Wall Street Breakfast: Must-Know News

• Towering list of troubled banks. The FDIC's watchlist of potentially problematic banks grew by more than a third to 416 in Q2, the highest level in fifteen years and equivalent to around 5% of the country's banks. The deposit insurance fund, which protects more than $4.5T, fell to $10.4B from $13B in the previous quarter (though that news should perhaps be less troubling to investors than some headlines suggested). Bank loan loss provisions rose to $66.9B from $60.8B, while the U.S. banking industry posted a net loss of $3.7B after a profit of $7.6B in Q1. FDIC's Sheila Bair acknowledged the heavy costs of rising bad loans and falling asset values, but noted "banking industry performance is, as always, a lagging indicator." (Read the FDIC's press release)
• Fed may trim planned MBS purchase. The Federal Reserve may not need to buy back the full $1.25T in mortgage-backed securities the bank is authorized to purchase by the end of the year. Richmond Fed President Jeffrey Lacker said the bank will evaluate “whether we need or want the additional stimulus” from buying the full amount, while St. Louis Fed President James Bullard said "it might not be necessary." However, even if the Fed chooses to stop short of the full $1.25T of purchases, Bullard said total spending would still be close to that target. (Read Lacker's speech)
• GDP shrinks less than expected. GDP fell an annualized 1% in the second quarter, in-line with an estimate released last month but better than the 1.5% contraction economists expected. Business inventories fell a record $159.2B, worse than the $141.B estimated earlier. However, analysts believe the fall in inventories has likely reached its bottom and, excluding inventories, GDP rose 0.4%, its first gain in a year. Personal consumption was down 1%, better than the -1.2% prior estimate and consensus of -1.3%. (Read the BEA's GDP report)
• Sweden goes negative. Swedish Riksbank became the first central bank in the world to introduce negative interest rates on bank deposits. Riksbank is hoping the move will encourage banks to lend more. The move will be closely watched by other central banks, and Bank of England's Mervyn King has already hinted he may follow Sweden's lead to avoid a liquidity-trap in the U.K.
• Benmosche helps AIG rally. Shares of AIG (AIG) continued to rally yesterday, gaining nearly 27% after new CEO Robert Benmosche said he's been in contact with former chief Hank Greenberg, hoping to draw on his advice about problems at the bailed-out insurer. Benmosche also reiterated his intent to take a slower approach to asset sales, giving the market a chance to recover first because "if we sell too soon, everyone loses." Separately, a recently obtained draft of a Treasury document called the government's investment in AIG 'highly speculative,' a phrase later omitted from a final version of the document.
• Google News faces antitrust probe. Italian antitrust regulators have opened an investigation into Google News (GOOG), concerned the service may be an abuse of the company’s dominant position on the internet. The investigation marks the first time Google News has faced a complaint on competition rather than copyright grounds.
• China iPhone in Q4. China Unicom (CHU) said Apple's (AAPL) iPhone will go on sale in China in Q4, and both the original iPhone and a 3-G model will be available. Apple will face competition for Chinese marketshare from Research in Motion's (RIMM) Blackberry and smartphones powered by Google's (GOOG) Android software.
• Dell doesn't disappoint. Dell (DELL) posted better-than-expected Q2 results yesterday (see details below) after cutting costs by contracting out more production. Dell, which is trying to save $4B annually, managed to raise gross margins to 18.7% by farming out as much as 40% of the company's manufacturing. The company said it's seeing "seasonal demand improvements" in both its consumer and government businesses.
• U.S. jobless claims dip down. Initial Jobless Claims registered 570K, down 10K from a week ago (revised) but worse than the 565K consensus. Continuing claims fell 119K to 6.133M.
• Japan's joblessness rises. Japan's jobless rate rose to a record 5.7% in July, threatening to undermine the country's recovery efforts and a punishing blow to Prime Minister Taro Aso ahead of elections his ruling Liberal Democratic Party will likely lose. Consumer prices dropped a record 2.2% compared to the previous year.
• U.K. GDP contracts. U.K. GDP contracted 0.7% in the second quarter, slightly better than the previous estimate of 0.8%. The economy shrank 5.5% from a year ago, the most since records began in 1955.

Earnings: Friday Before Open

• Tiffany (TIF): Q2 EPS of $0.46 beats by $0.13. Revenue of $612M (-16%) vs. $602M. Sees full-year EPS of $1.65-1.75 vs. $1.58 consensus. (PR)

Earnings: Thursday After Close

• Aruba Networks (ARUN): FQ4 EPS of $0.03 beats by $0.01. Revenue of $53M (+11%) vs. $49M. (PR)
• Bebe Stores (BEBE): FQ4 EPS of $0.00 misses by $0.01. Revenue of $130M (-24%) vs. $129M. Sees Q1 EPS of -$0.05 to $0.00 vs. $0.04. (PR)
• Cost Plus (CPWM): Q2 EPS of -$0.90 misses by $0.06. Revenue of $183M (-13%) vs. $186M. Same-store sales down 10.9%. Sees Q3 revenue of $177M-186M vs. $190M. Sees Q3 same-store sales down 6-11%. (PR)
• Dell (DELL): Q2 EPS of $0.24 beats by $0.01. Revenue of $12.8B (-22%) vs. $12.6B. "We have been reducing complexity in our organization and significantly lowering operating costs," said CEO Michael Dell. If demand trends continue, expects 2H revenue stronger than 1H. "We are expanding our capabilities in enterprise technology and services and investing in our core business." (PR)
• J Crew Group (JCG): Q2 EPS of $0.29 beats by $0.14. Revenue of $358M (+6%) vs. $347M. Same-store sales down 5%. (PR)
• Novell (NOVL): FQ3 EPS of $0.07 in-line. Revenue of $216M (-12%) vs. $217M. (PR)
• Marvell Technology Group (MRVL): Q2 EPS of $0.18 beats by $0.04. Revenue of $641M (-24%) vs. $620M. (PR)
• MICROS Systems (MCRS): FQ4 EPS of $0.36 beats by $0.04. Revenue of $224M (-13%) vs. $215M. (PR)
• Solera Holdings (SLH): FQ4 EPS of $0.17 misses by $0.21. Revenue of $144M (-1%) vs. $139M. (PR)

Today's Markets

Asia markets were mixed Friday, with moderate gains in Japan offset by hefty losses in Shanghai. Europe markets are up about 1%, and U.S. futures are trading near overnight lows.

• Asia: Nikkei +0.57% to 10,534. Hang Seng -0.71% to 20,099. Shanghai -2.91% to 2,861. BSE +0.9% to 15,922.
• Europe at midday: London +1%. Paris +1.4%. Paris +1.2%.
• Futures: Dow +0.3% to 9599. S&P +0.5% to 1034. Nasdaq +0.5%.
  Crude +0.7% to $73.02. Gold +0.6% to $952.90.
  30-year Tsy -0.27%. 10-year -0.13%.
  Euro -0.1% vs. dollar. Yen -0.4%.

Friday's Economic Calendar

• 8:30 Personal Income and Outlays
  9:55 University of Michigan Consumer Sentiment
• Notable earnings before Friday's open: FRO, TIF

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[markfl]

Despite other more optimistic consumer stats of previous days, "[c]onsumer spending in the U.S. probably increased in July at half the pace of the previous month. I guess you could call that a decline. At the same time, "figures may show the index of consumer sentiment dropped to 64 from 66 in July, based on the Bloomberg survey median." Actually, that IS a decline. www.bloomberg.com/apps...

2009 Aug 28 07:34 AM

[doubleguns]

Negative interest rates!!!

Why bother?!

Keep it under the mattress, in a cookie jar, buried in the yard, it doesn't matter where, but I am not paying no thieving bank to keep my money!!!!

I will find an alternative.

2009 Aug 28 08:02 AM

[marketman54]

LET SEE:

410 Banks in trouble

GDP down 1%

Unemployment up every month

Consumers not consuming

Foreclosures up

$2 trillion of debt and rising

YEP, I GUESS THINGS ARE REALLY LOOKING UP!!!!

2009 Aug 28 08:12 AM

[Bryan Gomez]

"FDIC's Sheila Bair acknowledged the heavy costs of rising bad loans and falling asset values, but noted "banking industry performance is, as always, a lagging indicator."

Isn't it that banking industry performance is always a leading indicator? Isn't it that in early cycle recoveries, banks must lead the outperformance?

2009 Aug 28 08:35 AM

[Truyen]

With the news from GDP shrinks less than expected, we can believe that we are in the right direction of recovery at least now.

2009 Aug 28 08:45 AM

[bbowen7]

People make a difference. We can be grateful that at the moment of crisis we had Ben Bernanke, Hank Paulson, and Sheila Bair. There is room for criticism, but they were solid, and not moved by the critics.

2009 Aug 28 09:42 AM

[AndrewBaker]

Yep, and think how good it would be if we has some really good news.

On Aug 28 08:12 AM marketman54 wrote:

> LET SEE:
>
> 410 Banks in trouble
>
> GDP down 1%
>
> Unemployment up every month
>
> Consumers not consuming
>
> Foreclosures up
>
> $2 trillion of debt and rising
>
> YEP, I GUESS THINGS ARE REALLY LOOKING UP!!!!

2009 Aug 28 10:56 AM

[AndrewBaker]

Being philosophical for a moment, I and many others, on here certainly, have been vocal in pointing out that the real situation is not as rosy as politicians, bankers and talking heads would have us believe, and some of us have been buying shorts when it looked like a reversal was coming/had arrived, and also taking short term profits on upward spikes in prices, plus holding cash rather than go long longer than the short term.

Well, what if we had instead gone with the crowd and joined this rally back in March/April? The market would surely have jumped even more and prices would have gone far more into overbought territory than they did and are. At some point, some amongst us would have said, "enough is enough" and taken their profit, which would have caused others to join in. The result would have been a big fall from a much higher position.

My point and conclusion? Us bears have saved the world from itself by being a valve on this pressured up-market. We should congratulate ourselves and take a bow: and also keep our money and shorts ready for later when we can then get our reward.

2009 Aug 28 11:06 AM

[Joseph L. Shaefer]

“The FDIC's watchlist of potentially problematic banks grew by more than a third to 416 in Q2, the highest level in fifteen years…”

If the FDIC shutters all 416 it is still treating only SYMPTOMS, not underlying CONDITIONS. if instead we saved those 416 smaller banks (for FAR less money) and let Citicorp or B of A or Megabank Inc. die the natural death they should, given their mis-steps, mis-takes, and mis-appropriation of taxpayer largesse, we could probably safely move all Citi (for instance) depositors to smaller banks that would then be able to continue as growing concerns. And we’d have removed one more “too-big-to-fail” bloated cancer from our nation.

2009 Aug 28 02:18 PM

[notsosmart]

is all this really fertilizing the green shoots?i think the green shoots are only weeds & the weed killer is coming.

2009 Aug 28 02:47 PM

[camelbox]

Your comment makes no sense.

Are you the Bank of Sweden?

If the BoS is paying banks to take its money that would result in higher interest rates for consumer depositers, not lower ones. I just have no idea where you were going with this.


On Aug 28 08:02 AM doubleguns wrote:

> Negative interest rates!!!
>
> Why bother?!
>
> Keep it under the mattress, in a cookie jar, buried in the yard,
> it doesn't matter where, but I am not paying no thieving bank to
> keep my money!!!!
>
> I will find an alternative.

2009 Aug 28 04:19 PM

[Bryan Gomez]

you know its weed if it grows up so fast


On Aug 28 02:47 PM notsosmart wrote:

> is all this really fertilizing the green shoots?i think the green
> shoots are only weeds & the weed killer is coming.

2009 Aug 28 11:29 PM