Thursday, January 8, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Aftershocks from the Satyam scandal. After admitting over $1B of value on its books was fictitious, Satyam (SAY) is dealing with the fallout, as are the accounting industry, investors and Indian markets. In frenzied premarket trading, Satyam shares lost 99.89% yesterday, plummeting from $9.35 to $0.01, and were halted before regular trading hours began. Now that Chairman Ramalinga Raju has lost his credibility with admission of the fraud, some wonder whether even his confession is believable and worry that perhaps the fictitious profits and accounting flaws go far beyond the $1B+ Raju confessed. At least one class action lawsuit has been filed against the company.
  • Satyam aftershocks, part II. Investors are worried that more tales of shaky corporate governance in Indian firms will begin to surface, making it extremely difficult for the country to attract back huge institutional investments that have fled the country as the economy slowed. Satyam's collapse put an end to the BSE's best start since 2000; the Indian market lost 7.25% yesterday and would likely have continued its downward spiral today if it weren't closed for a planned market holiday. (On the plus side, JPMorgan raised India's market rating to Neutral from Underweight, citing the 'attractive buying opportunity' presented by the Satyam dip.) For PricewaterhouseCoopers, Satyam's auditing firm, this is their second Indian snafu; PWC is already part of a probe for its suspect auditing of the collapsed Global Trust Bank.
  • Lenovo loss looms. Lenovo (LNVGY.PK) will cut around 2,500 jobs, or roughly 11% of its workforce, leading to savings of $300M in the year ending March 2010. The latest cuts come in addition to more than 2,000 jobs eliminated in 2006 and 2007, and the company will book a charge of around $150M this fiscal year. Lenovo also forecast its first loss in 11 quarters, citing falling demand for personal computers. The firm will cut executive compensation by 30-50%, and will combine its China and Asia Pacific units as part of its reorganization efforts. In Hong Kong, shares -26%.
  • Wyeth in acquisition talks. Wyeth (WYE) is in talks to buy Dutch vaccine maker Crucell (CRXL), part of its efforts to gain market share in one of the fastest growing parts of the industry. Sources say a deal valuing Crucell at more than €1B ($1.35B) could be reached as early as next week. Crucell confirmed the talks, characterizing them as 'friendly discussions' in a 'preliminary stage.' A deal would underscore the relative health of the pharmaceutical industry amid much financial and economic turmoil elsewhere, and would fall in line with the consolidation many I-bankers expect to see between small biotech firms and large cash-rich pharmaceuticals looking for fast growth.
  • Paulson calls for Fannie/Freddie changes. Speaking to the Economic Club of Washington yesterday, Treasury's Paulson called the government-sponsored enterprise model behind Fannie Mae (FNM) and Freddie Mac (FRE) flawed, citing the dangerous mix of policy and market distortions it creates. Allowing Fannie and Freddie to return to their old operating ways is not an option, he said, and the government needs to start thinking about how to best help home owners and what a post-conservatorship Fannie/Freddie will look like. One option is to break up and privatize the two behemoths, though Paulson expressed skepticism at the viability of that plan. A second option is to replace Fannie and Freddie with one or two private sector entities that would buy and securitize mortgages with a credit guarantee backed by the government. (Read Paulson's speech)
  • MSFT tries to buy its way up. Microsoft (MSFT) beat out Google (GOOG) and Yahoo (YHOO) to provide Verizon Wireless (VZ) customers with mobile web services. Microsoft has one-seventh the internet search traffic of Google, and is paying to cement this deal and ones with Hewlett-Packard (HPQ) and Sun Microsystems (JAVA) to try and narrow the gap. Verizon (VZ) is set to surpass AT&T (T) as the No. 1 U.S. mobile carrier after it closes its purchase of smaller operator Alltel later this week.
  • Yahoo TV, coming soon. Yahoo (YHOO) announced a list of partners that will help with its push to bring the internet and television together. Yahoo said it has deals with companies including Samsung, LG Electronics, Sony (SNE) and Vizio, which will produce hi-def TVs that support Yahoo's online services. The new TVs will be on the market as early as this spring, and will allow users access to an array of web activities, as well as increasing viewer interactivity with the programs they're watching.
  • Profit warning at Time Warner... Time Warner (TWX) now expects a net loss for 2008 vs. its earlier earnings forecast of $1.04-$1.07 a share. It will also take a $25B impairment charge related to goodwill and identifiable intangible assets at its Cable, Publishing and AOL segments. Separately traded Time Warner Cable (TWC) expects to take a $15B impairment charge in Q4 on its cable franchise rights, and another $350M charge related to its investment in Clearwire.
  • ...and at Intel. Intel (INTC) cut its Q4 revenue outlook again, this time to $8.2B - a 20% drop from Q3 vs. an earlier forecast of a 12% decline and an even earlier guidance of a 3% gain. Q4 results are generally the strongest for the semiconductor industry, and Intel's warning is a sign of further weakness in the computer sector. The company sees sales down 23% Y/Y on weakness in end demand and inventory reductions by its customers in the global PC supply chain.
  • Germany getting crunched by credit shortage. Facing a worsening recession and the first rise in unemployment in nearly three years, Germany is considering an emergency fund to lend up to €100B ($135B) of state-backed loans to companies hurting from the credit crunch. Though far from a done deal, the fact that such a plan is even up for discussion shows how concerned the German government is about the availability of credit despite a €500B bank bailout in October.
  • Bad employment numbers, all around. Big companies announced 166,348 layoffs in December, a quarter of them in the financial sector, up 275% from a year ago, Challenger wrote in its monthly report. Still, the number fell 8.4% from November's mammoth 181,670. For the year, companies announced 1.2M cuts, 59% more than 2007. According to ADP, nonfarm employment fell by 693K from November to December, far worse than consensus of -493K. The service sector fell an estimated 473K in December. Manufacturing -120K, its 27th decline in 28 months. To cap it all off, Monster's Employment Index fell 12 points to 131 (down 22% from 169 in Dec. '07). Public administration jobs dipped below year-ago levels for the first time on record as government recruiting eased for the second consecutive month. The best news was that the Y/Y rate of decline didn't increase.
  • BoE rate cut. Bank of England slashed its benchmark rate today by half a percentage point to 1.5%. "The world economy appears to be undergoing an unusually sharp and synchronized downturn" and there's a "significant risk of undershooting the 2% CPI inflation target." The cut was in-line with consensus and brought BoE's benchmark rate to its lowest level since the bank was founded in 1694. Economists think February may bring another 50 basis-point cut as policymakers try to prevent the credit squeeze from deepening.
  • Mortgage apps drop. Mortgage applications fell 8.2% from a week ago, MBA reported, on a seasonally adjusted basis. The average interest rate on 30-year fixed-rate mortgages increased to 5.07% from 5.03%.

Earnings: Thursday Before Open

  • Shaw Group (SGR): FQ1 EPS of $0.75 beats by $0.09. Revenue of $1.9B (+11%) in-line. (PR)

Earnings: Wednesday After Close

  • Bed Bath & Beyond (BBBY): FQ3 EPS of $0.34 beats by $0.01. Revenue of $1.78B (-0.6%) in-line. Sees FQ4 EPS of $0.40-0.46 vs. $0.49. (PR)
  • Christopher & Banks (CBK): FQ3 EPS of -$0.04 beats by $0.05. Revenue of $143M (-7.9%) vs. $133M. (PR)

Today's Markets

  • Asia markets closed broadly down. Nikkei -3.9% to 8,876. Hang Seng -3.8% to 14,416. Shanghai -2.4% to 1,878. BSE closed.
  • In Europe at midday, London -0.9%. Paris -1.0%. Frankfurt -0.9%.
  • U.S. futures: Dow -0.2%. S&P unchanged. Nasdaq +0.2%. Crude +1.9% to $43.46. Gold +0.2% to $843.30.

Thursday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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