Tuesday, June 16, 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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  • Ramp up to financial reform. Details continue to emerge on Obama's financial reform plan, due to be released tomorrow. Among other changes, the plan will urge stronger consumer and investor protections, more power for the Federal Reserve, larger bank capital cushions and more robust lending standards. It will also call for the originator of a securitization to retain a financial interest in its performance. Still unknown is how the plan will approach executive pay and streamlined bank supervision. (Read the WaPo op-ed by Geithner and Summers)
  • Crunch time for California. Democrats and Republicans in California's legislature are gearing up for battle as they try to close a $24B deficit that could leave the state unable to pay its bills next month. Democrats are calling for higher taxes and fees while Republicans are pushing for $16B in program cuts. Top state officials approached the White House for emergency aid but were rebuffed; the Obama administration is concerned a California bailout would set off a wave of requests from other states.
  • So long, Saab. General Motors reached a deal to sell its Saab unit to Swedish luxury carmaker Koenigsegg. Compensation details haven't been released yet, but the deal is tied to a $600M loan backed by the Swedish government.
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  • Cash for clunkers. The House of Representatives votes today on a 'cash-for-clunkers' bill that would let consumers collect up to $4,500 on car trade-ins. The $1B subsidy, which will likely be approved, is meant to encourage Americans to switch their old cars for new, more fuel-efficient models, and automakers have thrown their full support behind the measure as a way to get consumers into showrooms.
  • Raising the stakes on Data Domain bids. Data Domain (DDUP) recommended shareholders reject EMC's (EMC) unsolicited all-cash $1.9B bid, pointing to a binding agreement with NetApp (NTAP) and the uncertainty of an EMC acquisition. It's unlikely that EMC will be deterred, and a bidding war between EMC and NetApp is likely.
  • Extended Stay in bankruptcy. In one of the current recession's largest real-estate bankruptcies, Extended Stay Hotels filed for Chapter 11 protection yesterday. The hotel chain, with over 680 properties in 44 states, ended last year with $7.1B in assets and $7.6B in debt. The top holders of secured debt are Wachovia (WFC) and Bank of America (BAC).
  • Glaxo is Reddy for emerging mkts. GlaxoSmithKline (GSK) teamed up with Indian drug maker Dr. Reddy's Laboratories (RDY) to focus on emerging markets, excluding India. Under the agreement, products will be manufactured by Dr. Reddy's and licensed and supplied by Glaxo in countries in Africa, the Middle East, Asia Pacific and Latin America. For Glaxo, this is just the latest in a series of moves designed to expand the company's emerging markets presence. GSK +2.5% premarket (7:00 ET).
  • ECB sees more writedowns. In its Financial Stability Review, the European Central Bank said it expects eurozone banks will need to write down another $283B by the end of next year, with total crisis-related losses for the region at $649B vs. an IMF forecast of $904B. Risks to eurozone financial stability 'remain high' despite some signs of stabilization in the economy.
  • Credit card defaults soar. Credit card defaults reached a record high in May as consumers remained under severe stress. In particular, Bank of America (BAC) experienced a steep deterioration in its lending portfolio, with its default rate jumping to 12.5% from April's 10.47%. Delinquency rates fell across the industry, but analysts said the drop was because of a seasonal trend and the numbers will likely rise again in the coming months.
  • IMF raises U.S. outlook. The IMF issued a new outlook for U.S. economic growth, forecasting a 2.5% contraction this year and a 0.75% expansion in 2010. It's not exactly the makings of a robust recovery, but beats earlier forecasts of -2.8% growth in 2009 followed by a stall in 2010. Unemployment is expected to peak at around 10% next year. (Read the IMF report)
  • BoJ cautious on outlook (.pdf). Bank of Japan kept its overnight lending rate at 0.1%, and indicated it's unlikely to wind down extraordinary policy steps anytime soon because there's no guarantee the economy's revival will be sustained. Despite the caution, the bank noted that Japan's recession is easing as exports and factory output improve.
  • NY manufacturing declines. The New York Fed's Empire State Manufacturing index fell to -9.4, a five-point drop vs. consensus of -2, as conditions deteriorated at a moderately faster pace than in May. Technology and capital spending indexes were positive for the first time since October. Future indexes continued to rise.
  • Treasury International Capital. Net foreign purchases of long-term securities were $11.2B in April, well short of $60B consensus and a fraction of last month's $55.4B (revised). Private investors were net buyers of $18.3B, and foreign institutions bought another $16B, while U.S. investors took in $23B of long-term foreign securities.
  • Housing index dips down. NAHB/Wells Fargo's Housing Market Index dropped 1 point to 15, the first decline since January, vs. consensus of 17. The index indicates about one in six homebuilders think the market is "good." Headwinds include "the expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans."

Earnings: Tuesday Before Open

  • Smithfield Foods (SFD): FQ4 EPS of -$0.55 beats by $0.05. Revenue of $2.85B (-0.6%) vs. $3.1B. (PR)

Today's Markets

Asia markets slipped Tuesday after yesterday's U.S. selloff, but Europe stocks are carrying modest gains. Futures are slightly higher in light overnight trading.

  • Asia: Nikkei -2.86% to 9,753. Hang Seng -1.8% to 18,165. Shanghai -0.48% to 2,776. BSE Sensex +0.55% to 14,958.
  • Europe at midday: London +0.5%. Paris +0.4%. Frankfurt +0.3%.
  • Futures: Dow +0.1% at 8529. S&P +0.1% to 916. Nasdaq +0.2%.
    30-year Tsy +0.08%. 10-year -0.15%. 5-year -0.14%. 2-year -0.05%.
    Euro +0.7% vs. dollar. Yen +1%. Pound +0.9%.
    Crude +1.7% to $71.80. Gold +0.8% to $935.

Tuesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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