetite.

Paulson’s Plan Could be a Lose-Lose for the US Dollar

Paulson’s plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation’s debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months.

Home Sales, Durable Goods and President Bush

Existing home sales dropped by 2.2 percent last month while mortgage applications plunged by 10.6 percent, the largest decline since July. The ongoing turmoil in the financial markets has made it increasingly difficult for even people with money to buy a home to secure loans. House prices continue to fall with the median price declining 9.5 percent from last August, causing more homeowners to pull their houses off market. The inventory of unsold homes dropped 7 percent, which was the largest decline since December 2006. In times of strong growth, a reduction of inventory may be good because it could suggest that demand is strong, but in times of weak growth, it suggests instead that homeowners are giving up on selling their homes now. Durable goods, jobless claims and new home sales are due for release Thursday morning. We continue to expect economic data to confirm that the US economy is weakening. President Bush will also be giving a nationally televised address on the financial crisis on tonight. Although we do not expect any groundbreaking announcements, his comments could nonetheless be somewhat market moving for the US dollar.

Markets have soared late this week on the news that Superman (aka Henry Paulson) will once again fly into the heat of battle and snatch victory from the jaws of sure defeat. According to Paulson, the federal government is busily crafting a taxpayer funded scheme to absorb all of the bad mortgage debt and make Wall Street whole again. The idea of course is to put an end to the annoying financial crisis so we can get back to the serious business of overconsumption and debt accumulation.

“Out of Control?”

Political leaders were told last night by Paulson and Fed Chairman Bernanke that if something weren’t done, the entire US financial system was going to melt down in the next week. Maybe this is true, maybe it isn’t, but whatever the case, they’ve got the full cooperation of politicians to do whatever they want. Congress will sign anything right now as long as they can get out of town for their next vacation, and I fully expect Paulson to receive a carte blanche very quickly to do whatever he sees fit. Am I the only one who sees a problem with this? It was very clear from the news conference last night that Paulson is in charge. Not the President, not the Congress, but a banker. And not just any banker. This is the guy who used to be in charge of Wall Street’s biggest firm. This is the man who sold his holdings in Goldman Sachs on June 30, 2006 for almost half a billion dollars. Is it really out of place to consider the conflict of interest here? I think not. It would appear as though control over this entire situation has been ceded to Mr. Paulson, and to a lesser extent, Fed Chairman Ben Bernanke. Bernanke, however, is about as effective as Congress. He’s an academic, and has absolutely no idea how to fix this mess. That is apparent.

What is even more ironic is the sudden departure from the stance that taxpayer dollars not be used to conduct further bailouts. After the Fannie/Freddie mess we were assured that officials were very much against using taxpayer money for further actions. Yet less than two weeks later, we are now being told that hundreds of billions of taxpayer money will now be needed to fix the crisis.  I cannot honestly believe that Paulson would have said what he said 10 days ago if he knew he was going to have to retract it that quickly. This indicates that they have no idea what is going on. They are not proactive; they are reactive. This time they want it all. Full authority to buy all bad debt. They want this to be the last one. The biggest, best, and final bailout. The complete nationalization of the banking and financial system here in the US. I wonder if they plan on using taxpayer money to make good on all the bad debt that was sold overseas? Paulson’s estimate on the amount needed is off by at least a magnitude of 10. He knows he cannot go into a press conference and pledge trillions in taxpayer money to this problem. The Dollar sold off as it was – almost before the words were out of his mouth.

“The Chosen 799”

Around the same time, SEC Chairman Christopher Cox penned an emergency order banning the short sale of no less than 799 financial companies. Miss any Mr. Cox? This was done to ‘maintain market integrity’. Integrity? For anyone who was watching this morning, the results of this order have been dramatic. Obviously, short ETF’s and mutual funds make money for their holders by shorting stocks. Inverse ETF’s that track financial indexes make money for their holders by shorting financial stocks. So what happens is the poor guy that thought he’d try to protect his portfolio or actually make a few bucks by picking up one of these funds has gotten crushed this morning. Even the short funds that don’t necessarily focus on financial firms have had a bumpy ride.

Actually deciding to enforce the existing rule on naked short selling was the right thing to do. Nevermind the fact that this should have been going on all along. Clearly, naked short selling was ok as long as it was confined to operations deemed to be inconsequential by the financial elite. However, the action to place a curb on genuine short-selling is another matter entirely. To remove an important market function with absolutely no notice is draconian, and reeks of overt fascism. It says we no longer have a free market. It says that it is ok to put our hard-earned money in the markets as long as we do it in a manner which is pleasing to the financial aristocracy. The take home message here is that if they don’t like the rules, they’ll just change them. This mentality has become more and more obvious over the past seven or so weeks. It leaves those out-of-the-know wondering what rule will be changed next. It must be nice if you are privy to these things as I’m sure there are many that are, but for the majority of folks it adds another layer to an already complex puzzle.

A good dose of spin

The two day rally in the markets has already been called the triumph over the credit and banking crisis. Indeed the mood of Wall Street has changed from pure despair to pure euphoria in the span of 24 hours. Lost in all of this are the reasons for the euphoria. We’re losing our free markets and there is cheering. US taxpayers will pay for this mother of all bailouts for decades, maybe longer, and there is cheering and euphoria. The irresponsible actions of the very upper crust of the financial structure are once again being rewarded, and payment comes from the sweat of the common man’s brow. This is cheered, and there is euphoria.

In short, this has been a tragic week for capitalism and the free market in the United States. The idea that we’ll have capitalism when things go well and socialism when things go poorly is reprehensible. The US government and media has lambasted foreigners when they nationalize companies, natural resources, or infrastructure. Yet our government will do it on an even grander scale and the media looks the other way. There needs to be outrage, not cheerleading. There needs to be accountability, not bailouts. The system needs to be allowed to purge, not to continue the binge. Perhaps Sherwood Boehlert, a former Congressman from New York put it best when he said: ‘This is something you can’t go on forever without addressing, but Congress in a short span of time is best served by going home.’ For once I couldn’t agree more.

Listen to our weekly broadcast of ‘Beat the Street’ available on our website my2centsonline.com. This show will undergo some exciting changes in the coming weeks and months as we combine efforts with contraryinvestorscafe.com to bring you analysis of the economy and markets you won’t get anywhere else. Stay tuned for more information!

The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.

The idea was then floated around by current US Treasury Secretary Paulson this afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:

1. Restores Liquidity
2. Orderly Liquidation of Troubled Paper
3. Reduces Foreclosures because the Agency Would Manage Mortgage
4. Can Help to Revive Banks Stuck with Troubled Paper

Is the US at Risk of Losing its AAA Rating?

However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.

Fire up the Printing Presses?

This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.

Dollar Collapses as Traders Prepare for Bankruptcy, Watch Out for Further Carry Trade Losses

The dollar collapsed against the Japanese Yen, Euro and British pound on Sunday evening as traders prepare for a possible Lehman bankruptcy. The ISDA (International Swaps and Derivatives Association) extended the hours of an emergency trading session between Wall Street dealers and Lehman Brothers so that they can net out or cancel transactions that offset each other with Lehman. No one knows what will happen with Lehman and what the credit quality of their assets are - all they know is that the right thing to do now is to reduce Lehman exposure. Counterparty risk is huge at this point for the currency market and that means carry trade weakness. At this point, safe haven bets is less of a driver of the US dollar than foreign investors dumping their US investments.

FOMC Statement Could be Dollar Bearish

The big event this week is the FOMC meeting. With the troubles in the financial sector, the last thing that the Federal Reserve wants to do is to talk about the possibly of raising interest rates. In fact, expect Lehman’s troubles to drive up expectations for a rate cut over the next 12 months. Economic data has taken a turn for the worse and the troubles in financial sector are growing. The Fed will keep interest rates unchanged at 2.00 percent but the FOMC statement could actually be dovish. Consumer confidence improved for the month of September but we are particularly worried about the sharp drop in retail sales and the softer PPI numbers.

$ Greenfield Online, Inc (SRVY) - Microsoft Corp (MSFT)
September 12, 2008 (10:40a) - Tender Offer Statement Filed

MSFT filed the initial tender offer statement and offer to purchase for this transaction with the SEC on September 11, 2008.
The current tender offer expiration date is Wednesday, October 8, 2008.

The regulatory matters section of the statement notes the following regarding the HSR condition:
“Microsoft and Greenfield are required to file a Notification and Report Form under the HSR Act, which filing is required to be made as soon as practicable (and in any event by September 15, 2008) pursuant to the Merger Agreement. Currently, Microsoft expects to file the Notification and Report Forms as promptly as practicable after the date hereof.”

As this proposed acquisition does not involve any competition/antitrust issues, HSR clearance is anticipated before the current October 8 tender offer expiration date.

The document also identifies regulatory approvals in Germany and Italy. As with every tender offer transaction, the presence of non-U.S. regulatory reviews greatly increases the chances of some brief extensions to the offer period, depending on efficiency in notification filing. As of this entry, there is no record of this transaction on the GFCO’s pending review list. Thus, there is some possibility that the GFCO or Italian review could force a tender offer extension into mid-October.

Nevertheless, MSFT should have absolutely no difficulty completing this transaction in less than 45 days.

Huntsman Corporation (HUN) - Hexion Specialty Chemicals
September 12, 2008 (10:00a) - Status Report

Today’s early developments in this saga include this SEC filing by HUN, which essentially chides Hexion for its conditional consent to the “backstop payment” offer disclosed previously:

“We also reiterate that the Backstop Proposals by their terms are just that: backstops. If you honestly believe that the combined entity would not be solvent on your chosen capital structure without the backstop payments, you are in breach of your obligations under the merger agreement as a result of your failure to pursue the CVRs, raise equity or take all the other actions that are available to you to shore up your own balance sheet. You have been offered more funds at closing than that provided by the Backstop Proposals, and you have to date knowingly and intentionally refused to pursue any other available financing, even on terms as favorable as those reflected in the CVRs. We reserve all rights under the merger agreement or otherwise.

“We must take issue with your ‘concern’ about the accuracy and completeness of our public statements. Our public statements have not been inaccurate or incomplete and we do not appreciate the suggestion otherwise. We fully recognize that we are engaged in litigation that you initiated and that the parties are this week setting forth the respective cases before the Delaware Chancery Court. We are confident that the evidence in the litigation will prove out our views.”

Hexion has just responded with the following:

From the public filing made by Huntsman this morning, it is clear Huntsman does not have a solvency certificate. We note the peculiar timing of the announcement in view of Huntsman’s request for an expedited trial and the fact that the firm they reference was retained two months ago.”

It now appears that in one step HUN has reversed whatever chances existed to avoid litigation via the backstop payment negotiations. This situation is now again devolving into a situation where a positive outcome for HUN, under any scenario, is becoming more unlikely due to its own posturing.

$Longs Drug Stores (LDG) - CVS Caremark (CVS)
September 12, 2008 (9:25a) - Pershing Square Letter

Pershing Square Capital Management sent a letter to LDG yesterday (9/11) expressing its continued opposition to this transaction. Key passages for the letter are as follows:

“For the reasons outlined in this letter, we do not currently support the Transaction and consequently do not intend to tender our 3.1 million shares into the CVS offer. Based on public disclosures to date, we believe that the process that led to the Transaction’s announcement was seriously flawed. On the other hand, with our efforts and the assistance of our financial advisor, The Blackstone Group, we remain hopeful that any past defects in the process can be remedied even at this late date (and despite what we view to be overly restrictive deal lock-up clauses).

“While we are critical of the process, we take comfort from the fact that the Company and its advisors negotiated a contractual provision requiring CVS to hold the offer open for one full year — until August 12, 2009. Furthermore, the Transaction permits the Company to pay its normal $0.14 dividend, so as shareholders we get paid dividends while we wait. As a result, we view ourselves and other shareholders as having a one-year “put” to CVS at the transaction price of $71.50. We believe that the value of Longs to CVS and other interested parties substantially exceeds the announced deal price. Given that approximately 18.6 million shares, or 52% of the basic outstanding shares of common stock, have traded at or above the $71.50 offer price since the Transaction’s announcement, the market appears to agree that a higher deal value should be achieved.

“Consequently, we do not believe that the tender offer’s minimum tender condition of 66 2/3% of the outstanding shares will be satisfied by September 15, 2009, the earliest date that CVS would otherwise be entitled to take up and pay for tendered shares.”
As of this update, the other two major LDG shareholders — CTW and Advisory Research — have not publicly disclosed their latest positions. However, it is fully anticipated that these two, along with other shareholders, possess nearly identical opinions as Pershing at this time.

In other words, this publication agrees with Pershing’s assessment that the minimum tender conditions will not be met by the current September 15, 2008 expiration date.

Anheuser-Busch Cos. (BUD) - InBev
September 12, 2008 (8:45a) - Status Report

This entry will acknowledge the highly publicized antitrust lawsuits filed by public entities with respect to this transaction.

These types of actionscome as absolutely no surprise, but at the same time should not be considered a serious issue for the transaction in general. As discussed in several previous reports, there are literally no real antitrust issues associated with this proposed combination. The “angry beer drinkers” lawsuits are simply emotional reactions to the prospect of the “Budweiser” icon passing into non-U.S. ownership. While understandable, these lawsuits are absolutely without merit on antitrust grounds and will be disposed of rather promptly.

The HSR second request continues to be perceived as essentially a courtesy to allow for venting from consumer and/or political entities. As the anger and concern over this combination dissipates over the coming months — and the “antitrust” lawsuits are dismissed — the FTC will approve this transaction without much, if any resistance. The bottom line here is that the combination of BUD and InBev can not possibly create a monopoly in the beer market, or anything resembling a monopoly. The concept of a dominant beer entity is simply ludicrous.

*ImClone Systems (IMCL) - Bristol-Myers Squibb (BMY)
September 12, 2008 (8:20a) - BMY Response

BMY yesterday (9/11) issued this letter to IMCL in response to IMCL’s offer rejection. Excerpts include the following:

“As you know, Bristol-Myers holds the exclusive, long-term marketing rights in the United States to ERBITUX® and related compounds, including IMC-11F8. Bristol-Myers has no intention of agreeing to any modifications to these rights. ImClone also should understand that our offer is for the entire Company, and any potential restructuring of the Company could severely jeopardize ImClone’s value and deprive ImClone’s stockholders of the benefits of our offer.

“Notwithstanding ImClone’s receipt of a highly conditional preliminary proposal from another party, we continue to look forward to engaging directly with ImClone and its financial and legal advisors to discuss the merits of our all-cash offer, which is not subject to due diligence or financing, to acquire the approximately 83% of ImClone that we do not already own.”

This reaction is viewed as relatively weak under the circumstances. BMY’s attempt to leverage Erbitux and IMC-11F8 will likely have no impact whatsoever on IMCL/Icahn’s pursuit of a superior offer from the still unknown third party.
In short, the response to IMCL’s revelations will serve only to delay the inevitable, which is an increased offered by BMY at or above the $70 level.

Apria Healthcare (AHG) - The Blackstone Group (BX)
September 11, 2008 (10:45a) - SEC Filings Submitted (AHG)

AHG has filed an amended 10-K (2007), amended 10-Q (Q1 2008) and 10-Q for the second quarter of this year with the SEC.

With respect to the merger transaction and accounting restatement, the current 10-Q states the following:

“On August 26, 2008, Apria received a notice of default from the trustee under the indenture governing the senior notes regarding Apria’s failure to deliver its Quarterly Report on Form 10-Q for the period ended June 30, 2008 within the specified time period. Pursuant to the indenture, failure by Apria to comply with such reporting requirements will become an event of default if not remedied within 60 days after the date on which written notice of such failure, requiring Apria to remedy the same, is given to Apria by the trustee, and the senior notes, together with accrued and unpaid interest thereon, shall become due and payable immediately upon notice to the Company from the Trustee or the holders of not less than 25% in aggregate principal amount of the senior notes then outstanding. Upon the filing of this quarterly report on Form 10-Q for the period ended June 30, 2008, the Company will have remedied the default under its senior notes.”

As of this entry, Blackstone has not issued a statement regarding these filings or the transaction in general.

The current, tentative perception is that AHG’s restatement is relatively positive or, at least, not catastrophic to the point where Blackstone would be forced to reconsider this transaction. In other words, the rationale for the transaction appears to remain intact, based on the updated accounting. Again, this is a very tentative assessment and until Blackstone responds (or does not respond at all), the outcome of this transaction under the current terms remains tenuous.

*Alpharma Inc. (ALO) - King Pharmaceuticals, Inc. (KG)
September 11, 2008 (10:25a) - Tender Offer Commenced / Offer Increased

KG has announced the commencement of a hostile tender offer for $37 per ALO share.
This is precisely the offer range anticipated several weeks ago and should be adequate to at least obtain ALO’s serious consideration. Again, KG is fully capable of offering above $40, so there is certainly some chance that ALO will again reject this offer as inadequate.
However, the $37 per share offer is perceived by this publication as more than generous and will very likely be considered by ALO shareholders similarly.

Rohm Haas Co. (ROH) - Dow Chemical Co. (DOW)
September 10, 2008 (11:30a) - Status Report

As widely reported throughout this morning, DOW has disclosed that it is considering certain divestitures related to the HSR review of this proposed transaction.

The revelation here is not the specific operations being considered, but rather that DOW is clearly attempting to expedite the HSR process by identifying potential divestiture so quickly. Although it is to be expected that the companies began working on this aspect of the deal well before the second request was issued on August 29, it is somewhat remarkable that DOW has publicly stated its progress this early. This must be perceived as a motivated effort, by a highly experienced company in these situations, to be as direct and efficient with the FTC as possible. In turn, this must also be perceived as extremely positive from a timing perspective for this transaction in general.

Although there is essentially no chance the companies will obtain HSR clearance (or European Commission consent) before the end of this year, DOW’s efforts at this early stage are very likely to facilitate a close during Q1 2009, whereas it has been suggested by this publication that the regulatory delays in this situation could easily push the close into the the second quarter of next year.

$Sciele Pharma, Inc. (SCRX) - Shionogi Co.
September 10, 2008 (10:55a) - Tender Offer Statement Filed

Shionogi filed the initial tender offer statement and offer to purchase for this transaction with the SEC on September 8, 2008.

The current tender offer expiration date is Friday, October 3, 2008.

The statement discloses that the HSR notification was submitted with the FTC on September 3, 2008, creating a waiting period expiration date of September 18, 2008.
Regarding non-U.S. jurisdictions, the document states the following:

“Based on our review of the information currently available about the businesses in which Sciele and its subsidiaries are engaged, we are not aware of any notification filings that are required to be made or pre-merger approvals that are required to be obtained under the antitrust and competition laws of other foreign countries.”
There remains no expectation of any regulatory delay for this acquisition and a high expectation that the tender offer will be successfully complete within the current tender offer period.

$Longs Drug Stores (LDG) - CVS Caremark (CVS)
September 10, 2008 (10:35a) - LDG Shareholder Lawsuit Settlement Announced

LDG has announced a settlement agreement related to the equity lawsuit brought forth by two California Pension funds. The complaints and settlement press release are available in this SEC filing.

This settlement does not involve the critical investor triad of Pershing Square, Advisory Research, and CTW Investment Group, all of which have expressed concerns and/or opposition to the transaction to this point.

*ImClone Systems (IMCL) - Bristol-Myers Squibb (BMY)
September 10, 2008 (9:40a) - BMY Offer Rejected / Third-Party Offer Announced

IMCL has rejected BMY’s $60 per share offer as inadequate, as expected.
In a press release, IMCL has disclosed the following regarding a competing offer:
“Mr. Icahn also announced he has had several conversations with the Chief Executive Officer of a large pharmaceutical company. As a result of such conversations, the pharmaceutical company has submitted a proposal, subject to due diligence, but not subject to financing, to acquire ImClone for $70 per share in cash. The Special Committee has determined, subject to the execution of a confidentiality agreement, to allow this company to conduct due diligence for a two week period, subject to extension by mutual consent. No determination has been made as to whether $70 per share would be adequate.”

This development is not terribly surprising under the circumstances, as an offer of $70 has been the obvious minimum for some time. Although BMY has shown no indication of submitting a reasonable offer for IMCL, this third-party offer should serve as the catalyst for BMY to act quickly and decisively. As it is very difficult to believe that BMY will simply decline to match or exceed a competing offer at this level, it is extremely likely that the company will continue to pursue IMCL via an offer exceeding $70..

Allied Waste Industries (AW) - Republic Services, Inc. (RSG)
September 10, 2008 (9:20a) - Preliminary Proxy Statement Filed

RSG filed the first amended proxy statement for this transaction with the SEC yesterday (9/9).

Shareholder meeting details are not provided in the revised document.

Regarding the HSR second request issued on July 23, the proxy states the following:

“Both Republic and Allied are cooperating with the Antitrust Division to respond fully to the request for additional information as soon as practicable. In practice, complying with a request for additional information or material can take a significant amount of time. In addition, if the Antitrust Division raises substantive issues in connection with a proposed transaction, the parties will engage in negotiations with the relevant governmental agency concerning possible means of addressing those issues and may agree to delay completion of the transaction while those negotiations continue.”

The local overlaps in California, Georgia, North Carolina, South Carolina, and Texas continue to be the focus of this combination and, as discussed previously, divestitures are anticipated in order to obtain HSR clearance. Based on further research, it appears that the divestiture will be moderate in volume, and limited primarily to the Atlanta area, as well as various locales in California, North and South Carolina, and perhaps Texas. The focus of the DOJ is likely to be transfer stations and removal routes, as the landfill overlaps in these areas appear to face adequate municipal and/or private competition.
Based on the information available at this time, it is expected that roughly 15 to 20 divestitures will be required by the DOJ. It must be assumed at this stage that the specific units have been identified and the companies are currently in the process of indentifying buyers for the divested operations. This should not be a terribly problematic process, as there are several large and countless small/independent waste companies capable of purchasing and effectively taking over the operations.

In short, the HSR process in this situation is still believed manageable before the end of this year if the review has progressed to the point of seeking buyers. Assuming this is the case, a consent agreement should be announced before the end of November.
Naturally, Waste Management looms as a potential delaying factor as its efforts to disrupt this deal can be expected to continue over the next few months. Nevertheless, the closing projection of the AW/RSG transaction will remain at early/mid-December barring Waste Management interference.

UST Inc. (UST) - Altria Group, Inc (MO)
September 9, 2008 (11:55a) - Initial Analysis

This acquisition by MO is almost completely vertical as its presence in the smokeless tobacco market is virtually nil. Indeed, MO’s inability to establish a viable competing smokeless product under its iconic “Marlboro” brand is clearly the rationale for this transaction.

In obtaining the (also iconic) Skoal and Copenhagen brands, as wells as UST’s increasingly popular discount brands, MO will control more than half of the overall smokeless tobacco market for which it is currently not legitimate player. According to most reliable sources, UST’s current market share in the segment is roughly 58%, while Reynolds “Kodiak” and “Grizzly” products (via Conwood acquisition) have about 28% of the smokeless tobacco market. It should be noted that the FTC granted early termination of the HSR waiting period in the Conwood/Reynolds deal.
In short, this deal will also be viewed by regulators as a non-issue, as has been the case almost every other vertical combination over the last several years. This will be accentuated by the fact that UST’s flagship products (Skoal and Copenhagen). Under a more strict regulatory environment, this combination could conceivably be subject to some FTC interest due to the vertical aspects, but even then the likely outcome would be fairly quick HSR clearance. Under the present circumstance, this transaction will receive a standard 30-day HSR review, and perhaps early termination.

With respect to the SEC review, UST’s only recent encounter with the regulatory involved a 2004 quarterly report revision (Q1), which in turn resulted in a delayed annual report filing for the year ended 2003. This issue did not create any lingering problems with the SEC. Therefore, as an all-cash transaction, the companies should have no difficulty obtaining SEC clearance for the proxy materials in less than 45 days. Assuming the first proxy is filed by the second week of October, the UST shareholder meeting and close can occur in a mid/late-December time frame. A proxy waiver — which is possible in this case — would move the closing time frame to early/mid-December, but only if the first proxy is filed before the end of this month.

Huntsman Corporation (HUN) - Hexion Specialty Chemicals
September 9, 2008 (9:05a) - Delaware Chancery Court Status

Hexion’s pre-trial brief is available as part of this SEC filing.

HUN’s pre-trial brief is available as part of this SEC filing.

It will be noted that Hexion’s CFO (William Carter) testified yesterday that a combined HUN/Hexion entity would ultimately go bankrupt due to HUN’s debt and decreasing sales. Regardless of the details provided in the briefs and the various opinions contained therein, the continued claim of imminent bankruptcy by Hexion will likely resonate with the Delaware Chancery Court above all else. This is naturally a general and broad perception of the proceedings at this early stage, but one which this publication currently believes will dictate the outcome if this case continues in front of the Chancery Court.

Although HUN will certainly argue against the bankruptcy specter throughout the proceedings, it continues to be expected (tentatively) that the company will eventually realize its position in front of the Court and seek to settle the dispute before a final decision is issued.

Alpha Natural Resources, Inc. (ANR) - Cleveland-Cliffs Inc (CLF)
September 9, 2008 (8:30a) - Definitive Proxy Statement Filed (CLF Harbinger)

CLF has filed a definitive proxy statement with the SEC for the company’s October 3, 2008 special shareholder meeting to consider Harbinger Capital’s control share acquisition yesterday, September 9, 2008.

The record date for the special shareholder meeting is September 2, 2008.
Harbinger Capital also filed this definitive proxy statement for the October 3 shareholder meeting. Harbinger has added this passage to the document

“Harbinger is not seeking to control the Company. Further, there can be no assurance that, even if Harbinger obtained all of the shares contemplated by the Harbinger Share Acquisition, Harbinger would have the ability to, or would determine to, block shareholder approval of the Alpha transaction. In any event, we intend to be an advocate for the interests of shareholders, working with management, the Board, shareholders and all other interested parties to ensure that the Company explores all available alternatives for enhancing the value of its equity.”

This is a somewhat distorted position by Harbinger, as this investor clearly does intend to effectively gain control of CLF through this action. The above claim is clearly an effort to assuage undecided shareholders by softening its stance. Whether this will be effective at the October 3 shareholder meeting remains to be seen.

It is extremely likely, however, that the first shareholder meeting will result in a delay of the second shareholder special shareholder meeting to consider the merger transaction. Although no date as been set for the second meeting, adjournment will be considered on October 3 and, given the circumstances, it will be surprising if shareholders fail to vote for a postponement.

CLF to this point has not provided a very strong public relations campaign with respect to the Harbinger situation. Although the company is presumably working directly with key shareholders to fend off Harbingers share acquisition, there is absolutely no indication at this time that Harbinger’s efforts will fail. Thus, it continues to be the perception of this publication that this deal will not succeed barring increased and motivated efforts by CLF to alter the course of the company shareholders.

Huntsman Corporation (HUN) - Hexion Specialty Chemicals
September 8, 2008 (8:15a) - Status Report

As of this update, the Delaware Chancery Court trial remains scheduled to start today. This despite yet another last-ditch effort by HUN — disclosed in this SEC filing — to avert a trial via repeated shareholder commitments to provide post-closing financing.
Hexion/Apollo has not issued any statements or given any indication that it will consider the HUN shareholder initiative, nor are there any signs that settlement will occur before the start of today’s trial, as has been generally anticipated.

Nevertheless, it is difficult to believe that either side as much interest in seeing this case resolved by the Chancery Court. Assuming the trial does indeed begin today, it would not be surprising if the parties worked out a settlement after arguments are presented, but before the Court decision is issued. Again, there is very little expectation that this situation will end with a completed transaction.

]]> http://themarkettone.com/2008/09/13/detailed-recent-mergers-and-acquisitions/feed/ http://themarkettone.com/2008/09/10/euro-breaks-140-after-new-zealand-rate-cut/ http://themarkettone.com/2008/09/10/euro-breaks-140-after-new-zealand-rate-cut/#comments Wed, 10 Sep 2008 21:44:20 +0000 Kathy Lien http://www.kathylien.com/site/us-dollar/euro-breaks-140-after-new-zealand-rate-cut EURO BREAKS 1.40 HOW MUCH FURTHER CAN IT FALL?

The Euro broke 1.40 following the Reserve Bank of New Zealand interest rate decision as traders realized that the European Central Bank could cut interest rates over the next few months. Despite the hawkishness of ECB President Trichet, it should just be a matter of time before he gives in and cuts interest rates as well. For some investors like central banks who have deep pockets, EUR/USD at 1.39 may be a value play. But even if we see a relief rally in the EUR/USD, don’t expect it to last because the break of 1.40 could trigger a flush down to 1.39. On a purchasing power parity basis, the EUR/USD could fall as low as 1.15.

3 Factors Driving the EUR/USD Lower

1. Oil Prices Fall Despite OPEC Cut: There is a 70% Correlation between EUR/USD and Oil YTD
2. European Commission Slashes Eurozone Growth Estimates, Rate Cuts Anticipated
3. Risk Aversion: 1 Month ATM EUR/USD Volatility Hits Highest Level Since September 2001

Since the beginning of the year, there has been a 70 percent correlation between the price of oil and the EUR/USD. With crude prices edging lower despite a production cut by OPEC, the correlation with oil is a big reason why the Euro has broken 1.40. The European Commission also downgraded the Eurozone’s GDP forecast. The sharp drop in German exports suggests that the country could fall into a technical recession next quarter. Despite the problems, the growth story still favors the US over the Eurozone.

Volatility at 7 Yr High

One month at the money EUR/USD volatilities also hit the highest level in 7 years. Volatility peaked at 14.55 in the EUR/USD days after the 9/11 attack. We are faced with sharp volatilities once again with ATM 1 month vols at 12.63. High volatility tells us that the currency markets are still nervous but periods of high volatility usually precede periods of lower volatility. Back in 2001, after volatility peaked, the trading range in the EUR/USD contracted by 50% - that range lasted for 8 months.

Eurozone Needs a Weak Euro

The weakness of the Euro should be comforting for the European Central Bank because it is the answer to many of their problems. As an export dependent region, the slide in the Euro will help to support the economy, just like the weakness of the US dollar has contributed to corporate profitability. The Eurozone can also handle a weaker currency at this time because oil prices have fallen materially. Therefore don’t expect the ECB to stem the currency’s fall. We still believe that there will be further losses in the EUR/USD but not beyond 1.35.