Wednesday, April 8, 2009

Wall Street Breakfast: Must-Know News

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Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

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  • TARP watchdog: fire execs, liquidate banks. As expected, the congressional panel overseeing TARP released a report suggesting the best course of action may be to fire top executives and liquidate problem banks. The report also said the Treasury may be taking too optimistic a view of the economic downturn and the value of toxic assets, and that the program's success has been 'mixed.' Panel chair Elizabeth Warren commented "things may be getting a little better" under Geithner, but "we still have a long way to go, a very long way." The conclusions were not unanimous, and at least three members of the oversight panel disagreed with some of the findings.
  • Life insurers get gov't aid. After months of indecision, sources say the Treasury has decided to extend bailout funds to several struggling life insurers. Only insurers who own federally chartered banks will qualify for the program. The Treasury says it has around $130B of TARP funds remaining, though how much will be available to insurers is still unclear. Among life insurers that have applied for government aid are Hartford Financial (HIG), Lincoln National (LNC) and Prudential Financial (PRU). An announcement of the decision could come in the next several days.
  • Stress tests under wraps. The Treasury is reportedly planning to keep the results of any completed bank stress tests private until after the Q1 earnings season so as not to complicate stock market reactions. In addition to the timing of the releases, the Treasury is still debating how much information to make public and may ultimately disclose the tests in summarized results that are not institution-specific. Banks are at liberty to release their own results, but officials hope the banks will hold off until the end of April.

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  • AIG unit asks for credit line. AIG's (AIG) aircraft leasing unit is in talks to take a $5B credit line from the Federal Reserve to facilitate the sale of the unit. The unit, which is profitable and is a top customer to both Boeing (BA) and Airbus, is in advanced talks with three private equity groups but needs additional liquidity because AIG's collapse has closed off access to many traditional sources of funding. If the Fed proceeds with the unusual move, it will effectively raise the government's stake in the stricken insurer, though the exact details remain sketchy.
  • Job cuts at RBS. Royal Bank of Scotland (RBS) might cut as many as 9,000 jobs worldwide as it tries to reduce costs and repay government funds. The job cuts would be in addition to the 2,700 already announced in the U.K. for this year. CEO Stephen Hester said "we have set a new strategy for RBS to restore the bank to stand-alone strength as soon as practicable... To do so, we need to cut our costs, as in all businesses given the current recession."
  • Pfizer outlines R&D. Pfizer (PFE) will break its research and development into two separate organizations, one for traditional chemical pills and the other for biologic drugs made from living cells. The move is part of its efforts to quickly integrate Wyeth (WYE) and move ahead with drug development. The chemical unit will be led by Pfizer's current R&D chief Martin Mackay, while Wyeth's R&D leader Mikael Dolsten will oversee the biologics. Pfizer will also retain Wyeth's head of vaccines, Emilio Emini, and Wyeth's head of discovery, Menelas Pangalos.
  • Alcoa miss spurs cost cutting. Alcoa (AA) posted its second consecutive quarterly loss yesterday (see details below) for the first time in 15 years. In response to the earnings miss, the company aims to save $400M annually by reducing its payroll and other cost-cutting measures, and is banking on productivity gains and China's economic stimulus plan to help prop up 2009 results. Even with cost reductions, Alcoa may face another loss in Q2.
  • Possible Lewis successors. Bank of America (BAC) CEO Ken Lewis has managed to hold on to his job thus far, but has signaled he could leave the bank as soon as the current crisis is over and at most within three years. Gaining ground as a possible replacement for Lewis is Brian Moynihan, the lawyer put in charge of Merrill Lynch after John Thain was ousted. Though Moynihan has clashed with some top Merrill executives, he has emerged as a key right-hand man to Lewis. Other top execs under consideration include mortgage head Barbara Desoer and CFO Joe Price.
  • Quotables. Calling for reforms to Wall Street pay and regulation, Goldman Sachs (GS) CEO Lloyd Blankfein said "we have to recognize a higher responsibility... to act like an owner responsible for the integrity of the system." Compensation practices "look self-serving and greedy in hindsight."
  • Biogen buyout rumors. Shares of Biogen Idec (BIIB) gained 4.9% yesterday afternoon amid speculation the biotech firm might be a takeover target. Traders in Europe reported rumors that Sanofi-Aventis (SNY) could bid at least $75/share for Biogen, a marked premium on Wednesday's close of $52.09. Biogen declined to comment.
  • Britain's economy shrinks, again. U.K. GDP fell 1.5% in Q1, adding to a 1.6% decline in Q4, Niesr said today. At this stage the deterioration looks very similar to that of 1979 - which could mean a recovery to 2008 levels is at least three years away. Meanwhile, consumer confidence fell to a four-year low, according to a separate report. (read Niesr's GDP forecast and Nationwide's consumer confidence report (.pdf))
  • Retail sales rise. Chain-store sales rose 0.6% over the week, but were down 0.3% vs. the same week a year ago, according to ICSC's survey. According to Redbook, sales were up 0.5% over the past five weeks vs. a month ago, and down 0.8% vs. March 2008. The bottom line is that sales are showing some improvement, but are still contracting on a year over year basis.
  • Consumer credit drops. Consumer Credit fell $7.5B (-3.5%) in February vs. consensus of -$3B. Revolving credit took the biggest hit at -9.75%. It's not hard to see how this can impact spending...

Earnings: Wednesday Before Open

  • Family Dollar Stores (FDO): FQ2 EPS of $0.60 in-line. Revenue of $1.99B (+8.7%) in-line. Sees FQ3 EPS of $0.54-0.58 vs. $0.50. (PR)

Earnings: Tuesday After Close

  • Alcoa (AA): FQ1 EPS of -$0.59 misses by $0.02. Revenue of $4.15B (-40.7%) vs. $4.08B. The sharp drop in revenue resulted from the impact of the economic downturn on Alcoa's end markets - automotive, transportation, building and construction and aerospace, which saw metal prices down 26% Q/Q and 60% since last summer. Says stimulus spending should improve prospects. (PR)
  • Bed Bath & Beyond (BBBY): FQ4 EPS of $0.55 beats by $0.11. Revenue of $1.92B (-0.5%) in-line. (PR)
  • Mosaic Co. (MOS): FQ3 EPS of $0.18 misses by $0.06. Revenue of $1.38B (-35.9%) vs. $1.89B. Sees FQ4 stronger than Q3, but weaker than recent past. Also notes potash customers continue to be cautious. (PR)

Today's Markets

Overseas markets moved lower Wednesday, as two straight days of U.S. losses gave bulls the chills. But futures have moved off overnight lows over the past couple hours.

  • Asia: Nikkei -2.69% to 8,595. Hang Seng -3.04% to 14,475. Shanghai -3.76% to 2,347. BSE +1.97% to 10,742.
  • Europe at midday: London -0.5%. Paris -0.2%. Frankfurt -0.1%.
  • Futures: Dow -0.5% to 7721. S&P -0.4% to 811. Nasdaq -0.1%. Crude -2.7% to $47.84. Gold +0.7% to $889.

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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