Wall Street Breakfast: Must-Know News

• Madoff madness continues. More details emerged on the Madoff affair, including trading discrepancies that offer clues as to how the broker may have run his scam, as a federal judge ordered the U.S. operations of Bernard L. Madoff Investment Securities LLC to be liquidated. Traders who have now begun to examine Madoff's investment strategy point to many red flags that should have been obvious to the banks and funds promoting Madoff, including the fact that Madoff's stated strategy was valid, but impossible to execute with the amount of money he was managing. Another red flag was Madoff's consistently steady gains each month; his purported options-trading strategy would have limited volatility but generally wouldn't have produced gains in a falling stock market. The SIPC has said it will try to return to investors as much as possible of the over $17B the firm reportedly held at the start of the year, but itself has just $1.6B currently on hand.
• New territory for the Fed. Markets are waiting for what could be a historic FOMC decision later today. The Fed may reduce interest rates to the lowest level on record and begin a bold, new experiment of using its balance sheet as the key tool for monetary policy. Economists predict the Fed will cut its benchmark rate in half to 0.5%, and may signal plans to channel credit to businesses and consumers by further enlarging its $2.26T of assets. Speculation on a Fed cut pushed yields on 10-year Treasury notes to their lowest levels in over 50 years, and pushed the dollar lower against the euro and the yen. The FOMC will announce its decision at 2:15 PM.
• Auto industry running on fumes. With automakers still in limbo and desperate for cash, key lawmakers said the White House could announce its automaker bailout by tomorrow, with conditions similar to those approved by the House of Representatives last week. Treasury officials have been reviewing financial information on the auto industry, but Paulson cautioned that to give out federal money, "we would have to assure ourselves that this was a step on the path to long-term viability."
• Treasury's TARP trap. With TARP funds now a potential source of cash for the auto bailout, and only $15B remaining of the initial installment, the administration may need the second half of TARP funds sooner rather than later. However, House Speaker Nancy Pelosi has suggested Congress will try to block Treasury access to the second half of TARP funds unless there is more done to help struggling homeowners. Lawmakers from both parties have been frustrated with the Treasury for spending bailout funds on cash infusions to banks that have not increased lending, instead of focusing on troubled mortgages and foreclosures.
• OPEC open to cuts. Steep cuts are expected from OPEC tomorrow, possibly as much as 2M barrels/day, as the organization tries to keep up with falling prices and falling demand. Non-members of the cartel, including Russia, Azerbaijan, Syria and Oman, will attend Wednesday's meeting and may participate in the production cuts. Oil is down 67% from its summer high, with crude prices for January delivery at $44.51. Some analysts believe crude could fall as low as $30/barrel or lower early next year.
• EDF shoots for the stars. Electricite de France is close to an agreement to buy Constellation Energy (CEG) for $4.5B, a deal that would edge out a previously agreed upon takeover bid by MidAmerican Energy (BRK.A). Sources say approval by Constellation's board could be announced as early as this week. EDF estimates terminating the agreement with MidAmerican would cut Constellation’s available cash and credit by $2.4B, and would allow MidAmerican to walk away with $593M in cash, a 9.9% stake in Constellation and $1B of senior notes paying 14% interest. Still, EDF said its offer, along with asset sales planned by Constellation, would provide the company with sufficient cash and credit to operate.
• Industrial production declines. Industrial production fell 0.6% in November (vs. -0.8% consensus) with declines widespread across industries. Total industrial production is 5.5% lower than a year ago; capacity utilization of 75.4% is 5.6% below its normal average. With companies cutting back on investment, capital, inventories and production, industrial production is expected to continue its drop, said FTN's Lindsey Piegza. "The crisis has spread to all parts of the production line and we’re really going to have to cut back more."
• Builder confidence slips away. NAHB's homebuilder confidence gauge comes in at an anemic 9, just below consensus. Anything below 50 indicates a majority of negative responses. "The crisis continues," NAHB's Sandy Dunn said of yesterday's record low in builder confidence. "Buyers are afraid to move forward, and in any case there is almost no way to compete with the cut-rate product that is continually flooding the market from mounting foreclosures."
• Treasury international capital. Net foreign purchases of long-term securities were $1.5B, well short of the $40B consensus. Foreigners sold $34.8B of U.S. securities, while U.S. residents sold $36.3B of foreign securities.

Earnings: Tuesday Before Open

• Cemex (CX): Sees Q4 revenue of $4.45B (-23%) vs. $5B consensus. Says it's making progress in restructuring $6B in debt due by the end of next year. Shares -2.6% in Mexico City. (PR)
• FactSet Research Systems (FDS): FQ1 EPS of $0.70 beats by $0.07. Revenue of $155.6M (+16%) vs. $155.0M. (PR)

Today's Markets

• Asia markets closed slightly up. Nikkei -1.1% to 8,568. Hang Seng +0.55% to 15,130. Shanghai +0.5% to 1,975. BSE +1.5% to 9,977.
• In Europe at midday, London +0.3%. Paris +0.7%. Frankfurt +1.2%.
• U.S. futures: Dow +0.1%. S&P +0.4%. Nasdaq +0.4%. Crude +2.0% to $45.42. Gold -0.4% to $832.90.

Tuesday's Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:30 Consumer Price Index
  8:30 Housing Starts
  8:55 Redbook Chain Store Sales
  2:15 PM FOMC Decision
  5:00 PM ABC Consumer Confidence Index
• Notable earnings before Tuesday's open: BBY, FDS, GS
• Notable earnings after Tuesday's close: ADBE, HOV, PAY

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[NOWHEREMAN:]

TARP funds will be used to prop up, GS and MS. Having been exhausted, Pelosi will either cough up or have Auto's on Dem's conscience. Will passage of Latin American Free Trade be part of it?

My favorite Illinois son has done nothing compared to what is going on in Congress currently.

2008 Dec 16 07:44 AM

[Jersey:]

Between Blago, a state Governor and Madoff, the former chair of Nasdaq, I really don't know what or who to believe now,I don't even want to imagine who or what is next. This is totally inexcusable.

2008 Dec 16 08:34 AM

[eddie6442:]

If I were Senator Corker, I would seriously consider ending wasting my time and energy in government. Trying to save peoiple from themselves is fruitless and filled with aggravations nobody needs.
When America gets a real leader who gets things done, he/she is attacked as the problem. Americans don't deserve honest, results oriented leaders, as they show what they do to them...........

America.........the country of the ENTITLED, UNDER-EDUCATED, DISHONEST, IMMORAL, POLARIZED, and FINANCIALLY STRAPPED.........
What a wonderful future we have created for future generations??????
PATHETIC!!!!!!!

2008 Dec 16 08:40 AM

[axelrod608:]

All the above comments about losses due to greed and avarice are expectable in an economy awash in far too much easy, cheap money. When will it dawn on our "leaders" that reinflating the credit bubble with more easy, cheap money is not only not the solution, it will intensify the problem.

When money is scarce, people invest carefully and safeguard it. And it gets a reasonable return. When it is plentiful, people look for nnovative new ways to put it to work, like derivatives, CDO's etc. because it gets NO return in safe investments - savings, money market, etc.

And QUIT propping up Goldman and the other insolvent megabanks with federal money !!!!!

Until and unless money gets down to local and regional banks that keep American businesses running, the economy will continue swirling in the bowl...

2008 Dec 16 09:25 AM

[JasonR:]

Probably a few years into the Second Great Depression...


On Dec 16 09:25 AM axelrod608 wrote:

> When will it dawn on our "leaders" that reinflating the credit bubble
> with more easy, cheap money is not only not the solution, it will
> intensify the problem.

2008 Dec 16 10:49 AM

[bbowen7:]

Hope comes not from the wisdom or purse of government, but from the strength and depth of the American people. The first Great Depression was worsened by a haymaker from the right; the Second will be worsened by a haymaker from the left. But, the people will absorb the blows and continue to work and produce - so long as they are not crushed by taxation and inflation.

2008 Dec 16 12:40 PM

[NOWHEREMAN:]

Citigroup lent Dubai $8 Billion yesterday because they have had problems related to low oil prices.

Thats our money going to the people who want to cut production to prop up our costs.

TARP money, our money.

2008 Dec 16 02:00 PM

[PainfullyAware:]

The Money Men Silliness Continues.

Down With Clowns !!!

2008 Dec 17 01:04 AM

[NOWHEREMAN:]

The Clowns are still in control. Unfortunately/Fortunat... they are still fighting with each other.

Those "shoes" that were thrown at Bush have a bid of $10 million so far in the Arab community, so far. Who knows what the price would be if one had actually hit him.

Illinois Lt. Gov. wants to appoint Senate successor, the rest of the State is telling him to go to hell.

Helicopter Ben has finally arrived.

New Clowns, old clowns. They don't bother with what we say.

2008 Dec 17 06:54 AM