Friday, March 13, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Bye bye Bernie. Madoff pleaded guilty to 11 criminal charges yesterday, including securities fraud, money laundering and perjury, and was ordered to jail until his June 16 sentencing. Speaking publicly about his crime for the first time, he said "when I began my Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme... As the years went by, I realized that my arrest and this day would inevitably come... I am painfully aware that I have deeply hurt many, many people." Prosecutors had offered a plea deal but Madoff rejected it because it would have required him to admit to a conspiracy and provide the names of individuals who helped him run his $65B scam.
  • GE loses an "A." As anticipated, S&P downgraded General Electric (GE) and GE Capital to AA+ from the AAA rating it first earned in 1956. GE said it "does not anticipate any significant operational or funding impacts from this change... We are prepared to fund the Company as a Double-A, but we will continue to run GE with the disciplines of a Triple-A company." S&P said its outlook on GE is now 'stable,' suggesting there won't be additional downgrades in the foreseeable future, and investors responded positively, pushing shares to a 12.7% gain.
  • Berkshire rating gets a haircut. Fitch Ratings downgraded Berkshire Hathaway (BRK.A) to AA+ from AAA, citing concerns about Berkshire's equity and derivatives investments and Warren Buffett's tight grip on the company. Fitch said it "views the company's potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the 'AAA' level." However, Fitch added that no financial-oriented holding company should be rated AAA because of significant market volatility. Shares closed up 2.4%.
  • Lewis sees brighter BoA outlook. CEO Ken Lewis said Bank of America (BAC) turned a profit during the first two months of 2009 and expects to make money this year. According to Lewis, the bank doesn't expect to use more government capital and one of TARP's side benefits is that taxpayers "will most likely make a lot of money from it." Lewis also came out strongly against the idea of nationalization, calling the scenario a 'nightmare.' Shares +5.1% premarket (7:00 ET).
  • GM can finish month without aid. General Motors (GM) has enough cash to keep operating through the end of March and won't need the $2B of government capital it had asked for. GM did indicate that it will still need additional government aid, but said cost-cutting moves and spending deferrals in January and February were sufficient to see the automaker through this month without more U.S. funds.
  • Citi readies for new board. Citigroup (C) is reportedly preparing to announce boardroom changes early next week when it files its annual proxy statement with securities regulators. According to people familiar with the situation, Citigroup will nominate four financial experts, including two former bank chief executives, to be directors. The likely recruits include Jerry Grundhofer, former CEO of U.S. Bancorp; Michael O'Neill, former CEO of Bank of Hawaii Corp; and William S. Thompson, former co-head of bond-giant Pimco. Citigroup will likely also add at least one more director with a risk-management background. In the filing, Citigroup is also likely to disclose that current directors Kenneth Derr and Franklin Thomas will step down because they have reached the board's retirement age of 72.
  • Linking pay to performance. New York Attorney General Andrew Cuomo is working with Rep. Barney Frank and other lawmakers on a plan to tie Wall Street pay to the long-term performance of firms. The plan has the backing of Frank and other prominent Democrats, though legislation has not yet been introduced. Cuomo is looking into additional ways to stagger compensation payments over several years so if a business built on short-term risk blows up, firms will be able to claw back pay. Sources say Cuomo believes change is needed but doesn't intend to micromanage the private sector.
  • Tax havens yield to global pressure. Yielding to international pressure on tax havens, the European principalities of Andorra and Liechtenstein promised to relax their bank-secrecy laws. Officials from the U.K. and Germany said the announcement was good news but needs to be followed by 'concrete steps' because 'it is action that counts.' Since together Andorra and Liechtenstein account for just 1% of the $11.5T offshore banking industry, the real question will be whether major tax-haven centers like Switzerland choose to take similar steps.
  • Obama extends olive branch to business community. Obama spent more than an hour speaking to 65 CEOs from the Business Roundtable yesterday in his most aggressive outreach yet to the business community. Obama signalled his willingness to talk about lowering the 35% corporate tax rate and indicated he could compromise on his plan to cap carbon emissions so as not to stifle corporate innovation. (Read a live-blog of Obama's appearance)
  • IBM splashes into water venture. In an effort to continue branching out from traditional computer services, IBM (IBM) has a new business venture in which it will help manage water resources. Part of IBM's Big Green Innovations initiative, the new business will design and install systems of sensors and back-end software to monitor water pipes, reservoirs, rivers and harbors. "There's a lot of stress on water systems around the world," said Sharon Nunes, head of the Big Green venture. "With a limited supply, you'd better be able to manage it." Nunes estimates information technology for water management could become a $20B market.
  • Japan gets third stimulus. Japanese Prime Minister Taro Aso has ordered a third stimulus plan to help lift the economy from what could be its worst recession since WWII. Aso warned "there is a risk of further economic downturn. We must act before the risk becomes reality." Sources say the size of the package is expected to reach at least ¥20T ($204B).
  • China confident in growth target, worried about U.S. debt. Chinese Premier Wen Jiabao said China has 'adequate ammunition' to add to its 4T yuan ($585B) stimulus package at any time, and reaffirmed China’s target for 8% growth in 2009 as “difficult but possible.” He also expressed concern over the outlook for U.S. government debt that China holds, urging Washington to take the necessary steps to revive the U.S. economy.
  • Household wealth tumbles. U.S. households saw 18% of their net worth, or $11.2T, vaporized in 2008, wiping out four years of gains according to the Fed's quarterly Z.1 release. By year-end, households owned $9.9T in equities, less than the $11.3T they owned in 1998.
  • Retail sales dip. February retail sales -0.1% vs. -0.5% consensus. They're still -8.6% from a year ago. January revised to +1.8% from +1.0%. Gasoline sales -32.3% from last year. Motor vehicle and parts dealers sales -23.5% from last year.
  • More joblessness. Initial jobless claims rose to 654K from last week's 645K (revised), more than the 645K consensus. Continuing claims rose 124K to a record high of 5,139,750.
  • Inventories drop. Business inventories fell 1.1% in January (vs. -1.0% consensus) and are down 1.5% Y/Y, the Census Bureau reported. Combined sales fell 1.0% to $1.004T, and are down 14.0% Y/Y.

Earnings: Thursday After Close

  • Aeropostale (ARO): Q4 EPS of $ beats by $0.01. Revenue of $690M (+16.7%) vs. $682M. Same-store sales were up 6%. Sees Q1 EPS of $0.22-0.24 vs. $0.25. (PR)
  • Pacific Sunwear of California (PSUN): Q4 EPS of -$0.47 beats by $0.03. Revenue of $352M (-8.5%) vs. $345M. (PR)

Today's Markets

  • Asian stocks rode into the weekend on a high, led by Japan - a beneficiary of recent weakness in the yen. Nikkei +5.15% to 7,569. Hang Seng +4.37% to 12,526. Shanghai -0.24% to 2,129. BSE +4.95% to 8,757.
  • Europe shares are higher at midday, buoyed by Asia strength and after word from Citigroup (C) that it doesn't need any more government money. London +2.2%. Paris +2.4%. Frankfurt +1.7%.
  • Stock futures moved higher in the overnight session, sparking further speculation as to the validity of this week's rally. Dow +0.9% to 7,235. S&P +1.1% to 756. Nasdaq +0.9%.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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