Wall Street Breakfast: Must-Know News

• Elan risks losing blockbuster drug. A federal judge ruled that Elan's (ELN) recent deal with Johnson & Johnson (JNJ) violates a collaboration with Biogen Idec (BIIB) to jointly market multiple sclerosis drug Tysabri. Elan must now alter its J&J deal by September 26, or potentially lose all its rights to Tysabri, a drug with nearly $1B in annual revenue.
• Prius' patent problem. Toyota (TM) is facing a patent-infringement claim that could potentially prevent it from exporting the Prius and other hybrid models to the U.S. The complaint was filed yesterday by closely-held Paice LLC, which already won a 2005 case that the Prius and two other hybrids used Paice inventions.
• Beijing to raise quotas on foreign investors. Chinese authorities late Friday proposed changes to current restrictions on foreign investment, including raising the ceiling on investments by individual institutions by 25% to $1B, and shortening the duration of lock-ups to one-year from three. The announcement, which came after Shanghai's close, sparked a late-afternoon rally in Hong Kong, sending the Hang Seng up 2.8%. While the implications of the proposed changes are unclear given the size of China's markets, strategists were encouraged that Beijing is considering increased foreign investment.
• Losses rising at FHA. As its mortgage-related losses pile up, the Federal Housing Administration is at risk of seeing its reserves fall below the level mandated by Congress. The agency has rapidly increased its role in guaranteeing loans as part of an effort to stabilize the housing market, but its mounting losses raise concerns about whether the attempted rescuer will need its own taxpayer bailout. Another option is that the FHA may have to raise the premiums borrowers pay, although the agency says if there is a shortfall, it won't have to do anything other than report it to lawmakers.
• Deutsche Telekom shops U.K. unit. Deutsche Telekom (DT) has initiated discussions with Vodafone (VOD), France Telecom (FTE) and Telefonica (TEF) about selling its flagging T-Mobile U.K. unit. Talks are still in preliminary stages, but an improving global economy has raised hopes the unit could bring in as much as €4B ($5.7B). In the meantime, Deutsche Telekom is working to improve the unit's performance so that it can either demand a more attractive sale price or, if the bids are too low, it can cancel the sale and continue to operate the unit.
• Cloudy prospects for Oracle-Sun deal. The European Commission put Oracle's (ORCL) planned takeover of Sun Microsystems (JAVA) on hold, citing 'serious doubts' about competition in the database sector if the world's leading proprietary database company is allowed to take over the world's leading open source database company. As the European Commission investigates the $7.4B deal, rivals Hewlett-Packard (HPQ), Dell (DELL) and IBM (IBM) win another chance to lure away Sun's customers.
• Gearing up for the G-20 meeting. Ahead of a meeting of G-20 finance ministers this weekend: the U.S., U.K., Germany and France called for work to begin on coordinated exit strategies, though they acknowledged the crisis is not yet over; ECB president Jean-Claude Trichet outlined for the first time the principles the ECB will use to unwind its exceptional policy measures; Geithner is pushing for an international accord on capital and liquidity rules, with consensus by the end of 2010 and implementation by the end of 2012; and, the U.K., France and Germany want 'binding rules' to rein in compensation at financial institutions, though a cap on total bonus pools could cause as many problems as it solves. A full G-20 summit will take place September 24-25.
• Microsoft gets the last word, for now. Microsoft (MSFT) won a delay on a court order that would have required the software maker to change its Word program immediately or halt sales. The order won't take effect until an appeal of the underlying patent case is resolved, with oral arguments scheduled for September 23.
• Berkshire not in the mood for ratings firm. For the second time in two months, Berkshire Hathaway (BRK.A) reduced its holdings of Moody's Corp. (MCO), this time by 2%. The sales come as the ratings firm experiences profit declines and widespread criticism over its ratings of mortgage-backed securities. With 39.2M shares remaining, Berkshire is still Moody's largest shareholder.
• Android sprinting towards mass acceptance. Sprint (S) will begin selling its first mobile phone based on Google's (GOOG) Android operating platform in October. The move should help Android gain wider acceptance, as consumers have been slow to embrace the platform which has only been available through T-Mobile USA (DT).
• Small steps to a new reserve currency. The U.S. dollar is safe as the world's reserve currency for now, but China took the first step towards a new reserve currency by agreeing to buy $50B of the IMF's Special Drawing Rights. The deal marks the first such agreement in the IMF's history and China's first concrete step in achieving its long-term stated currency goal.
• Same-store sales down but not out. Retailers' same-store sales fell for the 12th month in a row in August, but the decline was smaller than July's drop and half of retailers beat expectations, some by large margins (including Target (TGT), Costco (COST) and Gap (GPS)). Analysts were generally positive about the results, upgrading a number of retailers' shares. (See the store-by-store breakdown: I, II, III, IV, V)
• Monster's index improves (.pdf). Monster's online employment index rose 7 points in August to 121, its highest monthly rate of increase since August 2005. Year on year, declines slowed to 24%, the most moderate slowdown so far this year.
• Jobless claims miss estimates. Initial Jobless Claims came in at 570,000, down 4K from a week ago (revised) but worse than the 562K consensus. Continuing claims rose 92K to 6.234M.

Earnings: Friday Before Open

• H&R Block (HRB): FQ1 EPS of -$0.39 misses by $0.02. Revenue of $275M (+1.3%) vs. $280M. Full-year guidance in line. (PR)

Earnings: Thursday After Close

• Cooper Companies (COO): FQ3 EPS of $0.54 misses by $0.08. Revenue of $285M (+2%) vs. $289M. Sees Q4 EPS of $0.66-0.68 vs. $0.60 and full-year EPS of $2.27-2.29 vs. $2.30. (PR)
• Esterline Technologies (ESL): FQ3 EPS of $1.09 beats by $0.19. Revenue of $362M (-1%) vs. $368M. (PR)
• Quiksilver (ZQK): FQ3 EPS of $0.03 in-line. Revenue of $501M (-11%) vs. $480M. (PR)
• Shanda Interactive Entertainment (SNDA): Q2 EPS of $0.90 beats by $0.06. Revenue of $181M (+48%) vs. $179M. Hopes to raise $800M spinning off games unit in planned U.S. IPO. (PR)
• Ulta Salon (ULTA): Q2 EPS of $0.10 beats by $0.05. Revenue of $274M (+10%) vs. $271M. (PR)

Today's Markets

Asia markets were mostly higher Friday, as is Europe. Futures edged higher overnight.

• Asia: Nikkei -0.27% to 10,187. Hang Seng +2.82% to 20,319. Shanghai +0.58% to 2,862. BSE Sensex +1.89% to 15,689.
• Europe at midday: London +0.8%. Paris +0.5%. Frankfurt +0.9%.
• Futures at 7:15: Dow +0.3% to 9361. S&P +0.4% to 1006. Nasdaq +0.5%.
  30-year Tsy -0.44%. 10-year -0.41%. 5-year -0.17%. 2-year -0.07%.
  Crude +0.85% to $68.54. Gold -0.6% to $991.80.
  Euro +0.1% vs. dollar. Yen +0.1%. Pound +0.2%.

Friday's Economic Calendar

• 8:30 Non-farm payrolls
• Notable earnings before Friday's open: HRB

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[markfl:]

"As its mortgage-related losses pile up, the Federal Housing Administration is at risk of seeing its reserves fall below the level mandated by Congress."

Rolfe Winkler with Reuters had a piece on his blog blogs.reuters.com/rolf.../ about the losses at FHA, noting the "paltry 2%" reserves, the same inadequate level that got Fannie and Freddie into similar trouble. It's increasingly evident that the worst recession both in terms of contraction and job losses has taught Washington very little.

Sep 04 07:33 AM

[Old Trader:]

"China took the first step towards a new reserve currency by agreeing to buy $50B of the IMF's Special Drawing Rights. The deal marks the first such agreement in the IMF's history and China's first concrete step in achieving its long-term stated currency goal."

Its only a small step, but definitely a harbinger...a "brown shoot", if you will, for the dollar, as the reserve currency. Actually, this was telegraphed a while ago, and I've written on this a few months back.

Sep 04 08:35 AM

[Joseph L. S...:]

"The U.S. dollar is safe as the world's reserve currency for now, but China took the first step towards a new reserve currency by agreeing to buy $50B of the IMF's Special Drawing Rights."

Actions have consequences.

Both the previous and current administrations decided we could mismanage our economy, eschew individual participation in the markets, and continue with 'business as usual' by keeping our largest financial institutions (barely) afloat. This was compounded when they issued a call, not to do the opposite of what got us into this mess and encourage savings, personal responsibility and accountability among the perps who created this fiasco by their greed and arrogance, but to spend more!

"Here! We'll pay your down payment with $8000 if you indebt yourself further to our financial institutions by buying a house! How's $4500 sound if you buy a car and finance the rest? Need a new refrigerator? Big Brother says you should have one! Buy! Buy! Buy!"

They may have fooled some of us. They certainly have fooled themselves. But the rest of the world looks at these irresponsible actions and concludes, in consequence, they need to protect themselves from our leadership. The profligacy and ignorance of basic economics at the national level confounds other nations.

China may be the first to take this step but, unless we change our ways, they won't be the last.

Sep 04 09:44 AM

[notsosmart:]

china will win the currency battle as their influence increases & ours decreases.the almighty bottom line influences everything & theirs is better than ours.this country is on an capitalistic suicidal path.you can only print yourself so much time.the dumb-dumbs here keep buying foreign products for price or prestige not understanding that they are not shooting themselves in the foot but in the head.things move a lot quicker in this new world order.the decline may show up sooner than expected.a society cant exist just pushing phony rated AAA paper.we better get back to making & buying our own quality products.if not we are doomed.careful,dont step on the green shoots.

Sep 04 10:30 AM

[Will.i.am:]

As Yogi Berra Said – It looks Like Déjà vu All Over Again – A few friends pointed out a neat little blog spot
(“News from 1930” website newsfrom1930.blogspot....) that points to items in an edition of the 1930’s WSJ that corresponds to each equivalent day in 2009.

Some of the items are rather eerily familiar.

Here are some from the September 3, 1930 WSJ:
Market has now reached resistance level where it ran out of steam on July 18 (240.57) and July 28 (240.81). Breaking through this level would be considered highly bullish signal. General confidence that this will happen based on recent market action; many leading stocks have already surpassed July highs. Further positive technicals seen in recent volume pattern (higher on rallies and lower on pullbacks), and in continued large short interest. Most economists agree business upturn close; peak in business was reached July 1929, so depression has lasted about 14 months. “Those who have faith and confidence in the country and its ability to come back will profit by their foresight. This has also been the case over the past half century.” Harvard Economic Society points to steady rise in bond prices as favorable for stocks. Says there is “every
prospect that the [business] recovery ... will not long be delayed,” although fall period may not be strong as expected. Notes worldwide decline in business, but 1922 recovery demonstrates US due to “great size, natural advantages, and diversity of conditions ... can lift itself out of depression without the stimulus of improved
foreign demand.”

This is from August 28, 1930:
There's a large amount of money on sidelines waiting for investment opportunities; this should be felt in market
when “cheerful sentiment is more firmly intrenched.” Economists point out that banks and insurance companies
“never before had so much money lying idle.”
Wow! Tons of money on sideline. Recession looks like it’s over. Bond rally good for stocks. Where have I heard this stuff
before. The more things change…….

Sep 04 10:30 AM

[hanson001:]

"The U.S. dollar is safe as the world's reserve currency for now, but China took the first step towards a new reserve currency by agreeing to buy $50B of the IMF's Special Drawing Rights."

From my understanding of SDRs, they are made up of a basket of currencies of which the U.S. dollar makes up around 45% of the basket. The IMF can change the weight of the dollar (in the basket) based on exchange rates. If you purchase these, are you really diversifying away from the U.S. dollar?

If China wants diversification of its reserves why not just buy the other major currencies in the basket (from Europe, Japan, and Great Britain) in the currency market? Is the IMF the new satan?

It makes no sense for China to desire a weaker dollar however. Like Japan, it's in their interest to have a strong dollar and thus great dollar reserves. This closes the trade imbalance loop and keeps their goods and services affordable to U.S. consumers, though I understand they worry about their dollar investments depreciating. Still what do you do? If I were China, I would purchase hard U.S. assets with that ocean of dollars. It looks like a perfect time for them to be shopping.

Sep 04 11:00 AM

[ebworthen:]

With FHA loans and Fannie and Freddie there is a perverse redistribution of wealth occurring.

People take out loans they can't afford, or are fired from their jobs to cut corporate costs. The government socialized the loss (risk) and spreads it among those still working to stay afloat, then gives interest free money to the banks and insurance companies it rescued.

Perverse indeed.

It's like a cop taking $20 out of your wallet to give to the thug who just robbed you of your watch with the rationalization of "He needs the cash so things don't get worse."

Sep 04 11:15 AM

[Buckoux:]

The US Dollar is as much a national resource to the US as crude oil is to Saudi Arabia. I wonder what the Saudi government would do if it caught its oil minister whizzing in one of its oil wells?

Sep 04 11:18 AM

[tobi:]

And again the bears are getting smoked today. This is so easy to predict with stick saves and rallying on fake good news, first get people to go short and then rally and force them to cover.

Sep 04 12:49 PM

[AndrewBaker:]

The US market is getting to be as unpredicable as the Shanghai and Schenzen markets: and they are the biggest gambling markets in the world. When the rain causes the computer screens to go down, the Chinese dealers bet on which raindrop will reach the bottom of the window first. If the world is paying much attention to these markets, then we really have gone gaga. And if any attention we pay to the utterings from the London G20 meeting this weekend leads to the markets moving higher, that will really show how crazy we have all become.

Let's have the drop we need now, and then we can dust ourselves off and get sensible about what to do to pull us out of this recession. Any other way may save a few politicans and bankers but will hurt main street disproportionately hard.

While we're waiting for common sense to prevail, sell the banks: their prices now are ludicrous, and without our tax money, they're all bust.

Sep 04 01:51 PM

[bbowen7:]

Hanson001 writes:
"If China wants diversification of its reserves why not just buy the other major currencies in the basket (from Europe, Japan, and Great Britain) in the currency market? Is the IMF the new satan?"

They are looking for a substitute currency, not a method to deal with a bunch of currencies. Of course, with the US being the largest economy in the world, the US currency would have a disproportionate weighting in the new currency.

The big point is that our shell game will soon be over, and that the Chinese will be among the first to stop being enablers of our financial irresponsibility.

Sep 04 02:11 PM