Wednesday, November 26, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • New acronym on the block... The government unveiled its newest initiative, called TALF, or Term Asset-Backed Securities Loan Facility. The $200B facility will support consumer finance, including student, auto and credit card loans and loans backed by the Small Business Administration, by lending to investors who hold securities backed by that debt. The facility could eventually be expanded to cover other assets, including mortgage-backed securities. The Treasury will help cover potential Federal Reserve losses by providing $20B of credit protection from TARP funds. This is the first time the Fed and Treasury have stepped in to finance consumer debt, and the program comes close to creating a government bank. Federal officials defended the move, pointing out that the market for securities backed by consumer debt 'came to a halt' in October, making it almost impossible for millions of Americans to secure affordable financing for everything from college to computers. (Read official statements from the Fed and Treasury.)
  • ...and new mortgage program. Along with TALF, the government also introduced a new mortgage program which will see the Federal Reserve buy up to $100B of debt issued by GSEs Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks. According to the statement released by the Fed, "this action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally." The announcement of the new programs immediately pushed down rates on 30-year mortgages by as much as 0.5%, though it's not clear whether the rates will stay down in the long-term. The initiative also includes up to $500B in purchases of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae. (Read the Fed's official statement.)
  • No more takeovers, just lots of debt. Rio Tinto's (RTP) shares plunged yesterday, closing down 27%, after BHP Billiton (BHP) abandoned its $66B takeover bid. Analysts are concerned Rio will find it difficult to sell assets and bring down its $39B in debt in the current market environment. Despite the scarcity of buyers, the company remains confident in its ability to make the sales happen over the next few months, and Chairman Paul Skinner said the company is financially comfortable and doesn't need to raise equity. Moody's signaled a possible ratings downgrade, and will make assets sales a key part of its review. Units up for sale include a major packaging business, aluminum products, its U.S. coal business, an Australian copper mine and its U.S. Sweetwater uranium mine.
  • Bad quarter for banks. The number of problem banks in the U.S. jumped to 171 in Q3 from 117 the previous quarter, marking the highest level in over a decade and fueling speculation of continued bank failures. The FDIC's insurance fund fell 23.5% to around $35B, though the agency expects higher premiums to offset increased bank failures. According to the FDIC's Quarterly Banking Profile (.pdf), the "industry’s quarterly return on assets fell to 0.05%, compared to 0.92% a year earlier. This is the second-lowest quarterly ROA reported by the industry in the past 18 years." Chairman Sheila Bair warned that losses are spreading to smaller institutions. Nine FDIC-insured institutions failed in Q3, the most in 15 years.
  • Goldman holds out for sweeter Sanyo bid. Goldman Sachs (GS) has broken off talks about potentially selling its stake in Sanyo (SANYY.PK) to Panasonic (PC). Goldman, one of Sanyo's main shareholders, called off negotiations when Panasonic's offer came in below Sanyo's current stock price. With $10B in cash and cash equivalents, Panasonic is unlikely to give up on the opportunity to acquire a new growth driver and talks could be revived if Panasonic comes back with a better offer. To acquire Sanyo, Panasonic has to buy out its top three shareholders, Goldman, Daiwa Securities SMBC and Sumitomo Mitsui Banking. In Tokyo trading, Panasonic -2.7%, Sanyo -1.9%.
  • Talk about a salary cut... Facing public and regulatory scrutiny, AIG (AIG) cut CEO Edward Liddy's salary to $1 this year and next, eliminated 2008 bonuses for seven top executives and halted 2009 pay raises for another fifty executives. NY Attorney General Andrew Cuomo, who has been pressing Wall Street firms for details of executive payment plans, held up AIG's recent steps as a model for other firms who need to 'wake up to the new reality on Wall Street.'
  • All eyes on audit. The first operational audit of the government's $700B TARP program will be delivered to Congress on Tuesday, with results expected to be mixed. The audit, carried out by the Government Accountability Office, is expected to be critical of the Treasury for failing to attach more strings to investments in financial institutions, and for failing to establish a system to track how bailout money is used in the market. Sources say the audit will also call for more careful regulation to prevent conflicts of interest when financial and legal specialists are hired for Treasury work. Despite the criticisms, the audit did take into account how quickly the program was set up, how much it has changed over time and how little feedback the Treasury has received to date from other oversight agencies.
  • One less 'A' for Toyota. Fitch downgraded Toyota Motor's (TM) credit rating to AA from AAA this morning, marking the automaker's first ratings cut in a decade. Fitch Director Tatsuya Mizuno said "the negative developments in the industry are so substantial and fundamental that even the strongest player - Toyota - can no longer support an 'AAA' rating." The agency called on Toyota to review its global investments, product mix and speed of expansion in response to the challenges it faces. Shares -4.6% in Tokyo.
  • So long, dividends. As companies struggle to conserve cash, dividends are being cut or eliminated at the fastest rate in fifty years. Over ninety companies listed on major U.S. exchanges have reduced or suspended their dividend payments this month, including Citigroup (C), New York Times Co. (NYT) and Genworth Financial (GNW). This is the most since May 1958 when 113 companies cut dividends, and outstrips the 81 cuts in October and 60 in September. As of Nov. 24, financial companies accounted for 75% of this month's cuts.
  • China's rate cuts. China's central bank cut benchmark lending and deposit rates by 1.08% today, the fourth cut since mid-September and the biggest in 11 years. The move comes less than three weeks after unveiling a 4T yuan ($586B) stimulus plan. One-year bank loans dropped to 5.58% from 6.66%, while the benchmark one-year deposit rate fell to 2.52% from 3.60%.
  • Retail sales keep spiraling. Retail chain store sales fell 0.9% from a week ago, according to ICSC, and fell 0.8% vs. the previous year, marking the second weekly decline for year-on-year sales. "Consumers are seemingly holding back waiting for those big discounts in the days following Thanksgiving, which means that a lot is riding on Black Friday shopping," said Michael P. Niemira, ICSC chief economist. Redbook showed national chain store sales down 1.3% in the first three weeks of November vs. the previous month, and down 1.1% vs. a year ago.
  • GDP heads down. Preliminary Q3 GDP fell 0.5%, in line with consensus, vs. the government's -0.3% advanced estimate. The main factor in the decline was a 3.7% drop in personal consumption vs. -3.2% consensus. Exports rose 3.4%, while imports fell 3.2%. The gap narrowed on both ends: In Q2, exports increased by 12.3% while imports shrank by 7.3%. Corporate profits fell by $14.6B vs. a $60.2B decrease in Q2. But locally, things were worse: Domestic profits fell by $61.6B vs. -$31B in Q2.
  • Shaky consumer confidence. The Conference Board's Consumer Confidence Index improved from October's all-time low, rising to 44.9 vs. 38.0 consensus. Despite the uptick, 'consumers remain extremely pessimistic' and H1 2009 growth 'remains highly unlikely.' ABC's Consumer Comfort Index remained unchanged at -52, its third week at or below -50 and the lowest level in 22 years of weekly polling. Only 8% of Americans rate the economy positively, and just 43% say their personal finances are in good shape.
  • Mortgage apps. Mortgage applications increased 1.5% from a week ago, according to MBA, on a seasonally adjusted basis. The average interest rate on 30-year fixed-rate mortgages decreased to 5.99% from 6.16%.

Earnings: Wednesday Before Open

  • Deere (DE): FQ4 EPS of $0.81 misses by $0.18. Revenue of $7.4B (+20.5%) vs. $6.8B. (PR)
  • Tiffany & Co. (TIF): Q3 EPS of $0.35 beats by $0.10. Revenue of $618M (-1.4%) vs. $644M. (PR)

Earnings: Tuesday After Close

  • Borders Group (BGP): Q3 EPS of -$0.64 misses by $0.14. Revenue of $682M (-10%) vs. $726M. Management is no longer considering a sale of the company. Shares -52%. (PR)
  • Coldwater Creek (CWTR): Q3 EPS of -$0.01 beats by $0.07. Revenue of $228M (-15.7%) in-line. (PR)
  • J Crew Group (JCG): Q3 EPS of $0.30 beats by $0.03. Revenue of $363M (+9.1%) vs. $351M. Shares -10%. (PR)
  • TiVo (TIVO): Q3 EPS of $0.98 vs. consensus of -$0.06. Revenue of $51.7M (-11.3%) vs. $50.7M. Sees Q4 revenue of $47-49M vs. $55.5M. Shares -0.7%. (PR)

Today's Markets

  • Asia markets closed mostly up. Nikkei -1.3% to 8,213. Hang Seng +3.8% to 13,369. Shanghai +0.5% to 1,898. BSE +3.8% to 9,023.
  • In Europe at midday, London . Paris . Frankfurt .
  • U.S. futures: Dow %. S&P %. Nasdaq %. Crude % to $.. Gold % to $..

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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