Wednesday, October 15, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Eli Hoffmann

Strong financials hide broader weakness. Equities closed down slightly Tuesday after a volatile session during which Dow futures spanned more than 800 points. Nasdaq fell 3.54% to 1,779. Dow -0.82% to 9,314. S&P -0.54% to 998. The Treasury's plan to buy stakes in nine of the largest U.S. banks (see below) bolstered financials, and masked some of the weakness in other sectors - which explains the Nasdaq discrepancy. The Financial Select Sector SPDR (XLF) rose 6.5%. Meanwhile PepsiCo (PEP) lost 12% after it lowered its profit forecast, sending Coca-Cola (KO) down 7.5%. Microsoft (MSFT) dropped 5.5% on concerns over weaker PC sales. Banks welcome deep-pocketed investor. The government unveiled a plan to buy $250B (which will come from its $700B rescue cache) of preferred stock in banks, including $125B in... Bank of America (BAC) ($25B), JPMorgan (JPM) ($25B), Citigroup (C) ($25B), Wells Fargo (WFC) ($25B), Goldman Sachs (GS) ($10B), Morgan Stanley (MS) ($10B), Bank of New York Mellon (BK) ($3B) and State Street (STT) ($2B). The other $125B will be made available to small-to-medium size banks. The shares pay a 5% dividend for the first five years, and 9% after that. Participating firms can't raise dividends for three years and must ask for permission to buy back their own stock. Some saw the deal as skewed in favor of the recipients, giving taxpayers the short end of the stick. FDIC backs up banks. Details of the FDIC's new liquidity guarantee program: The government insurer will cover $1.4T in senior unsecured debt and $400-500B in transaction deposit accounts, which businesses use to meet payrolls and pay vendors. It also boosted its retail-account guarantee to $250K from $100K. "The FDIC is taking this unprecedented action because we have faith in our economy, our country, and our banking system," Chairman Sheila Bair said. "The overwhelming majority of banks are strong, safe, and sound. A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address." Bair says the program "definitely would have made a difference" for Wachovia (WB). Unlimited liquidity hits $250B. The ECB, Bank of England and Swiss National Bank loaned banks $254B in their first tenders of unlimited dollar funds, led by the ECB's $171B. Central bankers are trying to unfreeze credit markets and get banks lending to each other again (see next item) after a crisis of confidence led to last week's stock-market selloff, the biggest since 1933, threatening to send the world into a global recession. Frozen credit markets thaw a bit. Helped by global moves to solidify the banking system and create almost unlimited liquidity, credit market pressures eased slightly Tuesday, but lending remains tight. Yields on both corporate bonds and commercial paper fell sharply, although market participants say it could still be weeks or months until funds once-again flow freely. The government rescue "was important in removing the immediate panic," Gimme Credit's Kathleen Shanley said, "but there's still going to be a sense of vigilance in the credit markets." Overnight dollar Libor fell to 2.18% from 2.47%, but three-month Libor remained at an elevated 4.6% which could spell bad news for homeowners in coming months; residential mortgage rates are often tied to the three-month rate. Tech giant reports growth; outlook uncertain. Intel (INTC) posted a 12% jump in Q3 profit and 1% growth in revenue (see below), but warned the outlook on technology spending is uncertain. Though the company is experiencing continued sales growth in the current period, it will schedule a midquarter update due to the difficulty of predicting the effects of the financial crisis. Intel's projections were generally seen as a positive sign amid fears of a negative surprise from the tech giant. CPFF takes shape; Pimco, State Street at helm. The Fed chose Pimco (a unit of Allianz (AZ)), the world's largest bond fund, to manage commercial-paper assets for its Commercial Paper Funding Facility (CPFF) program, while State Street (STT) gets the go-ahead as custodian and administrator. CPFF will allow the government to bring stability to the market, which is used by corporations to fund day-to-day operations. Fed chief Bernanke pledged Tuesday officials will not stand down until markets return to normal, and said he's confident the government's moves "will help restore confidence to our financial system and place our economy back on a path to vigorous, healthy growth." New Macs, slight discounts. Apple (AAPL) introduced upgraded versions of its laptops with aluminum models and a glass track pad which responds to multitouch gestures, similar to the iPhone. The laptops also have faster graphics performance. However, Apple didn't lower its prices as much as expected, dropping the entry-level MacBook only $100 to $999. The reluctance to price too far down may signal Apple's confidence in its ability to sustain sales despite an economic downturn. Shares are down 45% this year on worries the company will be hurt by slowdowns in North America and Europe. Strong sales help drugmaker. Genentech's (DNA) posts Q3 net income of $731M (+6.7%) on double-digit sales gains for its top cancer and arthritis drugs. Earnings rose to $0.81 from $0.73, and revenue increased 17% to $3.41B. Genentech executives declined to comment on Roche Holding's (RHHBY.PK) unsolicited bid, which it had previously called too low. The bid, at $89/share, is around $10 higher than Genentech's current share price. CDS market an easy, unfair scapegoat. Credit-default swaps [CDS] have gotten a bad wrap during the financial crisis, undeservedly so according to Robert Pickel, CEO of the International Swaps and Derivatives Association. In testimony before the Senate, Pickel said the role of CDS in the crisis is 'greatly exaggerated' and 'to say that CDS were the cause, or even a large contributor, to that turmoil is inaccurate.' Lawmakers have called for greater oversight of the $54.6T CDS market since Lehman Brothers, one of the top ten backers of the contracts, went bankrupt.

Earnings: Before Open

Coca-Cola (KO): Q3 EPS of $0.83 beats by $0.06. Revenue of $8.39B (+9.1%) vs. $8.54B. [PR] JPMorgan (JPM): Q3 EPS of $0.11 beats by $0.30. Revenue of $14.74B (-8.5%) vs. $16.01B. [PR] State Street (STT): Q3 EPS of $1.24 beats by $0.04. Revenue of $2.54B (+12.4%) in-line. [PR]

Earnings: Tuesday After Close

Altera (ALTR): Q3 EPS of $0.31 beats by $0.01. Revenue of $357M (-0.9%) in-line. Shares +5.8%. [PR] Genentech (DNA): Q3 EPS of $0.81 misses by $0.07. Revenue of $3.41B (+17.3%) in-line. Shares +2.2%. [PR] Intel (INTC): Q3 EPS of $0.35 beats by $0.01. Revenue of $10.22B (+1.3%) in-line. Shares +2.9% AH after falling 6.2% during regular hours. [PR] USANA Health Sciences (USNA): FQ3 EPS of $0.54 misses by $0.06. Revenue of $107M (+0.9%) vs. $112M. [PR]

Today's Markets

Asia drifted lower Wednesday, with the exception of Nikkei, +1.1% to 9,547. Hang Seng -5% to 15,998. Shanghai -1.12% to 1,995. BSE Sensex -5.9% to 10,809. In Europe, markets are all down at midday. London -2.65%. Paris -1.9%. Frankfurt -1.9%. U.S. futures are lower at 7:15 AM. Dow -0.88%. S&P -0.77%. Nasdaq +0.46%. Crude -3.05% to $76.22. Gold +0.88% to $846.90.

Wednesday's Economic Calendar

7:00 MBA Mortgage Applications
8:05 Fed's Rosengren speaks on economic outlook
8:30 Empire State Mfg Survey
8:30 Producer Price Index
8:30 Retail Sales
10:00 Business Inventories
10:35 EIA Petroleum Status
12:15 PM Fed's Bernanke speaks on the economic outlook and financial markets
2:00 PM Fed's Beige Book

Seeking Alpha editor Rachael Granby contributed to this post.

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