Friday, November 7, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Job loss lookout. Non-farm payrolls are expected to decline for the tenth straight month this morning (website). Economists estimate the U.S. economy shed 200,000 jobs in October, which would be the current downturn's worst month, outdoing September's -159K reading. The last time losses exceeded 200K in a month was March 2003. Some economists think the 27,000-strong Boeing (BA) strike could push October's count to -250K; while still within 50K of the consensus, a worse-than-expected figure "will add to the view that the economy is entering a deep slowdown, a deep recession," John Herrmann from Herrmann Forecasting says.
  • More begging from the Big Three. General Motors (GM), Ford (F) and Chrysler, with a combined H1 loss of $28.6B, are angling for $50B in federal loans as they face the worst market conditions in 25 years. The loan would be split into $25B to be spent on healthcare and $25B of general liquidity that could be delivered in different ways, including short-term borrowing from the Fed. In exchange, the automakers would take steps such as granting stock warrants. Top execs from all three firms had a 'positive' meeting with House Speaker Nancy Pelosi yesterday though no promises were made. Separately, the Bush administration told automakers they would soon have access to a previously approved $25B package of low-interest loans.
  • Mom-and-Pop investors face GMAC junk. GMAC (GKM), the primary lender to General Motors (GM) customers, might leave thousands of individuals holding as much as $15B of junk-rated debt unless it can find a way to quickly pay off its bills and raise its credit rating. GMAC has issued billions of dollars of debt, called SmartNotes, to retail investors over the last decade, and had targeted many older investors and retirees seeking safe and reliable interest income. Though the auto and home lender has paid off the debts as they've matured, SmartNotes due July 2020 have already lost about 2/3 of their value as GMAC, with $7.9B in losses since mid-2007, faces growing skepticism about its ability to survive. In the case of bankruptcy, the $15B of outstanding SmartNotes would be treated as senior unsecured debt, meaning investors would recover an average of $0.40 on the dollar.
  • South Korea cuts rates, again. South Korea lowered its interest rates for the third time in four weeks, hoping an aggressive round of rate cuts will prevent the economy from slipping into its first recession in a decade. The 25 basis points cut brings the country's key interest rate to 4.0%, its lowest level since 2006. Bank of Korea's Governor Lee Seong Tae says he's prepared to "take bigger actions if necessary." South Korea's won and Kospi stock index rose after the cut.
  • Wells raises cash, market hopes. Wells Fargo (WFC) successfully raised $11B in a public stock offering yesterday to help finance its purchase of Wachovia (WB). The shares were sold at $27 each, 6.2% below the stock's Nov. 6 price of $28.77. The sale's success, coming on a day when the S&P 500 fell 5% and the Dow Jones lost 4.9%, showed capital markets are beginning to thaw and is expected to send a positive message to other companies considering public financing.
  • Citi readies for more layoffs. In the latest round of job cuts, Citigroup (C) is preparing a list of employees who will be laid off from a division including investment banking as the company tries to reduce its workforce by 9,100 employees before next October. It has already cut around 23,000 positions this year. Since the credit crisis began, U.S. financial firms have shed tens of thousands of jobs, a trend that looks likely to continue for the foreseeable future.
  • AIG sales advancing. AIG's (AIG) asset sales are finally beginning to pick up some momentum. Sources say the struggling insurer is expected to reach deals by the end of the year to sell an equipment insurer and its U.S. personal lines unit, potentially valued between $5-7B. It's also making progress on the sale of a smaller business, Hartford Steam Boiler Inspection and Insurance Co. AIG has previously said it plans to keep its U.S. property-casualty, foreign general insurance businesses and an ownership interest in its foreign life operations but sell the rest.
  • Fed may restructure AIG loan. Federal officials are looking into options to ease the financial strain on AIG (AIG), including changing the terms of its $85B government loan. Sources say officials may reduce the interest rate on AIG's loan or extend the duration of the two-year facility, or may choose to backstop AIG's credit-default swaps contracts. AIG's current loan terms are fairly steep at 8.5% on money it isn't borrowing and 8.5% plus three-month Libor (currently 2.39%) on money it draws down, especially compared to the 5% interest charged to banks and firms covered by the $700B TARP program.
  • CDS market gains support. Under pressure from investors and regulators to make credit-default swaps [CDS] trading more transparent, a group of Wall Street dealers line up to support a new electronic marketplace for CDS. Nine banks, including Credit Suisse (CS), JPMorgan Chase (JPM) and Goldman Sachs (GS), plan to use an online platform operated by TradeWeb LLC (in which the banks hold minority stakes) to trade certain types of CDS with investors including hedge funds, foreign central banks and pension funds. Despite the hesitancy of some banks to switch to an exchange for fear of reduced profits, most Wall Street firms are readying to clear their CDS trades through a central exchange by the end of the year.
  • Microsoft's Verizon grab. Microsoft (MSFT) is trying to steal a deal with Verizon Wireless (VZ) away from rival Google (GOOG). Google has been negotiating with Verizon for months to make its search engine the default on Verizon phones. Sources say Microsoft has offered sweetened deal terms to make its own search service the default instead. Microsoft is also offering more generous revenue sharing and a guarantee of substantially higher payments. After failing to acquire Yahoo (YHOO) earlier this year, Microsoft has been putting together a new plan to fight Google, and Google's recent distraction over a failed Yahoo ad partnership provided Microsoft with the opportunity to poach the search service deal. Verizon is considering both offers and has not yet made a final decision.
  • No MSFT bid for Yahoo. Microsoft (MSFT) CEO Steve Ballmer said emphatically that his company will not make a renewed bid for Yahoo (YHOO). His comments come after Yahoo CEO Jerry Yang said yesterday that Yahoo, which spent months dodging Microsoft's bid, is now Microsoft's best option. Yang said he remains open to selling Yahoo at the right price, adding "people who know me know I don't have an ego about remaining independent versus not remaining independent." Ballmer left room open for future partnerships based on the two companies' search engines, but was definitive on the point that Microsoft does not plan to acquire Yahoo. With no Microsoft bid in sight and its Google partnership dead on arrival, Yahoo has reached what many analysts conclude is a strategic dead-end.
  • Fed lending. Borrowing from the Federal Reserve's discount window declined for the third week in a row, as primary dealers and commercial banks scaled back. Average daily borrowing dropped to $359.01B from $388.81B the week before. On Wednesday, borrowing dipped below the $347B mark.
  • Chain store sales. Nearly 60% of chain stores reported October sales even worse than already-weak forecasts. As a result, many retailers are now resorting to bigger discounts and earlier promotions to try to salvage what they can from the holiday shopping season. One notable exception was Wal-Mart (WMT). Its wallet-friendly reputation drew consumers from pricier retailers, helping same-store sales rise 2.4%, far better than its prediction of 1-2%.
  • Monster index. Monster's Employment Index for October ended a two month run of mild growth, dropping down 10 points to 150. The index is down 20% Y/Y as online recruitment activity continues to decline at the onset of Q4.
  • Productivity and costs. Nonfarm Productivity was up 1.1% in Q3, more than the 0.7% economists expected, but down from Q2's 3.6% jump. Unit labor costs were up a better-than-expected 3.6% (+3% consensus), after falling 0.1% last quarter.
  • Jobless claims. Initial Jobless Claims of 481K are a drop worse than the 477K economists expected, and down 4K from last week's revised 485K. 4-week average of 477K is unchanged.

Earnings: Friday Before Open

  • Ford (F): Q3 EPS of -$1.31 misses by $0.37. Revenue of $32.1B vs. $28.35B.. Says it burned $7.7B in cash over the quarter, and will cut 10% of its North American workforce. "We expect the marketplace to remain extraordinarily challenging." (PR)
  • LifePoint Hospitals (LPNT): Q3 EPS of $0.60 misses by $0.01. Revenue of $675M (+5.3%) vs. $683M. (PR)
  • Sprint Nextel (S): Q3 EPS of $0.00 misses by $0.03. Revenue of $8.82B (-12.2%) in-line. Expects continued pressure on post-paid subscribers in Q4. (PR)

Earnings: Thursday After Close

  • 99 Cents Only Stores (NDN): FQ2 EPS of $0.03 beats by $0.04. Revenue of $317M (+9.1%) vs. $302M. Shares +4.4%. (PR)
  • AES Corp. (AES): Q3 EPS of $0.25 misses by $0.03. Revenue of $4.34B (+24.7%) vs. $3.69B. Sees full-year EPS of $1.07 vs. $1.15. (PR)
  • Assured Guaranty (AGO): Q3 EPS of $0.28 misses by $0.20. Revenue of $149M (+71.8%) vs. $125M. (PR)
  • Avis Budget Group (CAR): Q3 EPS of $0.55 misses by $0.04. Revenue of $1.7B (-1%) in-line. (PR)
  • Blockbuster (BBI): Q3 EPS of -$0.11 beats by $0.05. Revenue of $1.2B (-2.7%) vs. $1.27B. Shares +1.5%. (PR)
  • CB Richard Ellis Group (CBG): Q3 EPS of $0.27 beats by $0.04. Revenue of $1.3B (-12.9%) vs. $1.18B. Shares +1.4%. (PR)
  • CDC Corp. (CHINA): Q3 EPS of -$0.07 misses by $0.09. Revenue of $104M (+5.5%) vs. $101M. Shares +5.1%. (PR)
  • Disney (DIS): FQ4 EPS of $0.43 misses by $0.06. Revenue of $9.45B (+5.8%) in-line. Lower operating income was driven by a decrease in domestic operations. Shares -4.2%. (PR)
  • Fairpoint Communications (FRP): Q3 EPS of $0.19 vs. consensus of $0.06. Revenue of $328M (-13.8%) vs. $339M. (PR)
  • Fluor (FLR): Q3 EPS of $1.01 beats by $0.10. Revenue of $5.67B (+38.4%) vs. $5.8B. Sees full-year EPS of $3.70-3.80 vs. $3.52. Shares +9.5%. (PR)
  • Genworth Financial (GNW): Q3 EPS of $0.51 misses by $0.04. Revenue of $2.17B (-24.6%) vs. $3.07B. Suspends share repurchase and earnings outlook. Shares -10.8%. (PR)
  • GT Solar (SOLR): FQ2 EPS of $0.19 beats by $0.05. Revenue of $140M (+71.4%) vs. $127M. Sees FQ3 EPS of $0.23-0.25 vs. $0.27 and revenue of $190-200M vs. $228M. Shares +10.5%. (PR)
  • Hansen Natural (HANS): Q3 EPS of $0.54 beats by $0.01. Revenue of $285M (+15.3%) in-line. (PR)
  • Heelys (HLYS): Q3 EPS of $0.03 misses by $0.04. Revenue of $23.8M (-52.3%) vs. $27.1M. Shares +6.9%. (PR)
  • International Rectifier (IRF): FQ1 EPS of -$0.06 in-line. Revenue of $244.5M (-8.2%) vs. $219M. Sees FQ2 revenue of $160-190M vs. $208.5M. Shares -4.6%. (PR)
  • Limelight Networks (LLNW): Q3 EPS of -$0.01 beats by $0.02. Revenue of $33.1M (+9.2%) vs. $31.2M. Sees Q4 revenue of $33-34M vs. $32.9M. Shares +5.1%. (PR)
  • Live Nation (LYV): Q3 EPS of $1.41 vs. consensus of $0.44. Revenue of $1.59B (+9%) in-line. (PR)
  • Macrovision (MVSN): Q3 EPS of $0.09 misses by $0.13. Revenue of $112M (+146.1%) vs. $154M. (PR)
  • Nvidia (NVDA): Q3 EPS of $0.20 beats by $0.08. Revenue of $898M (-19.5%) in-line. Gross margin of 41.9% vs. 39.6%. Shares +10.2%. (PR)
  • Plains Exploration & Production (PXP): Q3 EPS of $4.50 vs. consensus of $1.63. Revenue of $719M (+140.7%) vs. $714M. Shares (PR)
  • (PCLN): Q3 EPS of $2.39 beats by $0.29. Revenue of $562M (+34.6%) vs. $547M. Shares +7.9%. (PR)
  • Public Storage (PSA): Q3 FFO of $1.37 beats by $0.09. Revenue of $344M (+2.4%) vs. $417M. Declares special dividend of $0.60/share. (PR)
  • Qualcomm (QCOM): FQ4 EPS of $0.63 beats by $0.03. Revenue of $3.33B vs. $2.86B. Sees FQ1 EPS of $0.46-0.50 vs. $0.61 and revenue of $2.3-2.5B vs. $2.91B. "As a result of the credit crisis and the economic uncertainty, our guidance reflects slower end- market device growth for 2009 than previously anticipated..." Shares -1.7%. (PR)
  • SandRidge Energy (SD): Q3 EPS of $0.17 beats by $0.01. Revenue of $334M (+117.4%) vs. $281M. Shares +6.1%. (PR)
  • Skyworks Solutions (SWKS): FQ4 EPS of $0.21 beats by $0.01. Revenue of $233M (+22.1%) vs. $226M. Shares +11.5%. (PR)
  • Tenaris (TS): Q3 EPS of $0.97 beats by $0.14. Revenue of $3.12B (+28.1%) vs. $3.23B. (PR)
  • True Religion Apparel (TRLG): Q3 EPS of $0.64 beats by $0.17. Revenue of $79.4M (+64%) vs. $65.8M. Shares +9.15%. (PR)
  • VeriSign (VRSN): Q3 EPS of $0.28 beats by $0.02. Revenue of $246M (+14%) vs. $239M. (PR)

Today's Markets

  • Asia markets closed mostly up. Nikkei -3.5% to 8,583. Hang Seng +3.3% to 14,243. Shanghai +1.7% to 1,748. BSE +2.4% to 9,964.
  • In Europe: London +1.9%. Paris +0.9%. Frankfurt +1.1%.
  • U.S. futures have pared back earlier gains ahead of the payroll number. Dow +0.82% to 8771. S&P +0.94% to 913. Nasdaq +1.73%. Crude +2.29% to $62.22. Gold +1% to $739.60.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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