• R.I.P. Bond Rally. The yield on two-year notes (2.34%) overtook the fed-funds target rate of 2.25% this morning for the first time since 2004. "This could be the watershed, the inflection moment we’ve been waiting for," Morgan Stanley strategist George Concalves says. "We’ve been so tightly wound up in rates because of strong flight-to-quality flows, which was justified cause people trying to figure out where the problems were with the banks. Now, we’ve seen that come off."
• Comcast wades into wireless. Comcast (CMCSA) hired Save Williams, former CTO of Telefonica O2 Europe, to "explore wireless options" for the company. Sources think Comcast is weighing its quadruple play options (TV, internet, wireless and voice), and that it may consider a partnership with Sprint-Nextel (S) and Clearwire (CLWR) over WiMAX.
• Wall Street banks committed to funding a $22B private-equity buyout of Clear Channel Communications (CCU) are scheming to renege on the deal by offering terms "they know the [firms] won't be able to accept."
• To hedge or not to hedge. Airlines Q1 earnings were clobbered by soaring oil prices, with the notable exception of Southwest Airlines (LUV), which managed to turn a small-but-respectable profit to the credit of its aggressive fuel-price hedging. (Continental Airlines (CAL) hedged just 22% of its Q1 costs, Delta Air Lines (DAL) hedged 27%, and UAL (UAUA) hedged 30%. Southwest has hedged 70% of its anticipated Q2 costs!) The conundrum: With oil at $120/barrel and jet fuel up 75% from a year ago to $3.542/gallon, do you hedge against even higher prices? "Hedging costs money," says Stephen Schork, author of the Schork Report. "The perfect hedge loses money. Given how tight the margins are, some have opted to fly by the seat of their pants."
• From Ambac's (ABK) Q1 earnings conference call: "[The] mortgage market has deteriorated significantly. We expect loss rates to eventually plateau and ultimately burn out, but it’s impossible to say when that will happen... On a few deals, as David Wallace will discuss a little later, losses could reach as high impossibly as 80%; that is truly extraordinary." Indeed. Investors were none too impressed; the stock sold off as the call dragged on, ending the day down some 43%. Goldman Sachs said today ABK and MBIA (MBI) will need to raise another $3.4B to retain their AAA ratings.
• Peak potash. A Belarusian Potash Company announced yesterday it was increasing the price of Belarus- and Russia-made potash fertilizers to $1,000/ton for the South Asian market, a move aimed at putting pressure on the Chinese, Citigroup analysts say. At $1,000, potash prices have nearly quintupled since the beginning of 2007, a trend analysts see continuing fed by strong demand in North America and emerging market government subsidies.
• Slowdown a boon for private-equity. U.S. private-equity groups are not worried the credit crunch will stifle their ability to raise funds. "Investors see opportunities in a down market and fundraising targets for 2008 and beyond remain aggressive," one analyst says. Midmarket funds (managing from $50M to $300M) are seen as the best positioned.
• KKR stays in semis. When semi firm NXP, in which private-equity firm KKR owns a stake, sold 80% of its wireless unit to STMicroelectronics (STM) for $1.6B last week, markets assumed it was a sign of further semiconductor weakness, and that the proceeds would go to pay off debt and/or a dividend to its private-equity owners. Now it seems the money is staying with NXP -- to bolster its remaining two divisions. "KKR and its other co-investors saw opportunities at NXP to build the business further, some of which would see KKR as an active consolidator in the industry," a source says.
• Big ad/content deal on deck. When it reports earnings this afternoon, CNET Networks (CNET) will announce an expansion of its editorial and advertising relationship with Yahoo that will seriously increase its footprint on Yahoo, making it Yahoo's #1 tech news source. In turn, Yahoo gets to sell some of CNET's ad inventory, while CNET gets to sell ads on some areas of Yahoo. The deal should be seen as a big win for CNET management.
• Sequoia to open doors. The venerated Sequoia Fund is taking on new investors for the first time since 1982. Absent of new funds, it was looking at the possibility of having to "sell stocks that we didn't want to," as investors filed out during a rough Q1. Better be quick, though. "We won't hesitate to close it if too much money comes in too soon," co-manager Robert Goldfarb says.
• Bearish bellwether. UPS (UPS) execs say they expect the economic slowdown to last at least until year-end. Yesterday UPS lowered its full-year EPS forecast, and CFO Kurt Kuehn said in an interview anemic retail spending is a "telltale sign of recession."
• We're still here. TNK-BP co-owners in Russia (Alfa Group, Access Industries and Renova) denied rumors they have sold their stake to Gazprom. BP (BP) owns 51% of TNK-BP.
• Yahooptimism. During Yahoo's Q1 earnings conference call, Jefferies analyst Youssef Squali, who's bullish on Yahoo, had this question for Yahoo CFO Blake J. Jorgensen: "Blake, in the long-term guidance that you gave back in March, what kind of economic environment did you bake in there? Would you characterize it as conservative, or was it closer to a base case scenario? Because you are basically guiding to growth in the mid-20s for the next couple of years -- and that far outstrips the growth of the online ad market today. And clearly if you look at street estimates, they are a lot lower, implying a fair amount of skepticism." Some think Yahoo's lost its credibility: "It is difficult to support management with a three-year plan that is not credible," Think Panmure's William Morrison said. He says to meet its guidance, Yahoo needs to generate 60% margin growth in both 2009 and 2010. "The company has never delivered marginal profitability at that level for two years in a row since 'the bubble.' We simply do not believe management's forecasts," he says. "If management cannot offer credible guidance to investors, it may be difficult for investors to support them in a proxy battle with Microsoft."

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Eli Hoffmann

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