Wall Street Breakfast: Must-Know News

• Feinberg unveils pay cuts. So-called pay czar Kenneth Feinberg outlined much-awaited compensation rules for seven TARP recipient firms; top executives at firms such as Citigroup (C), AIG (AIG) and Bank of America (BAC) will have a pay cap of $500K - for many a 90%-plus reduction. Also, rather than cash, the rules require that the majority of salaries be paid in stock held for the long-term. The rules are only valid for two months - November and December - but will also form the basis for next year's reviews. Feinberg said the rulings are significant, and hopes his standards, which seek to strike a balance between compensation and risk-taking, will be "voluntarily picked up in the marketplace." In a brief statement, Treasury Secretary Tim Geithner said he hopes the new framework will encourage these companies to "return taxpayer dollars as soon as possible."
• Fed proposes compensation checks. While Feinberg was busy administering to TARP recipient firms, the Fed proposed a framework to crack down on pay packages that encourage bankers to take excessive risks by subjecting executives, traders and dealmakers' compensation to regulatory scrutiny. Instead of pay limits, the Fed's plan is to monitor pay practices at the nation's 28 biggest institutions, making sure compensation structures reward executives for long-term performance and discourage excessive risk-taking. Skeptics worry firms will continue to outsmart regulators in finding inventive ways to circumvent restrictions. (read the Fed's press release, proposal (.pdf), and Q&A (.pdf))
• Britain mired in recession. U.K. GDP dropped a surprising 0.4% in Q3, according to the Office for National Statistics, the sixth straight quarter of contraction. Economists had expected the British economy to move back to timid growth of 0.2%. Six quarters is the longest string of declines on record, while the 5.9% peak-to-trough drop in output is just short of the 6% contraction recorded in the recession of the early 1980s. The pound (ETF: FXB) fell like a stone following the report (-1% at 5:00 a.m.), retreating from a six-week high. (read ONS's preliminary GDP estimate (.pdf))
• CIT, Goldman near deal. After a week of tense negotiations, sources say CIT Group (CIT) and Goldman Sachs (GS) have reached an agreement over a $1B "make whole" payment CIT would owe Goldman if it files for bankruptcy, connected to a $3B credit facility Goldman extended it last year. The deal calls for Goldman to reduce the facility to just over $2B, and for CIT to pay Goldman $300M if it files for bankruptcy. An agreement opens the door for CIT to strike a deal with its bondholders, who were waiting on the outcome of the Goldman talks; it could also reduce CIT's need for financing from $6B to $4B.
• Nokia wants Apple to pay its dues. Nokia (NOK) filed a patent suit against Apple (AAPL) Thursday, claiming the iPhone violates 10 patents for GSM, UMTS and wireless LAN technologies. Nokia said it has repeatedly asked Apple to license its patents, which it developed as part of a consortium of global telecommunications companies, and says Apple is "attempting to get a free ride" on the back of its innovation. Cellphone royalties typically run at 1-2% of the wholesale price, estimated at $600 for the iPhone; a 2% royalty would put $12 per iPhone in Nokia's pockets.
• Book price-war under review. The American Booksellers Association asked the Department of Justice to investigate this week's book price-war between Amazon.com (AMZN), Wal-Mart (WMT) and Target (TGT), claiming it constitutes illegal predatory pricing that is damaging to the book industry and harmful to consumers. If the trio is allowed to continue selling hot-item books for under $10, the net result "will be the closing of many independent bookstores and a concentration of power in the book industry in a very few hands," it said. While mega-retailers can use book sales as a loss leader to drive traffic, independent bookstores rely almost entirely on profits from books. (read the ABA's letter to the DoJ)
• Amazon: emerging juggernaut. Amazon (AMZN) announced Q3 results that exceeded expectations, including a 28% jump in sales, and offered Q4 guidance that was well above analyst consensus, sending shares up over 14% in after-hours trade (see below). Electronics and other general merchandise (EGM) now accounts for 43% of Amazon's sales, vs. 54% for media. The rate of EGM growth (44%) versus that of media (17%) signifies the online retailer's rapid and successful transition from a bookseller to an "everything store," which will become even more pronounced once it completes acquiring Zappos in Q4. (read Amazon's Q3 earnings call transcript)
• Merck/Schering merger wins EC approval. The European Commission cleared Merck's (MRK) bid to buy Schering-Plough (SGP) in a deal worth more than $41B. "The proposed transaction would not significantly impede effective competition in the European economic area or any substantial part of it," the EC said. Merck agreed to sell its half of the Merial animal health business to Sanofi-Aventis (SNY), its JV partner, for $4B in order to meet antitrust requirements. The merged companies will cut 15% of their combined workforces.
• Fed's Evans warns of weak recovery: The Fed will be in no rush to withdraw fiscal stimulus, Chicago Fed president Charles Evans said yesterday, warning the recovery "is going to be very unsatisfactory in 2010." With weak labor markets and plenty of idle factory capacity, there is a sufficient slack in the economy to set aside inflation fears, he said. If anything, low levels of inflation are a concern.
• BP mulls rival bid for Jubilee. Sources say BP (BP) has hired Goldman Sachs (GS) to advise it on a rival bid to ExxonMobil's (XOM) $4B deal to purchase Kosmos Energy's stake in Ghana's Jubilee field. Goldman reportedly advised Cnooc (CEO) on a potential bid for the same stake. Cnooc's attempt is thought to have been hampered by its relative inexperience in developing such a large field, and Goldman's switch to advising BP implies a Cnooc bid is not forthcoming, analysts say.
• Sept. Leading Indicators: The Conference Board's Leading Indicators Index came in at +1%, vs. +0.6% in August and consensus of +0.8%. With the sixth consecutive increase, the six-month growth rate is now at the highest pace since 1983. The numbers suggest a strong recovery is developing, the group says, but notes "the continued downtrend in employment is keeping this index of current economic conditions from rising faster."

Earnings: Fri. Before Open

• Cache (CACH): Q3 EPS of -$0.43 misses by $0.23. Revenue of $44.9M (-22.7%) vs. $48.3M. (PR)
• Dover (DOV): Q3 EPS of $0.58 beats by $0.10. Revenue of $1.5B (-23.7%) in-line. (PR)
• Honeywell (HON): Q3 EPS of $0.76 beats by $0.04. Revenue of $7.7B (-17%) vs. $7.88B. (PR)
• Ingersoll-Rand (IR): Q3 EPS of $0.70 beats by $0.09. Revenue of $3.48B (-19.2%) vs. $3.56B. Sees 2010 EPS of $2.00-2.40 vs. consensus of $1.98. "The outlook for the strength and timing of the global economic recovery and the performance of our end markets remains cloudy. A preliminary review of our internal cost reduction and productivity improvement actions for next year gives us confidence that we can grow our earnings for 2010 even if our markets remain weak." (PR)
• Schlumberger (SLB): Q3 EPS of $0.65 beats by $0.02. Revenue of $5.43B (-25.2%) in-line. (PR)
• Whirlpool (WHR): Q3 EPS of $1.15 beats by $0.38. Revenue of $4.5B vs. $4.28B. Continues to see uncertain and volatile demand levels in many markets. (PR)

Earnings: Thur. After Close

• Amazon.com (AMZN): Q3 EPS of $0.45 beats by $0.12. Revenue of $5.5B (+28%) vs. $5B. Sees Q4 sales of $8.12B-9.12B vs. consensus of $8.11B. Shares +14.5% AH. (PR)
• American Express (AXP): Q3 EPS of $0.44 beats by $0.06. Revenue of $6B (-16%) vs. $5.9B. Consolidated provisions for losses down 13% to $1.2B. Tier one risk-based capital ratio 9.7%. Sees "broad-based improvements in credit quality" and encouraging trends in spending. Shares -0.5% AH. (PR)
• Broadcom (BRCM): Q3 EPS of $0.16 beats by $0.05. Revenue of $1.25B (-.35%) vs. $1.16B. Sees Q4 revenue flat sequentially. Shares -8.3% AH. (PR)
• Bucyrus International (BUCY): Q3 EPS of $1.21 beats by $0.35. Revenue of $676M (+5%) vs. $623M. (PR)CA Inc. (CA): FQ2 EPS of $0.42 beats by $0.02. Revenue of $1.07B (+1%) in-line. Shares +2.3% AH. (PR)
• Burlington Northern Santa Fe (BNI): Q3 EPS of $1.48 beats by $0.20. Revenue of $3.6B (-27%) in-line. Shares -1.9% AH. (PR)
• Capital One (COF): Q3 EPS of $0.94 beats by $0.80. Revenue of $$4.6B (+11.7%) vs. $4.11B. "We are successfully weathering the storm, but the storm is not over." Shares +8.5% AH. (PR)
• Cheesecake Factory (CAKE): Q3 EPS of $0.29 beats by $0.05. Revenue of $401M (-1%) vs. $397M. Comparable same-store sales down 2.8%. Shares +2.4% AH. (PR)
• Chubb (CB): Q3 EPS of $1.56 beats by $0.29. Total net written premiums of $2.7B (-7%). Raises full-year EPS guidance to $5.90-6.00 from $5.20-5.50, vs. $5.51. Shares -1.74% AH. (PR)
• Compuware (CPWR): FQ2 EPS of $0.12 beats by $0.04. Revenue of $218M (-19%) vs. $201M (one estimate). Shares +5.3% AH. (PR)
• Developers Diversified Realty (DDR): Q3 FFO of $0.44 beats by $0.01. Revenue of $202M (-9%) vs. $194M. Shares +1.1% AH. (PR)
• Eastman Chemical Company (EMN): Q3 EPS of $1.38 beats by $0.25. Revenue of $1.3B (-27%) in-line. Sees Q4 EPS of $0.85 vs. $0.79. Shares +3.2% AH. (PR)
• Emulex (ELX): FQ1 EPS of $0.08 beats by $0.02. Revenue of $86M (-23%) vs. $81M. Sees Q2 revenues of $88M-92M vs. $87M. Shares +2% AH. (PR)
• Informatica (INFA): Q3 EPS of $0.22 beats by $0.02. Revenue of $123M (+8%) vs. $120M. Shares -2.1% AH. (PR)
• Interactive Brokers (IBKR): Q3 EPS of $0.20 misses by $0.11. Revenue of $272M (-45.3%) vs. $298M. Market making income -47% Q/Q and -74% Y/Y due to tighter bid/offer spreads on options. Shares -7.2% AH. (PR)
• Juniper Networks (JNPR): Q3 EPS of $0.23 beats by $0.03. Revenue of $824M (-13%) vs. $797M. Shares +1.6% AH. (PR)
• Lattice Semiconductor (LSCC): Q3 EPS of $0.00 beats by $0.02. Revenue of $49M (-15%) vs. $47M. Shares +5.6% AH. (PR)
• Leggett & Platt (LEG): Q3 EPS of $0.34 beats by $0.06. Revenue of $810M (-28%) vs. $840M. Raises full-year EPS guidance to $0.65-0.75 from $0.55-0.70, vs. $0.64. Shares +0.5% AH. (PR)
• MEMC Electronic Materials (WFR): Q3 EPS of -$0.29 misses by $0.23. Revenue of $310M (-43%) vs. $302M. Shares -3.8% AH. (PR)
• Netflix (NFLX): Q3 EPS of $0.52 beats by $0.06. Revenue of $423M (+3.6%) vs. $420M. Subscriber acquisition cost $26.86 per addition vs. $32.21 a year ago. Churn was 4.4% vs. 4.2% a year ago. Shares -3.3% AH. (PR)
• PMC Sierra (PMCS): Q3 EPS of $0.15 beats by $0.01. Revenue of $131M (-6%) in-line. Shares -0.6% AH. (PR)
• Rambus (RMBS): Q3 EPS of -$0.26 misses by $-0.02. Revenue of $28M (-5%) vs. $27.6M (one estimate). Shares -0.3% AH. (PR)
• Riverbed Technology (RVBD): Q3 EPS of $0.19 beats by $0.04. Revenue of $103M (+18%) vs. $97M. Shares +0.8% AH. (PR)
• Sunpower (SPWRA): Q3 EPS of $0.42 beats by $0.02. Revenue of $466M (+23%) vs. $420M. Shares -11.4% AH. (PR)
• Synaptics (SYNA): FQ1 EPS of $0.48 beats by $0.06. Revenue of $120M (+3%) vs. $116M. Expects Q2 revenue of $128M-134M vs. $137M. Shares +10.1% AH. (PR)
• Synovus Financial (SNV): Q3 EPS of -$1.27 misses by $0.60. Net interest income of $758M (-8%). Shares -7.6% AH. (PR)
• Western Digital (WDC): FQ1 EPS of $1.25 beats by $0.31. Revenue of $2.2B (+4.3%) vs. $2.06B. Says demand remains strong. Shares +1.3% AH. (PR)

Today's Markets

Overseas markets echoed U.S. gains Friday. Futures are marginally higher in light overnight action.

• Asia: Nikkei +0.1% to 10283. Hang Seng +1.7% to 22590. Shanghai +1.9% to 3108. BSE +0.1% to 16811.
• Europe at midday: London +1.1%. Paris +0.9%. Frankfurt +0.9%.
• Futures: Dow -0.05% at 10033. S&P -0.1% to 1090. Nasdaq +0.1%. Crude -0.1% to $81.10. Gold +0.2% to $1,061. 30-year Tsy -0.18% to 119-13. 10-year -0.263%. 5-year -0.19%. 2-year -0.07%. Euro +0.1% vs. dollar. Yen -0.4%. Pound -1.4%.

Friday's Economic Calendar

• 8:10 Bair, Frank: Options for the Underbanked
  8:30 Bernanke, Kohn: After the Fall
  9:00 Gensler, Feinberg, Alvarez: Response to the Crisis
  10:00 Existing Home Sales
• Notable pre-market earnings: CACH, DOV, EXC, FO, HON, IR, MSFT, SLB, TROW, WHR

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Comments

[Michael Clark:]

Great news about the pay-cuts. I'm not sure why it took so long. I guess we had to wait until Goldman Sachs got off the hook first.

Oct 23 07:33 AM

[Michael Clark:]

Nice report. A lot of interesting information found in one place.

Oct 23 07:35 AM

[enigmaman:]

And to make everybody feel better about the future and the benefits of the 787 billion stimulus bill the AP reports this bit of news


WASHINGTON — A top White House economist says spending from the $787 billion economic stimulus has already had its biggest impact on economic growth and will likely not contribute to significant expansion next year.

Christina Romer, the chair of President Barack Obama's Council of Economic Advisers, said Thursday that the $194 billion already spent gave a jolt to the economy that contributed to growth in the second and third quarters of the year. She told a congressional panel that by the middle of next year, the impact of the stimulus will level off. Romer said spending so far has saved or created 600,000 to 1.5 million jobs but warned that unemployment will remain high, above 9.5 percent, through the end of 2010.

Oct 23 07:40 AM

[gmwright:]

I'm not surprised to see AMZN and AAPL doing so well. I have constantly been scared off by high p/e ratios and price/book values for these two companies in particular. When in reality I should've listened to Peter Lynch and just gone ahead and invested in these companies because they are clearly the best at what they do. I can understand how they work and why they work, and I personally enjoy both their products/services. I will probably start acquiring some AMZN in the near future as I think they will do well this holiday season compared to other retailers. I may wait for AAPL for more details of the tablet to come out.

Oct 23 07:58 AM

[WallStreet 101:]

First, I am totally opposed to the FED & Treasury micro managing compensation as if our current firms don't make the process hard enough internally.

However, if we are going to "pay restrictions" which will flow down the ranks in some way, why is it only contained to those that still owe TARP now. We should consider the firms that paid TARP back since they had those funds for 6 months of 2009 and were obviously using TARP which helped them accrue their bonus pools. Plus keep in mind the only Fed assistance like FDIC backed bonds which GS & JPM still have outstanding.

Oct 23 08:13 AM

[ScroogeMcduck:]

"Fed's plan is to monitor pay practices at the nation's 28 biggest institutions"

What we really need is someone to monitor the FED's pay practices.

Oct 23 08:15 AM

[User 387760:]

Right on. Nothing like an unelected and unexamined czar ordering a private company to violate its contracts. This is great, next, lets lower the salaries at NBC, ABC, and CBS. I am waiting for the candy bar czar to lower candy to .05, just like the old days. I hate those private companies that make a profit. Heil.


On Oct 23 07:33 AM Michael Clark wrote:

> Great news about the pay-cuts. I'm not sure why it took so long.
> I guess we had to wait until Goldman Sachs got off the hook first.

Oct 23 08:55 AM

[AndrewBaker:]

A basic problem is that there are too many people getting paid for doing non-jobs and non-productive jobs: the list includes many politicians, State and Federal workers, bank, insurance and financial company workers and the many media commentators who are so fond of telling us what needs to be done for the economy to improve.

Add to this the exorbitant pay that is now common in many companies for higher and highest level staff and paid on the excuse that they need to retain the best people, and it is no wonder that the greed of these non-producers has caused a downturn from which it will years to recover.

Token gestures to restrict pay for a certain group is just not enough. Pay differentials from base to peak need to be far less than they are, and based on real productiveness and genuine capability, not just paid to someone just because they've reached a level where excessive pay is the norm regardless of the quality of the person's real personal contribution.

Oct 23 09:15 AM

[bobbobwhite:]

Couldn't have written your comment better myself. Untold millions of USA high paying, non-productive gov't and service industry "jobs" are really harming us terribly in huge overhead costs for what they truly accomplish, as most of the gov't and service jobs prevalent now produce primarily lots of paper landfill and its cyber space equivalent, and not much else of real value relative to their cost. Too much in, too little out.

And, companies complaining that lowered pay will cost them their best employees to higher paying, unrestricted companies should recognize that losing them is really a blessing in disguise. The executives they stand to lose are the ones who created our economic crisis in the first place, as giant money rewards were always their primary motivation and not the quality and need of their products. Good riddance to those self centered non-producers.

On Oct 23 09:15 AM AndrewBaker wrote:

> A basic problem is that there are too many people getting paid for
> doing non-jobs and non-productive jobs: the list includes many politicians,
> State and Federal workers, bank, insurance and financial company
> workers and the many media commentators who are so fond of telling
> us what needs to be done for the economy to improve.
>
> Add to this the exorbitant pay that is now common in many companies
> for higher and highest level staff and paid on the excuse that they
> need to retain the best people, and it is no wonder that the greed
> of these non-producers has caused a downturn from which it will years
> to recover.
>
> Token gestures to restrict pay for a certain group is just not enough.
> Pay differentials from base to peak need to be far less than they
> are, and based on real productiveness and genuine capability, not
> just paid to someone just because they've reached a level where excessive
> pay is the norm regardless of the quality of the person's real personal
> contribution.

Oct 23 09:46 AM

[robert.b.fe...:]

Ah yes control the pay. Didn't Barney Frank try to get legislation to regulate every one's pay a few months ago? Will this result in brain drain for the affected companies? Or will this be a cost advantage for them inducing competitors to make similar pay cuts? How will these events affect stock prices and returns? As for leading indicators no one is shipping any thing and no one is buying any thing.

Oct 23 10:10 AM

[bassmaster17:]

Nokia should just throw in the towel...In regards to BNI they are doing a fine job operating in a lousy hand dealt by the US. Wonder if Buffett has taken notice of the selloff. Just my opinion, but I think some hedge funds are firing at the transports in order to take down the whole market...who knows.

Oct 23 10:20 AM

[TBill:]

The problem is the CEO's for the most part write their own pay checks. In the old days where fat cats controled big blocks of stock, they would put a brake on it. These days, only their nerve limits their pay. Hey, what would you pay yourself if you could get away with it?

Oct 23 10:53 AM

[robert.b.fe...:]

Board rooms have always been good ol boys clubs. Share holders could deal with some of this with board elections. However getting enough of them moving in the same direction is like herding cats. Just ask Carl Ichan.

Oct 23 10:59 AM

[robert.b.fe...:]

Jenna Lee at Fox Business is reporting that Helicopter Ben wants to decide executive pay at all financial institutions to curb their penchant for risky behavior. He asserts that this will mitigate systemic risk. He also wants to regulate overdraft and late fees. What do those items have to do with risk mitigation?

Oct 23 11:14 AM

[notsosmart:]

since greed cant be controlled this whole system is shot.some of these best & brightest??? should quit or be forced out.they caused this mess & should not be rewarded.the whole proxy voting system needs revamping as now the shareholder is powerless while the "clique" fills each others pockets.when will the herd of dumb sheeples wake up to the fleecing? never i guess as long as a beer & a ballgame is available.

Oct 23 11:42 AM

[Socialism c...:]

To all those complaining about pay ratios -- if you are that jealous of what top execs make, go become one, if you have the ability!

If you believe you can do better...that public companies are filled with bloat...start up your own company!

It's one thing to complain about salaries at those which took tax money, but don't get started capping pay at other companies. That's a very wrong road to go down. If you are an "underling" thinking you are underpaid...DO SOMETHING about it. Are you no longer free? Have no ambition? This is what drives our economy: freedom. Jealousy-induced artificial pay-capping only serves to remove one layer of freedom.

Oct 23 12:37 PM

[bbowen7:]

Control of executive pay is a complex subject, of obvious populist attraction as a reaction to the abuses on Wall Street and in concert with the rapidly growing reach of government. Companies that the government owns - OK; companies that pose a systemic risk - why not Glass-Steagul or some other free market answer; companies that are just obscenely profitable; what about individuals? Why banks and not A-Rod, Steven Speilberg, or George Soros? But then, this is change that we can believe in.

Oct 23 02:14 PM

[BIG-T:]

Sooooo, you would give the exectutives who have had to borrow YOUR money to keep their companies from going bankrupt, a free hand in determining their compensation??? It's OUR money and someone had better keep an eye on it!!!!! These guys shouldn't even be on the payroll and some should be in prison. What kind of management even allows these guys to remain in charge?

Oct 23 09:47 PM

[jillhandley:]

Wow at the Nokia and Apple feud.

Oct 24 02:31 PM