Wall St. Breakfast's Pre-Market Snapshot:
U.S. Futures As of 8:47 AM ET
S&P 500: +8.00; 1,497.80
NASDAQ 100: +17.75; 2,023.75
Dow: +60.00; 13,563.00
NIKKEI 225: -2.02%; 15,801.80 (-325.62)
HANG SENG: -0.09%; 24,576.85 (-22.49)
SHANGHAI SE COMPOSITE: +0.07%; 5,425.21 (+3.82)
BSE SENSEX 30: +1.06%; 15,669.12 (+164.69)
FTSE 100: +1.21%; 6,257.90 (+75.10)
CAC 40: +1.37%; 5,513.97 (+74.60)
XETRA-DAX: +0.61%; 7,525.64 (+45.79)
Commodity Futures (Reuters/Jefferies CRB)
Oil: +0.32%; $80.83 (+$0.26)
Gold: +0.53%; $727.60 (+$3.80)
Natural Gas: -2.03%; $6.52 (-$0.14)
Silver: +0.93%; $13.02 (+$0.12)
U.S. Breaking Newssee today's Wall Street Breakfast for earlier news
Lehman Beats Expectations
Shares in U.S. investment banker Lehman Brothers are up 2.5% in pre-market trading after it said Q3 earnings dropped only slightly from a year ago, despite a subprime lending crisis that has taken a toll on its fixed-income trading. Net profit fell 3% to $887 million ($1.54/share) from $916 million ($1.57/share) a year ago. Revenue rose to $4.31 billion from $4.18 billion. Its results bested Wall Street expectations: analysts were looking for $1.47/share on $4.23 billion in revenue. The firm said it recorded "substantial valuation reductions" on some leveraged loan commitments and residential mortgage-related positions, leading to a net revenue reduction of $700 million. Its fixed-income unit revenue fell 47% to $1.1 billion. However that was largely offset by a gain in revenue from equities, which jumped 64% to $1.37 billion. "Lehman has done a better job of diversifying away from the fixed income and hedge fund dependency," analyst Peter Kovalski said. CEO Richard Fuld: "Despite challenging conditions in the markets, our results once again demonstrate the diversity and financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles" (see full earnings call transcript later today). He added that more than half the firm's revenues over the quarter were from outside the U.S. During the quarter, Lehman closed its subprime mortgage lending unit (BNC Mortgage) and let about 2,500 people go. Lehman shares are down about 25% YTD, more than three times more than the drop in the Amex Securities Broker Dealer index, amid concerns over its exposure to subprime-mortgage-backed securities and leveraged buyouts. Lehman, the fourth-largest U.S. investment bank, is the first group to post Q3 numbers. Morgan Stanley reports results Wednesday, followed by Goldman Sachs Group Inc. and Bear Stearns Cos. on Thursday. Merrill reports in October.
Sources: Press release, AP, MarketWatch, Reuters, Bloomberg,
Commentary: Banks Hit With Surging Credit Costs • Lehman Strategist Says Economy Won't be Derailed by Subprime Crisis • Lehman Brothers: Hair of the Credit Crisis That Bit You
Stocks/ETFs to watch: LEH. Competitors: GS, MS, MER, BSC. ETFs: KCE, IAI, EXB
Earnings call transcript: Lehman Brothers F2Q07
Best Buy Beats and Raises Outlook
Best Buy posted strong quarterly results Tuesday, and raised its outlook for 2008. The company earned $250 million (55 cents/share), compared to last year's $230 million (47 cents/share). The number represented a 17% increase in earnings per diluted share and beat analysts' estimates of 44 cents/share. Revenues in the quarter were 8.75 billion, a 15% increase from $7.6 billion a year ago. Analysts were looking for only $8.48 billion. The strong quarter was supported by solid international results and high demand for computing, home theatre, and video game products. CEO Brad Anderson said, "Our results were better than we expected, as we continued to adapt to the marketplace and changes in customer needs." Best Buy's same store sales were up 3.6%, and for 2008, the company lifted its full-year outlook to a range of $3 to $3.15/share, from $2.95 to $3.15 earlier. Same store sales for 2008 were estimated to be around the midpoint of 3% to 5%. The company was up 5.2% to $46.85 in pre-market trading Tuesday.
Sources: Press Release, MarketWatch, Reuters
Commentary: Best Buy Announces Record Buyback • A Look At China's Retail Environment
Stocks/ETFs to watch: BBY. Competitors: CC, WMT. ETFs: RTH, VCR
IBM to Offer MS Office Rival Symphony for Free
The Wall Street Journal reports IBM is set to offer Symphony, a business software suite, free of charge from Tuesday, via download, or with purchase of its Notes collaboration software ($145/user). The IBM giveaway, which includes a word processor, collaboration, spreadsheet and presentation applications, will compete against Microsoft's Office suite. IBM is attempting to further promote its Notes software (alternative to Outlook) and its international standard "Open Document Format" as a free alternative to MS Office. Symphony is based on software available from OpenOffice.org, which IBM recently said it would join. IBM software chief Steve Mills concedes, "something we deliver for free won't be a moneymaker," but adds that corporate customers offering Symphony to some employees might free up budgets to buy other IBM software. Mills also says he expects IBM will continue to buy new versions of MS Office, since it has a lot of features not available with Open Office. However, Mills says not everyone needs the fancy features, in which case, Notes will suffice and upgrades to Office 7.0 are unnecessary. Notes has 135 million worldwide users. Shares of IBM fell 0.5% to $114.52 on Monday.
Sources: Wall Street Journal
Commentary: Microsoft's Open Office Setback: GOOG, IBM and SUNW to Benefit? • Yahoo! Beefs Up Email with $350M Zimbra Acquisition • Safety in Tech? You Betcha -- Barron's
Stocks/ETFs to watch: IBM, MSFT, GOOG, JAVA
Earnings call transcript: International Business Machines Q2 2007, Microsoft F4Q07, Google Q2 2007
AmEx Sells International Banking Unit For $1.1 Billion
American Express is selling American Express Bank, which controls its international banking operations, to London-based financial holding company Standard Chartered PLC for about $1.1 billion, it said Tuesday. The price includes the closing NAV of AmEx Bank, plus $300 million. According to AmEx CEO Kenneth I. Chenault, the sale "reflects our strategic focus on the high-growth, high-return payments businesses that have been driving our performance in recent years." The deal will likely close in the first quarter and will not affect the company's credit card business. The deal gives Standard an additional $22.5 billion in assets under management and is mainly in location the company is already located, with expected synergies of $100 million a year starting in 2009. AmEx doesn't expect to the sale to impact its own earnings negatively. AmEx shares are down 4% in 2007 and were unmoved in the pre-market on the news.
Sources: Press Release, Wall Street Journal, Reuters, AP, MarketWatch
Commentary: American Express: Don't Leave Home Without It • Credit-Card Defaults on the Rise -- FT • American Express Q2 Profit Rises 12%, But Shares Fall
Stocks/ETFs to watch: American Express Co. (AXP). Competitors: Mastercard Inc. (MA)
Earnings call transcript: American Express Q2 2007 Earnings Call Transcript
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Today's Market (via Sam Collins, ChangeWave.com)
Recap of Yesterday's Action
A big appeal against Mr. Softie, a big bailout of a U.K. lender, and a big decision on interest rates all conspired to put a lid on U.S. markets yesterday.
Before the opening, a decision by the European Union to uphold the anti-trust decision against Microsoft (NASDAQ:MSFT) for 497 million euros not only put pressure throughout the day on MSFT (off 1.1%) but on the entire technology sector. After the dust settled, the tech-heavy Nasdaq fell by .79%.
Even without the tech troubles, the image of depositors lining up at the branches of U.K. lender Northern Rock, despite a bailout by the Bank of England, was enough to hold back buyers who may have thought to invest in the financial sector.
But the real question of the day that contributed to investors' indecision was whether or not, and by how much, the Fed governors would lower interest rates at today's Federal Open Market Committee [FOMC] meeting. While most analysts agree that the Fed will lower rates by 25 basis points, some disagree and maintain that more is needed, while still others said that any cut was an overreaction. The result was a market stalemate and another day of low volume.
At the close, the Dow Industrials fell 39 points to 13,403. The S&P 500 lost eight to 1,477, and the Nasdaq was off by 21 and closed at 2,582. The NYSE traded 1.1 billion shares with a negative breadth of 11-to-5 and the Nasdaq did 1.4 billion shares at a negative 5-to-2 breadth.
The October crude oil contract set another new high by closing at $80.57 up $1.47 a barrel, and the Amex Energy SPDR (NYSEARCA:XLE) added 10 cents to close at $72.60. The December gold contract rose by $6 to $723.80, and the Philadelphia Gold/Silver Index [XAU] closed at $158.36 up 36 cents after briefly penetrating the July high and missing the July closing high by just 2 cents.
What the Markets Are Saying
Yesterday, independent investment advisory firm Dorsey Wright referred to an article by Sam Stovall in the Jan. 9, 2006, issue of Forbes.com that cited an interesting study on the adage, "Let your winners ride, but cut your losers short."
Stovall used 36 years of data and developed two portfolios. In the first portfolio, he invested an equal amount in the 10 S&P 500 sub-industries that performed the worst in the prior year, and in the second portfolio he invested in the 10 best sub-industries.
Here are the results: Portfolio 1 had a compounded annual growth rate of 7.6%, but Portfolio 2 had a compounded growth rate of 13.9% -- almost twice as good as Portfolio 1!
The conclusion is that there is a strong case for buying strong relative strength sectors even when they have had good gains in the prior year. And with proper discipline, such buying strong stocks in a bull market but only when they correct, you may even improve on those numbers. It is time to cull out the losers, hold cash, and buy strong stocks when they pull back to their 200-day averages or trend lines.
Today's Trading Landscape
Look for earnings today from the following companies: Autozone (NYSE:AZO), Bakers Footwear (OTC:BKRS), Best Buy (NYSE:BBY), CBRL Group (NASDAQ:CBRL), Darden Restaurants (NYSE:DRI), Lehman Brothers (LEH) (read above) and Kroger (NYSE:KR).
Today, the following economic reports are expected: Producer Price Index (the consensus expects negative 0.3% versus July's 0.6% growth), the TICS report on foreign purchases of U.S. securities and the NAHB Housing Market Index.
European markets are strong this morning following a pledge by the British government that all deposits were safe and that the government would specifically guarantee Northern Rock deposits. Apple Inc (NASDAQ:AAPL) launched its iPhone in the U.K. today in time for Christmas sales.
E*Trade Financial (NASDAQ:ETFC) estimates that this year's earnings will be much lower than forecast and increased its provision for loan losses and will exit its wholesale mortgage operation.
With subprime problems again in the news, pressure on the Fed to lower rates continues -- we will know the Fed's response will be at 2:15 p.m. today.
Asian Headlines (via Bloomberg.com)
• Asian Stocks Fall on Credit Crisis Woes; Mitsubishi UFJ Drops, Inpex Gains Asian stocks fell the most in a week, led by Mitsubishi UFJ Financial Group Inc., after Bank of America Corp. said fallout from U.S. subprime-mortgage losses will hurt earnings.
• Sony Reduces Size of Financial Unit's Initial Share Sale to $2.8 Billion Sony Corp. scaled back the proposed size of its insurance unit's initial public offering, the biggest in Japan this year, after U.S. subprime mortgage defaults roiled global financial stocks.
• Australia Cuts Grain Harvest Estimate by 31 Percent Because of Dry Weather Australia cut its forecast for barley, wheat and canola crops 31 percent on dry weather, adding pressure to shrinking world supplies that have driven up prices.
European Headlines (via Bloomberg.com)
• Bank Stocks Rebound in U.K., Led by Northern Rock; Belgacom, Telenor Drop U.K. bank stocks climbed after the government said it will guarantee all customer deposits at Northern Rock Plc and the Bank of England made emergency loans to lenders in the country.
• U.K. Inflation Rate Unexpectedly Fell in August to Lowest Since March 2006 The U.K.'s inflation rate unexpectedly fell last month to the lowest level since March 2006, giving the Bank of England scope to reduce interest rates in response to any worsening of the credit-market rout.
• German Investor Confidence Falls More Than Expected to Nine-Month Low German investor confidence fell more than economists forecast in September after rising defaults on U.S. subprime mortgages pushed up the cost of credit.