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Bernanke Blunt: Expect More Rate Hikes MoneyNews
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New Federal Reserve Chairman Ben Bernanke told Congress yesterday that the risk of inflation remains strong due to elevated energy prices and economic overheating - and the implication was that we can expect more interest rate hikes. While the new chief is very direct and succinct - quite opposite to the often vague and ambiguous ex-chairman - Bernanke stopped short of actually declaring any intention of raising short-term rates as his predecessor Alan Greenspan began doing in June 2004.
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According to The Wall Street Journal: "Markets expect the Fed, at its next meeting on March 27 and March 28, to raise its short-term interest rate target, now 4.5%, by a quarter of a percentage point, and put high odds on another increase on May 10." Despite Bernanke's testimony, bonds (especially long-term Treasuries) were up, and the Dow ended up jumping more than 30 points to end the day at 11,058.97 - the highest level since June 2001. While the chairman only hinted that rate hikes were coming, he did say that the Fed would have to "make ongoing, provisional judgments about the risks to both inflation and growth," meaning that the next move may depend on data to be released in the near future. Bernanke said that he is especially concerned with higher energy costs and the possibility that they could become intertwined with other expenses, as growing aggregate power demands could create unsustainable output, ultimately leading to overwhelming inflationary pressures. Meanwhile, the Journal says that "with the unemployment rate down to 4.7%, many economists believe the economy is operating at full capacity and that growth in gross domestic product much above 3% would strain capacity and risk a wage-price spiral."
And Bernanke seemed to agree, citing the possibility that home prices and construction could decelerate much more rapidly than anyone expects. The new chairman also used the public platform to reassure people that he intends to keep an open mind and consider all possible economic scenarios. Some had feared that Bernanke, an academic, might rely too heavily on statistical models and baseline forecasts and be unable to efficiently adapt and adjust to new economic developments. Meanwhile, according to WSJ, the Fed expects "economic growth of about 3.5% this year and 3% to 3.5% next year, inflation excluding food and energy at or a bit below 2% this year and next, and unemployment at 4.75% to 5% at the end of this year and next."
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2. Soros Sinks $30M Into Oil Distributor Billionaire financier and high-profile Democratic Party operative George Soros is doing a very un-liberal thing - he's trying to buy a gas company. Bloomberg reports that Soros is leading a group that has put $30 million on the table to purchase Stamford, Conn.-based Star Gas Partners LP, a heating oil distributor. The group - composed of Soros Fund Management LLC, Atticus Capital LP and Almeida Oil Co. - made an unsolicited offer for the oil firm that includes a stand-by commitment to a $35 million rights offering, which would establish the Soros group as Star's general partner. "The unsolicited offer will be considered by Star's board, the partnership said," reports Bloomberg. "It competes with a pending agreement with Kestrel Energy Partners LLC that Star announced on Dec. 15 and scheduled for a special unit holder vote on March 17." Kestral had agreed to pay Star $50 million in new equity financing in exchange for 7.5 million common units at $2 apiece. Bloomberg says that units of Star Gas slid $0.05 to $2.49 yesterday on the New York Stock Exchange. But the firm has had a strong start in 2006, as units have risen 34% so far.
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3. 'Crisis on the Horizon' for XM? It seems Oprah Winfrey just can't latch on to a winner these days. First her mercurial ride with controversial best-selling author James Frey exploded on national television. Now, it's her relationship with XM Radio that's causing agita for the talk-show queen. Just weeks after signing a $55 million contract with the satellite radio pioneer, Oprah wakes up this morning to see that XM has announced a worse-than-expected fourth-quarter loss. Reuters reports that the company has been hammered by higher acquisition and programming costs (the Oprah deal comes to mind) as well as higher marketing costs to trumpet that content. XM said its subscriber acquisition cost rose to $89 for the quarter, compared to $64 a year ago. "These increases were primarily due to higher marketing expenses to meet a one-time competitive event in the fourth quarter," XM CEO Hugh Panero said in a statement. The company racked up a loss of $268.3 million, or $1.22 a share, during that period, compared to a year ago, when XM reported a loss of $188.2 million, or $0.93 per share. Analysts had expected XM to report a loss of $0.92 per share for this most recent quarter. But the fourth-quarter loss isn't XM's only problem. One company director has jumped ship after expressing concerns over the company's future. According to Reuters, board member Pierce Roberts resigned after citing "a significant chance of a crisis on the horizon" and saying he was "troubled" by the direction XM is taking. Roberts had wanted XM to cut costs to trigger some much-needed cash flow, but he apparently didn't get his way. XM Radio, which is twice as big as its closest competitor, Sirius Satellite Radio, saw its stock drop 7.7% after the earnings news, to $23.20 on Thursday morning. Hidden within coverage of XM's woes is the fact that the company has significantly increased its revenues. "XM said its cost of attracting additional subscribers rose by 39% in the fourth quarter," reported Reuters. "Revenue more than doubled and topped Wall Street expectations," climbing to $177.1 million, from $83.1 million. Analysts had anticipated revenues of $174 million. XM also reported 898,000 subscribers for the quarter - bringing the current total to six million - and says it expects to reach 20 million by 2010. "Both XM and Sirius are growing rapidly in a nascent market, but losing money as they spend heavily on technology and entertainment such as celebrity hosts to win new subscribers," says Reuters. "The companies aim to attract long-term users who will pay a monthly fee for years to come." Panero told analysts that XM anticipates calmer waters in the first quarter, and he said that subscriber acquisition costs will decrease in 2006. Overall, the company sees subscription revenue of $860 million for the full year, up from $503 million in 2005, Reuters reports.
4. New Hedge Fund Raises Record $6B High-profile Harvard University endowment chief Jack Meyer is leaving academia - and he is doing so with a splash. Both Bloomberg and Forbes are reporting that Meyer, who established a new benchmark for endowment funding during his 15-year stint at Harvard University, has raised a record $6 billion for his new hedge fund, Convexity Capital Management LP. The new bond-management firm, which Meyer launched last fall with about 30 colleagues from Boston-based Harvard Management Co., will kick off this month. And even Harvard climbed aboard, pouring $500 million into the new venture. "Boston-based Convexity opens with more money than any new hedge fund, topping the $3.5 billion raised in 2004 by former Goldman Sachs Group Inc. partner Eric Mindich for Eton Park Capital Management LP," says Bloomberg. "The biggest new fund last year was TPG-Axon Capital Management LP, founded by ex-Goldman Sachs executive Dinakar Singh with $2.8 billion." Bloomberg also says that the 60-year-old Meyer will team up with former Harvard bond investors David Mittelman and Maurice Samuels, as well as emerging-markets specialist Edward DeNoble and chief risk officer Michael Pradko. Under Meyer, Harvard's endowment grew to $22.6 billion, up from $7 billion when he came aboard in 1990. "He moved the endowment into hedge funds, private equity and timber to increase annual returns, which averaged 16% in the 10 years through June 30," says Bloomberg. "That compared with the 10% advance of the Standard & Poor's 500 Index." Convexity will charge investors 1.25% of assets in an annual management fee and take 20% of profits as incentive fees, sources close to the company told Bloomberg. And Convexity is getting creative with its fee structure, offering seven different benchmarks that investors can choose from, reports Forbes. Apparently, the firm has to beat these if it is to collect its 20% performance fee from each client, say sources. "Convexity will focus on fixed-income trading, so many of the benchmarks track Treasury bills and other types of bonds," Forbes adds. "But investors can also pick equity indices such as the Standard & Poor's 500 and the MSCI EAFE." The $6 billion launch is even more impressive when you consider that it is occurring in a hedge fund environment that has exhibited slow growth - especially when it comes to new ventures. "Meyer's successful launch comes at a time when some emerging hedge fund managers - with less impressive reputations than Meyer - are struggling to raise new money," says Forbes. "The hedge fund industry as a whole saw its first quarterly net outflows for at least a decade during the fourth quarter, according to Hedge Fund Research."
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