Wall Street Breakfast: Must-Know News

• Dems showcase stimulus package. House Democrats unveiled an unprecedented $825B stimulus plan yesterday, divided into two-thirds spending and one-third tax cuts. Virtually everyone in the country would be affected by the package: 95% of workers would get a $500 tax cut or $1,000 cut for working couples; first-time home buyers between Jan. 1 and June 30 would get a $7,500 tax credit; local school districts would get $120B as local government budgets collapse; and states would get $87B for their Medicaid budgets. Among other sectors that would get stimulus money: food stamps, infrastructure, renewable energy, and state and local law enforcement. For all the targeted spending, however, there's still some pork attached to the bill, including funds to put fresh sod on the National Mall and millions of $40 coupons to help Americans adapt old their old TVs for digital signals.
• Mixed responses on stimulus. Obama praised the House Democrats' stimulus package for its ability to help "make America strong and competitive in the 21st century." Republicans were less than thrilled, and House Republican leader John Boehner was appalled that "my Democratic colleagues think they can borrow and spend their way back to prosperity." Economists were largely mixed on the issue. Despite the unprecedented size of the proposed stimulus plan, some economists worry it's still not large enough. Others believe the package is large enough but disagree on how the money should be spent. Still others suggest the stimulus will be effective in supporting an eventual recovery, but not necessarily at halting the current decline, because most of the plan's measures won't come into effect until late 2009 and into 2010.
• Obama escapes TARP trap. Obama won a key legislative test yesterday when the Senate voted to release the second half of TARP funds, voting 52-42 against a resolution that would have prevented access to the $350B. Obama acknowledged the 'frustration' felt over how the first half of TARP funds were used, and promised to set tougher restrictions on the money, including capping executive pay, requiring banks to lend more and ensuring transparency and accountability. He also pledged to spend $50B-$100B on a 'sweeping' foreclosure-prevention effort.
• Tank of America. Bank of America (BAC) secured an extra $20B from the government, bringing the total to $45B, and $118B of its assets will be backstopped by the Treasury and FDIC. Most of the assets guaranteed by the government are from Merrill Lynch. In exchange, taxpayers will get $4B in preferred stock with a 8% yield and warrants, BoA will cut its dividend to $0.01, and the bank agreed to a mortgage modification program. Meanwhile, shareholders are livid that CEO Ken Lewis didn't know how bad things were with Merrill prior to their Sept. 15 merger deal, and didn't disclose the problems prior to their Dec. 5 vote on the deal, or before its Jan. 1 closing. (Read the official statement and term sheet (.pdf))
• Citigroup to reorganize into two units after $8B loss. Citigroup (C) posted a Q4 net loss of $8.29B, compared with a prior-year loss of $9.83B. Revenue fell 13% to $5.6B (see more numbers below). Citigroup said it will reorganize into Citicorp and Citi Holdings: The former will focus on Citi's global universal bank in more than 100 countries, while the latter will be made up of brokerage and retail asset management, local consumer finance and a special asset pool - with its management focused on "tightly managing risks and losses." Citi said it will make the transition to two companies as quickly as possible, and is already looking for someone to head up Citi Holdings (Paulson?). Shares are up 15% premarket, but have shed 43% this month alone.
• BofA swings to loss, exacerbated by Merrill. Bank of America (BAC) swung to a Q4 loss of $1.79B - its first in 17 years - compared with a profit of $268M a year ago. Revenue increased 19% to $15.98B (more numbers below). Credit-loss provisions nearly tripled to $8.54B. BofA disclosed a preliminary Q4 loss at Merrill Lynch of $15.31B, demonstrating why it was so desperate for more government assistance (see above). For the first time, BofA revealed how much credit it extended - $155B in Q4, with $49B for commercial non-real estate and $45B for mortgages - and said it's beefing up its mortgage operations to meet surging demand as lending rates fall to historic lows.
• Chrysler Financial wants money too. With government money pouring out right and left, Chrysler is back in the news. The company's credit arm, Chrysler Financial, wants $1.5B from the bank bailout fund to increase loans to car buyers and help prop up dismal sales. Chrysler Financial has stepped up its appeals since GMAC (GKM), jointly owned by General Motors (GM) and Cerberus, became a bank holding company and received $6B in government aid. A spokeswoman said Chrysler Financial's application "is still pending, but we are optimistic we will receive the necessary support from the Treasury."
• Cuomo gets in on Madoff inquiry. New York Attorney General Andrew Cuomo has opened an investigation into the Madoff scam and has issued subpoenas to determine if financier Ezra Merkin defrauded universities and charities when he invested their money with Madoff. Cuomo is seeking information from Merkin, three investment funds he operated and 15 non-profits that gave him money to manage. Cuomo's involvement is seen as a welcome development by many investors, as New York law gives the AG broad subpoena powers and has a very broad definition of fraud.
• Freddie evictions during foreclosure halt. Freddie Mac (FRE) is moving forward with legal action to evict tenants from foreclosed properties, raising ire amongst tenants and legal groups who say the moves violate the spirit of the moratorium that Freddie agreed to in November. A spokesman for the mortgage lender said that Freddie has suspended sales of foreclosed properties and isn't locking people out of their homes, but is still pursuing existing court cases and initiating new ones against homeowners. Freddie is also still filing eviction proceedings against renters. The mixed messages of a simultaneously calling a halt to foreclosures while proceeding with some cases is creating 'immense fear, stress and instability' among homeowners and renters.
• ECB rate cut. The ECB cut its key rate by 50 basis points to 2%, as expected. The next important ECB meeting will be in March, said Trichet, downplaying the chance of a February cut. Trichet said inflation could pick up after mid-year.
• PPI falls. Producer Price Index -1.9% in December from a month ago, vs. consensus of -2%. Core PPI +0.2% vs. 0.1% consensus. Year-over-year Core PPI +4.3% vs. +4.1% consensus. Takeaway: producer prices fell less than expected, but not radically so.
• NY survey near record lows. The Empire State Manufacturing survey showed NY manufacturing deteriorated in January. Business conditions, new orders and shipments stayed near record lows. Forward-looking indicators fell below zero for the first time in the survey's history.
• Mixed report from Philly Fed. Philly Fed's Business Outlook ticked up to -24.3 from December's -36.1 and -35 consensus. New orders and shipments inched up, but unfilled orders and delivery times edged lower. Employment losses were substantial. In short, the report was better than expected, but hardly encouraging.
• Jobless claims tick up. Initial Jobless Claims rose to 524,000 last week, up 54K from last week's 470K (revised), and worse than the 500K economists predicted. The 4-week moving average of 518,500 is down 8K. "If there's any silver lining, it's that while the employment situation is sluggish, nothing points to intensification," said strategist Craig Peckham.
• Consumers see bleak present, hopeful future. RBC showed consumer sentiment at a six-year low, with its CASH index dropping to 13.3 from 15.3 in December. Despite the gloom, expectations ticked higher, suggesting "hope for the future under the new administration, although the outlook is clearly cautious." The RBC CASH poll (.pdf) asked "Would you say things in this country are heading in the right direction, or are they off on the wrong track?" 32% say right; 59% say wrong. But only 11% see the economy "much weaker" six months out.

Earnings: Friday Before Open

• Bank of America (BAC): Q4 EPS of -$0.48 misses by $0.56. Revenue of $15.98B vs. $20.72B. Merrill Lynch Q4 net loss of $15.31B ($9.62/share). Shares +11.8%. (PR)
• Citigroup (C): Q4 EPS of -$1.72 misses by $0.53. Revenue of $5.59B vs. $14.16B. Shares +7.3%. (PR)
• First Horizon (FHN): Q4 EPS of -$0.27 beats by $0.07. Revenue of $543M (+2.8%) vs. $456M. (PR)
• Johnson Controls (JCI): FQ1 EPS of -$0.14 misses by $0.15. Revenue of $7.34B (-22.6%) vs. $8.48B. Sees a FQ2 loss similar to that of FQ1, vs. consensus of $0.18. (PR)
• Sony Ericsson (SNE, ERIC) swings to a Q4 loss of €187M from +€373M last year. Shipped 24.2M phones, down from 30.8M. Net sales of €2.91B, down from €3.77B. Sees continued deterioration in the marketplace in 2009, particularly in the first half. (PR)

Earnings: Thursday After Close

• Genentech (DNA): Q4 EPS of $0.95 misses by $0.01. Revenue of $3.7B (+24.8%) vs. $3.66B. Sees 2009 EPS of $3.55-3.90 vs. $3.92. (PR)
• Intel (INTC): Q4 EPS of $0.04 in-line. Revenue of $8.2B in-line. Gross margins 53.1%. Recent guidance was at the bottom of previous expectations of 55% plus or minus a couple points. Sees Q1 gross margins of low 40s vs. 51% consensus. Declines to give Q1 revenue guidance due to economic uncertainty and limited visibility.(PR)

Today's Markets

• Strong gains in Asia Friday following Thursday's late-day U.S. comeback and more government rescue money. Nikkei +2.58% to 8,230. Hang Seng +0.09% to 13,256. Shanghai +1.78% to 1,954. BSE Sensex +3.06% to 9,324.
• Stocks are starkly higher in Europe at midday. London +2.4%. Paris +3.6%. Frankfurt +2.7%.
• U.S. futures post healthy gains in the overnight session. Dow +1.95% to 8324. S&P +2.1%. Nasdaq +1.95%. Crude +1.5% to $35.92. Gold +2.9% to $830.40.
• Treasurys are struggling as markets digest the prospect of more U.S. government debt. 30-year -1.49%. 10-year -1.11%. 5-year -0.56%. 2-year -0.09%.

Friday's Economic Calendar

• 8:30 Consumer Price Index
  9:00 Treasury International Capital
  9:15 Industrial Production
  12:15 PM Fed's Lacker speaks on economic outlook
• Notable earnings before Fridays's open: BAC, C, FHN, JCI, PPG

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[pablosplace13:]

The BofA bailout makes me livid. BofA is paying Merrill's top brokers 2-3 times what they were being paid before to keep them from leaving and now we taxpayers are subsidizing it.

Jan 16 08:10 AM

[AndrewBaker:]

We're in a hole and the bankers are being dug out with the intention of creating an environment where the ordinary folk can climb out too. My hope is that that is what happens. The first comment on this article is right to point out that surely the bankers, who are in large part responsible for the current economic problems, should take their pain in getting out, and pay their price for the hole in the first place. Investors in financial stocks should not get carried away with the present market rally, which will start today, as there is much more bad news to come from this sector than we yet know about; and the banks, insurance companies and other financials will want yet more bail-out funds going forward. We will look better, maybe not this year though, but for now I'm short financials, and long on hope.

Jan 16 08:17 AM

[daffy:]

you all want to take down the banks? Stop paying your credit cards.

Jan 16 08:42 AM

[OhioNative:]

I dont know, There is a lot of blame to spread around. Its not like Bernake loves bankers or something. Being a student of the depression, he (correctly) understood that a large part of that was monetary contraction because of bank failures (of course, the real issue is monetary expansion in the first place...). This mess we are in is because of the borrowing spree the American people went on, banks were a part of that, but those who live in glass houses should not throw stones....

Jan 16 08:43 AM

[fastcad:]

Where do the Republicans get off calling Obama's plan, when they are leaving a yearly budget deficit of 1 Trillion. They are truly the party of 'borrow and spend.'

Jan 16 09:07 AM

[bobbobwhite:]

So very telling of the entire Detroit bailout scam that Chryler wants gov't money not to improve their product or efficiency but to give it the ability to make car loans so buyers can more easily finance the junk that made Detroit fail in the first place.

Where's the auto industry "improvement" if the gov't is merely standing in for a loan company? That does not improve Chrysler in any way. It merely enables it to sell the same old crummy product as always.

What a total crock. Let them all fail, as they should.

Jan 16 09:53 AM

[bobbobwhite:]

Bank of America will never get another penny of my "investment" money as it has for so many years in the past. Now that it has been exposed to have a duplicitous and scheming CEO in Lewis, I would never consider risking my money with it again. Something really stinks about BAC now, and a sleazy CEO is probably just the most obvious. Perhaps a corporate Madoff?

Jan 16 09:56 AM

[notsosmart:]

there are many sleazy ceo's & boards out there.just dont invest in them.i never touched enron or world com or the financials.im not even a college grad.think for yourself & dont be so greedy.it may be better in the long run.handle your own money & dont believe the anal sts.with unemployment going up & 12 mos. supply of houses the near future is not great.do you have to be a harvard business school grad to figure that out?

Jan 16 10:15 AM

[Shaggieman:]

Wall St has taken over the Treasury. They've learned how to get free money by acting and saying they're broke.

Jan 16 10:34 AM

[petyaczar:]

The politicians caused this accounting meltdown, which caused the financial metldown, which caused the credit crunch, and will result in the Great Depression of the 21st Century.

The politicians caused this fiasco with their D/A Sarbanes Oaxley and the credit "reform" (sic) of 2004. with the institution of Mark to Market so called Fair Value accounting (sic).

So called fair value accounting destabilized the balance sheets of both borrowers and lenders. No one can trust anyoune's balance sheet anymore from one quarter to the next.

Go back to the accounting system that served us so well since the Great Depression, reinstate the Glass Steagall Act and the uptick rule on short sales. Drive a stke thru the heart of Mark to market accounting, cut off its head, and burn the corpus delicti and the financail markets will recover. IMO

Te politticians have pulled off a Coup DeTat overthrowing free market capitilism replacing themselves as rulers by fiat. And they managed to convince most of you torch bearing villagers to storm the wrong castle in an attempt to blame the financiers,bankers,tra... who are merely following the compulsory edicts of the G/D politicians.

You torch carrying villagers deserve the serfdom you will so surely achieve over the next few years. IMO

Jan 16 12:05 PM

[jackooo:]

BAC should score big but only over the long term.

Jan 16 01:26 PM

[John Lounsbury:]

petyaczar - - -

The problem with mark to market is not the mark, it is the market.

The idea is sound. The implementation is flawed. How can you implement mark to market when there is no market? One example is the CDS mess. There is no public exchange for these instruments. I keep hearing that there is a process started to establish such an exchange, but I expect that many in the financial world are hoping that it does not happen quickly or suddenly because of the exposure for more of their clay feet to be uncovered and eroded.

I believe that if there had been a public CDS daily exchange for CDSs set up 8-10 years ago, the current crisis would be much less severe. For one thing, the public scrutiny probably would have greatly diminshed the willingness of firms to enter these conracts because of the market risk. If there had been only a fraction of the CDSs issued, the overall risk profiles in the financial world would have been reduced. Too many firms said: "We can go into super-high leverage on less than sterling instruments because we have insurance against loss (CDSs)." If we had only 10-20% of the CDS world, we would have avoided a lot of the faulty rationalization in the preceding sentence (in quotes).

Jan 16 01:31 PM

[bbowen7:]

Does anyone think that perhaps the Merrill / BAC deal was brokered by Paulson in a smolke-filled room with a promise to make things whole if it didn't work out? Or wonder whether Tim Geithner will fulfill some other, yet to be divulged, commitments?

Jan 16 01:41 PM

[petyaczar:]

John,

Your comment re mark to marke "being good" is a theoretical assertion.
Look around you at the realpolitik of what this D/A mark to market has created. The village is burning !! There is no stability in balance sheets from quarter to quarter, there is no trust in the financial system and so there is a credit contraction.

Its a big G/D "Do-loop" in computer speak. a self reinforcing death spiral.

Process wise it has gone like this

1)The Government encourages leverage and "creative financing"
2)The Government changes the accounting rules now requiring mark to market
3)Credit contracts - market prices drop as forced sales occur.
4)MtoM forces further erosion and raises required reserves.
5)Putting more money into reserves - has a deleterious effect on profit- eliminating it.
6)The "Balance sheet" poor institutions have to petition the very government that caused the problem to "bail them out"
7)The govt transfers green paper printed at taxpayers expense to shore up the eroded balance sheets the government mtom created.
8)The government takes over operational control of the companies it has "saved"

Seems to me this is the 21 st Centiury version of the old Vietnam expression "We had to burn the village in order to save it"

The above statement of process IS NOT hypothetical It is ALL DOCUMENTED FACT.

Your prescription of a "public CDS exchange" is in my view euivalent to putting a band aid on a carcinoma. - hides the root cuase, doesn't solve the problem -merely allows it to fester.

Kill MTOM, fair value accting, reinstate Glass Steagall, reinstate the uptick rule, go back to the accounting rules that have served us so well since the first Great Depression. and watch what happens as stability returns, markets recover, and credit is once again freed up.

Don't do it, and we will be facing the Greatest Global Depression in history AND in the words of Martha and the Vandellas there will be "No where to run to baby, no where to hide" This to be followed by socialism, elimination of the free market system, and the emergence of a truly Big Beother" government.

IMO

IMO

Jan 16 04:48 PM

[doubleguns:]

petyaczar, You missed one important step.
Step one. Increase leverage at banks (more loans: ie subprime, altA ect..)when mark to market assets appreciate.

Mark to market is wonderful when everythings going up. The banks get to lend (create more loans) as assets appreciate. I believe this was the driving point behind initiating mark to market. Unfortunately they never had a thought about what happens when asset prices come down. Guess they couldn't imagine that far.

Jan 16 05:21 PM

[doubleguns:]

right in San Fran;

Na!

Jan 16 05:23 PM

[petyaczar:]

doubleguns

You are of course right, I refered to this in my comment

"Its a big G/D "Do-loop" in computer speak. a self reinforcing death spiral."

In the computers when you have a Do-Loop = a badly written bit of code that creates a constant useless circular logic of calculation, you DO NOT redesign the computer hardware around the DO Loop you REWRITE the code so it functions properly within the system

You do not want an accuonting system that makes things look better than they are in good times, and worse than they are in bad times. In electronics, such circuits are known as positive amplifiers, they amplify in the same direction as the original incoming signal. You want something that will smooth out the discontinuities providing essential ballast to the balance sheet

IMO some of these folks are making the classic mistake of thinking the accounting system IS REALITY, No, the accounting system is supposed to characterize and represent a working version of reality. just as statistics are meant to represent a distribution of outcomes in a manageable and workable and understandable fashion. Statistics are never meant to represent any individual outcome at any individual point in time.

This will be a disaster for our economy and Obama has no experience and has shown no real understanding of the root cause of the financial panic and resulting credit crunch that has arisen out of the slime of this accounting problem. Kill mark to market, eliminate fair value accounting, go back to the accounting rules that haved served us so well since the first GReat Depression and see how quick;ly these financial problems dissipate.

In the "old days" companies got to decide when to write down or otherwise write off nonperforming assets. NOW regulators get to decide when to write off or otherwise write down performing assets. How the hll does a company manage that?

IMO

Jan 16 07:22 PM

[Chuch:]

Still too much uncertainty to be buying, see here crashmarketstocks.com

Jan 17 02:17 AM

[Anthony Alfidi:]

Tougher restrictions on TARP spending won't help much now that the horse is out of the barn. Bank executives have only now started to ratchet down dividends and are still drawing megabucks compensation. A second TARP is all but inevitable because bad assets haven't been fully written down. Wall Street executives have learned the wrong lessons at our expense.

Jan 17 03:00 AM

[src7973:]

Don't forget Barney Frank who guarenteed a buyer (GSE's) for the creative junk that Wall Street sold. If there wasn't a guarenteed buyer of all the creative derivatives to get undeserving individuals into homes we would not be in this mess.


On Jan 16 08:07 AM birder wrote:

> What this country really needs is a public hanging of big bank presidents.

Jan 17 08:03 PM