Wall Street Breakfast's Pre-Market Snapshot
MACRO AND HOUSING
Risk Aversion Remains Despite Fed Move; Treasury Yields Plummet
Investors, unmoved by the Fed's efforts to calm the credit markets last week, raced into government securities on Monday, resulting in the steepest drop in yields on short-term Treasury bills in almost a generation. That drop has in turn led to increased speculation that the Fed will soon cut the benchmark federal-funds rate. The willingness of investors to accept low yields for the security of government bonds suggests they remain fearful that subprime problems will seep into the wider securities market. On Friday, the Fed cut its discount window rate to 5.75% from 6.25%. It did not change the federal-funds rate, but said it is "prepared to act" as "downside risks to growth have increased appreciably." On Monday, investors snapped up three-month Treasurys, sending prices shooting up and yields down 66 basis points to 3.09%, their sharpest drop since January 1989. In midday trading, the three-month Treasury yield sank 125 basis points, a steeper drop than on the day of the October 1987 crash. The yield on one-month Treasurys slid Monday by 62 basis points to 2.35% after plummeting 175 points. The flight to quality was led by money market funds that are backing away from asset-backed commercial paper. "We're having a crisis of confidence," said ING Investment Management fixed-income head James Kauffmann. "[I]nvestors with the cash have no risk appetite at all." Kornelius Purps, fixed-income strategist at Unicredit Markets: "The problem in the credit market is far from over."
Sources: Wall Street Journal, Financial Times I, II, Bloomberg
Commentary: Flight To Safety Has Barely Started • Treasury Bill Yields Collapse • The Place To Be If The Fed Cuts Interest Rates
Stocks/ETFs to watch: AGG, DIA, SPY
FINANCIAL
Buffett May Take Stake in Countrywide -- WSJ
Warren Buffett, who has built his reputation on value investing and bargain hunting, may feel the time is ripe to make a move in the wake of steep sell-offs resulting from the turmoil generated by the subprime crisis. According to the Wall Street Journal, the billionaire investor and chairman of Berkshire Hathaway, who is sitting on $50B in cash, may buy parts of Countrywide Financial Corp., one of the lenders hardest hit by subprime worries. Investors, the report said, believe Countrywide’s strong brand name and high-quality mortgage assets may be attractive to Buffett, as Berkshire’s insurance unit already doubled its investment in mortgage-backed securities rated “AA” or higher during the second quarter. “This is Berkshire Hathaway's market,” said Thomas Russo, a partner at investment fund Gardner Russo & Gardner and long-time investor in Berkshire told the Journal. Given the now difficult market for private-equity deals, the Journal also speculated that Buffett could make a move for Texas utility TXU Corp. if its deal with Kohlberg Kravis Roberts falls through. Or, it said, he could choose to increase his holdings in companies he already owns. He has been increasing his holdings in financial services companies, and earlier this month disclosed an investment in Bank of America. Berkshire is also a long-time shareholder in Wells Fargo. In addition to the cash stash, Berkshire holds some $74B in stocks and $27B in bonds, which Buffett has said he would happily redeploy for better returns. Buffett, as always, refused to comment, as did Countrywide and TXU.
Sources: Wall Street Journal, Reuters
Commentary: A Peek at Berkshire Hathaway's Holdings: Focus On Dow Jones, BoA • Cash-Rich Companies May Sop Up Oversold Value - Barron's
Stocks/ETFs to watch: BRK.A, CFC, TXU, BAC, WFC
Capital One Slams Door on GreenPoint Mortgage
The latest victim of the subprime crisis, Capital One Financial Corp. lowered its 2007 earnings outlook after halting residential-mortgage origination operations at its wholesale mortgage banking unit GreenPoint Mortgage. Citing near-term profitability challenges given current
conditions in the secondary mortgage markets and the likelihood that markets for prime, non-conforming products will remain challenging for the foreseeable future, the ninth-largest U.S. bank by market value said GreenPoint, which specialized in nonconforming loans, will cease making new loan commitments immediately, but continue to meet contractual obligations for commitments to customers with locked rates already in the pipeline. The company will close GreenPoint’s California headquarters along with 31 locations across 19 states, resulting in the elimination of some 1,900 jobs. The company estimated an after-tax charge of $860M ($2.15/share) related to the closure, including $110M related to ongoing operations, and therefore revised its 2007 earnings forecast down by that amount to $5/share. Without the charge, Capital One said it would have maintained its earlier outlook as its other businesses remain on a “solid trajectory,” with revenue growth and credit performance in line with expectations. “Capital One’s other businesses are supported by ample liquidity and funding including deep access to deposits, a ‘stockpile’ of subordinated credit card funding in place that allows approximately $9B of AAA credit card funding going forward, and a $25B portfolio of highly liquid securities,” said CFO Gary Perlin. Capital One noted that it will retain a $12.5B mortgage portfolio that includes $680M of second mortgages originated by GreenPoint. Capital One will continue to originate and sell traditional mortgages through its 750 bank branches.
Sources: Press release, Wall Street Journal
Commentary: Capital One Financial: The Latest Casualty of the Mortgage Crisis • No Bids In Corporate Bond Market
Stocks/ETFs to watch: COF
Earnings call transcript: Capital One Financial Q1 2007
Friedman Billings Unloads $4.95 Billion in Mortgage-Backed Securities
Washington, D.C.-based REIT Friedman, Billings, Ramsey Group announced Monday it has sold approximately $4.95 billion of agency mortgage-backed securities at a loss of about $57 million. That loss includes $17 million that was part of
AOCI (Accumulated Other Comprehensive Income) as of June 30, 2007 as a reduction of book value. The company is now left with an agency and AAA-rated mortgage-backed securities portfolio of approximately $1.2 billion. In a release, Friedman, Billings said it took the step to "reduce leverage during this period of disruption and uncertainty in the asset backed financing market and to better position its balance sheet to take advantage of future investment opportunities."
Sources: Press release, MarketWatch, Reuters
Commentary: Friedman Billings Ramsey: A Contrarian Dumpster Dive • Contrarian Mortgage Plays: Friedman, Billings, Ramsey Group • Friedman, Billings, Ramsey Group: Revival Expected
Stocks/ETFs to watch: FBR. Competitors: COWN, KBW. ETFs: REM
Lone Star Files Counterclaim Against Accredited Home
Private equity firm Lone Star Funds "categorically denies" the allegation of breach of contract raised in a suit by prospective buyout candidate Accredited Home Lenders Holding Co. Lone Star, which wants to cancel the planned $400
million ($15.10 per share) merger, has filed a counterclaim in Delaware Chancery Court. In its complaint, the buyout firm asks the court to declare that Accredited has failed to meet several conditions necessary for the closing of the tender offer because it has suffered a "material adverse effect" and asserts that Accredited has "materially breached numerous other obligations." According to Lone Star, Accredited is entitled to the agreed-upon $12 million reverse break-up fee and nothing more. Accredited's shares closed down 4.6% at $6.44 on Monday and then sank another 5.75% to $6.07 after hours.
Sources: Press release, MarketWatch, Reuters
Commentary: Accredited Home Deal Still On; Shares Rise • Accredited Home Sues Lone Star • Lone Star, Accredited Deal is Still On - For Now
Stocks/ETFs to watch: LEND. Competitors: FNM, FRE
SunTrust to Terminate 2,400 Jobs in Planned Overhaul
SunTrust, the 7th largest U.S. bank, announced that as part of a restructuring plan it will terminate 2,400 jobs, or 7.4% of its workforce, by the end of 2008. To cover the cost associated with the move, SunTrust will incur a pretax, one-time charge of $45 million in the September quarter. The restructuring
plan, announced last year by CEO James Wells, should help the company save $530 million in annual gross cost savings by 2009. SunTrust spokesman Barry Koling reiterated that the move was "unrelated to the current mortgage industry woes, and reflects a process that's been in place since the beginning of the year." SunTrust also said it would continue to closely review its balance sheet, including what to do with its long-held stake in Coca-Cola. SunTrust sold 9% of its shares in Coca-Cola in the second quarter, providing after-tax profits of $150 million which the company said will be used to partially fund stock repurchases of $750 million to $1 billion. It will decide by the end of the year if it wants to sell the rest of its position. Shares are trading down $1.14 (-1.42%).
Sources: Press release, Bloomberg, Dow Jones, AP
Commentary: A Voice of Wisdom at SunTrust • SunTrust Banks Anyone?
Stocks/ETFs to watch: STI. Competitors: BAC, BBT, WB. ETFs: IAT, KBE, RKH
Earnings call transcript: SunTrust Banks Q2 2007
Thornburg Loses $930 Million in Debt Fire Sale
Residential mortgage lender Thornburg Mortgage Inc. announced Monday it sold $20.5 billion of high-quality mortgage-backed debt, totaling 35% of its assets, at a discount to pay down debt it could not refinance. President Larry Goldstone said the company will post a $930 million dollar
loss on the sale, probably resulting in a net loss for the year. The securities sold for about 95 cents on the dollar according to Goldstone. Thornburg, which specialized in "jumbo" loans of at least $417,000 with good credit, hopes to resume normal operations over the next two weeks after it was forced to stop accepting loan applications as a result of a lack of funds last week (see full summary). Jefferies Group Inc. analyst Richard Shane Jr. commented on the situation, saying that while Thornburg "appears likely to survive its liquidity crisis, we believe future earnings power has been materially damaged." Shares of Thornburg traded -$1.54 (-10.5%) to $13.47 at 1:04 PM Monday.
Sources: Wall Street Journal, TheStreet.com, AP, Reuters, Bloomberg
Commentary: Thornburg Mortgage Hit With Margin Calls; Shares Plunge 47% • The Long Case for Thornburg Mortgage • Profitable Independent Lenders: Next Victims of the Credit Crunch?
Stocks/ETFs to watch: TMA. Competitors: WFC, BAC, FRE, FNM
Nasdaq OMX Bid Aided by Swedish Politics
Swedish politics could be a deciding factor in who wins the battle to buyout Nordic exchange operator OMX AB. Nasdaq submitted a $3.7 billion offer in stock and cash for the OMX on May 25, but was outbid by government-owned Borse Dubai who offered $4 billion in cash. However, both
the Swedish government and the OMX board are not sold on Borse Dubai's seemingly superior bid. The Swedish government is selling its 6.4% stake in OMX to reduce State ownership, but ruling coalition Moderate party member Bertil Kjellberg saw a deal with Borse Dubai as replacing "a state owner with a state owner." Karin Pilsater, chairman of the Swedish parliamentary committee on industry and trade, further added Dubai's "type of government is, to put it mildly, different" than Sweden's. OMX Chairman Urban Backstrom said that he did not consider the Borse Dubai bid superior to Nasdaq's. He explained the industrial synergies in a deal with Nasdaq were greater than Borse Dubai's. He added "I could never have realized then that another state, a sovereign state, would put a bid in (for) the company." The Nasdaq on Monday also said that it may sell its 31% stake in the London Stock Group (see full summary), encouraging expectations that it is preparing to increase its offer on OMX. Bob Greifeld is expected to travel Sweden this week to speak with OMX stakeholders as well.
Sources: Dow Jones, Reuters
Commentary: Nasdaq Puts LSE Stake on the Block • Borse Dubai Trumps Nasdaq's OMX Bid • The Nasdaq Is a Buy on Valuation and Growth Catalysts
Stocks/ETFs to watch: NDAQ. Competitors: CME, BOT, ICE, ISE, NYX
Earnings call transcript: The Nasdaq Stock Market
KKR Financial Looks to Raise $500M in Share Sale
KKR Financial, an affiliate of private equity giant Kohlberg Kravis Roberts & Co., announced Monday it was seeking to raise $500 million through share sales to institutional and private investors. The firm plans to raise $230 million by selling stock to seven institutional
investors, including Morgan Stanley and Oak Hill Advisors, and offering the other $270 million to current shareholders. The share price for both transactions will be $14.40. Existing shareholders will be able to buy one share per five that they own. If the offering is not fully subscribed, Kohlberg Kravis Roberts will buy up to $100 million of the shares themselves. Last Wednesday, KKR Financial shares plunged 31% after the company announced it could lose nearly $200 million because of highly leveraged investments in mortgage-backed securities. The company has already lost $40 million as a result of unwinding its $5.1 billion worth of mortgage loans (see full summary). Shares are up 4.9% to $15.10 in pre-market trading.
Sources: Press release, MarketWatch, TheStreet.com,
Commentary: KKR Financial Plunges on Mortgage Losses • Recent Monthly Adjustable Mortgage Reset Values and a Look Ahead
Stocks/ETFs to watch: KFN, MS. Competitors: AHR, DFR, LUM. ETFs: PSP
TECHNOLOGY
MTV, RealNetworks to Form JV to Challenge Apple iTunes
The Wall Street Journal reports Viacom's MTV Networks and Real Networks Inc., are set to announce a joint venture Tuesday, featuring MTV's online digital music library merged with Real's Rhapsody subscription music service, in order to compete better against Apple. The JV likely means the end of MTV's Urge digital service it had launched with Microsoft, the latter which has instead focused on its Zune brand of music players and download service. MTV and Real have reportedly been in discussions for months, and were planning a deal ahead of MTV's Video Music Awards scheduled September 9. The Journal says MTV plans to promote Rhapsody heavily on its TV channels. Verizon Wireless has signed on as a mobile supplier of the JV's digital contents, according to a person familiar with the matter.
Sources: Wall Street Journal
Commentary: MTV+Real+Verizon Vs Apple & iTunes • Solid Buying Opportunity In RealNetworks Following Earnings • iPhone Changes the Telecom Game
Stocks/ETFs to watch: VIA, RNWK, VZ, VOD, MSFT, AAPL. ETFs: IIH
Earnings call transcripts: Viacom Q2 2007, RealNetworks Q2 2007
LSI to Sell Mobility Products Unit to Infineon
LSI Corp., as part of an ongoing restructuring, is selling its mobility products business to Germany's Infineon Technologies AG for $450 million in cash. The deal also includes a performance-based payment of up to $50 million due in Q1 2009. The unit, which designs semiconductors and software for cellphones and satellite digital radio applications, generated $186 million in revenue in H1 2007. "The sale of our mobility business will allow us to further focus our efforts on attractive market opportunities in storage and networking, where we have a strong presence, significant differentiation and the scale needed to be successful," said CEO Abhi Talwalkar. As part of the deal, 700 LSI employees will join Infineon's communications solutions unit. The sale was decided upon in the course of a strategic review LSI conducted in April following its $4 billion acquisition of Agere
Systems. Two months ago, LSI announced it is selling its consumer video chip business to Magnum Semiconductor. In related news, LSI said its board has authorized a repurchase of up to $500 million in stock.
Sources: Press release, MarketWatch, Thomson Financial, TheStreet.com, Bloomberg
Commentary: Infineon's iPhone Win and Broader Vendor Base Point in Right Direction • Infineon: A Big Winner In iPhone • LSI Falls to Loss on Post-Merger Charges
Stocks/ETFs to watch: LSI, IFX. Competitors: STM, TXN. ETFs: BDH
Earnings call transcripts: LSI Logic Q2 2007, Infineon Technologies F3Q07
DreamWorks and Paramount: Only HD DVD
DreamWorks Animation and Viacom's Paramount Pictures announced Monday they will now use the HD DVD format exclusively for worldwide distribution and will not co-distribute on Sony's Blu-Ray format. The move is a significant win for Toshiba, which developed HD DVD. In a release, the companies said they made the move because of HD DVD's "market-ready technology and lower manufacturing costs." "Today Toshiba is making HD-DVD players available at $299, which is a first time that it's really been at an affordable price," said DreamsWorks Animation CEO Jeffrey Katzenberg. "It's a game-changer...and it's why we decided to throw in with them." The least expensive stand-alone Blu-Ray player retails for $499. Despite the price differential in players, Blu-Ray discs outsold HD DVD discs by a 2-to-1 margin in H1. Blockbuster recently announced it will stock only Blu-Ray high-definition titles, and Target said it will sell only Blu-Ray DVD players in Q4. Sony Pictures, Twentieth Century Fox, Walt Disney and MGM release movies only on Blu-Ray, while Universal releases only on HD DVD. Warner Brothers is now the only major studio releasing movies on both formats. "It had seemed like Blu-Ray was winning the format war,'' said Miller Tabak analyst David C. Joyce. "It's surprising Viacom would try to be a David in a fight with the rest of the industry goliaths."
Sources: Thomson Financial, MarketWatch I, II, Bloomberg, Reuters, Dow Jones
Commentary: Hollywood Sweats the Peak of the DVD Format • DreamWorks Animation Should Ride Shrek 3 To Growth • Can DreamWorks Animation Rise Above the Market Turbulence?
Stocks/ETFs to watch: TOSBF.PK, SNE, DWA, VIA. Competitors: HIT, Pixar Animation Studios Inc. (private), Walt Disney Feature Animation (private). ETFs: PBS, PEJ
Earnings call transcripts: DreamWorks Animation Q2 2007, Viacom Q2 2007, Sony F1Q07
INTERNET
Google Acquires Stake in Chinese Community Site
Google Inc. disclosed Monday it recently acquired a stake in Tianya.cn, a social networking site in China comparable to Facebook or MySpace. Details of Google's stake have not been confirmed, and have been estimated anywhere from less than 10 percent to as much as 60 percent. Google has been
searching for ways to gain a greater foothold in China, the world's second largest Internet market. Despite its efforts, according to research firm Analysis International, Baidu.com controlled 58% on the Chinese internet search market, followed by Google with a 23% share, and Yahoo China with 12%. Google has also opened an engineering research center in Shanghai, and was recently granted preliminary approval for a license to supply web content for China. With the Olympic Games quickly approaching, competition between Baidu, Google, and Yahoo should increase as Chinese search and Q&A sites become appealing for large companies looking to advertise leading up to and during the games.
Sources: Reuters
Commentary: China's Internet giants ready to rumble [MarketWatch] • China: 'In Cyberspace They Trust' • Google and Sina to Take on Baidu
Stocks/ETFs to watch: GOOG. Competitors: BIDU, YHOO, SOHU, SINA, TOMO. ETFs: FXI
TRANSPORT AND AEROSPACE
China Southern to Buy 55 Boeing 737s
China Southern Airlines Co. agreed to buy 55 Boeing 737 aircraft to accommodate increasing demand for flight services in China, enhance competitiveness and renew its fleet. The deal, which requires approval by China Southern shareholders, includes B737-700 and B737-800 aircraft. Due to a confidentiality agreement, China’s largest carrier by fleet size did not disclose what it was paying for the aircraft, but said the price was “significantly lower” than the $57M-$67.5M catalogue price range of a B737-700 and the $70.5M-$79M range for a B737-800. At catalog prices, the purchase would cost between $3.1B and $4.3B. China Southern, which will use cash and notes to pay for the aircraft, said it will take delivery of the planes between May 2011 and October 2013. The announcement came shortly after a China Airlines B737-800 exploded in Japan and Japanese authorities ordered an inspection of all B737-800s owned by Japanese airlines as well as some 737-700s with similar engines. Earlier this year, China Southern bought another 37 Boeing 737-800s, six Boeing 777F freighters and 20 Airbus A320s. Also Monday, China Southern said it
returned to profitability in the first half on strong passenger demand and appreciation of the yuan against the dollar. The airline said that, under Chinese accounting rules, it earned 308M yuan ($41M) for the six months ended June 30 compared to a loss of 854M yuan a year earlier as revenue rose to 25.21B yuan ($3.3B) from 21.14B yuan last year. Under international accounting rules, first-half net profit was 168M yuan ($22.1M), the company said.
Sources: Press release, AP
Commentary: China's Airline Industry: Robust Growth, But Risky Investing • Boeing Company: Inconsistent Fundamentals, Stock Severely Overpriced
Stocks/ETFs to watch: BA, ZNH
Earnings call transcript: Boeing Q2 2007
INTERNATIONAL
GE Seeks Exit From Japanese Consumer Finance Industry
General Electric is looking to divest Lake, a Japanese consumer finance company it acquired nearly a decade ago, as the $170 billion industry has come under stronger government regulation over the past year. "Now is an appropriate time to evaluate various alternatives that are in the best interest of both our business and Lake's long-term success," said a GE
spokesman in an email to Bloomberg. Lake is the sixth largest Japanese consumer lender with approximately ¥860B yen ($7.5B) of outstanding loans. A law was enacted last December capping the maximum lending rate at 20% from 29% previously, and requiring larger loan reserves to cover refund claims from borrowers. Lenders' shares remain under pressure amid heavy losses and uncertainty, but M&A activity is expected to accelerate following last month's ¥120B Promise/Sanyo Shinpan deal. In the meantime, GE continues to consolidate Lake's operations in an effort to cut costs. Separately, a Chinese state-owned newspaper reported GE and Siemens are in talks with Shenyang Blower Works, a manufacturer of larger compressors, to buy stakes in exchange for technology.
Sources: Bloomberg, Financial Times, Thomson-Newstex
Commentary: Aiful Corpration to Benefit From Japanese Consumer Lending Consolidation • GE Posts In Line Earnings; Boosts Share Buyback from $12 to $14B • Takefuji Corporation Forecasts a Return to Profit
Stocks/ETFs to watch: GE, C, SI, TAKAF.PK, AIFLY.PK
Earnings call transcripts: General Electric Q2 2007
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