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MACRO AND HOUSING

Homebuilders' Confidence Slumps to 16-Year Low

Confidence among U.S. homebuilders has tumbled to its lowest level in 16 years as growing defaults and stricter lending requirements resulting from the subprime mortgage crisis exacerbated an already dismal homebuilding market. The National Association of Home Builders/Wells Fargo index of builder confidence dropped to 22 in August from 24 in July, its sixth straight monthly decline and second-weakest reading since the survey started in 1985. Its nadir was 20 in January 1991. A year ago, the index was at 33, and two years ago it was at 67. Readings below 50 mean most respondents view conditions as poor. Economists had expected a reading of 23. "There is no question that problems in the subprime mortgage sector have spilled over to other components of housing finance, including the Alt-A and jumbo markets, delaying a revival NAHB Wells Fargo Housing Market Index 16 8 07of the single-family housing market," said NAHB chief economist David Seiders. Looking ahead, he thinks home sales could begin to rise again early next year, with housing starts beginning a "gradual recovery" by mid-2008. Confidence fell in three of four regions, with the biggest decline exhibited in the Midwest. Confidence in the South was unchanged at 25. A separate report from the National Association of Realtors showed that existing home sales were also weak; the price of a single-family home in one-third of metropolitan areas fell during the second quarter while sales, including condominiums, dropped 11%. Meanwhile, another shoe is likely to drop Thursday as economists expect a decline of some 5% in new home starts and a 1% drop in building permits when the Commerce Department releases its July numbers.
Sources: Press release, AP, Bloomberg, MarketWatch,
Commentary: The Existing Home Sales Report Beats ExpectationsWhat's the Problem with Real Estate Short Sales?Home Price Indexes Showing No Signs of Recovery
Stocks/ETFs to watch: XHB, ITB

Paulson Remains Confident Economy Will Not Enter Recession

U.S. Treasury Secretary Henry Paulson told the Wall Street Journal Wednesday that although he expects a growth "penalty" to be extracted from the U.S. economy during the current market turmoil, he does not anticipate a slide into recession. "The economy and the markets are strong enough to absorb the losses," he said. He said the repricing of risk is to be expected, and steps should not be taken either to guarantee players from potential losses or to inhibit them from taking risk. "When you have periods of benign markets... market participants aren't going to be as vigilant as they should be," he said. "One of the natural consequences of the excesses is that some entities will cease to exist." Paulson argued that the relative strength of the global economy differentiates this period from 1998, when Russia's default on its debt and currency devaluation and the subsequent collapse of hedge fund Long Term Capital Management precipitated a tightening of the credit markets. Paulson said he will be focusing on "mortgages and how the product is originated and sold" in view of the deterioration of standards, particularly in the subprime market. "Where we've got issues are in the riskier mortgages and in the jumbo prime mortgages," he said. "Clearly we're looking at all the policy levers available to us to increase liquidity in the markets."
Sources: Wall Street Journal, II [video], III, Reuters
Commentary: Bush, Paulson Shrug Off Market TurmoilLessons From A Chaotic Market
Stocks/ETFs to watch: AGG, DIA, SPY

TECHNOLOGY

Take-Two Interactive Gets Wells Notice

Take-Two Interactive Software may face charges regarding past stock options practices after receiving a Wells notice from the staff of the Securities and Exchange Commission. Take Two's former CEO Ryan Brant, in February, was the first ex-CEO to plead guilty to criminal charges over TTWO 16 08 2007 Chartoptions backdating in a scandal that has encompassed hundreds of companies. A review uncovered a significant number of option grants that were backdated during a period of more than six years to August 2003. In July, two senior executives pleaded guilty to falsifying company records in connection with the probe. The maker of the Grand Theft Auto video game said the notice indicated that the SEC staff planned to seek authority from the Commission to file charges and pursue a civil monetary penalty. The company was given a final chance to respond and convince the SEC not to file charges. Take-Two said it is cooperating and expects to resolve the probe through a settlement rather than litigation, and called the Wells notice "a significant step forward towards that resolution." The company had received a formal investigation order from the SEC in April. It was another blow to the company which has delayed the release of "Grand Theft Auto IV," is expecting a loss for the year and saw management ousted in a shareholder coup earlier this year. Shares fell 6.5% Wednesday, closing at $12.60.
Sources: SEC filing, AP, Reuters, MarketWatch
Commentary: Take-Two Is Buyable On This GTA Delay Stock CollapseTake-Two Interactive In Need Of Adult SupervisionTake-Two Plummets On 'Grand Theft' Delay; Sony, Microsoft May Be Affected
Stocks/ETFs to watch: TTWO

Salesforce.com Swings to Profit, Boosts Outlook

Salesforce.com said it earned $3.7M ($0.03/share) on revenue of $177M in the second quarter as sales jumped 49% to $176.6M and, for the first time ever, it added 3,000 net paying customers during a quarterly period. A year ago, the seller of Internet-based customer-management software CRM 16 08 2007 EarningsChartposted a loss of $145,000 (nil/share) on revenue of $118.1M. The results topped expectations of analysts who forecast earnings of a penny a share and sales of $173.7M, on average. Excluding items, however, earnings were $0.09/share -- below the average $0.10/share expected by analysts. The company attributed the customer increase, in part, to a new partnership with Google. It also noted that its customers are getting larger. "A year ago, our largest customer had roughly 7,500 subscribers. Today, our installed base includes two customers with more than 30,000 subscribers; four customers with 20,000 or more subscribers; five customers with over 10,000 and a remarkable 68 customers with more than 1,000 subscribers -- a greater than 40% increase in the number of customers with 1,000 or more subscribers versus six months ago," the company said. It ended the quarter with 800,000 subscribers. Possibly contributing to the higher earnings was a 50% tax-rate, rather than 70% as the company had expected, analysts said. Looking ahead, Salesforce.com now sees earnings of $0.08-$0.10/share on sales of $727M-$732M, up from the $0.07-$0.09 on a high-end of sales of $728M it previously had forecast. Analysts had been expecting earnings of $0.08 on sales of $730.4M, on average, for 2007. Third-quarter profits may be a bit below expectations as the company said it sees earnings of $0.01-$0.02/share on revenue of $187M-$189M. Analysts were expecting earnings of $0.02 on revenue of $188.3M. The company shrugged off concerns about competition from companies such as Microsoft, Oracle and SAP, saying it "had no attrition of any consequence."
Sources: Press release, MarketWatch, Reuters, Bloomberg
Commentary: First Albany Out Bullish On Salesforce.comIs Salesforce.com Hitting a Ceiling?Microsoft Ignites Potential Price War with CRM Live
Stocks/ETFs to watch: CRM. Competitors: MSFT, ORCL, SAP. Partners: GOOG

Network Appliance Jumps on Strong Outlook, Buyback

Shares of Network Appliance Inc. climbed as first-quarter earnings topped recently-lowered estimates and the provider of network storage solutions forecast stronger-than-expected sales for the fiscal second quarter and said it would buy back up to $1B of stock. NTAP said it earned NTAP 16 08 2007 EarningsChart$34.3M ($0.09/share) on revenue of $689.2M, compared with $54.7M ($0.14/share) on revenue of $621.3M a year ago. Excluding items, earnings were $76M ($0.20/share) compared to $96.6M ($0.25/share) last year, and above the $0.19 average analyst estimate. Analysts had expected revenue of $686.4M, on average. The company had warned earlier this month that results would fall far short of its previous guidance due to cutbacks in orders from large U.S. customers. "We are clearly disappointed with our revenue growth this quarter, yet confident about our underlying business strength and continued health," said CEO Dan Warmenhoven. "Our bookings growth and cash flow are both very encouraging, and we are optimistic about getting back on track for higher growth in revenue and profits going forward" (see full earnings call transcript). Against that backdrop, the company forecast second-quarter earnings of $0.16-$0.18/share, or $0.24-$0.26/share excluding items, on revenue of $752M-$768M. Analysts were expecting adjusted earnings of $0.25/share on revenue of $742.8M. Fourth-quarter sales were projected at $1B by NTAP. First-quarter bookings grew 27%; analysts said backlog and bookings suggest there is pent-up demand for data storage. In addition to the new repurchase plans, $200M remains available from a previous authorization, and the company said it may buy back as much as $500M in stock during the second quarter. Shares, which have fallen 38% this year, rose 5.8% to $25.56 AH, extending a 3.1% gain in the regular session.Sources: Press release, Reuters, Bloomberg
Commentary: Network Appliance Tumbles On Slashed ForecastIs Network Appliances on Sale?Network Appliance: Choosing Growth Over Earnings
Stocks/ETFs to watch: NTAP. Competitors: EMC, HPQ, MSFT. Partners: IBM. ETFs: IAH, PHW

MEDIA

Allen Considering Alternatives for Charter

Paul Allen, chairman of Charter Communications, is evaluating alternatives for the cable company including a sale, recapitalization or taking it private, according to a filing with the SEC. Allen, the billionaire investor who was a co-founder of Microsoft, controls 52% of the CHTR 16 08 2007 Chartcompany and 91% of its voting power. It would cost him about $1B to buy out the remainder of the company. Other cable operators such as Time Warner Cable previously have expressed interest in Charter, which has more than 5.6M subscribers. CEO Neil Smit has said the company is a buyer not a seller. The pool of available cable companies is shrinking; Cablevision Systems is being taken private and Cox Communications isn't for sale. Charter is highly leveraged with $19.6B in long-term debt and $81M in cash, and a recapitalization or restructuring could reduce that leverage. Other options on the table are a reorganization or sales of material assets, the filing indicated. Analysts, however, were skeptical any move was imminent given the turmoil in credit markets and the company's improving performance. "Charter should and will be acquired eventually, I just don't find the reference in the SEC filing as groundbreaking information. Charter is always looking at strategic alternatives," said one analyst. A representative for Allen wasn't available for comment, and a Charter spokeswoman declined to comment.
Sources: SEC filing, Wall Street Journal, Reuters, Bloomberg
Commentary: Charter: Paul Allen Mulls Alternatives, AgainCharter Communications: Paul Allen May Pursue Restructuring TransactionsNine Cable TV Stocks Worth Watching
Stocks/ETFs to watch: CHTR, TWC. Competitors: CMCSA, VIA, LBTYA, CVC

RETAIL

Kraft Exploring Sale of Post Cereals -- WSJ

Kraft Foods has begun to seek a buyer for its Post cereals unit, the Wall Street Journal reported Thursday. The Journal identifies Pepsico as a "logical bidder," since its Quaker unit owns Cap'n Crunch and Life cereals. A month ago, Pepsico's KFT 16 08 2007 ChartChairman and CEO Indra Nooyi said the company has a "robust" pipeline of acquisitions in the works (see full transcript), though the company has declined to say whether or not it is in talks with Kraft. Unidentified sources told the Journal the Post unit could be sold for up to $3 billion. Kraft has sent financial information on Post to several prospective buyers, possibly including General Mills and private-label food manufacturer Ralcorp Holdings. Post cereals cater to both adult and children's markets, with offerings ranging from Grape Nuts and Raisin Bran to Cocoa Pebbles and Alpha-Bits. Activist investor Nelson Peltz, who holds a 3% stake in Kraft, has urged CEO Irene Rosenfeld to sell Post cereals. The Journal notes that the cooling of the LBO market might encourage corporate acquisitions like this one, since companies no longer have to compete with private equity firms that drive up deal prices.
Sources: Wall Street Journal
Commentary: Kraft Foods Jumps On Reports of Peltz's 3% StakeKraft Foods Shares Rise On Reports of Icahn Stake, Peltz MeetingBuffett Takes a Stake in Kraft
Stocks/ETFs to watch: KFT, PEP, RAH, GIS. Competitors: K. ETFs: PRFG, FXG, UGE
Earnings call transcripts: Kraft Q2 2007

Nestle Surges on Strong Earnings, Guidance, $21B Buyback

Ordinary shares of Nestle climbed nearly 10% in Zurich Wednesday on news the company posted better-than-expected first-half net income of 4.92 billion Swiss francs (+18% y/y) on an 8.4% increase in sales to 51.1B francs. Nestle also forecast slightly higher margins and a 25B franc buyback over three years. Analysts had forecast net income of 4.59B francs on sales of 50.48B francs. Nestle expects margin expansion in the second-half as it passes on higher costs for a variety of products to customers. Sales volume will be sacrificed, but management said it believes full-year results will beat forecasts. Analysts reacted positively, with an Allianz analyst saying, "I have been looking at Nestle for 15 years and I have never seen anything like this." Bear Stearns analysts called the results "watershed." The $21B equivalent buyback amounts to approximately 14% of shares outstanding based on Tuesday's ordinary share closing price. Nestle's ADRs lost 0.6% to $93.66 on Tuesday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Baby Stocks: 10 Ways to Grow Your PortfolioTen Ways to Invest in SwitzerlandIs G.Willi Food-International Nestle's Next Takeover Target?
Stocks/ETFs to watch: NSRGY.PK. Competitors: CAG, KFT, GDNNY.PK. ETFs: EWL
Related: Nestle conference call presentation slides [PDF download]

Macy's Posts Sharp Profit Drop, Guides Down

Macy's saw its Q2 net income tumble 77% on a 1.7% drop in revenue in the face of what it called a "more challenging environment." "While the second quarter was below our initial expectations, we did see improving sales trends through the quarter in former May Company stores and in home-M 15 08 2007 EarningsChartrelated merchandise categories. We are optimistic that our business can and will improve in the second half of the year," CEO Terry Lundgren said in a press release. The number-one U.S. department store, formerly known as Federated, said EPS net of merger integration costs were $0.29/share -- at the high end of its $0.20-0.30 forecast, which was twice lowered from an initial $0.40-0.45. Total sales were $5.89 billion. Analysts were expecting the company to earn $0.26/share on revenue of $5.88 billion. Same-store sales fell 2.6%, having declined for four straight months. Some price-conscious Macy's shoppers have turned to rivals J.C. Penney and Kohl's after Macy's eliminated coupons and introduced pricier fashions, analysts say. Macy's gave Q3 sales guidance of $5.9-6 billion and Q4 sales of $8.8-9 billion. That means its full-year sales forecast has dropped to $14.7-15 billion, vs. a May outlook of $15-15.3 billion. Third-quarter same-store sales are forecast down 1% to up 1%, and Q4 flat to up 2%, vs. a previous second-half forecast of 2-3.5%. Q3 EPS after charges are estimated at $0.05-0.10, and Q4 EPS at $1.70-1.80. Analysts had been looking for a more robust $0.19 and $1.81 respectively. "They are still struggling with the integration, the merchandising, who their customer is and what they want," David Heupel of Thrivent Financial told Bloomberg. There have been reports the company may be the target of a leveraged buyout: On July 19, Women's Wear Daily reported that Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. are planning a $24 billion bid. Shares are down 17% YTD, and 2.3% in pre-market trading.
Sources: Press release, MarketWatch, Wall Street Journal, Bloomberg
Commentary: Despite Gains, Macy's Still Trading At Significant Discount To Potential OfferMacy's Shares Spike on Buyout Speculation
Stocks/ETFs to watch: M. Competitors: JCP, KSS. ETFs: RTH

FINANCIAL

KKR Financial Plunges on Mortgage Losses

KKR Financial Holdings LLC, a unit of buyout giant Kohlberg Kravis Roberts & Co., said Wednesday it could lose over $200 million on leveraged investments in mortgage-backed securities, causing its shares to plunge 31% to $10.52. The stock is now down almost 58% over the past month. KKR said it sold about $5.1 billion KFN 16 08 2007 Chartin residential-mortgage loans, and unwound the derivatives used to hedge them, at a loss of about $40 million. KKR Financial still holds about $5.8 billion in mortgage loans, mainly residential-mortgage-backed securities, which it says it finances largely through short-term borrowing. It has only $200 million of its own equity supporting those positions, a leverage ratio of over 26:1. "Due to the unprecedented disruption in the residential-mortgage and global commercial-paper markets, the company has initiated discussions with the investors in its asset-backed secured liquidity note facilities regarding various alternatives to resolve potential funding disruptions resulting from the current market environment," the company said in a statement. It warned it could lose another $200-$250 million in its efforts to extricate itself from residential-mortgage securities. A Lehman research note said KKR Financial "should be able to navigate through the current liquidity crisis; however, we are concerned about the potential impact from wider credit spreads." Another analyst said he didn't believe the current issue will derail the parent company's planned IPO. At least 70 U.S. mortgage companies have halted operations or sought buyers since the start of 2006, Bloomberg reports.
Sources: Press release, MarketWatch, Bloomberg
Commentary: Time To Hold — Anything Else Could Be Hazardous To Your Portfolio's HealthWhy Sub-Prime Doesn't Worry MeWhere is All the Money Going?
Stocks/ETFs to watch: KFN

Accredited Home Deal Still On; Shares Rise

Shares of Accredited Home Lenders rose 11% to close at $6.10 Wednesday on news that Lone Star Funds has extended its tender offer for the company, though the extension was required by the terms of the buyout agreement. Lone Star agreed in June to buy Accredited for $400 million, or $15.10 per share. LEND 16 08 2007 ChartThe mortgage market has deteriorated since then, and Lone Star has attempted to back away from the deal. Accredited threatened Lone Star with a lawsuit, arguing that a change in industry conditions does not absolve the buyout firm from its obligations. Lone Star, in compliance with the terms of the agreement, extended its tender offer until midnight of August 28. Lone Star said it had received approximately 11 million shares, or 43% of Accredited's common stock, by close of business Monday. "It appears to us that this deal has a good chance of closing, but we caution that the recent volatility in the mortgage market does create considerable uncertainty over the eventual outcome," wrote Morningstar analyst Erin Swanson.
Sources: Dow Jones, Reuters
Commentary: Lone Star, Accredited Deal is Still On - For NowAccredited Home Sues Lone StarAccredited Home Lenders Gets Regulatory Approval for Sale to Lone Star
Stocks/ETFs to watch: LEND. Competitors: FNM, FRE

Countrywide Shares Tank on Merrill Downgrade

Shares of market-leading mortgage lender Countrywide Financial fell 13% to close at $21.29 Wednesday, their worst drop since the crash of 1987, after an analyst at Merrill Lynch said he believed the lender could face bankruptcy. Kenneth Bruce downgradedCFC 16 08 2007 Chart Countrywide to Sell two days after publishing a note rating the stock a Buy. In the downgrade, he wrote that "effective insolvency" would result if Countrywide is forced by creditors to liquidate its assets. More than 70 lenders have either pursued buyouts or shut down since the beginning of last year as banks have shown increasing reluctance to lend and have demanded more collateral. Countrywide's shares have lost half their value this year. The price of Countrywide's five-year credit default swaps rose 225 basis points to 600 basis points on Wednesday, suggesting that doubts are rising about the company's solvency (CDS prices rise together with the perceived risk of owning a company's bonds). Countrywide provides funding for almost one in five U.S. home loans. Specialty finance company KKR Financial Holdings, which reported that it had lost $40 million on the sale of $5.1 billion of mortgage loans, plummeted 31% to $10.52 on Wednesday. Scottish Re fell 24% to $2.79 on news it is reviewing risks in its $3.1 billion of bond holdings backed by subprime and Alt-A mortgages.
Sources: Bloomberg, MarketWatch, Wall Street Journal
Commentary: Countrywide Financial, VTB Group: Why Are Analysts So Screwy About Sells?Countrywide Financial Plummets On 'Unprecedented Disruptions' In Secondary Mortgage MarketAs Countrywide Financial Goes, So Goes the Mortgage Sector
Stocks/ETFs to watch: CFC. Competitors: BAC, WFC
Earnings call transcripts: Q2 2007

HEALTHCARE/BIOTECH

Amgen Cuts Workforce, Lowers Guidance

Biotech giant Amgen announced Wednesday that it will lay off employees for the first time in its history. The company will cut 2,200 to 2,600 people, or 12-14% of its workforce. It will also shave $1.9 billion off capex over the next two years, AMGN 16 08 2007 Chartclose some operations and slim down its R&D. The steps, which will cost the company $600-700 million in pretax charges, are expected to save $1.0-1.3 billion next year. "It's the first time in our 27-year history we've had to restructure," said CEO Kevin Sharer. Amgen also lowered full-year 2007 EPS guidance to $4.13-4.23 from $4.28, compared with $3.90 in 2006. Amgen, which the New York Times notes experienced, "a virtually continuous rise in sales and profit since its first product, the anemia drug Epogen, reached the market in 1989," has been hammered by studies suggesting that overuse of Epogen and Aranesp, another of the company's anemia drugs, can cause blood clots and heart attacks. Q2 Aranesp sales fell 19% to $578 million in the U.S. The federal agency running Medicare is set to release a new policy slashing reimbursement for Aranesp and Procrit, another drug manufactured by Amgen. The new Medicare restrictions are "without apparent clinical or policy rationale," according to Sharer, and are "bad for patients."
Sources: MarketWatch, Bloomberg, Dow Jones, Reuters, Wall Street Journal, New York Times
Commentary: Tuesday's Analyst Upgrades and DowngradesAmgen Posts Slim Revenue Rise on Enbrel SalesCancer Stocks: Lagging Again
Stocks/ETFs to watch: AMGN. Competitors: BAX, JNJ, NVS. ETFs: BBH, PKW, PRFH
Earnings call transcripts: Q2 2007

INTERNATIONAL

China Mobile Q2 Net Up 29% on Rural Growth

China Mobile reported better-than-expected first-half earnings, which when broken out show a 29% increase in Q2 net income to 20.3 billion yuan ($2.7B), driven by value-added services and strong growth in rural areas. Revenues rose 23.5% to 88.9B yuan. CHL-Chart-8-16-2007 China Mobile's Hong Kong-listed shares lost 3.9% to HK$80.85 on broad market weakness on Thursday. "In the second half of 2007, we will continue to focus on exploring rural markets, expanding value-added services and optimizing our network to provide strong support for future growth," said CEO Wang Jianzhou in a statement. Average (monthly) revenue per customer [ARPU] was unchanged year-over-year at 88 yuan and up from 85 yuan in Q1. China Mobile's CFO said, "ARPU should be stable, or fall slightly" in the second-half due to growth among rural subscribers, but should be offset by higher data services sales. China Mobile added 31.2M subscribers in the first-half and now has 332.4M total. ADRs of China Mobile lost 2.8% to $52.26 on Wednesday.
Sources: Press release, Bloomberg, MarketWatch, Reuters
Commentary: Chinese Wireless: Business Model, Rather Than Technology, Impedes InnovationChinese Tech Stock Weekly Summary
Stocks/ETFs to watch: CHL. Competitors: CHA, CHU, CN. ETFs: FXI, PGJ, ADRE, EEB, FNI

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Energy: Rising Solar Prices Threaten Industry: Where's the Shakeout?
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