Fed Leaves Rate Untouched, Disregards Credit Market Tumult
For the ninth time in a row, the Fed voted unanimously to hold its target rate steady at 5.25%. The Fed also held the prime bank lending rate at 8.25%, where it has been for the last year. After the statement, the S&P 500 index dropped from an intraday high of 1476.45 to a low of 1457.07 (-1.3%) before rebounding to close at 1476.71. In a nod to recent volatility, the Fed's statement acknowledged that "financial markets have been volatile in recent weeks" and that "credit conditions have become tighter." However, the Fed reiterated its belief that moderate economic growth will continue forward despite continuing subprime fallout and an ensuing credit crunch, and that it believes the economy's "predominant policy concern remains the risk that inflation will fail to moderate as expected." The Fed concluded that future rate decisions would be predicated on "the outlook for both inflation and economic growth" - which many economists understood to mean a near-term rate cut was unlikely.
Sources: FOMC Statement, AP, MarketWatch, Wall Street Journal
Commentary: Fed's History of Acknowledging Risks [WSJ blog] • Market Stress: It's All About Perspective • Why The Fed Won't Cut Today
Stocks/ETFs to watch: SPY, IVV, DIA, QQQQ, AGG
Toll Bros. Forecasts Another Brutal Quarter
Toll Brothers said Wednesday morning in a preliminary earnings report its FQ3 revenue dropped 21% amid a widespread housing slowdown. The number-one U.S. luxury homebuilder forecast net revenue of $1.21B, down from $1.53B a year ago. This will mark its forth straight quarter of shrinking revenue, as homebuilders struggle with falling prices, tightening credit availability, and buyers intent on waiting for even lower prices. "You need some confidence on the buyer's part that when they do buy that home, it's not going to go down in value," Victory Capital Management analyst Jack Lake told Bloomberg. Toll said Q3 net signed contracts would be down 31% to $727 million, backlog would drop 34% to $3.67B, and cancellations would be 23.8% vs. 18.9% last quarter. Toll estimated its pretax write-down for land and land options at $125-175 million. "We are now in the twenty-third month of a down housing market," CEO Robert Toll said. "With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down." Toll reports Q3 results on August 22.
Sources: MarketWatch, Bloomberg
Commentary: Eight Key Points on the Real Estate Market • A Glance At US Bancorp and Homebuilder Stocks • Case Shiller Housing Composite: Worst Since 1991
Stocks/ETFs to watch: TOL. Competitors: DHI, CTX, PHM. ETFs: XHB
Worker Productivity Slows, Labor Costs Jump
Second quarter workplace productivity rose a lower-than-expected 1.8% annualized, and unit labor costs rose a more-than-expected 2.1%, according to the Labor Department. Revisions to first quarter figures also indicated a more pronounced slowing in productivity, as well as inflation risk. First quarter productivity numbers were lowered to a 0.7% increase from 1% previously, while the Labor Dept. said unit labor costs rose 3% rather than the 1.8% originally reported. Over the past year, productivity in the non-farm sector rose just 0.6%, the data showed, while unit labor costs climbed 4.5%. Economists said the second-quarter increase in productivity reflected a pickup in economic growth that's not likely to be matched going forward as the slump in real estate and credit markets are expected to curb growth. After the figures were released, some analysts had expressed concerns that the Fed would be worried by the numbers. The central bank made no change to interest rates in its rate-setting meeting Tuesday afternoon (see full summary).
Sources: Press release, RTTNews, Bloomberg, MarketWatch, AP
Commentary: Fed Keeps Rates Steady: Time to Confront Reality • Market Stress: It's All About Perspective • We're Due For a Good 10% Correction
Stocks/ETFs to watch: DIA, SPY, AGG
Cisco Boosts Outlook on Better-Than-Expected Sales
Shares of Cisco Systems jumped 6% in AH trading Tuesday after the networking giant exceeded analysts' estimates with a 25% rise in fiscal fourth-quarter earnings and raised its long-term revenue outlook. Traditionally conservative in its forecasts, Cisco said it now expects annual long-term revenue growth of 12%-17%, up from its previous targeted rate of 10%-15%. "We believe that we're very well-positioned in the industry from a vision, differentiated strategy and execution perspective," said CEO John Chambers (full earnings call transcript). For the first quarter, Cisco sees revenue of $9.45B-$9.55B vs. analysts' forecasts for $9.38B. For the fiscal year, Cisco sees revenue growth of 13%-16% while analysts had expected revenue of $39.7B, on average, representing growth of 13.6%. Cisco said it earned $1.9B ($0.31/share) on revenue of $9.43B, up from $1.54B ($0.25/share) on revenue of $7.98B a year ago. Excluding items, earnings would have been $2.3B ($0.36/share). Analysts had expected earnings of $0.35/share and revenue of $9.275B, on average. JP Morgan said the company now has "enough flexibility they that they can beat on a regular basis." Cisco said growth took place across all its product lines in the fourth quarter, but noted that its advanced technology segment -- which includes home networking, video conferencing and set-top cable TV boxes -- jumped 24% compared with 14% growth in its router division. Should the shares hold at AH levels during regular trade, it would mark a new 52-week high for the stock, which is at its highest level since the tech bubble burst in early 2001. Separately, Cisco said its CFO Dennis Powell would retire and be replaced by VP Finance Frank Calderoni at the end of January.
Sources: Press release, Reuters, MarketWatch, Dow Jones
Commentary: Cisco’s Quarter Looking Bright, But Where’s the Stock Upside? • Cisco Systems: Expecting 25-30% Upside
Stocks/ETFs to watch: CSCO. Competitors: NT, JNPR, ALU, IBM. ETFs: IAH, IXN, ROM
Nokia Shares Higher on New Chip Strategy, Despite InterDigital Patent Claim
InterDigital filed a complaint Tuesday with the U.S. International Trade Commission against Nokia, alleging it engaged in unfair trade practices by infringing on two of its patents. Shares of Nokia are trading to the upside in Helsinki however, as the firm announced it plans to use more commercially available chipsets. Nokia said it will discontinue parts of its own chipset development in order to "focus on its core competencies in chipset development (and modem technology), leverage external innovation, and foster competition in the chipset industry." Nokia also said it wants to focus on software to power internet services. Texas Instruments will continue to be a "broad scope supplier," while Broadcom was chosen as a supplier in EDGE, Infineon Technologies in GSM and STMicroelectronics in 3G. As for InterDigital's patent infringement claim, Nokia said it "intends to vigorously defend itself ...." Nokia was last up 1.85% to €22.05. Its ADRs lost 1.36% to $29.76 on Tuesday.
Sources: Press release I, II, III, Associated Press, MarketWatch, Reuters
Commentary: Nokia's Restructuring: Nobody Loves A Value-Chain Hog • Nokia Shares Jump on 2Q Earnings Beat, Margin Expansion • Motorola’s Failures Positive For Nokia
Stocks/ETFs to watch: NOK, IDCC, TXN, BRCM, IFX, IFX. Competitors: STM, ERIC, SNE, Samsung [not traded in the U.S., but a 15% component of iShares MSCI S. Korea (EWY)]. ETFs: MTK, WMH
Earnings call transcripts: Nokia Q2 2007
Vodafone Decides To Retain Its Entire Verizon Wireless Stake
Vodafone released a statement Wednesday defending its decision not to exercise an option to sell $10 billion worth of its jointly held Verizon Wirless business to Verizon. "Verizon Wireless is a market-leading business with strong growth prospects and the Board of Vodafone continues to believe that retaining its full 45% interest is in the best interests of shareholders," the statement read. Verizon owns the remaining 55% of Verizon Wireless. Vodafone had come under criticism from activist shareholder group ECS, which urged it to unlock greater shareholder value by spinning off several holdings including its Verizon Wireless stake. In July, Vodafone shareholders rejected ECS's proposal by a wide margin. Vodafone's shares have risen 47.2% over the recent 12-month period. They are higher by 0.25% in intraday trading in London.
Sources: Press Release, Bloomberg, MarketWatch, Dow Jones Newswires, Wall Street Journal, Financial Times
Commentary: Is Verizon Coming Closer to Owning Verizon Wireless? • Vodafone Denies Intention To Buy Verizon, But Talk Will Persist • Vodafone Denies It's Considering a $160B Bid for Verizon
Stocks/ETFs to watch: VOD, VZ. Competitors: TI, T, S, DT. ETFs: PTE, WMH, IXP
Earnings call transcripts: Vodafone Group FY 2006 Earnings Call Transcript
Priceline.com Soars on 2Q Earnings Beat, Brisk Bookings, Higher FY Guidance
Shares of Priceline.com surged more than 10% to $71.70 in extended trading Tuesday, following its announcement of a near tripling of 2Q earnings -- shares gained 5.5% to $65.09 during the regular session. Priceline reported net income of $34.6 million, or $0.79/share, on a 16% increase in revenues to $355.88m. Adjusted EPS of $1.11 topped analyst expectations of $0.89/share, on sales of $354m. Priceline said gross travel bookings increased 33% year-over-year, driven by 93% growth in international gross travel bookings. Priceline offered 3Q EPS guidance of $1.21 - $1.31, compared to analysts' average estimate of $1.08. For the full-year, Priceline upward revised its EPS outlook to $3.50 - $3.65, from $2.90 - $3.10 previously. Analysts had expected $3.12/share. (See earnings call transcript).
Sources: Press release, Bloomberg, MarketWatch
Commentary: Earnings Preview: Expecting Good News From Foster Wheeler, JA Solar, Priceline.com, TBS Int'l • Priceline: Riding High On the Internet Travel Boom • Stocks With the Greatest 1-Day Volatility On Earnings
Stocks/ETFs to watch: PCLN. Competitors: EXPE, OWW
Goldman Denies Hedge Fund Liquidation
Goldman Sachs Tuesday denied it was liquidating its Global Alpha hedge fund, after rumors circulated that the fund was being wound down after falling 12% over the past two weeks. The fund's goal is to generate returns not correlated to the S&P 500, but its risk aversion is supposed to be similar to that of the large-cap index. Investors said the funds investments were liquid, and that it should be able to sell its holdings should redemption demands grow. After losing 7.7% in the week ended July 27, the fund is now -12.1% on the year, before fees, according to investors. In 2006, the Alpha fund lost 6%, after a robust 40% gain in 2005, and an average 15.1% since its inception in 1995. The loss comes as the hedge fund industry suffered its worst week in four years, with Hedge Fund Research's investable hedge fund index falling 3.01%. A Goldman spokesman declined to comment.
Sources: Reuters, MarketWatch
Commentary: I-Bank Stocks Are Falling Knives • Brokers Are The New Homebuilders - Forget The Bailouts • The Key To Goldman Sachs' New Hedge Fund Operation: Teamwork
Stocks/ETFs to watch: GS
Earnings call transcript: Goldman Sachs F2Q07
Luminent Mortgage Hit Hard by Margin Calls
Luminent Mortgage Capital said it is considering "a full range of strategic alternatives" as shares lost more than three-quarters of their value after the company warned that it was facing a liquidity crunch amid a high number of margin calls. "Effectively, the secondary market for mortgage loans and mortgage-backed securities has seized up," Luminent said. "As a result, Luminent is simultaneously experiencing a significant increase in margin calls on its highest-quality assets and a decrease on the financing advance rates provided by its lenders." The board also suspended payment of its $0.32 second-quarter dividend. Just last week, Luminent said the dividend "is secure and will not be canceled," and that it had "ample liquidity to manage its business." Luminent said "prime" whole loans made up most of its assets as of June 30, and claimed that its credit process is stringent, saying it independently validates property values on every loan it buys and that as a result of that due diligence it "has experienced lower delinquencies than the prime mortgage market." The remainder of its portfolio, it said, are mortgage-backed securities, "the vast majority of which is rated AAA." UBS downgraded Luminent to "sell" from "neutral" and cut its price target to zero from $9. Luminent said it delayed filing its quarterly report with the SEC. It said it ended June with $9.5B in assets and $9.06B in liabilities on its balance sheet.
Sources: Reuters, MarketWatch
Commentary: Luminent Mortgage Capital May Be On the Verge of Bankruptcy • Luminent Mortgage Capital: Another MREIT Bites the Dust? • A Contrarian Look at the Financial Sector
Stocks/ETFs to watch: LUM. Competitors: NFI, NLY. ETFs: REM
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