An Oasis in the Crisis

For years, Dubai, Abu Dhabi, and other Gulf states seemed to run rings around sleepy Saudi Arabia when it came to economics and finance. Dubai benefited from a flood of expatriate bankers and other professionals attracted by the emirate's beaches, bars, and laissez-faire financial system. And the sovereign wealth funds of other Gulf states invested in hedge funds and private equity and took stakes in Western banks. The conservative Saudis, by contrast, mostly parked their cash in U.S. and European government bonds.

These days, with growth tumbling and credit hard to find, the Saudis' cautious approach looks smart—and is making the kingdom more attractive as an investment destination. Abu Dhabi and Kuwait have taken huge hits on their investment portfolios. And on Feb. 23, the central bank of the United Arab Emirates—the confederation of Gulf sheikhdoms—bought $10 billion in bonds to bail out beleaguered Dubai, which is struggling with $80 billion in corporate and government debt.

The Saudis' foreign holdings, meanwhile, have largely escaped the global equities crash. And tightly regulated Saudi banks haven't seen major hiccups even as neighboring countries have had to bail out their banking systems. "Saudi corporations and individuals have very little debt compared to other countries in the region," says Fahad A. Almubarak, chief executive of Morgan Stanley (MS) Saudi Arabia.

A REALITY CHECK ON PROJECTS

While the plunge in oil prices has hurt, the Saudis have salted away piles of cash. They have more than $500 billion in foreign assets—enough to pay for five years of imports—and an additional $226 billion in deposits in the domestic banking system. Riyadh plans to draw on these funds to increase infrastructure, education, and health-care spending by an estimated 10% this year, to about $150 billion. "Saudi Arabia is one of the countries least affected by the financial crisis," says Said A. Al-Shaikh, chief economist at National Commercial Bank in Jeddah.

That's not to say everything is rosy for the Saudis. Al-Shaikh is forecasting 2% real gross domestic product growth this year, down from 4% in 2008. The once-sizzling real estate market has gone cold, and banks have tightened lending. So the Saudis will have to pull back on some of the $600 billion in big projects they have in the works. A $20 billion-plus Saudi Aramco petrochemical plant with Dow Chemical (DOW) at Ras Tanura has been delayed, and there's likely to be a reality check on plans to build a half-dozen new cities in remote areas. At a minimum, Riyadh will need to give more financial support to such projects, even though they were supposed to be largely financed by the private sector.

But Saudi Arabia is looking more attractive to business. The country is by far the biggest market in the region. King Abdullah has introduced changes in the government, getting rid of some conservatives and appointing a woman as deputy minister of education, a first for the kingdom. And while Saudi stocks are off by more than half in the past year, prices have stabilized in recent months even as most other markets have continued to plunge.

Investors are betting that at least some megaprojects will continue. A $10 billion refinery venture with France's Total (TOT) looks solid. And major initiatives such as King Abdullah Economic City, a vast waterfront metropolis planned for the Red Sea coast, are unlikely to be scrubbed. "Once we get to the other side of the valley of the global recession," says Brad Bourland, chief economist of Riyadh-based Jadwa Investment, "Saudi Arabia will emerge as an extremely attractive place to invest."

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Cutting Work Hours Without Cutting Staff

Instead of jettisoning workers during the Great Depression, Iowa-based window maker Pella had its employees wash and rewash the windows it could not sell. These days, companies such as FedEx (FDX), Dell (DELL), and Motorola (MOT) are adopting their own tactics to hold on to jobs, from hiring freezes to companywide unpaid vacations. (All have had to resort to layoffs as well.) And some are doing more than chopping pay or perks.

Vermont's Rhino Foods, which makes the cookie dough for Ben & Jerry's ice cream, recently sent 15 factory workers to nearby lip balm manufacturer Autumn Harp for a week to help it handle a holiday rush. The employees were paid by Rhino, which then invoiced its neighbor for the hours worked. President Ted Castle is looking to adopt a similar approach with salaried managers, too. "It's a lot easier to just do the layoff," says Castle. "But in the long term, it's not easier for the business."

Across the U.S., some 37% of human resources managers say they're now spending more time devising alternatives to layoffs vs. six months ago, according to a recent survey by the Society for Human Resource Management. Peter Cappelli, director of the Center for Human Resources at the Wharton School of Business, notes that a 5% salary cut costs less than a 5% layoff because there are no severance payments. Some state governments even make the decision easier with a program called WorkShare, which allows companies to reduce employees' work hours and make up the difference through unemployment benefits. "We would have had to take more draconian measures, such as more layoffs, were it not for this program," says Mel White, a vice-president at Portland (Ore.)-based Classic Exhibits, which makes displays for trade shows.

Training Exising Staff to Do More

A typical move amid hiring freezes: training existing staff to do more. Luxury Retreats, a villa rental agency in Montreal, shuffled 8 of its 75 employees from areas such as product development to sales. CEO Joe Poulin even moved his personal assistant to the accounting department. "You have to be really efficient with your resources in times like these," says Poulin. Steelmaker Nucor (NUE), meanwhile, has cut factory time for many of its 22,000 hourly employees. On the days they're not making steel joists, though, workers are paid their base salary to perform maintenance or take classes.

In China, accounting giant Ernst & Young offered its 9,000 mainland and Hong Kong employees a chance to take one month of unpaid leave during the first half of this year. About 90% of the firm's auditors have opted in. Bin Wolfe, head of human resources for the region, says the move will slash EY's payroll costs by 17%.

Some try to motivate staff even while trimming their pay. Matt Cooper, vice-president of Larkspur (Calif.) recruiting firm Accolo, asked employees to take five days of unpaid leave this quarter but won't dock paychecks until March. If big deals come through, he'll lift the pay cut. And he shaved costs by sleeping on his brother-in-law's couch during a recent business trip to New York. Instead of paying $1,500 for a week in a hotel room, Cooper spent 10% of that on dinner for the two of them and a nice bottle of wine.

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A Stress Test Every Bank Can Pass?

On Feb. 25 regulators laid out details on how they will run the "stress tests" that Treasury Secretary Timothy F. Geithner has promised on the biggest banks. Now those tests, designed to judge whether the banks have the capital to keep lending and absorb losses in a severe recession, face an exam of their own.

Much of the credibility of Geithner's struggling bank bailout program hinges on what Treasury does with the test results. Many investors believe the banking system is drastically undercapitalized. While no one expects regulators to declare the money center banks insolvent, they are watching to see whether Geithner will allow the weakest of the examined banks to fail. "If everyone passes the test, it won't provide [investors] any comfort," says Andy Laperriere, a Washington-based policy analyst with the research firm International Strategy & Investment Group.

Regulators say they plan on more rigorous, more forward-looking versions of the computer simulations that the banks themselves have conducted to project how their capital would hold up through a variety of worst-case scenarios. While the banks' own tests often focused narrowly on issues such as interest rates, inspectors will consider two other prospects. First, they'll see what would happen to loan defaults and bank revenues if GDP falls by 2% this year and grows 2.1% in 2010, which is the consensus forecast. Then they'll look at what would happen should things get dire: if GDP falls 3.3% in 2009, say, and remains flat after that. The feds are projecting home prices will slide 14% this year, and will look at the impact of unemployment at 8% or even 10%. Regulators may also be more skeptical than the banks about the impact of a prolonged recession on the values of mortgage-backed securities, derivatives, and other assets.

What "Capital" Counts

A key consideration will be the kind of capital that regulators place the most confidence in. Bank executives fought to get regulators to focus on the traditional measure of solvency known as "Tier 1" capital, a broad measure that counts intangibles such as some deferred tax assets as well as preferred shares with debt-like qualities. But while the intangibles might have some future value to banks, investors have discovered just what a misleading barometer of a bank's health they can be. Washington Mutual and IndyMac had high Tier 1 ratios when regulators seized them.

So investors and bondholders have focused on tangible common equity, in which preferred stock and intangibles are stripped out. Senior government officials say they will focus primarily on Tier 1 capital in the stress tests, although they have also specified that the "dominant element" of Tier 1 capital should be common equity. But Karen Shaw Petrou, managing partner of Federal Financial Analytics, says regulators have signaled that banks won't be sanctioned if they can't meet that "dominant" standard. "If they don't pass key aspects and there are no sanctions, what's the point?" she asks.

Is Failure Possible?

The tests, which should be complete by late April, will give regulators a better idea of the hole that needs filling before the banks get more money. In theory, Treasury officials say any bank found lacking in capital still will first try to tap the markets. But few private investors want to invest in the banks. "It's a bit of hope over reality," says Daniel Alpert, managing director of Westwood Capital. So the Treasury may be the only option for any bank needing capital.

Should Treasury recapitalize the underwater banks, force them into a merger, or put them under the control of the Federal Deposit Insurance Corp.? Investors say the FDIC option—basically receivership—is necessary to avoid a Japan-like "zombie bank" scenario.

But it looks like flunking out is not in the cards. Speaking before Congress on Feb. 24, Fed Chairman Ben Bernanke said "the outcome of the stress test is not going to be pass or fail." A senior Administration official adds, "There is no explicit cap on the amount of capital we will provide." Investors are worried. "It's like a test you get to do again if you didn't do well," says Donald J. Rismiller, chief economist of institutional broker Strategas Research Partners. Adds Petrou of Federal Financial Analytics: "The fear is that the tests will simply set the price tag for how much more taxpayers have to put in."

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Amazon's Kindle 2: Delight Is in the Details

One thing I've learned in the years I've been reviewing products is that design details matter, even if the eye at first skims over them. The shape of a button or placement of a key can mean the difference between delight and drudgery. So it's not surprising that subtle changes in Amazon.com's (AMZN) second-generation Kindle e-book reader make it a vastly better product than the original.

Introduced in late 2007, the Kindle was a breakthrough in the long-disappointing field of e-book readers. Despite its mediocre hardware design, Amazon's elegant solution for buying and downloading content over an invisible network made it a winner. With the Kindle 2 ($359), Amazon is at last offering a device that is as good as the rest of the system. The combination of the new hardware and its superior book-buying experience puts the Kindle 2 miles ahead of its only real rival, the $300 Sony (SNE) Reader.

Better-Placed Buttons

Using the new Kindle is nothing like reading e-books on a laptop. You can enjoy the device anywhere you can whip out a regular book and not worry much about how you hold it. This wasn't necessarily the case with the Kindle 1. So much of its surface was covered with buttons that I never knew quite where to put my hands, and I was forever unintentionally turning pages, jumping to the menu, or triggering some other disruption.

The Kindle 2's buttons are much smaller and better placed. The ones that turn pages have been redesigned and no longer respond to a stray press on the edge of the reader. The odd scroll wheel on the original Kindle has been replaced by a more traditional five-way navigation control of the sort used on many cell phones. These changes—a cleaner look overall and half the thickness (just over a third of an inch)—add up to a far more pleasant experience.

Amazon also either left alone or improved the parts that worked well. Delivery of books, magazines, and newspapers is done over the Sprint (S) wireless broadband network and requires no user registration or extra fees. Purchases are billed to your Amazon account, and the cost of the network is built into the price. (One downside: Amazon's choice of network technology, along with content-licensing issues, limits the Kindle to the U.S. market, at least for now.) A redesigned keyboard lets you check for titles in the Kindle store, search for text in a book, or add annotations or bookmarks.

There are other nifty improvements: The display, based on technology from E Ink in Cambridge, Mass., supports 16 shades of grey instead of 4. Power consumption, low to begin with, has been cut further, so the battery lasts for days at a stretch. Pages turn a bit faster, and the Kindle can even read text to you—though no one will confuse its synthesized voice with that of an audiobook. There's enough memory to store 1,500 books, so managing your library is likely to be a bigger problem than running out of space. If you have multiple Kindles, new or old, linked to the same Amazon account, downloaded content appears on all of them. And Amazon promises, a bit vaguely, the future ability to load Kindle books onto other devices.

Not Perfect in Dim Light

There are things that could be done to make the Kindle even better. The E Ink display, which relies on reflected light rather than the backlight used by a computer or phone screen, is easy on the eyes, provided the lighting is good. But, as with Kindle 1, the letters are dark grey on light grey rather than black on white and thus a little hard to read in dim conditions. And too often I find that the book I want isn't available, even though Amazon offers more than 200,000 titles. (Prices range from $1 to around $15, with most books going for $10.) One last gripe, which isn't going to change: Unlike a paper book, a Kindle title can't be sold or given away when you're done with it.

Ultimately, the best market for the Kindle may be as a replacement for huge, expensive textbooks. But textbooks need a low-cost, large-format display and, especially for K-12 education, color. E Ink is working on both, but neither is likely in the near term.

I still prefer the old-fashioned pleasure of reading ink-and-paper books. But a couple of weeks with the Kindle 2 is converting me. The ability to carry a whole library in a 10-oz. package makes it a reader's treasure.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkThe Kindle's Voracious Fans

Amazon.com (AMZN) has been very stingy with data on the sales of Kindle e-book readers, but analysts' estimates range from 250,000 to 500,000 units in the first year. Kindle owners must be ferocious readers, though, because that relatively small number of devices accounts for a disproportionate share of Amazon's book sales. In an interview with Reuters, CEO Jeff Bezos says that for the 200,000-plus titles available in both paper and Kindle formats, the Kindle version accounts for over 10% of total sales.

For more on this topic, including the Q&A with Bezos, go to http://bx.businessweek.com/e-book-readers/reference/.

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Marcial: Allergan: A Lift from More Than Botox?

Almost everybody knows specialty pharma outfit Allergan (AGN) because of its widely popular Botox product. Botox, originally approved for eye disorders, grew into a blockbuster product as a facial cosmetic agent designed to smooth away wrinkles. But there is more to Allergan, of course, and its efforts to expand its beauty and medical franchise are making its stock pretty attractive, too.

Allergan is an "economic value added (EVA) superstar," says Dan Natoli, president of investment research firm Matrix USA , which rates the stock a buy. EVA is one of the metrics that MatrixUSA uses to evaluate a stock. "Strong profitability coupled with impressive sales gains make for a positive and rapidly expanding EVA and a classic growth company,"" says Natoli.

The stock has kicked up from its 52-week low of 28 a share reached last November to 40.39 on Feb. 24, 2009. But that is still way below its 52-week high of 63.98 hit a year ago, and that's one reason why some bulls think the shares still have room on the upside.

Eyelash Enhancer Promising

A global health-care company, Allergan is a leading producer of ophthalmic, neuromuscular, and skin-care products. Its eye-care products accounted for some 46% of 2008 sales; Botox, about 30%; breast implants, 7.1%; devices for obesity treatment, 6.8%; and skin care, 2.6%. Foreign markets accounted for about 35% of total sales.

Two things could soon make Allergan's stock move higher: a new application of Botox to treat chronic daily headaches and a new product called Lumigan, a treatment for glaucoma. But it's one of the side effects of Lumigan that could deliver a bounty for Allergan: use of the compound results in longer and thicker eyelashes. As a result, Allergan developed a product called Latisse, which the Food & Drug Administration approved for eyelash enhancement last December. Latisse is applied on the upper eyelid while Lumigan, an eyedrop, is used in the eyes.

Latisse was launched in January, 2009, priced directly to physicians at $70 per application and $88 to wholesalers, notes analyst John Boris of Citigroup (C). (Citigroup has done banking for Allergan.) He estimates sales of $40 million in 2009 from Latisse. Although he rates Allergan a hold because of concern about the weak economy, Boris says the company has above-average earnings growth, an attractive product pipeline, and a proven management team.

Gregg Gilbert of Merrill Lynch (BAC) says in a report that based on Allergan's market research, roughly 9 million women in the U.S. could consult their physicians about a product like Latisse. (Merrill has done banking for Allergan.) "If we assume a cost of $75 a unit per month, the market could approximate $8 billion in the U.S. alone," says Gilbert, who rates the stock a buy with a 12-month price target of 48 a share. A penetration of 5% of the market would equate to $400 million, which he says could generate 75 a share in yearly earnings for Allergan. He forecasts Allergan will earn $2.68 a share in 2009, $3 in 2010, and $3.46 in 2011, up from 2008's $2.57.

Botox for Headaches

With regard to Allergan's new Botox treatment for chronic daily headache, the company is expected to file with the FDA a new-drug application in mid-2009, with approval expected in the first quarter of 2010, or earlier if it gets a priority review, says Citigroup's Boris.

How big is the market for headache treatment? Analyst Aaron Gal of investment firm Sanford C. Bernstein , who rates Allergan outperform with a price target of 74, sees the market for Botox for headache treatment at $1.5 billion. (Bernstein has done banking for Allergan.) He expects FDA approval, and sees the new use of the drug adding as much as 20% to Allergan's revenues. Chronic daily headache is generally recognized as an area of "high unmet need," says Gal, where current treatments offer only partial assistance to patients. (Bernstein has done business with Allergan).

"Botox is a safe, effective medication which has shown to provide superior efficacy/safety for suffering patients in a relatively large market," says Gal. But he is puzzled, he says, how slowly the market has picked up on Botox as a headache treatment. It is a central bull thesis on Allergan, says Gal, and on "why we are concerned a larger pharmaceutical company will attempt to scoop up the company in today's depressed prices."

Some of the biggest institutional investors are big players in the stock. Among them are T. Rowe Price (TROW), which holds a 6.9% stake, and Fidelity Management , with 6.8%. Wall Street remains somewhat bullish on the stock, with six of the 14 analysts who track it recommending a buy. None recommend selling. Eight others rate Allergan a hold.

With sturdy eye-care and Botox franchises and with promising new products, Allergan shares could provide a welcome lift for investors worried about the broader market.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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Obama: Confront the Challenges

As President Barack Obama addressed a joint session of Congress on Tuesday, Feb. 24, he had two main jobs to accomplish on the economic front: First, he had to acknowledge the scope of the economic crisis facing the country while striking an optimistic tone. Then he needed to offer a broad-brush preview of the budget he plans to submit Thursday, even as he demonstrated a credible commitment to tackle a budget deficit groaning under the weight of hundreds of billions of dollars of economic-stimulus spending.

As expected, Obama offered little in the way of new economic or business policy, beyond a glimpse of the budget. He emphasized the urgency of health-care reform, which, together with energy policy and education reform, form the top tier of the Administration's initiatives. And he warned that restoring the financial system to health would be costlier than expected, suggesting he is likely to ask Congress for additional funds.

Throughout, he saw his main job as bucking up the American people without sounding too Pollyanna-ish. "We will rebuild, we will recover, and the United States of America will emerge stronger than ever," Obama said to the kind of rousing applause that typically peppers such joint-session and State of the Union speeches.

A Break With the Past

Blaming the economic crisis on gutted regulations, irresponsible home buyers, unscrupulous lenders, and "critical debates and difficult decisions…put off for some other time on some other day," he said that the "day of reckoning has arrived." He argued that it is now a time to "act boldly and wisely, to not only revive this economy, but to build a new foundation for lasting prosperity."

In many ways, the content of the speech was unusual compared to the Presidential addresses of his predecessor. Foreign policy, including trade, got short shrift, cropping up mostly toward the end of the speech, when he promised a speedy and responsible end to the wars in Iraq and Afghanistan, and to expand global markets while resisting protectionism.

And he spent several minutes early in the speech on the credit crisis, calling the restoration of credit Job One for the Administration and taking pains to lay out how reviving the banking system will help Americans generally: Fostering loans to a new homeowner creates jobs for homebuilders, who can then afford to buy cars or open their own businesses; conversely, he said, tight credit means fewer home and car sales, "so businesses are forced to make layoffs. Our economy suffers even more, and credit dries up further."

Failing to Act Could be Fatal

Acknowledging "how unpopular it is to be seen as helping banks right now, especially when everyone is suffering from their bad decisions," Obama argued that the Administration's plan to restore lending is "not about helping banks, it's about helping people." (Later, he lauded a Florida banker, Leonard Abess, for divvying up a $60 million bonus he received after selling his bank among 471 current and former employees.)

Not only will the plan "require significant resources," he said, but "probably more than we've already set aside." He argued, however, that failing to act would prove far worse.

The optimistic tone was in many ways a marked contrast from most of the five weeks of his Presidency, and during the transition before it, when Obama has pulled no punches about the grim economic news he and the country have had to absorb and often has given little more than a nod to the American public's resilience.

Further Emphasis on Potential Expected

Indeed, he's taken some knocks from political opponents for being too gloomy; Louisiana Governor Bobby Jindal, who gave the GOP response to Obama, scolded the President on this front, saying: "Our troubles are real, to be sure. But don't let anyone tell you that we cannot recover or that America's best days are behind her."

The optimism battles go beyond politicking, said Jeffrey Kling, a Brookings Institution senior fellow in economic studies. From here on out, expect to hear a lot more from Obama about the country's potential, and the promise of a strong recovery. "Restoring consumer confidence is probably the single biggest thing the President can do to get the economy moving," Kling said. "I expect to see the corner being turned here," at least rhetorically.

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UAW: A Seat on Ford's Board?

Ford Motor (F) reached a tentative agreement, announced Monday, with the United Auto Workers to pay $6.6 billion in obligations to the union's health-care trust fund in stock. The agreement could pave the way for the union to become Ford's largest single shareholder.

The deal was struck with Ford ahead of similar current negotiations with General Motors (GM) and privately held Chrysler, which are both negotiating with the U.S. Treasury over continued taxpayer loans to the troubled automakers. GM and Chrysler are also trying to secure deals to reduce the face value of bonds. If they can't get concessions from the UAW and bond holders, GM and Chrysler risk being forced into bankruptcy court.

While it is common in some European countries for union officials to have board seats, it is practically unheard of in the U.S. Daimler-Benz (DAI), Volkswagen (VOWG), and BMW (BMWG), for example, all have a representative of organized labor on their supervisory boards. And the UAW, when Chrysler was owned by Daimler, had a board seat at the German automaker.

Staying Out of Bankruptcy

But the notion that the union would have such power in the boardroom would have struck generations of Detroit executives—not to mention labor leaders—as inconceivable. Yet while Ford has not applied for government loans from the Troubled Asset Relief Program (TARP), it is restructuring its debt obligations anyway in an attempt to lower costs further, preserve cash, and avoid government loans and bankruptcy court. In a recent interview with BusinessWeek, Ford CEO Alan Mulally said: "We will make sure in all of this that we don't end up being disadvantaged to our competitors."

In 2007, Ford, as well as GM and Chrysler, struck deals with the UAW to reduce billions of dollars in future health-care obligations from its balance sheet. The changes reduced the companies' liabilities for retiree health care by 50%, according to the UAW. In return, the companies promised to make huge lump-sum payments into the trusts to cover much of the retirees' plans. Ford, for instance, paid $2.7 billion into the union's Voluntary Employment Benefits Assn. (VEBA) in January, but owes a total of $13.2 billion to the VEBA, according to Ford, over the next few years. GM is due to make a payment of about $7 billion in 2010, and owes the union a total about $22 billion.

The Ford deal could act as a template for negotiations with GM and Chrysler—except for one hurdle. GM and Chrysler are negotiating with the union at the same time they are dealing with bond holders for concessions, and neither wants to give up more than the other, even with the prospect of Chapter 11 hanging over the company. Ford is not yet negotiating with its debt holders for a "haircut" on the company's debt, according to Ford officials. A haircut, also known as a "cram down," means those holding debt will accept a reduction on the face amount of the bonds. The U.S. Treasury is looking for bond holders to take 30 on the dollar for GM's and Chrysler's unsecured debt, while GM's bond holder committee has been fighting for 50.

UAW Ford's Biggest Shareholder?

While Ford's deal with the UAW shows Wall Street and Washington that it is making progress lowering its union costs, the company is hoping to exchange as little stock for its cash obligations as possible. Ford's stock is trading at all-time lows and closed on Feb. 23 at $1.73 per share. Its market value on Monday was just barely above $4 billion. (GM's was a distressing $1.1 billion.) By today's share price, Ford, if it availed itself of the maximum terms of the deal, would pay more to the UAW in stock than all of the company's shares are worth today. "We will consider each payment when it is due and use our discretion in determining whether cash or stock makes sense at the time, balancing our liquidity needs and preserving shareholder value," said Ford spokesman Mark Truby in a written statement.

The UAW could become Ford's biggest single shareholder, thus giving the union the right to demand a seat on Ford's board. Ford officials and the UAW have not said yet if a board seat will be part of the settlement.

Ford has two classes of stock. The Ford family controls 40% of the voting shares of the company through Class B shares, which only family members hold. William C. Ford Jr., the great-grandson of founder Henry Ford, is the executive chairman of the company.

But it could be an interesting experiment. If the UAW does get a board seat, for the first time ever at Ford, the best interests of both management and labor would be truly aligned.

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Obama to Name Locke for Commerce

After two withdrawn nominations to head the Commerce Dept., President Obama appears poised to take a third swing, naming former Washington Governor Gary Locke, who has a reputation as a wonkish, bland straight-shooter.

A White House official describes Obama as being "very close" to naming Locke, who is still undergoing final background checks. In a statement, John D. "Jay" Rockefeller IV (D-W.Va.), who heads the Senate Commerce Committee, says Locke would be a "phenomenal" choice for Commerce Secretary

Global Trade Advocate

Since leaving public life in 2005, Locke, the nation's first Chinese American governor, has traveled to his ancestors' homeland multiple times as a corporate lawyer, helping companies enter the Chinese market and developing connections in China's hierarchy. He also has been a champion of transportation spending and tax breaks, including a successful effort that convinced Boeing (BA) to build the 787 jetliner in Everett, Wash.

Obama is hoping to have better success with Locke than with his first two picks for Commerce. His No. 1 choice, New Mexico Governor Bill Richardson, a Democrat, announced his withdrawal in early January amid a grand jury investigation into how a corporate political donor won a lucrative state contract. Then, earlier this month, Obama tapped Senator Judd Gregg (R-N.H.), who initially accepted, but changed his mind after a week of reflection.

Locke, a Yale-educated lawyer and son of immigrants who was once an Eagle Scout, was known more as a wonk than a flashy politician, according to the Seattle Post-Intelligencer. More recently, his work for law firm Davis Wright Tremaine and some large corporations has focused on energy and China.

Locke is also known as a budget-cutter—including taking the ax to social programs in Washington State—and a strong advocate of global trade.

In 2003, while delivering the Democratic response to President Bush's State of the Union address, Locke criticized the economic policies of Republicans as "upside-down." Instead, he urged hundreds of billions of dollars in investments and relief for the middle class.

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Chevron: A Big Value in Big Oil

Chevron (CVX) is the third-largest integrated oil company in the U.S. and the fifth-largest in the world—as well as the fifth-largest natural gas producer in North America. The company has a strong global presence in refining, marketing and transportation—with retail marketing under the Chevron, Texaco, and Caltex brands.

While the company's exploration and production earnings have been from hurt by the sharp drop in crude oil and natural gas prices, as well as reduced production rates reflecting damage from September 2008, Gulf of Mexico hurricanes, its diversification into downstream businesses has helped offset these losses, and lower crude oil feedstock costs have benefited its refining and marketing businesses.

We believe Chevron will benefit from improved industry fundamentals and higher commodity prices through its exploration and production activities. With Gulf of Mexico oil and gas production being restored, and several upstream projects slated to start up, we expect Chevron's oil and gas production will increase about 4% in 2009, and we look for annual production growth of 2% to 3% between 2007 and 2012. We believe the drop in oil prices over the past month(s) to the low $30-per-barrel range was excessive, and expect West Texas Intermediate (WTI) oil prices will average around $40 in 2009, and trend even higher in 2010 and beyond—averaging above $90 per barrel in 2014 and thereafter.

The stock recently traded at 65. A blend of our direct and relative valuation methods leads us to our 12-month target price for Chevron's shares of 95. The value represents potential appreciation of about 45% from current price levels, and an expected enterprise value of 7.5 times our 2009 earnings before interest, taxes, depreciation, and amortization (EBITDA) estimate, a discount to Chevron's U.S. supermajor oil peers. We believe that the company's high degree of earnings and dividend growth and stability (it has an A- ranking under the S&P Quality Ranking system) justifies a higher multiple than Chevron's stock currently receives in the market and that its shares are undervalued reflecting weakness in its upstream business. In addition, the shares recently had a dividend yield of about 4.0%.

The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).

INDUSTRY OUTLOOK

Our fundamental outlook for the Integrated Oil & Gas subindustry for the next 12 months is positive, as we see reduced upstream earnings being offset by increased downstream results. While we expect the profits of the U.S.-based integrated oils will drop more than 50% in 2009, we look for a rebound of over 50% in 2010 on higher projected pricing amid an improved economic outlook and continued upstream volume growth.

With the effects of the credit crisis spreading, impacts across the energy sector have intensified. Budgets are being cut, and it is difficult to expand oil and gas production. We are pessimistic about future supply trends, which we expect will put upward pressure on oil prices when demand rebounds. In the meantime, we think the slippage in supply is not enough to offset reduced global demand—focusing attention on OPEC compliance.

The current global economic slowdown has led to further reductions in global energy demand and energy prices. As of February 2009, IHS Global Insight, an economic and financial analysis firm, estimated that reduced consumption in the Organization for Economic Cooperation & Development (OECD) nations would lead global oil demand down by 0.84 million barrels per day (b/d), to 84.87 million b/d in 2009, and that OPEC cuts would lead global oil supply down by 1.67 million b/d, to 84.93 million b/d, in 2009.

As of Feb. 10, using a blend of data from the U.S. Energy Information Administration and IHS Global Insight, we estimate that WTI spot oil prices will average about $40 per barrel in 2009, $53 in 2010, and $61 in 2011. Risks to our forecasts to the downside include an extended worldwide economic downturn and limited OPEC output cuts. However, upward pressure on prices may occur if the world economy recovers sooner than anticipated, a major supply disruption occurs, or if OPEC aggressively cuts output.

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Did Court Ruling Prolong Stanford Probe?

Is the U.S. Supreme Court partly to blame for prolonging R. Allen Stanford's alleged $8 billion fraud involving questionable certificates of deposit sold by his Antigua-based bank?

One reason being offered up by some within the Securities & Exchange Commission for the agency's slow progress in unmasking Stanford's alleged $8 billion fraud is a 1982 high court ruling that tied regulators hands a bit. In Marine Bank v. Weaver, the nation's high court ruled that a bank CD is not the same thing as a stock or a bond and is not governed by federal securities laws.

In effect, the Supreme Court ruling left it up to bank regulators to go after abuses in the marketing or selling of CDs. Ever since, the SEC has been loath to get involved in any investigation involving the sale of CDs for fear the case might be tossed out of court.

Probe Started in 2006

So SEC investigators first tried to get U.S. bank regulators interested in taking a look at the activities of the Houston-based Stanford Financial Group, say people familiar with the Stanford investigation. But these sources, who did not want to be identified, said bank regulators, some of whom were contacted as far back as 10 years ago, didn't seem much interested. The identity of the bank regulators could not be determined.

The SEC itself didn't formally begin its own investigation into the unusually high-yielding CDs sold by Stanford Financial's offshore bank until October 2006. The investigation culminated on Feb. 17 with the SEC filing civil fraud charges against 58-year-old Texas native Allen Stanford and two of his top deputies. Regulators said they can't account for the approximately $8 billion in customer deposits that Stanford's offshore bank, Stanford International Bank, has taken in from the sale of high-yielding CDs.

Securities experts say the initial cautious approach that the SEC appears to have taken in its investigation of Stanford Financial Group is understandable in light of the 1982 court ruling. But the experts also say there should have been little doubt that the SEC had jurisdiction to investigate the firm, since it was Stanford brokers in the U.S. who were marketing and selling the offshore bank's CDs to wealthy investors.

"If it was just an offshore bank and people were going out there and finding the bank on their own, the SEC might be reluctant to get involved," says Christopher Clark, co-head of the white-collar criminal law defense practice at Dewey & LeBoeuf and a former prosecutor. "But this was a registered broker dealer that was actively marketing this product, whether it's a security or not. That's right in the wheelhouse of the SEC."

Misplaced Doubt

In fact, if there was any lingering doubt about the SEC's ability to go after Stanford's operation, it should have ended in 2001. That was the first time Stanford's brokerage arm formally filed a "notice of sale of securities" with the SEC for its "certificate of deposit program." The filing is required any time an investment firm or hedge fund plans to sell securities to U.S. investors. In the 2001 filing, Stanford reported that it intended to sell up to $150 million in CDs to wealthy investors in the U.S. In a subsequent 2007 filing, Stanford registered to sell up to $2 billion in CDs in the U.S.

It's not clear why the SEC's investigations didn't begin until 2006, even though some within the agency had concerns about Stanford's operation as far back as 1998. But on Feb. 17, when the SEC filed civil charges against Stanford, Rose Romero, the SEC's Fort Worth regional director, said: "Before Christmas we got a bit of good information that we didn't have before, and we moved quickly on that information."

SEC spokesman John Nester declined to specifically address the impact of the Supreme Court's 1982 ruling on the Stanford investigation. But he did say the ruling was a landmark decision. Generally, he said, the pace of an investigation can be affected by numerous factors, including the agency's ability to prosecute a matter and the jurisdiction in which the alleged offense takes place.

Latin Beat

A spokesman for Stanford Financial Group has declined to comment since the filing of the SEC charges. Stanford, the sole shareholder of both the offshore bank and the investment firm, has been unavailable for comment. To date, he hasn't been charged with any criminal wrongdoing, but sources said the FBI continues to look into the matter.

In any event, the 1982 court ruling could not have come at a better time for Stanford. Just four years later, he opened the doors for his offshore bank, originally called Guardian International Bank, on the Caribbean island of Montserrat. The Montserrat bank worked in tandem with a Miami investment firm called Guardian International Investment Services marketing the bank.

Guardian, which opened with $6 million in seed money from Stanford and his father, James, quickly found customers in Latin America. The bank took out advertisements in Spanish-language newspapers in Mexico, Venezuela, and elsewhere promoting its CDs, which at the time yielded 10.75%, about double the going rate.

In 1991, after the bank relocated to Antigua following a dispute with Montserrat authorities, Stanford eventually rebranded it with the current name and became chairman and sole shareholder.

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Slumdog Oscars Boost India Film Industry

Until this year, Indians never took much interest in the Oscars—and America's Academy of Motion Picture Arts & Sciences likewise had little interest in India. The country may have the world's most prolific film industry, but Bollywood has long had a dismal showing at the Oscars. Costume designer Bhanu Athaiya won the country's first Academy Award in 1983 for director Lord Richard Attenborough's Gandhi, and in 1992 legendary director Satyajit Ray received a lifetime achievement award. Lagaan, a colonial tale with cricket as a backdrop, was nominated for Best Foreign Language Film in 2002 but lost out to a movie from Bosnia.

Now, though, Indians are certainly paying attention to the American awards. On Feb. 22, Slumdog Millionaire, director Danny Boyle's film about an Indian slum boy making it rich, scooped a rich haul of eight Oscars, including Best Picture and Best Director. Indians were among the winners, with Allah Rakha Rahman—known as the Mozart of Madras—getting the Oscar for Best Music Score and sharing the Oscar with countryman Gulzar for Best Original Song, and Resul Pookutty winning for Best Sound Mixing. The Slumdog victory is the top story on Indian news channels, and Bollywood is all set to party tonight.

The celebrations are understandable. Ever since the global success of Slumdog—written by an Indian diplomat, made by a British filmmaker, distributed by American studio Fox Searchlight, with Bollywood talent—Indians have claimed the film's success as their own. Ties between India's film industry and Hollywood have been growing over the past few years, with Indian financiers such as Anil Ambani's Reliance Big Entertainment forming development deals with stars such as Julia Roberts, Brad Pitt, George Clooney, and Tom Hanks, while big studios such as Disney (DIS), Sony (SNE), and Warner Bros. Entertainment (TWX) have been ramping up local productions. But unlike most foreign films made in India, Slumdog is like a typical Bollywood film, complete with the local industry's favorite seasonings of survival, love, and triumph.

Hollywood Offers Roll In

That has gone down well with audiences worldwide, and people working in the local film industry say they suddenly are getting more calls from Hollywood producers wanting to know more about India. "Slumdog's Oscar tally is an absolute victory for India, as it has opened up so many gates for us," says local director Anurag Kashyap, who made Black Friday, based on the 1993 Mumbai bomb blasts. Kashyap, who gave Bollywood tips to Danny Boyle, says that Slumdog's victory has helped Hollywood discover Black Friday. "I am getting offers, and foreigners want to know where they can shoot their films in India," he adds.

The success of Slumdog will help earn respect for the local industry, says Bollywood director and actor Amol Palekar. Hollywood has consistently "ridiculed our song-and-dance sequences, but when the same is done by a British filmmaker, the world laps it up," he says. The biggest beneficiaries of Slumdog's Oscar win are likely to be the Indian technicians, he says. "Four of Slumdog's Oscars were won by Indian technicians," says Palekar. "Now that's sweet victory for us."

It also means that the Pune-based Film & Television Institute of India, which churns out excellent technicians, could be in the limelight. Slumdog's Oscar-winning sound mixer, Resul Pookutty, is an FTII alumnus. If that happens, some industry figures believe India could have yet another institute favored by global professionals looking for low-cost outsourcing possibilities.

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Marcial: Should Investors Call Emergency Medical Services?

What's most in need of emergency rescue right now? Investors' battered portfolios might top the list. "There's no place to hide" has become a common refrain among investors amid the continued downdraft in equity markets. Surely, however, some skilled stockpicking in this volatile bear market should help, although that, admittedly, is just one of a bunch of tools for salvaging portfolios from further damage.

Against the current dire market conditions, some savvy pros are highlighting the stock of a company that provides emergency aid of the physical kind: Big Board-listed Emergency Medical Services (EMS), the nation's No. 1 provider of emergency services.

EMS' stock chart shows that the company has kept itself above water against strong undercurrents that have pulled down most other stocks. On Feb. 20 it traded at 35 a share, not far from the 52-week high of 39.11 reached on Jan. 5, 2009. Although it's still a relatively modest operation, with sales of $2.5 billion, profits have steadily grown from $20 million, or 55 a share, in 2005, to $84.85 million, or $1.97 a share, in 2008.

favored by demographics

Analyst Andreas Dirnagi of investment bank Stephens forecasts that EMS' earnings will climb to $2.10 a share in 2009 and jump to $2.42 in 2010; EMS earned $1.97 a share in 2008. He rates the stock "overweight" with a 12-month stock price target of 42. "We would encourage investors to accumulate shares on any material price or market weakness," advises Dirnagi.

He says EMS' two businesses—American Medical Response (AMR), which provides ambulance transport services, and EmCare Emergency unit, the largest contract management group providing hospitals with emergency department physicians—are thriving, even amid the recession and financial crisis.

Dirnagi expects EMS will benefit from the continued rising demand for ambulance services and physicians for emergency rooms around the country. EMS is well positioned to continue gaining market share in those two fragmented businesses, he says. Helping EMS' business is the demographic trend, mainly the aging population combined with the pattern of increased demand for health care and hospital emergency services.

"Even though EMS is already the largest provider in the ambulance market, it continues to grow at rates almost double that of the industry in general," says Dirnagi. And hospitals increasingly outsource emergency-room physicians. EMS is also gaining market share in this business as hospitals continue to slash costs, mainly through cutbacks in doctors and medical personnel. Hospitals save bundles by hiring EMS to provide emergency-room doctors, the analyst says. Dirnagi notes that EMS has 427 contracts with hospitals for such services, which account for some 47% of revenues.

onyx: a wild card?

EMS' fourth-quarter results of 48 a share beat analysts' consensus forecasts, with the EmCare business having a "standout" quarter, says Michael Wiederhorn of Oppenheimer (OPY), who rates EMS "outperform" with a price target of 41 a share. Most importantly, he adds, EMS issued a "very strong 2009 [earnings] guidance" in the range of $2.05-$2.15 a share, compared with Street estimates of $1.98. So the analyst increased his own estimate from $2.06 a share to $2.10 for 2009, and from $2.31 to $2.33 for 2010. (Oppenheimer has done nonbanking services for EMS.)

So why aren't all analysts who follow the company so charmed by the stock's rise and the viability of EMS' operations? Of the nine analysts who track EMS, only four rate it a buy, and three tag it a hold. Two others recommend selling the stock.

Here is one explanation from analyst Jeffrey Englander of Standard & Poor's, who rates EMS a hold: "While a number of positive fundamentals (consolidation of a fragmented market, an aging population, and increased use of outsourcing for ambulance and ER services) should aid results over the longer term, we remain cautious," in part because a private investment company, Onyx Partners, owns 78% of the stock and has voting power of 96%.

Onyx's interests, says Englander, "may not be aligned with those of minority shareholders." (Standard & Poor's, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

The concern for some EMS watchers: Onyx may unload some or all of its stake to book profits. So far, Onyx hasn't sold shares. But Stephens' Dirnagi isn't worried about the Onyx holding. He notes that the group has filed a shelf offering to sell 10,000 shares, which he says is but a third of Onyx' holdings. "Onyx doesn't need the cash, and the offering apparently satisfies their current needs," explains Dirnagi. He points out that it wouldn't be in its best interest to just dump large amounts of the shares, as that would pull down the stock's price. He expects Onyx will act "appropriately and responsibly" if and when they do need to sell.

In the meantime, Onyx is making money on its stake, which it acquired in 2005 when EMS was spun off from Laidlaw International, which Onyx purchased. EMS went public in December 2006 at the price of 14 a share. With such winnings in the current environment, EMS has been one ambulance company worth chasing.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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Auto-Parts Suppliers Brace for Downturn

Michael Aznavorian knew he couldn't rely on Detroit's Big Three. Aznavorian, president and co-owner of Plymouth (Mich.)-based Clips & Clamps Industries, had been selling his metal brackets to U.S. carmakers. But three years ago, as foreign automakers continued to grab market share, Aznavorian set his sights on joining their supply chain. He now provides clamps to a number of so-called Tier One suppliers who in turn use them in components for Toyota, Honda, and Nissan. Foreign carmakers assembling in the U.S. now account for one quarter of the company's $10 million in sales. And while both domestic and foreign manufacturers have slashed production, forcing Clips & Clamps to lay off 18 of its 54 employees in the second half of 2008, Aznavorian thinks that when the recovery comes, foreign carmakers will rebound faster. "You can't sit around waiting for the Big Three to come back," says Aznavorian, who's also hustling to find new customers in industries such as agriculture.

With U.S. auto production down about a third over the past year, Craig Fitzgerald, an analyst at consultants Plante & Moran, says more than half of North America's 1,200 small auto suppliers—"small" being defined as those with under $20 million in sales—will vanish into bankruptcies, mergers, and liquidations within the next three years. But some are positioning themselves for a rebound, expanding their customer base to include foreign carmakers. They're also moving aggressively to become more efficient, reducing downtime and producing less scrap metal.

Certainly getting in with the Hondas and Toyotas of the world is a smart move. Aznavorian says their demand and production schedules tend to be more predictable than those of U.S. carmakers. But winning their business can be a long and grueling process. Aznavorian became a regular only after he developed some clips that solved a problem for a larger supplier, which then took him on as a subcontractor. "We got some difficult jobs and had to prove ourselves," says Aznavorian. "This takes years." It also takes a clean balance sheet, as carmakers increasingly are scrutinizing the financial strength of their suppliers.

JUST HANG ON

While entering new markets sounds smart, there are few substitutes for the high volumes of the car business. David Sofy, president of HMS Products, a $7 million, 50-person company in Troy, Mich., has seen a slowdown in the sales of his equipment, which automates metal stamping for both the auto and appliance industries. He's considering selling his machines to makers of wind turbines, but knows the potential is limited. "They just don't have the numbers," says Sofy.

For some, the goal is just to hang on. In early December, Bill Miller, president and co-owner of Miller Industrial Products, laid off his 36 employees, leaving only himself and a receptionist at his Jackson (Mich.) plant. These days Miller brings a few workers back to fill the occasional orders for machining of metal castings and forgings, generating enough money to keep the heat on and thereby preserve his equipment. Still, says Miller, "I'm not giving up."

Return to the BW SmallBiz Feb/March 2009 Table of Contents

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Laid-off Workers Want Their Severance

David Mazer doesn't think he should be cast as a villain. The former CEO of Mazer Corp. had been scrambling to keep his Dayton education publishing firm alive when his bank abruptly halted negotiations for much-needed financing on Dec. 30. Unable to pay wages and mounting bills at the company his father founded 44 years ago, Mazer immediately laid off employees without any severance or notice. He says he had no choice. Mazer sent e-mails to his 296 employees around 5 p.m., telling them it was their last day and adding that "we are sorry for the short notice, but we chose to fight until the very last minute to keep the doors open."

Scott Bent, a 26-year-old editor, was too stunned to pack up his belongings. But when he came back the next morning, he was prepared to fight. Bent organized a suit seeking class-action status against Mazer Corp., demanding severance, vacation pay, and other benefits. Says Bent: "I still have not received my final paycheck." Mazer responds that his hands are tied about the sudden closure, noting "we're angry, too." A spokeswoman for lender KeyBank, now fighting to seize Mazer Corp.'s assets in court, says the bank "exercised its rights under applicable law" in halting funds.

Managers dealing with the trauma of mass layoffs increasingly have something else to worry about: the law. A growing number of jettisoned employees are filing lawsuits for severance pay under the federal Worker Adjustment & Retraining Notification (WARN) Act, and politicians are stiffening rules to protect workers. On Feb. 1 the state of New York lengthened the amount of notice employers must give workers under the WARN Act to 90 days from 60. It also made the law applicable to companies that lay off as few as 25 employees, vs. the previous minimum of 50. Congress is now mulling ways to strengthen the act, and states such as New Jersey and Illinois have beefed up employee protection laws.

Desperate to save money and often struggling to keep their companies solvent, many employers are giving in to the temptation to skimp on severance when downsizing. A surprisingly large number aren't giving employees the 60 days' notice or severance pay that's required under the WARN Act. "Companies used to throw their hands up and say, 'Just pay it,' " notes Gerald T. Hathaway, a partner in New York of employment law firm Littler Mendelson. Now, he adds, they're "looking for more certainty that they really have to [pay out], because it's not cheap." Elaine Koch, an employment lawyer at St. Louis-based Bryan Cave, thinks inexperience is a factor: "Some are not fully aware of the laws," she says.

One reason may be the two-decade-old WARN Act has rarely been enforced. WARN also exempts companies that are hit with "unforeseeable circumstances." And the perils of running afoul of the act have not been significant, since employers aren't hit with penalties—only 60 days in back pay, benefits, and possibly lawyers' fees. Even WARN class actions typically have settled for far less than cases involving gender and discrimination claims. Last July one suit filed by 930 displaced workers at Quaker Fabric was settled for $1 million.

COMPLAINTS RISING

While alleged breaches of the WARN Act and related laws aren't tracked on a national level, employment lawyers across the country say they've seen a marked jump in complaints. Over the past six months, laid-off employees have filed lawsuits over violations of the WARN Act against companies as varied as Lehman Brothers, San Francisco law firm Heller Ehrman, retailer Goody's, electronics chain Tweeter (TWTRQ), and USA Jet Airlines. Even if a company files for bankruptcy, it still needs to give notice in the event of mass layoffs and plant closings—which means the trustee or debtor in possession may need to pay out those obligations.

For his part, David Mazer says he thought he could obtain financing right up until the bank abruptly ended negotiations. "We can do nothing more now than to offer our apology," he said in a statement to BusinessWeek. That's not good enough for laid-off editor Bent. He has moved in with his in-laws and is picking up freelance jobs while chasing down two months' pay. In August Bent plans to go to law school, where he may major in employment law. "I see it as a way to fight for the cause."

For more on the WARN Act and the challenges companies face complying with it, watch a video report at businessweek.com/go/09/warn.

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Hungry Carmakers Are Making Some Sweet Lease Deals

As the auto industry finds it harder to move metal in parlous times, attractive leasing deals are cropping up, particularly from foreign manufacturers.

"In some cases, they're very aggressive," says Philip Reed, senior consumer advice editor at Edmunds.com, the car information Web site. Counting all incentives, including low-rate loans, leases, and rebates, carmakers offered an average $2,698 in incentives per vehicle in the U.S. in January, up from $2,413 a year ago.

Edmunds, which offers online calculators to help determine how attractive a deal is, ran advertised specials through its systems at BusinessWeek's request. The researchers found a lot of variety. Drivers could do well, for instance, on a Mercedes-Benz C-Class Sport four-door sedan, which fetches about $43,000 at retail. Leasing would cost $430 a month for 39 months and $4,564 at signing, if the dealer chips in $1,100. Last year, leases for the same car cost $440 to $462 a month. But if you buy the car now instead, you might shell out $590 a month for 66 months with $7,845 down—if you qualify for a special 3.9% loan. (Be aware, though, that deals can change week by week.)

With other models, particularly less expensive ones, deals tilt in favor of buying. Leasing a $22,000 Mitsubishi Outlander ES 4-door SUV would cost about $279 a month for 42 months, with $2,558 due at signing. (Active-duty soldiers and current Mitsubishi owners could get another $500 off.) Buying the same car would cost only modestly more each month—$334 a month for 60 months—with a special 3.9% loan and a $4,076 down payment. (Zero-percent financing, where available for qualified buyers, would help even more.)

To assess some recently advertised deals, Edmunds subtracted rebates, applied special interest rates being offered, and, rather than leave out often-hefty sales taxes and title charges, which vary by Zip Code, used the sales tax and title charges for Southern California as roughly representative examples. Edmunds applied a 20% down payment on purchases and used suggested retail prices.

Whether to lease or buy is as much a lifestyle choice as a financial decision. If you swap for a new car every three years or so, you might be better off leasing since you don't have to worry if trade-in values are dropping. Indeed, trade-in values have plunged so much on American cars that the Big Three largely avoid leasing. Values for foreign brands have held up, keeping them in the game. But "if you own your car longer than five or six years, you probably should buy," says John Sternal, vice-president for marketing communications at LeaseTrader.com, an online marketplace for lease transfers. At that point, you own the car and are free of more payments—aside from repair costs.

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Nell Minow on Outrageous CEO Pay—and Who's to Blame

On Feb. 17, President Obama signed into law a $787 billion stimulus package that includes limits on the pay and bonuses of the 20 top-earning executives at companies receiving federal bailout money. The provisions, inserted by Senate Banking Committee Chairman Chris Dodd of Connecticut, are even tougher than the President proposed and are raising concerns on Wall Street about an exodus of talent. The view is different on Main Street, where executive pay is under attack as more Americans lose their jobs and as billions in taxpayer money props up teetering banks. But is there really change afoot in the way executives are compensated? I talked with Nell Minow, editor and co-founder of The Corporate Library, an independent firm respected for its research on corporate governance and compensation.

MARIA BARTIROMO

Anger over enormous executive compensation has been rising for years. Are we at a watershed moment?

NELL MINOW

Yes, I think so. All the scandals I have lived through going back to the savings and loan crisis, insider trading, Enron, and WorldCom seemed very localized—they were about something that everyone could understand. There were people who behaved unethically, and we got to see some very satisfying perp walks. But in this case, because the problem seems so systemic and there has been no indication that anyone has done anything illegal, that has fueled a level of rage I have never seen before. I used to compare some of these executives to Marie Antoinette, but a better comparison is Nero. When the stories came out about [former Merrill CEO John] Thain and his $1,400 wastebasket and the corporate jets and the bonuses, that makes people feel that not only did the business community create this problem, but they don't care how bad it gets. I will tell you that the biggest disappointment I've had in this mess has been the absolute vacuum of leadership on the part of the business community.

The public may be angry, but don't stockholders have to get angry, too, for there to be any dramatic changes?
I'm so glad that you brought that up because all the reforms going back to Enron and before always focus on what they call the supply side of corporate governance, which is what the boards must do, what the corporations must do, what the accountants and lawyers must do. And we have completely failed to address the demand side of corporate governance, which is what shareholders must do. Shareholders have reelected these directors, have approved these pay plans, and have been enablers for the addictive behavior of the corporate community.

The stimulus bill reins in compensation for executives of banks or companies receiving bailout money. Is that fair?
I think there are two important points to make about it. The most important is that this is not the government regulating CEO pay. This is capitalism. This is the provider of capital insisting on some improvement in CEO pay. And whether you are a distressed company that goes to a private equity firm for help or to your Uncle Max for help, those people are going to insist on some kind of a giveback with regard to pay. So this is a business partner negotiating. Caps don't really have much of an impact, but they send a powerful message. To me, the interesting part is the restricted stock. The fact that there's no limit on the restricted stock means that you can earn a zillion dollars under this program as long as you earn it. And the fact that it cannot vest until the government gets [paid back] is very, very good. It really does the best job possible of aligning the interests of the managers with the interests of investors and taxpayers.

Can you explain how compensation contributed to the mess we are in now?
Certainly. With regard to the subprime mess, compensation was structured so that people were paid based on the number of transactions rather than the quality of transaction. And it doesn't take a rocket scientist to figure out that that is going to lead to disaster.

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Dealmakers Tiptoe Back into the M&A Market

Is dealmaking back? The Masters of the Universe took a serious beating last year from the financial crisis and recession. Merger and acquisition volume worldwide dropped to $2.9 trillion in 2008, from $4.2 trillion the year before, according to research firm Thomson Reuters (TRI).

Yet despite the recent run of negative economic news, there may be some reason for optimism. With the credit markets perking up and stocks at record lows, buyers and sellers are once again circling each other in the well-known ritual of dealmaking. In late January pharmaceutical giant Johnson & Johnson (JNJ) acquired breast implant maker Mentor for $1 billion. Three days later drugmaker Pfizer (PFE) agreed to buy rival Wyeth (WYE) for $68 billion. "Expect a feeding frenzy," predicts Robert A. Profusek, head of global mergers and acquisitions at law firm Jones Day.

Pruning Tool

M&A activity often has to bounce back before the credit markets and the broader economy can recover fully. Deals are a critical tool for eliminating weaker players and wringing out excess capacity. They're also a signal of confidence, which can encourage other buyers and investors to jump back into the market. "The resurgence in dealmaking is the market's way of pruning the weak companies from the strong," says Paul Weisbrich, senior managing director at Costa Mesa (Calif.)-based investment bank McGladrey Capital Markets.

In preparation for a shopping spree, top-rated companies are issuing debt. Hewlett-Packard (HPQ) sold $2 billion worth of bonds in December, in part to pay for potential purchases. Overseas players, which are benefiting from a relatively weak dollar, are showing an interest in U.S. acquisitions. There's speculation that Singapore's sovereign wealth fund, Temasek Holdings, is eyeing the aircraft-leasing unit of insurer AIG (AIG).

Private equity firms, which helped fuel the last M&A boom, have an estimated $250 billion at their disposal for buyouts. Despite taking hits on holdings such as Huntsman (HUN) and casino Harrah's Entertainment, buyout shop Apollo Management recently raised $15 billion for a new investment fund. "Private equity money has been silently piling up and will start chasing new targets," says Weisbrich.

With stocks getting slammed, buyers will have plenty of attractively priced assets to consider. Even the best-performing sectors last year, health care and consumer staples, lost 24% and 17%, respectively. The raft of bankruptcies only adds to the supply of potential targets. "You have a very unusual situation where everything is on sale," says Donald B. Marron, CEO of private equity firm Lightyear Capital.

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What Will the Crisis Mean for Venture Capital?

In the lingo familiar to the kids toiling away at Web startups, the U.S. financial system is on the verge of an epic fail. The same may soon be said of many of the firms whose investments are the lifeblood of those Silicon Valley entrepreneurs.

There's been plenty of discussion about the impact of Wall Street's woes on emerging tech businesses. Web entrepreneur Jason Calacanis wrote late last month that as many as 80% would go under in 18 months. Early-stage investor Ron Conway advised entrepreneurs not to quit their day jobs unless they could get a year's worth of funding in advance. According to Om Malik, Sequoia Capital recently told its portfolio companies to hunker down for a long economic downturn. At a recent dinner party, an entrepreneur told me that his startup had about six months to pull a business model out of thin, recessionary air or it was toast.

Startups get funded in bunches, and in a downturn, the strong survive and the weak get sold for cheap or shuttered. We get it.

But what's in store for the venture capitalists who pump billions into these fledgling companies? My growing concern is that the financial crisis gripping the globe might cause some firms to close their doors and leave many VCs looking for a new line of work. Returns for plenty of firms are tapering off, particularly in recent years. And before long, even looking back a decade will indicate that venture capital didn't yield much more than the stock market and other less risky places to park cash. Think that won't be lost on the institutional investors, university endowments, and other limited partners that look to Sand Hill Road for returns? Think again.

Venture Capital's Lasting Power

To understand why, take a look back almost a decade ago. Even after the air came hissing out of the tech bubble, venture capital kept attracting investment (BusinessWeek.com, 10/3/07). Sure, a few firms retrenched, and a handful of reckless partners lost their jobs. But even more money poured into the asset class. That's because the last few decades have created such a surge of wealth in pension funds and endowments, and they all have to invest in what are commonly referred to as "alternative assets"—a category that includes VC funds. Even with a huge crash, venture capital was still a better long-term investment than the broader markets.

Limited partners look at industry returns in three-year, five-year, and 10-year increments. And in the early part of this decade, by those measures, VC returns could still be plotted upward and to the right. VC firms had little trouble raising new funds.

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John Malone: King of Satellite?

In his 1990s heyday at the helm of cable TV behemoth Tele Communications, John Malone was routinely labeled "The King of Cable." He was lauded for his leadership of a then-struggling industry. Today, the 67-year-old Malone may have just become the Satellite King.

By injecting as much as $530 million into ailing satellite radio company Sirius XM (SIRI), Malone's Liberty Media (LMDIB) is poised to hold sway over a stable of companies that use satellite technology to deliver TV, radio, and broadband to more than 37 million subscribers. "We have been impressed with the company, its operations and management team," Liberty CEO Greg Maffei said in a statement. "Sirius XM's ability to grow subscribers and revenue in a difficult financial and auto market is indicative of how listeners view this as a 'must have' service." Sirius XM has 18.9 million subscribers after the merger last year of two wobbly competitors, Sirius Satellite Radio and XM Satellite Radio.

Malone's Master Plan

People with knowledge of Liberty Media say Malone and Maffei believe they're investing in a vastly undervalued asset. Malone, a billionaire media maven, for years has been enamored with satellite, which he considers a cheaper alternative to cable TV and phone service. Under his agreement with Sirius, Malone's company will invest up to $530 million and could take a 40% stake in the company, though it is blocked for three years from taking a stake larger than 49.9%. That could give Malone, who joins the Sirius board along with Maffei, the time he needs to make Sirius a working part of larger satellite ambitions.

Malone, a Yale-educated engineering PhD, hasn't said what those ambitions are, but he has a reputation for thinking several steps ahead of his peers. "If there is something to make out of all of this, John Malone probably has it figured out already," says Jimmy Schaeffler, chief executive officer of the digital consulting firm Carmel Group. For starters, Malone's Liberty Entertainment unit owns a 48% stake in DirecTV (DTV), the nation's largest satellite TV operator, with 17.6 million subscribers. DirectTV already offers music from the Sirius XM service, but it could market the products to customers for use in their cars at a fraction of the current $12.95 monthly subscription fee for Sirius XM. Liberty could also harness unused satellite spectrum controlled by Sirius XM to offer more channels of video.

An equally intriguing prospect is how Sirius might fit with Liberty's 37% stake in WildBlue Communications, which offers wireless broadband for $49.95 a month to mostly rural customers who can't get high-speed Internet access from a local phone company. The service currently has 380,000 subscribers, a 10% increase in the last six months, but could likely do much better if it was marketed alongside Sirius radio.

Down the road, Liberty and Sirius XM are likely to weigh combining operations, says Larry Rosin, president of Edison Media Research . "I assume that they are going to eventually talk about a merger," Rosin says.

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Samsung and LG Take Aim at Nokia

As the movers and shakers of the mobile industry meet in Barcelona for the annual Mobile World Congress, which kicked off on Feb. 16, few handset makers see a brighter 2009 than the Koreans. Even as the undisputed leader, Finland's Nokia (NOK), is bracing for the global mobile-phone industry's first year of contraction in eight years, executives at Samsung Electronics and LG Electronics say they are determined to grab market share from rivals new or old. "The keyword for 2009 is yet more dramatic growth," says Lee Younghee, Samsung's vice-president for overseas marketing.

The Korean phonemakers were among the best performers in the past year. After Samsung overtook Motorola (MOT) as the world's second-largest handset maker in 2007, LG passed Motorola as the No. 3 in 2008. To keep up the momentum, LG President Skott Ahn has set a target of achieving double-digit market share for the first time this year, against an estimated 8.6% last year, when LG hit a sales record of 100.7 million units, up 25% from a year earlier.

LG's goal is to outdo Apple (AAPL) by matching its innovation and offering superior phone functions. Ahn points out that although consumers get emotional satisfaction with the iPhone's intuitive design and easy use, its frequent disconnection and short battery life force many users to carry two phones. "My plan is to let consumers carry just one" by providing easy use, rapid response, attractive design, and excellent connectivity, he says.

Parade of Hits

Turning up the dial on innovation isn't new for LG. In fact, it has emerged from a second-tier mobile-phone player three years ago to one of the top three by making a splash with such hit products as the Chocolate, Shine, and Viewty phones, each of which sported a distinctive look and feel. Also, in the race to launch a touchscreen model in 2007, it beat the iPhone by three months with its Prada phone, designed in a tieup with the luxury Italian fashion house.

In a new attempt to create buzz, LG is unveiling in Barcelona its new flagship handset, called Arena, featuring touch-based, three-dimensional menus. With a gentle sideways touch, the cube-based menu rotates four customized home screens for direct access to all functions, including video, MP3 music, ultra-fast Internet access, and GPS-based location services. LG is also collaborating with Intel (INTC) to develop a smartphone using the American chip giant's new processor, code-named Moorestown, designed to reduce power consumption below that of the Atom chip now widely used in netbook computers.

LG's path to success is similar to that of crosstown rival Samsung. Taking advantage of the downward spiral of Motorola and hemorrhaging Sony Ericsson, the joint venture between Japan's Sony (SNE) and Sweden's Ericsson (ERIC), the Korean electronics powerhouse has been cementing its position as the only credible challenger to Nokia. In the past two years, Samsung has increased its global market share by 5.1 percentage points, to 16.7%, and executives have said the company's target is to top 20% this year.

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Stocks: A Painful New Phase

The stock market could give a nasty surprise to those investors who thought equities were already as low as they could go.

The broad Standard & Poor's 500-stock index fell below 800 on Feb. 17, dropping 4.6%, to 789.17. In the process, the market set off alarm bells on many Wall Street trading floors.

For the past few months, amid plenty of bad news, buyers have stepped in to prevent stocks from falling to their extreme lows of last November. Now technical strategists, who watch such things closely, say the markets have a downward momentum that could be tough to slow.

A close below 800 "would suggest a full test of the November lows is underway," warned Bruce Bittles, chief investment strategist at R.W. Baird.

Hope for a Rebound Fades

The level of 789 is particularly significant, says Uri Landesman of ING Investment Management (ING). "This is a very important battleground right here," he says.

It's not just technical traders who are worried. Long-term investors have been unnerved by a range of developments.

Just a few weeks ago, many portfolio managers spoke confidently of a second-half rebound for the U.S. economy. Those hopes may not have faded entirely, but few appear willing to bet money on them anymore.

"It continues to be a market that is rife with uncertainty," says Robert Siewert, a portfolio manager at Glenmede.

Brian Reynolds, chief market strategist at WJB Capital Group, says stock investors are catching onto the economic pessimism that already dominates credit markets. "There is another year of economic pain ahead," he says.

That pain is spreading fast. In fact, global developments are in many cases more alarming than those inside the U.S., says John Merrill of Tanglewood Wealth Management.

The economic output of Japan fell by 12.7% last quarter, according to data released Feb. 16. By contrast, advance data for the U.S. gross domestic product showed a 3.8% decline in the fourth quarter.

Market Balks at Stimulus, Bank Plan

To help stop the economy's slide, President Obama on Feb. 17 signed a $787 billion economic stimulus bill. Several days before, Treasury Secretary Timothy Geithner unveiled an effort to prop up the financial system.

Both fell flat with many investors. "The financial markets were not impressed with either the fiscal stimulus deal reached by Congress or the announcement of the financial rescue plan," says Deutsche Bank (DB) chief economist Joseph LaVorgna. The stimulus bill won't provide a significant boost until next year, he said, while Geithner's plan lacked details.

Markets were also rattled by parts of the stimulus bill that would limit bank executive pay, Landesman says.

"A lot of people are willing to believe good stuff is coming" from the Obama administration, Merrill says. "But there is some disappointment on what's come down so far."

Government, both in the U.S. and around the world, is a "powerful influence on equity markets," says Chad Deakins, portfolio manager of the RidgeWorth International Equity Fund (SCIIX). But investors get spooked when governments change laws and rewrite the rules.

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