Friday, January 16, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Dems showcase stimulus package. House Democrats unveiled an unprecedented $825B stimulus plan yesterday, divided into two-thirds spending and one-third tax cuts. Virtually everyone in the country would be affected by the package: 95% of workers would get a $500 tax cut or $1,000 cut for working couples; first-time home buyers between Jan. 1 and June 30 would get a $7,500 tax credit; local school districts would get $120B as local government budgets collapse; and states would get $87B for their Medicaid budgets. Among other sectors that would get stimulus money: food stamps, infrastructure, renewable energy, and state and local law enforcement. For all the targeted spending, however, there's still some pork attached to the bill, including funds to put fresh sod on the National Mall and millions of $40 coupons to help Americans adapt old their old TVs for digital signals.
  • Mixed responses on stimulus. Obama praised the House Democrats' stimulus package for its ability to help "make America strong and competitive in the 21st century." Republicans were less than thrilled, and House Republican leader John Boehner was appalled that "my Democratic colleagues think they can borrow and spend their way back to prosperity." Economists were largely mixed on the issue. Despite the unprecedented size of the proposed stimulus plan, some economists worry it's still not large enough. Others believe the package is large enough but disagree on how the money should be spent. Still others suggest the stimulus will be effective in supporting an eventual recovery, but not necessarily at halting the current decline, because most of the plan's measures won't come into effect until late 2009 and into 2010.
  • Obama escapes TARP trap. Obama won a key legislative test yesterday when the Senate voted to release the second half of TARP funds, voting 52-42 against a resolution that would have prevented access to the $350B. Obama acknowledged the 'frustration' felt over how the first half of TARP funds were used, and promised to set tougher restrictions on the money, including capping executive pay, requiring banks to lend more and ensuring transparency and accountability. He also pledged to spend $50B-$100B on a 'sweeping' foreclosure-prevention effort.
  • Tank of America. Bank of America (BAC) secured an extra $20B from the government, bringing the total to $45B, and $118B of its assets will be backstopped by the Treasury and FDIC. Most of the assets guaranteed by the government are from Merrill Lynch. In exchange, taxpayers will get $4B in preferred stock with a 8% yield and warrants, BoA will cut its dividend to $0.01, and the bank agreed to a mortgage modification program. Meanwhile, shareholders are livid that CEO Ken Lewis didn't know how bad things were with Merrill prior to their Sept. 15 merger deal, and didn't disclose the problems prior to their Dec. 5 vote on the deal, or before its Jan. 1 closing. (Read the official statement and term sheet (.pdf))
  • Citigroup to reorganize into two units after $8B loss. Citigroup (C) posted a Q4 net loss of $8.29B, compared with a prior-year loss of $9.83B. Revenue fell 13% to $5.6B (see more numbers below). Citigroup said it will reorganize into Citicorp and Citi Holdings: The former will focus on Citi's global universal bank in more than 100 countries, while the latter will be made up of brokerage and retail asset management, local consumer finance and a special asset pool - with its management focused on "tightly managing risks and losses." Citi said it will make the transition to two companies as quickly as possible, and is already looking for someone to head up Citi Holdings (Paulson?). Shares are up 15% premarket, but have shed 43% this month alone.
  • BofA swings to loss, exacerbated by Merrill. Bank of America (BAC) swung to a Q4 loss of $1.79B - its first in 17 years - compared with a profit of $268M a year ago. Revenue increased 19% to $15.98B (more numbers below). Credit-loss provisions nearly tripled to $8.54B. BofA disclosed a preliminary Q4 loss at Merrill Lynch of $15.31B, demonstrating why it was so desperate for more government assistance (see above). For the first time, BofA revealed how much credit it extended - $155B in Q4, with $49B for commercial non-real estate and $45B for mortgages - and said it's beefing up its mortgage operations to meet surging demand as lending rates fall to historic lows.
  • Chrysler Financial wants money too. With government money pouring out right and left, Chrysler is back in the news. The company's credit arm, Chrysler Financial, wants $1.5B from the bank bailout fund to increase loans to car buyers and help prop up dismal sales. Chrysler Financial has stepped up its appeals since GMAC (GKM), jointly owned by General Motors (GM) and Cerberus, became a bank holding company and received $6B in government aid. A spokeswoman said Chrysler Financial's application "is still pending, but we are optimistic we will receive the necessary support from the Treasury."
  • Cuomo gets in on Madoff inquiry. New York Attorney General Andrew Cuomo has opened an investigation into the Madoff scam and has issued subpoenas to determine if financier Ezra Merkin defrauded universities and charities when he invested their money with Madoff. Cuomo is seeking information from Merkin, three investment funds he operated and 15 non-profits that gave him money to manage. Cuomo's involvement is seen as a welcome development by many investors, as New York law gives the AG broad subpoena powers and has a very broad definition of fraud.
  • Freddie evictions during foreclosure halt. Freddie Mac (FRE) is moving forward with legal action to evict tenants from foreclosed properties, raising ire amongst tenants and legal groups who say the moves violate the spirit of the moratorium that Freddie agreed to in November. A spokesman for the mortgage lender said that Freddie has suspended sales of foreclosed properties and isn't locking people out of their homes, but is still pursuing existing court cases and initiating new ones against homeowners. Freddie is also still filing eviction proceedings against renters. The mixed messages of a simultaneously calling a halt to foreclosures while proceeding with some cases is creating 'immense fear, stress and instability' among homeowners and renters.
  • ECB rate cut. The ECB cut its key rate by 50 basis points to 2%, as expected. The next important ECB meeting will be in March, said Trichet, downplaying the chance of a February cut. Trichet said inflation could pick up after mid-year.
  • PPI falls. Producer Price Index -1.9% in December from a month ago, vs. consensus of -2%. Core PPI +0.2% vs. 0.1% consensus. Year-over-year Core PPI +4.3% vs. +4.1% consensus. Takeaway: producer prices fell less than expected, but not radically so.
  • NY survey near record lows. The Empire State Manufacturing survey showed NY manufacturing deteriorated in January. Business conditions, new orders and shipments stayed near record lows. Forward-looking indicators fell below zero for the first time in the survey's history.
  • Mixed report from Philly Fed. Philly Fed's Business Outlook ticked up to -24.3 from December's -36.1 and -35 consensus. New orders and shipments inched up, but unfilled orders and delivery times edged lower. Employment losses were substantial. In short, the report was better than expected, but hardly encouraging.
  • Jobless claims tick up. Initial Jobless Claims rose to 524,000 last week, up 54K from last week's 470K (revised), and worse than the 500K economists predicted. The 4-week moving average of 518,500 is down 8K. "If there's any silver lining, it's that while the employment situation is sluggish, nothing points to intensification," said strategist Craig Peckham.
  • Consumers see bleak present, hopeful future. RBC showed consumer sentiment at a six-year low, with its CASH index dropping to 13.3 from 15.3 in December. Despite the gloom, expectations ticked higher, suggesting "hope for the future under the new administration, although the outlook is clearly cautious." The RBC CASH poll (.pdf) asked "Would you say things in this country are heading in the right direction, or are they off on the wrong track?" 32% say right; 59% say wrong. But only 11% see the economy "much weaker" six months out.

Earnings: Friday Before Open

  • Bank of America (BAC): Q4 EPS of -$0.48 misses by $0.56. Revenue of $15.98B vs. $20.72B. Merrill Lynch Q4 net loss of $15.31B ($9.62/share). Shares +11.8%. (PR)
  • Citigroup (C): Q4 EPS of -$1.72 misses by $0.53. Revenue of $5.59B vs. $14.16B. Shares +7.3%. (PR)
  • First Horizon (FHN): Q4 EPS of -$0.27 beats by $0.07. Revenue of $543M (+2.8%) vs. $456M. (PR)
  • Johnson Controls (JCI): FQ1 EPS of -$0.14 misses by $0.15. Revenue of $7.34B (-22.6%) vs. $8.48B. Sees a FQ2 loss similar to that of FQ1, vs. consensus of $0.18. (PR)
  • Sony Ericsson (SNE, ERIC) swings to a Q4 loss of €187M from +€373M last year. Shipped 24.2M phones, down from 30.8M. Net sales of €2.91B, down from €3.77B. Sees continued deterioration in the marketplace in 2009, particularly in the first half. (PR)

Earnings: Thursday After Close

  • Genentech (DNA): Q4 EPS of $0.95 misses by $0.01. Revenue of $3.7B (+24.8%) vs. $3.66B. Sees 2009 EPS of $3.55-3.90 vs. $3.92. (PR)
  • Intel (INTC): Q4 EPS of $0.04 in-line. Revenue of $8.2B in-line. Gross margins 53.1%. Recent guidance was at the bottom of previous expectations of 55% plus or minus a couple points. Sees Q1 gross margins of low 40s vs. 51% consensus. Declines to give Q1 revenue guidance due to economic uncertainty and limited visibility.(PR)

Today's Markets

  • Strong gains in Asia Friday following Thursday's late-day U.S. comeback and more government rescue money. Nikkei +2.58% to 8,230. Hang Seng +0.09% to 13,256. Shanghai +1.78% to 1,954. BSE Sensex +3.06% to 9,324.
  • Stocks are starkly higher in Europe at midday. London +2.4%. Paris +3.6%. Frankfurt +2.7%.
  • U.S. futures post healthy gains in the overnight session. Dow +1.95% to 8324. S&P +2.1%. Nasdaq +1.95%. Crude +1.5% to $35.92. Gold +2.9% to $830.40.
  • Treasurys are struggling as markets digest the prospect of more U.S. government debt. 30-year -1.49%. 10-year -1.11%. 5-year -0.56%. 2-year -0.09%.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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