Stocks set for slight gains

Futures narrowly higher as investors mull when Fed will cut rates; bank earnings loom.

NEW YORK (CNNMoney.com) -- U.S. stocks futures gained early Monday, lifted by hopes that the Federal Reserve would step in with an emergency rate cut, although looming bank earnings remained a worry.
At 4:53 a.m. ET, S&P 500 and Nasdaq futures were narrowly higher, hinting at a flat to slightly positive start for Wall Street.
Stocks tanked last week on increasing concerns about the economy, but the darkening outlook has also raised hopes that the Fed would slash rates before its next meeting.
A report in the Wall Street Journal said the Fed is unlikely to cut rates before its next meeting on Jan. 29-30 because Fed Chairman Ben Bernanke has already "recalibrated market expectations." But that could change if the outlook dramatically worsens, the report added.
Investors have been haunted by recession worries recently, and earnings results due this week from a number of big banks could spark more fears. Embattled banks Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are both expected to take giant writedowns when they post their results.
In global trade, Asian markets tumbled. Japanese markets were closed for a holiday. European stocks edged higher in morning trading.

America's fastest-growing small public companies

PrimeEnergy
Rank: 24 (Previous rank: 11)Get quote: PNRG Industry: Energy CEO: Charles E. Drimal Jr., CEOHeadquarters: Stamford, CTEmployees: 206 (as of March 25, 2006)
Analysis:PrimeEnergy is an oil and gas exploration and development company with properties in six states and the Gulf of Mexico. Its subsidiaries service oil and gas wells and manage oil and gas limited partnerships.

Sun Hydraulics
Rank: 25 (Previous rank: 14)Get quote: SNHY Industry: Manufacturing/Industrial CEO: Allen J. Carlson, CEO & PresidentHeadquarters: Sarasota, FLEmployees: 663
Analysis:Sun Hydraulics designs and makes screw-in hydraulic cartridge valves and manifolds that control force, speed and motion in mobile and industrial machinery. Sun, which operates in the U.S. and five other countries, has generated a profit every year since 1972.


Parallel Petroleum
Rank: 26 (Previous rank: 27)Get quote: PLLL Industry: Energy CEO: Larry C. Oldham, President & CEOHeadquarters: Midland, TXEmployees: 41
Analysis:Parallel Petroleum drills through rock for natural gas horizontally, releasing the gas more efficiently from locations in Texas and New Mexico. Acquisitions and development of properties during the past five years helped increase PLLL's proved reserves over 52% last year.


U.S. Lime & Minerals
Rank: 27 (Previous rank: 20)Get quote: USLM Industry: Manufacturing/Industrial CEO: Timothy W. Byrne, President & CEOHeadquarters: Dallas, TXEmployees: 317
Analysis:USLM manufactures lime and limestone products used for highway construction, parking lots, steel manufacturing and water purification. The company sold its products to 900 customers across 14 states last year.


Edge Petroleum
Rank: 28 (Previous rank: 4)Get quote: EPEX Industry: Energy CEO: John W. Elias, Chairman, President & CEOHeadquarters: Houston, TXEmployees: 75
Analysis:Founded in 1983, Edge is a crude oil and natural gas exploration, development, and production company. Last year its proven reserves decreased slightly from 2005, but Edge still drilled 52 wells with an 83% success rate. About 75% of its daily production is natural gas.


Ansoft
Rank: 29 (Previous rank: N/A)Get quote: ANST Industry: Tech CEO: Nicholas Csendes, President & CEOHeadquarters: Pittsburgh, PAEmployees: 305
Analysis:Ansoft's software simulates the design and performance of circuitry and electromagnetic fields inside high-speed computers and wireless communication devices, so engineers no longer need to build prototypes. A demand for faster integrated circuits within wireless devices is driving sales.

Cybex International
Rank: 30 (Previous rank: N/A)Get quote: CYBI Industry: Consumer CEO: John Aglialoro, Chairman & CEOHeadquarters: Medway, MAEmployees: 547 (3/30/2007)
Analysis:Cybex is a household name among fitness enthusiasts, who build strength and endurance on the company's machines, both at home and in the gym. Its products include treadmills, cross trainers and weight equipment. Last year Cybex broke ground on a new office and manufacturing facility on 36 acres in Minnesota.

New life for plasma TVs?

LAS VEGAS - In the United States, plasma televisions are losing the high-def battle with LCD screens. But at the Consumer Electronics Show, plasma backers including Pioneer and Panasonic clearly believe it’s not over.
Plasma’s problem has always been the side-by-side comparison with LCD on the showroom floor. Because LCD screens tend to be brighter and thinner, consumers tend to judge it superior, even though good plasma sets can provide truer colors and better contrast ratios for a lower price.
Pioneer had one of the more eye-popping previews in its booth: TVs based on its “Project Kuro,” which alludes to the Japanese word for “black.” Pioneer set out to achieve the blackest blacks it could in its plasma sets, reasoning that black is the canvas on which color is displayed, so high contrast will make colors pop more. Walk around the booth, and the effect is obvious: color oozes seductively from of the screen, particularly in scenes that offer high contrast.
Pioneer also showed a 50-inch display that’s just 9 millimeters thin and 41 pounds – an offering that would certainly turn heads the local Best Buy or Circuit City. Still, there’s no word on exactly how much the sets will cost and when they will be available — Pioneer said only that it won’t be this year.
Panasonic also voiced its continuing support for plasma, showing off a 150-inch set. Yoshi Yamada, CEO of Panasonic North America, told Fortune the company remains committed to big-screen plasma, though it offers LCD TVs as well. Some competitors are pushing just LCD, “because it’s easy,” Yamada said. With plasma, “there is more research and development required to make it a real TV.” Panasonic has done that work, he said, and “as far as we are concerned, we see in a lot of the areas, plasma does a lot better.”
It’s not clear how any of this might change the game in store showrooms, where plasma is fighting an uphill battle.
Stan Glasgow, president of LCD-exclusive Sony Electronics (SNE), seemed to acknowledge the plasma camp’s efforts, but couldn’t resist slipping in a dig at his rivals. “I think it’s going to be an interesting year in terms of plasma, what they’re going to do as they keep losing share in the United States.”

Robots galore

Femisapien by WowWee
Price: $99

This walking humanoid can detect words and music, communicate with other robots and see up to 1.2 feet away. According to WowWee, the womanly toy also has "fluid movements" and "elegant gestures." Look for "her" this summer.

ConnectR by iRobot
Price: TBD (the product is still in beta)The ConnectR from Roomba-maker iRobot enables "virtual visits" over the Internet. Up to ten family and friends can access and control the password-protected machine - equipped with two-way audio and a video camera - over the Internet.

Spykee Spy by Erector / Meccano
Price: $149-$299The Wi-Fi enabled Spykee Spy is Skype-compatible and plays MP3s. Great for do-it-yourselfers - this robot comes unassembled. Check out its latest family members, including Spykee Cell and the voice-activated Vox and Miss, due out next fall.

Looj by iRobot
Price: $99 (available at www.irobot.com)It's hard to get excited about a robot that cleans your gutters, but that's exactly what this strange-looking contraption does. iRobot claims this little guy can clear a 60-foot section of gutter in just ten minutes.

Rovio by WowWee
Price: $299This new robot comes with a built-in Wi-Fi enabled Web cam that lets homeowners patrol their houses remotely over a PC, phone or video game console. The Rovio also has built-in GPS - that enables it to easily locate and report its position and the position of other objects and even navigate back to its charging station. Available this fall.

Alive Cubs by WowWee
Price: $59Meant to be cute and cuddly, these furry bots are a bit on the creepy side. The small machines can blink, purr and fall asleep (wow, tough life). Choose from lion, white tiger, panda or polar bear cubs - all available this summer.

RoboCAM by Microrobot
Price: TBDHome surveillance over 3G cellular networks? Sleek user interface, gas detector and vacuuming capabilities? Too bad this all-in-one robot is not yet available in the United States.

Why the Countrywide deal makes sense

Whether Wall Street likes it or not, Bank of America's Ken Lewis is getting a good deal, according to Shawn Tully's number-crunching.
By Shawn Tully

(Fortune) -- Bank of America's $4 billion deal to rescue Countrywide Financial is getting decidedly mixed reviews from Wall Street. Investors fret that CEO Ken Lewis is overpaying for a ruined franchise to save face, following his ill-timed $2 billion investment in Countrywide late last year.
The markets are hardly cheering: B of A's stock has dropped as much as 2% today to $38.40, its price in early 2002. But the best guide to gauging the probable success or failure of this deal is studying the numbers: they show that, barring absolutely disastrous writedowns, this deal will prove a winner.
Before we get to the all-important math, let's examine two other important reasons to endorse this deal. The first is Ken Lewis' consistently underrated record as an acquirer. Investors accused Lewis of overpaying for Fleet BankBoston in 2004, but Lewis recognized what the market didn't: That Fleetนs earnings were poised for a sharp rebound following years of huge credit losses. B of A also generated far bigger cost savings than Wall Street, or even the bank itself, anticipated by shuttering inefficient branches and combining computer systems.
Skeptics are leveling the same charges against Lewis in his $21 billion purchase of La Salle, a deal that gives B of A a huge footprint in a market where it was heretofore weak, the Chicago region. But once again, it's probable that higher-than-anticipated cost savings will save the day. It's more likely that Lewis is following his usual course of weighing the numbers rather than making an irrational, emotionally charged decision.
A second reason the deal makes sense is the branding issue. To be sure, Countrywide (CFC, Fortune 500) established a powerful brand name in the mortgage boom. But its image is now severely tarnished. The lender is now a poster child for all the excesses of the real estate bubble. Sure, it's possible that the Countrywide name could be revitalized. But why take that chance? The best way to extract value from buying Countrywide is to keep its powerful origination and servicing franchises, and re-brand its product to erase the unsavory associations that the Countrywide name now raises with America's borrowers.
Of all the big banks, B of A is in the best position to do that - for a simple reason. It boasts the strongest brand in banking. Its Hispanic customer base, the biggest source of its growth, has great confidence in the Bank of America brand, and B of A has shrewdly targeted its offerings to that market. It's inevitable that B of A will rebrand Countrywide as Bank of America (BAC, Fortune 500). As a result, what's now a fallen name will quickly take on new luster.
Now, let's examine the make-or-break numbers. B of A is paying around $4 billion for a franchise that was worth over $20 billion just a year ago. Sounds like it's paying a cheap price. But is the price really cheap? The best way to find out is to use the discounted cash flow technique you learn in Econ 101, and that still proves a valuable guide to estimating the future returns on investments.
To play it safe, let's make some highly negative assumptions. Say that Countrywide takes a $3 billion writedown for 2008, or $2 billion after-tax, and makes no money at all in 2009. Starting in 2010, it returns not to its peak earnings, but to the profits it was generating in the 2003 and 2004 period, around $2 billion a year. Also, let's say that Countrywide's profits remain flat from then on, simply increasing with inflation.
Given those assumptions, what's the present value of Countrywide's estimated earnings if B of A is to achieve a 10% return, and how does it compare with what Lewis is paying? By my calculations, Countrywide's earnings stream is worth around $13 billion. B of A is paying $4 billion. Sure looks like a winner.
But let's say the writedowns are far bigger than anticipated, and that Countrywide faces heftier payoffs on class action suits than Lewis is predicting. Fair enough, but Lewis enjoys just what Warren Buffett calls the most important thing in investing, a big margin for error. Put simply, Countrwide could suffer another $9 billion in after-tax losses, and B of A would still make a 10% return.
B of A could get an additional margin for error by trumping the highly negative assumptions. When you invest at a low price, the bar is set far lower for future performance, so any improvement makes the stock worth far more. For example, it's highly unlikely that Countrywide's earnings won't grow at all once it recovers. Lewis could also gain big economies of scale that could actually boost Countrywideนs profits above the $2 billion mark, by cutting overhead and combining Countrywide outlets with B of A's network of over 6000 branches.
The mortgage industry is still a lot like the banking industry was when Lewis was vacuuming up regional banks under Hugh McColl at NationsBank. That fragmentation led to inflated costs, just as it did in banking before the massive consolidation of the last decade and a half. Sure, this deal could still fail. But the numbers sure look good.

BofA's awesome Countrywide tax break

Brace yourselves, taxpayers of America. You're going to help Bank of America finance its $4 billion buyout of Countrywide.
By Allan Sloan

NEW YORK (Fortune) -- Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States.
That's because Bank of America (BAC, Fortune 500), which is solidly profitable, will be able to use some of Countrywide's losses to offset its own taxable income. The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.
At this point, of course, no one knows how much in losses Countrywide has run up since the junk mortgage market began souring and defaults accelerated. Countrywide (CFC, Fortune 500) itself probably doesn't know. But it seems almost certain to ultimately be in the billions.
In tax circles, Bank of America is famous for its 1988 purchase of the failed FirstRepublic Bank of Dallas, which was being auctioned off by federal regulators. Bank of America, then known as NCNB Corp., the parent of North Carolina National Bank, discovered a way to structure the deal to save $1 billion of taxes, using a convoluted strategy that none of the other bidders knew about. That allowed NCNB to outbid its rivals for the bank, and still come out way ahead.
The Countrywide tax break isn't in that league, but it would still be worth a lot of money. Willens estimates that Bank of America will be able to deduct $270 million of Countrywide's losses annually for the first five years it owns the firm.
That's based on a $6 billion purchase price - $4 billion to Countrywide's common stockholders, plus the $2 billion of preferred stock that Countrywide sold to Bank of America in August. Willens says that you multiply that $6 billion by 4.49 percent - the so-called "long-term tax-exempt rate" - to calculate how much of Countrywide's losses Bank of America can deduct annually for five years after the purchase.
A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes. The long-term tax-exempt rate, which is based on Treasury rates and other things so complicated that they make my teeth hurt. The rate changes each year, Willens says, but not by much. When I asked how it's calculated, Willens, a master of tax arcana, threw up his hands. (Metaphorically, of course.) "It's like the formula for Coca-Cola," he said, "no one outside the circle knows it" and it's so complicated that, "no one else wants to find out."
So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year.
Isn't life fun?

Apple: What've you done for me lately

Shares of the iPod maker more than doubled in 2007. With Macworld coming up, what can Steve Jobs and Apple do for an encore this year?
By Kenneth Musante

NEW YORK (CNNMoney.com) -- Apple had a banner year in 2007. The stock more than doubled thanks to strong sales of the new iPhone, revamped iPods, and updated Macs.
But that was last year. Now investors want to know if Apple can live up to Wall Street's lofty expectations for 2008.
Tech stocks have taken a big tumble so far this year and Apple (AAPL, Fortune 500) is no exception, with shares falling about 10 percent.
With that in mind, investors will be paying a lot of attention to what Apple chief executive officer Steve Jobs has to say during his keynote address at the company's Macworld show on January 15th.
Last year, Jobs unveiled the iPhone at Macworld. So Wall Street is hoping Jobs can once again deliver some exciting news to get the stock back on track.
A new 'Touch' for the iPod
Investors will definitely be looking for any announcements about updates to the company's popular iPod. Despite that product's runaway success, some analysts say that Apple has started to reach the saturation point with its portable media player. "Everyone who wants one has one," said Technology Business Research analyst Ezra Gottheil.
Morgan Keegan analyst Tavis McCourt also wrote in a recent report that he's concerned about slowing growth in iPod sales.
He cited the fact that the number of iPods sold in the company's fiscal fourth quarter, which ended in September, increased just 17 percent from a year ago, down from 50 percent growth in unit sales in the company's fiscal first quarter.
But just before the holiday season, Apple released the iPod Touch - basically an iPhone without the phone. The device's ability to access the Internet and its emphasis on video makes it more than just a standard iPod. So analysts said they are confident the iPod Touch could rejuvenate sales growth for the iPod product line in 2008.
Apple could also benefit from falling component prices. McCourt noted that NAND flash memory chips, which are used in the iPhone, iPod Nano, iPod Shuffle, and iPod Touch, have been getting steadily cheaper, which could boost the amount of profit Apple generates from the iPod and other consumer electronics devices.
And analysts said that other announcements from Macworld may also be viewed positively by investors. Trip Chowdhry of Global Equities Research, predicts Apple will unveil an update to Apple TV, a device that lets people view videos stored in their iTunes library on their television sets.
There has also been speculation that Apple will announce plans to allow movie rentals on iTunes through a partnership with News Corp.'s (NWS, Fortune 500) Fox studio. Gottheil said that even though revenue from iTunes is still relatively small, anything that can help increase movie and music downloads would be helpful since this should also boost demand for new iPods.
Thin is in
Of course, Apple still relies heavily on computer sales -- even though the company dropped the word "Computer" from its corporate name last year and now generates more than half of its total sales from non-Mac products.
At this year's Macworld, analysts suspect the company will round out its MacBook line with a new ultra light notebook.
A highly portable computer with long battery life and a flash drive instead of a delicate hard disk is something that Apple doesn't have right now, said Chowdhry.
He argues that if Apple unveils a new MacBook, that could open Apple's laptop line even further to new customers.
Gottheil disagreed with the idea that an ultra portable would bring in new customers. Still, he said that even if Apple simply got existing Apple fans to buy newer MacBook models, this would still benefit Apple because the new MacBooks would likely generate higher profit margins.
And that would be good news for Apple shareholders since Mac sales have been what's really driving growth for the overall company lately.
In the company's fiscal fourth quarter, Mac sales rose 40 percent from a year earlier to $3.41 billion. iPod sales, on the other hand, increased only 4 percent to $1.6 billion. So if the iPod Touch isn't as big a hit as analysts expect, the company will need to depend even more on the Mac to keep sales and profits growing.
No worms in this stock
With all this in mind, how will Apple's stock fare this year. David Bailey of Goldman Sachs wrote in a report earlier this month that he doesn't believe 2008 will be as "explosive" as last year, but that Apple's stock should head higher over the next twelve months.
He expects Apple's upcoming fiscal first-quarter earnings announcement, which includes sales during the key holiday shopping season, to prove that Apple is still a great growth stock.
Apple will report its results on January 22. Analysts predict revenue will grow 32 percent to about $9.4 billion and that profits will soar 40 percent to $1.60 a share.
Apple's string of healthy results come at a steep price, however. The stock trades at nearly 35 times fiscal 2008 earnings estimates.
That's much higher than the valuations for rivals Microsoft (MSFT, Fortune 500) and personal computer maker Dell (DELL, Fortune 500), which trade at 19 times and 13 times earnings forecasts for this fiscal year respectively.
Still, Apple has consistently smashed Wall Street's earnings per share estimates over the past year. And the company's projected earnings growth rates of 30 percent this fiscal year and 22 percent a year, on average, for the next few years, is much higher than most other large tech companies.
Chowdhry said investors should probably not try and make short-term trades on the stock though. He warns that investors who buy now just because they think Jobs will make an announcement at Macworld that will send the stock higher could be setting themselves up for disappointment.
But analysts said Apple is a good buy for long-term investors who can avoid being influenced by day-to-day volatility. Investors who want to make a bet on the company's ability to keep coming out with the hottest new gadgets and delivering strong earnings will eventually be rewarded.
Analysts quoted in the story do not own shares of Apple.