Wednesday, December 3, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • TARP's first report card. In the first full audit of the government's bailout program, the Government Accountability Office [GAO] faulted the Treasury Department for failing to address several critical issues, including how to ensure its efforts were successful. The Treasury was also cited for its incomplete management structure and system of internal controls, and for failing to find a way to make sure recipients of federal aid comply with limits on executive compensation and dividend payments. Treasury's Neel Kashkari said his department has made 'significant efforts' to communicate more clearly to lawmakers and taxpayers, but 'more can and will be done in these areas.' The GAO report also noted that as many as 200 full-time employees will be needed for the office that is running TARP, but as of Nov. 21 only 48 positions had been staffed. Near-term hiring could be difficult during the new administration's transition into the White House. (Read the full GAO report (.pdf) or just the highlights (.pdf).)
  • Automakers keep their fingers crossed. Big Three automakers presented turnaround plans to Congress yesterday, including pleas from General Motors (GM) and Chrysler for $15B just to survive through January. The tab for a potential auto industry bailout has risen to $34B from an original $25B, with GM requesting $18B in total (and $4B immediately, saying 'there is no Plan B'), Chrysler requesting $7B and Ford (F) asking for a $9B credit line it says it may not need to tap. House Speaker Nancy Pelosi responded to bailout calls by saying bankruptcy is 'not an option,' but lawmakers didn't detail possible plans for saving automakers. Congressional hearings are planned for Thursday and Friday.
  • Dueling bids for Constellation. Electricite de France [EDF], the world's largest operator of atomic reactors, has made a $4.5B bid for half of Constellation Energy Group's (CEG) nuclear business. EDF, which owns 9.5% of Constellation, is looking to expand in the U.S. and to thwart a rival bid by Warren Buffett; earlier this year, Constellation agreed to be bought by Berkshire Hathaway's (BRK.A) MidAmerican Energy Holdings unit for $4.7B, but the deal still needs to be approved by shareholders in a vote later this month. In October, EDF abandoned a $6.24B bid for all of Constellation, citing financing difficulties due to the credit crisis, but said the new proposal is 'not subject to a financing condition' and that the MidAmerican offer 'significantly undervalues Constellation and its future opportunities.' CEG +21.2% pre-market.
  • AIG wants better terms. AIG (AIG) has reached an agreement with the government to clear its obligations on around $53.5B in toxic mortgage debt. The move is part of the Federal Reserve's agreement last month to buy up to $70B of toxic mortgage assets underlying AIG's credit-default swaps. AIG's new CEO, Edward Liddy, said he hopes to renegotiate the terms of the insurer's rescue package as soon as the company makes some 'good progress' on selling some assets and paying down debt. In particular, Liddy wants to reduce the 10% dividend on preferred shares that the government is receiving and to reduce the government's stake from 79.9%.
  • GE looks to the future. General Electric (GE) provided investors with an updated strategic framework and revised Q4 outlook. The company projects Q4 EPS will trend towards the low end of its $0.50-0.65 guidance, in-line with $0.51 consensus, and said it will maintain its dividend. It also forecast a $1-1.4B charge to restructure GE Capital, which it described as an invaluable part of the company, ending lingering speculation of a break-off or spin-off. By the end of next year, GE expects its capital unit to account for 30% of company profit, down from 50% last year, and will reduce the unit's reliance on short-term funding. The news helped shares of the battered stock rally 13.6%, though the cost of credit-default-swap insurance on its debt, at nearly 5%, barely budged.
  • Swallowing Yahoo whole. Jonathan Miller, former CEO of AOL, is trying to raise money to purchase some or all of Yahoo (YHOO). He has been speaking to private-equity investors and sovereign-wealth funds, and believes he can create a deal that would be worth $20-$22/share to Yahoo shareholders. For a purchase of the entire company, Miller is looking to raise between $28B-$30B. The deal is a long-shot, and financing a purchase of this size in the current market environment would be extremely difficult, but Yahoo shares rose on the news anyway, closing up 7.1% to $11.50.
  • Goldman Goldman Sachs (GS) is considering whether to launch an online bank as part of its efforts to broaden its funding sources and pull in deposits. Sources familiar with the situation say the bank would likely offer a range of savings products, including certificates of deposits, but many details of its operating plans remain undecided. Though the deposits are typically a low-margin business, the online bank would be an important part of Goldman's efforts to diversify, especially as the bank potentially faces its first quarterly loss later this month since going public in 1999. If it moves forward with its plans, Goldman will face competition from banks including Bank of America (BAC), Citigroup (C) and ING Groep (ING).
  • Auto sales plummet. As expected, November's auto sales proved to be a dismal affair as U.S. auto sales plunged to their lowest annual rate in 26 years. Nissan (NSANY) posted November sales of 46,605, down 42.2% vs. consensus of -35%. General Motors (GM) reported a 41.3% drop in November U.S. sales to 154,877 vs. -33% consensus. Its car sales were down 44.1% and truck sales fell 39.4% because "the consumer is scared and sitting on the sideline." Honda (HMC) posted November sales of 76,233, a decline of 31.6% from a year ago vs. consensus of -22%, and its Acura sales fell 38.9% to 7,888. Toyota (TM) reported November vehicle sales of 130,307, down 33.9% from last year vs. -27% consensus. Its car sales fell 32.3% and light truck sales dropped 36.1%. Ford (F) reported November light-vehicle sales of 122,723, down 30.6% vs. -32% consensus. Its truck sales declined 29% while car sales fell 36.2%.
  • Retail sales. Retail chain store sales increased 0.1% from a week ago, according to ICSC, and rose 1.3% Y/Y, ending two consecutive weeks of declines. "Black Friday promotions provided the incentive consumers were looking for," said Michael P. Niemira, ICSC chief economist. According to Redbook, national chain store sales fell 1.1% in the first four weeks of November vs. the previous month, and fell 0.9% vs. a year ago.

Earnings: Tuesday After Close

  • Marvell Technology (MRVL): Q3 EPS of $0.23 beats by $0.02. Revenue of $791M (+4.3%) in-line. (PR)
  • OmniVision (OVTI) FQ2 EPS of $0.19 beats by $0.01. Revenue of $164M (-29.5%) vs. $166M. Sees FQ3 EPS of -$0.22 to -$0.09 vs. $0.17. (PR)

Today's Markets

  • Asia markets closed in the green. Nikkei +1.8% to 8,004. Hang Seng +1.4% to 13,589. Shanghai +4.0% to 1,965. BSE +0.1% to 8,747.
  • In Europe at midday, London -0.8%. Paris -1.9%. Frankfurt -1.8%.
  • U.S. futures: Dow -1.7%. S&P -1.9%. Nasdaq -1.4%. Crude +0.7% to $47.30. Gold -0.8% to $777.00.

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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