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MACRO AND HOUSING

Commercial Paper Slump Deepens, T-Bill Yields Fall

The U.S. commercial paper market contracted for the third week in a row -- its worst slump in at least seven years -- and has shed 11% of its value in a month as investors continue to flee to safe investments. Outstanding commercial paper fell a seasonally adjusted $62.8 billion over the past week. That fall is smaller than that of the previous week, when paper dropped by $90.2 billion, but is still significant. Total outstanding commercial paper now stands at $1.979 trillion, the first time in five months it has ticked below $2 trillion. Asset-backed commercial paper fell $59.4 billion to $998 billion in the past week, its lowest since December. On August 17, the Fed reduced the discount rate to lure investors back to the market, but they remain reluctant to buy short-term debt backed by mortgage assets. "I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management. "The market is going to overshoot itself and not lend money to people who deserve it." An $18 billion auction Thursday for two-year U.S. government debt drew the most demand in fifteen years. The yield on the three-month T-bill, which fell 21 basis points Thursday to 3.80%, has fallen 114 basis points since August 8. The average yield on the highest-rated asset-backed commercial paper with one-day maturity, on the other hand, rose 11 basis points to 6.15%, its highest since 2001.
Sources: Bloomberg I, II, Reuters
Commentary: Bernanke Challenges Investor Perceptions -- WSJFed Weighed Policy Action Ten Days Prior to Rate CutIn the Federal Reserve We Trust?
Stocks/ETFs to watch: DIA, SPY, AGG

Speculator Defaults Aggravating Housing Crisis

Foreclosures rose 93% nationwide in July, while Standard & Poors' Case-Shiller index recorded a 3.2% drop in Q2 home prices. With no buyers in the mortgage securities market, lenders have tightened lending standards, discouraging applications from potential homebuyers: The Mortgage Bankers Association mortgage application index fell 4% last week, its second consecutive decline. Adjustable rate mortgage applications fell 23% and rates rose to 6.51% from 5.84% last week, while fixed interest loan rates fell. The vicious cycle has economists predicting 7-10% home price declines by 2008. Nervous homebuilders will meet with Fed chief Ben Bernanke next week, possibly to press for a Fed Funds rate cut to buffer the struggling industry. But builders may find deaf ears, as the MBA survey found that in former price and building boom states that are now suffering the most, many of the loans defaulting were to made investors and speculators. In Nevada, 32% of prime mortgage defaults as of June 30th were for non-owner-occupied homes. In Florida and Arizona it was 25%, 20% for California and 17% nationwide. Investor home subprime loan defaults were at 24% in Nevada vs. 12% nationally. Bernanke's Fed indicated with the discount rate cut that they will do their utmost to maintain calm in the credit markets, but they aren't inclined to help out speculators and flippers with an interest rate cut.
Sources: Press release, New York Times, Bloomberg, Wall Street Journal, Maryland Gazette
Commentary: But Is Subprime Really the Issue?A Look At U.S. Home Price Performance in 20 MarketsHousing Bubble and Real Estate Market Tracker
Stocks/ETFs to watch: XHB, ITB, KBE, KBW

U.S. Housing Prices Rise at Slowest Pace in a Decade

Housing prices in the U.S. rose at their most sluggish pace in a decade during Q2, according to a report by the Office of Federal Housing Enterprise. Prices increased only 0.08% from the first quarter, the slowest since the end of 1994. The 3.2% increase in single-family homes was the smallest since 1997. Higher foreclosure rates have caused banks to raise standards for loan applicants, resulting in less potential buyers. The U.S. housing slump is the worst in at least 16 years. Home resales slumped to 5.75 million, the lowest number since 2002. Resales have gone down for five consecutive months. "The housing market is at a standstill right now because buyers are reluctant to go back into the market," noted Celia Chen, housing economist for Moody's Economy.com. "There's uncertainty whether the market will fall, so no one wants to buy." Chen sees home sales and construction to begin rising again in the middle of next year, but she added "home prices won't revive until 2009." But OFHEO director James Lockhart saw a positive side to the data: “House prices were basically flat in the second quarter despite tightening credit policies, rising foreclosure rates, and weakening buyer sentiment,” he said. “Significant price declines appear localized in areas with weak economies or where price increases were particularly dramatic during the housing boom.” The study only includes price information through June; to the extent that recent mortgage market instability may have affected housing demand and prices, those effects would be evident in OFHEO’s next HPI release, it said.
Sources: Press release (.pdf), Bloomberg, Reuters
Commentary: 'Subprime Chuck' Plays the FoolU.S. Home Prices Show No Sign of BottomThe Problem With 'Median Home Price' Data
Stocks/ETFs to watch: XHB, ITB

Banks Not Eager to Borrow at Discount Window

U.S. banks are making but slight use of the recently lowered rate at the discount window, according to Federal Reserve data released Thursday. Two weeks ago, the Fed cut the discount rate to 5.75% and extended loan periods from one day to 30 days. Banks can still borrow among themselves, however, at a rate of 5.25%. Primary credit borrowing at the window averaged $1.3 billion per day this week, up from an average of $1.2 billion last week. On Wednesday, though, primary credits totaled $1.1 billion, down from $2 billion a week earlier. Last week, Citigroup, JPMorgan, Bank of America and Wachovia each borrowed $500 million at the window in a show of support for the Fed's move. The data just released indicate that little to no new borrowing has occurred since. "There are very few people in the money markets that I talk to who think it is providing any relief beyond psychological relief," said Christopher Low, chief economist at FTN Financial in New York. "It is too expensive. If a bank has decent credit, they can get a much lower rate in the market."
Sources: Wall Street Journal, Bloomberg, MarketWatch
Commentary: Major U.S. Banks Step Up to Discount WindowThe Fed's Discount Marketing: Window-Dressing for More Bad News
Stocks/ETFs to watch: JPM, C, BAC, DB, WB. ETFs: FDL, XLF, RKH, KBE

TECHNOLOGY

Dell Beats on Healthy Sales

Dell said late Thursday its profit rose a greater-than-expected 46% on lower costs for computer components, but predicted component cost declines during the second half would decrease, reducing its profits. The world's number-two PC maker also delayed further stock repurchases until early November, when it files overdue SEC reports. Net income came in at $733 million ($0.32/share), vs. $522 million ($0.22/share) a year ago. Revenues climbed to $14.8 billion from $14.1 billion. Average analyst estimates were $0.31 per share on revenue of $14.6 billion. Operating profit margin fell to 6% from 6.5% in FQ2, but was almost 2% higher than the year-ago period, which "suggests PC industry competition remains rational," Citigroup analyst Kirk Yang said in a post-earnings note. Dell got a boost in PC orders from retailers including Wal-Mart; in June Dell began selling its computers through retailers for the first time in its 22-year history. "The story probably gets better from here," commented PC analyst Crawford Del Prete. "The management team they have in place is very strong." CEO Michael Dell has revamped the company in an effort to increase sales; since the beginning of the year he has shuffled his management team, forged retail deals in Japan and the UK, announced plans to cut 10% of the company's workforce, and negotiated a deal to sell PCs in mega-retailer Wal-Mart. CEO Dell commented on his company's quarter: "While our results demonstrate we've made progress against our goals, we are still in the early stages of transforming our company's structure, costs and operations." Dell closed Thursday up 2.2% to $28.46, and gained another 0.3% in AH trading.
Sources: Press Release, Bloomberg, Reuters
Commentary: Changes in the Consumer PC Market: Great News For Apple, Ominous For DellDell Admits Falsifying Results; Will Restate Four Years of EarningsAcer Sees Opening As Dell's Trouble's Deepen
Stocks/ETFs to watch: DELL. Competitors: GTW, HPQ. ETFs: IAH, PRFQ
Earnings call transcript: Dell Q2 2007

Research in Motion Hits Record on Takeover Rumor

Shares of Research in Motion hit a record $85.00 Thursday before closing up 1.3% at $82.87 on the resurgence of speculation that Microsoft is planning to buy it. "I can't even count the number of times we've heard that [rumor] over the last three years," said Steve Sachs, head of trading at Rydex Investments. According to options education firm Optionetics, speculation is centering on Microsoft's need to respond to Google's statement that it is considering making its own mobile phone OS, which would compete with Windows Mobile. A Microsoft offer for the company would be "incredibly unlikely" and "out of character," said Canaccord Capital analyst Peter Misek. Nevertheless, interest in Research in Motion's front-month calls is surging, with more than 8,000 lots of the September $93.375 series trading Thursday morning. "The heavy trading in...out-of-the-money calls seems to reflect speculative call buying on the view the share price will continue moving higher during the next few weeks," said Frederic Ruffy of Optionetics. The WSJ suggests the enthusiasm for the rumor despite the lack of corroboration reflects investor hopes that M&A activity will be taken up by companies now that the credit crunch is drying up private equity LBOs.
Sources: Reuters, Bloomberg, Wall Street Journal
Commentary: Google Phone Is Now A RealityResearch in Motion Widens Smart Phone Lead; Palm Continues to SlideResearch In Motion: Goldman Raises Price Target to $295
Stocks/ETFs to watch: RIMM, MSFT, GOOG. Competitors: PALM, MOT, NOK. ETFs:
Earnings call transcript: Research In Motion F1Q08

Nortel Takes Aim at Tellabs

Nortel, North America's largest telephone equipment producer, may be targeting Tellabs for a possible acquisition, according to a report in Light Reading, which says the proposed takeover price will fall between $14 and $15. Tellabs has experienced a recent slowdown in demand for its network switching equipment. However, analysts have said that a larger company could use Tellabs to increase its own products offering and secure a greater position with large U.S. communication companies. Nortel is in the midst of a corporate turnaround, but CEO Mike Zafirovski has made comments that he was comfortable growing the company through acquisitions. "We started discussions recently with companies that we believe can be adding to our growth trajectory," he said in an Aug. 2 interview with Reuters. "We're confident that we'll be able to successfully integrate other activities if the pricing is appropriate." One potential snag in the deal is that sources say the offer consists of both cash and stock. Tellabs prefers an all-cash deal. The deal may also hinge on Nortel finding financing in a currently shaky credit market. Tellabs shares were up $0.39 to $10.57, while Nortel slipped $0.12 to $17.48 at the close on Thursday.
Sources: Light Reading, TheStreet.com, Reuters
Commentary: Buyout Speculation Lifts TellabsAnalysts React To Tellabs Buyout Rumor
Stocks/ETFs to watch: NT, TLAB

TRANSPORT AND AEROSPACE

Toyota Zeros In on GM Car Sales Record

2007 will be remembered by baseball fans as the year Hank Aaron's mark of 755 career home runs, long believed to be unbreakable, was finally taken down. Toyota predicts 2008 will be no less monumental for fans of auto sales records, as it attempts to eclipse GM's 30 year old single-year car sales mark of 9.55 million, set in 1978. Friday Toyota President Katsuaki Watanabe said his company "wants to keep the high pace of growth" it established in recent years. The company unveiled global sales goals of 9.8 million and 10.4 million vehicles for 2008 and 2009, representing two-year growth of 11% assuming it sells its projected 9.34 million vehicles globally in 2007. To reach its goals, the company plans to aggressively expand sales in overseas markets. Toyota's global sales figures include subsidiaries Daihatsu Motor Co. and Hino Motors Ltd. As it continues to grow, industry experts warn Toyota must become less dependent on North American sales, which currently represent approximately a third of its global sales, but 60% of the company's operating profits. Toyota outsold GM globally in the first half of 2007 for the first time ever.
Sources: Wall Street Journal, Bloomberg, Reuters
Commentary: Merrill Likes Toyota Even With Strong YenToyota Posts Double-Digit Profit, Sales Growth, Reiterates FY GuidanceAutomakers Lower 2007 Forecasts; Toyota Delays New Hybrid
Stocks/ETFs to watch: TM. Competitors: HMC, NSANY, GM, F, DCX. ETFs: ADRA, EWJ, ITF
Earnings call transcript: Toyota Motor F1Q08

ITT Scores Surpise FAA Contract Win

ITT Corp. beat out teams led by Raytheon and Lockheed Martin in a surprising win of the first major contract to begin upgrading the nation's aging air-traffic-control system, the FAA announced. The victory puts ITT in a position to play a major part in the lucrative $20 billion upgrade, scheduled to roll out over the next 20 years. Lockheed and Raytheon are considered bigger players than ITT in the air-traffic-control sector, but the FAA, which announced its choice Thursday, said it preferred ITT's proposal because it posed "no technical risks." Once in place, the new system will allow planes to fly closer together, saving fuel and time. The initial contract budgets $207 million to install the new system in four areas by 2010. The areas will serve as a test before ground stations roll out nationwide by 2013. The technology, known as ADS-B (Automatic Dependent Surveillance-Broadcast), reduced small-plane accidents in Alaska by 40%. Its added capacity will enable air-traffic-control to keep up with a predicted surge in air travel in coming years.
Sources: Press release, Wall Street Journal, Reuters
Commentary: ITT Corporation Is Making the Most of Its Market
Stocks/ETFs to watch: ITT, RTN, LMT

FINANCIAL

Brokerage Earnings to Drop -- Lehman

U.S. brokerage stocks traded broadly to the downside Thursday, on a warning from Lehman Brothers' analysts about Q3 earnings amid ongoing market turmoil. The firm cut its second-half and 2008 estimates for brokerage firms Goldman Sachs, Morgan Stanley, Merrill Lynch and Bear Stearns. "We believe that third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed/mortgage markets, only partially offset by strength in currencies, rates and commodities as well as decent equities comparisons and favorable investment banking conditions at least through July," the analysts said in a research note. The note also said Lehman has "limited conviction about 2008 ... sitting here at the end of August with a wall of worry to climb between now and October." Merrill Lynch analysts lowered their estimates for brokerages on Tuesday. Separately, Standard & Poor's said it won't change its ratings on Barclays, in spite of reports about its exposure to structured investment vehicles. S&P said Barclays "benefits from its broad and diversified range of businesses ...", but mentioned it will closely watch the situation. On Thursday, shares of Goldman Sachs lost 1.4% to $171.38, Morgan Stanley -1.7% to $60.16, Merrill Lynch -1.3% to $72.18, Bear Stearns -0.4% to $106.70 and Barclays -2.8% to $47.72.
Sources: Bloomberg, MarketWatch I, II
Commentary: Moody's: I-Banks Are Safe. Standard & Poor's: Not NecessarilyFundie Analysts and Merrill's I-Bank DowngradeU.S. Investment Banks: Brave Investors May Be Rewarded Handsomely
Stocks/ETFs to watch: GS, MS, MER, BSC, LEH, BCS. ETFs: IAI, KCE, XLF
Earnings call transcript: Goldman Sachs F2Q07, Morgan Stanley F2Q07, Merrill Lynch Q2 2007, Lehman Brothers F2Q07

Thornburg Mortgage Raises $473 Million in Stock Sale

Thornburg Mortgage Inc. announced Thursday it had raised about $473 million by selling convertible preferred stock. The funds will allow the company to resume making loans and buying mortgaged-backed securities. Earlier this month, Thornburg sold about a third of its mortgage assets and halted new loan applications as a result of a having to meet financial obligations that were too expensive to refinance (full story). The preferred shares will pay a dividend of at least 10% and are convertible at $11.50 per common share. The company said in a statement it "believes it is positioned to capitalize on what it expects will be a more profitable mortgage market." AG Edwards analyst Greg Mason noted yesterday "it appears the bleeding in mortgage pricing has stopped for now." Thornburg shares have plunged more than 50% this year. There is the real potential for dilution of earnings as a result of the company having to increase its share count by 35%. However, for now the Street sees this as a positive step: Thornburg shares traded 7% higher to $11.97 midday Thursday.
Sources: Press Release, Bloomberg, Reuters
Commentary: Thornburg Mortgage Hit With Margin Calls; Shares Plunge 47%The Long Case for Thornburg Mortgage
Stocks/ETFs to watch: TMA. Competitors: WFC, BAC, FNM. ETFs: DON, REM

HEALTHCARE/BIOTECH

Judge Limits J&J's Claims Against Boston Scientific

A federal judge has denied a motion to dismiss a breach-of-contract claim brought by Johnson & Johnson against Boston Scientific regarding the latter's acquisition last year of heart-device manufacturer Guidant. U.S. District Judge Gerard Lynch did, however, grant Boston Scientific's motion to dismiss claims that it was guilty of tortious interference as well as a claim against Guidant that it had acted in bad faith. He also granted a motion by co-defendant Abbott Laboratories, which had entered into a divestiture agreement with Boston Scientific concerning a Guidant unit, that it be dismissed from the suit. In April 2006, Boston Scientific beat out J&J and bought Guidant for $27 billion. Abbott bought Guidant's vascular and endovascular business for $4.1 billion, a sale that removed an antitrust threat from Boston Scientific's purchase of Guidant. J&J sued Boston Scientific and Abbott five months later, seeking at least $5.5 billion in damages, alleging that Guidant had leaked confidential information to Abbott. "We're pleased that the majority of the claims were dismissed," said Boston Scientific spokesman Paul Donovan. "We continue to believe the remaining claim is without merit." In related news, the American Society of Clinical Oncology has asked Medicare to lift regulations that block the use of anemia drugs made by Amgen and J&J. Amgen lost over a quarter of its value this year after its anemia treatments Aranesp and Epogen were linked to heart risks.
Sources: Reuters, Dow Jones, Bloomberg I, II
Commentary: Boston Scientific: A Buyout Waiting to HappenBoston Scientific Settles Guidant Suits for Less Than ExpectedBoston Scientific Fails to Have Punitive Charges Dismissed
Stocks/ETFs to watch: BSX, JNJ, ABT, AMGN. Competitors: MDT, STJ. ETFs: IHI
Earnings call transcript: Boston Scientific Q2 2007

MUST-READS ON SEEKING ALPHA TODAY

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Long Idea: Mattson Technologies: Upside Awaits
Short Idea: Atheros' Growth May Be Its Downfall
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Networking: LanOptics' Recent Recovery
Hardware: Tech Stocks Not As Safe As They Appear
Chips: iPhone’s Component Ecosystem: ARM Holdings
Software: VMware: Wouldn't Want to be Short This Stock
Gadgets: Nokia's Marketing Missteps Help Apple's Euro iPhone
Media: WorldSpace: For Professional Gamblers
Biotech: Why I'm Buying Elron
Retail: Kellwood's Share Price Is In Tatters
Transport: HEICO: A Mouse Among Elephants
Gold: Lundin: The Bargain Won't Last Forever
Energy: Forestry Companies May Become Excellent Bargains
Financial: W Holding Company Worth a Look
Asia: Grab a Piece of the BRIC
ETFs: First Trust's First Truly Global REIT ETF
Hedge Funds: Why Are Hedge Funds So Important?
Sound Money: Beat Back-to-School Anxiety
Jim Cramer: Latest stock picks

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