Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

Seeking Alpha's one-page summary of this morning's key market-moving and stock-moving stories


MACRO AND HOUSING

Toll, Beazer Say Housing Slowdown Continues [Reuters]

Summary: The U.S. housing slowdown is showing no sign of abating, according to homebuilders Toll Brothers and Beazer Homes USA Inc. Orders at Toll Brothers skidded 56% and revenue dropped 10% in fiscal Q4. The company also expects to take Q4 write-downs of $50-100 million on both the land it owns and has options to buy, sharply up from a prior forecast of $4 million. The charges will reduce net EPS by $0.18 to $0.36. Cancellations have also soared to 37% of contracts in Q4, up from 18% in Q3. Beazer, meanwhile, reported a 44% drop in quarterly earnings and a 58% drop in fiscal Q4 orders. Beazer reported net income of $91.9 million, or $2.19 a share, down from $164.4 million, or $3.61 a share, a year earlier. Toll is a luxury homebuilder and Beazer primarily a builder of first-time homes, so their disappointing reports imply weakness across the entire sector. Consumer spending has been curtailed by rising interest rates and high energy prices, and prospective home buyers appear increasingly reluctant to enter the market before a bottom is in view. Though the companies' reports were not good, they were largely expected by the market; TOL took a small hit and then recovered by the close of trading and Beazer managed to show a slight gain.
Related links: Earnings coverage: Wall Street Journal • Commentary: Housing Stocks Stabilizing But No Reversal in SightTime to Start Looking Beyond the Housing SlumpWSJ Economist Survey -- Housing Slowdown to Continue; Recession a Possibility
Potentially impacted stocks and ETFs: Toll Brothers Inc. (NYSE:TOL), Beazer Homes USA Inc. (NYSE:BZH) • ETFs: iShares Dow Jones US Home Construction (NYSEARCA:ITB), SPDR Homebuilders (NYSEARCA:XHB), and iShares Dow Jones US Home Construction (ITB) have either TOL or BZH as a top-ten holding

U.S. Consumer Credit Down by Most Since April 1992 [MarketWatch.com]

Summary: September's outstanding consumer credit, which excludes mortgage debt, fell by $1.20 billion in September, to $2.366 trillion, at a seasonally adjusted annual rate of 0.61%. These results were the sharpest drop since April 1992, when outstanding consumer credit fell by $1.78 billion. Wall Street economists were not expecting these results; most were expecting a growth of about $5 billion in outstanding credit. Much of the decline is pinned on nonrevolving credit such as car and boat loans- an indication of a slowdown in car sales. Nonrevolving credit fell by $4.05 billion or 3.21% to $1.50 billion. However, credit card balances or so-called revolving debt, rose at a rate of 4%. It can be surmised that as housing prices fall, it has become harder for Americans to borrow against their homes in order to raise cash for other expenses. Instead, people have been relying more heavily on credit cards.
Related links: Additional coverage: WSJForbes
Potentially impacted stocks and ETFs: American Express (NYSE:AXP), Bank of America Corp (NYSE:BAC), Citigroup (NYSE:C), Mastercard (NYSE:MA) • ETFs: iShares Dow Jones U.S. Financial Services Index (NYSEARCA:IYG), Vanguard Financials ETF (NYSEARCA:VFH)

TECHNOLOGY AND INTERNET

Nortel 3Q Loss Narrows [Business Week]

Summary: Nortel reported that its loss in the 3rd quarter was less than last year, but commented on fierce competition and pressure to produce cutting-edge, less profitable products as challenges facing the telecom equipment producer. The Toronto-based company lost $99 million, or 2 cents a share, between July and September 2006 compared to $136 million, or 3 cents a share loss in the same period last year. Revenue growth increased 17% from $2.52 to $2.96 billion and Nortel predicts continued growth at around 5 to 9%. While CEO Mike Zafirovski was pleased with the increase in earnings, he complained about Nortel Chart 9 11 06the amount of revenue going to "next-generation, early-cycle products" which pose "a challenge to our goal of significantly increasing profitability." Shareholders were disappointed with the results, and Nortel's shares fell 17 Canadian cents, or 6.3 percent, to C$2.53, on the Toronto Stock Exchange. The stock lost 14 cents, almost 6 percent, to $2.25 in New York. Nortel is planning to consolidate its shares 1 for 10 beginning in December, a move which will lower transaction fees and may attract investment funds.
Related links: Earnings conference call transcript: Nortel 3Q 2006. Press release: Nortel Declares Preferred Share Dividends
Potentially impacted stocks and ETFs: Nortel Networks (NT) • Competitors: Alcatel (ALA), Cisco Systems (NASDAQ:CSCO), Lucent Technologies (LU)

Softbank, News Corp. form Japan MySpace JV [MarketWatch.com]

Summary: Yesterday Softbank of Japan and News Corp announced a joint-venture to establish a Japanese version of MySpace. Each company will invest ¥590 million ($5m). News Corp Chairman/CEO Rupert Murdoch was in Tokyo to announce the deal, saying, "This project marks MySpace's first joint venture, and our launch in the Asian market." MySpace is the world's largest social networking site, but will face local competition from mixi, which is Japan's leading SNS site with 5.7 million users as of Sept. 14. Softbank CEO Masayoshi Son, whose company will manage the JV, and has mentioned plans of possibly roping in Yahoo! Japan and Softbank Mobile, commented, "Unlike sites such as mixi, we will not have an invitation-only system." News Corp COO Peter Chernin added, "We have never been No. 1 in any market we've entered." But, MySpace has become the top SNS site in overseas markets including the U.K., Ireland, and Australia.
Related links: MySpace Japan beta. Additional coverage: Bloomberg, Forbes and WSJ. Seeking Alpha commentary: MySpace Growth Tailing Off As Site Population Reaches Critical MassComScore Traffic Data for Sept.: YouTube Continues To ExplodeIs Digg On the Block For $150m?YouTube vs. MySpace Growth: No ContestNews Corp: Pay Attention to the MySpace FactorEncouraging Stupidity: Analysts Up in Arms Over 'Outrageous' MySpace ValuationRBC: MySpace Soon Worth $10-20 Billion for News Corp.Google's MySpace Deal Is Better Than Reported
Potentially impacted stocks and ETFs: News Corp (NASDAQ:NWS), Softbank (OTCPK:SFTBF) • Editor's note: Google (NASDAQ:GOOG) is both a collaborator and competitor for News Corp since they reached a deal in August for Google to provide MySpace and other Fox sites search and advertising services -- but remember Google's acquisition of YouTube, which competes with MySpace in attracting net traffic.

ENERGY AND MATERIALS

Oil Industry Barely Boosted Investment in Production, IEA Says [Wall Street Journal]

Summary: A report released yesterday by the International Energy Agency [IEA] indicates that after adjusting for inflation, the world oil industry's investment in oil and natural gas production has increased a skimpy 5% over the past five years. Because oil and gas projects cannot be completed quickly, paltry investment during the decade's first half will come back to haunt consumers in the second half. If demand for oil exceeds expectations, or if capacity falls short, the result will be a rise in prices. But even in the unlikely event that both supply and demand remain in line, the industry's insufficient investment will have failed to add enough to the world's spare oil capacity -- leaving consumers at the mercy of supply disruptions. Oil prices have almost doubled since 2000, in part because of a 9.3% increase in global demand. The industry's production capacity is expected to continue to edge demand through the end of the decade, but only if current projects reach fruition. Even then, the total reserve of 3.3 million barrels a day would be well shy of the five million barrels a day considered necessary to keep the world safely supplied. The IEA advocates accelerated development of nuclear and other alternative energy sources as a means of reducing the world's dependency on fossil fuels -- a solution that would offer the added benefit of slowing the pace of climate change.
Related links: IEA Press Release: World Energy Outlook 2006 • Seeking Alpha commentary: Oil Inventories On the Rise: Where's the Shortage?Saudi Threatens Further Production Cuts to Defend $60 Oil PriceInvestment Thesis: Clean Energy ETF
Potentially impacted ETFs: United States Oil Fund LP (NYSEARCA:USO), Oil Service HOLDRs Trust (NYSEARCA:OIH), PowerShares Dynamic Oil Services Portfolio (NYSEARCA:PXJ), iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYSEARCA:IEZ), SPDR Oil & Gas Equipment & Services ETF (NYSEARCA:XES), iShares Dow Jones US Oil & Gas Ex Index (NYSEARCA:IEO), Vanguard Energy ETF (NYSEARCA:VDE), PowerShares Dyn Energy Exploration (NYSEARCA:PXE), WilderHill Clean Energy Index (ECO), Powershares Wilderhill Clean Energy Portfolio (NYSEARCA:PBW)

TRANSPORTATION

GM Says Q3 Loss Was Smaller Than Reported [Reuters]

Summary: General Motors updated its 3rd quarter earnings report with news that its loss was less than initially stated because of a late loan sale by its finance arm. The new figure for total loss is $91 million or 16 cents a share down from the original $115 million or 20 cents a share. The world's largest automaker also increased its revenue from $48.8 to $48.9 billion. GM has been in negotiations with Delphi Corp., a company it spun off in 1999, concerning cost-cutting strategies to pull the auto-parts company out of bankruptcy. GM predicts that its exposure for benefit guarantees to Delphi will be at least $6 billion and might even reach $7.5 billion, and has been working with its auto-parts supplier to avert a strike which would threaten GM's production. General Motors has been struggling to reduce its losses since Toyota took a significant portion of its market share in the first nine months of 2006.
Related links: Earnings conference call transcripts: GM 3Q 2006. Seeking Alpha commentary: Auto Nation: Detroit Needs To Get RealRick Wagoner Corporate America's Comeback Kid of the Year?
Potentially impacted stocks and ETFs: General Motors (NYSE:GM) • Competitors: Toyota (NYSE:TM), Daimler Chrysler AG (DCX), Ford (NYSE:F)

FINANCIAL

Lehman Adds Heft But Not Height in Europe [Wall Street Journal]

Summary: In an effort increase its presence in European investment banking, dominated by its rivals Citigroup Inc., JPMorgan & Chase Co., Goldman Sachs Group Inc., and Morgan Stanley, Lehman Brothers has recently hired dozens of bankers and gone on somewhat of an advertising spree. Yet its elaborate corporate remodeling has failed to follow-through into market share; in some areas it has even receded. For its part, Lehman says it remains calm, and that it never expected an immediate payoff. But its costs have soared; total European expenses were up 32% (to $2.4B) and compensation costs rose 54% to $1.1B. Revenues are up -- 35% to $503M -- but its rivals have been growing just as fast or faster. In a booming $1.1T M&A market (for the first nine months of this year), Lehman ranks #13 in M&A with deals Lehman Bros Chart 9 11 06valued at about $206B, lower than boutiques N.M. Rothschild & Sons and HSBC Holdings PLC, and down from its last-year's #10 spot. Lehman's final word: "We view building this franchise as a long-term commitment, we're not done yet, and there's plenty more to do."
Related links: Earnings conference call transcripts: Lehman Brothers F3Q06Citigroup Q3 2006 Goldman Sachs F3Q06
Potentially impacted stocks and ETFs: Lehman Brothers Holdings Inc. (LEH), Citigroup Inc. (C), JPMorgan & Chase Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), HSBC Holdings plc ADR (HBC) • ETFs: iShares Dow Jones US Financial ETF (NYSEARCA:IYF), iShares Dow Jones US Financial Services (IYG), Financial Select Sector SPDR ETF (NYSEARCA:XLF), Vanguard Financials VIPERs (VFH). iShares Dow Jones US Broker-Dealers Index Fund ETF (NYSEARCA:IAI) has a 7% holding.

HEALTHCARE

Merck Adds U.S., Canada Tax Disputes to Woes [Wall Street Journal]

Summary: As if tens of thousands of lawsuits over Vioxx weren't enough, Merck & Co. is now faced with a potential liability of $5.58 billion on tax disputes with the U.S. and Canadian governments. The IRS and its Canadian equivalent allege that Merck employed inappropriate "maneuvers" to maximize profits and failed to pay back taxes, accusations the company plans to fight in court. Merck can afford to pay the penalties if it loses all the cases -- it has $15.22 billion in current assets, including $6.22 billion in cash -- but operations and cash flow would suffer during the quarter in which the payments are made. Merck is already faced with a potential liability into the tens of billions over the claims on Vioxx, a painkiller the company withdrew from the market in 2004 after it was shown to increase the risk of heart attacks and strokes. The Canadian dispute involves Merck's asthma drug Singulair, which was originally developed by the company's Canadian subsidiary. In 1998, Merck transferred its Singulair patents to a Barbados subsidiary, but the Canadian government believes it is entitled to back taxes. This is what is known as a "transfer pricing dispute," in which either too much revenue is reported in a low-tax jurisdiction or too many expenses are reported in a high-tax jurisdiction. Transfer pricing disputes are increasingly common: the IRS has come after GlaxoSmithKline, which ended up agreeing to pay $3.4 billion, as well as Symantec, Motorola and Dow Chemical.
Related links: Associated Press, Reuters • Seeking Alpha commentary: Merck's Offshore Shuffling: Shades of Crazy EddieMerck's Vioxx Shown to Pose Heart and Kidney RisksEthical Questions Continue to Surround Merck's Vioxx Probe • Earnings conference call transcripts: Merck Q3 2006
Potentially impacted stocks and ETFs: Merck & Co. Inc. (NYSE:MRK), Symantec Corp. (NASDAQ:SYMC), Motorola, Inc. (MOT), Dow Chemical (NYSE:DOW) • Competitors: Pfizer, Inc. (NYSE:PFE), Novartis AG (NYSE:NVS), Schering-Plough Corp. (SGP) • ETFs: Pharmaceutical HOLDRs (NYSEARCA:PPH), iShares Dow Jones US Pharmaceuticals (NYSEARCA:IHE), First Trust Morningstar Div Leaders Idx (NYSEARCA:FDL), SPDR Dividend ETF (NYSEARCA:SDY), and WisdomTree High-Yielding Equity (NYSEARCA:DHS) have Merck as a top-ten holding

Revenue Shortfall at Teva [TheStreet.com]

Summary: Israeli-based Teva Pharmaceutical Industries posted stronger-than-expected earnings and raised its EPS forecast for the year by 10 cents, but shares nonetheless fell in trading yesterday on lower-than-expected revenue for 3Q06 as well as a lowered revenue forecast for FY06. Teva earned $606.4 million, or 74 cents a share, for the three months ended Sept. 30; Thomson First Call analysts were predicted EPS of just 63 cents. However, analysts were looking for sales of $2.33 billion, but Teva recorded only $2.29 billion. The company raised its EPS range for the year from $2.15 - $2.25 to $2.25 - $2.35 however President and CEO Israel Makov stated revenue would be closer to $8.4 billion after Teva had forecast annual revenue of $8.5 billion during its last earnings report in August. Investors chose to focus on the missed revenue figures rather than on Teva's beat net profits, sending shares down $0.50, or 1.5% in trading yesterday. CEO Makov further worried investors when he stated next year will be a "challenge" because there will be more generic competition for many of Teva's products. Teva continued on its incredible growth pace year-over-year, nearly doubling net profits and adding nearly a billion dollars in revenue; during last year's 3Q, Teva earned just $267.1 million, or 40 cents a share, on revenue of $1.32 billion. 2006 has seen Teva launch generic versions of some of the world's largest blockbuster drugs including Zocor (originally Merck's), Pravachol (originally Bristol-Myers Squibb's) and most recently, Zoloft (originally Pfizer's). Its acquisition of Ivax earlier this year also boosted sales considerably for the quarter. In other news, Teva announced a $600 million share buyback.
Related links: Teva Pharmaceuticals Q3 2006 Earnings Call Transcript. Additional earnings coverage: TheStreet.comBusiness Week. Seeking Alpha Commentary: With Teva's CEO Departure, There's No Need for PanicThe Long Case for Teva PharmaceuticalTeva Pharma Should Profit From Wal-Mart's New ProgramTeva's Win-Win SituationCramer's Take on TEVA.
Potentially impacted stocks and ETFs: Teva Pharmaceutical (NYSE:TEVA) • Competitors: Merck (MRK), Bristol-Myers Squibb (NYSE:BMY), Pfizer (PFE), Watson Pharmaceuticals (WPI), Alpharma Inc. (NYSE:ALO), Barr Pharmaceuticals (BRL), King Pharmaceuticals (KG), Mylan Laboratories (NASDAQ:MYL) • ETFs: BLDRS Emerging Markets 50 ADR Index (NASDAQ:ADRE), iShares Dow Jones US Pharmaceutical Indx (IHE)

AEROSPACE AND DEFENSE

FedEx Switches Orders To Boeing From Airbus [Wall Street Journal]

Summary: airbus In yet another loss to its cross-Atlantic rival Boeing, Dutch-based EADS, owner of Airbus, has learned that FedEx has canceled an order for 10 Airbus A380s (pictured) due to production delays. That leaves only UPS to still order the cargo and shipping planes. FedEx first placed the order, valued at $2.3 billion, in 2001 and was forced to cancel it after Airbus repeatedly delayed its arrival. Frederick W. Smith, Chairman, President and CEO of FedEx, said his company desperately need the increased freight capacity for flight to and from its new Asia-Pacific hub scheduled to open in Guangzhou, China, in December 2008. "The airplane was delayed not once, but twice," explained CEO Smith, "with a level of uncertainty that simply was unacceptable to us, given the steps that we have taken to build our network out." The winner in all this is once again Airbus' largest rival, Boeing, who inked a deal with FedEx in Airbus' place for $3.5 billion (list value). The Chicago-based airplane builder will provide FedEx with 15 Boeing 777 freighters, with the option for 15 more. In still more potentially bad news for Airbus, UPS, who still has 10 A380Fs on order, said through a company spokesman that it is reviewing Airbus' projections for completing production and hasn't decided whether it will alter or cancel its order due to delays.
Related links: AP • WSJ - (i) (ii). • Seeking Alpha commentary: Boeing One-Ups Airbus Yet Again With FedEx ContractAirbus' Loss in Market Share is Boeing's GainEmbraer Poised to Capitalize on Airbus' Jumbo-Jet Sized DifficultiesThe Jumbo Jet (Airbus) is Fast Becoming IrrelevantAirbus' New Headache: Boeing Wins TAM SA Jet OrderBoeing's Outsourcing for the 787 Dreamliner. Earnings conference call transcripts: Boeing Q3 2006 Earnings Call TranscriptFedEx Discusses New International Routes (FDX F2Q06 Conf Call Quotes)FedEx on Asian Expansion Developments (FDX 1Q06 Conf Call Quotes).
Potentially impacted stocks and ETFs: Boeing (NYSE:BA), FedEx (NYSE:FDX), United Parcel Service (NYSE:UPS) • ETFs: iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA), PowerShares Aerospace & Defense (NYSEARCA:PPA), Vanguard Industrials (NYSEARCA:VIS)

A380 Charges Trigger Surprise EADS Loss [MarketWatch.com]

Summary: Airbus parent and European defense giant EADS announced a Q3 loss of 195M euros ($249M), a result of it taking an unexpected 1B euro charge over production delays in its flagship A380 superjumbo program. EADS had previously announced (Oct. 19) that it would be taking a 1.1B euro charge before year end, but the move to do so now took investors by surprise -- they expected EADS to post a small Q3 profit. EADS has not had an easy year: yesterday FedEx cancelled an order for 10 A380 freighters, opting to buy from U.S. rival Boeing. Last week, Boeing got an order from TAM SA, Brazil's biggest airline, for four 777s, breaking Airbus's stronghold on Latin America. In June, shares dropped 26% in one day when the company originally announced that a fresh round of delays in A380 deliveries would cost it 2B euros over the next four years. In October, EADS announced the A380 would be delayed by another A380 9 11 06year, wiping out another 4.8B euros in profit. Previous CEO Noel Forgeard recently resigned after it emerged he profited wildly by cashing in on stock options in advance of the delay announcements. On the brighter side, underlying performance was better than expected: aside from the A380 blunders, Airbus performed well. Sales were up 14%, and EADS confirmed its 2006 sales expectation of 37B euros. EADS shares fell 1% on the news, then recovered, and were up 2.4% in Paris this morning.
Related links: Seeking Alpha commentary: Boeing Inks Cargo Plane Contract With FedEx After Airbus Delays Delivery • William Trent says FedEx is the #1 customer for the A380, and "if they are no longer in the market for the A380, you can stick a fork in it."Airbus' New Headache: Boeing Wins TAM SA Jet OrderAirbus ' Loss in Market Share is Boeing's GainThe Jumbo Jet ( Airbus ) is Fast Becoming IrrelevantAirbus Superjumbo Stalled at the Gates. Earnings conference call transcripts: Boeing Q3 2006
Potentially impacted stocks and ETFs: Boeing Co. (BA), TAM SA (NYSE:TAM) • ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)

INTERNATIONAL

Japan's GDP Seen Unchanged as Consumers Cut Spending [Bloomberg]

Summary: Japan's preliminary Q3 GDP report is due out Nov. 14th, followed by a revision scheduled for release on Dec. 8th, which can be wide of the original release. Twenty-three analysts polled by Bloomberg expect Q3 GDP to be flat, at an annualized rate of 1%. That would be the slowest expansion since 2004. While exports are seen as robust, especially in autos led by Toyota, domestic demand has been weak with blame being pointed at consumer spending due to a longer than average rainy season, negligible quarterly wage growth and a struggling stock market. Yasunari Ueno, chief market economist at Mizuho Securities comments, "A weaker-than-expected GDP number would be a headwind against the Bank of Japan raising rates this year." Meanwhile, concern is growing over tech-related inventory, but Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute says, "Sustainable overseas demand will be key in reducing the risk of inventory adjustments that could cause the economy to stall." A preliminary reading of Japan's leading economic indicators showed they improved slightly over August, but at a reading of 20, still suggest contraction (>50 = expansion, <50 = contraction).
Related links: Additional coverage: Forbes.com newswire. Seeking Alpha commentary: Sluggish Consumer Spending Dampens Japan's Economic ExpansionWeak Core CPI Keeps Pressure on BoJ to Hold RatesBoJ Keeps Rate Unchanged; Producer Prices Up SharplyBoJ's Tankan Surprises to Upside, Investment Implications
Potentially impacted stocks and ETFs: Mitsubishi UFJ Holdings (NYSE:MTU) • ETFs: iShares MSCI Japan Index (NYSEARCA:EWJ), iShares S&P/TOPIX 150 Index (ITF), BLDRS Asia 50 ADR Index (NASDAQ:ADRA), BLDRS Developed Markets 100 ADR Index (NASDAQ:ADRD) have Mitsubishi UFJ as a top-ten holding; the first two ETFs offer broad exposure to Japan with both having mega-banks and other financial stocks as components.

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