Thursday, November 20, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Market recap. U.S. stock and bond markets dropped to their lowest levels since the economic crisis began, on new concerns about rising defaults and the financial system's health. The stock market fell to a 5.5 year low, led by banks and financial institutions. Markets are now down 43.5% from an all-time high reached just over a year ago, and nearly all the gains from the last bull market (from Oct. 2002 - Oct. 2007) have been erased. Indices closed heavily down: Dow Jones Industrial Average -5.1% to 7,997.28; S&P 500 -6.1% to 806.58; Nasdaq -6.5% to 1,386.42. Asian and European markets followed suit Thursday morning, posting heavy losses.
  • EU stimulus on the horizon. The European Union is preparing a €130B ($164B) regional stimulus package, said German Economy Minister Michael Glos, though it is unclear how much of the money, if any, will be new as the package will contain some previously announced measures. The plan will include stimulus spending by the EU's 27 individual member states, spending from the EU's $150B annual budget and lending by the European Investment Bank. According to Glos, the package could involve each member state spending 1% of their GDP. EU officials backed away from confirming a 1% target, saying the size of a coordinated stimulus package is weeks away from being finalized.
  • FOMC minutes show concern, determination. Minutes released from October's FOMC meeting show the Federal Reserve ready to 'take whatever steps were necessary,' including cutting interest rates to their lowest levels in fifty years, to help turn the economy around. Officials generally expected the economy to contract in the second half of 2008 and the first half of 2009, and some thought economic weakness 'could persist for some time.' GDP is expected to regain its stride in 2010, and core inflation will continue to edge down through 2010. Officials raised their forecasts for 2008 unemployment to 6.3%-6.5% from 5.5%-5.7%, though subsequent data from the Labor Department showed that by October unemployment had already reached 6.5%. The 2009 unemployment forecast was raised to 7.1%-7.6%. (Read the full minutes.)
  • CPI drop challenges Fed. Consumer Prices fell 1% in October after an unchanged September, the largest single-month decline since before World War II, raising the small but real chance of deflation. The Federal Reserve's Donald Kohn said the threat of deflation was a 'still remote possibility,' but the risk is higher than it was four of five months ago. Sharply falling energy prices were the main factor in October's drop. Factoring out food and energy, consumer prices (core CPI) fell by 0.1% vs. consensus of +0.1%, with core prices up 2.2% from a year ago. JPMorgan Chase (JPM) believes the Fed will likely cut interest rates to 0% over the next two months to keep prices from spiraling down.
  • Wachovia mortgage probe. The SEC and U.S. prosecutors are investigating Wachovia (WB) for its mortgage lending and its disclosures to investors. The investigation is focused on whether Golden West Financial, the lender Wachovia bought in 2006 for $24B, fraudulently pushed borrowers into expensive loans or altered paperwork to get the loans approved. Regulators are also checking to what degree managers monitored and disclosed loan defaults. "We are looking down, in terms of what borrowers were told," said U.S. Attorney Joseph Russoniello, "and we're looking up at what investors were led to believe." A Wachovia spokesman declined to comment.
  • Bond-ratings probe. The Senate has launched a probe into the causes of the global financial crisis, focusing in part on bond-ratings firms and whether 'inherent conflict clouded the judgment of the agencies.' Investigators will look to see if competition between ratings firms and the 'zeal to make money' led the firms to issue certain ratings to win business from banks. The Senate probe comes in addition to several other investigations into the bond-rating industry, including by the SEC and the New York Attorney General. The probe will also examine how credit-default swaps, which one senator called among the "prime culprits responsible for this financial disaster,' were marketed and used by banks.
  • Citi nosedives. Citigroup (C) plunged 23.4% yesterday, closing at $6.40, and has lost a third of its market value over the past three days. Contributing to yesterday's drop was Citi's announcement that it will buy the last $17.4B in assets held by its structured investment vehicles (SIV), and will take a $1.1B writedown to reflect the assets' diminished values. David Trone, an analyst at Fox-Pitt Kelton, further dismayed investors with a steeper Q4 loss projection, noting "the specter of Citi's problem asset levels...could continue to hinder investor confidence in the story." The continued share price erosion and downbeat forecasts have undermined investors' faith in CEO Vikram Pandit and his ability to turn around the struggling financial giant.
  • Ambac news sends shares down, up. S&P downgraded Ambac's (ABK) credit rating by three notches yesterday, bringing its rating to 'A,' on concerns of further losses connected to collateralized-debt obligations. Later in the day, Ambac announced a deal with counterparties to commute four securitized transactions worth around $3.5B at the end of September in exchange for a $1B cash payment. CEO David Wallis said the settlements "represent positive and tangible steps" towards the "de-risking and de-leveraging of our balance sheet." Shares fell 33% during regular trading, and rose 54% in after-hours trading to $1.17.
  • Yahoo scores mobile phone deal. T-Mobile USA (DT) picked Yahoo (YHOO) to be its default search provider for most of its devices, a win for Yahoo as it fights Google (GOOG) and Microsoft (MSFT) for market share in the growing mobile internet sector. Yahoo and T-Mobile will share ad revenue, but declined to say how long the deal will last or whether Yahoo will make guaranteed payments to T-Mobile. Trying to turn more of its 32.1M customer base into mobile internet users, T-Mobile said Yahoo was best suited for the lower-end phones common in the mass market. The company had previously partnered with Google for the high-end smartphone G1, and said it will continue its relationship with Google.
  • IPO at last. Grand Canyon Education (LOPE) successfully broke the IPO dry spell that saw 15 consecutive weeks pass without a single U.S. initial public offering. Grand Canyon shares priced at $12, the lower end of its estimated price range, for total proceeds of $126M. During the 15 weeks of IPO silence, 29 companies cancelled or postponed their public offerings due to market volatility.
  • Housing starts fall. Housing Starts came in at 791,000 for October, 4.5% lower than September's revised 328,000 and 38% worse than a year ago. This is the slowest pace since similar records were first kept during the housing boom in the late 1940s, but still managed to beat consensus estimates for an even weaker 780,000.

Earnings: Thursday Before Open

  • Buckle (BKE): Q3 EPS of $0.64 beats by $0.01. Revenue of $211M (+25.7%) vs. $209M. (PR)
  • Patterson Companies (PDCO): FQ2 EPS of $0.40 misses by $0.06. Revenue of $759M (+2.4%) vs. $801M. (PR)
  • Suntech Power (STP): Q3 EPS of $0.35 misses by $0.07. Revenue of $594M (+53.7%) vs. $572M. (PR)
  • The Children's Place Retail Stores (PLCE): Q3 EPS of $0.84 in-line. Revenue of $450.6M (+4.6%) in-line. (PR)
  • Wet Seal (WTSLA): Q3 EPS of $0.07 in-line. Revenue of $147M (-2.5%) vs. $146M. (PR)

Earnings: Wednesday After Close

  • Dress Barn (DBRN): FQ1 EPS of $0.32 beats by $0.05. Revenue of $376M vs. $370M. Sees 2009 EPS of $0.90-1.00 vs. $1.15. (PR)
  • Gymboree (GYMB): Q3 EPS of $1.06 beats by $0.03. Revenue of $261M (+5.5%) vs. $270M. (PR)
  • Hot Topic (HOTT): Q3 EPS of $0.17 beats by $0.01. Sales of $197M (+4.7%) in line. (PR)
  • Intuit (INTU): FQ1 EPS of -$0.09 beats by $0.03. Revenue of $481M (+8%) in-line. Sees FQ2 EPS of $0.40-0.42 vs. $0.46 and revenue of $860-880M vs. $900M. (PR)
  • Limited Brands (LTD): Q3 EPS of $0.01 beats by $0.01. Revenue of $1.84B (-4.2%) in-line. (PR)
  • Men's Wearhouse (MW): Q3 EPS of $0.30 beats by $0.06. Revenue of $460M vs. $475M. (PR)
  • PetSmart (PETM): Q3 EPS of $0.28 beats by $0.02. Revenue of $1.3B in-line. (PR)

Today's Markets

  • Asia markets closed broadly down. Nikkei -6.9% to 7,703. Hang Seng -4.0% to 12,299. Shanghai -1.7% to 1,984. BSE -3.7% to 8,451.
  • In Europe at midday, London -2.3%. Paris -2.9%. Frankfurt -2.9%.
  • U.S. futures: Dow -1.2%. S&P -1.5%. Nasdaq -1.6%. Crude -2.9% to $52.04. Gold +1.0% to $743.60.

Thursday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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