Wall Street Breakfast

MACRO AND HOUSING

Economists Up the Odds of a Recession -WSJ

Economists that participated in a WSJ.com survey felt that there was on average a 36% chance that the US will fall into recession in the next 12 months. There were 52 economists that participated in the survey, and it was taken the days following the disappointing jobs report on September 7th. Three-fourths of the economists thought there was a greater than 30% chance of recession, and the 36% average was up from 28% a month ago. The main sources of risks were the credit crisis and the housing slump. About 60% of the forecasters thought the housing slump was half over, while the rest still thought it was in its early stages. The economists that felt more positive about the US economy believed that strong manufacturing expansion and a solid global economy creating more US export growth would support the US. About 85% of the forecasters felt the existing conditions necessitated a rate cut. Wells Fargo economist Scott Anderson said, "The drop in trend employment growth is stark and deserves a response from the Fed if only for insurance reasons." Economists forecast a couple rate cuts in the next year. and predict the fed funds rate will drop to 4.5% by mid 2008. Finally, not one economist predicted that oil would finish this year above $80/barrel. The average price estimated was $68.63/barel.
Sources: Wall Street Journal
Commentary: Forecasts Show Crude Prices Falling Steadily • Oil Trades All-Time High • Bernanke Mum on Possible Rate Cut

Fannie Mae ‘Prepared to Act’ if Portfolio Cap is Increased

Fannie Mae is fighting for its regulators to lift the company's investment limits so it can buy home loans and provide liquidity and stability in the market. Its regulator, the Office of Federal Housing Enterprise Oversight, told the company in 2006 that the company's portfolio would be capped at $727 billion, until Fannie Mae reformed some of its business practices. In a speech on Wednesday, CEO Daniel Mudd said, "We have vastly reduced our control weaknesses. We've come into compliance with all the major issues outlined in the consent agreement." Though progress was made, not all the remedial requirements were met and it was not enough for regulators; last month the OFHEO rejected Fannie Mae's request to increase its portfolio limit. "We're still continuing discussions. I don't have anything to announce to you today but we hope to get to the place where we can do more," added Mudd. The cap agreement does have terms that would allow James Lockhart, the director of OFHEO, to waive the cap if there are "market liquidity issues" or "other relevant information." Mudd highlighted that Fannie Mae was ready and "prepared to act." He may not have to wait too much longer if the mortgage markets and housing continue their current trends. Fannie Mae traded down 1.8% to $62.59 in midday trading Wednesday.
Sources: Reuters, Wall Street Journal
Commentary: Subprime Mortgage Lenders Don't Need Help From Fannie and Freddie -- Bernanke • Fannie Mae, Freddie Mac Soar on Possible Easing of Portfolio Limits
Stocks/ETFs to watch: FNM
Earnings call transcript: Fannie Mae Q4 2006

TECHNOLOGY

Syntax-Brillian Plunges 24% in After-Hours on Disappointing Guidance

Syntax-Brillian shares tanked 24.1% to $4.65 in heavy after-hours trading, following the company's fiscal Q4 earnings release, in which it reported a return to profitability with EPS of $0.11 (vs. -$0.11 last year), but missed analysts' average estimate by a penny and issued disappointing guidance. In addition, Syntax-Brillian said CFO Wayne Pratt will resign effective Sept. 30 to take a position with a start-up also located in Tempe, Arizona. Syntax-Brillian's Q4 revenue surged to $205.3 million, from $59.8M last year, easily topping analyst expectations of $198M. However, investors were more focused on fiscal Q1 guidance. Syntax-Brillian forecasted Q1 (ending Sept. 30) revenue of $170M - $180M, well short of analysts' average estimate of $257M. Gross margins are expected to be 15% to 17%, compared to 20.2% for fiscal Q4. The company cited "a severe tightening of credit in Asia that has significantly impacted the bank and other credit facilities of our supply chain partners (by over $200M)." Syntax-Brillian said it has decided to take a "more cautious approach" to sales in Asia. Its shares lost 2.5% to $6.13 during normal trading on Wednesday.
Sources: Press release I, II, MarketWatch, TheStreet.com
Commentary: Syntax Brillian: Where Have All The Bulls Gone? • Vizio Leads LCD Sales; Syntax-Brillian Remains in Seventh Place • Syntax-Brillian Jumps in Pre-Market Trading on Guidance Revision
Stocks/ETFs to watch: BRLC. Competitors: SNE, PHG, MC, GLW, AUO

INTERNET

Yahoo! Secures Deal with Social Networking Site Bebo

Yahoo! will announce Wednesday it has secured an exclusive partnership to sell most of Bebo's display advertising. Bebo is England's leading social networking site and reaches about 11.6 million people in England and Northern Ireland. It is the first time Yahoo has agreed to supply advertising for a social network site, and it fits nicely with Yahoo's recent strategy of finding revenue from sites besides its own on the Web. MySpace and Facebook, the largest American social network sites, have already struck deals with Microsoft and Google. Toby Coppel, managing director of Yahoo Europe said, "It's a core step for us in building up the largest and most effective advertising network. It's a big deal." Yahoo will also integrate its community driven knowledge service, Yahoo Answers, on to Bebo, and create a toolbar so users can monitor Bebo even when they are not on the site. The financial terms of the deal were not disclosed, but Yahoo should start receiving revenue from the new deal in the fourth quarter. Yahoo stock stood unchanged at $23.71 in pre-market trading.
Sources: CNN, MSN
Commentary: Yahoo Overhaul Unlikely -- WSJ • Yahoo's Paid Search Looks Good, But Banner Ads Still Weak • Yahoo to Acquire Targeted Ad Vendor BlueLithium for $300M
Stocks/ETFs to watch: YHOO. Competitors: GOOG, MSFT. ETFs: FDN, HHH
Earnings call transcript: Yahoo! Q2 2007

RETAIL

McDonald’s Jacks Dividend Up 50%

McDonald's announced late Wednesday that it would increase its annual dividend 50% -from $1.00 to $1.50 - as part of a plan to return $15 billion to $17 billion back to its shareholders in the next two years. The company has been under pressure from William Ackman, who owns 1.6% of McDonalds stock outstanding, to raise returns for shareholders. In an interview, Ackman said McDonald's "is doing right by shareholders" and added he was "delighted" with the decision. Ackman has been an activist investor since buying the shares in 2005, and even tried to win a board seat last year. "Ackman added a little extra fire under the stock," said Arthur Barry, portfolio manager at Loomis Sayles. McDonald's shares definitely have been cooking in the last year, up 35% since September 2006. They got a boost yesterday from strong same-store sales numbers (full story), and this announcement kept the positive momentum going. McDonald's shares were up 2.9% to $51.20 in after hours trading.
Sources: Press Release, Bloomberg, TheStreet.com
Commentary: Wake Up and Smell the Coffee: Starbucks Still Doesn't Get It • McDonald's Posts Q2 Loss on Store Sales, Adjusted EPS In-Line
Stocks/ETFs to watch: MCD. Competitors: BKC, YUM. ETFs: PBJ, VCR
Earnings call transcript: McDonald's Q2 2007

Target Considering Sale of $7B of Credit Card Receivables

Target announced late Wednesday it has hired Goldman Sachs to advise in its review of potential ownership alternatives for its credit card receivables valued at approximately $7 billion. Target also said it will re-evaluate its use of debt and pace of share repurchases. The reviews are expected to be completed by the end of the year. The credit card receivables review concerns possible differences in growth rates and credit risk. As for Target's capital structure in light of proceeds from a possible sale of the receivables, CFO Doug Scovanner said Target "won't consider taking any deliberate actions that would jeopardize current short-term debt ratings" and expects to preserve Target's long-term debt ratings within the "A" category. Activist investor Bill Ackman disclosed a nearly 10% stake in Target in July and called the company "undervalued" and said he planned to talk with management about changes, in a regulatory filing. Both Sears and Macy's have sold their credit card receivables to Citigroup, in 2003 and 2005-06, respectively. Shares of Target gained 1.5% to $62.72 during normal trading Wednesday and added 2.7% to $64.38 in light after-hours activity.
Sources: Press release, Bloomberg, MarketWatch
Commentary: August Same-Store Sales Roundup • Investors Appear to be Right on Target • Citigroup Sees Upside of 12% for Target Shares
Stocks/ETFs to watch: TGT. ETFs: RTH, XLY
Earnings call transcript: Target F2Q07

ENERGY AND MATERIALS

Oil Prices Climb to New Record High

Oil prices hit all-time highs Wednesday as inventories dropped more than expected. The October contract for crude oil touched $79.20, trading through the old high of $78.80 hit on August 1st. The jump was after the US government reported crude supplies had dropped 7.1 million barrel last week. Analysts were looking for a drop of only 2.7 million, according to Dow Jones. John Person, president of NationalFutures.com, said that the data was a "big shock to the oil market." He later said, "Consumers are still soaking up supplies rather than conserving and this is forcing refineries to increase production." In an effort to lower the price, OPEC decided yesterday to increase the daily production ceiling for oil (full story). Despite the move, oil continues to creep closer to the $80 level, as demand is projected to increase in the next few years. UPDATE: The October contract gained $1.68 (2.2%) to $79.91 on Wednesday, climbing as high as $80.05 intra-day.
Sources: MarketWatch, CNN
Commentary: A 'Total' Shift in the Oil Industry • Forecasts Show Crude Prices Falling Steadily
Stocks/ETFs to watch: OIL, USO

FINANCIAL

Goldman's Global Alpha Fund Dropped 22.5% in August

Bloomberg reports Goldman Sachs sent clients an unsigned update of August hedge fund performance. Goldman's Global Alpha quantitative fund lost 22.5%, its largest monthly decline ever, and is now down 33% year-to-date and 44% from its March 2006 peak. Investors in Global Alpha notified Goldman in August that they plan to withdraw $1.6 billion or about 20% of the fund's assets as of July 31. Unlike the $2B in capital Goldman injected into its Global Equity Opportunities quant fund, Goldman decided not to increase the capital in Global Alpha, after the funds suffered substantial losses in early August. Global Equity Opportunities went on to recoup nearly half its losses by mid-August. "We still hold our fundamental investment beliefs that sound economic investment principles coupled with a disciplined quantitative approach can provide strong uncorrelated returns over time," said Goldman in its update. Goldman also acknowledged the long-term importance of developing more unique quantitative trading factors, as it blamed recent losses on too many quant funds making similar trades. Global Alpha was hurt most by rapid appreciation of the yen. Shares of Goldman Sachs fell 0.5% to $182.53 on Wednesday.
Sources: Bloomberg
Commentary: Goldman Sachs and Lehman Brothers: While Some Panic, Others Hunt for Bargains • Price/Book Not So Helpful in Assessing Broker-Dealers • GS Quant Fund Bounces Back
Stocks/ETFs to watch: GS. Competitors: MS, MER, LEH, BSC. ETFs:
Earnings call transcript: Goldman Sachs F2Q07

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market:	Tune Out The Hype Machine
Housing:	There Are Some Real Estate Opportunities
Long Idea:	Oppenheimer Out Bullish On O2 Micro, Marvell
Short Idea:	Why WaMu Must Confess
Internet:	Look Out MySpace: Facebook's Catching Up Quickly
Telecom:	Qualcomm Loses Again
Networking:	3Com: Beneficiary of Online Video?
Media:	Tribune Company: It's a Done Deal
Healthcare:	Aventis' Altace Patent Invalidated by Circuit Court
Transport:	Container Port Opening Big Boon for CN Rail
Gold:	Look Here For An Inflation Proof Currency
Energy:	Forecasts Show Crude Prices Falling Steadily
Asia:	Yen Carry Trade Unwinding? Not So Fast...
ETFs:	How Much Market Impact Do ETFs Have?
Jim Cramer:	Latest stock picks

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