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MACRO AND HOUSING

Banks Borrow $7.2 Billion From Fed

US banks had borrowed $7.2 billion from the Federal Reserve as of Wednesday, the most since right after the 9-11 tragedy. The data show the NY Fed was owed $4.9B, the Cleveland Fed $1.6B, and the Richmond Fed $550M, but the names of the banks were not detailed. Banks usually borrow from other banks at the federal funds rate, which has averaged 5.01% this month. The banks that borrowed money from the Fed had to pay 5.75% (the discount rate). According to Lou Crandall, chief economist for Wrightson ICAP, the Fed was "deliberately stingy" ahead of the expiration of the reserve maintenance period, the time when banks must show they have enough cash on reserve against their capital. The Fed created a situation where the federal funds rate, at 6.5% on Monday, 6.0% on Tuesday, and 6.25% on Wednesday, was higher than the 5.75% discount rate. The reasoning behind the Fed's actions is because until this week, it had little success encouraging banks to borrow from them to increase liquidity and ease the credit crunch. There is a stigma associated with borrowing from the discount window; historically, it is done only in extraordinary situations. By forcing banks to borrow, this might diffuse the stigma. The Fed also lowered the discount rate last month half a point with the same idea of getting banks to borrow from them (full story). "If the carrot won't work, use the stick," Crandall said. The Fed's last tactic was more than effective.
Sources: MarketWatch
Commentary: Economists Up the Odds of a Recession -WSJBernanke Mum on Possible Rate CutMajor U.S. Banks Step Up to Discount Window

TECHNOLOGY

August Video Game Sales Better Than Expected

Video game software sales jumped almost 23% in August, easily beating analyst expectations of 10% - 15% growth, according to data released by research firm NPD Group late Thursday. Console sales were even more robust, +94%, because Nintendo's Wii and Sony's PlayStation 3 were not yet available last August. Electronic Arts' "Madden NFL 08" series was the best-selling game, with 1.87 million unit sales across the Xbox 360, PS3 and PS2. The Xbox 360 version led all titles with 896,000 unit sales, the PS2 version was second with 643,600 unit sales. Take-Two Interactive's "Bioshock" was third-best, with nearly 491,000 copies sold. Activision's "Guitar Hero" franchise grabbed two places in the top-10, while Nintendo had four titles in the top-10. As for game consoles, Nintendo's Wii dominated rivals with 403,000 units sold versus 276,700 for Xbox 360 and 130,600 for PS3. Sales of Sony's PS2 remained strong at 202,000 units, widely outselling the PS3. The Xbox 360 now has an installed base of 6.3M, followed by 4M for the Wii and 1.75M for the PS3 (39.1M for PS2). Among handheld consoles, Nintendo's DS unit sales were more than double Sony's PSP, 383,300 vs. 151,200, respectively.
Sources: MarketWatch, TheStreet.com
Commentary: Video Game Companies Extend Bullish TrendNintendo’s Near Term Outlook CloudedUBS Notes Trouble In 'Weak Performance' Of EA's Madden ‘08 On Sony PS3
Stocks/ETFs to watch: SNE, MSFT, OTCPK:NTDOY, ERTS, TTWO, ATVI

Qualcomm Wins Stay on Handset Import Ban

Qualcomm won a rare legal victory late Wednesday, as the U.S. Court of Appeals for the Federal Circuit granted a stay pending appeal that will allow third parties to import handsets into the U.S. originally banned by the International Trade Commission. The ITC imposed the ban in early June after finding Qualcomm had infringed on a patent held by Broadcom (full story). In a statement, Qualcomm said it is pleased with the decision and "will continue to pursue the appeal of the ITC's order with the Federal Circuit and seek a reversal of the underlying infringement finding." Mobile device makers and wireless carriers also benefit from the decision. UBS analysts published a research report following the court's decision, saying they maintain their "buy" rating with a 12-month price target of $54/share. A Thomas Weisel analyst commented, "Given that the stock is currently discounting a worst case scenario and trading at historically low multiples relative to the company's strong business fundamentals, we believe the stock offers upside." Shares of Qualcomm rose 3.4% to $39.17 on Thursday, gaining as much as 4.6% intra-day. Broadcom was up 1.4% to $35.87.
Sources: Press release, Bloomberg, MarketWatch, newratings.com
Commentary: Qualcomm Loses AgainNokia Seeks to Block U.S. Import of Qualcomm ChipsShould You Buy Qualcomm On Bad News?
Stocks/ETFs to watch: QCOM, BRCM, NOK. ETFs: BDH, WMH, IGN
Earnings call transcript: QUALCOMM F3Q07, Broadcom Q2 2007

Alcatel-Lucent Cuts Outlook, Shares Drop

Alcatel-Lucent, the world's largest telecommunications equipment producer, cut forecasts for full-year revenue growth and noted that it estimates third quarter operating profit to be "around break even." The Paris-based company said it projects revenue for 2007 to be flat to slightly up with a constant Euro-dollar exchange rate; it had earlier guided mid-single digit percent growth. The lowered forecast was caused by a slowdown in purchases from North American companies. Touching on the lowered sales in North America, the company said in a statement, "Alcatel-Lucent is now seeing a change in capital spending with those customers in 2007, compared to what it had anticipated. As a result, the company is not seeing the projected volume changes that would have mitigated the ongoing pricing pressures it is experiencing." Before today, Alcatel-Lucent shares were already down 33% this year. Since Alcatel and Lucent merged in November 2006, the resulting company has struggled. "Alcatel is a classic example of M&A heartburn," said Piers Hillier, head of European equities at WestLB Mellon Asset Management. "Two poor businesses put together do not make a good one." Ericsson, Alcatel-Lucent's biggest rival, has been gaining market share and said this week that third quarter sales will be "strong." Alcatel-Lucent's ADRs fell 8.8% to $9.16 Thursday.
Sources: TheStreet.com, Bloomburg, Wall Street Journal
Commentary: Ikanos Picks Up Alcatel's Check$1.53 Billion Judgment Against Microsoft Overturned
Stocks/ETFs to watch: ALU, ERIC. Competitors: CSCO, NT. ETFs: BDH, IGN
Earnings call transcript: Alcatel-Lucent Q2 2007

Dell Postpones 10-Q Filing

Dell informed the Securities and Exchange Commission Thursday its second-quarter 10-Q filing will be delayed until after the first week of November, due to the recent concluding of an investigation, resulting in a restatement of financial results for fiscal 2003 - 2006 and Q1 2007. Dell announced the findings of its Audit Committee's independent investigation of the company's accounting and financial reporting practices on August 16. Net income will be restated by $50M - $150M ($0.02 - $0.07/share vs. $4.78/share originally reported) with a 1% or less reduction to revenue for each of the four years (full story). In late August, Dell reported better-than-expected preliminary Q2 results. Earnings per share of $0.32 beat the Street by a penny and revenues of $14.8B topped expectations of $14.6B (full story). Dell plans to file its restated financial documents by the first week of November. Shares of Dell gained 0.5% to $26.89 during normal trading Wednesday and lost 0.15% to $26.85 in light after-hours activity.
Sources: Dell SEC Form 10-Q, MarketWatch
Commentary: Dell Admits Falsifying Results; Will Restate Four Years of EarningsDell Beats Estimates on Healthy SalesMichael Dell Focuses On New Directions
Stocks/ETFs to watch: DELL. Competitors: HPQ, IBM, GTW, JAVA. ETFs: IAH, PRFQ, ROM

RETAIL

Cadbury Rejects Private-Equity Bid -- FT

Ordinary shares of Cadbury Schweppes in London are trading lower after a report by the Financial Times said the company's board of directors rejected a £6.4 billion to £6.9 billion ($13B - $14B) private-equity bid last week for its beverages unit. The private-equity offer was the second made by a consortium consisting of Blackstone Group LP, Kohlberg Kravis Roberts & Co. and Lion Capital LLP. Without name its source, the FT says Cadbury reportedly was not satisfied with the terms of the offer, which included a vendor-financing proposal. The FT says the board's rejection increases the possibility Cadbury's beverages unit, which includes soft drink brands Dr Pepper and 7Up, will be spun off into the market rather than sold outright. Cadbury originally announced it would sell or spin off the unit in March, but in July was forced to delay the sale, citing "extreme volatility" in debt markets. Cadbury shares were last down 0.4% to 585 pence after losing as much as 2.6% in early trading.
Sources: Bloomberg, MarketWatch
Commentary: Cadbury Schweppes Leverages The Net For Product DevelopmentCoca-Cola, Eyeing Snapple, Approaches Bidders for Cadbury's Drinks BusinessCadbury Schweppes to Sell Beverage Unit
Stocks/ETFs to watch: CSG, BX

ENERGY AND MATERIALS

Crude Finishes Over $80

Crude oil continued its strong upward trend Thursday, as it finished above $80/ barrel for the first time ever. The October crude contract finished the day session at $80.09, slightly under the intraday high of $80.20. "After the markets' formidable display this week, it is clear that prices are reacting more to supply concerns, both perceived and real," said Edward Meir, analyst at MF Global. "The impact of weaker demand has yet to manifest itself given the lags associated with this variable." Overnight, a storm named Humberto grew strength and hit Texas as a Category 1 hurricane. Damages were not serious; three refineries were shut down in Port Arthur, Texas and ships were not able to enter or leave the Houston Shipping Channel for a short time, according to Platts, an information service for the energy sector. XLE, an energy sector ETF, was up 0.63% to $72.30 at the close on Thursday.
Sources: TheStreet.com, MarketWatch
Commentary: Oil Prices Climb to New Record HighCrude's New High a Result of Dollar Weakness
Stocks/ETFs to watch: XLE
Related: Select Sector SPDRs

FINANCIAL

Countrywide Jumps on New Financing

Countrywide Financial, the largest US mortgage lender, announced Thursday it was able to secure $12 billion in financing. The news "should substantially address funding concerns," Moshe Orenbuch, an analyst at Credit Suisse Group said in a research report which had CFC rated as an "outperform." In a statement, Countrywide President David Sambol said, "Looking forward, the company expects that it will be a long-term beneficiary of the current conditions and corrections in the mortgage industry, and we are confident that the actions which we have taken in response to the current environment will position us for profitable future growth and success." Countrywide used its entire $11.5 billion credit-line and sold $2 billion in preferred shares to Bank of America in August. Last week, CFC announced it would cut up to 20% of its workforce to cut costs. Since the beginning of last year, more than 100 mortgage companies have gone out of business or put themselves up for sale because of subprime and housing issues. Countrywide shares closed Thursday +13.9% to $18.93.
Sources: TheStreet.com, Bloomberg
Commentary: Countrywide Seeks More Capital - NY PostCountrywide Takes Steps to Survive Credit Crunch
Stocks/ETFs to watch: CFC. Competitors: NDE, WFC. ETFs: PGF, IYF
Earnings call transcript: Countrywide Financial Q2 2007

INTERNATIONAL

People's Bank of China Hikes Rates Again

The People's Bank of China raised interest rates (effective Saturday) for the seventh time this year, increasing the benchmark one-year lending rate by 0.27% to 7.29%, a nine-year high and raising the rate on deposits by the same amount to 3.87%. The PBOC has also increased banks' reserve requirements on seven occasions in 2007. An economist at the State Information Center in Beijing commented the PBOC's biggest concern is inflation, because "people get negative returns on bank deposits, and that's fueling investment and bubbles in the stock and property markets." Earlier this week data showed August CPI increased a larger-than-expected 6.5%, a decade high, as pork and vegetable shortages continue to drive up food prices. Also, China's August trade surplus widened 33% to nearly $25B (full story). China's Q2 GDP grew 11.9%, the fastest in twelve years, prompting a rate hike in July; the PBOC also hiked in August (full story). The Shanghai Composite rallied late, boosted by a 5.7% rise in B-shares, to gain 0.7% to 5,312.18.
Sources: Bloomberg
Commentary: China's Retail Sales Hit Three Year HighChina's August CPI Hits Decade High, Surplus Widens; Stocks DropInvesting in China, The Non-ETF Way
Stocks/ETFs to watch: CAF, FXI, PGJ

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