Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Eli Hoffmann

• Global markets drop, again. Korea's central bank lowered its key interest rate by an unprecedented 0.75%, Japan's finance minister talked down the bulging yen by suggesting the government is willing to intervene, and Australia's CB bought sagging Aussie dollars for the first time since 2007. None of this did much to stop the bleeding as Asia's markets picked up where they left off Friday - with Nikkei down 6.4% and Hang Seng down 12.4%. India's Sensex lost as much as 11.4%, plunging below 8,000 for the first time in three years, but rebounded to close down 2.2%.
• Automakers grope for the lesser evil. GM (GM) and Chrysler continued to talk tie-up over the weekend, with the possibility of forming a new company that could include a third automaker. While daunting in its complexity, the growing feeling is that a combo is the best way to avoid bankruptcy and draw federal money. Analysts say that without external intervention - likely a government-led cash injection with or without a merger - both could run out of cash within 12 months. Odds on a Big-Three bankruptcy are currently about 50-50, based on the price of their bonds ($0.20 to $0.40 on the dollar). On Thursday, Daimler (DAI) wrote its 19.9% stake in Chrysler down to zero. The bankruptcy of even one would likely bring down its suppliers, which would effectively shut down the other two for lack of parts. More here.
• CenturyTel to buy Embarq. CenturyTel (CTL) is buying larger rival Embarq (EQ) for about $5.76B in shares excluding debt, a 36% premium to Embarq's Friday close. The deal marks a significant step toward the much-anticipated consolidation of U.S. regional phone carriers. Upon closing of the transaction, Embarq shareholders are expected to own approximately 66% and CenturyTel shareholders are expected to own approximately 34% of the combined company. Landline carriers are feeling the pinch as customers move to VOIP and cable companies roll out their own offerings.
• Morgan Stanley used $23B to prop up money-market funds. Morgan Stanley (MS) clients withdrew almost 1/3 of their cash from money-market accounts last month, forcing the firm to buy $23B of securities held by the funds to keep them afloat. Most of the $46B withdrawn in September were from funds that invest in corporate paper. Last week the Fed rolled out a Money Market Investor Funding Facility that will provide up to $540B in loans to buy assets from funds hit with redemptions.
• MUFG to raise capital. Mitsubishi UFJ Financial (MTU) said it will raise up to ¥990B ($10.6B) by November 2009 to strengthen its balance sheets. MUFG will issue up to ¥600B of common shares and ¥390 in preferred securities. The move follows a series of heavy investments this year, including a 21% stake in Morgan Stanley (MS). Shares fell a record 15% in Tokyo trading after the announcement.
• Goldman, Citigroup briefly discussed a combo. Not long after Lehman filed for bankruptcy protection on Sept. 15, Goldman Sachs (GS) quietly approached Citigroup (C) about a possible merger, sources say. The Lehman failure sent shares of rival brokers like Goldman and Morgan Stanley (MS) down sharply. The brief courtship did not result in further talks, and soon thereafter the Treasury decided to pump $125B into nine major banks, a move banks hope will ease jitters over the shaky U.S. banking system.
• Money remains scarce. Short-term lending rates were little changed over the weekend. "We see money markets remaining tight because the fear and uncertainty haven't gone away," economist Adam Carr says. Another sign of banks' wariness to lend even to each other: financial institutions continue to deposit record amounts in central banks' overnight deposit facilities.
• Mostly black, but some white, for newspapers. Most of the largest U.S. newspapers not-surprisingly saw a drop in print circulation during the first half, but the news may be less bleak than the numbers indicate: Newspapers are boosting profits by raising newsstand prices, curtailing discounted copies and stopping delivery to some not-profitable customers. "We'd asked newspapers to really focus on paid, quality circulation," Dave Walker, CEO of NSA Media, which buys ads on behalf of big companies says. "They're actually doing what we asked them to do."
• More rate cuts on the way. Economists say the Fed will likely drop its key lending target rate another 50 BPs to 1% on Oct. 29 and will continue a march toward near-zero percent overnight lending amid widespread economic deterioration. "We're heading south big-time," former Fed governor Lyle Gramley says. Former Fed officer Vincent Reinhart calls the Fed's three-pronged attack - lower rates, increased liquidity and purchases of toxic assets - a "great monetary experiment" in which we, apparently, are the guinea pig. For the record, the fed funds target has never been below 1%.
• Credit crunch may shrink crops, spur prices. Bone dry credit markets may send ag commodity prices back up as farmers cut back on crop size due to lack of funds. Dan Basse, president of AgResource, says wheat futures will jump 16% by the end of 2009, corn will rise 15%, and soybeans will gain a more modest 3%. "The costs of farming operations today are huge, and that backs up to the banks that have balance sheets that are tight, it backs up to elevators that have credit stretched out," U.S. Agriculture Secretary Ed Schafer said. Corn is down more than 50% from its peak in early July.

Earnings: Monday Before Open

• BE Aerospace (BEAV): Q3 EPS of $0.59 beats by $0.06. Revenue of $588M (+37.3%) in-line. [PR]
• Humana (HUM): Q3 EPS of $1.49 beats by $0.02. Revenue of $7.15B (+13.1%) vs. $7.34B. [PR]
• Sohu.com (SOHU): Q3 EPS of $1.08 beats by $0.13. Revenue of $121M (+134.2%) vs. $115M. [PR]

Today's Markets

• Asian markets close deeply in the red: Nikkei -6.4% to 7,163. Hang Seng -12.7% to 11,016. Shanghai -6.3% to 1,723. BSE -2.2% to 8,510.
• European markets are heavily down at midday: London -4.7%. Paris -6%. Frankfurt -4.2%.
• Futures drifted down for most of the overnight session, but are now off their lows. Dow -1.9% to 8102. S&P -2.45%. Nasdaq -2.2%.
• Crude -2.63% to $62.46. Gold -0.93% to $723.50.
• 30-year bond +0.69%. 10-year +0.48%. 5-year +0.38%. 2-year +0.16%.

Monday's Economic Calendar

• 10:00 New Home Sales
• Notable earnings before Monday's open: ACI, BEAV, EXP, FPL, HUM, LO, ONB, PENN, SOHU, TDW, VZ
• Notable earnings after Monday's close: ACF, ATHR, AXS, CF, EXEL, FIS, HLIT, HPC, MTH, PCL, PCU, RCII, SCUR, SLG, TXRH, VRTX, WMS, ZRAN

Seeking Alpha editor Rachael Granby contributed to this post.

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