Fed Holds Rates, Eases Stance
The Fed unexpectedly dropped the prospect of future interest rate hikes from its statement Wednesday, catching forecasters unprepared and sparking a stock and bond market rally. The Federal Reserve held its benchmark overnight lending rate steady at 5.25% for its sixth straight meeting, and said it is still concerned with inflation. But it dropped a reference to possible "firming" that may be needed to address inflationary risks, saying instead, "Further policy adjustments will depend on the evolution of the outlook." It also seemed to agree with indications that economic growth is slowing, saying, "Recent indicators have been mixed..." instead of January's "somewhat firmer." However, it referred to current core inflation readings as "somewhat elevated" vs. January's "improving modestly." Some investors hoped the Fed might mention the possibility of rate cuts down the road in light of recent mortgage-industry upheaval, but with long-term mortgage rates falling despite the unchanged Fed rate, policymakers are apparently satisfied that ample credit is not a problem. Still, short-term interest-rate futures immediately shifted the odds of a 1/4 point rate-cut by midyear to 44% from 24% before the meeting. Economists were miffed by the removal of possible 'firming' from the statement; some saw it as a syntax change without significance, while others said Fed Chairman Bernanke "came to the rescue" of the markets from its subprime woes. After the statement, the DJ Industrial Average climbed 159.42 points to 12,447.52 -- its biggest one-day gain of the year -- leaving it down just 0.1% YTD. Treasuries rallied as well; the benchmark 10- vs. 2-year note yield entered positive territory for the first time since August, and closed flat.
Sources: Federal Reserve Press Release: January, March, Reuters, Wall Street Journal I, II, Washington Post
Commentary: Fed Statement, Revised For Reality • Fed Easing Cycles and Core CPI, 1960-Present • Economists React [WSJ]
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)
Related: Federal Reserve Monetary Policy, Interactive Yield Curve
Private Equity Circles Cash-Desperate Subprime Lenders
Subprime lenders efforts to stave off a cash crunch as Wall Street underwriters cut off credit lines is giving contrarian hedge funds a chance to buy up discounted assets on excellent terms: 1) According to regulatory filings disclosed Wednesday, before hedge fund Farallon Capital Management LLC gave a $200 million, five-year asset-backed loan to Accredited Home Lenders Holding Co. at 13% interest, Farallon considered and is still considering taking over the subprime lender, of which it now owns 7.8%. Accredited already sold off $2.7 billion in loans at a discount recently, and Farallon's loan terms give it 3.3 million Accredited options at $10 each over 10 years. 2) Citadel Investment Group LLC, which bought ResMae Mortgage Corp. two weeks ago, yesterday revealed a 4.5% stake in Accredited. 3) Fremont General Corp. said Wednesday it will sell $4 billion of loans at a discount, for a pretax loss of $140 million. 4) Private equity Blackstone Group is buying PHH Corp.'s mortgage unit. Subprime fears calmed Wednesday on the news, as Accredited and Fremont shares rose 11%, to $11.96 and 16% to $10.19 respectively.
Sources: Bloomberg I, II, Reuters UK, BusinessWeek, NY Times, MSNBC, San Francisco Business Times, CNN Money
Commentary: Accredited Home Lenders: Survival in the Quicksand of Subprime • Accredited Home Lenders to Sell $2.7 Billion of Loans • Housing Bubble and Real Estate Market Tracker
Stocks/ETFs to watch: Accredited Home Lenders (LEND), Fremont General (FMT), New Century Financial Corp. (OTCQB:NEWC), Fannie Mae (FNM), Novastar Financial (NFI), Wells Fargo (NYSE:WFC), Fieldstone (FICC), PMI Group (PMI), MGIG Investment (NYSE:MTG)
Fremont Sells $4B in Loans at a 3.5% Discount, Shares Climb
Fremont General Corp., which is leaving its subprime mortgage business, said Wednesday it had agreed to sell $4 billion of its mortgages at a discount, resulting in a $140 million pre-tax loss. It said the loan sales would be completed over the next few weeks, and that it had already received $950 million as a first installment from an unspecified buyer. The sale price represents a 3.5% discount to face value. The company shut down its mortgage-lending operations on March 5 and put its employees on paid leave. On Monday Fremont said it had given two-months notice to some of the unit's 2,400 employees. It continues to operate its commercial real estate, residential loan-servicing and retail banking units. Shares, which are down about 33% on the year, were up 16% to $10.19 in Wednesday trading.
Sources: Bloomberg, New York Times
Commentary: Housing and Subprime: This Was No Surprise • Who's to Blame for Subprime Woes? Not the Fed. • The Mess Beyond Subprime : Its the "E" in P/E That Worries Me
Stocks/ETFs to watch: Fremont General Corp. (FMT). Competitors: Accredited Home Lenders Holding Co. (LEND), New Century Financial (OTCQB:NEWC), Countrywide Financial Corp. (CFC), NovaStar Financial Inc. (NFI). ETFs: iShares Cohen & Steers Realty Majors (NYSEARCA:ICF), iShares Dow Jones US Real Estate (NYSEARCA:IYR), Vanguard REIT ETF (NYSEARCA:VNQ)
Intuit's TurboTax Sales Disappoint, Shares Drop in After-hours
Intuit announced the second of three seasonal sales updates for its TurboTax software and reiterated its guidance (issued Feb. 22) for fiscal 2007. Total TurboTax (federal) sales were up 1% (y-o-y) at 10.91 million units. Desktop units sold fell 2% to 6.038 million, while Web returns increased 4% to 3.847 million. Intuit's Senior VP and GM of consumer tax said the firm expects 3% to 5% total unit growth for the full season, of which 1/3 is still to come. He commented on changes made to their product lineup and pricing strategies resulting in higher ASPs. Based on this, he said Intuit is "confident in reiterating 10% - 15% segment revenue growth guidance." Intuit expects full year adjusted EPS of $1.33 - $1.37, on sales of $2.63 - $2.68 billion, compared to analysts' average estimate of $1.37 on $2.66b in revenue. Intuit's shares gained 2.4% to $30.00 in normal trading yesterday, but lost 5.9% to $28.22 on volume of over 232,000 shares in after-hours activity.
Sources: Press release, Associated Press, Reuters
Commentary: Intuit Shares Fall on Soft Guidance • Intuit Earnings Likely To Have Little Effect On Seasonal Price Swings • Buying Intuit Into Tax Season
Stocks/ETFs to watch: Intuit (NASDAQ:INTU). Competitors: H&R Block (NYSE:HRB). ETFs: Software HOLDRS (NYSE:SWH), iShares Goldman Sachs Software Index (NYSEARCA:IGV)
Motorola Will Miss Forecasts -- Again
Motorola shares shed almost 5% last night to hit a two-year low after it warned that it will miss forecasts, due primarily to the poor performance of its handset unit. This is the third consecutive quarter that the company has missed expectations. Motorola is now forecasting a net loss for Q1 of -$0.07-0.09, including charges, on revenue of $9.2-9.3 billion, down from a January forecast of $10.4-10.6 billion. Analysts were expecting EPS of about $0.17 on sales of $10.46 billion. Full-year sales and profitability are now projected to be "substantially below prior guidance." Profit margins at the phone division plummeted to 4.4%, their lowest in four years. The company suffered from a price war with rival Nokia, slashing handset prices by an average $12. Management expects the handset unit to recover by H2 and forecasts the company will be profitable for the full year. Motorola also announced a management reshuffle and an increase in its share buyback program to $7.5 billion worth of common stock, the latter in response to the demands of activist shareholder Carl Icahn. Zander refrained from comment on rumors that Motorola is about to make a play for Palm Inc. or that Motorola itself might be the target of an LBO.
Sources: Wall Street Journal, Bloomberg, MSNBC, Reuters, MarketWatch (I, II)
Commentary: Could Motorola Be In Play To Private Equity? • Motorola Suffers from High Inventories, Weak Margins • Motorola: No Improvement in Sight
Stocks/ETFs to watch: Motorola Inc. (MOT). Competitors: LM Ericsson Telephone Co. (NASDAQ:ERIC), Nokia Corp. (NYSE:NOK). ETFs: Broadband HOLDRs (NYSE:BDH), Wireless HOLDRs (NYSEARCA:WMH), Vanguard Information Technology ETF (NYSEARCA:VGT)
Major League Baseball Turns Down Cable Offer
Major League Baseball has turned down an offer from iN Demand, a cable consortium owned by Comcast, Time Warner and Cox, to match its seven-year, $700 million arrangement with satellite network DirecTV. This Tuesday, representatives of M.L.B. and DirecTV will testify before the Senate Commerce Committee about their deal regarding Extra Innings, M.L.B.'s package of out-of-market games. “M.L.B. must sit down with the carriers and come to an agreement that ensures all fans continue to have access to baseball,” said Senator John Kerry, who will chair the hearing. iN Demand claims it offered M.L.B. the same financial terms as DirecTV and guaranteed the same 15 million subscribers for the MLB Channel, which is to go on the air in 2009. Bob DuPuy, president of M.L.B., turned down iN Demand's offer in less than an hour, claiming it “falls short [of the DirecTV deal] in nearly all of the material conditions.” When M.L.B. announced the DirecTV deal, it invited the Dish Network and iN Demand to make offers “at consistent rates and carriage requirements,” apparently as a concession to the 75 million households that watch games on cable. M.L.B. asserts that to be thus "consistent,” the cable companies would have to guarantee that the MLB Channel be available to 80% of their digital customers. iN Demand President Robert D. Jacobson: “By rejecting this matching offer, M.L.B. has proven it never intended for iN Demand to have a fair and equal opportunity to bid for Extra Innings." iN Demand and Dish have until March 31 to meet M.L.B.'s terms. Shares of DirecTV rose 5% to close at $23.75.
Sources: Wall Sreet Journal, Bloomberg, Sports Illustrated, New York Times
Commentary: Play Ball! DirecTV and Major League Baseball Ink Non-Exclusive Broadcast Deal • DirecTV May Move For Major League Baseball • Satellite TV: EchoStar No Cheaper than DirecTV
Stocks/ETFs to watch: DirecTV Group Inc. (NASDAQ:DTV), EchoStar Communications Corp. (NASDAQ:DISH), Comcast Corp. (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC). ETFs: PowerShares Dynamic Media (NYSEARCA:PBS), PowerShares Dynamic Telecom & Wireless (PTE), Vanguard Extended Market Index ETF (NYSEARCA:VXF)
Herman Miller's Earnings Jump, But Miss Estimates, Shares Trade Lower
Herman Miller, a leading U.S. office furniture manufacturer, reported Q3 (ended Mar. 3) net income climbed 44.2% to $32.3 million, or $0.50/share (+51.5%), on a 14.3% increase in sales to $484.8m. Analysts however, expected $0.52/share on sales of $491m. Herman Miller offered Q4 EPS guidance of $0.47 - $0.51, on sales of $485m - $505m, compared to analysts' average estimate of $0.52 on sales of $500m. Orders grew 15.2% to $457.9m in the quarter and it recorded its highest ever Q3 backlog, up 23.4% to $297.1m. CFO Beth Nickels commented on the challenging nature of Q3 due to holidays and uneven production schedules, and especially this year because production was started in China. However, she also noted "commodity markets appear to have leveled off," which in addition to its recently announced price increases should be beneficial to future earnings. Herman Miller's shares gained 1.61% to $37.84 in normal trading, but lost 6.9% to $35.23 on volume of about 170,000 shares, in after-hours activity.
Sources: Press release, Reuters
Commentary: Herman Miller's Earnings Results - A Contrarian Indicator? [Sept. '06]
Stocks/ETFs to watch: Herman Miller (NASDAQ:MLHR). Competitors: HNI Corp (NYSE:HNI), Steelcase (NYSE:SCS)
Starbucks Reiterates 2007 EPS, Revenue Forecasts
Starbucks CEO Jim Donald told investors yesterday that he stands behind the company's forecast of EPS of $087-0.89 for 2007. He also continues to anticipate same-store sales in the range of 3-7%. The total revenue growth forecast is unchanged at 20%. Starbucks shares are trading about 20% below their November 52-week-high, partly on concerns over brand strategy. An email sent by Chairman Howard Schultz to the company's top executives a few weeks ago, which was subsequently leaked to the press, expressed his concern that the chain's growth to more than 13,000 locations had led to "dilution of the [Starbucks] experience." Some analysts theorized that the message was deliberately made public to signal investors that the company is going to rein in its growth. Schultz insisted that on the contrary, he wants to see Starbucks double its locations within four or five years and eventually reach 40,000 stores. Schultz's email also indicated that the company's spring product line will show a new emphasis on merchandise, including music. Starbucks has just signed an exclusive deal with Paul McCartney to record an album on its new Hear Music label.
Sources: Reuters, Chron.com, MarketWatch, Wall Street Journal
Commentary: Starbucks' Recent Roadblocks Present a Buy Opportunity • Goldman: Conditions Right for 45% Starbucks Upside
Stocks/ETFs to watch: Starbucks Corp. (NASDAQ:SBUX). Competitors: Tim Hortons Inc. (NYSE:THI). ETFs: Vanguard Consumer Discretionary ETF (NYSEARCA:VCR), Ultra QQQ ProShares (NYSEARCA:QLD), Consumer Discretionary SPDR (NYSEARCA:XLY)
Conference call transcripts: F1Q07 (Qtr End 12/31/06)
TRANSPORT AND AEROSPACE
Chrysler Sale Looms Nearer, Will Maintain Ties - WSJ
DaimlerChrysler CEO Tommy LaSorda reassured Florida dealers yesterday that talks to sell its Chrysler division to a private equity contender -- purportedly either Cerberus Capital, a Blackstone Group/Centerbridge partnership, or Canadian auto parts maker Magna International -- are advancing quickly. He hopes to report decisively on a sale or turnaround effort at the April 4 shareholders meeting. LaSorda indicated that Mercedes and Chrysler would maintain ties regardless, such as in current joint purchasing for volume discounts, and collaboration on technology, and engineering & design. The hybrid engine partnership is particularly potentially lucrative, with Washington offering fuel efficiency incentives. DaimlerChrysler is selling off assets like Detroit's American Axle Manufacturing, and executives say that inventory is now aligned with dealers' needs in response to last years overproduction. But a potential Chrysler sale is shadowed by 8% lower sales this year, and job cuts. Missouri lost 1900 Chrysler jobs this week, and 13,000 firings are planned nationwide. A buyout will also be hampered by Chrysler's UAW union's high wage & benefit agreements, and bloated retiree pensions.
Sources: Wall Street Journal, Detroit Free Press I, II, III, IV , St. Louis Business Journal, Press Telegram, Akron Beacon Journal
Commentary: The Rise of Toyota and the Demise of the American Auto Industry • The Dating Game: Magna Likes Chrysler • Daimler-Chrysler: Does Divorce Really Loom? - Barron's
Stocks/ETFs to watch: DaimlerChrysler (DCX), Magna International (NYSE:MGA), Ford Motor Co. (NYSE:F), General Motors Co. (NYSE:GM), Toyota Motor Corp. (NYSE:TM), Honda Motor Co. (NYSE:HMC)
Morgan Stanley Shares Gain 6.9% on Earnings Leap and Perelman Verdict Reversal
Morgan Stanley shares gained nearly 7% yesterday on two pieces of good news: quarterly earnings jumped 70% on record debt and equity trading, and a Florida court has overturned a verdict requiring the investment bank to pay $1.58 billion to billionaire financier Ronald Perelman. Morgan Stanley was found guilty of fraud in 2005 for having concealed the financial condition of Sunbeam Corp., which went bankrupt a few months after Perelman sold the Coleman Company for Sunbeam shares in 1998. Perelman plans to appeal the reversal. The original verdict, which awarded Perelman $604 million in actual damages and $850 million in punitive damages, contributed to the ouster from Morgan Stanley of then-CEO Philip Purcell. Morgan Stanley will now be free to release $360 million it had set aside to pay the award. The company also announced that Q1 profit rose 70% to an all-time high of $2.67 billion ($2.51/share) from $1.57 billion ($1.48) a year earlier on trading gains and higher investment-banking fees.
Sources: Business Week, Bloomberg, Reuters, MarketWatch
Commentary: Morgan Stanley Tops EPS and Revenue Estimates By a Wide Margin; Shares Surge • Wall Street I-Banks Show Outstanding 2006 Results • Expecting Upside From Morgan Stanley
Stocks/ETFs to watch: Morgan Stanley (NYSE:MS). Competitors: Goldman Sachs Group Inc. (NYSE:GS), Merrill Lynch & Co. Inc. (MER). ETFs: iShares Dow Jones US Broker-Dealers (NYSEARCA:IAI), Financial Select Sector SPDR (NYSEARCA:XLF), Vanguard Financials ETF (NYSEARCA:VFH)
Conference call transcripts: F1Q07 (Qtr End 2/28/07)
Chinese Markets Complete Recovery, Close at New Highs
Chinese stocks closed at record highs Wednesday, completing their recovery from a drastic February drop that sparked a global equity selloff. The benchmark Shanghai Composite Index climbed 0.8% to close at 3,057.38, just above its high of Feb. 26, one day before falling 9%. China's smaller market in Shenzen was up 1.4% to close at 805.68, also a new record. Real estate holdings made strong gains after Gov. Zhou Xiaochuan said in an interview with the EmergingMarkets newspaper distributed Tuesday at a meeting in Guatemala City that China doesn't want to continue building its foreign exchange reserves, sparking speculation the central bank will raise yuan rates at a quicker pace than previously thought. Real estate companies benefit from a strong yuan because land and property holdings are denominated in local currency. Banks were also up, as their yuan-denominated holdings would also benefit from yuan strength. Chinese foreign currency reserves currently total more than $1 trillion.
Commentary: The Main Reasons Behind FXI's Trading Discrepancies • China: Annual Spring Economic Cool Down Underway • China's Central Bank Raises Interest Rates 0.27%
Stocks/ETFs to watch: iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), PowerShares Golden Dragon Halter USX China Portfolio (NYSEARCA:PGJ)
Have Wall Street Breakfast emailed to you every morning before the market opens.