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MACRO AND HOUSING

REITs Could Take Biggest Hit In Decade - Economists

American REITs are forecast to suffer their worst decline in almost ten years and could drop up to 20% within the next year, Bloomberg reported Thursday. Economists cited by the New York Times estimate that problems in the mortgage markets could ultimately cost financial firms and investors up to $400 billion. REIT stocks have outperformed the S&P 500 every year since 2000, but are expected to suffer as higher borrowing costs put the brakes on takeovers and slash property values. "REITs are overvalued by 25-40% relative to stocks and bonds, and cash flow yields are too low," said University of California economist Kenneth Rosen. Investors are steering clear of bonds backed by subprime and commercial mortgages, and their reluctance to lend is affecting the value of trusts that own commercial properties, apartment complexes, hotels, shopping centers and mortgages. The Bloomberg REIT Index has fallen 16.5% since the Blackstone Group bought Equity Office Properties Trust for $39 billion including debt. Bloomberg notes that the last time the Index sank more than 10% was in 1998, when investors were pouring money into Internet stocks. The only segment of the Index not to lose value this year is warehouse and industrial, which rose 11.5%. Public storage REITs suffered most with a 19% decline. "There is plenty more shakeout to go in the REIT market," said American Century Investments fund manager Jeffrey Tyler. "Property values are going to be under pressure, and by extension that will move to REITs."

Existing Home Sales Plummet

Existing home sales dropped more than economists forecasted in September, as continued problems in the mortgage market forced demand down and supply up. The National Association of Realtors Home reported home resales slid to an annual 5.04 million, an 8% decline from August, and well below economists' estimates of 5.25 million. Single family home sales fell to their lowest levels in 10 years. Inventories rose 0.4% in September to a 10.5 month supply. "The credit freeze in August definitely impacted sales in September, particularly the jumbo [loan] side, so we have seen a large sales decline in the upper end of the market," NAR senior economist Lawrence Yun said. "The good news is that mortgage availability has markedly improved in recent weeks with interest rates on jumbo loans falling." The median existing-home price fell 4.2% to $211,700 in September, down from $220,900 a year ago; the drop follows three months of year-over-year stability. With such bleak figures, many expect the Fed to step in and offer some relief. Lehman Bros. now predicts the Fed will cut its overnight lending rate by a full percentage point to 3.75% by the middle of next year. "The housing crunch is accelerating; the Fed can't stand by and watch," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

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TECHNOLOGY

Sony's Game Division Losses More than Double

Sony reported a surge in fiscal second-quarter profit to ¥73.7 billion ($646M), or ¥70.1/share, after earning only ¥1.7B last year, due among other things to a ¥51.2B charge for a massive notebook PC battery recall. Despite the jump, earnings came up short of some analysts' estimates according to a Bloomberg survey. Group revenues rose 12% to ¥2.08T. Sony's earnings were mixed with wider-than-expected losses at its Games Division (-¥96.7B on +43% sales) and another operating loss for its LCD TV segment, offset by continued strength in digital and video cameras. Overall Electronics division sales rose 21%. Sony's CFO warned the company may miss its 2007 PlayStation 3 sales target of 11M consoles (with 5.6M sold through Sept.), while rival Nintendo continues to boost its target (full story). Sony's Pictures division returned to profitability with operating earnings of ¥2.7B, compared to a loss of ¥15.3B last year. Sony raised its full fiscal year operating profit forecast by 2% to ¥450B, citing one-off gains from the sale of real estate and shares of Sony Financial Holdings. Analysts expect ¥431.5B, according to Reuters Estimates. Sony's ordinary shares lost 1.35% to ¥5,110 ahead of its earnings release. Sony's ADRs lost 1.65% to $45.29 on Wednesday.

Nintendo Raises Forecast; FQ2 Mostly In-line

Nintendo posted a 34.5% increase in fiscal Q2 net income to ¥52.2 billion ($460M), as sales more than doubled to ¥354.36B. Results were mostly in-line with estimates and caused volatile late trading as investors initially took profits, but shares were bought back on the dip. Nintendo boosted its full fiscal year (ending March) profit outlook for a second time, to ¥275B ($2.4B), or +58% y/y, from a previous forecast of ¥245B in July. Analysts had been expecting ¥273.4B on average, according to a Bloomberg survey. Nintendo also raised its sales guidance to ¥1.55T, +60% y/y, compared to its prior forecast of ¥1.4T and analysts' average estimate of ¥1.48T. Operating profit is seen rising 86% y/y to ¥420B, or 14% above its earlier forecast. Nintendo said it sold 7.33 million Wii units and 13.35 million (+32% y/y) DS handheld units during its fiscal first-half. It now expects full fiscal year unit sales of 17.5M and 28M units, respectively, versus its prior projection of 16.5M and 26M units. Nintendo hiked its full year dividend to ¥1,090/share, from ¥960/share last year. The company revised its forex outlook to ¥115/$1 and ¥160/€1, from ¥118/$1 and ¥155/€1. Nintendo's ordinary shares fell 3.5% to ¥66,400, reversing earlier gains, ahead of its earnings release. Nintendo's ADRs climbed 6.3% to $74.90 on Wednesday.

VMware Profit Triples, Stock Continues to Climb

VMware reported a huge jump in profits and its first earnings beat after the bell Wednesday. The company, whose stock price has tripled since going public two months ago, posted a profit of $65 million ($0.18/share) after earning $19.2 million ($0.06/share) last year. Excluding charges and one-time expenses, VMware earned $0.23/share. Revenue surged as well, jumping to $358 million from $189 million a year ago. The company beat forecasts of $0.17/share on $334 million in revenue. "We had solid growth during our first quarter as a public company," said CFO Mark Peek. "In particular, we were pleased with our ability to grow operating income while continuing to invest in the business, increase our footprint in the market, develop new products, and meet the high expectations of our customers and partners," (full earnings call transcript later today). The company was spun-off from EMC, which still retains a 86% stake in the virtualization software developer. Shares of the VMware traded down 2.5% Wednesday, but moved up 4.6% to $111.0 in after-hours trading.

Ericsson Net Drops 36% on Falling Margins; CFO Resigns

Swedish telecom equipment maker LM Ericsson reported a 36% drop in net earnings Thursday, having warned investors last week (full story), and said CFO Karl-Henrik Sundstroem would step down immediately, to be replaced by Hans Vestberg. Shares plummeted almost 30% last week on the warning. Q3 profit was 3.97 billion kronor ($614.6 million), vs. 6.23 billion a year ago. The drop, the company said, was largely due to weak sales in high-margin software, and greater sales in its low-margin network rollouts. Revenue rose 5.5% to 43.55 billion kronor, while operating profit fell 36% to 5.64 billion kronor. CEO Carl-Henric Svanberg remarked about the company's dwindling margins: "Our networks business continues to develop most rapidly where new network build-outs and break-in contracts are predominant and pricing pressure is most intense. This has so far been offset by higher margin sales of software, expansions and upgrades to our installed base. While we expect such higher margin sales to gradually resume, new network build-outs will continue to weigh on networks [margins]," (full earnings call transcript later today). Shares are now flat over the past two years, after last week's warning knocked $15 billion off the company's market cap.

Symantec Cuts Q3 View on Economic Concerns

Symantec shares skidded 11% to $18.66 AH Wednesday after the maker of security software warned that third-quarter earnings would come in below forecasts, even as it posted second-quarter numbers that bested analysts' expectations. "While our first-half performance has been solid, exceeding our operating plan in both quarters, we have not met our planned new business targets," CEO John Thompson said on a conference call (full transcript). The cautiousness is due partly to worries about U.S. consumer spending given the housing and credit crisis. Against that backdrop, Symantec forecast third-quarter earnings of $0.25-$0.30/share, excluding items, on revenue of $1.41B-$1.45B; analysts had been expecting adjusted earnings of $0.31/share on revenue of $1.47B, on average. It expects third-quarter cash flow will be below the $454M reported a year earlier. Thomson continues to believe, however, that the company will meet its forecast for fiscal year earnings of $1.10-$1.15/share. Second-quarter earnings were $0.06/share, or $0.29 excluding items, on revenue of $1.42B, topping the average analyst forecast for earnings of $0.26/share and revenue of $1.39B.

Saifun Shareholder to Oppose Sale to Spansion

Israel-based Saifun Semiconductors will face stern opposition from key shareholders to its Oct. 8 agreement to be acquired by Spansion Inc., Globes Online reported, citing unnamed sources. In an interview with Globes Wednesday, Saifun CEO Dr. Boaz Eitan defended his decision to sell the company for what amounts to an 8.5% premium. "I'm not ashamed. It's not because we didn't try, not because we lost our way and got sidetracked by the money," Eitan said. But investor Efi Gildor, who owns a 4.8% stake in Saifun, Wednesday sent a letter to the company's directors in which he claims Saifun allowed itself to be taken out at a "major discount." Gilder says Eitan failed to meet his own target, and that the price "does not reflect the potential of Saifun’s intellectual property." Gilder payed $31.3 million for his Saifun stake in 2005 before the company's IPO. He stands to lose about $20 million of that based on the agreed-upon price. Saifun's NROM non-volatile memory enables high-density applications on devices such as mobile phones, digital cameras and USB drives.

INTERNET

Microsoft to Take $240M Facebook Stake, Become Exclusive Ad Platform

Microsoft will take a $240 million minority stake in Facebook's next round of financing, at a $15 billion valuation. The companies will also expand their existing advertising partnership, which will see Microsoft becoming Facebook's exclusive third-party advertising platform. Microsoft, which already sells banner ads for Facebook in the U.S., will now sell Facebook ads internationally as Facebook expands to include foreign language social-networks. Facebook is expected to earn $30 million this year, on revenue of $150 million, the Wall Street Journal says, quoting unnamed sources. Facebook, which boasts more than 49 million active users, and registers a quarter million new users a day, 59% of which are currently outside the U.S., is seen as the next big venue for online ads, especially since most of its users are in the young age group advertisers covet. Microsoft has built up a formidable online advertising sales force in recent years, a factor that will allow Facebook to shift the burden of ad selling to its better-equipped partner.Earlier, the New York Post and Wall Street Journal reported the stake was the subject of a fierce battle between Microsoft and internet giant Google (full story). $240 million gives Microsoft just a 1.6% stake in Facebook, far less than the 5-10% stake rumored. It also appears there will be no third-party financial partner, as had been rumored. Microsoft shares gained 1.1% in regular trading, and another 1.2% AH.

Akamai Earnings Jump 73%; Boosts Guidance

Akamai Technologies Q3 net rose 73% to $24.3 million ($0.13/share) from $14 million ($0.08/share), matching analyst consensus estimates, the web content delivery said late Wednesday. It raised its full-year revenue forecast to $625-629 million, from a previous $615-625 million. Shares, which fell 4.2% to close at $32.97 on fears over weak results, partially recovered to $33.54 after the company boosted its guidance. Revenue jumped 45% to $161.2 million from $111.5 million, matching estimates. Gross margin fell 1% to 73%, while adjusted Ebitda margin was up 2% points q/q to 45%. The company said the discrepancy was a result of big media deals that demanded a lower price, but helped it boost its bottom line. "What we've seen is some contraction of gross margins, which we expected, and an expansion of the bottom line," CEO Paul Sagan said in an interview (full earnings call transcript). Akamai shares are down 28.6% from a year ago as investors worry about growing competition from Limelight Networks and some smaller web content delivery startups. "I think the numbers were good. I think the market's getting more comfortable with the company's strategy," said Merriman analyst Colby Synesael.

Monster Beats Estimates, Boosts Share Buybacks

Monster Worldwide swung to a quarterly net profit of $33.3 million ($0.25/share) Wednesday, having lost $83.8 million ($0.64/share) last year when it took a loss on a unit sale. Revenue of $337 was up 25% from last year's $286 million, and just above analyst estimates of $336M. Adjusted earnings of $0.35/share beat analyst estimates by $0.02. Operating margin was up 2% to 21% q/q. Monster also boosted it share repurchase program by $100 million to $350 million. During the conference call, Monster said it is not seeing a carryover of U.S. economic weakness into international markets, and that it believes the global economy is more resilient with regard to a U.S. downturn than has been seen in previous cycles (full earnings call transcript later today). Monster said it holds $627 million in cash. "We believe our strong balance sheet will support the Company's growth opportunities as we work toward building long term sustainable value for our customers, shareholders and dedicated associates across the globe," CEO Sal Iannuzzi said in a press release. In a Barron's feature last weekend, editor Andrew Bary said many believe the company isn't getting ample credit for a shift in help-wanted ad revenue to the internet (full story). Monster shares jumped 5.35% in extended trading, having lost 3.1% during regular hours.

MEDIA

Cablevision Shareholders Reject $10.6B Takeover

Cablevision shareholders rejected the Dolan Family's $10.6 billion bid to take the company private on Tuesday. The Dolans needed the majority of shareholders unaffiliated with the family to approve the buyout for the deal to go through. The outcomes was not a huge surprise after two of the company's largest outside shareholders, ClearBridge Advisors and Gabelli Funds, spoke out against the deal last week (full story). CEO James Dolan said after the vote, "there is really nothing negative about today's outcome." He said he took the rejection as a "vote of confidence in the prospects of Cablevision, the company's management, its employees and the future of the cable industry." This was the third attempt by the Dolan Family to buy out the company. Cablevision's board did approve the $36.26/share buyout, but stipulated that the majority of shareholders not associated with the Dolan family also had to agree. With the credit crisis and increase in volatility hitting the market in the late summer, it looked like there was a chance for the deal to go through. However, today's meeting proved that shareholders either believe in the company's prospects or that they think the Dolan family will raise its bid. For now, the Dolans said they would not increase their bid and would never allow an outside company to acquire Cablevision. Shares of the company fell 2.7% after the vote was announced.

RETAIL

FTC Wants Whole Foods / Wild Oats Merger Reversed

In what appears to be a legal longshot, the FTC has filed a motion with a Washington appellate court asking it to review an August federal-district court ruling that allowed the $565 million Whole Food/Wild Oats merger. The agency opposes the merger on antitrust grounds, and argues that an appeal is still warranted, in part because the new company continues to operate Wild Oats stores separately. Earlier this month, Whole Foods filed a motion asking the appellate court to declare the case moot. "It will be very difficult for the FTC to get this decision reversed," said antitrust lawyer Paul Yde. The district-court judge's opinion "was very strong... I'm surprised they're still pushing." Whole Foods shares fell 0.7% Wednesday.

Anheuser-Busch Tops Estimates; Sees Strong FY Growth

Anheuser-Busch, maker of Budweiser beers, reported slightly higher earnings than Wall Street expected. Shares, which has been trading down 0.6% prior to the mid-day Wednesday announcement, reversed and closed higher by 0.62% in composite trading. Net income rose to $707 million in Q3, good for EPS of $0.95, versus $0.82 in the prior-year period. Net sales rose to $4.62 billion from $4.28 billion a year ago. Consensus analyst estimates were for EPS of $0.93 on net sales of $4.51 billion. The company reported U.S. beer sales rose 6.7% while operating cash flow before changes in working capital increased 16%. CFO W. Randolf Baker told analysts on the company's conference call, "We expect double-digit profit growth for our international beer operations." The company also said it expects its full year EPS growth to surpass its long-term growth expectations of 7%-10%. Along with earnings, the company announced a quarterly dividend of $0.33, in-line with its previous quarterly dividend, and a 10% increase over the prior-year quarterly payout (though the yield held steady). BUD shares are up 5.43% YTD, lagging top U.S. competitor Molson Coors, whose shares are up 43.35% in 2007.

ENERGY AND MATERIALS

Shell Tops Targets; Margins, Production Pressured

The steep rise in oil prices helped Europe's largest oil company, Royal Dutch Shell plc, to a better-than-expected 16% rise in profits. Shell's share price was little changed in London trading Thursday, as strong profits were offset by "satisfactory" refining margins, growing costs and lower production. Shell averaged $70.69/barrel during the quarter, versus $65.13 in the prior-year period. That contrasted with a 24% drop in adjusted profit at its refining unit. CEO Jeroen van der Veer believes that, "Given the weaker industry refining margins we have seen in the quarter, these are satisfactory results, underpinned by Shell's operating performance," (full earnings call transcript later today). Net income rose 16% to $6.92 billion, while revenue climbed 8% to $90.7 billion. Excluding certain items, Shell earned $6.13 billion, well above analyst estimates of $5.47 billion in operating income. Production dropped to 3.14 million barrels, a 4% decline from a year ago. Shell CFO Peter Voser said oil prices seemed to be being "driven by speculation" rather than by the current reality of ample global supply. Voser also said Shell is contemplating a project in Iran that would potentially incur U.S. sanctions against the company. The U.N. security council has passed sanctions against Iran for its refusal to cooperate with the its nuclear inspections. Iran's hard-line leader, Mahmoud Ahmadinejad, has repeatedly defied the world community, threatening to destroy Israel, while violently cracking down on opposition groups at home.

FINANCIAL

Bank of America Slashes 3,000 Jobs; Reviews Investment Bank

Bank of America announced Wednesday it will eliminate about 3,000 jobs and begin a strategic review of its investment banking unit, the profit of which plummeted 93% in Q3. The cuts will be mostly from that unit, which employs about 20,000 people, and will affect less than 2% of the bank's overall workforce. In a surprise move, CEO Ken Lewis is forcing out Gene Taylor, head of Global Corporate and Investment Banking and "a longtime ally and close friend," according to the WSJ. Taylor will be replaced by Brian Moynihan, who was head of the bank's Global Wealth and Investment Management business. Last Thursday, the bank reported a 32% drop in Q3 profit. Net income fell to $3.7 billion ($0.82/share) from $5.42 billion ($1.18) a year ago, and revenue was down 12% to $16.3 billion. The investment banking unit suffered approximately $4 billion in trading losses, defaults and writedowns over the quarter, attributed by Lewis in part to the roiling credit markets and in part to the bank's mistakes. "I've had all of the fun I can stand in investment banking at the moment," Lewis said after the report. "So to get bigger in it is not something I really want to do." "Ken Lewis was clearly disappointed by the performance and the bank's risk management," said KBW Inc. analyst Jefferson Harralson. "He is moving quickly to boost earnings for next year." The strategic review of the division is expected to be completed by early 2008.

HEALTHCARE/BIOTECH

Amgen Profits Skid on Charges

Amgen Inc. reported earnings of $201M ($0.18/share) for the third quarter, down 82% from the $1.1B ($0.94/share) profit posted a year ago, as sales of its Aranesp and Epogen anemia treatments, which account for some 40% of its revenue, dropped 23% and 5%, respectively. Sales of the two drugs have been pressured by tighter Medicare reimbursement restrictions, and the company has lost some $17B in market value since studies showed high doses of Epogen and Aranesp raised the risk of heart attack and death. "We were caught in an unexpected hurricane, and we are coming out of it," said CEO Kevin Sharer. Excluding charges, the company earned $1.08/share, topping analysts' average forecast of $1.03/share. Revenue at $3.6B also came in ahead of the $3.58B average analyst estimate. The biotech giant also increased the cost estimates for the restructuring announced in August, saying it now expects charges to total $775M-$850M, up from its previous forecast of $600M-$700M. Amgen already has taken $582M of those charges and expects to incur the rest in the fourth quarter, with some carrying over into 2008. It reiterated its outlook for earnings of $4.13-$4.23/share, excluding items, for 2007.

Sources: Press release, Wall Street Journal, Bloomberg, MarketWatch, Reuters
Commentary: Amgen Announces LayoffsFriday's Profit-Taking a Prelude to a Positive Earnings Week
Stocks to watch: AMGN. Competitors: BAX, JNJ, NVS. ETFs: IBB, BBE, PBE
Earnings call transcript: Amgen Q3 2007 Earnings

Lilly Suspends Two Trials of Blood-Thinner

Eli Lilly & Co. said late Wednesday it is suspending two trials of its prasugrel blood-thinner, which had been hoped to be the company's next blockbuster drug, to examine whether certain dosages may need to be changed. The small, Phase II studies are evaluating how well prasugrel works compared to Plavix, which is produced by Bristol-Myers Squibb and sanofi aventis, in stopping clotting in patients with coronary artery disease. "These amendments are strictly protocol-related and do not provide a basis for inferring overall outcomes of other prasugrel trials," Lilly said, noting that patient enrollment would resume once the protocols are amended and approved by institutional review boards. Late-stage clinical trial results are expected to be presented at the American Heart Association meeting November 4. Analysts, however, have speculated the results may be negative; earlier this week Cowen & Co. downgraded Lilly, predicting that prasugrel would be associated with statistically more bleeding than Plavix. Lilly is co-developing prasugrel with its Japanese inventor Daiichi Sankyo Co. and still plans to submit the drug for FDA approval by year-end, with an expected market debut as early as 2008. Analysts say Lilly shares could fall 10% if prasugrel doesn't beat Plavix. "The worst case is the failure to show superiority," said Natixis Bleichroeder analyst Jon LeCroy. "If it's a complete blow-up, we expect Lilly to drop to $50." Lilly shares fell 1.2% to $55.49 AH on the news, following a 1.7% drop in the regular trading session.

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