Friday, March 20, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Aid for auto suppliers. The Treasury announced the Supplier Support Program for auto suppliers. Suppliers will get a government guarantee that money owed to them for products shipped will be paid "no matter what happens to the recipient car company." The program will make $5B in financing available and will be facilitated through U.S. auto firms that choose to participate. Suppliers will have to pay a small fee to join the program. General Motors (GM) welcomed the move, as did Chrysler, which called the program a 'vote of confidence' for the industry and 'the future of our company.' Ford (F) said it will not participate and has no problem paying its suppliers. (Read the Treasury's press release and fact sheet (.pdf))
  • TALF debut. The Federal Reserve launched its Term Asset-Backed Securities Loan Facility and received requests for $4.7B of financing. According to the New York Federal Reserve, investors asked for $1.9B in loans to buy securities backed by auto loans and $2.8B for debt connected to credit card loans. Officials hope that figure will ultimately reach as high as $1T, as they're counting on TALF to unfreeze credit and help bring an end to the recession. Fed and Treasury officials are expanding the program to include leases of business equipment and other types of loans.
  • Citi considers reverse split. Citigroup (C) may conduct a reverse stock split as part of an exchange offer that could give taxpayers a 36% stake in the bank. The reverse split could take place June 30, 2010 and seven possible exchange ratios were proposed, ranging from 1-for-2 to 1-for-30. The move could help boost Citigroup's stock above $5, making it easier for institutional investors to buy the stock. Separately, Citigroup officials defended the bank's decision to spend $10M on new offices for CEO Vikram Pandit and other executives, saying the plan will save $20M, "an amount well in excess of the project costs."
  • GE assures jittery investors. General Electric (GE) said its finance unit won't need a capital injection even if unemployment hits 10% and 2009 GDP falls by more than 3%. Its ratio of tangible common equity to tangible assets of 6% "reflects a very strong capital base." Though GE lowered its profit outlook for GE Capital, it expects the unit to be profitable in the first quarter and the worst-case scenario would be a break-even result for the year. The comments were part of a five-hour briefing in which GE executives tried to calm investor fears, but the cost of protecting GE Capital's senior debt against a default remained in distressed territory with the annual cost to protect $10M at $850,000 up-front plus $500,000 per year. (Read GE's investor presentation (.pdf))
  • FTC cracks down on mortgage-lending abuse. Jon Leibowitz, Chairman of the Federal Trade Commission, will use new authority to "step up our vigilance on predatory practices in the financial services area," specifically in mortgage lending. A $410B spending package approved by Congress this month enables the FTC to ban abusive practices such as deceptive advertising and servicing procedures. Leibowitz also promised more aggressive enforcement of antitrust laws.
  • AIG sues Countrywide. An AIG (AIG) unit has filed a lawsuit against Countrywide Financial Corp. (BAC), alleging the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The complaint claims most of the mortgages at issue were either underwritten in violation of Countrywide’s own guidelines or contained defects. The AIG unit, United Guaranty Mortgage Indemnity Co., said it has already paid out over $30M in insurance claims and is exposed to claims of several hundred million dollars more as a result of unprecedented mortgage defaults.
  • House okays bonus tax. The House of Representatives overwhelmingly approved a bill to levy a 90% tax on bonuses at AIG (AIG) and other firms receiving federal bailouts. The measure passed 328-93 and now heads to the Senate, where lawmakers have suggested a 70% tax paid half by employees and half by the companies. Nineteen states have begun an investigation into AIG's bonus payments.
  • BoA linked to Merrill writedowns. The Financial Times reported that Bank of America (BAC) was directly involved with markdowns that contributed to Merrill Lynch's $15.3B Q4 loss. According to people familiar with the matter, Bank of America sent Neil Cotty, its chief accounting officer, to work with Merrill's financial team during Q4. Cotty played an active role in preparing accounts and gave his blessing for a $1B writedown of credit-default swaps. Cotty issued a statement that "while BofA had access to Merrill’s financial information in the fourth quarter and had input into many accounting policy and valuation issues, Merrill management was responsible for these decisions regarding the marks and other valuations."
  • TARP recipients owe taxes. Rep. John Lewis is livid about bailout recipients who owe the government more than $220M in unpaid back taxes, including more than half of the top 23 TARP recipients. Though he declined to name the firms, Lewis said the firms signed statements at the time of receiving federal aid stating that they owed no federal taxes. "It is a disgrace," Lewis said at a hearing to examine TARP. "The American people are fed up... and they're not going to take it anymore."
  • Palm misses on weak demand. Palm (PALM) reported a larger-than-expected quarterly loss and a revenue drop of over 70% (see details below) as the recession hurt sales and consumers held out for the launch of Palm Pre. CEO Ed Colligan acknowledged "Palm is proceeding through a challenging transitional period." The Pre, an iPhone-like touch device, will be released in the first half of the year but a specific launch date hasn't been set.
  • Jobless roll grows. Initial Jobless Claims came in at 646K vs. consensus of 655K. Last week's numbers were revised to 658K from 654K. Continuing claims rose 185K to 5,473,000 - a new record. "There is no sign of even a temporary easing in the downward pressure on employment," said one economist.
  • Leading indicators lag. Conference Board's Leading Indicators fell 0.4% in February, slightly better than the -0.6% economists expected. There has been widespread deterioration in its components, but "its rate of decline has moderated slightly in recent months."
  • Philly Fed weakness. The Philadelphia Fed's Business Outlook Index edged up to -35.0 from February's -41.3, better than consensus for -38.0. The index has been negative for 15 of the past 16 months, and all broad indicators show continued weakness.

Earnings: Thursday After Close

  • Blockbuster (BBI): Q4 EPS of $0.40 beats by $0.15. Revenue of $1.38B (-12.1%) vs. $1.52B. Plans to cut costs by at least $200M in 2009. (PR)
  • 3Com (COMS): FQ3 EPS of $0.13 beats by $0.03. Revenue of $325M (-3.5%) vs. $332M.(PR)
  • Palm (PALM): Q3 EPS of -$0.86 misses by $0.27. Revenue of $90.6M vs. $104.95M consensus. (PR)

Today's Markets

  • Asia markets were mostly lower. Hong Kong stocks fared the worst, as analyst downgrades dominated after a string of earnings misses. Nikkei -0.33% to 7,946. Hang Seng -2.26% to 12,834. Shanghai +0.68% to 2,281. BSE -0.39% to 8,967.
  • Europe stocks opened lower, moved back to breakeven, but are back in the red at midday. London -0.9%. Paris -1%. Frankfurt -0.6%.
  • U.S. futures spent the overnight session in negative territory. Dow -0.6% to 7310. S&P -0.5% to 776. Nasdaq -0.2%. Crude -1.4% to $51.34. Gold -0.5% to $954. 10-year Tsy +0.28% to 124-28.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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