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Five Things You Need to Know for Monday


What you need to know (and what it means).


Five things you need to know to stay ahead of the pack on Wall Street.

1. Capital Idea

Capital One (COF) agreed to buy North Fork Bank (NFB) for $14.6 billion in cash and stock, accelerating the big credit-card issuer's push into traditional banking.

  • COF itself had been considered a potential acquisition target as credit card play for a major bank looking to expand into that area.
  • Other standalone credit card companies have been snapped up by larger competitors.
  • According to the Wall Street Journal, the acquisition is a move to reduce COF's reliance on credit cards.
  • Recently COF has expanded into other lending areas, such as auto lending.
  • Last year the company bought New Orleans-based Hibernia Corp.
  • The WSJ says that the acquisition will allow COF to fund its lending business more cheaply.

2. Knight Fever

McClatchy (MNI) agreed to buy Knight Ridder for about $4.5 billion in cash and stock and plans to sell 12 Knight Ridder papers, including the Philadelphia Inquirer, the Philadelphia Daily News and the San Jose Mercury News.

  • After the purchase of Knight Ridder and the sale of the 12 papers, McClatchy will have 32 daily newspapers with a combined circulation of 3.2 million.
  • The acquisition of Knight Ridder leaves the combined companies in the No. 2 spot, behind Gannett Co., which has combined daily paid circulation of 7.3 million.
  • McClatchy was the only major newspaper company to submit a final bid for Knight Ridder.
  • According to the New York Times, the lack of final bidders underscores the uncertainty in the newspaper publishing industry as readers have begun to drift away from print in favor of web-based reading.
  • Although the industry has faced declining circulation and falling stock prices in the last several years, MNI, through the end of 2004, had 20 consecutive years of circulation increases and 10 consecutive years in which its shares grew at the highest rate of any newspaper stock.
  • According to the WSJ's Heard On the Street, Private Capital Management LP, a unit of Legg Mason Inc., is KRI's biggest shareholder, with an 18% stake.

3. Let's Give 'Em Something to Talk About

While the London Stock Exchange and Nasdaq consider resuming talks about a potential takeover by the Nasdaq, the NYSE may be weighing a bid for the London exchange.

  • Over the weekend the London Stock Exchange rejected a $4.2 billion cash buyout proposed by Nasdaq last Thursday.
  • Nasdaq is considering revising its proposal to make it more attractive to LSE shareholders, possibly by giving them shares in a new company instead of just cash, according to the Wall Street Journal.
  • The LSE is considering a deal, but prefers to wait until sometime this summer to execute it, giving it time to finish its plan to give $870 million to its shareholders.
  • The LSE is also waiting to see if it gets a higher bid from NYSE Group, the public company that owns the New York Stock Exchange and which went public last week and which has a market value of about $12 billion.

4. Guiding Light Canceled?

The Financial Times this morning has a front page article on the diminishing practice among companies of providing earnings guidance.

  • Pfizer (PFE) is the latest to join Citigroup (C), Motorola (MOT), Ford (F) and General Motors (GM) among companies that no longer provide earnings guidance, and Google (GOOG) has never provided earnings guidance.
  • Merrill Lynch recently urged its global research analysts to discount company guidance when preparing forecasts.
  • In Washington, the House financial services committee is understood to be planning a hearing on the dangers of guidance as part of a review of corporate disclosure.
  • Meanwhile, some companies are concerned that eliminating guidance may send a negative signal.
  • A study by McKinsey released last week concluded that the perception that regular earnings guidance leads to lower volatility and higher share valuation is a myth.

5. That Really Hits Home

A popular way of financing a home over the past few years has been the so-called "affordability" loan - a loan that holds down payments for an initial period before "resetting" to a higher rate and payment.

  • Now the initial low-payment periods are due to end on many of these mortgage loans, leaving borrowers to face resets of their interest rates that may boost monthly payments between 10% and 50%, the Wall Street Journal reports.
  • More than $2 trillion of U.S. mortgage debt comes up for interest-rate resets in 2006 and 2007, estimates Moody's
  • A recent study by First American Real Estate Solutions projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default.
  • ARMs most at risk of default were those with low initial "teaser" rates of 2 percent or less and whose borrowers had less than 15 percent equity.
  • Defaults on these loans could result in $110 billion in losses nationwide over the next five years, though that is less than 1 percent of the total amount of home loans sold in 2004.
  • In January, there was a 45% increase in new foreclosure cases nationwide compared to a year earlier, according to RealtyTrac.

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