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Wall Street Breakfast: Must-Know News

January 20, 2010 by: SA Editor Rachael Granby  |  includes: AFC, AIG, ARCC, ASML, BA, BAC, BSX, CREE, CS, CSX, DIA, FULT, GLD, GS, IBM, MET, MS, PFE, PSEC, QQQ, RMBS, SPY, USO, VOLC, WMGI

  • Mass. vote puts healthcare overhaul at risk. In a major political upset, Republican Scott Brown won a Senate seat in Massachusetts yesterday, potentially jeopardizing Obama's healthcare plan. Medical device makers like Volcano Corp. (VOLC) and Wright Medical Group (WMGI) stand to gain if the healthcare legislation falls through, and shares of health insurers and pharmaceutical companies (including Pfizer (PFE) and Boston Scientific (BSX)) rose yesterday as investors anticipated Brown's victory. The election of a Republican to a traditionally Democratic state is a further sign that Americans are getting tired of government intervention.
  • AIG talks unit sale, bailout defense. AIG (AIG) is all over the news, with several separate developments worth noting: 1) The insurer is in advanced negotiations to sell its Alico unit to MetLife (MET) for $14-15B. If the deal goes through, $9B would be returned to the New York Federal Reserve and the rest could be used to pay back part of AIG's federal bailout. 2) In a letter (.pdf) to the Government Accountability Office, Bernanke said he would "welcome a full review" of the circumstances under which AIG was bailed out, while the NY Fed defended itself yesterday by denying it pressured AIG not to disclose certain counterparty payments. 3) The Fed apparently has billions of dollars in paper profits from the underlying value of CDOs purchased from AIG as part of its bailout. At the time of the purchase, the CDOs had a face value of $62.1B and a market value of $29.6B. With credit markets rallying and spreads tightening, the market value of the CDOs is now at least $45B.
  • Bonuses get delayed, slashed. Facing heavy regulatory and public pressure, banks are bowing to demands to rein in bonuses. Credit Suisse (CS) said it will cut its global bonus pool by 5% and will cut bonus payments to top managers by more than 30%, making it the first bank to publicly pass along the U.K.'s controversial 50% tax on bonuses. Goldman Sachs (GS) will delay telling employees what their 2009 bonuses will be until the end of the month, explaining that "this is clearly a highly sensitized period and we are very conscious of the sensitivities. We want to be able to provide context to what we tell our people."
  • Samsung, Rambus reach chip settlement. Samsung Electronics reached a deal to pay Rambus (RMBS) up to $900M over five years in order to settle ongoing litigation over memory chips. Samsung will pay $200M upfront and $25M quarterly for five years, and will invest $200M in Rambus' stock. The deal won't significantly affect Samsung's earnings because the company had already set aside provisions. Premarket: RMBS +16% (7:00 ET).
  • Allied turns away new prospect. Allied Capital (ALD) rejected an offer from Prospect Capital (PSEC), saying the bid was not a "superior proposal" to the one Allied has already agreed upon with Ares Capital Corp. (ARCC). Ares Capital's all-stock offer is valued at $648M. While Prospect's all-stock offer is valued at around $900M, there is a risk that the merged companies would be unable to maintain dividend payments or access capital markets on favorable terms. In after-hours trading yesterday, ALD +5.1%, PSEC -0.3%, ARCC -1.8%.
  • FHA gets tougher to stay solvent. The Federal Housing Administration announced stricter lending requirements and higher borrowing fees today, a move meant to shore up the agency's tanking finances and preclude the need for a taxpayer bailout. The FHA's reserves to cover losses have fallen to $3.6B, or 0.5% of the $685B in loans outstanding. A year ago, its reserves stood at 3%, and Congress requires the FHA to maintain a 2% capital-reserve ratio.
  • Treasury demands warrant premium. The Treasury and, by extension, the taxpayers, may reap a profit from certain elements of the financial bailout. According to a draft report prepared by the Treasury, many big banks were pushed to pay more than market estimates to repurchase government warrants. In particular, big banks like Goldman Sachs (GS) and Morgan Stanley (MS) received rejections on bids that were in line with, or above, both internal and external estimates. Thus far, the Treasury has received $2.9B in gross proceeds from the 31 warrant repurchases through the end of last year. The report will be released later today.
  • IBM isn't feeling that blue. IBM (IBM) reported better than expected quarterly earnings (see details below), with Q4 profit rising nearly 9% on the back of cost-cutting and growth in IBM's services division. The company booked a record $18.8B in new services contracts, reflecting both IBM's heavy push in that direction and improved corporate and governmental demand.
  • China reins in lending. Chinese banking regulator Liu Mingkang has told certain banks to limit lending and plans to restrict overall credit growth in the country to 7.5T yuan ($1.1T). Liu declined to specify which banks were told to limit lending, but said the lenders had failed to meet several regulatory requirements, including those for sufficient capital. The news helped pushed Asian markets lower (see details below), as investors worried further lending curbs will follow.
  • Boeing's extra JAL orders. Boeing (BA) had orders for 71 planes from now-bankrupt Japan Airlines, 21 more than it had previously disclosed. The total order is worth around $10B. A restructured JAL will be a smaller carrier and need fewer aircraft, so while Boeing's order may not necessarily be canceled, it certainly is in danger.
  • Unemployment likely to persist. A new report from a group of U.S. mayors suggests that while unemployment will likely peak in most U.S. cities this year, it will take many years before the jobless rate returns to the lows experienced last decade. In some areas, unemployment will stay at or above 10% through 2013, but "what is just as alarming as the double-digit unemployment in many of the nation's major metro areas is the lethargic rate at which it will recede once the job market turns around."
  • Housing market still weak. NAHB's Housing Market Index dropped 1 point to 15, still the lowest point since June. Current sales conditions fell 1 point to 15, and buyer traffic fell 1 point to 12. Sales expectations for the next six months remained steady at 26. “We stand poised and ready to deliver new homes as soon as our customers are ready" to take advantage of tax credits and conditions, said NAHB Chairman Joe Robson.
  • Consumer confidence dips. ABC's Consumer Comfort Index slipped 2 points to -49, entering "full retreat" mode this month after posting gains in December. Ratings of the national economy held steady at 9% positive, but those who think it's a good time to buy things slipped a point to 23%, and those rating their personal finances positively slipped a point to 45%.
  • Treasury International Capital. The Treasury released data on November's International Capital Flow yesterday, showing that net foreign purchases of long-term securities reached $126.8B vs. $25B expected and $20.7B in October. Private foreign investors bought $96B and official institutions bought another $33.3B, while U.S. residents purchased $2.5B of long-term foreign securities.

Earnings: Wednesday Before Open

  • ASML (ASML): Q4 EPS of €0.12 beats by €0.02. Revenue of €581M (+18%) vs. €574M. (PR)
  • Bank of America (BAC): Q4 EPS of -$0.60 misses by $0.07. Revenue of $25.4B (+59%) vs. $26.8B. Shares -1.1% premarket (7:00 ET). (PR)
  • Bank of NY Mellon (BK): FQ4 EPS of $0.59 beats by $0.08. Revenue of $3.3B (-1%) in-line. (PR)
  • Covidien (COV): FQ1 EPS of $0.86 beats by $0.11. Revenue of $2.7B (+7%) vs. $2.6B. (PR)

Earnings: Tuesday After Close

  • Cree (CREE): FQ2 EPS of $0.38 beats by $0.08. Revenue of $200M (+35%) vs. $187M. (PR)
  • CSX (CSX): Q4 EPS of $0.77 beats by $0.01. Revenue of $2.3B (-13%) vs. $2.4B. (PR)
  • Fulton Financial (FULT): Q4 EPS of $0.11 in-line. Net interest income of $136M (+3%) vs. $137.5M. (PR)
  • IBM (IBM): Q4 EPS of $3.59 beats by $0.12. Revenue of $27.2B (+1%) vs. $27B. Expects full-year EPS of at least $11.00 vs. $10.88. Americas revenue down 3%; Asia-Pacific up 6%. Gross profit margin 48.3% vs. year-ago 47.9%. (PR)

Today's Markets

  • In Asia, Nikkei -0.25% to 10,738. Hang Seng -1.8% to 21,286. Shanghai -2.9% to 3,152. BSE -0.1% to 17,474.
  • In Europe at midday, London -0.6%. Paris -0.7%. Frankfurt -0.4%.
  • Futures: Dow -0.4%. S&P -0.5%. Nasdaq -0.6%. Crude -1.4% to $77.91. Gold -0.6% to $1,133.

Wednesday's Economic Calendar

Seeking Alpha editors Eli Hoffmann and Jason Aycock contributed to this post.


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This article is tagged with: Macro View, Economy, Market Outlook, Earnings, Wall St. Breakfast