Monday, January 12, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Smith Barney on the sales block. Citigroup (C) is in advanced talks to sell a controlling stake in its brokerage to Morgan Stanley (MS). The deal could provide Citi with a much-needed post-tax gain of $5B-$6B, though some decry Citi's choice of "selling out the future to get through the crisis of the present." Citi CEO Vikram Pandit had pledged not to sell the brokerage unit, Smith Barney, which has played a critical role in the company over the last decade. Paying $2B-$3B for a 51% stake (with an option to increase that stake in the future), Morgan Stanley would combine Smith Barney with its own brokerage unit in a $20B joint venture. The new firm would have around 22,000 brokers, creating the world's largest retail brokerage. A deal could be announced as early as this week.
  • Satyam rallies on hope. The Indian government replaced Satyam's (SAY) board and appointed three new directors. The computer company will have to restate its earnings and might be broken up into pieces after chairman Ramalinga Raju announced that over $1B on the company's balance sheet was fictitious. Raju and his younger brother Rama have been detained on charges including forgery, breach of trust and criminal conspiracy. Despite all the bad news, shares climbed 45% in India on hopes the government will craft some sort of rescue, or that the new board will come up with a workable plan.
  • Obama tries to navigate TARP trap. Members of Obama's administration are negotiating with lawmakers to avoid a messy fight over access to the second half of TARP funds. Obama has been considering whether President Bush should request permission to use the funds, with the goal of having the funds in place soon after Obama takes office on January 20. To address lawmakers' concerns, Obama's team has suggested using the funds for new purposes, including preventing foreclosures, and placing tougher conditions on recipients. If dissatisfied, Congress can deny the release of the funds, leaving Obama in a tricky political position.
  • Trying to ford the auto sales gap. Despite previous assurances to the contrary, Ford (F) may have to fall back on federal loans as a weakening economy threatens to drag domestic sales lower than the company expected. Ford had forecast 12.2M U.S. light vehicle sales this year, nearly 2M more than the annualized sales rate of the last three months. (In comparison, Chrysler expects sales may reach 11M units and General Motors (GM) forecasts a range of 10M-11M.) Ford told Congress last month that 2009 sales of 10M-10.5M units would trigger the need for up to $13B in loans. Analysts agree domestic sales will fall this year, with several estimates for 2009 sales in the 10M-11M range.
  • GM may ask for more money. Last week, General Motors (GM) said it had received enough money from the government to make it through a worst-case scenario and wouldn't need additional funds unless the economy worsens. It looks like GM has seen the economy sour in just the last few days, since CEO Rick Wagoner is now telling reporters the company may seek additional government loans beyond the $13.4B it has already been pledged. "The $13.4B is consistent with what we asked for through the first quarter under our downside market scenario, which is the way the market is running," said Wagoner, but in March, "we will obviously review the whole plan and at that point we'll see what requirements are."
  • China relaxes bad debt regulations. The China Banking Regulatory Commission will allow bad debt to increase this year as it softens the rules of bank lending to revive the Chinese economy. After five years of declines, the Commission will drop its target of reducing the balance and ratio of bad loans. The looser requirements may help lending, but also raise concerns about a surge in bad loans just four years after China spent over $500B cleaning up its banking system.
  • U.K. wants to stem bankruptcies. The U.K. is in the early stages of considering a plan that would set up a fund aimed at preventing corporate defaults. Sources say officials are looking at different structures for the plan, including one where struggling companies would give the fund equity in return for the fund assuming debt owed to banks. The goal is to prevent further bankruptcies and job losses as the U.K. economy continues to weaken. Several other efforts to bolster the economy are also under consideration.
  • Payrolls drop. The government released data on Nonfarm Payrolls on Friday, showing a fall of 524,000 in December, in line with the 525,000 drop economists expected. Unemployment jumped to 7.2% from 6.7%, vs. 7% consensus - its highest level since January 1993. October and November were revised, with another 150K jobs lost. "This will be a big hit to consumer spending and confidence," says one economist. "It suggests a very long, challenging recession."

Today's Markets

  • Asia markets closed in the red. Hang Seng -2.8% to 13,971. Shanghai -0.2% to 1,900. BSE -3.15% to 9,110. Kospi -2.05% to 1,157. Nikkei closed.
  • In Europe at midday, London -0.6%. Paris -0.3%. Frankfurt -0.3%.
  • U.S. futures: Dow -0.1%. S&P -0.2%. Nasdaq +0.1%. Crude -4.75% to $38.90. Gold -1.1% to $845.90.

Monday's Economic Calendar

  • 12:40 PM Fed's Lockhart speaks on the U.S. economic outlook
  • Notable earnings before Monday's open: SCHW
  • Notable earnings after Monday's close: AA

Seeking Alpha editor Eli Hoffmann contributed to this post.

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