Tuesday, December 16, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Madoff madness continues. More details emerged on the Madoff affair, including trading discrepancies that offer clues as to how the broker may have run his scam, as a federal judge ordered the U.S. operations of Bernard L. Madoff Investment Securities LLC to be liquidated. Traders who have now begun to examine Madoff's investment strategy point to many red flags that should have been obvious to the banks and funds promoting Madoff, including the fact that Madoff's stated strategy was valid, but impossible to execute with the amount of money he was managing. Another red flag was Madoff's consistently steady gains each month; his purported options-trading strategy would have limited volatility but generally wouldn't have produced gains in a falling stock market. The SIPC has said it will try to return to investors as much as possible of the over $17B the firm reportedly held at the start of the year, but itself has just $1.6B currently on hand.
  • New territory for the Fed. Markets are waiting for what could be a historic FOMC decision later today. The Fed may reduce interest rates to the lowest level on record and begin a bold, new experiment of using its balance sheet as the key tool for monetary policy. Economists predict the Fed will cut its benchmark rate in half to 0.5%, and may signal plans to channel credit to businesses and consumers by further enlarging its $2.26T of assets. Speculation on a Fed cut pushed yields on 10-year Treasury notes to their lowest levels in over 50 years, and pushed the dollar lower against the euro and the yen. The FOMC will announce it decision at 2:15 PM.
  • Auto industry running on fumes. With automakers still in limbo and desperate for cash, key lawmakers said the White House could announce its automaker bailout by tomorrow, with conditions similar to those approved by the House of Representatives last week. Treasury officials have been reviewing financial information on the auto industry, but Paulson cautioned that to give out federal money, "we would have to assure ourselves that this was a step on the path to long-term viability."
  • Treasury's TARP trap. With TARP funds now a potential source of cash for the auto bailout, and only $15B remaining of the initial installment, the administration may need the second half of TARP funds sooner rather than later. However, House Speaker Nancy Pelosi has suggested Congress will try to block Treasury access to the second half of TARP funds unless there is more done to help struggling homeowners. Lawmakers from both parties have been frustrated with the Treasury for spending bailout funds on cash infusions to banks that have not increased lending, instead of focusing on troubled mortgages and foreclosures.
  • OPEC open to cuts. Steep cuts are expected from OPEC tomorrow, possibly as much as 2M barrels/day, as the organization tries to keep up with falling prices and falling demand. Non-members of the cartel, including Russia, Azerbaijan, Syria and Oman, will attend Wednesday's meeting and may participate in the production cuts. Oil is down 67% from its summer high, with crude prices for January delivery at $44.51. Some analysts believe crude could fall as low as $30/barrel or lower early next year.
  • EDF shoots for the stars. Electricite de France is close to an agreement to buy Constellation Energy (CEG) for $4.5B, a deal that would edge out a previously agreed upon takeover bid by MidAmerican Energy (BRK.A). Sources say approval by Constellation's board could be announced as early as this week. EDF estimates terminating the agreement with MidAmerican would cut Constellation’s available cash and credit by $2.4B, and would allow MidAmerican to walk away with $593M in cash, a 9.9% stake in Constellation and $1B of senior notes paying 14% interest. Still, EDF said its offer, along with asset sales planned by Constellation, would provide the company with sufficient cash and credit to operate.
  • Industrial production declines. Industrial production fell 0.6% in November (vs. -0.8% consensus) with declines widespread across industries. Total industrial production is 5.5% lower than a year ago; capacity utilization of 75.4% is 5.6% below its normal average. With companies cutting back on investment, capital, inventories and production, industrial production to expected to continue its drop, said FTN's Lindsey Piegza. "The crisis has spread to all parts of the production line and we’re really going to have to cut back more."
  • Builder confidence slips away. NAHB's homebuilder confidence gauge comes in at an anemic 9, just below consensus. Anything below 50 indicates a majority of negative responses. "The crisis continues," NAHB's Sandy Dunn said of yesterday's record low in builder confidence. "Buyers are afraid to move forward, and in any case there is almost no way to compete with the cut-rate product that is continually flooding the market from mounting foreclosures."
  • Treasury international capital. Net foreign purchases of long-term securities were $1.5B, well short of the $40B consensus. Foreigners sold $34.8B of U.S. securities, while U.S. residents sold $36.3B of foreign securities.

Earnings: Tuesday Before Open

  • Cemex (CX): Sees Q4 revenue of $4.45B (-23%) vs. $5B consensus. Says it's making progress in restructuring $6B in debt due by the end of next year. Shares -2.6% in Mexico City. (PR)
  • FactSet Research Systems (FDS): FQ1 EPS of $0.70 beats by $0.07. Revenue of $155.6M (+16%) vs. $155.0M. (PR)

Today's Markets

  • Asia markets closed slightly up. Nikkei -1.1% to 8,568. Hang Seng +0.55% to 15,130. Shanghai +0.5% to 1,975. BSE +1.5% to 9,977.
  • In Europe at midday, London +0.3%. Paris +0.7%. Frankfurt +1.2%.
  • U.S. futures: Dow +0.1%. S&P +0.4%. Nasdaq +0.4%. Crude +2.0% to $45.42. Gold -0.4% to $832.90.

Tuesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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