Wednesday, October 29, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Eli Hoffmann

  • Asia surges, then retreats. Asian stock markets erased most of their early gains Wednesday (see below) despite a huge Wall Street rally, with the exception of Japan's Nikkei which stormed to a 7.7% gain on hopes the Bank of Japan will halve its interest rate to 0.25% from 0.5% this week. "Investors are wary that we are going to see prices back down again," one broker said of the midday jitters. "Everybody is taking profits on everything they bought in the last couple of days," a trader noted. ABN Amro's Alexandra Dalzell echoed the concerns of many after yesterday's grand slam: "You can't help but think this extreme strength (on Wall Street) is going to be followed by extreme weakness, and really what we would like to move toward is a level of stability."
  • Treasury may open TARP to private banks. Treasury officials may expand the government's financial rescue plan (TARP) to include non-publicly-traded banks, potentially opening up the program to thousands of new institutions. Such a move may also placate the powerful community-banking industry, an outspoken critic of TARP, due to its fears bigger rivals will use the government's largesse to sweep up healthy firms that are too small to fight back. About 6,000 privately-held financial institutions aren't eligible under the current rules. (table: TARP participants)
  • GMAC seeks bank status. Auto finance and mortgage company GMAC (GM) is seeking to become a bank holding company in order to access the government's $700B financial bailout money, sources say. As a bank holding company, GMAC could receive equity injections from the Treasury and sharply reduce its borrowing costs through access to the Fed's discount window. On Tuesday GMAC said the Fed approved it to use its commercial paper funding facility. Becoming a bank could require GM to reduce its 49% stake in GMAC to 24.9%; Cerberus owns the other 51%.
  • How low can it go? The Fed will likely shave its key fed funds target rate to just 1% today, and signal further reductions to levels unseen since Dwight Eisenhower was president. "Inflation risks are off the table," economist Mark Gertler says, which is why it can afford to be 'very aggressive' in stimulating the anemic U.S. economy. "If the economy shows additional signs of a deepening recession, I think the Fed will decide that the floor is not 1 percent," former Fed governor Lyle Gramley said. "Zero is a possibility."
  • Consumer confidence plunges to record low. The Conference Board's Consumer Confidence Index plummeted to an all-time low of 38, down from 61.4 in Sept., falling way short of consensus estimates of 52. "The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers' confidence," it said. "In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic." Ian Shepherdson of High Frequency Economics called the data extraordinarily awful, and noted the lower-than-expected expectations index indicates real consumer spending could fall at an annualized rate of about 3.5%, even worse than the 3% he previously expected.
  • Rio takes jab at BHP, miners. Rio Tinto (RTP) CEO Tom Albanese said no one in the mining industry is immune from the global financial crisis, and criticized companies like BHP Billiton (BHP) for failing to publicly acknowledge the need to review investment strategies. In particular, BHP has launched a $73B hostile takeover bid for Rio and has shown no signs of reviewing its growth spending. Many mining companies worldwide have been forced to close mines or cut back production, and to defer investments on growth projects, as commodity prices have fallen and profit margins have been squeezed.
  • Tightening things up at Motorola. Sanjay Jha, Motorola's (MOT)s new co-CEO and head of its mobile phone unit, is moving quickly to scale back the struggling division by simplifying the way it makes devices and cutting additional jobs. Sources say Jha has decided to make Google's (GOOG) Android OS the software platform for Motorola's showcase phones. Motorola may scrap dozens of phone designs already in development, which will likely lead to short-term production delays.
  • Crude climbs. Crude futures are up more than 5% in overnight trading (see below), its first rise in four days, on speculation efforts to unlock global credit markets are beginning to work and may help revive demand. OPEC will probably cut crude output quotas a second time to avoid inventory growth, Venezuelan Oil Minister Rafael Ramirez said today.
  • Home prices drop, again. Home prices fell 16.6% in August from a year ago, in-line with forecasts, after a 16.3% decrease in July. It's the 20th straight monthly drop in the S&P/Case-Shiller index. "The downturn in residential real estate prices continued, with very few bright spots in the data," S&P's David Blitzer said. Sales of distressed properties accounted for 35-40% of the month's total. "House prices will remain on a downward trend for some time and until they are low enough to stimulate sufficient demand to clear the market," economist Joshua Shapiro said.
  • Retail sees small bounce. Retail chain store sales increased 0.5% vs. a week ago, following a 1.6% decline last week. Sales were up 1.3% vs. last year. "Overall, consumers continue to spend modestly and mainly on everyday items," ICSC's Michael Niemira said. Research firm ShopperTrak expects a pick-up in retail activity this week. "More and more folks are holding out. They're looking for the markdowns."

Earnings: Wednesday Before Open

  • Aetna (AET): Q3 EPS of $1.12 in-line. Revenue of $7.98B (+14.4%) in-line. Sees full-year EPS of $3.90-3.95 vs. $4.00. (PR)s
  • Bayer (BAYRY.PK): Q3 profit fell 76% to €277M ($353M) vs. €1.18B the previous year, and short of the €302M consensus. Sales +2% to €7.95B. Bayer still expects 2008 sales of around €33B. (Bloomberg)
  • Newmont Mining (NEM): Q3 EPS of $0.44 beats by $0.02. Revenue of $1.34B (-17%) vs. $1.46B. (PR)
  • Nexen (NXY): Q3 EPS of $1.68 beats by $0.35. Revenue of $2.21B (+53%) in-line. CEO Charlie Fischer to retire at year-end. (PR)
  • Praxair (PX): Q3 EPS of $1.11 beats by $0.05. Revenue of $2.85B (+20.2%) vs. $2.73B. Sees Q4 EPS of $1.03-1.08 vs. $1.09 (PR)
  • Sony (SNE): FQ2 EPS of ¥19.83 misses by ¥72.07. Revenue of ¥2.1B (-0.5%) vs. ¥2.7B. Operating income -90.1% Y/Y to ¥11B. Shares +1.95% in Tokyo. (PR)
  • SPX Corp. (SPW): Q3 EPS of $1.66 beats by $0.01. Revenue of $1.51B (+28.8%) vs. $1.6B. (PR)
  • Suncor Energy (SU): Q3 EPS of C$1.04 misses by C$0.19. Revenue of C$8.95B in-line. Production from the company's oil sands operations averaged 245,600 barrels per day. (PR)
  • United Microelectronics (UMC): Q3 EPS of $0.02 in-line. Revenue of $768M (-20.2%) vs. $809M. "Customers have adopted a cautious attitude with regard to their wafer demand forecasts due to uncertainty related to the current global economic situation." Shares +44% in Amsterdam. (PR)
  • Wabco (WBC): Q3 EPS of $0.97 misses by $0.01. Revenue of $655M (+10%) vs. $715M. (PR)

Earnings: Tuesday After Close

  • Ace Limited (ACE): Q3 EPS of $1.51 beats by $0.04. Net premiums written and earned increased 17% and 15%. (PR)
  • Centex (CTX): FQ2 EPS of -$1.62 misses by $0.68. Revenue of $1B (-54%) vs. $1.3B. Records $103M of impairments and land-related charges. Shares -2.7%. (PR)
  • Chicago Bridge & Iron (CBI): Q3 EPS of $0.09 beats by $0.07. Revenue of $1.56B vs. $1.6B. Shares +0.7%. (PR)
  • Dreamworks Animation (DWA): Q3 EPS of $0.38 beats by $0.06. Revenue of $151.5M (-5.7%) vs. $130M. Shares -0.3%. (PR)
  • Fiserv (FISV): Q3 EPS of $0.81 misses by $0.02. Revenue of $1.08B (+16.9%) in-line. Shares -1.5%. (PR)
  • FMC Corp. (FMC): Q3 EPS of $1.13 beats by $0.11. Revenue of $281M (+31%) vs. $731M. Shares +3.8%. (PR)
  • Manitowoc (MTW): Q3 EPS of $0.80 misses by $0.01. Revenue of $1.11B (+19.6%) vs. $1.26B. Shares -4.7%. (PR)
  • McKesson (MCK): FQ2 EPS of $1.17 beats by $0.14. Revenue of $26.6B (+8.6%) vs. $26.2B. "We did begin to see some customers delay their purchasing decisions," CEO John Hammergren says. (PR)
  • STMicroelectronics (STM): Q3 EPS of -$0.32 vs. consensus of $0.18. Revenue of $2.46B vs. $2.5B. Gross margin was 37.2%. Shares +5.2% in Frankfurt. (PR)

Today's Markets

  • Asia: Nikkei +7.74% to 8,212. Hang Seng +0.84% to 12,702. Shanghai -2.94% to 1,720. BSE Sensex +0.4% to 9,045.
  • Europe: London +5.2%. Paris +6.6%. Frankfurt +0.1%.
  • U.S. futures: Dow -0.68% to 9,207. S&P -0.83% to 931. Nasdaq -1.2%. Crude +5.1% to $65.92. Gold +1.2% to $749.50.

Wednesday's Economic Calendar

Seeking Alpha editor Rachael Granby contributed to this post.

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