Friday, December 5, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Closer ties in trade talks. The U.S. and China wrapped up two days of bilateral economic talks, their last before President-elect Obama takes office, with an agreement to deepen financial ties, and pledged $20B to fund trade. The U.S. agreed to institute a rapid approval process for Chinese financial firms that want to invest in the country. In a joint statement, the U.S. said it welcomes investments by China's sovereign wealth fund, while Chinese officials look forward to a 'candid and pragmatic dialogue' with the new administration. In response to urging by Treasury's Paulson to let the yuan appreciate, China said it remains committed to a 'stable' yuan and currency reform, and that the U.S. should deal with its own economic problems, including excessive consumption and debt.
  • Job losses pile up. Anticipating declining sales and tougher times ahead, companies across a broad swath of industries are accelerating layoffs. Over 33,000 job cuts were announced this week alone, including 12,000 jobs at AT&T (T), as well as cuts at household names like Viacom (VIA), DuPont (DD) and Avis Budget Group (CAR). All told, the U.S. has lost around 1.2M jobs this year, and economists expect November's losses to reach 350,000. (The government will release its monthly employment report today at 8:30am.) Unemployment will likely tick up to 6.8% for November, or possibly as high as 7%, and break 8% by the end of the year. (More employment data below.)
  • What next from the Fed? Central banks in Europe and Asia slashed interest rates aggressively this week in an effort to stabilize financial markets and check deflationary pressures (see below). Federal Reserve officials are weighing their options and considering following suit. Ahead of today's employment figures, the market priced in a 60% chance that the Fed would cut rates by 75 basis points to 0.25% on December 16. Aside from rate cuts, the Fed is also considering unconventional steps, including new efforts to bring down rates it doesn't usually target, such as those on mortgages, other consumer borrowing and Treasury bonds. Raising expectations for aggressive policy action as soon as next week, Bernanke called for new government measures to stem foreclosures, while two other Fed policy-makers said the economic outlook has 'clearly deteriorated' and is 'not encouraging.' Fed officials insisted the central bank has the necessary tools to tackle current weaknesses and future shocks, even as benchmark interest rates approach zero.
  • Voters line up on BoA/MER deal. Shareholders of Bank of America (BAC) and Merrill Lynch (MER) face separate votes today to approve the takeover deal forged in September. Expected to close by the end of the year, the deal is a significant one in the reshaping of the U.S. financial industry, blurring the lines between investment bank and commercial bank. Some Merrill brokers are reportedly chafing at the BoA approach of peddling stocks through retail-bank branches, though executives have repeatedly denied any cultural tensions. Little has been said about the possible sales strategy for the combined companies, and the internal focus has been on cost-cutting, with as many as 25,000-30,000 positions, or 8%-10% of the new firm, likely to be eliminated over the coming three years.
  • Lu to the search-ad rescue. Microsoft (MSFT) tapped Qi Lu, a former top executive from Yahoo (YHOO), to run its internet operations, a strategically important business in which Microsoft has struggled to gain traction. With Lu's appointment, Microsoft is looking to revamp its search ad-strategy to better compete with industry juggernaut Google (GOOG). Microsoft executives believe search engine technology is the most powerful way to make money on the internet, but the company remains a distant third place despite hefty investments. In October, 63.1% of U.S. searches were done with Google, 20.5% with Yahoo and just 8.5% with Microsoft.
  • Retail sales plunge. For the month of November, U.S. retailers posted the biggest decline in same-store sales in at least 39 years, with heavy discounting keeping sales from falling even lower. Overall, retail sales were down 2.7% from last year, with ICSC's Michael Niemira forecasting 'the weakest holiday season in our record.' Wal-Mart (WMT) beat expectations, and helped pull up overall sales. Excluding Wal-Mart, same-store sales fell by 7.7%. (See how other retailers fared.)
  • Central bank cuts. Bank of England cut its key interest rate by 100 BPs to 2%, as expected, saying "there remained a substantial risk of undershooting the 2% CPI inflation target in the medium term." The European Central Bank cut its key interest rate by 75 BPs to 2.5%. The cut was larger than the expected 50 BPs reduction, and the largest in the ECB's 10-year history, but many suspected something more was in store amid ever-weakening economic data. While economists were satisfied with the larger than expected cut, Nomura's Laurent Bilke says the central bank is late to the party. "The economy is in deep recession now."
  • Monstrous employment numbers. Monster's online employment index fell 7 points in November to 143, and is down 22% from the previous year. Public administration remained Monster's most resilient industry category, but the trend appeared to be weakening. Online job availability rose in just one of Monster's 20 industry categories. The Labor Department's initial jobless claims, released yesterday, totalled 509,000, down 21K from last week. The numbers were less than the 540,000 economists expected, marking the second week in a row forecasts have overshot. The 4-week moving average moved up 6,250 to 524,500.
  • Underwhelming factory orders. October's factory orders were down 5.1% vs. -2.8% consensus, the third consecutive monthly decrease. Ex-transportation, orders fell 4.2%, the largest percentage decrease since 1992.

Earnings: Friday Before Open

  • Big Lots (BIG): Q3 EPS of $0.15 in-line. Revenue of $1.0B (-0.9%) in-line. (PR)

Earnings: Thursday After Close

  • Guess? (GES): Q3 EPS of $0.69 beats by $0.06. Revenue of $528M vs. $512M. (PR)
  • Novell (NOVL): FQ4 EPS of $0.06 in-line. Revenue of $245M (-0.1%) vs. $250M. (PR)

Today's Markets

  • No clear pattern in Asia trading Friday. Nikkei -0.08% to 7,918. Hang Seng +2.49% to 13,846. Shanghai +0.86% to 2,019. BSE Sensex -2.87% to 8,965.
  • In Europe, markets are lower in anticipation of a weak U.S. payroll number. London -1.1%. Paris -2.6%. Frankfurt -2.5%.
  • Futures are down a bit in light overnight trading. Dow -0.1% to 8395. S&P -0.2% to 845.50. Nasdaq -0.4%. Crude +1.4% to $44.29. Gold +0.6% to $770.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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