Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

• Global panic submerses bourses, futures. Yesterday's strong close in the U.S., which saw major indices erase heavy losses and finish with modest gains, did not carry over into Asia and Europe, sending futures spiralling. Tokyo's Nikkei 225 plunged 9.6% to 7649 - its lowest close since April 2003 - as investors fretted global recession and weaker-than-expected earnings that made it clear the financial crisis has spread its wings beyond the banks. Early trading in Europe tracked Asia's losses, compounded by a surprisingly soft British GDP number (see below) and warnings from automakers. The pan-European Dow Jones Stoxx 600 index dropped below 200 for the first time since mid 2003, falling 9%. U.S. futures are broadly lower, with Dow and S&P futures locked limit down, -6.27% and -6.56% respectively. "Volatility and uncertainty seem to be the watchwords at the moment," one dealer said.
• OPEC curbs supply. In an emergency meeting held this morning, OPEC leaders agreed to cut oil output by 1.5M barrels per day, beginning November 1, from the existing quota of 28.8M barrels per day. Saudi Arabian Oil Minister Ali al-Naimi said OPEC members would wait to see the market effects of the cut before considering additional reductions, with OPEC's next meeting scheduled for December. Crude oil prices have fallen more than 50% from July's record of $147.27/barrel, while U.S. fuel demand is down 8.5% from a year ago. Oil futures -5.0% to $64.48.
• Greenspan on the financial storm. Answering questions before a Congressional committee, former Federal Reserve Chairman Alan Greenspan said he was "shocked" by the current market crisis, calling it a "once-in-a-century credit tsunami." He admitted there was apparently a "flaw" in his market ideology and that he was "partially" wrong for opposing regulation of credit derivatives, but said it's unreasonable to "expect perfection in any area where forecasting is required," adding that a 60% success rate at forecasting would be exceptional. The admission that free markets have faults and sometimes call for government regulation was a giant policy shift for Greenspan who for decades had ascribed to a hands-off regulatory philosophy.
• AIG's black hole of credit. AIG (AIG) taps an additional $7.4B from its government credit line, with total borrowing now in excess of the original $85B emergency loan meant to bail out the insurance giant. At $90.3B, AIG has called on nearly 75% of its expanded government credit line, but CEO Edward Liddy warned the company may need more than the $122.8B available. Liddy said the total loan amount required would depend on the company's ability to "stop the bleeding" in the financial products area and the health of capital markets. An AIG spokesman clarified that the cash is buying the company time while it looks for a permanent solution to the liquidity drain' and tries to sell businesses.
• Treasury turns to regional banks. The Treasury could announce plans as early as today to take stakes in a number of regional U.S. banks. Regional lenders are hurting from the housing downturn, the rising rate of delinquent loans and general market turmoil, and some of the mid-sized firms have begun to report mounting losses (NCC, STI). Neel Kashkari commented "markets deteriorated much more quickly than we had expected" and explained taking stakes in banks is the fastest way to inject funds. The actual purchases, which would be part of the second round of the Treasury's $250B capital injection into financial companies, would not be funded until several weeks after the announcement.
• Support for a CFTC-SEC union. SEC Chairman Christopher Cox testified in a Congressional hearing that he "strongly" supports a merger between his agency and the Commodity Futures Trading Commission, and recommends a committee be appointed to explore the possible merger of the two agencies. This is the first time Cox has publicly supported the merger, an idea which has been floated for years but never found much support because of jurisdictional battles. The union, Cox said, would "bring futures within the same general framework that currently governs economically similar securities."
• Confusion on Fannie/Freddie debt. Risk premiums on debt securities from Fannie Mae and Freddie Mac reversed course, first tightening up to 0.07% and then widening by 0.02%, on confusion about the government's guarantee of these bonds. Federal Housing Finance Agency [FHFA] Director James Lockhart had said the government's seizure of Fannie Mae and Freddie Mac represents "explicit" support for the companies' debt and mortgage-backed securities, but FHFA later distanced itself from those comments and said debtholders have only an "effective" guarantee. The practical difference between Lockhart's "explicit" and FHFA's "effective" remains unclear to investors, nor is it known whether Lockhart's language reflects a forthcoming policy change.
• GE to tap CPFF. General Electric (GE) announced plans to use the Federal Reserve's new short-term funding facility when it starts next week. GE, the largest U.S. issuer of commercial paper, has not yet decided how much it will borrow, saying the decision will be based on customers' liquidity needs, but its finance arm is eligible for up to $60B. A company spokesman seemed to indicate that the expected borrowing will be GE's way of supporting the Fed's actions and will help de-stigmatize the market.
• Shrinking auto firms. General Motors (GM) and Chrysler both announced additional cutbacks as merger talks continue. Chrysler, which lost about $660M in Q2, will cut around 1,825 jobs by the end of the year and will close one of its S.U.V. plants a year earlier than expected. At GM, more employees accepted buyouts than originally anticipated but the company still intends to lay off an unspecified number of workers and will cut back on or eliminate several key employment benefits. GM had previously said it wants to cut 15% of its work force by November 1. Concerned about the sharp job cuts coming from the Detroit automakers, Michigan lawmakers are urging the Fed's Bernanke and Treasury's Paulson to provide relief and liquidity for the struggling industry.
• Microsoft's outlook stokes fears. Shares of Microsoft (MSFT) are down 7% pre-market after the tech bellwether beat EPS estimates by a penny on a 2% gain in earnings (see below) but lowered its full-year outlook due to the "likelihood of a continued economic slowdown." The revision wasn't a surprise; CEO Steve Ballmer said not long ago that "whatever happens economically will certainly effect itself on Microsoft." Still, the warning was ominous: "The trends seen late in the first quarter are now forecast to continue, whereas previous expectations were for the economy to improve in the second half of the fiscal year." Client software sales were up just 1.9%. Entertainment and devices revenue was down 6%. Microsoft's loss from online services widened to $480M from $267M. Ad revenue was up 15%.
• UK staring at recession. The British economy (ETF: EWU) shrank more than expected and for the first time in 16 years in Q3, with GDP down 0.5% from Q2, vs. -0.2% consensus. The numbers underscore what PM Gordon Brown and BoE chief Mervyn King said earlier this week - that the U.K. is likely entering a recession. The extreme weakness could clinch a BoE rate cut in early November; earlier this month it cut its benchmark rate 50 BPs to 4.50%. "Given the deeper than expected third quarter contraction ... we believe there is a very real danger of a longer and deeper downturn," Global Insight's Howard Archer said. He thinks rates could drop to 2.5% or lower in 2009.
• Home prices spiral. U.S. home prices fell the most in at least 17 years and are under continued downward pressure from the highest foreclosure rate on record. According to Federal Housing Finance Agency data released yesterday, home prices are down 5.9% from the previous year while Q3 foreclosures rose 71% from the previous year. Every quarter another 250,000 houses enter foreclosure, with each foreclosure pulling down the value of nearby homes by a total of $220K.
• Jobless claims. Initial jobless claims increased by 15,000 to 478K - worse than consensus of 470K. Hurricane Ike added approximately 12K claims to the total. The 4-week moving average was 480,250, a decrease of 4,500 from the previous week's revised average.

Earnings: Friday Before Open

• Corn Products International (CPO): Q3 EPS of $1.15 beats by $0.37. Revenue of $1.15B (+23.1%) vs. $1.02B. [PR]
• ITT Industries (ITT): Q3 EPS of $1.11 beats by $0.05. Revenue of $2.8B (+32.0%) in-line. [PR]

Earnings: Thursday After Close

• Affymetrix (AFFX): Q3 EPS of -$0.25 misses by $0.17. Revenue of $75.2M (-20.8%) vs. $76.6M. (PR)
• Ariba (ARBA): Q3 EPS of $0.15 misses by $0.02. Revenue of $85.5M (+13.3%) vs. $87.3M. Shares -4.3%. [PR]
• AFLAC (AFL): Q3 EPS of $1.02 beats by $0.02. Revenue of $3.69B (-4.4%) vs. $4.33B. Doesn't see need to raise more capital. Shares -1.8%. (PR)
• Burlington Northern Santa Fe (BNI): Q3 EPS of $1.92 beats by $0.23. Revenue of $4.91B (+20.6%) vs. $4.8B. Shares . (PR
• Celestica (CLS): Q3 EPS of $0.24 beats by $0.05. Revenue of $2.03B (-2.4%) vs. $1.97B. Shares +15.0%. (PR)
• Cheesecake Factory (CAKE): Q3 EPS of $0.19 misses by $0.08. Revenue of $405M (+7.9%) in-line. "Our earnings were also pressured by spikes in commodity and utility costs, which have begun to moderate as food and energy costs come off of the highest levels we have seen this year." Shares -7.1%. (PR)
• Chubb (CB): Q3 EPS of $0.93 beats by $0.01. (PR)
• Compuware (CPWR): FQ2 EPS of $0.08 beats by $0.01. Revenue of $270M (-10.6%) in-line. (PR
• Developers Diversified Realty (DDR): Q3 EPS of $0.83 misses by $0.14. Revenue of $233.9M (+1.0%) vs. $227.1M. Shares -5.3%. [PR]
• Emulex (ELX): FQ1 EPS of $0.22 beats by $0.04. Revenue of $111.7M (-4.6%) vs. $109.6M. Shares +6.9%. [PR]
• Flextronics International (FLEX): FQ2 EPS of $0.28 misses by $0.01. Revenue of $8.9B (+59.5%) vs. $8.7B. Shares +2.4%. [PR]
• Ingram Micro (IM): Q3 EPS of $0.27 beats by $0.04. Revenue of $8.28B (-3.8%) vs. $8.44B. (PR)
• Integrated Device Technology (IDTI): FQ2 EPS of $0.26 beats by $0.01. Revenue of $200M (-1.8%) in-line. Shares +2.6%. [PR]
• Interactive Brokers (IBKR): Q3 EPS of $0.65 beats by $0.04. Revenue of $497M (+11.7%) vs. $511M. Shares +0.7% (PR)
• Juniper Networks (JNPR): Q3 EPS of $0.32 beats by $0.02. Revenue of $947M (+28.8%) vs. $927M. "The long-term growth potential of the high-performance networking market is strong and, even in this uncertain economic climate, we are cautiously optimistic about our near-term opportunities," it says. Shares -3.8%. (PR
• MEMC Electronic Materials (WFR): Q3 EPS of $0.86 misses by $0.02. Revenue of $546M (+15.5%) vs. $530M. Shares +5.2%. [PR]
• Microchip Technology (MCHP): FQ2 EPS of $0.45 beats by $0.04. Revenue of $270M (+0.6%) vs. $273M. (PR)
• Microsoft (MSFT): FQ1 EPS of $0.48 beats by $0.01. Revenue of $15.06B vs. $14.78B. Sees Q2 EPS of $0.51-0.53 vs. $0.55 and revenue of $17.3-17.8B vs. $17.96B. (PR)
• Riverbed Technology (RVBD): Q3 EPS of $0.15 beats by $0.01. Revenue of $86.5M (+36.7%) vs. $84.2M. (PR)
• Synaptics (SYNA): FQ1 EPS of $0.50 beats by $0.06. Revenue of $116M (+33.7%) vs. $111M. Shares +4.6%. (PR)
• Synovus Financial (SNV): Q3 EPS of -$0.08 misses by $0.15. "Credit issues, along with a weakening economy, created the need for aggressive actions to appropriately value, write down and dispose of problem credits." (PR)
• Varian Medical Systems (VAR): FQ4 EPS of $0.68 beats by $0.03. Revenue of $593M (+14.8%) vs. $588M. (PR)
• Western Digital (WDC): FQ1 EPS of $0.93 beats by $0.12. Revenue of $2.11B (+19.4%) in-line. Shares +11.1%. (PR
• YRC Worldwide (YRCW): Q3 EPS of -$0.11 misses by $0.03. Revenue of $2.38B (-3.1%) in-line. (PR)

Today's Markets

• Asia markets closed heavily down. Nikkei -9.6% to 7,649. Hang Seng -8.3% to 12,618. Shanghai -1.9% to 1,840. BSE -11.0% to 8,701.
• European markets are facing sharp losses: London -7.5%. Paris -7.7%. Frankfurt -8.9%.
• U.S. futures: Dow -6.2% to 8,226 [limit down]. S&P -6.6%% to 855.20 [limit down]. Nasdaq -6.7% to 1,169.75. Crude -4.9% to $64.49. Gold -3.7% to $688.40.
• 30-year Treasury is up 1.55% on the flight-to-safety trade. 10-year +0.57%. 5-year +0.47%. 2-year +0.18%.

Friday's Economic Calendar

• 10:00 Existing Home Sales
• Notable earnings before Friday's open: CPO, DSL, ERIC, EXC, FO, IR, ITT, TROW, UST

Seeking Alpha editor Eli Hoffmann contributed to this post.

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