Wall St. Breakfast's Pre-Market Snapshot:
U.S. Futures As of 9:05 AM ET
S&P 500: -10.00; 1,495.75
NASDAQ 100: -13.00; 2,136.75
Dow: -97; 13,463
NIKKEI 225: -2.24%; 16,438.47 (-375.90)
HANG SENG: -3.70%; 28,373.63 (-1,091.42)
SHANGHAI SE COMPOSITE: -2.59%; 5,667.33 (-150.72)
BSE SENSEX 30: +0.31%; 17,613.99 (+54.01)
FTSE 100: -1.27%; 6,444.70 (-83.20)
CAC 40: -1.39%; 5,660.74 (-79.74)
XETRA-DAX: -1.13%; 7,795.30 (-88.82)
Commodity Futures (Reuters/Jefferies CRB)
Oil: -1.68%; $87.11 (-$1.49)
Gold: -1.99%; $753.10 (-$15.30)
Natural Gas: -1.75%; $6.92 (-$0.12)
Silver: -1.50%; $13.43 (-$0.205)
U.S. Breaking Newssee today's Wall Street Breakfast for earlier news
Strong Sales Power Merck Past Estimates
Pharma giant Merck & Co. saw its Q3 earnings climb 62%, topping consensus analyst estimates, and sending its shares higher in pre-market trading. Net income was $1.53 billion, good for EPS of $0.70, versus EPS of $0.43 a year earlier. (Merck took a $598 million one-time charge a year ago for Vioxx-related legal expenses.) Excluding one-time restructuring costs, EPS was $0.75 - well above Wall Street's predictions of $0.69 a share. Sales were 12% higher, at $6.07 billion - above consensus estimates of $6.03 billion. Its recent strong performance caused Merck to raise its FY 2007 EPS guidance to between $2.87 and $2.93 a share. The company credited accelerating sales in drugs Singulair, Januvia, Gardasil, Varivax, Vytorin and Zetia, as well as its global restructuring program for its better-than-expected results. The company spent $1.4 billion on research and development in the quarter - a 52% rise over the prior-year quarter's R&D expenses. Looking up the pipeline, CEO Richard Clark said Merck was "very pleased to gain FDA approval of our groundbreaking HIV treatment, Isentress. The approval of this novel HIV integrase inhibitor further underscores the Company's ongoing commitment to developing truly innovative new medicines to meet unmet medical needs." (check back later for MRK's latest earnings call transcript)
Commentary: The Merck Lesson: Watch For Companies On The Ropes • More Big Pharma Layoffs: What This May Mean • Cramer on MRK
Stocks to watch: MRK. Competitors: BMY, PFE, SNY. ETFs: PPH, PRFH, XLV
Earnings call transcript: Merck & Co. Q2 2007 Earnings Call Transcript
Schering-Plough's Q3 Net Doubles, But Falls Short of Estimates
Schering-Plough reported a more than doubling of third-quarter net income to $750 million, or $0.45/share, but adjusted EPS (ex-acquisition related items and an upfront R&D expense) of $0.28 was two cents short of analysts' average estimate. Sales growth of 9.2% to $2.81B also missed analyst expectations of $2.87B. However, sales would have totaled $3.5B (+12% y/y) if Schering-Plough included sales of Vytorin and Zetia, which are sold jointly with Merck and accounted for under the equity method. Total sales of Vytorin and Zetia climbed 26% to $1.3B. In a statement, CEO Fred Hassan commented, "Our (long-term) strategy to grow the top line, exercise financial discipline and expand our R&D pipeline again delivered strong results" (full earnings call transcript later today). Schering-Plough is currently in the process of acquiring Akzo Nobel NV's Organon unit (pending U.S. antitrust approval) for $14.4B and expects to complete the transaction by year's end. The Organon unit is one of the world's largest makers of birth control pills and is viewed by management as a way to diversify the company's revenue sources. Schering-Plough lost 0.7% to $32.71 on Friday and was last down 1.4% to $32.25 in thin pre-market trading Monday.
Commentary: Are Pharmaceutical Companies Investable? • S&P 500 Stocks With the Highest Estimated Growth Rates • Jim Cramer's Take on SGP
Stocks to watch: SGP, MRK. Competitors: GSK, JNJ, SNY. ETFs: PPH, XPH, IHE, XLV
Kimberly Clark Beats Estimates on Strong International Sales
Shares of health and hygiene product manufacturer Kimberly Clark were up 2% Monday after the company said its Q3 net income jumped 24.4% on a 9.7% revenue gain, driven by strong international sales and corporate cost reductions. Earnings for the quarter were $453.1 million on sales of $4.62 billion, up from $364.2 million on sales of $4.21 billion a year ago. Excluding one-time charges, Kimberly earned $1.07/share, just ahead of the $1.06/share on revenue of $4.52 billion consensus analyst estimate. For the coming quarter, the firm gave EPS guidance of $1.09-1.11. On the year, it now forecasts EPS of $4.23 to $4.25, up from a previous forecast of $4.20 to $4.25. Analysts had been looking for Q4 EPS of $1.12 and full-year EPS of $4.25. "We're focused on driving our targeted growth initiatives and continually improving our capabilities and cost effectiveness," CEO Thomas Falk said in a statement (full earnings call transcript later today). Personal care sales were up 12%, tissue products gained 10.5%, while sales of healthcare products fell 5.2% after the company exited the latex glove business in late 2006. "They've done a good job at managing their margins," Bernstein analyst Ali Dibadj said Monday in a Bloomberg interview. Shares are down 1.2% YTD and 0.4% over the past year.
Commentary: Kimberly-Clark: Challenging Another Rate Cut • Kimberly-Clark Corporation is Still Over-Valued
Stocks to watch: KMB. Competitors: JNJ, PG. ETFs: UGE, IYK
Earnings call transcript: Kimberly-Clark Q2 2007
Royal Caribbean Beats and Raises Despite Record Oil Prices
Royal Caribbean Cruises reported before Monday's market open that third-quarter net income increased 14% to $395 million, or $1.84/share, beating analyst expectations of $1.77/share. Revenues climbed 19% to $1.95B, also exceeding analyst estimates of $1.79B. Royal Caribbean offered EPS guidance of $0.32 to $0.37 for Q4 and $2.80 to $2.85 for the full-year. Analysts on average were expecting $0.34/share and $2.76/share, respectively. Royal Caribbean credited its better-than-expected Q3 earnings to "stronger late bookings." Royal Caribbean also benefited from 14% higher capacity in Q3 and a 4.1% increase in net yields, reflecting higher average pricing. CEO Richard Fain commented, "It was a very encouraging finish for the quarter and augurs well for upcoming periods. It is very satisfying that, despite higher fuel prices and other challenges, we produced record results." Shares of Royal Caribbean Cruises were last up 2.7% to $40.30 in thin pre-market trading. Royal Caribbean lost 1.6% on Friday to $39.25.
Commentary: Royal Caribbean, Carnival: Deals on the Open Sea • Royal Caribbean Blames Fuel Costs For Soft Earnings, Guidance • Royal Caribbean Cruises: Compelling Valuation, Attractive Entry Point
Stocks to watch: RCL. Competitors: CCL, DIS
Related: Carnival, Royal Caribbean on Comeback as Dollar Hedge -- Bloomberg
Ceridian Reports Fall in Profits and Planned Debt Sale
Payroll processing company Ceridian Corp. announced Monday profits dropped 10% in the third quarter, after the company paid severance and proxy-related charges connected to its agreement to be bought out for $5.2 billion. Ceridian is expected to be acquired later this quarter for $36/share by private equity firm Thomas H. Lee Partners and Fidelity National Financial (full story). For the quarter, Ceridian's net income slumped to $41 million ($0.28/share) compared to $45.6 million ($0.32/share) last year. Excluding one-time charges, the company made $0.31/share, in-line with analysts' estimates. Revenues climbed 7% to $412.4 million, slightly missing forecasters' targets of $412.9 million. The company also announced it will offer $1.3 billion in notes in connection to the acquisition. The debt sale is dependent on the closing of the merger, and proceeds from the offering will go to pay for expenses and fees related to the merger. Shares of Ceridian ended Friday down 0.42% to $35.45.
Commentary: Activist Shareholder Bill Ackman to Oppose Ceridian Buyout, Find Higher Bidder -- WSJ • Ceridian Corporation Awaits Pershing 'Approval'
Stocks to watch: CEN, FNF. Competitors: ADP, PAYX. ETFs: VFH
Harman Settles for $400M Investment In Lieu of Cancelled Buyout
Kohlberg Kravis Roberts & Co. and Goldman Sachs Group, after calling off their planned $8 billion takeover of high-fidelity audio manufacturer Harman Industries (full story), said Monday they would instead buy $400 million of the company's debt, which Harman will use to fund a share buyback. As part of the agreement, KKR and Goldman will be absolved of the $225 termination fee the deal carried. The cancelled LBO is one of many deals that soured after buyers found themselves unable or unwilling to foot what they would come to perceive as inflated prices in the face of a deflated credit market. In another high-profile case, J.C. Flowers, JP Morgan and Bank of America are being sued by student lender SLM Corp. after reneging on their $25 billion buyout deal (full story). The cordial Harman settlement indicates some corporate boards are taking a more realistic view of current buyout conditions: "There were no positive outcomes here," one person involved in the Harman talks told the Wall Street Journal. "The bottom line is what do you want to do to make shareholders the most amount of money over time?" Sources told the Journal Harman executives didn't want to spend tens of millions in lawyers' fees, and were reluctant to put their business under public scrutiny. Harman shares are up 1.7% to $87.90 on the news; the company now carries a $5.6 billion market cap.
Commentary: Era of Bloated LBO Profits May Be Over - Barron's • Harman Buyout Shelved: Bleak Outlook for SLM Corp and First Data Deals
Stocks to watch: HAR, GS
Earnings call transcript: Harman F4Q07
Strong Sales Boost Halliburton Profits 19%
Halliburton Co. posted a 19% jump in third-quarter earnings as record oil prices led to increased exploration spending, resulting in large sales gains, especially in the Middle East and Asia where spending increased 41%. One analyst called the company's revenue growth of 26% outside North America and profit margins of 24% in the Eastern Hemisphere "phenomenal." The oilfield services company reported net income of $727M ($0.79/share) on revenue of $3.93B, up from $611M ($0.58/share) on revenue of $3.39B a year ago. Excluding a $0.15/share gain from the recognition of U.S. foreign tax credits, and a $0.02/share charge related to environmental matters, earnings were $0.66/share, topping the average analyst estimate of $0.64/share Also contributing to the higher earnings were 13% fewer shares outstanding than a year earlier; the company said it bought back 11M shares during the quarter at an average price of $33.71. Halliburton said it is still seeing strong demand for its services in U.S. land-based markets.
Commentary: Schlumberger, Halliburton Poised To Gain On Higher Oil Prices
Stocks to watch: HAL. Competitors: SLB. ETFs: OIH, PXJ, XES
Bear Stearns, Citic to Swap $1B Stakes (Update)
Bear Stearns and Chinese investment bank Citic Securities will each take a $1 billion stake in the other, they said Monday. Citic's $1 billion will get it a 6% equity stake in Bear; it also retains rights to take another 3.9% stake through public markets, giving it a maximum of 9.9%. Bear will get a 2% stake in Citic for its $1B, with options to buy another 5% over the next five years. The deal, the Wall Street Journal says, is a welcome bright spot in what has otherwise been an overcast year for Bear after two of its hedge funds collapsed (full story). The alliance includes "broad collaboration in the People's Republic of China," Bear Stearns said in a press release. "The companies will work together to develop new financial products and services to meet the evolving needs of the Chinese market." The two will also form a Hong Kong-based pan-Asian company to provide capital markets services in the region. "As the strategic alliance moves forward, it is envisioned that each company will have representation on the other's Board of Directors," they said. For Citic, it marks the increasing desire and ability of Chinese financial companies to participate in overseas markets. The deal comes despite Citic's Friday denial of any talks, and a promise made to Chinese regulators not to take a stake in the company for the next three months (full story). Year to date, Bear shares are down 28%, while Citic shares have more than tripled amid a booming Chinese stock market. Bear Stearns shares are down 0.3% to $116 in pre-market trading.
Commentary: Citic Not Considering Bear Stearns Stake • China's Citic Eyes Stake in Bear Stearns • Investment Banks: Not Dead Yet
Stocks to watch: BSC
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• Ecolab Inc. (NYSE:ECL) saw its Q3 profit rise 3% on strength in the U.S., Latin American and Asia. The cleaning products and services company brought in EPS of $0.46, vs. $0.45 a share a year earlier. Excluding one-time items, it earned $0.49 a share, in line with consensus analyst estimates. (source: Reuters)
• Toymaker Hasbro Inc. (NASDAQ:HAS) reported a 62% rise in profits on a tax gain and strong movie-related sales. EPS came in at $0.95, vs. $0.58 a year earlier. The latest quarter included a $0.17 a share tax gain, vs. a $0.09 a share expense in the prior-year period. Still, Hasbro topped consensus estimates, pulling in $0.78 a share on an adjusted basis, vs. the $0.71 analysts were looking for on average. Shares were up 3.8% in pre-market action on the news, as of 8:30 a.m. ET. (source: Wall Street Journal)
Today's Market (via Sam Collins, ChangeWave.com)
Recap of Last Week's Action
Friday saw blue chips being hit hard, as some of the stalwart names like 3M (NYSE:MMM), Caterpillar (NYSE:CAT) and Honeywell (NYSE:HON) plunged. Even McDonald's (NYSE:MCD), which reported a 27% gain for Q3, and Xerox (NYSE:XRX), which beat both sales and earnings estimates, fell hard. Financial stocks, like Wachovia (NASDAQ:WB) and Capital One Financial (NYSE:COF), both of which reported losses, got clipped as expected.
Some blamed the sell-off on a skittish public that was bombarded with stories of the 1987 crash. However, analysts seemed surprised by Caterpillar's and Honeywell's Q4 outlooks and especially prediction of a recession from James Owens, the CAT Chairman and CEO.
Owens' remarks are especially noteworthy since the company's products are considered a cross section of the U.S. economy. In his release Evans said, "We expect 2008 to be the sixth consecutive year of sales and revenue growth, despite a U.S. economy near to, or even in, recession." Evans made comments like this last month and the market seemed to shrug them off, but on Friday with the anniversary of the crash in people's minds and energy prices hitting new highs, his opinion seemed to carry more weight.
Despite the triple-digit drop, shares of Google (NASDAQ:GOOG) smashed into new high ground, up $5.09 at $644.71, after hitting $600 earlier in the week. GOOG opened strong after reporting earnings of $3.91 while Wall Street was looking for $3.78 after Thursday's close.
At the close on Friday, the Dow Jones Industrial Average lost 367 points, closing at 13,522. The S&P 500 was off 39 at 1,501, and the Nasdaq dropped by 74 points to close at 2,725. After averaging 1.3 billion shares for the last three weeks, volume picked up on the selling with the NYSE trading 1.8 billion shares and the Nasdaq crossing 2.4 billion. Breadth was decidedly negative with both exchanges at a 5-to-1 ratio of decliners versus advancers.
Friday's selling also put the week sharply into the minus column with the Dow Industrials down 4.1%, the S&P 500 off 3.9%, and the Nasdaq down 2.9%. Throughout the week, the blue chips seemed to be receiving the brunt of the selling.
Crude oil (November contract) traded over $90 a barrel for the first time last week and closed down 87 cents at $88.60 (a reversal) after making a high at $90.02. The Amex Energy SPDR (NYSEARCA:XLE) lost $3.54 and closed at $74.40 with the next support at $73.50. Gold (December contract) fell by 30 cents to $768.40, and the Gold/Silver Index [XAU] lost $3.40 to close at $173.90.
What the Markets Are Saying
Friday's sharp sell-off resulted not from Caterpillar's comments, nor the memories of the 1987 crash, nor even the price of oil.
Technically speaking, I've warned for several weeks that the sentiment and internal indicators have been very overbought and that the market was therefore in relatively weak hands and subject to irrational selling. Compounding the emotional aspect of Friday's action was options expiration, and recently calls have been the choice of action for the small trader -- and Friday was their fleecing day.
So, as expected, the S&P 500 has collapsed into the old April-to-July trading zone of 1,490 to 1,540 and may even trade below that zone for a short time and then stay there for a few weeks before exhausting the sellers. Volatility is now high, so we should expect a series of violent days. However, the intermediate and long-term trends are still bullish, so we should be on the alert for good values that corrections like this bring to the patient investor.
Today's Trading Landscape
Today look for earnings from Albemarle Corp, American Express, Apollo Group, Apple Inc., Astec Ind., Au Optronics, Berkely WR, Buckeye Industrial, Canadian National Ry, Check Point Software, Community Bancorp, NevCrane Co., DST Systems Inc., DelEagle Materials, Ecolab, Edwards Lifesciences Corp., Equifax, Everest Re Group, EXACT Sciences Corp., Forward Air Corp., Gentex, Halliburton Co. (read above), Hasbro, Hexcel Corp., NewHub Group, Kimberly Clark (read above), Liberty Property, Lincare Holdings, Merck (read above), Netflix, Ocwen Financial, Owens & Minor, NewPactiv Corp., Petmed Express, Plum Creek Timber Company, Pre Paid Legal Services, Regis, Royal Caribbean Cruises (read above), Sierra Bancorp, Synplicity, Taubman Centers, Telefonos De Mexico, Texas Instruments, Thomas & Betts, Total System Services, Veeco Instruments, Volterra Semiconductor, Waste Connections, Weatherford International, Zoran Corp. and many others. There are no significant economic reports due today.
European and Asian markets sold off sharply today in response to the U.S. market's decline. U.S. futures are lower this morning and commodities prices are sharply lower, but investors will be focusing on the large number of companies reporting Q3 earnings today, and positive earnings could result in a reversal of the recent selling. Bear Stearns (NYSE:BSC) (read above) and a Chinese investment bank are close to a partnership, and Schering Plough (SGP) (read above) missed earnings forecasts this morning by 2 cents.
Asian Headlines (via Bloomberg.com)
Asian Stocks Fall on Concern Global Growth to Slow; Toyota Motor, BHP Drop Asian stocks fell the most in two months after the Group of Seven industrialized nations said the global economy is slowing. U.S. stock futures dropped.
Yen Strengthens to Six-Week High as G-7 Shows Concern About Global Growth The yen rose against the 16 most actively traded currencies as global stocks slumped after the Group of Seven nations said near-record oil prices and a housing slowdown in the U.S. will curb global growth.
Wal-Mart Will Buy Remainder of Japanese Retailer Seiyu for $876 Million Wal-Mart Stores Inc., the world's biggest retailer, will pay as much as 100 billion yen ($876 million) to take full control of Seiyu Ltd. after a five-year investment failed to return the Japanese chain to profit.
Nanya Reports Second Straight Loss After Memory-Chip Prices Drop on Supply Nanya Technology Corp., Taiwan's second-biggest computer-memory chipmaker, posted a second straight quarterly loss after a glut pushed down prices.
Hong Kong Dollar Advances to Three-Year High on Speculation Peg May End The Hong Kong dollar touched its highest in more than three years on speculation the city will scrap the currency's 24-year link to the U.S. dollar.
European Headlines (via Bloomberg.com)
European Stocks Decline After G-7 Comments; BHP Billiton, Electrolux Drop European stocks fell after the Group of Seven finance ministers and central bankers said the rising cost of credit, record oil prices and the U.S. housing slump will sap economic growth.
Electrolux Says Lower U.S. Demand, Higher Costs Will Curb Earnings Growth Electrolux AB, the world's second- largest maker of household appliances, said lower U.S. demand and higher steel and plastic costs may hurt earnings growth this year.
ECB's Weber, Liebscher Say Rising Food, Oil Prices Will Fan Inflation Risk European Central Bank officials said food costs and record oil prices are fanning inflation pressures in the 13 euro nations, suggesting they may support further interest-rate increases.
Suedzucker May Buy Back Shares After Price Slides 20 Percent in 12 Months Suedzucker AG, the world's biggest sugar processor, may buy back shares because the price is too low, Chief Executive Officer Theo Spettmann said.
Macquarie Raises Techem Bid to $1.53 Billion, Wins Endorsement From Board Macquarie Bank Ltd. raised its bid for the shares in Techem AG it doesn't own by 18 percent to as much as 1.07 billion euros ($1.53 billion), winning backing from the board at Germany's biggest reader of utility meters.
EU Court May Scrap Law Protecting Volkswagen, Letting Porsche Gain Control The European Union's highest court will likely strike down Germany's so-called Volkswagen Law tomorrow, paving the way for Porsche AG to fully take over Europe's largest carmaker, analysts said.