Wall Street Breakfast: Must-Know News

• Financial reforms snag non-banks. Obama wants industrial loan companies [ILCs], firms which face less scrutiny than banks but can still offer credit cards, make loans, etc., to register as bank-holding companies and be subject to stricter regulation. For ILCs like Target (TGT), Harley-Davidson (HOG), Pitney Bowes (PBI) and dozens of others that routinely pitch loans and other financial products, bank-holding status could potentially be so restrictive that the firms will opt instead to give up their ILC status altogether, closing down another source of consumer credit. Also facing a regulatory problem is General Electric (GE), whose GE Capital will almost certainly be classed as systemically important. Since tighter regulations would be applied to GE as a whole, the shift could potentially force a spin off of the capital unit.
• SEC dives into dark pools. SEC's Schapiro is concerned trading on private electronic markets could present 'emerging risks,' and may require firms to disclose more information about their transactions. The lack of transparency in these so-called 'dark pools' could promote price fluctuations and give some traders an unfair advantage, said Schapiro, and "the commission will be taking a serious look at what regulatory actions may be warranted."
• EU leaders agree on supervision. Wrapping up a summit, EU leaders agreed to tighten financial supervision, create three pan-European watchdogs to help prevent another global economic crisis and to establish a new European Systemic Risk Board to monitor risks to stability. Lawmakers stopped short of giving the new regulators the power to force national governments to bail out companies. Jose Manuel Barroso's bid for a second five-year term as president of the EU's executive European Commission received unanimous support.
• Merrill trio discussed buyback. Three former Merrill Lynch executives approached Bank of America (BAC) CEO Ken Lewis to discuss buying back some or all of their old company, but were turned down. The trio - made up of Dan Tully, former Merrill CEO; Launny Steffens, former head of Merrill’s private client business; and Winthrop Smith Jr., son of one of Merrill’s co-founders - met with Lewis two months ago to float the idea.
• Switzerland mulls bank shrinkage. Switzerland's central bank is examining whether to force banks like UBS (UBS) and Credit Suisse (CS) to shrink down in order to limit risks imposed by their size. "There can be no more taboos, given our experiences of the last two years," said one official, and the bank could impose "direct and indirect measures to limit [large banks’] size."
• FDA approves Novartis genetic drug. The FDA approved the sale of a Novartis (NVS) drug called Ilaris, the company's first drug in its push to focus on the genetic triggers of disease. As opposed to blockbuster drugs marketed to millions of patients, Ilaris treats a rare disorder affecting only a few thousand people worldwide, and represents a shift in the industry towards developing drugs for niche diseases through genetics-focused research.
• Scrushy slammed with $2.88B fine. A judge ordered Richard Scrushy, former chairman and CEO of HealthSouth Corp. (HLS), to pay a staggering $2.88B in damages for helping to artificially inflate HealthSouth's earnings for at least six years through an accounting scam uncovered in 2003. The civil suit was brought by shareholders and the judgment against Scrushy appears to be the largest financial penalty ever levied against a single executive.
• Alcatel-Lucent, H-P team up. Alcatel-Lucent (ALU) and Hewlett-Packard (HPQ) signed a ten-year partnership to develop and market communications and computing products. As part of the deal, Alcatel-Lucent will outsource its IT infrastructure to Hewlett-Packard, saving the company about €750M ($1.05B) and transferring around 1,000 employees to Hewlett-Packard in the process.
• FCC reviews cellphone exclusivity deals. The FCC has begun to investigate wireless handset exclusivity arrangements such as AT&T's (T) deal with the iPhone (AAPL) or Sprint's (S) deal to offer the Pre (PALM). The investigation comes in response to lawmakers' concerns that the deals may be hurting consumers and distorting industry competition.
• New iPhone and more competition. Apple (AAPL) releases a new iPhone today, hoping to lure customers with the promise of faster speed and more features as the smartphone market grows increasingly crowded with offerings from Research in Motion (RIMM - see earnings below), Palm (PALM) and others. An older version of the iPhone is now selling for $99, half the original price, which could boost iPhone sales to 18M this year and 28M next year.
• Tweaking Libor. In order to keep Libor as representative of borrowing costs as possible, the British Bankers' Association has started letting banks outside London contribute quotes. The change could increase the number of lower-rated institutions included in the Libor panel, potentially driving up the average cost of borrowing money. Libor is used as a price reference on around $350T of financial contracts worldwide.
• Jobless claims. Initial Jobless Claims came in at 608K vs. consensus of 604K. Claims from the prior week were revised to 605K from 601K. Continuing claims fell by 130K to 6.69M.
• Leading indicators improve. Conference Board's Leading Indicators rose 1.2% in May, vs. +1% consensus, the second increase in as many months. Vendor performance, interest rate spread, real money supply, stock prices, consumer expectations, and building permits all made positive contributions to the index.
• Philly Fed outlook surges up. Philly Fed's Business Outlook came in at -2.2 in June, up from -22.6 in May and the highest since Sep. 08, which was the only month out of the last 19 that the index was positive. The six-month outlook surged by 12.6 points to 60.1 - close to a 15-year high. The survey noted "declines in the region's manufacturing sector diminished significantly this month. Indicators for general activity, new orders, and shipments are suggesting steadier levels of activity, in contrast with the series of continuous large declines suggested in previous surveys."

Earnings: Thursday After Close

• Research In Motion (RIMM): FQ1 EPS of $0.98 beats by $0.04. Revenue of $3.42B (+52.7%) in line. Sees FQ2 EPS of $0.94-1.03, in line, and revenue of $3.45-$3.7B. (PR)

Today's Markets

Overseas markets moved higher Friday and futures are up in tandem as stocks try to stage a late-week comeback - but there's still a ways to go.

• Asia: Nikkei +0.85% to 9,786. Hang Seng +0.81% to 17,921. Shanghai +0.93% to 2,880. BSE +1.8% to 14,522.
• Europe at midday: London +1.8%. Paris +1.05%. Frankfurt +0.3%.
• Futures at 7:00: Dow +0.5% to 8540. S&P +0.7% to 919. Nasdaq +0.8%.
  Crude +1.15% to $72.74. Gold +0.1% to $935.50.

Friday's Economic Calendar

• No events scheduled.
• Notable earnings before Friday's open: KMX
• Notable earnings after Friday's close: FMCN

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[doubleguns:]

I think the Swiss are on to something. We do not need to big to fail institutions putting us at risk any more. Including car companies, banks or industrialized companies like GE.

Time to start down sizing.

Washington obviously needs included in the down sizing solution.

Jun 19 07:40 AM

[axelrod608:]

>> "Financial reforms snag non-banks." >>

Unrestrained greed with a total lack of concern for risk got us here. Will sufficient reform in regulation to fix the problems have unseen, unanticipated consequences ? Absolutely. This is not necessarily a bad thing.

The financial industry was allowed to "grow like topsy" and turned out to be an unregulated disaster. If our leaders don't fix it, it will likely have another meltdown in the future.

What we should really be doing in public policy is to debate the issue of whether an economy 70% driven by consumer spending with half of the rest coming from finance is a desirable or sustainable economy. In my estimation is is not.

As an old gearhead I like to use car analogies. For $60,000 you can restore a 1955 Chevy to new condition. For $20,000 you can buy a new Cobalt. Which do you want to drive daily ? We need an economy that serves today's needs, not an unsustainable antique designed for an era long past

We need too-big-to-fail financials like a fish needs a bicycle. Our kids and grandkids need an economy that will serve them as well as we have been served. I'd sure like to see our "leaders" get something right for a change..

Jun 19 08:51 AM

[BlueOkie:]

Maybe a reason for continuing jobless claim drop is because the extension of benefits puts your income too high to draw food stamps. Go figure! The gov't gives with left hand and takes with the right.

Jun 19 08:58 AM

[BlueOkie:]

Greed has been around for a long time. It will pop its head up again and again.


On Jun 19 08:51 AM axelrod608 wrote:

> >> "Financial reforms snag non-banks." >>
>
> Unrestrained greed with a total lack of concern for risk got us here.
> Will sufficient reform in regulation to fix the problems have unseen,
> unanticipated consequences ? Absolutely. This is not necessarily
> a bad thing.
>
> The financial industry was allowed to "grow like topsy" and turned
> out to be an unregulated disaster. If our leaders don't fix it,
> it will likely have another meltdown in the future.
>
> What we should really be doing in public policy is to debate the
> issue of whether an economy 70% driven by consumer spending with
> half of the rest coming from finance is a desirable or sustainable
> economy. In my estimation is is not.
>
> As an old gearhead I like to use car analogies. For $60,000 you
> can restore a 1955 Chevy to new condition. For $20,000 you can buy
> a new Cobalt. Which do you want to drive daily ? We need an economy
> that serves today's needs, not an unsustainable antique designed
> for an era long past
>
> We need too-big-to-fail financials like a fish needs a bicycle.
> Our kids and grandkids need an economy that will serve them as well
> as we have been served. I'd sure like to see our "leaders" get something
> right for a change..

Jun 19 09:00 AM

[Gravity404:]

How about a downsizing Czar?


On Jun 19 07:40 AM doubleguns wrote:

> I think the Swiss are on to something. We do not need to big to fail
> institutions putting us at risk any more. Including car companies,
> banks or industrialized companies like GE.
>
> Time to start down sizing.
>
> Washington obviously needs included in the down sizing solution.

Jun 19 09:49 AM

[Larrysyr:]

The original ILCs - particularly the car companies' - served a valuable purpose in enabling ordinary people to buy the expensive products offered, thus driving up sales volume. It seems they got out of hand and became larger and more important than the primary business. This turned out to be an unhealthy development.

Today, there are lots of alternatives to ILCs. It's time to have banks act like banks and industrial companies act like industrial companies.

Jun 19 10:04 AM

[AndrewBaker:]

Everyone everywhere is into regulating banks and financials, when they're not "revising" last week's/month's figures and telling us how much less it's getting worse; yet, the bank's still seem to be surviving and even able to repay TARP with the funds trusting souls have put into their new stocks. When will it dawn on people that the banks' stock prices have been bubbled up, and that once the rhetoric and outright lies are out of the way, we will see more realistic valuations? And I don't mean higher ones either!

Jun 19 10:25 AM

[Drew Horn:]

I agree, the Swiss approach is useful but it will never be imposed on the US financial industry for two reasons: 1) the banks and insurance industry "own" congress and 2) Geithner, Sommers, ET AL know they have temporary jobs and may already be maneuvering for a financial CEO job even before Obama' leaves office.

The real "systemic risk" is that the political system is responsive only to money which has proven to be fully capable of buying almost any election result. Eisenhower warned about the military / industrial complex. There should be a new warning about the Madison Ave / Washington Lobbyists complex. So long as the first amendment is held to mean that money = free speech, government and our economy will be in the hands of the banks.

Jun 19 10:59 AM

[bbowen7:]

Not much comment here on the proposed new regulatory scheme, which seems generally to be "doable" domestically. It is apparent, that the US approach must integrate with global approaches - pan-European agencies; Swiss rules; understandings about international subsidiaries of US global players; etc. The Obama administration presentation and the Congressional hearings seem to imply that we are still acting in a "non-global" mindset - perhaps because it is one step at a time, and the public isn't ready to deal with giving up sovereignty.

Jun 19 02:24 PM

[TinyTim:]

Yeah, the Swiss have the right idea.

"dozens of others that routinely pitch loans and other financial products, bank-holding status could potentially be so restrictive that the firms will opt instead to give up their ILC status altogether,"

this is a step in the right direction too. Although I don't agree it will stifle credit as these will be spun off rather than closed. Ultimately bring on more competition.
The big banks need to get cut down to size.
The Founding Fathers were very leary and prescient about banks, but I don't think even they realized money would take over govt.

Jun 19 02:24 PM

[a. palmer jr.:]

I think I have it...how about the President appointing a committee, as you said above, led by a downsizing Czar, and let that committee appoint a sub committee, each with pages, attorneys, and an advisory board to try to downsize government. Wait a minute; that would actually create more of what we're trying to do away with!

Jun 19 10:06 PM