Research In Motion’s shares plummeted 17% on Friday after the smartphone maker’s fiscal third-quarter outlook announced Thursday missed expectations.
The Waterloo, Ontario-based RIM, which makes the BlackBerry, reported earnings after the close of trading Thursday.
A disappointing forecast punished RIM shares more than two hours after the open. Shares fell $14.15, or more than 17%, to close at $68.91.
"I would look at this as an overreaction, and a buying opportunity," said Nick Agostino, analyst at Research Capital. "The report was lighter than expectations, but to say ’significantly lower’ is a bit strong."
Excluding one-time charges, RIM (RIMM) said it earned $1.03 per share in its second fiscal quarter, up 17% from earnings of 86 cents a share last year. Revenue jumped 37% to $3.53 billion. Analysts were expecting earnings of $1 per share on revenue of $3.62 billion.
During the quarter, which ended Aug. 29, RIM said it shipped 8.3 million smartphone devices.
But RIM’s outlook was not as rosy. For the third fiscal quarter, which ends in November, RIM said it expects revenue of between $3.6 billion and $3.85 billion. Analysts were expecting $3.92 billion.
The company expects earnings per share of between $1.00 and $1.08, while analysts are expecting $1.05. RIM expects to ship between 9.2 million and 9.9 million units in the third quarter.
"Expectation is certainly a key risk," Agostino said, noting that RIM will upgrade many of its devices in its third quarter.
Shares also suffered on some analyst downgrades. Goldman Sachs (GS, Fortune 500) cut its rating on RIM to "neutral" from "buy," while Deutsche Bank (DB) moved it to "sell" from "hold."
Agostino said he left his rating unchanged at "buy," with a price target of $98.
"I’m hoping that as we move toward November and get more visibility on new devices and launch dates, the stock will get a reaction," he said. "We’ll need to see about fourth-quarter outlook, but it should be an interesting few months for these guys."
Whether or not you’re personally convinced that the recession is just about over, those in the big buck mergers-and-acquisitions game are believers.
Biotechnology stocks, for example, have made dramatic gains because investors consider them ripe for picking. Big drug companies want innovative products in place for an economic revival.
Bristol-Myers Squibb recently bought biotech group Medarex Inc. for $15 a share, or $2.4 billion, about a 100 percent premium for Medarex shareholders.
"There are all these biotechnology companies out there that have been dying throughout the recession and unable to get capital or funding," observed Richard Bove, banking analyst with Rochdale Securities of Stamford, Conn.
Other deals include Walt Disney Co. buying Marvel Entertainment Inc., PepsiCo Inc.’s purchase of Pepsi Bottling Group Inc. and, in energy, Baker Hughes Inc. acquiring BJ Services Co.
In pharmaceuticals, there’s been the Pfizer Inc. deal for Wyeth and Merck & Co. acquisition of Schering-Plough. In technology, there’s the Adobe Systems Inc. deal for Omniture Inc. and Oracle Corp. purchase of Sun Microsystems Inc. In candy, Cadbury Plc has been in play since Kraft Inc.’s hostile bid.
"It’s all a sign you can’t keep a good capitalist down, and eventually greed will overcome fear," said James Paulsen, chief investment officer for Wells Capital Management, Minneapolis. "People are saying, ‘Gee, not only are we not going to have a depression, but it looks like we’re actually going to have a recovery.’"
Stock is still available at a "30-percent-off sale price," and there is excess cash lying around, said Paulsen. "That boatload of cash is on hand at so many companies because nine months ago everyone was saying cash was king — even though they were earning nothing on it," he said.
While he doesn’t expect a red-hot M&A market the rest of this year, he thinks it will continue to noticeably improve.
"It seems like a lot is happening because finally, after the whole economic crisis, some deals are actually getting done," said Jonathan Marino of the M&A Journal in New York. "It’s not driven by availability of money because credit markets are just as frozen as they were in May, but many acquirers have cash on their balance sheets."
Cash lets firms avoid issuing stock or paying high loan costs, he said.
"Some of these deals are tacit indication that the companies can’t grow their businesses much beyond what they are now, so they’re looking to fill some holes with key partnerships," said Paul Nolte, director of investments for Hinsdale Associates in Hinsdale, Ill. "Certain companies reach a ceiling where they are limited in how fast they can grow their revenue organically."
Firms aren’t using their traditional sources of financing, said Nolte. In the case of Kraft, financing for the deal was lined up well in advance of an offer being made.
"It’s really a broad spectrum this year," he said. "We’ve seen deals in the food industry, entertainment, technology and oil industry."
There will be windfalls for some investors. Greatest gains typically fall to those holding shares of the company being bought, especially if there are several competitors due to a hostile bid. Meanwhile, the acquiring firm’s stock often suffers on worries over whether the merger is logical or could stretch finances too thin.
Investors are buying a variety of shares in the likely target industries. Much of the acquisition activity will take place in digestible smaller firms, along with some larger companies if they have strong product lines.
The fact that mining company BHP Billiton has built up $18 billion in cash, for example, has investors looking at its possible acquisition of Freeport-McMoRan Copper & Gold Inc., Potash Corp. or Anglo American Plc.
Nonetheless, everyone is still into low risk these days. Lenders aren’t over-lending, individuals aren’t overpaying for houses, most firms aren’t expanding their business, and assets are still priced for "the depression that wasn’t," Paulsen said.
The 2009 merger environment is "high risk and high reward," according to a recent report by the Transaction Services unit of PriceWaterhouseCoopers. It believes a number of deal makers, including private equity firms, are eager to get back to business. While some companies will merge for survival, others will simply decide it is a good time to combine with a partner to prepare for an uptick in the economy.
Here are the sectors best-positioned for mergers and worthy of monitoring by investors, according to the PriceWaterhouseCoopers partners:
— Technology is "poised for another wave" of consolidation because many of its companies have mature business models and healthy balance sheets.
— Energy is experiencing greater stabilization in crude oil prices. This industry features excellent cash flow and growth prospects that make it a "consolidation hot spot."
— Pharmaceuticals and health care are now in the merger "spotlight," no matter what type of reform may be passed in Washington. Drug companies are seeking to fill their product pipelines through acquisitions, while some health care companies will be realigning their business models to take advantage of a new industry environment.
— Financial services consolidation will be "rampant," driven by mergers of necessity based on the distressed circumstances of some competitors. There will a flight to quality banks in the top one-fourth of the banking industry because they aren’t so hamstrung by government oversight.
Stocks slumped Thursday, falling for the second straight session, as a surprise drop in existing home sales and tumbling commodity prices gave investors a reason to sell into a rally that pushed the major gauges to one-year highs.
The Dow Jones industrial average (INDU) lost 41 points, or 0.4%. The S&P 500 (SPX) index fell 10 points, or 1%. The Nasdaq composite (COMP) declined 24 points, or 1.1%.
Declines were broad based, with 2 out of every 3 Dow stocks sliding, including GE (GE, Fortune 500), Alcoa (AA, Fortune 500), Bank of America (BAC, Fortune 500), Chevron (CVX, Fortune 500), Boeing (BA, Fortune 500), Caterpillar (CAT, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and United Technologies (UTX, Fortune 500).
Stocks gained in the early going after the Labor Department reported that jobless claims fell for the third week in a row. But the market abandoned gains after the housing report. A slide in oil and gold shares on the back of a stronger dollar dragged on commodity stocks.
Stocks slipped Wednesday, falling from almost one-year highs, after the Federal Reserve kept interest rates unchanged and essentially maintained its recent economic outlook. A week ago, Fed chief Ben Bernanke said the recession was very likely over, but the labor market still has a long way to go.
In the short term, "there’s not a whole lot of bad news that could derail equities," said Robert Siewert, portfolio manager at Glenmede. "But the rally since March has been the sharpest since the 1930s and it’s not surprising to see occasional pullbacks."
However, Siewert said that longer term, there are a lot of headwinds that could challenge stocks, with 2010 likely a tougher year for equities. He cited challenges including the eventual rising of taxes, the labor market weakness, the still-tight credit market and the struggle of a consumer that chooses to save at the expense of personal spending.
Friday brings government reports on new home sales and durable goods orders, as well as the University of Michigan’s September consumer sentiment index
Housing: Existing home sales fell to a seasonally adjusted 5.1 million unit rate in August from a 5.24 million unit rate in July, according to a report from the National Association of Realtors. Economists surveyed by Briefing.com forecast that sales would rise to a 5.3 million unit rate in the month.
Jobs: A report from the Labor Department showed weekly jobless claims fell for the third week in a row. The number of Americans filing new claims for unemployment fell to 530,000 last week from a revised 551,000 in the prior week. Economists thought claims would rise by 5,000.
Continuing claims, a measure of Americans who have been receiving benefits for a week or more, fell to 6,138,000 from 6,261,000 in the previous week. Economists expected a rise.
IPOs return: Shares of A123 Systems (AONE) surged as much as 56.6% from their initial pricing, before trimming the gain to just over 50% at the close. The company, one of a small group of electric-car battery makers, raised $380 million in an initial public offering Wednesday that priced above forecasts. The company trades under the ticker symbol AONE.
A123 was one of 5 companies that went public Thursday, the biggest day for the IPO market since Nov. 15, 2007, when 6 debuted.
Among the other debuts, online pharmacy Vitacost.com (VITC) was little changed Thursday and asset management firm Artio Global Investors (ART) added 4 no fax cash advance.8%.
Two REITs also debuted: Apollo Commercial Real Estate Finance (ARI), which fell 7.5% Thursday, and Colony Financial (CLNY), which fell 2.5%.
Three more IPOs are due by the end of the week and eight over the next two weeks. The recharged market could be seen as another indicator that a broader economic recovery is taking hold. Alternately, it could attest to how few financing options are available to companies.
Other company news: Rite Aid (RAD, Fortune 500) reported its ninth consecutive quarterly loss Thursday morning, although the results were not as weak as analysts had expected. However, the drugstore chain also said it would see a wider fiscal-year loss than it initially thought because of falling sales.
Shares fell 12.3%.
Among other movers, Chelsea Therapeutics (CHTP) tumbled 60% after its experimental drug to treat a neurological disorder showed disappointing results in a late-stage trial.
One-year highs: The major indexes ended Tuesday’s session at the highest levels since just after the collapse of Lehman Brothers last September.
Since bottoming at a 12-year low March 9, the S&P 500 has gained 56.8% and the Dow has gained 48.9%, as of Thursday’s close. After hitting a six-year low, the Nasdaq has gained 68%.
The stock advance was driven by signs that the economy is slowly starting to recover — and by extraordinary amounts of fiscal and monetary stimulus.
Despite predictions of a big September selloff, stocks have seen only modest pullbacks that have been met with renewed buying.
Fed: The Federal Reserve said Thursday it was dialing down a pair of emergency programs in the wake of an improving economy. The central bank is cutting back the amount of money available to banks under the Term Auction Facility, a short-term loan program.
The Fed is also pulling back on a program that lets investment banks trade bad debt for safe Treasury debt.
G-20 summit begins: The Group of 20 leading developed and emerging countries are meeting in Pittsburgh to discuss financial reforms in the wake of the global financial market collapse. It is the third such meeting, following earlier events in April and last November.
World markets: Global markets were mostly lower. In Europe, London’s FTSE 100 lost 1.2%, while France’s CAC 40 and Germany’s DAX both lost around 1.7%. Asian markets ended lower, with the exception of the Japanese Nikkei.
Currency and commodities: The dollar gained versus the euro and the yen. The greenback has repeatedly hit one-year lows against a basket of currencies over the last few weeks.
A stronger dollar hit dollar-traded commodities, including oil and gold.
U.S. light crude oil for October delivery fell $3.08 to settle at $65.98 a barrel on the New York Mercantile Exchange.
COMEX gold for December delivery fell $15.50 to settle at $998.90 an ounce. Gold closed at a record high of $1,020.20 last week.
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.38% from 3.41% late Tuesday. Treasury prices and yields move in opposite directions.
Sometimes you need a little starter cash to get things going.
Mariam Noland, president of the Community Foundation for Southeast Michigan, took that idea to a whole new level.
Nolan and her organization raised $100 million for Detroit’s New Economy Initiative, which aims to diversify the area’s businesses away from the automobile industry.
The money doesn’t just stop with the New Economy Initiative. The community foundation uses big sums of money from foundations, donors and a healthy endowment to fund a variety of public initiatives around the Detroit area. This year they’ll give out over $40 million.
"Anything can get done," said Noland, who started her career in college admissions offices before getting a mid-level position at a sister community foundation in Cleveland over 25 years ago. "My job is to figure out who can do it, and where to get the money."
The New Economy Initiative is striving to diversify the area’s current auto-reliant business mix to one that incorporates information technology, biotech, advanced manufacturing, renewable energy, and a host of other emerging industries.
New Economy was also a major sponsor behind a recent entrepreneur training workshop in Detroit, helping Detroiters put themselves to work.
The Community Foundation for South East Michigan is part of a national network of community foundations that all work on community development.
Other recent initiatives undertaken by Detroit’s community foundation include an effort to convert some of the city’s vast tracts of vacant land to greenways. There’s now over 100 miles of greenway trails snaking around southeast Michigan.
The foundation has also worked on programs addressing childhood obesity and helped local arts organizations build long-lasting fundraising programs in what is undoubtedly a challenging environment to raise money.
"It’s about money, but it’s also about knowledge," said Noland. "Once the money is used you want people to be better able to do whatever it is they need to do."
Raising money in Michigan is a challenge itself, said Noland. Many people that make it big in Detroit often leave the area for warmer weather, and bring their money with them. Keeping that money in Detroit is one of the group’s challenges.
Going forward, Noland said journalism is one area her group may focus on. She said the cutbacks at struggling news outfits is leading to less information for the community, information that’s vital for people to make good decisions. Funding non-profit news agencies might be something the foundation would do, although no plans have been made yet.
Working to raise money doesn’t come without it’s odd stories.
One gentleman, who appeared homeless, would come into the foundation on a regular basis saying he wanted to start a fund, as Noland tells it.
The staff would give him food or make sure he was ok, but no one really took him seriously. Finally they contacted his lawyer, who told them to make preparations for a fund. When the man died they found out that he was a former cab driver who had evidently been quite frugal with his earnings. He left a six-figure endowment to help the homeless.
One donor gave $1 million with the stipulation that the grants be chosen by high school students. Another sent in a dollar every three months to atone for a shoplifting incident as a young girl that had apparently been weighing on her conscience.
Getting Detroiters to give is one thing. Getting them to change their mind set is another.
Noland is confident Detroit can grow in the next 5 years, but she said it will take strong local political leadership and a recovering national economy to do it.
But like many in Detroit, she said moving the city from its old way of thinking is key to putting it on track to compete in the 21st century economy.
"It’s an entitlement culture here, you didn’t have to go to school and you could get a good job," said Noland. "That’s gone."
General Motors Co. said Tuesday that it would add shifts at three U.S. assembly plants, restoring 2,400 jobs, as it shutters other facilities or prepares them for new products.
The addition of shifts at plants in Kansas, Indiana and Michigan comes at a time when U.S. auto industry sales are thought to have hit bottom and manufacturers are raising production to restore depleted vehicle inventories.
U.S. dealer inventories were trimmed sharply after the federal government’s "cash for clunkers" program lifted sales in July and August with incentives of up to $4,500 to turn in gas-guzzling vehicles and buy new more fuel-efficient models.
GM said about 600 other jobs at related stamping, engine and casting facilities would be restored as well.
The company said it would add a shift at its assembly plant in Fairfax, Kansas, in January. Fairfax will become the sole builder of the Chevrolet Malibu sedan when GM ends production in Orion, Michigan, to retool that plant for small car production.
In April, GM plans to add a shift of heavy-duty pickup production in Fort Wayne, Indiana. The company is closing its Pontiac, Michigan, plant at the end of September.
GM also plans to add production of the Chevrolet Traverse SUV at its Lansing Delta Township, Michigan, plant in April. Production of the Traverse at GM’s plant in Spring Hill, Tennessee, will end in November, and that plant will be put on standby status.
Earlier in September, GM said it expected to build 535,000 vehicles in North America in the third quarter and 655,000 in the fourth quarter, down about 20 percent from a year ago.
With little on the docket to challenge investor optimism, the defiantly bullish stock market is looking to extend its staggering run in the week ahead.
And why not? Wall Street has shaken off pervasive calls for a September selloff and warnings about the still-struggling economy, managing frequent, fresh 2009 highs of late. The Dow Jones industrial average, the S&P 500 index and the Nasdaq composite have all ended higher in 9 of the last 11 sessions.
The petering out of certain government programs in the last two months of the year and the possibility that third-quarter financial reports will disappoint are real concerns — so is the reality of a still-brutal job market and change in consumer attitudes toward spending versus saving. But these longer-term worries aren’t likely to dominate in the week ahead.
"As long as the economic news keeps pointing up, the market is likely to post more gains in the near-term," said Michael Sheldon, chief market strategist at RDM Financial Group.
"However, given the rate of ascent in recent days, investors should be prepared for a pullback before too long," he said. "Anything that could disrupt the positive outlook could spell trouble."
Since bottoming at a 12-year low March 9, the S&P 500 has gained 58% and the Dow has gained 50%. Since bottoming at a six-year low, the Nasdaq has gained 68%.
The advance has been driven by extraordinary amounts of fiscal and monetary stimulus and a growing sense of optimism about the economy.
But that optimism may be misplaced, said Robert Loest, portfolio manager at Integrity Funds, and he said stocks could be in for a bigger selloff a few months out. "I don’t think we’ve seen a rebound of this magnitude following a crash and I’m suspicious."
"This is not the time for investors to be getting into stocks but to be taking profits," he said. "I think this rally can go another five weeks or so, but not three months or six months."
The week ahead: The Federal Reserve meets Tuesday and Wednesday and is likely to hold interest rates steady. Last week, Fed chief Ben Bernanke said that the recession is "likely over," although the labor market has a way to go. The Fed’s statement is likely to echo that observation.
Several housing market reports and the index of leading economic indicators are also on the docket this week. But the recent momentum is likely to keep nudging stocks higher.
Economy
Monday: The Conference Board’s index of leading economic indicators is due in the morning. LEI is expected to have risen 0.7% in August after having risen 0.6% in July, according to a consensus of economists surveyed by Briefing.com.
Tuesday: The Federal Housing Finance Agency (FHFA) releases its July home price index after the start of trading. The index is expected to have risen 0.5% after rising 0.5% in June.
The Federal Reserve begins its two-day interest rate policy setting meeting with a decision expected Wednesday afternoon.
Wednesday: Treasury Secretary Timothy Geithner is set to testify before the House Financial Services committee on regulatory reform, starting at around 9:30 a.m. ET.
The Fed is widely expected to hold the fed funds rate, a key short-tem interest rate, at historic lows near zero on Wednesday, with an announcement due at 2:15 p.m. ET. But investors will be more focused on what the bankers say about their "exit strategy" as they seek to wind down programs that pumped trillions into the economy to cushion the blow of the recession.
The weekly crude oil inventories report is also due in the morning.
Thursday: The existing home sales report from the National Association of Realtors (NAR) is due shortly after the start of trading. August sales are expected to have risen to a 5.33 million unit annual rate from a 5.24 million unit rate in July. July sales were up 7.2% from the previous month, the largest monthly gain on record, going back to 1999.
The weekly jobless claims report from the Labor Department is due before the start of trading. 550,000 Americans are expected to have filed new claims for unemployment, versus 545,000 claims the week before. Continuing claims, a measure of people who have received benefits for a year or more, likely fell to 6.188 million from 6.230 million the week before.
Also Thursday, the G-20 summit in Pittsburgh gets underway. The Group of 20 leading developed and emerging countries will discuss the ongoing efforts to stabilize economies after the financial market meltdown.
Friday: Sales of new homes are expected to rise at a 440,000 unit annualized rate in August, according to forecasts, after rising at a surprisingly robust 433,000 unit annualized rate in July. The government report is due out after the start of trading.
The University of Michigan’s September consumer sentiment index is due shortly after the start of trading. Sentiment is expected to have dipped to 70 from an initial read of 70.2.
Durable goods orders, or orders for long-lasting manufactured products, are expected to have risen 0.1% in August after rising 5.1% in July. The July jump resulted from a spike in aircraft orders. Orders excluding transportation are expected to have risen 0.8% in August after rising 1.1% in July.
With apologies to the Beatles, the list of the best-performing Fortune 500 stocks in the year after the collapse of Lehman Brothers reads like a stroll down Penny Lane.
Penny stocks — those that trade for less than $5 apiece — are here, there and everywhere.
The top returning Fortune 500 stock over the past year is, ironically enough, Freddie Mac (FRE, Fortune 500). The irony lies in the fact that the government’s seizure last September of the mortgage purchaser and its big sister Fannie Mae (FNM, Fortune 500) kicked off the most turbulent month in the financial markets since the Great Depression.
Taking over the companies didn’t just tip Fannie and Freddie shares into free fall. It also sent shock waves through the financial system, as dozens of banks and insurance companies were left with big losses on preferred shares of Fannie and Freddie they had viewed as safe.
When Lehman failed a week later, Fannie and Freddie shares had a head start in the race to the bottom that many other giant financial firms, from AIG (AIG, Fortune 500) to Wachovia and Washington Mutual, would soon join.
Since then, shares of Freddie are up 367%. Fannie Mae was No. 3, returning 167% over the year ended Sept. 15, 2009.
Yet even after those gains — much of the increase coming during the manic cheap-stock rallies this summer — shares of Freddie were trading recently for only $1.87 each and those of Fannie were fetching just $1.60. Given the tens of billions of dollars of federal aid the companies have received, many analysts doubt the shares will hold even that value for long.
Though Fannie and Freddie are the most prominent penny stocks on the list, they aren’t the only ones. Shares in the eighth-best performer, drug store chain Rite Aid (RAD, Fortune 500), surged 82% over the past year — to $1.82 each. The debt-laden Camp Hill, Pa., company posted a $2.9 billion loss for the fiscal year ended in April and is struggling to reduce a massive debt load.
The top stocks on the Fortune 500 list aren’t all lottery tickets, as some refer to the low-priced shares of companies with poor prospects. But, owing to the depth of the economic meltdown last fall, almost all the top performers have spent some time trading in the single digits.
Take Oshkosh (OSK, Fortune 500), the military truck maker that was the No allstate insurance. 2 Fortune 500 performer over the past year with a 171% gain. It traded recently at $31.47 and fetched as much as $60 a share in 2007, following a big Army order.
But shares dropped as low as $3.85 last fall, as the economy went into free fall.
The only stock among the top 10 performers in the Fortune 500 to have spent the entire year above $10 a share was World Fuel Services (INT, Fortune 500). The Doral, Fla.-based provider of nautical and aviation fuel was the No. 6 gainer last year, rising 101% to a recent $50.
Obviously, though, it wasn’t all fun and games in low-price stock land last year. Three of the worst-performing Fortune 500 stocks — not counting those that were delisted or filed for Chapter 11 bankruptcy protection, such as General Motors, cable company Charter Communications and numerous auto parts suppliers — were AIG, Citigroup (C, Fortune 500) and CIT (CIT, Fortune 500).
AIG, the insurer that was taken over by the government as it teetered on the brink of insolvency the day after Lehman’s failure, dropped 59% over the past year, adjusted for a 1-for-20 reverse stock split the company did in June to retain its New York Stock Exchange listing. It was the sixth-worst performer in the Fortune 500 among companies still listed on a major exchange.
Citi, the big bank that is the biggest recipient of federal aid via capital infusions and loan guarantees, was the fourth-worst performer with a 73% decline. This despite the fact that the stock has more than quadrupled since March, when it hit a multidecade low below a dollar amid fears a government takeover was on the way.
And CIT, the troubled small business lender that this summer pledged all its assets to get its hands on a $3 billion emergency loan, was down 81%. That made it the second-worst performer on the Fortune 500, after Crosstex Energy (XTXI, Fortune 500), the Dallas-based pipeline company that posted an 84% decline.
With research by Fortune senior list editor L. Michael Cacace
Since unveiling his NorthSide plan in May, Paul McKee has done a lot of pitching.
He’s pitched to the neighborhoods he wants to rebuild. He’s pitched to city officials who must approve the plan. He’s pitched to the media, to business groups, to anyone who will listen.
But the people he really needs to pitch to are the guys with the money: Bankers. Investors. The people with the cash to get his vision off the ground. That may be his toughest pitch of all.
The plan to rebuild 1,500 acres of north St. Louis is projected to cost $8.1 billion. In filings with the city, McKee’s McEagle Properties has said it hopes to borrow $6 billion of that and raise most of the rest in the form of equity from investors and partners. And he’ll need to do it in the toughest credit market in decades.
It is worth noting that McEagle won’t need to borrow $6 billion all at once. It plans to "recycle" capital over the course of the 20-year project, and use profits from the early stages to help fund the later ones. But the first four years alone call for nearly $1 billion in expenses, and that money will have to come from somewhere.
Meanwhile, the market for financing big commercial real estate projects keeps getting worse.
The $3.5 trillion industry of office buildings and shopping centers in this country has lost 39 percent of its value in the past two years, according to the MIT Center for Real Estate. Couple that with a wave of commercial mortgages coming due — nearly half will expire in the next five years — and experts worry about a flood of foreclosures and costly refinance deals. That could suck up a lot of cash which might otherwise fuel projects such as NorthSide.
When you figure in the long time frame and complexity of McKee’s project, local finance experts say, raising the money to get it off the ground becomes a very tough sell indeed.
"It’s almost unimaginable," said Edward Lawrence, a finance professor at the University of Missouri-St. Louis. "There are some really knotty issues."
For one, NorthSide will take two decades, starting with a few office buildings and rolling out to include 10,000 homes. That means the project can build on early successes, which is good, Lawrence notes, but it also leaves a lot of time for things to go wrong. "This thing can fall apart at any point," he said.
Then there’s uncertainty about all the different pieces that must come together, from thorny political approvals to an unfunded highway interchange at 22nd Street, to a new $640 million bridge across the Mississippi. And questions about who will fill 4.5 million square feet of new office space in a city where downtown vacancy remains stubbornly high.
The project carries a lot of risk in an environment where many banks don’t want any, said Joe Monteleone, executive vice president of Q10 Triad Capital Advisors, a commercial real estate firm in Creve Coeur.
The way to ease that risk, Monteleone said, is for McEagle to attract a lot of equity — to bring cash to the table and keep its borrowing to a minimum. But that’s no easy task.
"Right now, attracting equity is just very difficult on all projects," he said. "In a very large deal like this, it just becomes that much more difficult."
In documents filed with the city, McEagle says that it and its partners expect to kick in 20 percent, or about $1.7 billion. Then there’s the 75 percent funded through borrowing. The rest would come from tax credits and other government incentives, especially in the first few years as NorthSide gets off the ground.
Most large urban redevelopment projects — such as Atlantic Yards in Brooklyn — have dialed back in this recession, said Stephen Blank, a senior fellow who studies real estate capital markets for the Urban Land Institute. The money just isn’t there right now.
Debt markets are basically frozen. There’s no appetite for commercial mortgage-backed securities. And no one really knows where prices are going, so it’s hard to find buyers for buildings. Simply having a great vision isn’t enough to make a deal happen instant payday loan.
"I don’t know how you could possibly do this," Blank said. "This could be a game changer (for St. Louis), but I don’t see it in today’s environment."
Still, some local banking experts were more optimistic.
Generally speaking, St. Louis banks haven’t been burned like some of their counterparts elsewhere, said Joe Stieven, a longtime bank analyst who heads Stieven Capital Advisors. Some banks have capital, and are willing to lend it, but on their own terms for a change.
"The boring old banking industry — not ’shadow’ banking or investment banking — is willing and able to finance projects," Stieven said. "If you have a good project, you can get it financed."
But so far, just two banks have committed publicly to McEagle’s NorthSide project. And one is defunct.
That’s Corn Belt Bank, which was based in Pittsfield, Ill., and had a branch in Clayton. In 2007, it gave McEagle $3 million in financing, according to deeds filed with the city. But in February, it was shut down by federal banking regulators, and now that note is held by the FDIC, which plans to sell it. McKee said he hoped to extend or refinance that loan with whoever buys it.
The other lender is Bank of Washington, in Washington, Mo., which lent McEagle $27.6 million in December and submitted a letter to city officials pledging to help finance the first two phases of NorthSide if they approve $398 million in tax increment financing.
The bank’s chairman, L.B. Eckelkamp, acknowledged that tough credit markets meant the project might not start as fast as it would have two or three years ago, but he was confident it would succeed. "It’s a wonderful plan," he said. "It does a lot for the city."
McKee says that his capital efforts have been "much more extensive" than just those loans, that he’s talking with banks, private capital groups and institutional investors. He was bullish on his chances.
"We think this project will attract attention from all over the U.S. and foreign investors as well," he wrote in an e-mail interview.
But that money won’t come off the sidelines, he said, until "public commitment to this is evident." In other words, until the city signs that TIF, and grants McEagle the redevelopment rights that will let it start tapping tax credits.
It would certainly help, he said, if the city agrees to back half the cost of that TIF — just under $200 million. In this climate, McKee said, his company can’t afford to carry the full cost of the massive road and sewer upgrades it’s planning for NorthSide. And because the city will benefit from the improvements, he said, it ought to share in the risk.
But city officials are skeptical.
They’ve only backed three other TIFs in recent years, and wound up on the hook each time. And with a tight budget and pension obligations looming, there isn’t much room to pay down bonds if new tax revenue from NorthSide can’t.
Even if Mayor Francis Slay’s office agrees, it’s not clear that there are enough votes on the Board of Aldermen.
"I’m not more of a financial expert than the banks that are looking at this," said Alderman Antonio French. "If they’re still passing on it, who are we to say it’s a good deal?"
Still, in this economic climate, the way to sell the money people on NorthSide may be through the political process, Monteleone said. Lining up public support, and putting down a lot of equity, is the only way to instill enough confidence in a project this big.
"It’s just a difficult project to conventionally finance," Monteleone said. "It’s going to take a lot of public finance. It’s going to take a lot of political clout. I think if anybody is going to be able to pull it off, it’s Paul."
Americans are not nearly as optimistic about the economy as the chairman of the Federal Reserve seems to be, a national poll released Thursday shows.
Eighty-six percent of those questioned in a CNN/Opinion Research Corporation survey said they think the United States is still in a recession, with 13% saying the nation’s economic downturn has ended. According to the poll, 42% say the country is in a serious recession, 35% call it a moderate recession, and one in 10 characterize it as a mild recession.
Earlier this week, Federal Reserve Chairman Ben Bernanke said the recession is very likely over, although the job market will continue to struggle for some time.
"Economists have typically called an end to recessions long before the public thinks hard times have passed," said CNN Polling Director Keating Holland. "The recession of the early 1990s was officially over by 1991, but a majority of Americans didn’t think the recession was over until late in 1993."
The poll also suggests that only a small minority, 9%, say their family’s financial situation is better now than it was a year ago. Nearly four in 10 say they’re worse off now than they were a year ago, and just over half said their family’s financial situation was about the same.
"Rural America seems to feel the pinch more than the rest of the country," Holland said. "Nearly half of people who live in rural areas say they are worse off, compared to 37% of suburbanites and 29% of people who live in cities."
Looking to the future, nearly half of those polled say the stock market will be higher a year from now, with three in 10 saying the markets will be at about the same level and 18% feeling the markets will be lower.
According to the survey, 44% say home values in their area will be about the same a year from now, with 35% predicting house prices will be higher and 22% suggesting values will be lower than they currently stand.
The CNN/Opinion Research Corporation poll was conducted September 11-13, with 1,010 adult Americans questioned by telephone. The survey’s sampling error is plus or minus 3 percentage points.
If the word ‘cybercrime’ conjures up images of computer geeks trying to crash computers from their mothers’ basements, think again.
Cybercrime has become a rapidly growing underground business built by savvy criminals, who buy and sell valuable stolen financial information from millions of unsuspecting Internet users every year in an on online black market.
"Most cybercriminals are very, very interested in financial gain by compromising customer accounts," said FBI special agent Austin Berglas, who supervises the Bureau’s New York Internet crimes squad. "Believe it or not, there are people who fall victim to their scams, and we see it every day."
Because cybercriminals are so skilled at hacking into thousands of computers every day, the crime is potentially a billion-dollar business. If every stolen credit card and bank account had been wiped clean last year, that would have netted cybercriminals some $8 billion, according to data from Symantec, maker of the Norton antivirus software.
As a result of the lucrative payout, more and more online criminals are entering the game. In fact, the number of new Internet security threats rose nearly three-fold last year to 1.7 million.
Those cyber attacks mostly come from malware, or malicious software, that hands control of your computer, and anything on it or entered into it, over to the bad guys without you even knowing it. The most common forms of malware include keystroke logging, spyware, viruses, worms and Trojan horses.
How the deed is done. Once your information has been stolen, cybercriminals go onto an invitation-only Internet Relay Chat (like a chat group) to do commerce with other online criminals. Cybercriminals will often set up a hacker channel for a matter of days, do business, and then take it down to avoid detection. When active, hacker IRCs can get upwards of 90,000 cybercriminals talking to one another at a given time, according to Dave Cole, senior director of product management at Symantec.
Online criminals use the IRCs to sell or trade your credit card or bank account information. Credit cards are some of the cheapest commodities sold on the Internet Black Market, averaging about 98 cents each when sold in bulk. A full identity goes for just $10.
Credit cards and bank account information made up 51% of the goods advertised on the underground economy last year, up from 38% in 2007. Credit cards are most popular because they’re the cheapest stolen commodity. Cards with expiration dates, CVV2 numbers and names go for more than ones with numbers only, but there is no honor in the underground online crime world — oftentimes hackers will sell the same credit card information to multiple users, and many have already been canceled.
As a result, buyers and sellers on IRC channels will often give the information to a trusted third party for a fee guaranteed high risk personal loans. The third party will test the card information, often by charging a very nominal amount or by posing as a charity, and then verify the goods to the buyer.
After the information is purchased by a secondary criminal, that person can use a machine to print out a fake credit card with your information. But many use yet another tertiary person to wire stolen money into an overseas bank account.
That third person in the chain is usually called a "mule," who often doesn’t even know he or she is part of an underground organized crime scheme. Many mules respond to the "make money from home" schemes, where stolen money is sent to their accounts, and they subsequently wire that money to an overseas account for a 10% to 15% fee.
Other mules are given phony ATM cards and are asked to retrieve cash for a small fee. But there is substantial risk involved — law enforcement usually comes knocking on mules’ doors first.
To catch a thief. The FBI is working undercover in many of these IRC channels in an effort to thwart the cybercriminals. And in many cases, captured criminals agree to work for the government in exchange for reduced sentences.
"After we make an arrest for someone cashing out at ATM machines, I’ll tell them they can go to jail for 10 years or they can come work for Team America," said Berglas.
The strategy doesn’t always work. Albert Gonzalez, the infamous TJ Maxx (TJX, Fortune 500) thief who stole 45 million credit card numbers and private information of 450,000 customers in 2007, was an FBI informant. He helped bring down a massive credit card theft scheme, but double-crossed the FBI, using insider information to help fellow criminals evade detection and carry out the TJ Maxx theft.
Security software also helps, but it far from solves the problem. To avoid detection, many cybercriminals will send out just a handful of viruses before modifying the code and sending it out again.
"The truth is that ‘fingerprint’ security technology is no longer effective," said Rowan Trollope, senior vice president of product development at Symantec. "The bad guys that got involved are organized professionals, and they figured out how to get around our technology."
Though Trollope said the new version of Norton’s antivirus software helps address the problem by scanning for files’ reputations, he said that Internet consumers also need know how how to keep their identities safe online.
"We do products really well, but the next step is education," said Trollope. "We can’t keep the Internet safe with antivirus software alone."
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