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MACRO AND HOUSING

Existing Home Sales Dip in July; Financial Stocks Fall

Sales of existing homes fell in July to their lowest point in almost five years and inventories soared to their highest point since 1991, suggesting the end is not yet in view for the housing slump. The National Association of Realtors reported Monday that existing-home sales dropped 0.2% in July to a seasonally adjusted annual rate of 5.75 million homes. The median sales price fell 0.6% to $228,900. Inventories were up 5.1% to 4.59 million, or about 9.6 months of supply (a six-month supply is considered a balanced market.) The credit crunch that assailed the markets in August is expected to result in tighter credit standards, which will likely worsen the scenario for home sales. Its full impact may not be felt until the release of September's sales figures. Problems will likely be most visible at the ends of the spectrum: low-end homes that sell to borrowers with spotty credit histories, and high-end homes that require jumbo loans, the Wall Street Journal says. According to Joshua Shapiro, chief economist at MFR, home prices could drop as much as 10% over the next six months. "It is hard to see a bottom before mid-2008," said economist Nigel Gault. Shares of mortgage lender Countrywide Financial fell 4.76%; Lehman Brothers, the biggest underwriter of mortgage-backed bonds, shed 4.56% Monday. S&P 500 Financial dropped a collective 1.4%.
Sources: Wall Street Journal, Bloomberg I, II, Reuters
Commentary: Bubble Comparison: Homebuilders Versus the NasdaqHow Low Will Housing Go?
Stocks/ETFs to watch: RYL, LEN, HOV, CFC, TOL. ETFs: ITB, FXR, XHB
Earnings call transcripts: Countrywide Financial Q2 2007, Toll Brothers F3Q07, Hovnanian Enterprises F2Q07, Lehman Brothers F2Q07, Ryland Group Q2 2007

TECHNOLOGY

Shanda Interactive Tops EPS, Sales Estimates In Latest Quarter

Shanghai interactive game maker Shanda Interactive reported Q2 adjusted net income more than tripled, to 415.9 million yuan, versus
133.6 million yuan a year ago (check back later for SNDA's earnings call transcript). Adjusted EPS nearly doubled to 3.28 yuan from 1.86 yuan in the year-ago period. Revenue came in at 564.4 million yuan, excluding aproximately 178 million yuan in proceeds from the sale of Sina Corp., a
gain of 39.1% from the 405.7 million yuan earned a year ago (full story). Consensus analyst estimates
were for EPS of $0.36 on revenue of $72 million (when converting yuan to dollars, Shanda's adjusted EPS was $0.42 on sales of $74.1 million). In other news, Shanda announced
CFO Daniel Zhang resigned and will be replaced by current President Jun Tang.
Sources: Press Release, MarketWatch, Reuters, AP
Commentary: Opportunities In China Following Today's SelloffInvesting In China's Online Gaming Sector
Stocks/ETFs to watch: SNDA. Competitors: NTES, NCTY
Earnings call transcripts: Shanda Q1 2007 Earnings Call Transcript

INTERNET

Subprime Meltdown Could Pinch Online Ad Revenues -- FT

Search engines and web portals might begin to feel the effects of the subprime meltdown in their advertising revenues, the Financial Times reported Monday. Financial services companies -- particularly mortgage lenders and credit scoring agencies -- are major online advertisers. The sector represents 16% of online ad revenues, making it second only to retail. Lenders Countrywide and Low Rate Source were two of the 10 biggest online advertisers in the country last month, as were credit score companies Experian and Privacy Matters. A good deal of the mortgage advertising oriented toward less creditworthy borrowers has quickly dried up. "A lot of the subprime [advertising] has gone away," said David Jakubowski, general manager of Microsoft's MSN. Because fewer companies are competing for online advertising in certain classes, ad pricing in those classes may go down.
Sources: Financial Times, 24/7 Wall Street
Commentary: Local Advertising Network Revenues Threatened By Search Industry
Stocks/ETFs to watch: GOOG, YHOO, MSFT, CFC. ETFs: FDN, FPX, HHH

RETAIL

Home Depot Slashes Unit Sale Price By 18%

Home Depot's board voted to sell its construction-supply unit for $8.5 billion yesterday to private equity firms Bain Capital, Carlyle Group and Clayton, Dubilier & Rice -- 18% less the $10.3 billion they agreed upon in June, a reflection of the credit crunch that has surfaced in recent weeks, making large debt-financed deals complicated and uncertain. Home Depot will hold on to 12.5% of the unit's equity, and was forced to guarantee $1 billion of the debt for the leveraged buyout. The deal's lenders, including Merrill Lynch, Lehman Brothers and JPMorgan, demanded better terms so they would be left with less money in loans in case they could not repackage and sell those loans in the presently spooked debt markets. There are still $400 billion in buyout deals in the works, and with demands to purchase this debt drying up, banks will be forced to make similar plays, or hold on to debt and increase their risk exposure. Home Depot was planning to use the all-cash deal to finance a $22.5 billion stock repurchase; the restructured the deal will likely postpone the buyback. The deal remains uncertain, as banks are still hesitating on terms. Home Depot closed up 1.6% midday to $35.25, but is down 12% on the year.
Sources: Wall Street Journal, Bloomberg, MarketWatch
Commentary: Home Depot: This Buyback Was Destined To FailHome Depot: Poor Earnings Puts Supply Division and Buyback Deal At RiskHome Depot: Despite Good News, Uncertainty Remains
Stocks/ETFs to watch: HD, MER, LEH, JPM. Competitors: LOW, WOS. ETFs: PSP.
Earnings call transcript: The Home Depot Q2 2007

Wal-Mart To Consider Acquisitions and New Store Formats

Wal-Mart Stores Inc. announced that it was considering different types of store formats, adding that it was hiring middle-management execs to explore the alternatives. Earlier Monday, the Financial Times also reported that the retailer was looking to make an acquisition in the US for the first time in 25 years. Wal-Mart has acquired companies in other countries, but has kept growth in the US organic. FT cited a Wal-Mart job posting, in which the company was looking to hire an executive to investigate "strategic implications of any possible M&A" activity. However, Wal-Mart warned it would be "wrong to speculate" on what those job descriptions actually mean. The news of change arrives right as British grocery store Tesco begins its expansion into the US. Tesco will begin by opening 30 stores in California, Arizona, and Nevada. These stores will be smaller than normal supermarkets and will be called Fresh & Easy Neighborhood Markets. Robert Buchanan, retail analyst at A.G. Edwards & Sons, noted "Wal-Mart is always trying new things." He thinks Wal-Mart could make a small acquisition in the next two or three years, but did not foresee a "buying spree." Wal-Mart hopes that any adjustments or changes will increase its same store sales, which slumped to 1.9% last quarter. Wal-Mart closed the trading day up .2% to $43.82.
Sources: Reuters, MarketWatch, CNNMoney
Commentary: Wal-Mart: An Underpriced, Long-Term BuyWal-Mart Misses Earnings Estimate Despite Record Sales
Stocks/ETFs to watch: WMT Competitors: COST, TGT ETFs: PBJ, UGE
Earnings call transcripts: Wal-Mart F2Q08 (Qtr End 7/31/07)

TRANSPORT AND AEROSPACE

Buffett Boosts Burlington Northern Stake

Berkshire Hathaway Inc. beefed up its holdings in Burlington Northern Santa Fe Corp. The investment vehicle of billionaire investor Warren Buffett disclosed in an SEC filing that since August 23 it has purchased 10.1M more shares in the second-largest U.S. railroad for $806.2M, lifting its stake to 15%, or 52.1M shares. Berkshire had first disclosed its rail holdings in the spring, indicating that it also purchased shares in railroads Union Pacific and Norfolk Southern. Earlier this month, Berkshire said it would keep its holdings in Norfolk Southern and Union Pacific secret under a provision that allows high-profile investors to withhold information on some holdings if the SEC determines that the disclosure would harm their investment strategies. As of the end of March, Berkshire held 10.5M shares in Union Pacific and 6.36M in Norfolk. Buffett, who also has transportation assets in the trucking and air sectors, said at Berkshire's annual meeting in May that one reason he favors railroad stocks in the transportation sector is the lower impact of diesel prices, which have more than doubled over the past five years.
Sources: Bloomberg
Commentary: Buffett Rumors and My PredictionsBerkshire Hathaway Releases Latest 13F: Summary of Holdings
Stocks/ETFs to watch: BRK.A, BNI

FINANCIAL

Countrywide Not on Easy Street Yet -- Analysts

Investors who thought Countrywide Financial's troubles were over last week when the mortgage-lender received a $2B capital injection from Bank of America got another dose of reality Monday as shares dropped as much as 7% after Piper Jaffray downgraded the shares and Lehman Bros. cut its price target and lowered estimates. The bottom line is that analysts expect the mortgage market will continue to decline. "We still believe tough times lie ahead for CFC in the coming quarters barring a significant drop in mortgage rates," Lehman analyst Bruce Harting told clients as he dropped his 12-month price target to $28 from $30 and sliced his 2007 and 2008 earnings per share estimates to $1 from $2.80 and to $1.55 from $3, respectively. Lehman rates the shares "equal weight." Piper Jaffray cut its rating on the shares to "market perform" from "outperform" and its price target to $23 from $29. Piper expects earnings of $0.84 for 2007 and $2.60 for 2008. Analysts, on average, are expecting earnings, excluding items, of $2.21 for 2007 and $2.96 for 2008. Among items cutting into future profits, according to Lehman, is the fact that an increasing percentage of loans that Countrywide makes will have to be eligible for purchase by Fannie Mae or Freddie Mac. Meanwhile, Harting noted that the Bank of America deal should help stabilize the company's liquidity position and help lower some concerns over solvency but said he believes the investment is more of a strategic infusion of capital to stabilize Countrywide rather than a broader strategic partnership or precursor to a merger. Countrywide shares closed down 4.8% at $20.
Sources: Bloomberg, Reuters, Forbes.com
Commentary: http://seekingalpha.com/article/45721-should-investors-heed-the-recession-warning-of-countrywide-s-ceo">Should Investors Heed the Recession Warning of Countrywide's CEO? http://seekingalpha.com/article/45616-bank-of-america-s-countrywide-investment-time-will-tell">Bank of America's Countrywide Investment: Time Will Tell
Stocks/ETFs to watch: CFC. Competitors: BAC
Earnings call transcripts: http://seekingalpha.com/article/42171-countrywide-financial-q2-2007-earnings-call-transcript">Countrywide Financial Q2 2007 Earnings Call Transcript

Credit-Card Defaults on the Rise -- FT

American consumers are defaulting on their credit-card debt much more frequently than last year, suggesting that troubles in the subprime mortgage market might be seeping into other forms of consumer debt, the FT reported Monday. Credit-card companies wrote off 4.58% of payments in H1 2007, nearly 30% more than at the same time last year. Late payments went up and the quarterly payment rate went down -- its first decline in over four years. Moody's attributes the trend in part to the housing slump and a drop in the number of refinancings. "The combination of higher interest rates and a softer real estate market diminished the attractiveness of mortgage refinancings in which many borrowers reduced their more expensive credit-card debt by drawing on the equity in their home," Moody's said. The ratings agency noted, however, that it is unclear whether the people defaulting on their credit cards are the people defaulting on their subprime mortgages. "Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly, and gasoline and other energy prices remain high," said Moody's economist Scott Hoyt.
Sources: Financial Times
Commentary: Citigroup Faces $700M in Credit-Related LossesMastercard: Good Time For An Initial Entry? Consumer Credit Usage Spikes In June: A Sign Of Consumer Spending Strength?
Stocks/ETFs to watch: MA, AXP, MS, BCS, C. ETFs: FPX, IYG, KLD
Earnings call transcript: MasterCard Q2 2007, American Express Q2 2007, Morgan Stanley F2Q07, Barclays plc Q2 2007, Citigroup Q2 2007

Nasdaq and Borse Dubai May Form Joint Bid for OMX -- Daily Telegraph

The Nasdaq Stock Market, which is in a bidding war with Borse Dubai for the Nordic exchange OMX (full story), might use its 31% stake (worth $1.6B) in the London Stock Exchange to submit a joint bid with Borse Dubai, The Daily Telegraph reported Monday. Borse Dubai bid $4B in cash for OMX last week, trumping Nasdaq's highest offer. Dubai has expressed interest in the past for LSE shares, however Nasdaq has said it will not unload all the shares to one buyer, presumably since UK law requires an automatic takeover bid by investors acquiring more than a 30% stake in a company. Reuters reports other interested parties in the LSE include NYSE-Euronext, Australia's ASX, Singapore's Temasek Holdings and the Deutsche Boerse. However, coverage by The Wall Street Journal raises doubt whether a buyer will emerge, due to the LSE's hitherto disinterest in a full-fledged merger. The Journal also notes concerns LSE shares are overvalued following a 130% run in the past two years. At any rate, Nasdaq plans to use LSE share sale proceeds to initiate a stock buyback and pay down debt. This should raise Nasdaq's share price and effectively raise the value of the Nasdaq's cash-and-share bid for the OMX.
Sources: The Daily Telegraph, MSN Money, Reuters, Wall Street Journal
Commentary: Borse Dubai’s Dealings Found IllegalNasdaq OMX Bid Aided by Swedish PoliticsThe Nasdaq Is a Buy on Valuation and Growth Catalysts
Stocks/ETFs to watch: NDAQ. Competitors: CME, NMX, NYX. ETFs: EXB
Earnings call transcripts: The Nasdaq Stock Market Q2 2007

INTERNATIONAL

China Telecom's Q2 Earnings Flat, Miss Estimates

China Telecom reported Q2 net income of 5.68 billion yuan ($752M), unchanged over the same period last year, and short of analyst expectations of 5.90 billion yuan. China Telecom faced increased competition from mobile carriers, which offer cheaper rates than China Telecom's fixed-line access. Revenues rose 3.8% to 44.30 billion yuan. China Telecom controls 60% of the domestic fixed-line market, but not only do mobile users outnumber fixed-line subscribers (501.7M vs. 372.7M as of June '07), China's largest mobile carriers reportedly signed up ten-times as many users as fixed-line operators in the first-half of 2007. China Telecom's net fixed-line subscriber additions fell 83% in Q2 to 1.5M. However, high-speed internet subscribers increased 27% y/y to 32.2M, for a 54% market share. China Telecom plans to enter the 3G mobile phone market when it is approved in China. Hong Kong listed shares of China Telecom lost 1.3% to HK$4.43 on Tuesday. China Telecom's ADRs gained 4.7% to $59.22 on Monday.
Sources: Bloomberg
Commentary: Interactive Q&A: Steve Zhang, CEO of AsiaInfo HoldingsChinese Tech Stock Weekly SummaryGoogle/China Telecom Form Online Ad Alliance
Stocks/ETFs to watch: CHA. Competitors: CN, CHU. ETFs: FXI, PGJ
Related: China Telecom Investor Relations

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Two Possible Outcomes Of A Fed Rate Cut
Housing: Housing Bubble/Real Estate Market Tracker
Long Idea: Ken Lewis's Savvy Countrywide Investment
Short Idea: Brace Yourself for a Slow, 40% Drop
Internet: Operating Margin Gains Ahead For Amazon
Telecom: Good Times To Keep Rolling For China Unicom
Networking: Street's Bullish on Aruba Ahead of Earnings
Hardware: Multiple Milestones Ahead for Acer
Chips: AMD: Citigroup Awaits Restructuring
Software: The9 Limited Q2 Earnings Preview
Gadgets: Don't Expect Much From New Motorola Phone
Biotech: Biogen Idec Jumps on Icahn Interest
Retail: Altria: Now Is The Time For PMI's Spin
Transport: Ceradyne: Significant Upside
Gold: Mountain Province Retracts Economic Study
Energy: Energy Stocks Poised for Stronger Advance
Financial: Times’ 'Expose' of Countrywide Lacks Evidence
Asia: A New Boom In China H-Shares
ETFs: Pining For A New Zealand ETF
Hedge Funds: Hedge Funds Are Risky? Say It Ain't So!
Sound Money: Drive Safely in Bad Weather (Part I)
Jim Cramer: Latest stock picks

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