Wall Street Breakfast: Must-Know News

• CIT on the brink. Sources say CIT Group (CIT) is preparing a sweeping exchange offer that would eliminate 30-40% of its $30B in debt, giving bondholders new debt with a later maturity, and nearly all the equity in a restructured CIT. The plan is likely to be more attractive to bondholders with near-term debt, and some insiders say competing bondholder interests are likely to thwart any deal and send CIT to bankruptcy court. CIT -24% premarket.
• IMF turns optimistic. The IMF reduced its estimate of global loan losses by 15% to $3.4T due to improvements in credit markets and a tentative economic recovery. It predicts bank losses on bad assets over the next year will hit $470B in the euro area, $420B in the U.S., and $140B in the U.K. "Systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement," the IMF said this morning in its Global Financial Stability Report. "Even so, credit channels are still impaired and the economic recovery is likely to be slow." Separately, media reports say the IMF will lift its 2010 growth forecast for the world economy to 3.1% from 2.5%, and has revised its 2009 outlook to -1.1% from -1.4%.
• FDIC comes with hat in hand. Acknowledging it vastly underestimated the problems facing U.S. banks, the FDIC said Tuesday its deposit insurance fund has fallen into the red for only the second time in its history (the first was in 1991 during the saving-and-loan crisis), and asked banks to prepay three years of premiums in order to prime its coffers with $45B. Banks were generally upbeat about the proposal, which forestalls the possibility of an emergency assessment. Banks would amortize the prepayment over three years so as not to impair their already fragile balance sheets. Based on current levels, Wells Fargo's (WFC) contribution would be $3.2B, JPMorgan (JPM) would pay $2.4B, and Citigroup (C) $1.2B, although fees could be higher based on the FDIC's plan to boost the assessment rate by $0.03 per $100 in deposits and its assumption that bank deposits will increase by 5%/year.
• H-P may join PC and print units. Sources say H-P (HPQ) CEO Mark Hurd is working on a plan to combine H-P's printer and PC businesses into one unit under current PC chief Todd Bradley. When Hurd took the helm four years ago, H-P's printer business accounted for more than 70% of its profits, while PCs were less than 5%; in its most recent quarter, PCs produced $8.43B in revenue and $386M in earnings (12% of H-P's profits), while printer and ink generated revenue of $5.66B and $960M in earnings (30%). One of Hurd's first moves when he joined the company was to separate the units, which had recently been melded by previous CEO Carly Fiorina.
• More improvement in home prices. The ongoing decline in U.S. home prices continued to abate, with prices down 12.8% and 13.3% for S&P/Case-Shiller's 10- and 20-city home price indexes, a 1.7% improvement from a month ago. The group said figures continue to support the stabilization story, "but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures."
• Consumer confidence takes a turn for the worse... The Conference Board's Consumer Confidence index fell unexpectedly to 53.1, down from 54.5 in August and well short of 57.0 consensus. The Present Situation index dropped 22.7 from 25.4. Expectations fell moderately. "While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes," the Conference Board said in its press release. "With the holiday season quickly approaching, this is not very encouraging news."
• ... as does investor confidence. State Street's Global Investor Confidence fell to 118.1 from 122.8 in August, which was a five-year high. "There is a recognition that a portion of the recent rise in global equity prices can be attributed to liquidity expansion rather than fundamental opportunities," the study said. "Institutional investors are pausing to assess this balance."
• Ontario sues tobacco companies. The Province of Ontario filed a lawsuit on Tuesday seeking C$50B from several tobacco companies - including Altria (MO) - to recover smoking-related health costs since 1955. Ontario argues tobacco makers have known for decades that their products are addictive and dangerous to health, but have done little or nothing to mitigate their effects and were late to warn consumers. Tobacco companies accuse the government of double dipping by taxing smokers and suing tobacco makers.
• China to stay the course. People's Bank of China said it will stick with its accommodative monetary policy to support an economy still suffering from weak external demand. Basically a repetition of its previous quarterly statement, the PBoC said China needs to speed up the restructuring of its economy so that growth depends less on exports. (PBoC statement (Chinese))

Earnings: After Tuesday's Close

• Allscripts-Misys Healthcare Solutions (MDRX): FQ1 EPS of $0.15 beats by $0.01. Revenue of $165M (+78%) vs. $167M. Shares +0.7% AH. (PR)
• Darden Restaurants (DRI): FQ1 EPS of $0.67 beats by $0.01. Revenue of $1.7B (-2%) vs. $1.8B. Shares -6.1% AH. (PR)
• Jabil Circuit (JBL): FQ4 EPS of $0.16 beats by $0.08. Revenue of $2.8B (-15%) vs. $2.7B. Sees Q1 EPS of $0.24-0.32 vs. $0.18 and revenue of $3B-3.2B vs. $2.9B. Shares +7.5% AH. (PR)
• Micron Technology (MU): FQ4 EPS of -$0.10 beats by $0.09. Revenue of $1.3B (-10%) in-line. DRAM sales up 28% sequentially due to 19% increase in volume and 8% increase in average price. NAND flash sales up 10% sequentially. Shares flat premarket. (PR)
• Nike (NKE): FQ1 EPS of $1.04 beats by $0.07. Revenue of $4.8B (-12%) vs. $4.9B. Future orders down 6%. Shares +5.8% premarket. (PR)
• Sealy (ZZ): FQ3 EPS of $0.05 in-line. Revenue of $350M (-14%) vs. $335M. Shares +8.4% AH. (PR)
• Worthington Industries (WOR): FQ1 EPS of $0.08 beats by $0.04. Revenue of $418M (-54%) vs. $462M. (PR)

Today's Markets

Asian markets posted gains Wednesday, Europe is in the green and stock and commodity futures are higher.

• Asia: Nikkei +0.33% to 10,133. Hang Seng -0.28% to 20,955. Shanghai +0.9% to 2,779. BSE +1.63% to 17,127.
• Europe at midday: London +0.1%. Paris +0.4%. Frankfurt +0.2%.
• Futures: Dow +0.3%. S&P +0.4%. Nasdaq +0.4%. Nov. crude +1.8% to $67.91. Dec. gold +0.9% to $1,003.10.

Wednesday's Economic Calendar

• 7:00 MBA Mortgage Applications
  8:15 ADP Jobs Report
  8:30 Final Q2 GDP and Corporate Profits
  9:00 NAPM NY Report on Business
  9:30 SEC panel on short selling, Day 2
  9:45 NAPM Chicago Business Barometer
  10:30 EIA Petroleum Inventories
  10:30 Fed's Lockhart speaks on U.S. economic outlook
  12:00 PM Chicago Fed's Midwest Manufacturing Index
  12:35 PM Fed's Kohn participates in panel on "Central Bank Exit Policies"
  2:30 PM Fed's Tarullo testifies on "International Cooperation to Modernize Financial Regulation"
• Notable earnings before Wednesday's open: ATU
• Notable earnings after Wednesday's close: LWSN

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Comments

[markfl:]

The ADP report came in a little disappointing vs. Bloomberg's survey forecast. I am getting increasingly jittery about the U6 unemployment being as high as 9.9, and that the markets will end the week on a sour note. We get some good M&A activity and these macro reports throw water all over it. I don't think we will really have true vector on the economy until Q3 GDP; however, the final Q2 revision came in as high as double some forecasts, which bodes well for Q3 at the upside of 3-4. Good for stocks but the prospect of 10% unemployment is becoming increasingly hard to avoid.

Sep 30 08:34 AM

[AndrewBaker:]

True unemployment is probably already over 10%.

Foreclosures will be down because why take a house that you can't sell and doesn't give you your money back when you can keep getting money from the occupier, even if they are behind with their payments?

Consumer sentiment is down because people are now realizing that there is no recovery on the go, just a few economic improvements because the wage bill is lower after laying off so many, re-stocking costs are less because stock levels are still so high, and for the businesses that are lending money, margins are higher because the cost of money is so low yet they are charging high rates to lend it out.

Put it all together and you come to the conclusion that things are not getting better, only worse more slowly. When the true extent of delinquent loans are known and the effects are properly felt along with unemployment and home losses, then the real problems will begin. We have not got there yet, so be cheerful yes, because it's a good way to be, but do not be complacent. If you're long in the market, be watchful; and if you're not in but holding cash, keep holding it: it's the safest way.

Sep 30 08:59 AM

[markfl:]

I should have said U3. Any perceived improvement in the economy or re-extension of benefits may only add entrants to the workforce and drive up the rate further.

On Sep 30 08:34 AM markfl wrote:

> The ADP report came in a little disappointing vs. Bloomberg's survey
> forecast. I am getting increasingly jittery about the U6 unemployment
> being as high as 9.9, and that the markets will end the week on a
> sour note. We get some good M&A activity and these macro reports
> throw water all over it. I don't think we will really have true vector
> on the economy until Q3 GDP; however, the final Q2 revision came
> in as high as double some forecasts, which bodes well for Q3 at the
> upside of 3-4. Good for stocks but the prospect of 10% unemployment
> is becoming increasingly hard to avoid.

Sep 30 09:10 AM

[JCCIII:]

Ontario Sues Tobacco Companies. Canada, I dis-invested in your country following your politicians' lies during your 2006 elections concerning the energy trusts. I have been looking for reasons to re-invest, but so far the risk associated with putting my money within your sphere of chicanery outweigh the potential rewards. Your attempt, now, to double sue tobacco companies only reinforces my previous decisions.

Sep 30 09:55 AM

[spald_fr:]

[Ontario sues tobacco companies. The Province of Ontario filed a lawsuit on Tuesday seeking C$50B from several tobacco companies - including Altria (MO) - to recover smoking-related health costs since 1955. Ontario argues tobacco makers have known for decades that their products are addictive and dangerous to health, but have done little or nothing to mitigate their effects and were late to warn consumers.]

Ontario grows some of the best fine tobacco for cigar wrap, so I would imagine the Ministry of Agriculture would be aware of the potential hazards of smoking. I believe the A+ preferred tobacco wrap comes from Connecticut, with Ontario a close second.

Won't stop the lawyers, though.

Sep 30 10:15 AM

[Old Trader:]

Re: CIT restructuring,

There was a piece in NYT's Dealbook yesterday, talking about this, and evidently, if a deal doesn't get struck, in terms of a restructuring with a debt for equity swap, and the company ends up in bankruptcy, the money CIT got from the government (aka, the taxpayer) will be "kaput".

Sep 30 10:44 AM

[gold33vain:]

Silver and Gold are the only mid term (1-4 years) solution to the falling dollar and the hyperinflation that will DEFINITELY manifest itself during 2010 and continue through 2012.

Owning gold & silver is buying INSURANCE on your wealth. Insure it soon or lose it later.

We have legalized gambling in the USA...NASDAQ, NYSE, COMEX, etc. Holding a stock portfolio in this economic climate is riskier than casino gambling.

Gambling with discretionary money is OK as it is a form of entertainment. Gambling with your retirement fund and your family financial future is not a form of entertainment.

Sep 30 11:47 AM

[ebworthen:]

Why would the banks not be upbeat about the FDIC proposal?

The money they will be paying to the FDIC comes from the taxpayer!!!

*$@#%*!

The FED and Congress have made it clear that they will continue to provide free money at 0% for the banks to pay bonuses, FDIC fees, buy other banks, whatever the hell they want to do with it.

Once again the middle class gets the shaft to benefit the hegemony of the banking and government classes who thrive outside of the tyrannous yoke about the necks of those they feed off of.

Oct 01 11:03 AM