Wall Street Breakfast: Must-Know News

• Morgan Stanley Smith Barney. Citigroup (C) and Morgan Stanley (MS) confirmed they're merging their wealth management units into Morgan Stanley Smith Barney. Morgan will pay $2.7B for a 51% stake with the option of taking full control after five years. Citi will book a pre-tax gain of $9.5B, and an after-tax gain of $5.8B. The joint venture will employ 20,390 brokers in over 1,000 firms, surpassing the 16,000-strong 'thundering herd' of brokers that Bank of America (BAC) acquired in Merrill Lynch. However, some question the timing of the deal, wondering if creating the largest group of financial advisers is prudent when many investors and brokers are shying away from Wall Street giants and analysts expect a resurgence of 'boutique' brokerage firms.
• Citi keeps shrinking. Citigroup's (C) deal with Morgan Stanley (MS) is just one part of its radical restructuring operation. Abandoning the much-touted 'financial supermarket,' sources say Citi is preparing to break the mega-bank into investment and commercial units, essentially dismantling the 1998 merger between Citicorp and Travelers that created Citigroup. It will jettison several business units and scale down its proprietary trading, shrinking itself by about a third and focusing on large corporations and wealthy individuals instead of less-affluent customers. Sources say the changes will be unveiled when Citi released Q4 earnings next week. Citigroup declined to comment.
• Bernanke backs new efforts for toxic assets. In a speech at the London School of Economics yesterday, the Fed's Bernanke threw his support behind a big U.S. stimulus plan, saying "a substantial fiscal package... could provide a significant boost to economic activity." However, he also said that Obama's plan is 'unlikely' to revive growth on its own without 'a comprehensive plan to stabilize the financial system and restore normal flows of credit.' To that end, he raised three options for Obama's Treasury in the event that it actually decides to address troubled assets with TARP money: 1) public purchases of troubled assets, as previously proposed by Paulson, 2) government provision of asset guarantees in return for warrants, or 3) creating and capitalizing 'bad banks' that would purchase assets from financial institutions in exchange for cash and equity in them. (Read the full text of Bernanke's speech)
• HSBC at risk. Shares of HSBC (HBC) fell 7.3% in London after analysts at Morgan Stanley said Europe's largest bank may be forced to raise up to $30B and cut its dividend in half. Unlike most rivals, HSBC has not had to raise capital during the financial crisis, but the analysts warned its capital position has eroded: "Historically, HSBC has carried about 120 basis points of surplus capital at the group level - this has now all but gone at a time when we think it better for the buffer to have increased," they said, adding it now has "one of the weaker capital ratios in Europe and the second weakest in Asia."
• Yahoo turns to Bartz for rescue. Yahoo (YHOO) named Carol Bartz its new CEO, as expected, and announced that President Sue Decker is resigning. Talking up Bartz, chairman Roy Bostock said "she is the exact combination of seasoned technology executive and savvy leader that the board was looking for." Not everyone agrees. Bartz's appointment is largely viewed by Wall Street as safe but unspectacular, and some worry about her lack of professional experience with internet companies and online advertising. Known as a tough-talking straight-shooter, Bartz will be under immediate pressure from investors who have watched Yahoo's share price erode over the last year. Bartz was previously executive chairwoman of Autodesk (ADSK) and had served as its CEO for 14 years.
• Deutsche's major Q4 loss. Deutsche Bank (DB) warned of a loss of roughly €4.8B ($6.4B) in Q4 vs. profits of around €1B a year earlier. Germany's biggest bank, Deutsche lost around $1B on bad bets involving CDS-hedged bonds, and another $500M trading equities. CEO Josef Ackermann released a statement Deutsche Bank has "scaled back or exited trading strategies most affected by market turbulence." The bank cited 'exceptional market conditions' for its poor performance, notably in credit trading, equity derivatives and equities proprietary trading. Its official Q4 FY '08 earnings report is due Feb. 5. Shares -11% premarket (7:00 ET).
• Quotables. "I’ve never quite been in this situation before of getting a massive pay cut, no bonus, no longer allowed to stay in decent hotels, no corporate airplane," complained Bob Lutz, General Motor’s (GM) Vice Chairman. "I have to stand in line at the Northwest counter. I’ve never quite experienced this before." Poor guy.
• Barclays lays off workers, again. Barclays (BCS) is cutting around 2,100 jobs globally in its investment banking and money management units. The bank had built these units aggressively over the last five years but now says it wants to be 'appropriately sized, given the current market conditions.' The move will likely raise speculation about further cost-cutting in Barclays' retail and corporate banking division. Shares -14% premarket (7:00 ET).
• RBS sells China stake. In line with yesterday's whispers from unnamed sources, Royal Bank of Scotland (RBS) confirmed it has sold its 4.26% equity stake in Bank of China for around $2.3B. "The decision to sell the stake forms part of the ongoing strategic review of the group's businesses announced in October," RBS said in a statement.
• U.S. keeps its Triple-A. S&P affirmed its AAA rating for the U.S., but said risks to the country's top sovereign rating have increased "noticeably" since September. S&P's "reasonable worst-case scenario" sees net general government debt rising from its 2008 level of 42% of GDP to as much as 75% by 2011. On the plus side, S&P said U.S. strengths include one of the most flexible economies of any nation and the fact the U.S. dollar is one of the world's most used currencies.
• Retail sales drop. Retail chain store sales fell 2.3% from a week ago, ICSC reported, and fell 2.2% Y/Y. "A seasonal weakening in traffic, less gift-card redemption and adverse weather all came together to weaken demand sharply for the first full week of 2009." Redbook reported a 2.3% decline in the first week of January vs. the previous month, while sales were down 1.9% Y/Y.
• Budget deficit balloons. The U.S. Budget Deficit swelled to a record $485B in FQ1, compared to a deficit of $455B for all of fiscal 2008. December's budget shortfall was $83.6B, vs. a $48.3B surplus a year ago. Congressional estimators project an unparalleled deficit of $1.2T for 2009, not including any Obama stimulus.
• Consumer confidence? What's that? A whopping 65% of Americans now rate the economy as 'poor,' a record in 23 years of weekly polls, according to ABC News. Another 29% say it's 'not so good' for a net negative rating of 94% - matching the all-time high. ABC's Consumer Comfort Index remains at a dismal -49.
• Trade balance. November's Trade Balance of -$40.4B, down from October's -$56.7B, was less than economists' $51B forecast. Exports: $142B (-$8.7B); imports: $183B (-$26B). For now, the global slowdown is crimping U.S. demand for exports more than it is foreign demand for U.S. products.

Today's Markets

• Asia markets closed in the green. Nikkei +0.3% to 8,438. Hang Seng +0.3% to 13,705. Shanghai +3.5% to 1,929. BSE +3.3% to 9,370.
• In Europe at midday, London -2.3%. Paris -1.3%. Frankfurt -1.95%.
• U.S. futures: Dow -0.7%. S&P -0.8%. Nasdaq -0.85%. Crude +3.1% to $38.94. Gold +0.7% to $826.30.

Wednesday's Economic Calendar

7:00 MBA Mortgage Applications
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
10:30 EIA Petroleum Status
1:00 PM Fed's Stern speaks on macroeconomic policy
2:00 PM Fed's Beige Book
Notable earnings after Wednesday's close: XLNX

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[Michael Fit...:]

S&P also slapped AAA ratings on toxic sub-prime re-packaged paper....

Jan 14 08:10 AM

[Georgebarronj:]

It's time to nibble at Bank of America and short treasuries. Yes things will get worse but getting BOA at say 6 or 7% yield(adjusted for expected dividend cuts) is decent if you can sit on it for 5 years.

20 year treasury at 2.5% is unsustainable.

Jan 14 08:11 AM

[Prudent Man...:]

Consumer Confidence? Why would anyone be confident in the economy, which is only our fifth worst since the end of WWII, when the, Fed Administration, Congress and especially Obama all tell everyone it is going to get worse? In the previous recessions the government pretty much kept their mouths shut and did their job instead of being much too vocal

Why are all the Fed members talking so much. In my fifty years as a professional investor I never heard so much said by people who proved they know so little. If all these rear-mirror economists, who are behind the curve, would spend their time doing some analysis instead of brushing up their resumes they may have seen the problem with credit years ago. Because the non-discounting stock markets kept going up all these people were just Pollyandas.

Whey is Obama and Congress so vocal? These Socialists see and opportunity in the false "worse receission since the Great Depression, and I lived in that time that was exacerbated to unnecessarily last ten years, they can make the greatest theft of taxpayer money in history. As we all know, those who have the money have the control.

If the Fed Congress and the Administration would have said that the Free Market will work things out so property will revert to their rightful owner this recession would be over. The promise of bailing out loser at the cost of winners is very far from Free Market Capitalism as it is Socialist Capitalism. Are problems started decades ago and the Fed and Congress could very easily have reighned it in with the laws on the books.

I think this is the best time for rational investors support and end encourage Congressional Term Limits.

Jan 14 08:15 AM

[AndrewBaker:]

I agree with PrudentMan. The ones telling us the way forward and making the great plans to recover are the same ones that didn't see it coming and were telling us what a great economy we had. Now they want to interfere with natural markets in the guise of putting things right! As long as their names and pictures are out there in the public gaze and they get well paid for their utterances, they will be happy. The rest of us might not be, sad and truthful to say.

Jan 14 09:01 AM

[Igneous:]

I agree, it's time for term limits for all members of Congress.
Power, money, greed, and politics have corrupted the whole institution. Two terms max.


On Jan 14 08:15 AM PrudentMan, CFA wrote:

> Consumer Confidence? Why would anyone be confident in the economy,
> which is only our fifth worst since the end of WWII, when the, Fed
> Administration, Congress and especially Obama all tell everyone it
> is going to get worse? In the previous recessions the government
> pretty much kept their mouths shut and did their job instead of being
> much too vocal
>
> Why are all the Fed members talking so much. In my fifty years as
> a professional investor I never heard so much said by people who
> proved they know so little. If all these rear-mirror economists,
> who are behind the curve, would spend their time doing some analysis
> instead of brushing up their resumes they may have seen the problem
> with credit years ago. Because the non-discounting stock markets
> kept going up all these people were just Pollyandas.
>
> Whey is Obama and Congress so vocal? These Socialists see and opportunity
> in the false "worse receission since the Great Depression, and I
> lived in that time that was exacerbated to unnecessarily last ten
> years, they can make the greatest theft of taxpayer money in history.
> As we all know, those who have the money have the control.
>
> If the Fed Congress and the Administration would have said that the
> Free Market will work things out so property will revert to their
> rightful owner this recession would be over. The promise of bailing
> out loser at the cost of winners is very far from Free Market Capitalism
> as it is Socialist Capitalism. Are problems started decades ago and
> the Fed and Congress could very easily have reighned it in with the
> laws on the books.
>
> I think this is the best time for rational investors support and
> end encourage Congressional Term Limits.

Jan 14 09:10 AM

[auto44:]

The peter principal is alive and well and at work.


On Jan 14 08:15 AM PrudentMan, CFA wrote:

> Consumer Confidence? Why would anyone be confident in the economy,
> which is only our fifth worst since the end of WWII, when the, Fed
> Administration, Congress and especially Obama all tell everyone it
> is going to get worse? In the previous recessions the government
> pretty much kept their mouths shut and did their job instead of being
> much too vocal
>
> Why are all the Fed members talking so much. In my fifty years as
> a professional investor I never heard so much said by people who
> proved they know so little. If all these rear-mirror economists,
> who are behind the curve, would spend their time doing some analysis
> instead of brushing up their resumes they may have seen the problem
> with credit years ago. Because the non-discounting stock markets
> kept going up all these people were just Pollyandas.
>
> Whey is Obama and Congress so vocal? These Socialists see and opportunity
> in the false "worse receission since the Great Depression, and I
> lived in that time that was exacerbated to unnecessarily last ten
> years, they can make the greatest theft of taxpayer money in history.
> As we all know, those who have the money have the control.
>
> If the Fed Congress and the Administration would have said that the
> Free Market will work things out so property will revert to their
> rightful owner this recession would be over. The promise of bailing
> out loser at the cost of winners is very far from Free Market Capitalism
> as it is Socialist Capitalism. Are problems started decades ago and
> the Fed and Congress could very easily have reighned it in with the
> laws on the books.
>
> I think this is the best time for rational investors support and
> end encourage Congressional Term Limits.

Jan 14 09:17 AM

[tginomorebush:]

prudentman ......... Barack Obama will be sworn in January 20th 2009!
king george iii bush-it is the president NOW! "These Socialists" comments are silly and stupid! AND beneath you and your previous posts!

Jan 14 09:18 AM

[know nothing:]

I want to party like a irresponsible politician! At the expence of the helpless sheepel that work their whole life to pay taxes for my fine wine! Talk about dividing a nation! Will it ever stop? Helicopter Ben was suppose to be a great economist, What happened?

Jan 14 09:34 AM

[axelrod608:]

>> "Citigroup (C) and Morgan Stanley (MS) confirmed they're merging their wealth management units" >>

Job cuts will surely follow. Just another example of corporations using their bailout money to buy up assets and lay off more workers. .

Jan 14 09:36 AM

[bobbobwhite:]

For so many years, ever since Johnson's Great Society began, we as a country have been mollycoddling vicious criminal offenders as "victims" but giving unfair, profit-center traffic tickets to solid citizens for tiny and inadvertant driving offenses, given gov't jobs to unqualified minority applicants over those much more qualified thus overall American job performance has suffered greatly requiring more employees to be hired to get the work done, created public schools where outstanding individual performance has been submerged beneath the "self -esteem" movement for deficient, fringe students, with costly alternative schools created for those with "issues", given gigantic no-contract business awards to company favorites of the present administration in the ill-advised Iraq war, and now giving huge taxpayer funded bailouts to private companies that were created in the promise of capitalism to compete with like others for business and fail if they could not. All of these were done at the great and growing expense of the taxpayer.

When someone tells you that Obama is the start of socialism, don't fall for it. It has been here, alive and healthy, for over 40 years, working hard to bring America down.

Jan 14 10:02 AM

[Rob Viglione:]

Excellent commentary. Politicians love to come to power in times of "crisis." Doesn't matter that it was caused by politicians, since the incoming ones of course are omniscient and know exactly how to fix everything. The answer is always more regulation, more taxes, and more spending on our behalf. In essence, it is the call to cede increasing power from the individual to public domain. Non of this hog wash will fix anything; rather, it is why we now stand on the precipice...

As far as American's AAA rating...there is no way S&P will downgrade the government's credit rating before the market tears it apart itself. S&P must answer to its masters, and those masters are sitting in Capitol Hill with nice suits spending as much of our money as they can. A credit downgrade would put an inconvenient end to that spending orgy...not likely to happen.


On Jan 14 08:15 AM PrudentMan, CFA wrote:

> Consumer Confidence? Why would anyone be confident in the economy,
> which is only our fifth worst since the end of WWII, when the, Fed
> Administration, Congress and especially Obama all tell everyone it
> is going to get worse? In the previous recessions the government
> pretty much kept their mouths shut and did their job instead of being
> much too vocal
>
> Why are all the Fed members talking so much. In my fifty years as
> a professional investor I never heard so much said by people who
> proved they know so little. If all these rear-mirror economists,
> who are behind the curve, would spend their time doing some analysis
> instead of brushing up their resumes they may have seen the problem
> with credit years ago. Because the non-discounting stock markets
> kept going up all these people were just Pollyandas.
>
> Whey is Obama and Congress so vocal? These Socialists see and opportunity
> in the false "worse receission since the Great Depression, and I
> lived in that time that was exacerbated to unnecessarily last ten
> years, they can make the greatest theft of taxpayer money in history.
> As we all know, those who have the money have the control.
>
> If the Fed Congress and the Administration would have said that the
> Free Market will work things out so property will revert to their
> rightful owner this recession would be over. The promise of bailing
> out loser at the cost of winners is very far from Free Market Capitalism
> as it is Socialist Capitalism. Are problems started decades ago
> and the Fed and Congress could very easily have reighned it in with
> the laws on the books.
>
> I think this is the best time for rational investors support and
> end encourage Congressional Term Limits.

Jan 14 11:21 AM

[notsosmart:]

nobody knows anything except perhaps not to trust AAA ratings or any ratings.think for yourself.

Jan 14 12:18 PM

[Bad Dog:]

But this idea did not come from the socialists! It came from your friends: the titans of the banking world, the most free-market ideologues one could imagine, and the Wall Street folks like Bernie Madoff. The socialists don't want the capitalists bailed out! So I wouldn't go around blaming the socialists. They are on your side even though you can't seem to work that out!


On Jan 14 08:15 AM PrudentMan, CFA wrote:

> Consumer Confidence? Why would anyone be confident in the economy,
> which is only our fifth worst since the end of WWII, when the, Fed
> Administration, Congress and especially Obama all tell everyone it
> is going to get worse? In the previous recessions the government
> pretty much kept their mouths shut and did their job instead of being
> much too vocal
>
> Why are all the Fed members talking so much. In my fifty years as
> a professional investor I never heard so much said by people who
> proved they know so little. If all these rear-mirror economists,
> who are behind the curve, would spend their time doing some analysis
> instead of brushing up their resumes they may have seen the problem
> with credit years ago. Because the non-discounting stock markets
> kept going up all these people were just Pollyandas.
>
> Whey is Obama and Congress so vocal? These Socialists see and opportunity
> in the false "worse receission since the Great Depression, and I
> lived in that time that was exacerbated to unnecessarily last ten
> years, they can make the greatest theft of taxpayer money in history.
> As we all know, those who have the money have the control.
>
> If the Fed Congress and the Administration would have said that the
> Free Market will work things out so property will revert to their
> rightful owner this recession would be over. The promise of bailing
> out loser at the cost of winners is very far from Free Market Capitalism
> as it is Socialist Capitalism. Are problems started decades ago
> and the Fed and Congress could very easily have reighned it in with
> the laws on the books.
>
> I think this is the best time for rational investors support and
> end encourage Congressional Term Limits.

Jan 14 01:26 PM

[Lynn:]

Looks like Bob Lutz (of GM) has just found incentive to turn the company around -- standing in line at a Northwest Airlines counter.

Jan 14 01:53 PM

[bbowen7:]

GM so much reminds me of IBM and AT&T in the 70s and early 80s. Fat cats overcharging for a reputation that was long past its legitimacy. To Bob Lutz and the management team it is about the ability to manage the politics of Washington - not about making and selling value to consumers.

Jan 15 01:10 AM