Wall Street Breakfast: Must-Know News

• Madoff CFO pleads guilty: "It was all fake." Frank DiPascali, who served as a 'key lieutenant' in Bernie Madoff's firm, pleaded guilty to ten charges of financial crimes including conspiracy, securities fraud, money laundering and perjury. DiPascali told the court he recorded fictitious trades for clients and lied to the SEC about the firm's activities under Madoff's instructions. Though his testimony shed some light on how the fraud was perpetrated, DiPascali declined to identify any accomplices other than Madoff. To date, only Madoff, DiPascali and the firm's outside accountant David Friehling have been charged in connection to the $50B fraud, though authorities are said to be investigating at least ten other people. (Read the SEC's charges against DiPascali)
• Parsing the productivity jump. A preliminary estimate of Q2 nonfarm productivity showed a strong 6.4% increase, compared to 5.5% consensus. Unit labor costs fell 5.8% compared to -2.5% consensus. The larger-than-expected fall in labor costs stemmed from the fact that hours worked fell 7.6% but output fell just 1.7%, indicating workers are either putting in more unpaid overtime or are being more productive in an effort to hold on to their jobs. Though that may not seem to be a basis for a sustainable recovery, it's historically how recessions have ended. Manufacturing sector productivity rose 5.3%, breaking a streak of four consecutive declines.
• Obama releases derivatives reform. The Obama administration released its derivatives reform proposal, which would split supervision of the $450T private swaps market between the SEC and the Commodity Futures Trading Commission, and would require all standardized derivatives to trade on regulated exchanges. It also recommended federal supervision for over-the-counter [OTC] derivatives dealers and traders that take large positions in OTC swaps. (Read the White House's press release and reform proposal (.pdf))
• China arrests Rio employees. China formally arrested the four Rio Tinto (RTP) employees that have been detained since July 5, charging them with bribery and illegally obtaining trade secrets but holding back from the more serious charge of espionage. Despite the downgrade in the severity of the charges, the news is likely to further unsettle investors worried about Rio's future in China. Shares -3% premarket (7:00 ET).
• CIT drops on delayed earnings report. Shares of CIT Group (CIT) fell nearly 19% in trading yesterday after the company announced it will delay its Q2 earnings report, citing the 'unreasonable effort and expense' that would be required to meet its reporting deadline during its restructuring. Shares had rallied 116% last week as investors hoped a debt exchange deal would help CIT avoid bankruptcy, and the company still insists that bondholders aren't planning to push for a Chapter 11 filing. However, the news reawakened fears that the most likely outcome for CIT could be a prepackaged bankruptcy. (Read CIT's late filing notification to the SEC)
• BHP beats but profit falls. BHP Billiton (BHP) broke a six-year streak of record annual results, posting a 61.8% fall in full-year net profit to $5.9B because of a slump in commodity prices. However, the mining company's profit came in slightly ahead of expectations and cash flow was a record $18.9B. Revenue fell 16% to $50.2B. Despite a recent improvement in commodity prices, the company believes "the global economy is likely to emerge from this recession less rapidly than in previous cycles." Shares -0.8% premarket (7:00 ET).
• Taylor Bean prepares for Ch. 11. Taylor, Bean & Whitaker Mortgage Corp., the country's 12th-largest mortgage lender, is expected to file for bankruptcy shortly. In court papers filed last week, Taylor Bean said a 'bankruptcy filing is imminent' after it was forced to stop its mortgage lending operations on August 5. Bank of America (BAC) is taking over all Taylor Bean mortgages backed by the Federal Housing Administration.
• Bidders circle Guaranty Bank. Guaranty Bank (GFG), the major Texas lender on the verge of collapse, is drawing bidding interest from Blackstone Group (BX), Flexpoint and U.S. Bancorp (USB) as rising bank failures prompt potential acquirers to look for cheap assets. A Guaranty failure would be the largest since the September seizure of Washington Mutual.
• Lloyds sells assets to BNY Mellon. Lloyds Bank (LYG) plans to bring its asset management units together under its Scottish Widows brand and sell most of its Insight Investment Management Ltd. business to Bank of New York Mellon (BK) for £235M ($386M). The deal is expected to close in Q4. LYG +3.1% premarket (7:00 ET).
• MSFT brings Office to Nokia. Microsoft (MSFT) is expected to announce this morning that it's teaming up with Nokia (NOK) to make its Office suite of applications available on Nokia's phones. The move comes after Google's (GOOG) recent entrance into the software market with free online versions of word processing, calendar and e-mail applications.
• White House mulls change to clunker vouchers. As the success of cash-for-clunkers diminishes inventories of many popular, fuel-efficient clunker replacements, the White House is considering a congressional request to issue vouchers toward future vehicle purchases even when new models are unavailable or need to be ordered from the manufacturer. Under the current system, vouchers can only be used if a model is in stock. As of Tuesday morning, 292,447 vouchers had already been issued under the cash-for-clunkers program.
• Atticus shutters two funds. Activist hedge fund Atticus Capital closed down two of its funds, including its flagship Atticus Global, and returned $3B to investors. Founder Timothy Barakett said the move was because of personal reasons, and wasn't motivated by withdrawals. Atticus Global lost 25% in 2008 and is down another 6% this year. (Read Barakett's letter to investors)
• Mortgage apps fall. Mortgage applications fell 3.5% from last week, MBA reported. The average interest rate on 30-year fixed-rate mortgages rose to 5.38% from 5.17%.
• Retail sales. Chain store sales fell 0.5% in the first week of August, Redbook said, slightly better than the -0.6% expected. According to ICSC, weekly sales were up 0.4% Y/Y and were flat compared to the previous week.

Earnings: Wednesday Before Open

• JA Solar (JASO): Q2 EPS of -$0.18 vs. consensus of -$0.06 (may not be comparable). Revenue of $88M (-51%) vs. $78M. (PR)
• Liz Claiborne (LIZ): Q2 EPS of -$0.48 misses by $0.08. Revenue of $684M (-29%) vs. $691M. (PR)

Earnings: Tuesday After Close

• Applied Materials (AMAT): FQ3 EPS of $0.00 beats by $0.08. Revenue of $1.13B (-39%) vs. $958M. (PR)
• Celadon Group (CLDN): FQ4 EPS of $0.01 misses by $0.02. Revenue of $117M (-24%) in-line. (PR)
• Clearwire (CLWR): Q2 EPS of -$0.38 beats by $0.01. Revenue of $64M (+9%) vs. $65M. Total subscribers up to 511,000 from year-ago 461,000. (PR)
• Cree (CREE): FQ4 EPS of $0.18 beats by $0.01. Revenue of $148M (+9%) vs. $146M. Sees Q1 EPS of $0.21-0.23 vs. $0.17. Sees Q1 revenue of $160M-166M vs. $151M. (PR)
• Systemax (SYX): Q2 EPS of $0.17 misses by $0.12. Revenue of $722M (-5%) vs. $771M. (PR)
• Warnaco Group (WRC): Q2 EPS of $0.48 in-line. Revenue of $456M (-9%) vs. $425M. Sees full-year revenue down 7-9% from year ago. (PR)
• WuXi PharmaTech (WX): Q2 EPS of $0.24 beats by $0.12. Revenue of $67M (-3%) vs. $64M. (PR)

Today's Markets

Asian markets closed down, China heavily so. Despite Asian jitters, European markets are trading up and U.S. futures are weakly positive.

• In Asia, Nikkei -1.4% to 10,435. Hang Seng -3% to 20,435. Shanghai -4.7% to 3,113. BSE -0.4% to 15,020.
• In Europe at midday, London +0.6%. Paris +0.6%. Frankfurt +0.7%.
• Futures: Dow +0.2%. S&P +0.1%. Nasdaq +0.25%. Crude +0.2% to $69.62. Gold flat.

Wednesday's Economic Calendar

• FOMC Meeting
  7:00 MBA Mortgage Applications
  8:30 International Trade
  10:30 EIA Petroleum Status
  2:00 PM Treasury Budget
  2:15 PM FOMC Announcement
• Notable earnings before Wednesday's open: EJ, JASO, LIZ, M, SLE, SOL
• Notable earnings after Wednesday's close: AAP, HRS, KGC, LDK, NTES, URS

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[doubleguns:]

Productivity up as people work their a$$ off hoping to hold on to a job. Mortgage apps down and retail sales off only .5% instead of .6%.

Figure the market will go through the roof today. (sarcasm)

Aug 12 08:23 AM

[AndrewBaker:]

Well, everyone is waiting for the Fed to speak about the economy and the result of the auction of the bonds being sold this week: I would be surprised if both didn't get presented as good for the recovery. With the markets down yesterday with profit being taken, they are ripe to pick back up again later today and maybe continue to the end of the week. Vacation time means that no great volume is needed to move things either way, and we already know that the powers-that-be want a northerly direction, so I'm staying in for now and booking my profits later.

I have gold and other commodities too as support.

Aug 12 08:23 AM

[BlueOkie:]

If health care passes I see unemployment going up! Companies won't be able to afford paying the extra costs. If Cap and Trade passes I see industries moving off shore.

Aug 12 08:52 AM

[robert.b.fe...:]

Minimum wage went up but unit labor costs went down? Yea right. However the cost of a breakfast sandwich went from $2.15 to $2.63 must be all that productivity. Retail sales dropped which means consumer confidence is rising at least that's what it meant last month. Should Texas declare Guaranty Bank too big to fail and buy it?

Aug 12 08:53 AM

[notsosmart:]

be aware-much rail stock(diesel engines,freight cars) are sitting idle.check it out.wonder how all that productivity is moving around?truck?

Aug 12 09:12 AM

[Joe Shareho...:]

Rate increases today, market plunges. Rate remains, market plunges. Does it really matter anyway?

Aug 12 09:20 AM

[ebworthen:]

Isn't a person at their most manic right before their breakdown?

How are you Fred? "I'm great! God! Never felt better!".

"Didn't you just declare bankruptcy and get out of the hospital from that overdose/alcohol poisoning?" you ask. "Oh that, yeah, well, just needed to learn my limit that's all, and my Mom and Dad cashed out one of their retirment accounts to pay my bills and buy me a case of scotch, everything is just GREAT!" sniff...tweak nose...sniff.

Good Lord, we've gone mad.

Rally.

Recovery.

Based on what?

Really people, where is sanity?

Aug 12 10:31 AM

[Buckoux:]

"The play's the thing".

On Aug 12 10:31 AM ebworthen wrote:

> Recovery.
>
> Based on what?
>
> Really people, where is sanity?

Aug 12 11:32 AM

[I.H.:]

Love this stuff, keep up the good work.

Aug 12 12:38 PM

[cigarbourbo...:]

"and i think it's gonna rain today" (R. Newman)

Aug 13 08:31 AM