Wednesday, December 10, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Auto update. The House of Representatives could vote on a $15B bailout for the auto industry as early as today, after top Democrats and the White House reached 'an agreement in concept' late last night. If Democrats manage to push a bill through the House, they'll still have to face off with Republicans in the Senate. "It's not going to be a slam dunk," quipped one congressional aide. Progress on a bailout helped Japanese automakers lead the Nikkei higher (+3.15% to 8,660). Toyota (TM) +6.5%. Honda (HMC) +10.3%. Nissan (NSANY) +5.2%.
  • Fed flirts with debt issuance. The Federal Reserve is considering issuing its own debt for the first time as it looks for new tools to stabilize tempestuous financial markets. Government debt issuance is largely under the jurisdiction of the Treasury Department, and the Fed can already print as much money as it wants, but Fed officials are searching for creative solutions as the credit crisis drags on. Though there are several hurdles to moving the idea forward, sources say Fed officials have approached Congress about the concept.
  • Tinted ore outlook spurs Rio cuts. Mining giant Rio Tinto (RTP) announced its intentions to pay down $10B of debt by the end of 2009 by cutting 14,000 jobs and putting significant new assets up for sale as part of a planned $15B asset divestment. The company will also cut its net capital expenditure to $4B from $9B, but said it will still be well placed to 'resume its growth programs with renewed momentum' when the global economy recovers. Dividend payments for 2008 will remain at the 2007 level of $1.36 per share. Rio's net debt at the end of October was $38.9B, down $3.2B from the previous quarter. Shares +14% pre-market.
  • AIG in trouble again. AIG (AIG) owes around $10B to some of Wall Street's biggest firms for speculative trades that have soured, say sources familiar with the matter. These speculative trades on mortgage assets and corporate debt go beyond what AIG had explained to investors about the nature of its risk-taking operations, and are the first sign that AIG may have been gambling with its own capital. An AIG spokesman called the trades 'credit protection instruments' and said they were not speculative bets. The insurance giant is now in a difficult position as it needs to raise money to pay off its partners and is restricted from using the government's $150B rescue to cover these debts.
  • TARP report card. A panel overseeing the Treasury's $700B rescue program will release a report today that is expected to be highly critical of how the government has handled the bailout thus far. The report won't present any new findings, but will raise fresh questions about TARP, including queries relating to the program's strategy, accountability and why the Treasury hasn't done more to help stem foreclosures. A truly scathing report could prompt some lawmakers to try to block the Treasury's access to the remaining $350B of TARP funds.
  • T-bills tumble. Investors looking for a safe play have flocked to Treasury bills, pushing the yield on four-week bills to an unprecedented 0%. The yield on three-month bills reportedly dipped between negative 0.1% and 0.2% yesterday, though by the afternoon it had moved back into positive territory at 0.04%. "I have never seen this before," said Michael Franzese, head of government bond trading at Standard Chartered. "It's all about capital preservation for the turn of the year, not capital appreciation."
  • Apocalyptic call of the day. Using Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier says markets are heading for a 'horrific' bottom. The S&P is down 39% this year, pushing equity prices below replacement costs, but Napier believes the S&P could plummet another 55% to a trough of 400 by 2014. Before then, said Napier, investors will likely see a bear market rally as central bank actions delay deflation.
  • Retail sales fall. Retail chain store sales fell 0.8% vs. a week ago, ICSC reported, but rose 0.4% from the year-ago period. "With the rush and excitement of Black Friday sales and promotions behind them, consumer spending took a break from the pace of the prior week," during which sales increased 0.1%.
  • Canadian cuts. Bank of Canada cut its overnight lending rate by a more-than-forecast 0.75% to 1.5%. "The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," it said. After the announcement, fed funds futures priced in a 96% chance of the FOMC slashing 75 BPs off overnight rates next week, vs. less than 40% a week ago. A 50% cut is fully priced in.
  • Home sales dip down. Pending home sales slipped 0.7% in October, better than the -3% consensus, and September's -4.3%, NAR reported. "Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable," said Lawrence Yun, NAR chief economist.
  • Mortgage apps cool off. Mortgage applications fell by 7.1% last week after climbing an unprecedented 112% a week earlier, MBA said. 30-year mortgage rates slid 2 BPs to 5.45%.

Earnings: Tuesday After Close

  • ADC Telecommunications (ADCT): Q4 EPS of $0.19 beats by $0.06. Revenue of $352M (+10%) vs. $347M. Sees Q1 EPS of -$0.06 to $0.06 vs. $0.09 and revenue of $255-290M vs. $317M. (PR)
  • Pall (PLL): FQ1 EPS of $0.40 beats by $0.02. Revenue of $578M (+3.0%) in-line. (PR)
  • SAIC (SAI): Q3 EPS of $0.29 in-line. Revenue of $2.63B (+11.3%) in-line. (PR)

Today's Markets

  • Asia markets closed broadly up. Nikkei +3.1% to 8,660. Hang Seng +5.6% to 15,578. Shanghai +2.0% to 2,079. BSE +5.4% to 9,655.
  • In Europe at midday, London -0.1%. Paris +0.3%. Frankfurt +0.3%.
  • U.S. futures: Dow +1.3%. S&P +1.5%. Nasdaq +1.1%. Crude +4.6% to $44.00. Gold +1.8% to $788.10.

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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