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Wall Street Breakfast's Pre-Market Snapshot

FINANCIAL

Bank of America Takes Countrywide Stake, Boosting Mortgage Lenders

Shares of Countrywide Financial were up 16% in pre-market trading Thursday after Bank of America announced late Wednesday it has taken a $2 billion equity stake in the troubled mortgage lender. Countrywide finances about one of every six mortgages in the U.S. The announcement followed news that Lehman Brothers is shutting down a subprime lending business (full summary) and the closure by Capital One Financial of its GreenPoint mortgage unit (full summary). BofA invested in Countrywide's nonvoting convertible preferred stock, yielding 7.25% annually, which can be converted to common stock at $18 a share, 17.5% below Wednesday's close. If it converts its entire holding, BofA will hold 16-17% of Countrywide's common stock. Countrywide was caught off guard last week as the market for commercial paper dried up, forcing it to tap its entire CFCC 23 08 2007 Chart$11.5 billion credit line from a syndicate of 40 banks. "In the current turmoil, the stock market has been underestimating the value in Countrywide's operations and assets," said BofA CEO Kenneth Lewis. "We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets." Morningstar analyst Ganesh Rathnam speculates that BofA might have its eye on a bigger prize. "Eventually I think they'd be looking to acquire the whole firm," he said. "I don't see why they would otherwise buy $2 billion into it." BofA will presumably become Countrywide's preferred lender, analysts said. Many also thought the move may signal healing in the battered mortgage lending market: "With last week's Fed action and today's announcement, it appears that the mortgage capital markets will return to more normal levels of activity and liquidity sooner than we thought,'' Fox-Pitt Kelton Inc. analyst Howard Shapiro wrote in a note to investors Wednesday. Other mortgage lenders jumped in AH trading: Thornburg Mortgage Inc. gained 10% percent, IndyMac was up 7%, and Accredited rose almost 9%.
Sources: Press release, Wall Street Journal, Reuters, MarketWatch, Bloomberg
Commentary: A Very Short Act In One Play: How Bank of America Decided To Save CFCBank of America Invests $2B in Countrywide: Who Wins?Capital One Slams Door on GreenPoint Mortgage
Stocks/ETFs to watch: BAC, CFC, TMA, IMB, LEND. ETFs: RKH, KBE, FDL
Earnings call transcripts: Countrywide Financial Q2 2007, Bank of America Q2 2007

Major U.S. Banks Step Up to Discount Window

Citigroup, JPMorgan Chase, Bank of America and Wachovia announced Wednesday they have each borrowed $500 million from the Fed's discount window. Deutsche Bank went to the window last Friday, the day the Fed announced it had lowered the discount rate to 5.75% from 6.25%. The discount window was originally set up as a means by which the Fed can assist struggling banks. Banks generally avoid it because of the associated stigma (indeed, shares of all five banks slipped temporarily on news they had gone to the window). The Journal notes that while the move was largely symbolic, the banks had an incentive to step up: the Fed gave them a temporary exemption from a restriction barring them from using discount-window funds to "finance certain securities purchases by their investment-banking units." "The Fed was playing DJ here, luring people out onto the dance floor," said Lou Crandall, chief economist at Wrightson ICAP. "The only way to eliminate the stigma of the discount window is to get prime institutions to use the facility." Robert Brusca, chief economist at FAO Economics, sees the move as a cover for banks that have nowhere else to turn: "Intermittent use of the window by large players will muddy up any attempted take on the amounts being borrowed by the truly distressed...My guess is that subterfuge is the real game plan."
Sources: Dow Jones I, II, Wall Street Journal, Reuters, MarketWatch I, II, Bloomberg
Commentary: As Mortgage Shops Close, Big Banks Are Looking Better and BetterPost Rate Cut: What Lies Ahead?Why The Fed Rate Cut Was No Surprise
Stocks/ETFs to watch: C, JPM, BAC, WB, DB. ETFs: FDL, XLF, RKH, KBE
Earnings call transcripts: Citigroup Q2 2007, Wachovia Q2 2007, Bank of America Q2 2007, JPMorgan Chase Q2 2007

H&R Block Taps Credit Lines

Faced with “increasingly constrained and unstable” credit markets, H&R Block said it has tapped into its working lines of credit to provide "a more stable source of funds" to support short-term needs. The drawdown, by subsidiary Block Financial Corp., was done in two takes; one of $200M on August 16, HRB 23 08 2007 Chartwhich was repaid with part of the second $850M draw on August 20. Block said it expects to continue using these credit lines “until the commercial paper stability and market pricing return to normal levels.” The company said it has $2B available, which “exceeds the company’s current short-term and expected future borrowing needs." The move by the provider of tax-return preparation services comes a week after Countrywide Financial Corp. drew down $11.5B from credit lines. Moody’s on Tuesday, downgraded Block Financial debt to “Baa1” from “A3,” on concerns continued mortgage market turmoil might kill the planned sale of its Option One Mortgage unit to Cerberus Capital Management for a price that adjusts according to the underlying value of the mortgage portfolio. Block recently said the deal, which was supposed to have closed in October, may not close until December. Separately, proxy adviser Institutional Shareholder Services recommended that investors elect a slate of three dissident directors nominated by investment firm Breeden Partners to the company’s board. Block said it was “disappointed” with the recommendation. Breeden wants Block to consider options to “stop the bleeding” in the subprime mortgage business, which is conducted by Option One.
Sources: Press release, TheStreet.com, Reuters, Wall Street Journal
Commentary: H&R Block CEO: Straight Shooter Aims at Hedge FundMoney Market Malaise: Commercial Paper Remains ProblematicH&R Block Reports Net Loss On Subprime Woes, Misses Estimates
Stocks/ETFs to watch: HRB, CFC. Competitors: INTU, JTX

Accredited Halts New Loans and Cuts 62% of Workforce

Mortgage lender Accredited Home Lenders Holding Co. announced Wednesday that it was no longer accepting new mortgage applications and will cut 1,600 jobs. The layoffs represent 62% of the company’s workforce, and will also lead to a shutdown of 60 retail branches and 10 wholesale LEND 23 08 2007 Chartoffices. Accredited will honor “existing commitments,” and does plan on resuming wholesale loan originations when the market recovers. "This is the only way to weather the storm, cut the work force, stop making loans they can't sell, and hope things get better," Bose George, a Keefe, Bruyette & Woods Inc. analyst, commented on the plan. On Tuesday, the company announced it would sell $1 billion worth of home loans to lower exposure to margin calls to an unnamed investor (full summary). Accredited also has plans to take Lone Star, a private equity firm, to court in order enforce a deal under which Lone Star agreed to acquire Accredited for $400 million (full summary). The deal had been agreed up on June 4th, but Lone Star has made claims that Accredited breached the merger agreement. Bose George stressed the importance of the court decision: "A lot of the value in the shares is based on whether the lawsuit succeeds, either through a merger or cash settlement." Accredited closed down 6.9% to $6.10 on Wednesday, but gained 6.6% back in AH trading on news that Bank of America took a $2 billion stake in Countrywide Financial, igniting hopes that the worst of the sudden mortgage lender crisis may be over.
Sources: Wall Street Journal, Reuters, MarketWatch
Commentary: Bank of America Invests $2B in Countrywide: Who Wins?Lone Star, Accredited Deal is Still On - For NowAccredited Home Lenders is on Life Support
Stocks/ETFs to watch: LEND, CFC, BAC. Competitors: WFC, FNM, FRE. ETFs: KBE

Lehman Slams Door on Mortgage Unit

Add Lehman Brothers Holdings to the growing list of subprime victims. The biggest underwriter of U.S. bonds backed by mortgages said it will close down its BNC Mortgage LLC unit in a move that will result in the firing of 1,200 employees, or about 4.2% of the company’s work force. Associated costs will LEH 23 08 2007 Charttotal $52M, and the company expects a related after-tax charge of about $25M. Lehman will continue to offer home loans to more credit-worthy borrowers through its Aurora Loan Services unit. According to Inside B&C lending, BNC was a top-20 subprime mortgage lender in 2006, originating more than $14B of home loans, though Lehman has indicated that subprime mortgages and related securities provide less than 3% of its revenue. One asset manager said it was a “relief” that the announcement wasn’t about some bad debt that went sour on the company’s balance sheet. Lehman is the first Wall Street firm to shutter its subprime-lending unit, though last month, Bear Stearns closed down two of its hedge funds that were heavily invested in home loans (full summary). Lehman wasn’t alone in feeling the effects of the credit crunch Wednesday: Accredited Home Lenders Holding Co., a subprime specialist, announced 1,600 job cuts in a bid to outlast the crisis (full summary); HSBC Holdings Plc is eliminating 600 U.S. jobs and closing a mortgage office in Indiana; and Capital One Financial is closing down GreenPoint Mortgage (full summary).
Sources: Bloomberg, MarketWatch
Commentary: Brokerage Stocks: Good Money After Bad?Lehman Denies Subprime Exposure
Stocks/ETFs to watch: LEH, HBC, LEND, COF. Competitors: MS, BSC, MER, GS. ETFs: KBE, KCE

FDIC: Q2 Bank Earnings Down 3.4% on Mortgage Defaults

The FDIC reported Wednesday that U.S. bank profits fell 3.4% in Q2 on surging defaults. Earnings dropped to $36.7 billion from $38 billion in the year-ago period. Loans and leases at least 90 days past due (noncurrent) rose 10.6% to $66.9 billion from a year earlier, the fifth consecutive quarterly rise and the steepest quarterly rise since 1990. Noncurrent residential mortgage loans were up by $3.1 billion, or 12.6%. Noncurrent loans for real estate construction and development grew by $2.2 billion, a 39.5% jump. Banks and thrifts set aside $11.4 billion to cover loan losses in Q2, the highest level since Q4 2002. FDIC Chairman Sheila Bair said during a briefing that "banks continue to face two key challenges: a difficult interest rate environment and ongoing weakness in residential mortgage lending." She added that many subprime borrowers will face "resets," or changes in their monthly payments, in Q3 and Q4 2007 and into 2008. In related news, the Office of Thrift Supervision reported Tuesday that thrifts' earnings fell 8.6% in Q2 from a year ago. Net income was $3.84 billion in the quarter, down from $4.21 billion in the year-ago period. Troubled assets grew to 0.95% of all assets from 0.62% on higher delinquencies for mortgages and construction loans.
Sources: FDIC press release, Bloomberg, MarketWatch, Forbes
Commentary: As Mortgage Shops Close, Big Banks Are Looking Better and BetterMajor U.S. Banks Step Up to Discount WindowThe Central Banks are Worried, or at Least They Should Be
Stocks/ETFs to watch: PJB, KBE

TECHNOLOGY

IBM Buys Web Conferencing Vendor WebDialogs

IBM announced it acquired the privately-held firm WebDialogs Inc. on Wednesday. The financial terms of the deal were not disclosed. WebDialogs allows users to communicate through the web using audio and video connections. It has nearly 500,000 clients. Commenting on deal, IBM 23 08 2007 ChartWebDialogs CEO Lou Guercia said "WebDialogs technology will strengthen IBM's existing unified communication and collaboration portfolio with easy to access and use web conferencing services." The Web Dialogs service will be added to the Lotus package, IBM’s web conferencing and instant messaging software group. The acquisition pits IBM against Cisco, who bought WebDialogs’ biggest rival WebEx for $2.6 billion in May. In an analyst pre-briefing call, IBM said the new brand would be called "IBM Lotus Sametime Unyte." Analyst Mike Gotta commented, "The acquisition of WebDialogs creates as many interesting opportunities for IBM as much as it raises concerns over alignment and integration with Sametime. IBM has struggled over the years to deliver an effective and sustained solution for hosted web conferencing. While I have not come across WebDialogs all that often in the large enterprise (compared to Cisco (WebEx), Microsoft, or Adobe), I expect that IBM gains here are in the SMB (small and medium business) market. It also benefits by acquiring the reseller/partner channels of WebDialogs."
Sources: Press release, Reuters, Collaborative Thinking
Commentary: IBM To Expand Support for Sun’s Solaris 10WebEx: Shares Jump 22% on News of $3.2B Acquisition by Cisco
Stocks/ETFs to watch: IBM, CSCO, MSFT, ADBE

Sony Announces HD TV Recording Device for PS3

Sony unveiled "PlayTV" -- a device designed to watch and record high-definition television on a PlayStation 3 console, with a feature to transfer contents to a PlayStation Portable -- at a gaming conference in Europe Wednesday. Sony-PS3-console PlayTV will be sold throughout Europe, including the U.K., France, Italy, Germany and Spain, from early 2008. Sony reportedly doesn't have plans to launch PlayTV in other regions, but didn't rule out the possibility. A price for the device was not provided. Sales of PS3 and PSP consoles have struggled, especially compared to rival Nintendo, with many analysts blaming a poor game lineup. The Wall Street Journal says PlayTV "may help reinforce the company's strategy to give its videogame console a more central role in home entertainment." Ordinary shares of Sony gained 2.8% to ¥5,440 ($46.63 ADR equiv. at ¥116.67/$1) in a broad market rally in Tokyo. Sony's ADRs rose 0.7% to $46.66 on Wednesday.
Sources: Wall Street Journal
Commentary: Memo To Microsoft and Sony: Game Consoles Are For Playing GamesSony's New Budget LCD Line to Compete Directly With Less Popular BrandsSony's Q1 Profit Doubles Despite Widening Game Losses
Stocks/ETFs to watch: SNE. Competitors: NTDOY.PK, MSFT. ETFs: ADRA, ITF, EWJ
Earnings call transcripts: Sony F1Q07

RETAIL

Limited Brands' Q2 Net Jumps on Asset Sales, Beats By a Penny

Limited Brands reported late Wednesday Q2 net income more than doubled to $264.4 million ($0.67/share), boosted by its sale of Express. Revenues rose 6.9% to $2.62B. Adjusted earnings totaled $80.6M, or $0.20/share, compared to analyst expectations of $0.19 on sales of $2.65B.LTD-EarningsChart-8-23-2007 Same-store-sales increased 2.0% during the quarter. Limited recorded a number of significant items related to asset sales, including a pre-tax $302M ($0.46/share) gain for divesting 75% of Express and a pre-tax $73M ($0.20/share) loss for a 75% divestiture of Limited Stores. Limited said it recently completed a $1B share buyback announced June 22; its board authorized a new $250M repurchase program. For Q3 and Q4, Limited said it is "comfortable" with current First Call consensus EPS estimates of $0.04 and $0.18, respectively. Limited's earnings call is at 9 a.m. ET (see earnings call transcript later today). Shares of Limited gained 0.7% to $22.25 on Wednesday, adding 4% to $23.14 in light after-hours trading.
Sources: Press release, MarketWatch
Commentary: Limited Brands' Potential Looks Unlimited - Barron'sJuly Same-Store Sales RoundupJim Cramer's Take on LTD
Stocks/ETFs to watch: LTD. Competitors: GPS, AEOS, JCG. ETFs: RTH, XRT

Abercrombie & Fitch Posts In-Line Q2 Earnings

Teen clothing retailer Abercrombie & Fitch reported a 24% Q2 earnings rise after hours on Wednesday. The company posted quarterly net earnings of $81.3 million ($0.88/share) versus $65.7 million ($0.72) a year ago. RevenueANF 23 08 2007 EarningsChart was up 22% to $804.5 million from $658.7 million. Analysts were expecting EPS of $0.87 on revenue of $795 million. Q2 same-store sales were down 2%, and markdowns caused gross margins to narrow to 68.8% from 69.1%. Abercrombie is forecasting H2 2007 EPS of $3.63-3.67 and full-year EPS of $5.16-5.20 based on flat same-store sales. Analysts had been projecting EPS of $5.24 for the full year. Abercrombie is planning capex for 2007 in the $395-405 million range, with about $220 million of the total allocated to store constructions and remodelings. In its earnings conference call (see full transcript), the company said CEO Mike Jeffries would not participate on the call, and will not participate in call for the foreseeable future. "As our company continues to grow, the demands on Mike Jeffries" have increased, CFO Mike Kramer said. "With the two growth initiatives, Concept Five and our international expansion, we believe Mike’s time is better served focusing on those areas." The company operates 984 stores in the U.S. under the Abercrombie & Fitch, abercrombie, Hollister and Ruehl names. Shares closed down 2.2% Wednesday at $77.63, regaining 0.6% in AH trading.
Sources: Press release, MarketWatch, Wall Street Journal, Bloomberg, Reuters
Commentary: Strong Growth Outlook for Abercrombie & FitchJuly Same-Store Sales RoundupSelect Retail Sales Slow in May: Sign of a Wider Consumer Slowdown?
Stocks/ETFs to watch: ANF. Competitors: AEO, GPS, JCG. ETFs: XLY, PEZ, VCR

TRANSPORT AND AEROSPACE

GM Cuts Production on Pickups, SUVs

General Motors announced Wednesday that it is slashing production at six plants that manufacture large SUVs and pickups because of fuel prices and competition. The automaker did not specify the extent of the cuts, though it might do so when GM 23 08 2007 Chartit announces monthly sales results on Sept. 4. The affected plants are in Arlington, TX; Janesville, WI; Fort Wayne, IN; Flint, MI; Silao, Mexico; and Oshawa, Ontario. "Reducing overtime production enables us to reduce pressure for excessive incentive spending, helping us keep brand and product residual values as high as we can," said GM spokesman Tom Wickham. The company's SUV and truck sales were down 9% in the first seven months of 2007 on slow housing starts, high gas prices and stiff competition from rivals offering incentives. GM's plan to cut production is fanning fears that the overall industry is heading for a longer and more difficult decline than anticipated. "It's pretty scary. The consumer has pulled back," said Michael Jackson, CEO of dealership chain AutoNation Inc. Retail auto sales are "a disaster," he said.
Sources: Wall Street Journal, Reuters, AP
Commentary: GM Restructuring Positives May Outweigh Rescap RisksAuto Retail Industry Changing Faster Than Most Can Keep Up WithThe Slowdown In Housing Does Indeed Affect Auto Sales
Stocks/ETFs to watch: GM. Competitors: F, TM, DAI. ETFs: PRFG, RPV, PRF
Earnings call transcripts: General Motors Q2 2007

INTERNATIONAL

BoJ Holds Rates Again at 0.5%; ECB Signals Another Rate Hike

The Bank of Japan [BoJ] ended a two-day meeting Thursday, voting 8-1 to hold its benchmark interest rate at 0.5%. Japanese stocks closed broadly higher, recouping more of last week's heavy losses, while the yen weakened back towards the 116 level against the U.S. dollar. BoJ governor Toshihiko Fukui warned "distortions and the misallocation of resources could occur if interest rates are kept at levels inconsistent with the economy," adding that the Bank is ready to act when it is confident in its judgment. The decision to pause was widely expected given recent market turmoil. Investors currently expect a 39% chance of a rate hike next month (Sept. 19), according to Credit Suisse. Separately, the European Central Bank signaled a rate hike is still possible at its next meeting on September 6, despite recent credit market turmoil. In a statement Wednesday, it said, "The position of the Governing Council of the ECB on its monetary policy stance was expressed by its President on 2 August 2007," at which time ECB president Jean-Claude Trichet said the bank would exercise "strong vigilance" against inflation risks. Market participants now expect more than a 60% chance of a 0.25% rate hike to 4.25%, compared to 30% on Tuesday.
Sources: BoJ report, ECB press release, Bloomberg, Wall Street Journal I, II
Commentary: 'Flight of the Foreigner' in Tokyo Means Medium-Term Trading ChannelECB Will Continue To Print Money By the Truckload — Is the Euro In Trouble?Japan: Q2 GDP Slows; BOJ Rate Hike Less Likely
Stocks/ETFs to watch: MTU, MFG, IX. ETFs: EWJ, FXY, EZU, VGK, FEZ, FXE, DBV

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Five Reasons Why The Fed Won’t Cut Rates
Housing: A Look At U.S. Homebuilder Declines
Long Idea: Seeking Assets That Are Nobody Else's Liability?
Internet: In-Video Ads - How Does One Define Relevance?
Hardware: Business Spending On Technology Cause For Cautious Optimism
Chips: Why Marvell's Managers Will Deliberate Before Releasing Results
Software: Cost Cutting At Comverse Could Be A Prelude to Breakup
Gadgets: iPhone Shipments May Exceed Expectations, New iPods And Notebooks To Follow
Media: WSJ’s Subscription Business Can Go
Healthcare: China Rejects St. Jude Pacemakers In Move That Smacks of Retaliation
Retail: Altria: Marlboro Smokeless Product Will Be A Hit
Transport: National Bank Lowers CP Rail Target, Recommends We Buy Rails In August
Gold: Applying the Subprime Collapse to Gold, Silver and Commodities
Energy: The Transportation Fuel of the Future
Financial: As Mortgage Shops Close, Big Banks Are Looking Better and Better
Asia: US Market Volatility a Boon to Chinese Stocks
ETFs: Cost Cutting At Comverse Could Be A Prelude to Breakup
Hedge Funds: iPhone Shipments May Exceed Expectations, New iPods And Notebooks To Follow
Small-Caps: Providence Service Corporation: Up to the Task
Sound Money Tips: Exercise at Your Hotel
Jim Cramer: Latest stock picks
Earnings Transcripts: Affiliated Computer Services F4Q07BHP Billiton Ltd. Annual Fiscal 2007Ross Stores F2Q07Jack Henry & Associates F4Q07Tech Data F2Q08Wilsons The Leather Experts F2Q07Toll Brothers F3Q07Abercrombie & Fitch F2Q07Intuit F4Q07JDS Uniphase F4Q07Synopsys F3Q07Men's Wearhouse F2Q07Santos Q2 2007

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