Fed Rate Cut No Shoe-In - WSJ
A widely-predicted Fed rate cut this week is not a shoe-in, and officials are not considering a half-point cut in the fed funds target rate, the Wall Street Journal said Tuesday. The article's author, Greg Ip, is thought to at times reflect views of senior central bankers. Ip said Fed officials see Wednesday's decision as a choice between a 0.25% to 4.5% to further stimulate weak housing and credit markets, or no cut at all. Perhaps the biggest challenge the Fed faces, he said, is dealing with the Street's certainty of a rate drop: "The current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology," Ip wrote. Currently, the implied probability of no change was 16%, according to data analyzed by the Cleveland Fed; the probability of a quarter-point cut was 72%, and of half-a-point cut, 10%. There has been little evidence that a weak housing market has spilled over into the broader economy, thus Fed officials "don't appear to have significantly altered their forecast of a return to moderate growth next year," Ip writes. Tokyo-based currency traders said the article helped push the dollar up slightly from near record lows against the euro in overseas trading, Reuters reported.
Commentary: Fed to Appease Markets With Another Rate Cut • Will the Fed Cut Rates Tomorrow? The Markets Think So • Bill Gross Expects a Rate Cut to 3.5%
Stocks to watch: SPY, DIA, AGG
Bill Gross: Fed Will Cut to 3.5%
In his Investment Outlook piece for Pacific Investment Management Co. [PIMCO]'s November newsletter, bond guru Bill Gross forecasts that the Fed will cut short-term interest rates to 3.5%. "An increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3 1/2% fed funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s," he writes. A few weeks ago, Gross said he expects the Fed to cut rates to 3.75% over the next 6-9 months. Bloomberg notes that futures traded on the Chicago Board of Trade put the odds of the Fed's lowering rates to 4.5% at its October 30-31 meeting at 98%. The odds of a rate cut to 4.25% at the Dec. 11 meeting are 69%. In the newsletter, Gross expresses skepticism about Treasury Secretary Henry Paulson's "Super-SIV" -- a consortium of banks that plans to buy at-risk securities to prevent their prices from going into freefall (full story). "Whether Paulson’s 'Committee to Save the World – Part II' will succeed like Bob Rubin’s original during the Long Term Capital crisis is debatable," he writes. "The idea...is counterproductive because it continues to hide subprime asset prices in the 'shadows.'"
Commentary: Bill Gross Wants A PIMCO Bailout • Housing to Hold Fed's Attention for Years, Pimco's Gross Says • Pimco Chief Bill Gross: 5-10% Correction May Be Ahead
ETFs to watch: SHY, IEF, TLT, TLH
Atheros Climbs on Strong Results, Bullish Outlook
Atheros Communications said late Monday its third-quarter profit jumped 50% amid strong demand for its networking chip products. The company reported earnings of $9.7M ($0.16/share) on revenue of $106.3M, up from $6.3M ($0.11/share) on revenue of $79.6M a year ago. Excluding items, earnings were $16.9M ($0.28/share) compared with $10.4M ($0.19/share) last year, and above the $0.26/share average analyst estimate. Looking ahead, the company said fourth-quarter results were being hurt by declining market share at one particular PC customer, but it was, nevertheless, bullish about its prospects for the period; it expects earnings of $0.30/share for the quarter on revenue of $113.7M, on expectations for sales growth in all its major business units, including the PC group. Analysts had been forecasting earnings of $0.28/share and revenue of $113.7M on average. The company also introduced the latest version of its ROCm Wi-Fi chip, which uses 70% less power than existing products. "We think this a tremendously competitive product, both for power-consumption, cost and form-factor reasons," said CEO Craig Barratt. Shares rose 7% to $32 AH building on a 5.2% gain in the regular trading session.
Commentary: Atheros' Growth May Be Its Downfall • Does Expected Sales Growth Justify the Inventory Buildup At the Semis?
Stocks to watch: ATHR. Competitors: BRCM, CNXT, INTC. ETFs: SMH, IGW
Earnings call transcript: Atheros Communications Q3 2007
Logitech Net Falls 76% on Impairment Charge
Shares of computer accessory maker Logitech International SA were down 3% in pre-market action after reporting its 2Q08 net income fell 76% on a one-time, $67.4 million impairment charge related to its short-term investment portfolio. The charge was within the range the company had previously warned investors about. The company announced it had sold 50% of its short-term portfolio, which it will record as a one-time gain of $33.7 million in its next quarter. The company reported net income of $11.6 million, good for EPS of $0.06, versus EPS of $0.26 a year ago. Consensus estimates had been for EPS of $0.37, excluding the one-time impairment charge. Sales climbed 19% to $595 million, besting the $556 million consensus analyst estimate. Revenue from Web cameras suffered, falling 27%.
Commentary: Analysts Anticipate Continued Good Times for Logitech • Why Logitech Is Making Us Nervous
Stocks to watch: LOGI.
Earnings call transcript: Logitech F2Q08 (Qtr End 9/30/07)
Sohu.com Surges on Beat and Raise
Chinese Internet company Sohu.com reported a 47% rise in Q3 profit on Monday and issued new Q4 guidance above Street expectations. The company's shares gained 7.2% to close at $53.53 prior to the announcement and added another 9.3% to $58.51 in AH trading following the report. Net income rose to $9.69 million ($0.25/share) from $6.6 million ($0.17) a year earlier (see full earnings call transcript). Revenue gained 46% to $51.5 million. Analysts were expecting earnings of $8.1 million on sales of $46.5 million. Sohu is projecting Q4 EPS excluding items at $0.33-0.35 on revenue of up to $55.5 million, ahead of prior analyst forecasts of $0.29 EPS on revenue of $48.9 million. Q3 online ad sales rose 32% to $31.5 million, while non-ad revenue was up 74% to $20 million. The martial arts game Tian Long Ba Bu, introduced in May, could post Q4 sales of $14 million, a 28% increase from Q3, according to CFO Carol Yu. "Sohu did a wonderful job in developing this game," said Pali Capital analyst Tian Hou. "If the game can continue to stimulate interest, it can be successful no matter how many other games are in the market." The government-sponsored Internet Society of China forecasts that sales in China's online game market could rise to 9 billion yuan ($1.2 billion) in 2008 from 7.2 billion yuan this year.
Commentary: Is Sohu.com Overvalued? • Chinese Tech Stock Weekly Summary
Stocks to watch: SOHU. Competitors: BIDU, SINA. ETFs: FXI, PGJ
Washington Post a Solid Defensive Media Stock - Deutsche Bank
In a note to clients Monday, Deutsche Bank upgraded shares of newspaper publisher Washington Post to Buy from Hold, calling it a "good value for [a] solid defensive media stock." Analysts say investors still value the company like a media property, despite the fact that its Kaplan educational division is now about 30% of the company. Post shares are up just 7.5% YTD, vs. a 60% gain in an index of 11 education stocks. "While we are concerned about print ad spending in The Washington Post and Newsweek, their two combined divisions but account for only 16% of Ebitda in 2008E (21% in 2007E)," the analysts wrote. The Post's largest non-family shareholder (it is controlled by the Graham family) is famed investor Warren Buffett, who owns a 30.9% stake. Shares closed up 2.1% to $818.60 Monday.
Commentary: The Economic Reality of Free Online Content • Newspapers' iPod Moment Has Arrived - Look Out Below
Stocks to watch: WPO, BRK.A. Competitors: NYT, SSP, BLC, TRB, DJ
Baugur Group Considers Joint Bid for Saks
The Baugur Group, an investment firm from Iceland, is considering making a joint bid for Saks Inc., according to an SEC filing made late Monday. Saks shares gained 9.2% to $21.60 in AH trading on the news. Baugur has had initial discussions with Indian retail billionaire Micky Jagtiani's Milestone Resources Group (also known as the Landmark Group of Dubai) about constructing a proposal. Baugur, which is run by Icelandic businessman Jo'n A'sgeir Jo'hannesson, owns British retailers House of Fraser and Karen Millen and has expressed interest in establishing a foothold in American retail. Baugur holds an 8.5% stake in Saks, and an investment group led by Jagtiani holds 1.2%. Mexican billionaire Carlos Slim holds 9% of the company. Shares of the company have risen more than 25% since September, when it was disclosed that Baugur had bulked up its stake. Earlier this month, the Times of London reported that Baugur was mulling a $3 billion offer for Saks. Saks has 54 stores in the U.S. including its flagship Fifth Avenue store in New York.
Commentary: Saks Q2 Loss Narrows, But Worse Than Expected, Sales Up 15% • Retail's Dismal Performance a Reason to Short on Any Bounce • Saks: The Revival is Worth Watching
Stocks to watch: SKS. ETFs: XLY, PEZ, VCR
Earnings call transcript: Saks Q2 2007
Office Depot Delays Q3 Earnings; Shares Plunge 14%
Shares of business retailer Office Depot plunged 14.1% Monday after the company said it would delay its Q3 earnings release, originally slated for Tuesday. Office Depot said the review, "relates principally to the timing of the recognition of certain vendor-program funds." Shares dropped drastically after one analyst said the delay raised question about the firm's financial statements: "While the scope and specific drivers of the issues are unclear, the presence of any investigation with the involvement of the board, suggests questions about the integrity of the company's financial statements and, as such, render the valuation process challenging," Goldman Sachs analyst Matthew Fassler wrote. While it's too early to assess if there were any "untoward" practices, Fassler said, he expects "high sensitivity to this issue given the significant margin expansion noted in the early portion of [CEO] Steve Odland's tenure." Lehman analyst Brad Thomas was less disturbed: "This often has been a one-time issue rather than something that impacts growth rate and cash flow," he wrote.
Commentary: Office Depot Is Cheap Relative To Peers Staples and OfficeMax • Office Depot's Dubious Analyst Call Program • Office Depot's Working Its Way Up - Barron's
Stocks to watch: ODP
Earnings call transcript: Office Depot Q2 2007
Applebee's Q3 Shy of Forecasts; Shareholder Vote on IHOP Deal
Applebee's International said it earned $15.8M ($0.21/share) on revenue of $323.7M in the third quarter, slightly higher than the $14.8M ($0.20/share) on revenue of $314.2M posted a year ago. Excluding items, the restaurant operator posted earnings of $18.8M ($0.25/share), short of the $0.26/share expected by analysts, on average. Revenue was in line with expectations. System-wide domestic comparable-store sales dropped 0.3% while company and domestic franchise restaurant comps fell 0.2% and 0.4%, respectively. The company said its preliminary comparable store sales for October decreased 1.1% reflecting a 2.5%-3% decline in guest traffic, combined with a higher average check. Applebee's is set to be acquired by IHOP; shareholders will vote on the $25.50/share deal today. If approved, the combined company would be the largest sit-down restaurant chain in terms of location with more than 3,200, but the outcome of the vote is uncertain as institutional holders haven't indicated their voting intentions. The deal calls for a fundamental change in APPB's business model to that of a franchisor (full story).
Commentary: IHOP to Acquire Applebee's for $2.1 Billion
Stocks to watch: APPB, IHP.Competitors: EAT, RT
TRANSPORT AND AEROSPACE
American Axle Jumps 9% on Upgrade to Aggressive Buy
Shares of American Axle & Manufacturing jumped 12% to $26.58 Monday after analysts from Keybanc Capital Markets upgraded the company's shares from Buy to Aggressive Buy and raised 12-month estimates for the company from $30 to $34. In a research note Monday, the analysts note AXL may announce an additional Special Attrition Program [SAP] in early-2008 which could reduce its per-hour cost and excess manpower. The company is also well-positioned for new contract wins of $100 million from Dana, they said. "Belief that there are significant earnings drivers on the horizon that will force material upward revisions to 2008 and 2009 [EPS] estimates. We believe the financial community in general continues to underestimate the company's true earnings power, and contend that it will be revealed over the course of the next year in the form of the following higher-probability events: 1) Another company-wide special attrition program in early 2008 that may substantially reduce both excess manpower and its per-hour cost; 2) $100 million in axle-related component business from Chrysler beginning in 2H09; and 3) Roughly $100 million in new business wins from Dana with 50% beginning in 2008 and the remaining portion in 2009." The firm also raised 2009 EPS estimates from $3.10 to $3.53.
Commentary: Underdog Catcher George Putnam's Long and Short Picks - Barron's
Stocks to watch: AXL. Competitors: ARM, DCNAQ.PK, MGA, BWA, JCI
Northwest Airlines Storms Back Into Black
Northwest Airlines announced Monday it swung to a third-quarter profit and beat analysts' estimates, sending shares higher. The company earned $244 million ($0.93/share) after posting a $1.18 billion loss ($-13.50/share) last year when it was in the final stages of emerging from bankruptcy. Revenue dropped 0.9% to $3.38 billion. Forecasters estimated the company would make $0.73/share on $3.36 billion of revenue. CEO Doug Steenland said the quarter reflected the company's "remarkable turnaround" and was consistent with the airline's five year plan. Each seat mile cost the company $0.1076 in the last quarter, which was lower than all larger airlines except Delta. Operating expenses dropped 4% on lower spending for salaries and strategic fuel hedging. Shares of the company traded 1.7% higher to $17.64 Monday.
Commentary: Earnings Improvement In The Airline Business Continues • AirTran Back in the Bidding for Midwest
Stocks to watch: NWA. Competitors: LUV, AAI, MEH. ETFs: IYT
UBS Swings to Big Q3 Loss; Should Return to Profitability in Q4
UBS reported a third-quarter net loss of 830 million Swiss francs ($712M) on subprime-related trading writedowns of 4.2B francs, compared to earnings totaling 2.2B francs last year. The poor results exceeded the mid-range loss projection from a UBS update earlier this month, in which UBS said it would also cut 1,500 jobs from its investment banking division (full story). The net loss also was worse than analysts' average forecast loss of 668M francs, according to a Reuters poll. Third-quarter revenue fell 39% to 6.47B francs. In a statement, UBS said, "Markets remain uncertain, but based on current information, UBS should return to profitability at Group level in fourth quarter 2007." During the company's conference call, CEO Marcel Rohner commented, "While we are still disappointed with the result, we have a very strong set of numbers in particular in asset-gathering and the commission-based businesses," (earnings call transcript later today). The company noted that the fourth quarter has started with "good" results from all businesses, including its investment banking unit. An Allianz asset manager warned UBS still has exposure to subprime from its fixed-income and credit businesses and said, "If a further weakening of the markets there occurs, UBS will have to make additional writedowns." Shares of UBS trading on the NYSE lost 1.1% to $53.25 on Monday and shares in Zurich were last down 0.7% to 61.7 francs in late morning trading.
Commentary: UBS Confirms Loss; More Writedowns possible • The Writedown Leaderboard: Merrill Now in First • How Banks Calculate Their Write-Downs
Stocks to watch: UBS. Competitors: DB, CS, MER, C, HBC. ETFs: EWL, IXG
Lehman Raises $3B for LBO Debt Fund
Lehman Brothers announced Monday it had raised enough money to create a $3 billion fund to buy leveraged buyout loans at a discount from lenders. The fund rasied about $670 million from investors, including $130 million from Lehman employees, and will increase the investment amount by borrowing equity. The Lehman Brothers Loan Opportunity Fund will allow Lehman and its customers to take advantage of "dislocations in the credit markets," said Michael J. Odrich, managing director and global head of private equity for Lehman. As a result of the credit crunch, banks have about $300 billion in loans sitting on their books which they have not been able to sell. Lehman joins companies like Oaktree Capital and Blackrock who have targeted banks looking to unload debt. Shares of Lehman closed 3.9% higher to $62.76 on Monday.
Commentary: Global Rescue Fund Seeks Participants - WSJ • Three Reasons To Refrain From Buying Investment Banks
Stocks to watch: LEH, BLK. Competitors: GS, MER, BAC. ETFs: IAI, KCE
Earnings call transcript: Lehman Brothers F3Q07 (Qtr End 8/31/07)
Teva Profit Falls on Loss of Blockbusters
The number one global maker of generic drugs, Teva Pharmaceutical Industries, saw its profit fall 13% during Q3 on the loss of exclusive rights to three U.S. blockbuster drugs. Net income fell to $525 million, good for EPS of $0.64, versus EPS of $0.74 a year ago. Revenue climbed 4% to $2.4 billion, missing consensus estimates of $2.47 billion (full earnings call transcript later today). Despite EPS coming in $0.02 above consensus analyst estimates, Teva's ADR shares were down 2.5% in pre-market action on the Nasdaq as of 6 AM ET. Teva lost exclusive rights to distribute Pfizer's Zoloft, Merck's Zocor, and Bristol-Myers Squibb's Pravachol in the U.S., which cut into its bottom line. One Israeli analyst who follows his country's largest company by market cap expressed frustration with the recent quarter: "All in all, it's just okay. I thought they were going to be a little higher on sales." Shares were down more than 3% in morning trading in Tel Aviv. Teva's top-selling drug, its proprietary multiple sclerosis treatment Copaxone, saw its sales rise 24% to $441 million, but there are concerns other drugmakers will soon challenge Teva's dominance in that market. In other news, the company announced CFO Dan Suesskind, with the company for 31 years, will step down in mid-2008. He will be replaced by Eyal Desheh, current CFO of Check Point Software.
Commentary: Teva's Generic Famir Victory Overshadowed by Novartis' Emergency Injunction • Forest Labs' Rights Affirmed in Lexapro Appeal • Wyeth's PI Motion Against Teva in Protonix Litigation Denied
Stocks to watch: TEVA. Competitors: PFE, MRK, BMY. ETFs: IBB
Earnings call transcript: Teva Pharmaceutical Industries Q2 2007
MUST-READS ON SEEKING ALPHA TODAY
Have Wall Street Breakfast emailed to you every morning before the market opens.