Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

MACRO AND HOUSING

Economists Reduce 2008 Growth Outlook for Third Time

Economists have cut their 2008 growth outlook for the third month in a row because the housing slump is worse than originally feared, according to the Blue Chip Economic Indicators newsletter, released Wednesday. Economists surveyed now see the economy expanding 2.4% for the year, down from a 2.6% forecast in September and a 2.8% estimate in August. They believe troubles in the housing sector will likely spill over into consumer spending and business investment. The 52 economists polled are forecasting 2% growth for 2007. Housing starts are projected to be their lowest since 1993, and home prices could post their first y-o-y decline since the 1930s. Because growth is expected to remain tepid and inflationary risk to ease, most of the economists surveyed anticipate at least one more rate cut by the Fed. The survey was completed in October, prior to the release by the Labor Department of upwardly revised employment figures (full story).
Sources: Reuters
Commentary: Poole: Markets Stabilizing But Fragile; Yellen: I'm Open To More Rate MovesDon't Write Inflation's Obituary, Just YetWhat Does the Personal Savings Rate Tell Us About the Economy?
Stocks/ETFs to watch: SPY, DIA, QQQQ

FOMC Minutes Awaken Buyers

The release of the FOMC minutes from last month's meeting boosted stocks Tuesday afternoon, as the minutes showed there was no opposition to the Fed's aggressive 50 basis point cut, and that its members seemed very comfortable with inflation. The officials did not hint at the timing or direction of the next Fed move, saying "future actions would depend on how economic prospects were affected by evolving market developments and by other factors." The Fed forecasted "moderate" income growth in the third quarter, and cut its fourth-quarter and 2008 GDP estimates. It also expected a "modest" increase in employment would dampen consumer spending. As for inflation, members "recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained." The minutes also noted "all members agreed that a rate cut of 50 basis points [on Sept. 18] was the most prudent course of action." There was some belief based on comments prior to the meeting that some of the FOMC's more hawkish members did not support the cut. Finally, though many believed the August jobs report, which was off by 93,000 jobs, greatly influenced the Fed's decision, it did not seem to be fooled by the numbers, saying August employment "probably was not as weak as the most recent monthly data had suggested." All markets were up after the minutes were released.
Sources: Sept. 18 minutes, Wall Street Journal
Commentary: All Is Not Well In the Labor MarketWill Financial Stocks Rally?
Stocks/ETFs to watch: SPY, DIA

Poole: Markets Stabilizing But Fragile; Yellen: I'm Open To More Rate Moves

St. Louis Fed President William Poole said Tuesday that the Labor Department's recent employment report implies the economy is not in as much danger as was feared, but conditions remain delicate. On the same day, San Francisco Fed President Janet Yellen said she is uncertain whether further rate cuts will be required to stabilize the economy. "Financial markets appear to be stabilizing, but they have not returned to normal and are still fragile," said Poole, who is a voting member of the FOMC this year. "The substantial upward revisions to data released in the August [jobs] report remind us that it is a mistake to place too much weight on any one report." He cautioned that housing will likely remain weak for several more quarters. Yellen called the Fed's half-percentage-point rate cut in September "prudent" and defended it against the charge of moral hazard. "Investors who misjudged risks will surely suffer losses even if monetary policy is successful in keeping the economy on track," she said. "I don't believe that the Fed should stand aside as a financial shock threatens to derail the economy." Though she believes the rate cut helped to contain downside risk, she said it is too early to tell whether the economy "dodged a bullet." "I have a totally open mind about what, if anything, is going to be needed from here on in," she said.
Sources: MarketWatch I, II, Bloomberg, Reuters I, II, Forbes
Commentary: All Is Not Well In the Labor MarketSomething's Fishy About the Jobs NumberS&P 500 Sets Record On Jobs Data
Stocks/ETFs to watch: SPY, QQQQ, DIA

WSB Sponsor

MEDIA

GE’s NBC Acquires Oxygen Media

NBC Universal, a unit of GE, announced Tuesday it will acquire Oxygen Media for $925 million. Oxygen, a cable network started in 2000 by a group including Oprah Winfrey, targets young females and is available in 74 million homes. "This acquisition increases our foothold in the advertiser-coveted young, upscale, female demographic, and perfectly complements our current roster of cable channels," NBC Universal Chief Executive Jeff Zucker said. NBC's cable portfolio already includes USA Network, Sci Fi, CNBC and MSNBC. To finance the purchase, GE will sell two independent Telemundo TV stations in Los Angeles and Puerto Rico. Shares of GE traded up 0.51% to $41.74 in afternoon trading Tuesday.
Sources: Wall Street Journal, Bloomberg
Commentary: Amazon's Unbox Grabs NBC Programming From iTunesGE Reiterates Earnings Guidance
Stocks/ETFs to watch: GE. Competitors: CBS, TWX, DIS, NWS. ETFs: PBS
Earnings call transcript: General Electric Q2 2007

RETAIL

Costco Q4 Sales Fall Short

Costco Wholesale said early Wednesday FQ4 net income rose 4.7%, in line with analyst forecasts, but net sales fell short of expectations. Same-store sales were up 5% while total sales gained 3%. The largest U.S. warehouse retailer said net income for the quarter was $372.4 million ($0.83/share), vs. $355.6 million ($0.75/share) a year earlier. Net sales increased 3% to $20.09 billion from $19.5 billion. The 5% gain in same-store sales included a 4% rise in the U.S. and a 9% gain overseas. Consensus estimates were for EPS of $0.83 on $20.73 billion in sales. Net sales for F2007 were $63.09 billion, up 7% from $58.96 billion. Comparable warehouse sales increased 6% y/y. Costco distinguishes itself by selling high-end merchandise such as pricey jewelry, plasma TVs, and top-line exercise equipment alongside warehouse-club staples like cereal and tomato sauce. It tends to attract higher-income shopper than rivals like Wal-Mart's Sam's Club and BJ's Wholesale Club. "The thing that Costco has going for them is that they tend to get a little bit more upscale customers," Coldstream Capital's Rachel Wakefield said. On Oct. 3, JP Morgan analyst Charles Grom wrote that store managers at 10 out of 14 Costco stores in California cited housing as a concern among customers, something Grom says "we are watching closely." Shares are up 19.7% YTD and 28% over the past year; the stock fell 1.15% in Frankfurt trading Wednesday morning.
Sources: Press release, Bloomberg, MarketWatch, Dow Jones
Commentary: A Preview of Q3 EarningsCostco: Goldman, Citi Analysts Remain Cautious
Stocks/ETFs to watch: COST. Competitors: WMT, BJ, SHLD
Earnings call transcript: Costco F3Q07 • Check later for Costco's FQ4 earnings call transcript

Cadbury to Spin Off, Not Sell, U.S. Drinks Unit

Cadbury Schweppes plc says it now plans to spin off its U.S. drinks unit through a share issue to shareholders via a listing on the NYSE, not to be completed before Q2 2008. Cadbury had put the unit up for sale in March, and had strong interest from private equity firms, but deteriorating credit markets over the summer hindered progress towards a sale. A Bear Stearns analyst said the spin off decision is "ultimately disappointing," since investors expected Cadbury to make up to £7 billion from the sale. The analyst added that Cadbury will "struggle to defend its current premium." Separately, Cadbury provided a Q3 trading update, noting its confectionary business had a "particularly strong" quarter with revenues up 10%. Revenues at its Americas Beverages unit were up 3%, in what Cadbury said reflects a "challenging" quarter. In unrelated news, Hershey's Trust, which owns about 1/3 of Hershey's equity, but 2/3 of voting rights, said it is "not satisfied" with Hershey's performance. The Trust said it is "actively engaged in an ongoing process" to improve Hershey, apparently including pursuing a merger with Cadbury (full story). Ordinary shares of Cadbury were last up 0.33% to 602.50 pence in London. Cadbury's ADRs gained 0.5% to $49.26 on Tuesday.
Sources: Press release, Bloomberg, MarketWatch, Reuters
Commentary: Cadbury Rejects Private-Equity Bid -- FTEight Halloween Stock Tricks.... I Mean PicksCadbury Schweppes Leverages The Net For Product Development
Stocks/ETFs to watch: CSG. Competitors: KO, PEP, OTCQB:JSDA, HANS, FIZ

September Same-Store Sales to Miss Forecast - ICSC

Unusually warm weather and apprehensions about the state of the economy will probably result in weaker-than-expected September same-store sales, the International Council of Shopping Centers said Tuesday. Sales are now forecast to grow only about 2%, below the ICSC's prior forecast of up to 2.5%. Comps for the week ended October 6 are projected to have risen 2.1%, their slowest since mid-June. "Retailers need to be mindful going into the holiday season of the economic conditions that are affecting consumer-spending patterns and consequently have to have a strong marketing plan in place to win back consumer demand," said ICSC Chief Economist Michael Niemira. Last month was the eighth-warmest September since 1895, which dented purchases of cold-weather apparel like sweaters and hoodies. In September, Target cut its sales growth forecast; on Tuesday, Children's Place Retail Stores slashed its profit forecast; and on Wednesday, Costco Wholesale reported in-line earnings but lower-than-expected sales (full story). The S&P Retailing Index fell 0.4% Tuesday and is down 1.9% this year. Most retailers will issue monthly same-store sales reports on Thursday.
Sources: Dow Jones, Bloomberg, MarketWatch
Commentary: Slowing Consumer Spending Growth Rate Ahead; No Immediate Red FlagsTarget Expecting Big September Miss: Can't Blame the Weather!Looking for Strength and Weakness in Retail
Stocks/ETFs to watch: WMT, TGT, PLCE. ETFs: RTH, XRT, PMR

Hershey's Trust Sours on Chocolate Maker

Hershey's Trust, which holds about one-third of the equity but controls about two-thirds of the vote in the largest chocolate maker in the U.S., said Monday it was "not satisfied" with Hershey Co.'s performance and was "actively engaged in an ongoing process" to improve it. In a statement obtained by the Wall Street Journal, the Trust noted that the candy maker had lost some $1B in market value during its current period of unsatisfactory performance, but that it nevertheless, intends to maintain its controlling interest. It believes, it said, that "the long-term prosperity of the Company requires the Company Board and its management to build on its strong U.S. position by aggressively pursuing strategies for domestic and international growth." Among the processes it apparently is pursuing is a merger with Cadbury Schweppes plc. Hershey is currently licensed to distribute Cadbury brands in the U.S. and Cadbury has said a combination would make sense. People familiar with the situation told the Journal the Trust last month met with the U.K. confectioner to discuss a possible deal, but that nothing has yet come out of the meeting. Trouble has been brewing for some five years since 2002, when the Trust forced Hershey CEO Richard Lenny to put the company up for sale, but the process was called off amid pressure from the local community despite a joint $10.5B bid from Cadbury and Nestle SA and a $12.5B offer from gum maker Wm. Wrigley Jr. Co. Last week, Lenny abruptly announce that he would retire at year-end, just days after he stepped down from a post at the Trust.
Sources: Hershey Trust Statement, Wall Street Journal, Financial Times
Commentary: Hershey: Sweet Dividend Increases, Sour Equity Growth RateHershey Continues To Melt: Time For a Chocolate-Filled Shakeup
Stocks/ETFs to watch: HSY.Competitors: CSG, WWY
Earnings call transcript: Hershey Co. Q2 2007

TRANSPORT AND AEROSPACE

Mitsubishi Heavy Selects Pratt & Whitney Jet Engine

A new engine technology developed by United Technologies Corp.'s Pratt & Whitney unit has been selected by Mitsubishi Heavy Industries Ltd. for use in its Mitsubishi Regional Jet, the first Japanese-manufactured passenger aircraft in 40 years. The technology, called the Geared Turbofan engine, is designed to boost fuel efficiency and reduce noise. It has been in production for more than 20 years. Progress on the technology has been monitored by Boeing and Airbus, which are considering designing new single-aisle models to replace the Boeing 737 and the Airbus A320. "We are very much aware of the technology and applaud Pratt's efforts to continue the research and development in this area," said an Airbus spokesman. Mitsubishi hopes the Regional, which will hold 70 to 90 passengers, will be airborne by 2012. Mitsubishi Heavy Industries President Kazuo Tsukuda said each plane will cost ¥3-4 billion ($26-34 million), a relatively low range. The Geared Turbofan has a gearbox separating the main fan blade from internal engine parts, allowing them to operate at different speeds. This burns about 12% less fuel and cuts noise by 50%. Mitsubishi Heavy's endorsement is "a considerable boost," Bank of America aerospace analyst Robert Stallard wrote in a note.
Sources: Press release, Wall Street Journal
Commentary: Stocks With the Most Analyst LoveThe Long Case for United Technologies
Stocks/ETFs to watch: UTX. Competitors: BA, GE, ERJ. ETFs: ITA, PPA, XLI
Earnings call transcript: United Technologies Q2 2007

ENERGY AND MATERIALS

Alcoa Misses Profit Target, Announces Bulked Up Buyback

Alcoa reported an increase in third-quarter profits Tuesday, but the number fell short of analyst's estimates. Earnings from continuing operations came in at $558 million ($0.64/share) compared to $540 million ($0.62/share) a year ago. Though profits were 3% higher, it missed forecasts by a penny. Revenues, which were in line with analysts' targets, dropped to $7.4 billion from $7.6 billion last year. "The third quarter was challenging, with lower metal prices and a weaker dollar and we had cost pressures from raw materials and energy," said CEO Alain Belda (earnings call transcript). He said he expects aluminum demand to remain strong, even though U.S. demand is expected to decline 6%, because China's consumption of aluminum is forecasted to grow 36% this year. In total, Belda sees global demand to jump 10%. The company also jacked up its share buyback program to include a total of 25% of outstanding shares, up from the 10% it planned previously. Based on today's close, the new buyback is worth $6.17 billion. "I think the big issue is the 25 percent buyback. It's both good and bad," said analyst Charles Bradford at Bradford Research/Soleil. "Shrinking the company is good, (but) it's also an indication that they're running out of high profit things to do." Alcoa shares ended Tuesday's trading session up 2.35% to $39.20, before shares were halted for the earnings announcement. In after hours trading, shares were up 1.76% to $39.89.
Sources: Press release, Reuters, TheStreet.com
Commentary: Alcoa's Earnings: Barometer for the Market?Alcoa: Ironically, An Energy Efficiency Stock
Stocks/ETFs to watch: AA. Competitors: AL. ETFs: XLB, PRFM, IYM
Earnings call transcript: Alcoa Q2 2007

Chevron Warns

Number-two U.S. oil company Chevron said late Tuesday Q3 earnings will be significantly below the record $5.4 billion it earned in Q2. "The lower projected earnings are mainly the result of a sharp decline in refined-product margins," it said, also citing nonrecurring items. "Nonrecurring net charges in the third quarter are projected to be approximately $700 million. These charges include asset impairments, environmental remediation provisions, income tax adjustments, asset retirement obligations, and severance provisions." Chevron also said production from its U.S. refineries fell about 8% to 812,000 barrels per day, mostly due to planned and unplanned shutdowns. Despite higher oil prices, some refiners are suffering due to the higher prices they are paying for oil, reducing their margins, or the profits they make from turning crude into products such as gasoline and diesel. While analysts weren't necessarily surprised that Q3 profits wouldn't match Q2's record, they were taken aback by the $700 million charge: "The real negative surprise in this trading statement is the $700m of charges that rear their head... With weak refining and marketing and natgas, and production down -4% year on year, the near term oil investment case is based on WTI holding $80. We think it will fall sharply," Deutsche Bank analysts told investors in an Oct. 9 note. Separately, the company announced its Gorgon Joint Venture with ExxonMobil and Shell received an environmental green light from the Australian government after four years of scrutiny, though there is some doubt whether the project can produce enough profits to warrant following through with it. Chevron shares fell 2.1% in extended trading Tuesday.
Sources: Press release I (.pdf), II Wall Street Journal, Reuters I, Reuters II
Stocks/ETFs to watch: CVX, XOM, RDS.A

International Paper Warns on Q3 Earnings Miss

International Paper Co. issued a warning late Tuesday saying its third-quarter earnings would miss analyst consensus estimates due to a shortfall in land sales. International Paper expects EPS greater than the $0.52 it earned in Q2, compared to analyst expectations of $0.63. International Paper previously forecasted land sales earnings of $110 million to $140 million in Q3, but now expects approximately $100M. Separately, International Paper said results from its $1.6 billion 50:50 joint venture with Russia's Ilim Group will be included in the company's Q1 2008 financial statements and will continue to be reported on a one-quarter lag. Shares of International Paper rose 1.76% to $37.06 during Tuesday's regular session, but dropped 2.8% to $36.06 in extended trading.
Sources: Press release, MarketWatch, Reuters
Commentary: Stocks Making New Highs: Early Signs of Market Strength?International Paper: Strong Growth From Foreign MarketsTight Timber Market Creates Investment Opportunities, But Beware Locality
Stocks/ETFs to watch: IP. Competitors: MWV, WY. ETFs: PRFM, XLB, IYM
Related: International Paper heads to Siberia (MarketWatch)

Newmont Boosts Gold Production With Miramar Acquisition

Newmont Mining, the world's second largest gold producer and a member of the S&P 500, announced Tuesday it would acquire Canadian gold explorer Miramar Mining for $1.5 billion in cash. The agreed upon share price of $6.36 represented a 29% premium over Miramar's 20-day volume-weighted average trading price. Miramar offers Newmont a long-term source for gold with its Hope Bay Project in the Nunavut Territory of Canada, in a stable political climate. With resources quickly drying up in established areas, many mining companies have begun claiming stakes in unstable regions filled with risk. "It's a great deal for Newmont," said Joe Foster, a fund manager at New York-based Van Eck Associates Corp. "I did my valuation, and they have a great asset. It's world class." JPMorgan Chase and Citigroup agreed to underwrite a $1.3 billion loan to help finance the deal. Newmont shares traded up 2.2% to $45.82, and Miramar is up 22.7% to $6.32 in late morning trading Tuesday.
Sources: MarketWatch, Bloomberg
Commentary: Newmont Mining to Shutter Merchant Banking Business, Eliminate Gold HedgeLook Who's Benefiting From Record-High Gold Prices
Stocks to watch: NEM, MNG, JPM, C. Competitors: AU, ABX. ETFs: GDX, XME
Earnings call transcript: Newmont Mining Q2 2007

FINANCIAL

Banks Under the Gun to Lure Buyers of Debt - WSJ

Despite the chilly atmosphere in the credit markets, banks have managed to sell $30 billion of loans for pending LBOs in recent weeks -- but they have another $280 billion to go, the Wall Street Journal reported Wednesday. Henny Sender wrote that the banks' success up to now is the product of their willingness to sell the loans at a loss-making discount, a strategy that could backfire in view of the huge remaining supply. Up to $100 billion in debt is due to come to market over the next month alone. If the banks fail to sell the loans quickly, they could be saddled with them for months -- a risky prospect if the economy slows down, and one that could create friction between the banks and the private equity firms whose deals they are financing. It could also ratchet up the chance of debt sales at fire-sale prices. The half-percentage-point cut in the fed funds rate helped the banks sell some debt in September, notably for Kohlberg Kravis Roberts's $26.4 billion buyout of First Data Corp. Citigroup and Credit Suisse sold $9.4 billion of loans for that deal, double what they had expected. One billion dollars of the debt for Carlyle's and Onex's $5.75 billion buyout of Allison Transmission also sold well. Both chunks of debt were sold at $0.96 on the dollar, leaving the banks with losses. Still, Sender noted, "moving any of the loans contributed to the impression of a market on the mend."
Sources: Wall Street Journal
Commentary: First Data's Loan Deal Oversubscribed - ReutersCapital Access And The First Data BuyoutFirst Data Corporation: Mega Bucks M&A Coping with Liquidity Meltdown
Stocks/ETFs to watch: C, CS, JPM. ETFs: KCE

HEALTHCARE/BIOTECH

Sanofi Shares Climb Amid Rumors of Pfizer Interest

Shares in French drugmaker sanofi-aventis are up 2.1% Tuesday amid ongoing speculation the company may be the target of a takeout bid by U.S. pharmaceutical giant Pfizer. Other rumors have Pfizer buying a large stake in sanofi from oil giant Total S.A. and cosmetics company L'Oreal, which jointly own about 23% of the company. In an Oct. 9 research note, Natixis analysts told clients: "The question (of a takeover), iconoclastic not long ago, is now being openly asked." They said Pfizer's future is at stake due to declining sales and very few products in the final development stage. "Sanofi-Aventis is the most plausible target for Pfizer." Acquiring sanofi, with its $117 billion market cap, would be a major deal for Pfizer, which itself boasts a $176 billion capitalization. "It would seem to make sense from a therapeutic perspective," Deutsche Bank's Mark Purcell commented. "The cardiovascular franchise would sit quite nicely with that of Pfizer and the CNS (central nervous system) business fits in with where Pfizer's research is trying to re-emerge. It makes sense -- but it's just a rumor at the moment and it would be a very large acquisition." Sanofi shares gained 1.8% on Monday.
Sources: MarketWatch, Reuters
Commentary: Bristol-Myers Shares Look Good Despite Analyst Skepticism -- BloombergSanofi-Aventis's Earnings Hurt by Generic Competition
Stocks/ETFs to watch: SNY, PFE, TOT

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Consumers and Banks are Stretched, When Will the Band Break?
Internet: BofA Ups Targets On GOOG, AMZN, EBAY
Hardware: Ingram Micro: Play IT Safe
Software: Eye on Guidance Software
Transport: Gotta Love the Boeing Backlog
Biotech: Accentia to Rise on Significant Developments
Gold: Yamana: It's Lonely on Top
Energy: Buy LDK Solar's Panic Selling Drop
Financial: Patient Thornburg Buyers Will Be Handsomely Rewarded
Asia: "Wu Li Re Xin" - Irrational Exuberance in Chinese
ETFs: Morningstar's Top 5 ETF Picks Up Close
Sound Money: Write a Legally Binding Contract
Jim Cramer: Latest stock picks
Transcripts: Aracruz Celulose S.A. Q3 2007Vasogen F3Q07Alcoa Q3 2007Innovo Group F3Q07CardioDynamics Q3 2007Cantel Medical F4Q07Yum! Brands F3Q07Oxford Industries F1Q08LG Philips LCD F3Q07
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