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MACRO AND HOUSING

Economic Impact of Credit Crunch Limited, Fed Says

Financial markets may have been exceptionally volatile in August given the broadening credit crisis, but the economic impact of the rout was limited largely to the housing sector, according to the Federal Reserve. "Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited. Economic activity has continued to expand," the central bank said in its Beige Book survey of the 12 Fed districts released Wednesday. Moderate expansion was reported in two districts while three said expansion was modest and four districts said expansion was slowing. The New York Fed said expansion "continued." The report noted that tighter lending standards were hurting housing activity, however, with most districts reporting weak or declining residential sales and declining or stable prices. Unsold home inventories were high, and seven regions said they believed housing market softness would continue in the near future. Despite somewhat tighter credit conditions, the Fed said commercial real estate was "generally stable to expanding." Elsewhere, the report said most districts reported gains in manufacturing, while retail sales were "generally positive" and employment increases were "modest." Fed Chairman Ben S. Bernanke said last week the bank would pay "particularly close attention" to information from regional business contacts because regular economic reports don't capture the impact of the credit-market sell-off.
Sources: Bloomberg, Reuters, MarketWatch
Commentary: Is a Housing Crisis Developing?Five Reasons Why the Fed Will Cut RatesJust How Widespread is the Fallout from the Unfolding Credit Crisis?

Pending Home Sales Fell 12.2% in July; Steepest Drop on Record

The National Association of Realtors announced Wednesday that the number of Americans signing contracts to buy previously owned homes fell in July by the most since at least 2001, when the organization began recording the figure. The NAR's pending home sales index fell 12.2% to 89.9, 16.1% below its year-ago level. The decline was over five times greater than the average 2.2% drop forecast by 26 economists surveyed by Bloomberg. "This is disastrous," said Ian Shepherdson, chief U.S. economist with High Frequency Economics. "Note that this collapse in pending home sales predates the turmoil in the markets and the subsequent jump in jumbo mortgage rates, even for prime borrowers." All four regions fell, with the West dropping 21%, the Midwest 13%, the Northeast 12% and the South 6.6%. Stocks pulled back and Treasurys gained on speculation among traders that economic growth will continue to suffer as the subprime mortgage market continues to implode. The DJIA closed off 1.1% at 13,305.5, the S&P Supercomposite Homebuilding Index lost 4.3%, and the yield on the benchmark 10-year note fell to 4.47% from 4.55% Tuesday. In related news, ADP Employer Services is projecting that U.S. companies added the fewest jobs in August since 2003. ADP's below-forecast 38,000 job increase figure led some economists to reduce their employment growth estimates ahead of this week's report from the Labor Department.
Sources: Bloomberg, MarketWatch, Wall Street Journal I, II
Commentary: Is a Housing Crisis Developing?Housing Market Bad But No Longer WorseningIs a Perfect Storm About to Hit the Housing Market?
Stocks/ETFs to watch: TOL, BZH, LEN, KBH, C, LEH, BS, MS. ETFs: IAI, KCE, XHB, ITB

Housing, Credit Weakness to Further Test U.S. Economy -- OECD

Housing weakness will exert a longer and more potent than expected drag on the U.S. economy, leading to a distinct drop in GDP growth, the Paris-based Organisation for Economic Co-Operation and Development [OECD] said Wednesday. "It has not yet been possible to fully evaluate the negative impact of credit market turbulences on economic activity. In any event, consumer resilience will be tested by mortgage rate resets, tighter credit standards, weaker collaterals and slower job creation," it said, in its interim assessment of economic conditions of the world's 30 richest countries. Recent developments have highlighted 'serious imperfections' in worldwide credit markets, which will likely lead to greater regulation and a more active stance against predatory lending. Fiscally, it said, revenue buoyancy has "continued to surprise to the upside." Still, the OECD dropped its growth expectations for the world's seven largest economies by 0.1% to 2.2%, and said its estimates were likely overly optimistic. While housing downturns often lead to a recession in the U.S., OECD noted consumer spending has been resilient, and said that if job losses were not extensive, a "pronounced recession" could be avoided. Eurozone growth may have peaked, it said, but growth should nonetheless pick up in H2 2007. Japan, despite a weak first half, should continue to expand.
Sources: OECD interim assessment (.pdf), Financial Times
Commentary: The Financial Times' Top 500: This Year's Global ShuffleThe Fed Continues to Get it Right
Stocks/ETFs to watch: SPY, DIA, EFA, EWJ

TECHNOLOGY

Apple Cuts iPhone Price by $200, Introduces ‘Best iPod Ever’; Shares Fall 5%

Apple Inc. introduced its revamped iPod lineup to the public along with some additional surprises on Wednesday. The company lowered the price of its more expensive iPhone from $599 to $399, and will phase out the entry level model. CEO Steve Jobs introduced the new iPod Touch, which will come with touch screen capabilities similar to the iPhone. "It's incredibly impressive in terms of both technical innovation and what consumers are looking for," commented Avi Greengart, analyst at Current Analysis. "It's basically an iPhone for people with Verizon." The iPod Touch will cost $299 for the eight-gigabyte version, and $399 for the 16-gigabyte version. Investors were worried that the iPhone would take the limelight away from the iPod, but the new version should be able to hold its own. Jobs during the product launch called it, "the best iPod ever." The device also has Wi-Fi capabilities that will allow users to preview and download music without a computer from the new Wi-Fi iTunes, which will launch next week. The iPod Nano received a face lift with a wider screen and video game features. The 4-gigabyte version will be $149, and the 8-gigabyte version will be $199. The old iPod was renamed iPod Classic and will be available with twice the storage space. In addition, a new version of iTunes will be released, which will allow iPhone users to use songs as ringtones. One of Apple's rivals made news today as well; Microsoft announced it was slashing the price of the Zune, its digital media player, by $50 to $199 just hours before Apple's launch. An employee at Microsoft said the move had been planned "for months." Zune has thus far failed to make a dent in the iPod's dominant position in the digital media device market. Apple shares traded down 5.2% to $136.74 as investors took profits after the recent run-up before the launch; Microsoft was down 1.2% to $28.48.
Sources: Reuters, Bloomberg, Wall Street Journal
Commentary: iPhone Price Drop Is A Bad SignApple Selloff Creates Buy OpportunityQ&A with Jobs [USA Today] • How To Get $200 Back If You Just Got An iPhone [GigaOM] • Engadget
Stocks/ETFs to watch: AAPL, MSFT
Earnings call transcript: Apple F3Q07, Microsoft F4Q07 (Qtr End 6/30/07)
Related: iPod touch guided tour

Seagate to Announce HDD Encryption Chip; CEO Comments on M&A

Seagate is set to introduce Thursday hard drives with special data encryption chips for desktop PCs, the Wall Street Journal reports. To-date, most encryption efforts have been focused on email and laptops; now Seagate's Barracuda FDE will extend government-strength protection to desktops. Seagate CEO William Watkins says government officials have reason to be concerned if sensitive information is stored in an encrypted drive designed by an overseas company. Barracuda is expected to ship in the fourth quarter; pricing details are unknown. Seagate will also announce Maxtor-brand drives with weaker chip encryption but also having software encryption. On Wednesday, Seagate announced the Cheetah 15K.6, the newest generation of its enterprise Cheetah family and the highest-performance hard drive ever in a 3.5" form factor. Separately, CEO Watkins told Bloomberg in an interview that the company has not been approached by a Chinese company for a takeover, but Seagate itself has an "appetite" for acquisitions, as "there has to be" more industry consolidation.
Sources: Press release I, II, Bloomberg, Wall Street Journal
Commentary: Seagate Boosts Outlook, Says It's Not for SaleSeagate To Gain From Higher Hard Drive Prices
Stocks/ETFs to watch: STX. Competitors: WDC, HIT, OTCPK:FJTSY
Earnings call transcript: Seagate F4Q07, Western Digital F1Q07

Altera Takes Loan for Buyback; Reiterates Q3 Guidance

Programmable chip manufacturer Altera said Wednesday it has entered into a five-year, $750 million unsecured credit facility to finance a $500 million share buyback scheduled to be completed in H1 2008. The company also affirmed its Q3 outlook of flat-to-3% revenue growth. The $500 million buyback will be additional to a previously announced $1 billion repurchase. Altera has spent $651 million on buybacks so far in 2007 and does not plan to take on additional debt. The company also reiterated its Q3 sales projection of $319.7-329.3 million.
Sources: AP, Bizjournal
Commentary: Altera Tops Estimates, Boosts OutlookSemiconductor Pricing Appears To Be BottomingCash-Rich Companies: Watch Out for the Siren’s Song
Stocks/ETFs to watch: ALTR. Competitors: OTCQB:ACTL, LSCC, XLNX. ETFs: SMH, XSD
Earnings call transcript: Altera Q2 2007

INTERNET

Web Usability Expert: Users Ignore Ads -- Other Than Google's

Web usability expert Jakob Nielsen says he conducted eyetracking studies to examine the degree to which visitors to web sites take note of ads, and reports that "at all levels of user engagement, the finding is the same regarding banners...: almost no [eye] fixations within advertisements... Often, users didn't even see the advertiser's logo or name, even when they glanced at one or two design elements elsewhere inside an ad." Two notable exceptions: First, text ads on search engine results pages do get readers' attention. Second, ads which are unethically disguised to look like editorial content also get attention. Nielsen's conclusions explain the strength of Google's ad business, and the weak pricing of Web ads relative to newspaper ads -- a costly problem for Web content companies like Yahoo!, Time Warner, CNET, and TheStreet.com.
Sources: Useit.com
Commentary: Newspaper Online vs . Print Ad Revenue: The 10 % ProblemOnline Ad Spending to Overtake Print by 2011 -- Study
Stocks/ETFs to watch: YHOO, GOOG, TSCM, CNET, TWX, VCLK

RETAIL

Higher Dairy Costs a Potential Concern at Starbucks

Peter Bocian, CFO at Starbucks Corp., said that the company expects dairy prices to be a "negative" in 2008 while speaking at the Goldman Sachs retail conference on Wednesday. He noted the company has tried to offset the higher prices of dairy and other commodities through two price increases over the last 12 months. "We're still doing fairly strong. The macroeconomic factors have had some impact but not a huge one on our sales," Bocia said. He also backed the company's 2007 earnings forecast between $0.87 and $0.89 and net revenue growth of 20%, but admitted that hitting the high end of the estimate would be "challenging." The company expects revenue growth of about 18% in 2008 as well. Starbucks closed down 1% to $27.44 on Wednesday.
Sources: MarketWatch, CNN
Commentary: Starbucks to Raise Beverage PricesBook Review: Grande Expectations - A Year in the Life of Starbucks' Stock
Stocks/ETFs to watch: SBUX. Competitors: THI, MCD. ETFs: VCR, IYC
Earnings call transcript: Starbucks F3Q07 (Qtr End 7/1/07)

Kraft Boosts Outlook

Kraft Foods increased its full-year 2007 EPS target Wednesday to $1.60-1.62 from $1.50-1.55 previously. Excluding items, the company now expects per-share earnings of $1.80-1.82, due to confidence in its growth initiatives, a previously announced stock buyback program, and a lower-than-expected tax rate in 2007. Analysts had been forecasting adjusted EPS of $1.80. "We're making good progress on the four strategies that will help return Kraft to reliable growth... and our investments are beginning to pay off in stronger top-line momentum," CEO Irene Rosenfeld said at the Lehman Brothers Back-To-School Consumer Conference in Boston. Shares are up 2.1% to $32.77 in pre-market trading.
Sources: Press release, MarketWatch
Commentary: Starbucks to Sell Coffee Through Kraft's Tassimo LineKraft Exploring Sale of Post Cereals -- WSJKraft and Google: Nobody is Correct All of the Time
Stocks/ETFs to watch: KFT
Earnings call transcript: Kraft Foods Q2 2007

Tyson Guides Down

Shares of Tyson foods are down 9.2% to $20 in early trading Wednesday after the company told investors it now expects full-year 2007 EPS of $0.72-0.80, down from its previous guidance of $0.82-0.90."The fourth quarter is turning out to be more challenging than expected. Our beef business has been affected by higher than expected live cattle costs and a decline in beef revenues," CEO Richard Bond will tell investors later today at the Lehman Brothers Back-To-School Consumer Conference in Boston. Tyson expects 2007 pretax earnings will increase $700 million, but increased grain costs will cut into its earnings by almost $300 million. Bond will say Tyson has initiated a program called FAST -- focus, agility, simplify and trust -- which emphasizes "doing only value-added activities and encouraging faster decision making." The program is expected to help the company continue streamlining, and may involve reducing layers of management and giving managers more decision-making authority.
Sources: Press release, MarketWatch
Commentary: The Bull Case for Tyson Foods
Stocks/ETFs to watch: TSN
Earnings call transcript: Tyson Foods F3Q07 (Qtr End 6/30/07)

TRANSPORT AND AEROSPACE

Boeing 787 Test Flight Delayed; First Delivery Still on Schedule

Boeing pushed back the first test date for its 787 Dreamliner on Wednesday morning, saying the aircraft will now fly between mid-November and mid-December instead of in September. But Boeing didn't alter its earnings forecast, because the company still believes it can make its first delivery in May 2008 as scheduled. The delay stems from the parts taking longer than expected to reach Boeing's factory. For the first time, suppliers will complete larger components of the aircraft before they reach final assembly. Boeing also is putting additional time into the flight control software. CEO Scott Carson commented on the delay: "The most important thing is to meet our commitments and deliver the airplane on time. It is a voyage of discovery. Every time we run into an issue, we deal with it." The Dreamliner has been received well by the $60 billion/year jetliner industry, with 706 orders to date. Boeing hopes it can retake the lead in aircraft production after it was usurped by Airbus in 2003. Boeing shares were up 0.1% to $96.02 during midday trading on Tuesday; the stock recovered from the news of the delay after Boeing announced it had finalized a deal to sell 22 more 787s to Aeroflot.
Sources: AP, Bloomberg, Reuters, Wall Street Journal
Commentary: Kuwait Airways Cancels $3B of Boeing, Airbus Plane OrdersBoeing's 787 Dreamliner Faces Hurdles -- Business Week
Stocks/ETFs to watch: BA. ETFs: ITA, UXI
Earnings call transcript: Boeing Q2 2007

FINANCIAL

Citigroup, Banks Could Face Hidden Risk -- WSJ

"Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper," the Wall Street Journal reports. The vehicles, known as conduits and SIVs, need not appear on a bank's balance sheet due to U.S. accounting laws, and may create an uncharted source of risk. Citigroup controls 25% of the SIV market, the Journal says; its holdings are nearly $100 billion. Citigroup's Centauri Corp. owns $21 billion in debt, yet is not mentioned in its 2006 annual filing. Conduits and SIVs are usually high-rated, short-term debt that offers a higher-yielding alternative to government debt. So far there have not been any reported problems at Citigroup: "Quite simply, portfolio quality is extremely high and we have no credit concerns about any of the constituent assets," Citi directors Paul Stephens and Richard Burrows said in a recent letter. However, there have been issuers who were not able to find buyers for their commercial paper. Banks that have stakes in the conduits provide "liquidity back-stops" -- a promise that the vehicles' IOUs will be paid when they come due if they can't be resold. The banks would not want to consolidate the vehicles because their balance sheet would balloon, which could hamper lending. Allowing conduits or SIVs to fail could decimate a bank's reputation. Due to a lack of investor interest in commercial paper, banks may be forced to lend conduits money, or take substantial losses. In Europe, similar vehicles have already run into trouble; UK bank HBOS was forced to lend to a SIV it partly owns.
Sources: Wall Street Journal, MarketWatch
Commentary: Modeling Forward Defaults: Top Five US BanksCommercial Paper Slump Deepens, T-Bill Yields Fall - Seeking Alpha
Stocks/ETFs to watch: C. Competitors: MER, BSC, GS. ETFs: IAI, PKW
Earnings call transcript: Citigroup Q2 2007

Number of Distressed Bonds Rising at Rapid Rate

Amid the credit crunch surrounding the subprime crisis, the number of distressed bonds in the market has risen sharply as worries about the associated risk of defaults escalates. Bloomberg reports that the number of distressed bonds is increasing at the fastest rate since 2003, while a Merrill Lynch index indicates the number has quintupled to $24.8B since June. So-called distressed corporate bonds yield at least 10 percentage points more than Treasurys, given the higher risk they entail because of the greater chance of default. Moody's expects the percentage of borrowers missing payments to double to 3.5% next year. While it may not come as a surprise that names such as Residential Capital and WCI Communities are so classified given the problems in the mortgage market, based on their yields, the debt of amusement park operator Six Flags Inc. and pizza chain Uno Restaurant Corp. also are distressed. Yet, despite the higher risks, Bloomberg says the market's appetite for the securities hasn't subsided with investors sinking $83M into junk bond funds during the week ended August 29. Junk bond sales reached a record $101B in the first half, and investors who specialize in distressed debt are gearing up for more opportunities, raising $23B through mid-August, breaking the 2006 record of more than $16B.
Sources: Bloomberg
Commentary: Just How Widespread is the Fallout from the Unfolding Credit Crisis?Speculator Defaults Aggravating Housing CrisisRising Defaults on Credit Card Bills
Stocks/ETFs to watch: WCI, SIX

SLM Falls as Congress Nears Deal on Student Loans

Congress is reportedly close to an agreement that would cut subsidies to the student loan industry, a move that could kill the planned buyout of SLM Corp., or Sallie Mae, the nation's leading provider of student loans. According to reports, Congress is looking to cut a subsidy paid to student lenders a bit more than expected, and lower the amount the government reimburses lenders for missed payments. It also would temporarily cut borrower interest rates on the loans and launch a pilot program to test the auction to lenders of student loans taken out by parents. J.C. Flowers, which is part of an investor group that includes Bank of America Corp. and JP Morgan Chase & Co., has indicated that legislative proposals such as this "could result in a failure of the conditions" to the closing of its planned $25B purchase of Sallie Mae. Shares of Sallie Mae dropped 1.6% to $49.10 Wednesday as rumors of the deal circulated and investors feared Flowers would use the legislation to back out of the buyout. Sallie Mae, however, claims that the changes would hurt profit by less than 10% and, therefore, are not material enough to cancel the deal.
Sources: AP, Dow Jones Newswires
Commentary: Sallie Mae Buyout May Fail Due to Pending LegislationSallie Mae Merger-Arb: There's No Such Thing as a Free Lunch
Stocks/ETFs to watch: SLM, JPM, BAC, XLF, PGF, IYF

Countrywide Lays Off Another 900

Number-one U.S. mortgage originator Countrywide Financial is laying off another 900 employees as a result of decreased lending and increased defaults resulting from the worst U.S. housing slump in two decades. The cuts, representing approximately 1.5% of the company's total work force, come on top of 500 workers who were let go in August. The latest round of layoffs will come predominantly from Countrywide's mortgage production division. "Any further changes to the Countrywide organization will reflect our ongoing strategy to align our business to the marketplace," the company said. Its shares have fallen more than 55% YTD, including a loss of 5.1% Wednesday.
Sources: Wall Street Journal, Reuters, TheStreet.com
Commentary: Countrywide to Cut Jobs -- WSJWhy Countrywide is DoneBank of America's Countrywide Investment: Time Will Tell
Stocks/ETFs to watch: CFC. Competitors: BAC, WFC. ETFs: KBE, KBW, PJB
Earnings call transcript: Countrywide Financial Q2 2007

HEALTHCARE/BIOTECH

Cardica Surges to All-Time High on Success of Device

Shares of medical systems manufacturer Cardica skyrocketed 49% to close at $8.02 Wednesday before tacking on another 5.9% in AH trading after the company announced that two surgical teams have successfully used its automated system during coronary artery bypass procedures. This is the first time the C-Port Flex A anastomosis system, which received FDA approval in April, has been used during an operation. The Flex A is a more flexible and versatile version of Cardica's C-Port xA system. The device, which attaches blood vessels and grafts, was used by one surgical team in Richmond, VA and another in Nashville, TN during "closed chest" procedures. The Richmond patient was discharged from the hospital two days after his surgery and the Nashville patient resumed physical therapy the next day.
Sources: AP
Commentary: Cardica Raises $11.9 Million to Advance Anastomosis SystemsInsider Buys, Listed by Size
Stocks/ETFs to watch: CRDC. Competitors: BSX, JNJ, MDT. ETFs: IHI, RXL

Forest Labs' Rights Affirmed in Lexapro Appeal

Forest Laboratories Inc. has prevailed in a dispute over the validity of a patent on the its Lexapro anti-depressant. Shares of the drugmaker surged 9.9% to $41.63 Wednesday on the news that the U.S. Court of Appeals for the Federal Circuit affirmed a July 2006 decision by the U.S. District Court for the District of Delaware that determined that the U.S. patent covering escitalopram, the active ingredient in Lexapro, is valid. It also upheld an injunction that prevents generic drug maker Teva Pharmaceutical Industries Ltd. and Cipla Ltd. from launching generic versions of the product until the patent expires in 2012. The court, however, modified the order against Teva to only include escitalopram oxalate, the chemical name for Lexapro, which had $2.1B in sales last year, representing 61% of Forest's revenue. Separately, a U.S. district judge granted Teva approval to launch a generic version of Novartis AG's Famvir for genital herpes. Teva shares added 0.3% to $43.74.
Sources: AP, Reuters, Bloomberg
Commentary: Lexapro Maintains Market ShareForest Labs: How Long Will These Strong Profits Last?
Stocks/ETFs to watch: FRX, TEVA, NVS, PPH, IHE. Competitors: LLY, GSK, PFE
Earnings call transcript: Forest Laboratories F1Q08 (Qtr End 6/30/07)

INTERNATIONAL

Blackstone Sets Sites on China Mainland

Blackstone Group is "on the verge of announcing its first investment in mainland China" as it looks to take a 20-40% stake in Chinese chemical maker BlueStar, The Daily Telegraph newspaper reported today. An announcement is likely within days, people familiar with the talks say. Sources say the purchase will cost more than $500 million. Merrill Lynch is advising Blackstone on the deal, which is expected to bring Blackstone a number of seats on BlueStar's board. The Chinese government took a 10%/$3 billion stake in Blackstone's IPO in June, which was expected to give the buyout firm stronger prospects of Chinese mainland ventures, where deals have been difficult for foreign companies to pull off. The deal, the Telegraph says, will enable BlueStar to expand both domestically and overseas. BlueStar is owned by China National Chemical. It originally planned to raise about $300 million through a Hong Kong IPO this year, but its plans were scrapped after investment bankers abandoned the transaction due to the company's poor financial performance, the South China Morning Post reported on June 20. Trading in shares in three companies associated with BlueStar was halted Thursday morning in Shanghai, after they said their parent company is in talks on a "major issue."
Sources: Daily Telegraph, Bloomberg, Reuters
Commentary: Real Competition: China and Global SecuritiesBlackstone to Capitalize on Market Downturn
Stocks/ETFs to watch: BX

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Credit Concerns Haven't Gone Away
Housing: Real Estate: How Far, How Fast?
Q&A: CEO of e-Future Information Technology (NASDAQ:EFUT)
Long Idea: Three Stocks for a Tough Market
Short Idea: iPhone Price Drop Is A Bad Sign
Internet: RealNetworks: Good, Not Great
Chips: RF Micro: Expecting Stock To Climb
Software: Parsing the Engineering Software Earnings Calls
Gadgets: Selloff Creates Apple Buy Opp.
Media: Coming to Terms With Dreamworks Animation
Biotech: Time to Hop Aboard NeurogesX
Retail: Altria: Hold Your Shares In The Spin
Transport: Ford and GM: Solid Q4?
Gold: Why I'm Betting on a Surging Gold Price
Energy: Deep Sea Drillers Turning Back Up?
Financial: Financials Not Promising with Potential Rate Cut
Asia: VeruTEK: Spring Cleaning All Year Long
ETFs: Van Eck's Agribusiness ETF Takes Unique Approach
Hedge Funds: 130/30: Fad Or New Paradigm?
Sound Money: Think Before You Act
Jim Cramer: Latest stock picks

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