Wall Street Breakfast: Must-Know News

• Fed frets CRE collapse. In a just-revealed presentation to banking regulators last month, the Fed lamented that U.S. banks "are slow" to book losses on commercial real-estate loans being battered by slumping property values and rental payments (see below for more on commercial rentals). "Banks will be slow to recognize the severity of the loss - just as they were in residential," the Fed warned, suggesting banking regulators are girding for a rerun of the home-lending breakdown. NY Fed chief Bill Dudley echoed similar concerns in a speech this week, saying, "More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures."
• Kindle goes global. Amazon.com (AMZN) announced late Tuesday a new version of its bestselling book reader that will wirelessly download books in more than 100 countries using AT&T (T) and its international roaming partners' network instead of Amazon's U.S. partner Sprint (S). The global Kindle will retail for $279, while the price of the domestic version drops by $40 to to $259. Electronic book readers are having a breakout year; in a report being released today, Forrester will revise its sales volume forecast prediction for the industry to 3M devices, up from a previous estimate of 2M.
• Fannie, Freddie lend a hand. Sources say Fannie Mae (FNM) and Freddie Mac (FRE) are readying a program that will help mortgage banks acquire the short-term credit they need to make home loans by committing in advance to purchase certain mortgages. The plan builds on an undisclosed pilot that Freddie has with lenders Provident Funding Associates and NattyMac, which provides short-term loans to mortgage lenders. GSE commitments to buy loans reduce the risk lenders will be stuck with GSE-reject loans which must then be resold at huge discounts.
• Nine EU members have 'excessive debt.' The European Commission warned nine countries, including Germany and Italy, that their budget deficits are too large. Twenty of the EU's 27 member countries are on track to breach the bloc's 3%-of-GDP limit on deficits, but the nine warned today "are neither close to the reference value nor temporary," the Commission said.
• HSBC in talks for RBS Asia assets. Sources say HSBC Holdings (HBC) is in advanced discussions to buy Royal Bank of Scotland's (RBS) retail and commercial banking assets of in China, India, and Malaysia after RBS's negotiations with Standard Chartered faltered yesterday.
• Santander: World's biggest IPO in 18 months. Santander's (STD) spinoff of part of its Brazilian unit, the world's biggest IPO in 18 months, will bring in about $8B. Spain's biggest bank hopes to open 600 branches in Brazil by 2013, and carve out new business in lending to companies and homebuyers as it bets on the Brazil's expansion while Spain wades through its worst recession in 60 years.
• BofA shortlist gets very short. Sources say Bank of America (BAC) has narrowed its list of internal candidates for CEO to Chief Risk Officer Gregory Curl and Brian Moynihan, the consumer and small-business banking chief - although the search committee continues to consider an outside hire. If the 61-year-old Curl were named CEO, it would likely be a two-year stint; Moynihan, 49, would likely be a longer-term choice.
• Europe contracts more than expected. Euro area GDP fell by 0.2% in Q2, according to Eurostat's second estimate (.pdf), far less than Q1's 2.5% contraction and the 4.8% decline of a year ago. In comparison, U.S. GDP also declined 0.2% in Q2, while Japan's GDP increased by 0.6%. The decline was sharper than the 0.1% dip estimated last month. While the report is "slightly negative," economist Nick Kounis said, it "adds nothing to the big picture: The economy very likely returned to growth in Q3, and a rather moderate recovery is likely to follow in the coming quarters."
• Office rents plunge. Office rents fell 8.5% Y/Y in Q3, the biggest drop since 1995, according to research firm Reis. The decline came as renters returned a net 19.6M square feet to landlords; YTD they've given back 64.2M square feet - the highest negative absorption rate on record. The vacancy rate of 16.5% is a five-year high. With more job losses still predicted, many say it's too soon to look for a bottom: "If employers are still shedding jobs, they are also going to shed space."
• Better economy doesn't inspire spending. Consumers are feeling an improvement in the U.S. economy, but concerns about their personal finances are limiting their spending plans. Only 19% of respondents in Discover's U.S. Spending Monitor said they expect to spend more in the next month, even though 33% now feel an improvement in economic conditions. "There appears to be no indication consumers are willing to increase their spending," Discover's Julie Loeger said.
• Mtg. apps rise. Mortgage applications increased 16.4% from a week ago, MBA said this morning, led by an 18.2% in refinancings. Average rates on 30-year fixed mortgages fell five points to 4.89%.

Earnings: Wed. Before Open

• Costco (COST): FQ4 EPS of $0.83 beats by $0.06. Revenue of $22.38B (-3.1%) in-line. Says sales were negatively impacted by ongoing softness in U.S. sales, higher employee benefit costs, and lower U.S. dollar amounts of international profits as a result of weaker foreign currencies. (PR)
• Family Dollar Stores (FDO): FQ4 EPS of $0.43 beats by $0.02. Revenue of $1.81B (+2.5%) in-line. Gross profit as a percentage of sales rose to 34.8% from 33.6% last year. Co. ends year with $439M in cash vs. $158M a year ago. (PR)

Earnings: Tue. After Close

• AngioDynamics (ANGO): FQ1 EPS of $0.09 beats by $0.01. Revenue of $50M (+13%) vs. $48M. Shares +2.1% AH. (PR)
• Yum! Brands (YUM): FQ3 EPS of $0.70 beats by $0.12. Revenue of $2.8B (-2%) in-line. Shares +1.3% AH. (PR)

Today's Markets

Asia markets were mostly higher Wednesday following Tuesday's strong U.S. showing. Europe stocks are flat at midday, and premarket futures are slightly higher.

• Asia: Nikkei +1.11% to 9,780. Hang Seng +2.07% to 21,242. BSE -0.9% to 16,807. Shanghai was closed.
• Europe at midday: London -0.1%. Paris +0.1%. Frankfurt flat.
• Futures at 7:00: Dow +0.2% to 9674. S&P +0.2% to 1051. Nasdaq +0.2%. Crude +0.4% to $71.19. Gold +0.7% to %1,047.10. Treasurys are flat. Euro flat vs. dollar. Yen +0.5%.

Wednesday's Economic Calendar

• 7:00 MBA Mortgage Applications
  10:00 House Financial Services Committee on OTC Derivatives
  10:30 EIA Petroleum Inventories
  1:00 PM Results of $20B, 10-Year Note Auction
  3:00 PM Consumer Credit
• Notable earnings before Wednesday's open: COST, FDO, MON, SU
• Notable earnings after Wednesday's close: AA, RT

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Comments

[AndrewBaker:]

Of course banks are slow to book commercial real estate loan losses: it would show their true parlous position that much sooner if they did. The high profits banks make on the turn between the cost of money to them, which is negligible, and the rate charged to the borrower, which is significant, still is not enough to make the banks viable when their bad loans are brought into account.

Jiggery pokery with the numbers can hide the truth only so long: whilst no-one particularly wants banks to fail, no-one wants to buy bank stock at unrealistically inflated prices, which is the case right now.

There's a lot more pain to go through for the banks before they can be considered safe investments again. Unload your bank stock now while you can still get a more than reasonable price.

Oct 07 07:56 AM

[robert.b.fe...:]

Commercial real estate is having problem? Ya don't say. Eureka! Set up a new GSE to reinflate that market too. After all Freddie and Fannie are devising new plots...err plans to reinflate residential mortgages just add CRE and the whole problem is solved. The recession will be over and we can all go back to the Kool-aid bowl.

Oct 07 08:48 AM

[Mike Real E...:]

Also in the WSJ this AM was an article on Starwood's acquisition of Corus. Corus' portfolio is largely broken construction loans, and the FDIC is explicitly enouraging slow resolution of these loans rather than sale at current market prices. If Federal Government controlled insitutions are not willing to transact or mark to market their real estate portfolios, preferring to wait for a brighter day than to take the hit, why should anyone expect privately held institutions to recognize their losses?

Oct 07 09:14 AM

[Joseph L. S...:]

"The European Commission warned nine countries, including Germany and Italy, that their budget deficits are too large" and "Europe contracts more than expected." So much for the notion that there is a stable currency out there with which to replace the current reserve currency.

The US Dollar is a pale imitation of the solid currency we grew up with in which, while traveling behind the Iron Curtain or in China, locals would sidle up to us and try to get us to exchange our dollars at double and triple the official exchange rates.

But I think the country song "Don't Take Her She's All I Got," is the only reasonable response of the world's central bankers when contemplating replacement of the dollar. Sure, they may hedge a little around the periphery, but would you rather trust Vladimir Putin or King Abdullah to make certain the ruble or the riyal maintain their value when either decide to unilaterally devalue by 50%? That might leave the Yen and the Euro, but one represents an economy mired in denial and the other is a "union" that is comprised of nations bound only by geography, not shared loyalties.

Wow, having the EU bureaucrats tell Germany its budget deficit is too large. Is that like having the school nerd / hall monitor tell you to get back in class?

Oct 07 10:11 AM

[ebworthen:]

Oh dear...

I see another bubble forming.

CRE being kicked down the road and lower rental rates, asset reflation based on stimulus money and FED giving out free dollars and koolaid to the banks and Fannie/Freddie and FHA, "money on the sidelines" still on the sidelines or going into gold and TIPS and money markets.

I keep looking back at the same scenario in 1929-1932. I hear people say we are in 1937 versus 1930. I don't see it.

Perhaps we are in a "recovery" that will maintain the gains but I don't see it. What I see is a market and asset reflation greater than the market pop of 1929-1930 precisely because of the actions of the FED and stimulus which occurred faster and to a greater extent than 1929-1930.

This would mean that the downward grind will be that much faster and greater than 1930-1932 and that is truly frightening.

Pride comes before the fall.

Oct 07 11:45 AM

[bbowen7:]

Commercial real estate is a looming problem, but it lacks the multiplier of Fannie/Freddie, Barney Frank, and esoteric derivatives. Trouble for the banks, but not a disaster for the general economy.

Oct 07 12:35 PM

[Larrysyr:]

The U.S. dollar I grew up with wasn't so great. Significant devaluation in 1971 and double-digit inflation later in the 70s didn't reflect a really strong dollar. The dollar is (and always was) stronger than the ruble, but that's like getting a D grade and saying it's better than an F.


On Oct 07 10:11 AM Joseph L. Shaefer wrote:

....
>
> The US Dollar is a pale imitation of the solid currency we grew up
> with in which, while traveling behind the Iron Curtain or in China,
> locals would sidle up to us and try to get us to exchange our dollars
> at double and triple the official exchange rates.
>
........

Oct 07 03:16 PM

[notsosmart:]

what country can you trust re their money? not russia or china for sure.

Oct 07 06:07 PM

[gmwright:]

Despite all the peripheral bad signs it appears it will be another positive earnings season that will push the DOW 10k+. I am getting into the problem where I expect a 10-15 % correction. But if you are expecting this since DOW 9k and the DOW swoons up to 10k, now a 10 % correction only gets you back to your original point at which you though a correction was due.

I am still planning on seeing how the rest of the earnings season pans out, especially revenues. Companies are still beating earnings estimates but revenues still seem to be decreasing YoY for the big companies which is worrisome since 1 year ago we were already pretty heavily into the recession although not into the precipitous drop offs in Oct. and Mar.

Still AA turning a profit must be taken as good news. I need to look into it a bit more though to see how much of their production has been brought back online.

Oct 08 05:56 AM