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.


U.S. Trade Deficit Shrinks

The Commerce Department said Thursday the trade deficit narrowed in August, as exports increased for the sixth month in a row. The deficit dropped 2.4% to $57.6 billion from a revised $59 billion in July. The number beat economists' estimates of $59 billion. A weak dollar and a general increase in demand for U.S. goods were the main reasons for the smallest trade gap since January. The continuation of this demand is extremely important as most believe the housing slump has not bottomed, and could still pull the U.S. economy into a recession. "Strong global demand is going to be a very important source for U.S. economic growth," said Meny Grauman, an economist at Scotia Capital. "We see ongoing strength in exports and ongoing softness on the domestic side." Prices of goods imported by the U.S. were up 1%, but if oil was excluded, prices actually fell 0.2%, the largest drop since October 2006. Also, the trade deficit with China, the U.S.'s second largest trading partner behind Canada, decreased 5.4%, as American companies sent a record $5.9 billion worth of goods to China in August.

Foreclosures Double Nationally; Countrywide Mortgage Fundings Drop 44%

Home foreclosures increased 99% nationally in September, on an annualized basis, according to RealtyTrac, which tracks real estate trends across the U.S. Banks and mortgage lenders filed 223,538 repossession notices last month, or about one in every 557 households, an 8% drop from August's figure, which marked a 32-month high in foreclosures. Hardest hit were subprime borrowers, who found it difficult to make adjustable-rate mortgage payments. The foreclosures are making the U.S. housing slump worse, by flooding an already over-saturated market with even more units. In related news, the U.S.'s top private mortgage initiator, Countrywide Financial Corp., reported foreclosures in September doubled while late payments increased as well. Countrywide reported its total portfolio of mortgage loans fell 44% in September from a year earlier to just $21 billion. A report by Credit Suisse believes the company's foreclosure rate will probably double over the next two years. Countrywide shares fell 1.9% in composite trading Thursday and an additional 1.2% after hours; its shares are down 57% YTD.

Moody's Cuts Ratings on $33.4 Billion of Subprime Bonds

In its biggest downgrade yet, Moody's Investors Service announced Thursday it has lowered the ratings on $33.4 billion of securities because their underlying loans are deteriorating. Ratings were cut on 2,187 securities backed by subprime first-lien mortgages that were originated in 2006. Most of them were originally rated Ba, Baa or A. They represent 7.8% of the original dollar volume of the debt rated by Moody's. The agency has also placed another $23.8 billion of first-lien residential mortgage-backed securities on review, including 48 securities rated Aaa and another 529 rated Aa. "This asset class has taken a bullet in the head," said Christopher Whalen, an analyst for Institutional Risk Analytics. "The unfortunates who have this will not want to hold the paper any more. These bonds are going to trade like orphans." The downgrades coincided with an announcement by RealtyTrac that U.S. home foreclosures doubled to 223,538 in September from a year ago (full story). Moody's, Standard & Poor's and Fitch have all been criticized for granting high valuations to securities backed by subprime loans; Moody's chief rating executive Ray McDaniel Thursday told the Financial Times the company could issue new rating measures for illiquid securities by year-end. Moody's' shares closed off 3.4% at $49.16.

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Oracle Makes $17/Share Bid for BEA Systems

Oracle Corp. said early Friday it has proposed to buy BEA Systems Inc. for $17/share, a 25% premium over BEA's Thursday close of $13.62. The proposal was made in a letter sent to BEA's board on October 9. "The acquisition of BEA by Oracle will enable an increase in engineering resources that will in-turn accelerate the development of our world-class suite of middleware. Both Oracle and BEA customers will benefit from this increase in engineering investment as they migrate to modern SOA technologies," the company said in a press release. Activist investor Carl Icahn has been building a stake in BEA; in an Oct. 5 SEC filing he disclosed an 13.2% stake (52M shares including underlying call options) in the company, up from an 11% stake disclosed in on Oct. 3. A previous filing said Icahn believes a sale of the company to a strategic acquirer will maximize the price of the shares. Icahn said he was seeking talks with management to discuss possibilities of a deal, and that he may seek to nominate members for election to the company's board.

EA Acquires Game Studios for $775M, Expects Q2 Beat

Electronic Arts announced Thursday it has agreed to acquire VG Holdings Corp., parent of video game studios BioWare and Pandemic, for $620M in cash and up to $155M in stock in order to retain key VG Holding employees. EA CEO John Riccitiello was involved in combining the two game studios in a $300M deal less than two years ago when he was a partner at private equity firm Elevation Partners. EA expects the deal to close in January. The studios are seen bolstering EA's competitiveness in action, adventure and role-playing games. EA said the acquisition is expected to be dilutive to fiscal 2008 EPS on a GAAP basis by $0.30 to $0.40, or by $0.05 on a non-GAAP basis. On a conference call, EA CFO Warren Jenson said the company "will be excess of our guidance" for fiscal Q2, in which it expects a net loss of $0.76 to $0.92 (+$0.10 to $0.20 on an adjusted basis), on sales of $825M to $910M. Citigroup resumed coverage of EA on Thursday, rating the stock "1H" (buy/high risk) with a price target of $75.00. Citi called EA's acquisition a "strategic strike." Shares of Electronic Arts fell 2.0% on Thursday along with the broader market's afternoon reversal, but rallied 1.4% to $59.50 in extended activity.

Sony Ericsson Posts Lower Profits, Beats Estimates

Mobile phone maker Sony Ericsson posted lower profits in its third-quarter report Thursday, but managed to beat analysts' profit estimates. The joint venture between Sony and Ericsson made a pretax profit of €384 million, down 10.0% from last year's €427 million. Sales increased 6.7% to €3.11 billion from a year ago. The company easily beat analysts' forecasts of profits of €358 million, but fell short of their €3.29 billion sales target. The company said the average selling price of its mobile phones dropped to €120, down from €147 last year. The discounts did lead to a 31% increase in units shipped, approximately what forecasters had expected. The company began moving from high-end phones to manufacturing simpler phones to compete in emerging markets. "Sony Ericsson's operating mode is to broaden its portfolio," said Per Lindberg, an analyst at Dresdner Bank. "They aim to be a fully fledged partner to operators and capture the growth prospects in markets like India, Africa. There is no inconsistency in their strategy." Shares of Sony fell 1.67% to $48.29, while its partner Ericsson's shares increased 1.1% to $40.80 Thursday.


Limelight Networks Jumps on Improved Outlook

Internet content delivery company Limelight Networks' shares jumped nearly 10% in extended trading Thursday after the company said Q3 revenue and net loss will be better than its previous outlook. Limelight now expects Q3 sales of $28.6-29.1 million, vs. an August forecast of $27-28 million. Analysts were expecting revenue of $26.3 million, according to Reuters. The company also said its net loss would be "improved" from previous guidance of -$0.04 to -$0.06 a share. Limelight, which competes with companies like Akamai Technologies, said 175 new customers over the quarter brings its total customer base to over 1,000. Limelight also said it will restate its 2006 financial statements as well as for the quarters ended March 31 and June 30, 2007: a correction of its stock options accounting resulted in another $100,000 in 2006 expenses and a drop in 2007 expenses, while collecting payment from a previously underbilled customer led to a $900,000 revenue increase in 2006. In a note to clients, Jefferies & Co. expressed some concern over the company's quick build in customers: "While high level of customer adds are a good indication Limelight's salesforce is scaling, new customers typically carry a lower ARPC (average revenue per customer), albeit at a higher gross margin... Limelight's decreasing ARPC indicates that there are few new customers of size and that industrywide price pressure continues. A derivative rally in Akamai today could be short-lived," it said.


Coldwater Creek Sinks on H2 Warning

Shares of women's clothing retailer Coldwater Creek plunged 16% to $9.10 in AH trading Thursday after the company said H2 sales and income will be below forecasts. The company is now expecting a loss per share of $0.11-0.13 for Q3, a steep drop from its $0.34 profit forecast in August, on revenue of $260-265 million. Analysts had forecast EPS of $0.14 on revenue of $300.2 million. For Q4, Coldwater Creek is estimating break-even earnings on sales of $360-$365 million, well shy of analysts' prior expectations of $0.20 EPS on sales of $425.3 million. For H2, the company forecasts revenue of $620-630 million and a loss per share of $0.10-0.12. "We are clearly disappointed in the current business trends, including continued lower customer traffic," said President Daniel Griesemer, who will replace retiring Dennis Pence as CEO. On August 30, Coldwater Creek's shares fell 26%, their steepest drop in six years, after Q2 net income missed expectations. The company has authorized a buyback of up to $75 million worth of shares.

Avon OKs $2B Share Repurchase

Avon Products Inc. said late Thursday its board authorized a $2 billion share buyback over a five-year period once it completes its current buyback. The company has repurchased 26 million shares for $904 million under its current program. The company has about 433 million shares outstanding. "Today's announcement is indicative of the long-term health of our business and our ongoing commitment to enhance shareholders' return on their investment in Avon," CEO Andrea Jung said (see Q2 earnings call transcript). Citigroup analysts say the announcement reaffirms its belief that AVP will deliver a happier "Hello Tomorrow": "With roughly $900 million in cash, and our expectation for operating cash flow of over $800 million in 2007, today’s announcement reinforces our belief that AVP’s business is performing well; and, despite AVP’s significant investment spending, AVP can both drive top-line growth and return value to shareholders." It told clients in an OCt. 11 research note buying shares is Avon's best bet, giving the difficulty it has in finding fairly-priced synergistic acquisitions. Citi has a $47 target on the $37.50 stock.


Sallie Mae Posts Q3 Loss, Blackstone Shows Interest

Sallie Mae reported a third-quarter loss and missed estimates Thursday, days after filing a lawsuit against the companies that had agreed to buy the student lender earlier in the summer and subsequently backed out. SLM's net loss was $344 million ($-0.85/share) compared to a net income of $263 million ($0.63/share) last year. Core earnings, excluding some items, were $0.70/share, missing analysts' targets of $0.73/share. Chairman Albert Lord was not shy about the disputed buyout's effect on the company: "It's clear that the deal distractions are significant. They've cost us earnings momentum," he said. He insisted that Sallie was "not trying to play poker," and was trying to sell the company, but said that the buyers wanted "to pay the wholesale price, not the retail price." Lord also mentioned that other groups had shown interest in the lender (earnings call transcript). Though he did not mention any specifics, the New York Times reports that the Blackstone Group has expressed interest in Sallie Mae. Shares of SLM finished up 0.37% to $48.81 Thursday.


Wyeth's Prempro Caused Cancer, Jury Finds; Awards $134 Million in Damages

A Nevada jury has awarded $134.5 million in compensatory damages to three women who say their breast cancer was caused by Prempro and Premarin, hormone-replacement treatments manufactered by Wyeth. Punitive damages have yet to be determined. The jury found Wyeth negligent and guilty of malice and fraud. The award, which is to be divided roughly equally among the three plaintiffs, is far greater than any granted in similar suits against the company. The suit is one of about 5,300 hormone-replacement cases filed against Wyeth on behalf of 7,900 plaintiffs, and the seventh to be concluded since trials began last year. Of the other six, two verdicts favoring plaintiffs were thrown out and a third was overturned in Wyeth's favor. No plaintiff had been awarded damages exceeding $3 million. In 2002, an NIH-sponsored study suggested that Wyeth's hormone-replacement therapies increased women's chance of breast cancer by 24%. Wyeth did not withdraw the drugs, instead adding a warning to labels and information sheets. The drugs generated $1 billion in revenue in 2006. Deutsche Bank drug analyst Barbara Ryan said the Prempro cases are harder to prove than the "fen-phen" diet-drug cases previously brought against Wyeth. Still, as Seton Hall law professor Howard Erichson pointed out, "With thousands of cases remaining to be tried, it's a scary thing to know that juries don't like your argument." Shares were down 0.8% to $45.78 in Thursday trading.


Stocks Fall on ECB's Warning of Inflation Risk

European Central Bank governing council member Axel Weber warned the ECB may need to become more "restrictive" in its monetary policy in order to keep inflation under control. In a speech late Thursday, Mr. Weber warned "if risks to price stability are threatening to materialize" the ECB "can't lose sight of its primary mandate." Mr. Weber placed priority on price stability even if it means having to sacrifice the "robust economy." The ECB's inflation target is 2.0%, which was eclipsed for the first time in a year in September. Mr. Webber said price increases "are taking place on a broad front and are no longer only attributable to energy and food prices." Mr. Weber also serves as head of Germany's central bank and president of the Deutsche Bundesbank. His comments are partially blamed for the sudden reversal in early afternoon trading in U.S. stocks (full story). Regarding the overall EU economy, Mr. Weber said the outlook remains "favorable" and financial market volatility will increase risks, but "won't make a sustained dent in growth."

Sources: Associated Press, Bloomberg
Commentary: Thursday Was Reversal DayECB, BOE Hold Rates
Stocks to watch: EZU, VGK, FEZ, FXE, DBV, QQQQ, DIA, SPY

Buffett's PetroChina Sale Out May Signal Anxiety Over Chinese Bubble - WSJ

Analysts say it is likely Warren Buffett's company, Berkshire Hathaway, has already sold off its entire position in oil explorer and producer PetroChina, a move that has some Buffett followers speculating the investment giant may feel the Chinese market's recent upside explosion may be getting long in the tooth, the Wall Street Journal reports. "There are a lot of people paying attention to what he is doing and watching the trajectory of his move," says Andrew Foster, director of research at Matthews China Fund. "As investors, we're all wrestling with the fact that it's difficult to justify current valuations in China, even though there has been a lot of fundamental, macroeconomic progress there." This week Berkshire reported it has sold more than 70% of its original 11% stake in the company, which would today be worth $4.7 billion. "There is a lot of euphoria and blue sky in the valuations, with very little worry over downside risk," said Aberdeen's Devan Kaloo. "We've been taking some money off the table, and it looks like old Warren's been doing the same." Others, such as Templeton's Mark Mobius, says PetroChina is still a bargain at just 8x estimated five-year earnings. Buffett's divestiture may reflect ethical qualms with PetroChina's parent company's investments in Sudan, the profits of which are used to fund Khartoum killings, and not a distaste for the Chinese economy. Bulls say Beijing will eventually allow oil to move towards global prices, giving the company an even bigger earnings boost.


U.S. Market: Thursday Was Reversal Day
Housing: Housing Meltdown: There's No Time For Sorrows
Internet: Google vs. Microsoft: Call It A Draw
Software: The Salesforce.com Bubble is Ready to Burst
Media: Radiohead Sounds Death Knell For Warner Music
Biotech: 3 Positives From Vanda's Conference Call
Retail: Time to Sell the Consumer Discretionary Sector
Transport: Ocean Power Tech.: Ride the Marine Energy Wave
Energy: CNOOC Limited: Future Oil Supermajor
Financial: What Is Citi's Chuck Prince Doing?!
Asia: China Rebalancing ETF Pair Trade
ETFs: Choosing the Best Large Cap ETF For Your Money
Options: Thursday's Options Report: Ford, GM, Google, GlobalSantaFe, Wal-Mart, NRG
Small-Caps: T-3 Energy Services: Gushing Profits
Jim Cramer: Latest stock picks
Transcripts: Audiovox F2Q08Safeway Q3 2007PepsiCo Q3 2007Sallie Mae Q3 2007Infosys Technologies Ltd. Q2 FY08Fastenal Company Q3 2007
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