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Wall Street Breakfast: Must-Know News 24 comments

by: SA Editor Rachael Granby July 15, 2009 | about: AIG / ALTR / ASML / CIT / DIA / GLD / INTC / QQQQ / SPY / USO / YUM    
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  • Calpers goes after rating agencies. California's Calpers, the nation's largest public pension fund, filed a lawsuit against the three leading rating agencies, claiming $1B in losses were caused by 'wildly inaccurate' credit ratings. The lawsuit is focused on the $1.3B of structured investment vehicles Calpers bought in 2006, only to see them collapse in 2007 and 2008. The SIVs had been given the highest credit rating by Moody's, Fitch and S&P, making a 'negligent misrepresentation' to the pension fund.
  • CIT bleeds cash as rescue nears. CIT's (CIT) liquidity crisis continues to worsen as customers draw down hundreds of millions of dollars from their credit lines. The extra pressure has increased the urgency of a federal aid package, and regulators were working out details of a rescue late Tuesday night. Though still in flux, the plan would see CIT transfer some assets from its holding company to its bank. The Federal Reserve would then let CIT pledge some of those assets at its discount window while CIT took steps to refinance its debt. Officials remain reluctant to use TARP funds on a company that may not be critical to the financial system.
  • Fighting the Fed's growing role. A coalition of investors, analysts and former regulators plan to oppose Obama's efforts to give the Federal Reserve control over large financial firms. The coalition feels the Fed's credibility has been 'tarnished' by the current crisis and supervisory powers should be given to a new agency that would be accountable to Congress.
  • AIG unit loses lead bidders. Franklin Templeton Investments and its buyout adviser Charles E. "Chuck" Johnson, the lead bidders for AIG's (AIG) asset management unit, dropped out of talks to buy AIG Investments, citing irreconcilable strategic differences within the bidding group. The bidding group intends to pursue a deal without Franklin Templeton's involvement, but the latest twist raises questions about how AIG has managed the negotiations thus far and why they have dragged on for so long.
  • China's foreign exchange reserves soar. China's foreign exchange reserves broke the $2T mark for the first time, rising a record $178B in Q2 as overseas investors poured into Chinese stocks and property. In comparison, the reserves rose by $7.7B in Q1.
  • BoJ lowers forecasts. Bank of Japan kept its target rate at 0.1%, as expected, and extended its emergency credit programs until the end of the year. The bank cut its economic forecast as borrowing conditions remain tight, and expects the economy to shrink a record 3.4% this fiscal year vs. earlier predictions of -3.1%.
  • Intel sets hopeful tone for tech. Intel (INTC) beat expectations with earnings of $0.18 per share (see details below) as demand for PCs, especially in Asia, exceeded forecasts. The company raised its Q3 revenue outlook but expects corporate spending to remain weak. Earnings inclusive of charges from a $1.45B European antitrust fine in Q2 came in at -$0.07 per share, Intel's first quarterly loss since 1986.
  • Euro-zone CPI posts first-ever drop. Euro-zone consumer prices rose 0.2% in June compared to May, but were 0.1% lower on the year, the first drop on record. The ECB has said it expects the recent decline in commodity prices to lead to a drop in consumer prices for several months, before a return to positive territory by year-end. Energy costs were down 18.8% from a year ago. U.S. consumer prices are due today at 8:30. (see Eurostat release (.pdf))
  • MBA apps rise. Mortgage applications rose 17.7% last week, MBA reported. The average interest rate on 30-year fixed-rate mortgages fell to 5.05% from 5.34%.
  • Retail sales rise. Retail sales increased 0.6% in June to $342.1B, slightly better than +0.5% consensus, but down 9% vs. a year ago. May's sales were unrevised at +0.5%.
  • Chain store sales fall. Chain store sales fell 1.7% in the first week of July, Redbook said, worse than the -0.9% expected. According to ICSC, weekly sales were down 0.9% and July is likely to be another tough month.
  • PPI climbs. June's Producer Price Index rose 1.8% vs. consensus of +0.9% and +0.2% in May. Core PPI was up 0.5% vs. consensus of +0.1% and -0.1% in May. Wholesale prices were down 4.6% from a year ago, while core producer prices were +3.3%.
  • Inventories shrink. Business Inventories were down 1% in May vs. -0.8% consensus, and were down 8% Y/Y. April was revised to -1.3% from -1.1%. Retail inventories fell 1.6% in May, led by the biggest drop in auto inventories in almost four years.
  • Consumer confidence wanes. ABC's Consumer Confidence Poll came in at -51, below -50 for its fourth week straight. Those who think the economy is getting better: down to 25%, from 31% in June and a five-year high of 33% in May.

Earnings: Wednesday Before Open

  • ASML (ASML): Q2 EPS of -€0.24 in-line. Revenue of €277M (-67.2%) vs. €216M. Issues upside Q3 revenue guidance of €450M vs. €359M consensus. (PR)

Earnings: Tuesday After Close

  • Altera (ALTR): FQ2 EPS of $0.16 in-line. Revenue of $280M (-22%) vs. $278M. Sees Q3 sequential sales down 1%-5%. (PR)
  • Intel (INTC): FQ2 EPS of $0.18 beats by $0.10. Revenue of $8B (-15%) vs. $7.3B. Sees Q3 revenue $8.1B-8.9B vs. $7.8B. (PR)
  • Yum! Brands (YUM): FQ2 EPS of $0.50 beats by $0.07. Revenue of $2.5B (-7%) in-line. Sees EPS growing 10% for FY10. (PR)

Today's Markets

Stocks were broadly up in Asia. European markets and U.S. futures are following suit.

  • In Asia, Nikkei +0.1% to 9,269. Hang Seng +2.1% to 18,259. Shanghai +1.4% to 3,189. BSE +2.9% to 14,253.
  • In Europe at midday, London +1.6%. Paris +2%. Frankfurt +2%.
  • Futures: Dow +1%. S&P +1.3%. Nasdaq +1.8%. Crude +1.5% to $60.42. Gold +1.3% to $934.60.

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.


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This article has 24 comments:

  •  
    The whole world should go after the ratings agencies, banks, congress, mortgage brokers etc........
    Jul 15 07:29 AM | Link | Reply
  •  
    I hope CALPERS wins big damages. The rating agencies put big bucks ahead of veracity when they gave these SIV the high ratings they did. There were those within the companies concerned who were concerned about the viability and strength of these vehicles given a worsening credit environment, but they were ignored by others with more power and far greedier for the profits and bonuses they would get.

    The failures of these SIV have now worked through to the real economy causing home and job losses, uncertainty about both for those still with homes and jobs, and substantial falls in savings and worth for all but the most profligate and indebted.

    The government's answer of printing yet more worthless money and trying to inflate away the debt problem will only cause us even more financial loss, and many years of yet more hard work to get back to where we were before this recession/depression began courtesy of, initially, the banks' greed in constructing and selling flawed SIV.
    Jul 15 07:31 AM | Link | Reply
  •  
    Again we see the banks and financials with problems, and these are only the glossed-up versions: there is so much more bad news as yet undisclosed. But what is happening is that we are being lied to about how well things are looking so that we bid up their stock prices to even more ridiculous levels. Goldman Sachs, and people previously with them, want us to believe it's getting better: well, it is for them, as they rake in even more cash; but for you and me, it's going to be a long hard road, and we are not even far from the start even now.
    Jul 15 07:36 AM | Link | Reply
  •  
    Rather than thinking about new more onerous regulations, why not address the moral hazards in the current set. Clearly establishing investment grade securities based on Rating agencies rating systems and then requiring certain institutions to only invest in these rated securities creates a system with considerable systemic risks. Isn't this closely bound community of investment banking (bundles and markets various investments with no penalty if they get it wrong), rating agencies paid by the firms issuing the security (with no penalty if they get it wrong) and the regulators that demand our banks and other institutions rely on these ratings when establishing acceptable "risk" in the investment assets/portfolio and restricting who qualifies as a Rating agency that is acceptable. (again, no penalty if they get it wrong). Where's the incentive to get it right?
    Jul 15 07:45 AM | Link | Reply
  •  
    CALPERS bought 1.2B in SIV and didn't understand it. Now they want to blame the rating agency. Exactly how much did CALPERS pay the rating agency for this advice. How about firing the managers who decided to buy the SIVs. CALPERS might get paid in IOUs.
    Jul 15 07:54 AM | Link | Reply
  •  
    [ CIT's (CIT) liquidity crisis continues to worsen as customers draw down hundreds of millions of dollars from their credit lines.]

    This is a CREDIT run on a bank?
    Jul 15 07:58 AM | Link | Reply
  •  
    CalPers' suit, if successful, might give impetus to the movement to have ratings agencies paid by the buyers of rated products, rather than by the sellers, making them (the ratings firms) truly "independent".
    Jul 15 08:46 AM | Link | Reply
  •  
    How can you have a credit run on a bank? They should be able to just limit or close any credit acounts. Maybe they should follow CA's lead and lend out IOUs. Jobless claims up mortgage aps up intrest rates down; things that make you go hmmmm? There is a bright spot though resistance to the knee cap our trade snake oil mandate is building and Intel (INTC) looks like it's at a good entry point for anyone interested in opening a position in the TEC sector.
    Jul 15 08:49 AM | Link | Reply
  •  
    When you sell more cars at steeply discounted prices because myriad dealerships are being closed, it is not a "real and sustainable" retail sales gain. This is especially true when you consider that those same dealerships will no longer exist in the future. They will no longer contribute to sales. As I understand it, the continuing dealership closings should be with us for a few months. During that time I think it only makes sense to look at the ex-autos numbers (+.3%). This was lower than the +.4% figure expected (a disappointment).

    In this month's case, a lot of the rise in sales was due to increased oil prices. The amount of oil consumed did not go up demonstrably in the US. Rather the cost went up 6.6%. To get a better idea of "real" retail sales trends you then need to look at ex-autos and ex-gas (-.2%). This was a bad number. When you also look at the ICSC chain store sales (negative) and the Redbook sales (-1.7% lower than last month), the sales figures are just plain bad. Yet in this rally people keep citing them as good. This makes me think that "da boyz" are orchestrating a crash or severe pull back for the near future. I don't mind if the market goes up, I like it. However, when people are pushing it up on a grossly destorted view of reality (retail sales outperforming expectations), it worries me a lot.
    Jul 15 09:17 AM | Link | Reply
  •  
    I think CalPers suit should be successful and should put the rating agencies out of business. Let investors figure out for themselves what is a good investment and what is bad.
    Jul 15 09:23 AM | Link | Reply
  •  
    The Fed's ZIRP - zero interest rate policy - is the driver behind most of our economic problems. Florida's pension plan bought a ton of Lehman preferred with a 10+% yield, rated AAA and ended up eating it. Investors like pension plans that must make gains and individuals who want gains have to move out on the risk continuum to make gains that exceed tax and inflation costs. The Fed policy mandates that anyone who wants to make positive gains has to buy. riskier investments.

    There simply aren't any guaranteed investment vehicles that will pay more than taxes and inflation.

    Having said that, whoever buys any investment they don't fully understand is at least as liable as the seller. CALPERS should have done their due diligence and known better.

    And having said that, the rating agencies need radical transformation. They serve the interests that pay them - the sellers. Never a good policy.
    Jul 15 09:24 AM | Link | Reply
  •  
    No one should trust a financial ratings company's information as their relationship is too incestuous with all financial institutions.

    Caveat Emptor should have been Calpers watchwords and they should have operated their own high quality internal assessment teams, just as Mr. Buffett does. Looking for scapegoats is not acceptable as they are directly responsible for handling the pension investments. If Calpers officials cannot do their job, they should all resign.
    Jul 15 10:03 AM | Link | Reply
  •  
    To add to the bashing of the ratings agencies. They are, so far, the villain in the crash of 2008 that has not been held accountable for their shoddy practices and culpability. They must be, and maybe via law suits, will be held accountable. I agree with the comment above, that they should be paid by the purchasers of the assets they rate.
    Jul 15 10:11 AM | Link | Reply
  •  
    I wonder if Calpers would be as anxious in filing suit if they were GM bondholders.
    Jul 15 10:12 AM | Link | Reply
  •  
    For those waiting for the petroleum stocks numbers to turn the market. The API numbers yesterday indicate crude stocks were down 1.2M barrels. Gasoline stocks were also down very minorly. The petroleum stocks info at 10:30am ET will likely not turn the market (at least not on its own).
    Jul 15 10:13 AM | Link | Reply
  •  
    You are 100% correct!


    On Jul 15 07:31 AM AndrewBaker wrote:

    > I hope CALPERS wins big damages. The rating agencies put big bucks
    > ahead of veracity when they gave these SIV the high ratings they
    > did. There were those within the companies concerned who were concerned
    > about the viability and strength of these vehicles given a worsening
    > credit environment, but they were ignored by others with more power
    > and far greedier for the profits and bonuses they would get.
    >
    > The failures of these SIV have now worked through to the real economy
    > causing home and job losses, uncertainty about both for those still
    > with homes and jobs, and substantial falls in savings and worth for
    > all but the most profligate and indebted.
    >
    > The government's answer of printing yet more worthless money and
    > trying to inflate away the debt problem will only cause us even more
    > financial loss, and many years of yet more hard work to get back
    > to where we were before this recession/depression began courtesy
    > of, initially, the banks' greed in constructing and selling flawed
    > SIV.
    Jul 15 10:31 AM | Link | Reply
  •  
    China itself seems to be in a bubble... inflation pressure will rise.
    Once again, those overseas investors will pull the plug... nasty concentration of capital just distorting real economy and markets.
    Jul 15 10:31 AM | Link | Reply
  •  
    They are intentionaly creating a bubble with thier stimulous program. However they have surplusses in U.S. treasuries not massive debt.


    On Jul 15 10:31 AM lightwarrior wrote:

    > China itself seems to be in a bubble... inflation pressure will rise.
    >
    > Once again, those overseas investors will pull the plug... nasty
    > concentration of capital just distorting real economy and markets.
    Jul 15 10:51 AM | Link | Reply
  •  
    One has to wonder why the regulatory reform proposals have not included reversion to the earlier practice of having the buyers of bonds pay a small fee to compensate the rating agencies, rather than the current practice. It would make S&P, Moody's, and Fitch more boring places to work, but there must be some green eye shade accountants who would take the gig. With this so obvious and easy, why hasn't this been done? I cannot think of any constituency that wants it this way.
    Jul 15 10:55 AM | Link | Reply
  •  
    AMEN!


    On Jul 15 09:24 AM axelrod608 wrote:

    > The Fed's ZIRP - zero interest rate policy - is the driver behind
    > most of our economic problems.
    Jul 15 11:16 AM | Link | Reply
  •  
    The investment managers at Calpers, and the investment raters at Moody's, Fitch and S&P, obviously attended California public schools.
    Jul 15 11:20 AM | Link | Reply
  •  
    The rating agencies are no better than stock analysts and should not have any exalted position in the market. Whatever credibility they had before the meltdown they have now lost.

    Calpers is not totally innocent, but I'm on their side in this case simply because I think it's time to get rid of the rating agencies, and no one else seems to be taking them on.
    Jul 15 11:22 AM | Link | Reply
  •  
    "There simply aren't any guaranteed investment vehicles that will pay more than taxes and inflation. "

    And there is our problem. The government and most everyone else will not let prices hit their new natural equilibriums. Notice the complete shifts in supply and/or demand curves for a great deal of products and services.
    Jul 15 12:51 PM | Link | Reply
  •  
    Retail sales rise. Retail sales increased 0.6% in June to $342.1B, slightly better than +0.5% consensus, but down 9% vs. a year ago. May's sales were unrevised at +0.5%.

    Unrevised? Stop the Presses! I think I found a green shoot!
    Jul 15 04:54 PM | Link | Reply
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