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

Fed Cuts Key Rates by 0.25%

The Federal Reserve said Wednesday it was lowering its fed-funds target rate by 0.25% to 4.5%, coupled with a 0.25% cut to the discount rate, which brings it to 5%. "Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time," it said. In a nod to continuing inflationary concerns, the Fed said: "Some inflation risks remain, and it will continue to monitor inflation developments carefully." The move had been widely anticipated among economists, who predicted the Fed would cut rates to further stimulate a weak housing market and waning consumer confidence. But data released earlier Wednesday showed economic growth was stronger than economists had expected; Q3 U.S. GDP growth rose to 3.9%, far faster than the 3.0% economists predicted (full story). And ADP Employer Services said U.S. private employers added 106,000 jobs in October, vs. analyst expectations of 60,000. The Fed concluded: "The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth," interpreted by many economists as a signal that more rate cuts may not be imminent. "Right now, I'd say chances of a cut in next meeting in December are smaller than they were two days ago, largely because of the strong numbers that are coming in with GDP," Finance professor Steve Wyatt said. Nine of ten Governors voted for the rate drop; K.C. Fed Governor Thomas M. Hoenig would have preferred no change in the fed-funds target. Treasury markets were sharply down on the news. After an initial move to the downside, stock markets rallied. Gold futures breached the $800 mark. Oil gained more than $4/barrel. Immediately following the news, Wachovia announced it was lowering its prime lending rate from 7.75% to 7.5%.

U.S. Construction Spending Rises an Unexpected 0.3% in September

Construction spending posted a surprise 0.3% gain in September following a downward revision for August, the Commerce Department said Wednesday. Spending rose to a seasonally adjusted $1.16 trillion after August spending was revised from a 0.2% rise to a 0.2% decline. Analysts were expecting the September figure to be a 0.5% drop. Private nonresidential construction rose 1.5% and public construction spending 1.9%, both record highs. They offset a 1.4% drop in private residential spending in September to a $511 billion annual rate, the 19th consecutive monthly decline and the lowest in four years. Housing spending is down 16.4% over the past year; total construction spending is down 0.8%. Federal construction spending fell 7.9% in September following a 3.6% rise in August. State and local construction spending rose 2.7% and public-sector spending 1.9%. "I don't think you have reached the point where nonresidential has turned down," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "I think that's a next year phenomenon." In related news, the Commerce Department also announced Wednesday that the U.S. economy bucked the housing trend and increased at a 3.9% annual rate in Q3 -- the best GDP growth performance in six quarters (full story).

Superfund Isn't a Bailout - NYT

The $75 billion superfund announced three weeks ago by JPMorgan Chase, Bank of America and Citigroup will serve more "to provide hospice care" to investment funds before their demise than to resuscitate them, according to Thursday's New York Times. The structured investment vehicle [SIV] business model "is dead, or soon will be," wrote Eric Dash. Lou Crandall, chief economist at Wrightson ICAP, said the fund is "more a towline to get them to the scrapyard." As confidence has eroded in the securities purchased by SIVs about 30 of them have been compelled to dump assets, "shedding roughly $75 billion since July and shrinking the industry by a fifth." Though the fund is widely viewed as a bailout, a source close to it demurs. "People get the idea that this is a total solution or a complete rescue," said the individual. "But the goal is actually... to provide an orderly unwind or promote a restructuring." SIVs will have to refinance about $90 billion in asset-backed commercial paper over the next six months, which is more than the fund plans to raise. "There may be some SIVs that it's not going to help, and that's life in the fast lane," said James Dimon, chairman of JPMorgan Chase. Some observers believe Citigroup's involvement in the fund is the product of protective self-interest, since its seven SIVs -- which have a combined $80 billion of assets -- represent almost a third of the industry. Though Citigroup is not directly exposed, its reputation is at risk if it allows its investors to absorb the losses.

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TECHNOLOGY

IBM to Unveil $1.5B Data Security Initiative - WSJ

The Wall Street Journal reports IBM is expected to announce Thursday a "major initiative" involving $1.5 billion of spending to expand its presence in the data-security market. The funds are earmarked for 2008, and are "much more than we've ever spent," IBM's head of security programs said. IBM may also make acquisitions separate from the $1.5B allocation -- it has made several in the past year, including the $1.3B deal for Internet Security Systems. In addition to IBM's announcement, the company is expected to release new software, including a corporate confidential document tracker with external site blocking capability, as well as a program of services and software that broadly meet security standards of the credit-card industry. The Journal says IBM declined to discuss current or future forecasts of security-related revenues. However, one analyst believes the $1.5B IBM plans to spend in 2008 is twice historical levels for security R&D. Market researcher IDC Corp. says PC security spending climbed 17% to $44.5B in 2006. Shares of IBM gained 1.75% to $116.12 on Wednesday.

JDS Uniphase Q1 Loss Narrows; Forecast Disappoints

JDS Uniphase posted a first-quarter loss that was smaller than the year-ago period and adjusted earnings that bested analysts' estimates, but shares slumped 3% to $14.80 AH as it issued a disappointing Q2 sales outlook. The telecommunications equipment maker said it expects sales of $372M-$394M for the current quarter; the $383M mid-point of that range is below the $386M average analyst estimate. The company blamed the lower-than-expected forecast on fewer orders from wireless carriers as they complete network-technology upgrades and cut back spending on testing equipment. For the first quarter, the company posted a net loss of $6.9M ($0.03/share) vs. a year-ago loss of $17.4M ($0.08/share) on sales that climbed to $356.7M from $318.1M. Excluding items, the company earned $23.7M ($0.08/share). Analysts had expected earnings of $0.06/share and revenue of $355.8M, on average. Consolidation in the fiber optics industry, it said, hurt sales (full earnings call transcript). Deutsche Bank analyst Cobb Sandler said he was encouraged by the company's 3.9% gross margin gain to 41.3%; he recommends investors buy the stock "as the company enters its seasonally strong period and as margins modestly improve from current levels." He added, "The company represents one of the few liquid ways to be exposed to overall improving optical trends."

RETAIL

Holiday Gift Spending to Hold Steady, Deloitte Survey Says

Americans plan to spend less this holiday season, but will still be opening their wallets for gifts, according to the 22nd Annual Holiday Survey of retail spending and trends commissioned by Deloitte. Consumers were less optimistic about the economy, with only 57% saying they expected it to improve or remain the same next year. Lower-income respondents cited higher food and fuel costs as reasons for their anticipated pullback in spending, while those at higher income levels blamed stock market volatility and declining home values. "American consumers are resilient, and clearly they are in a giving mood this year," said Stacy Janiak, Deloitte's U.S. Retail Leader. "They may be more restrained in their general holiday spending and their personal indulgences, but they are determined to maintain the spirit and generosity of the holidays." According to the study, four in 10 consumers intend to cut back on overall spending in areas such as home improvements, socializing, charitable donations and non-gift clothing, but they still plan to spend the same amount on gifts as last year and even intend to buy more gifts -- 23 on average -- the highest in six years. Department stores are likely to be the top beneficiaries, as respondents indicated them to be the top shopping destination. Gift cards were named as the top gift purchase idea.

Investors Bite Crocs on Weak Outlook

Shares of casual footwear seller Crocs Inc. plunged more than 23% in extended trading Wednesday, after the company reported disappointing sales numbers and guidance. The company's earnings increased to $56.5 million ($0.66/share) compared to $21.5 million ($0.27/share) last year. Analysts were expecting $0.63/share. Revenue more than doubled to $256.3 million, but was short of the forecasters' targets of $258.3 million. Crocs also said 2007 full-year sales would come in at $820-$830 million; analysts had been estimating $835.6 million. The company predicted net income for the year would be $1.97/share, which fell in the range of $1.94-$1.98/share analysts were expecting. CEO Ron Snyder said his company's brand was reaching "new levels of recognition and acceptance around the world" and that the company would leverage its brand to other categories to "further diversify" the business and "create new growth vehicles for the future," (full earnings call transcript). However, investors did not see that growth in the company's forecast. "I think the stock has been trading as a momentum stock. What we're seeing here is a reversal of that momentum," Wedbush Morgan's Jeff Mintz commented, in an attempt to justify the huge drop, which wasn't justified by the company's numbers.

Sources: Press release, Bloomberg, MarketWatch, Reuters
Commentary: Why I'm Shorting CrocsIs Crocs Doomed For Failure?
Stocks to watch: CROX. Competitors: DECK, NKE, TBL. ETFs: JKK

TRANSPORT AND AEROSPACE

Ford Expecting Five Bids for Jaguar, Land Rover; May Close Fewer Plants

Ford expects a minimum of five bids when its formallly puts luxury brands Jaguar and Land Rover on the auction block this week, Reuters reports. Ford has been employing a strategy of selling off its luxury holdings in order to focus on its core U.S. business since March of this year, when it sold its stake in Aston Martin (full story). Among the expected bidders are Indian carmaker Tata Motors, buyout firms One Equity, Ripplewood and TPG, as well as British financier Guy Hands's Terra Firma. A sixth, unnamed bidder has also been mentioned. Ford hopes to have Jaguar and Land Rover sold by early 2008. The company reported record losses in FY2006 and doesn't expect to turn profitable until 2009 at the earliest. In other news, there are reports Ford is considering closing less U.S. plants if the UAW will offer it greater cost savings, during its current contract negotiations with the union. The UAW has already concluded deals with GM (full story) and Chrysler (full story), and is looking to gain job security for it members from the struggling Ford. Ford currently has plans to close 16 U.S. factories.

ENERGY AND MATERIALS

Crude Rallies; Traders Bet on $125 Oil

Crude oil rallied Wednesday after the Energy Department reported lower inventories than expected. December crude settled up $4.15, or 4.6%, at $94.53 -- a record-high close -- following a report that crude supplies dropped 3.9 million barrels to 312.7 million last week; analysts were expecting a build of 1.25 million. The report also said refinery capacity utilization fell 0.9% to 86.2%, surprising forecasters who predicted the number would rise by 0.5%. "The severe weakness in the capacity utilization number is shocking," said Kevin Kerr, president of Kerrtrade.com. "$96 to $100 is now not only likely but probable within seven to 14 days if not much sooner." The rally continued in overnight trading, as December crude rose to a record $96.24/barrel; futures are up 19% over the past month. Oil traders are betting on even higher prices. As of Oct. 29, traders owned call options to buy 2.52 million barrels of December crude at $125, up from 1,000 barrels on June 29. They currently hold options to buy almost 50 million barrels of $100 December crude. "A few years ago, when triple-digit oil was talked about, it was tempered by negative responses," said Mitsubishi's Anthony Nunan. "Slowly, it's becoming a reality. It's not crazy anymore, it's a reasonable target... $125 or $130 is also possible."

Anadarko Wins Landmark Gulf Royalty Relief Case

A federal judge in Louisiana has ruled in favor of Anadarko Petroleum Corporation in what could be a precedent-setting case against the U.S. government's ability to collect royalties from Gulf of Mexico energy producers. The government granted royalty relief to a host of Gulf drillers beginning in 1995, at a time when production was sagging and prices were low. The U.S. Minerals Management Service [MMS] claims it retains the right to tax Gulf producer earnings on leases granted between 1996 and 2000 in a case where prices recover, such as presently. Anadarko, which said $157 million was at stake, took the government to court over its attempt to collect back royalties. Anadarko argued it took a big chance by operating in the Gulf during a time of low demand and prices, and now deserves to reap the benefits of that risk-taking. On Wednesday, U.S. District Judge Patricia Minaldi ruled against the MMS, claiming the agency's "action is unlawful because it contradicts the plain, unambiguous text of the [1995] statute." Wednesday's ruling may set a precedent for other Gulf energy companies to resist the government's attempts to collect royalties on contracts signed under the premise of royalty relief.

FINANCIAL

Credit Suisse Net Falls 31% on 2.2B Franc Writedown

Credit Suisse said Thursday Q3 net earnings fell 31% after the investment bank was hit by massive writedowns on leveraged loan commitments, residential mortgages and CDOs. Quarterly net income was 1.3 billion francs ($1.12B), down from 1.89 billion francs last year, but slightly ahead of the 1.27B francs analysts expected. Results included a 1.1B franc writedown on leveraged loans that the bank was unable to resell after credit markets dried up in July and August, and another 1.1B franc writedown on residential and commercial mortgages and CDOs. Revenue slipped 15% to 6.84B francs from 8.08B. Proprietary trading was hit with a 300M franc loss in quantitative trading. CEO Brady Dougan told investors he is "seeing encouraging signs that activity in the credit markets is increasing, although it is too early to predict when all of the affected markets will return to normal levels." Credit Suisse said it began unwinding its subprime exposure late last year, and appears to have taken a smaller hit than many of its peers. Earlier this week rival UBS took a worse-than-expected loss and warned of more writedowns in Q4 (full story). Indeed, Credit Suisse shares are down 8.6% YTD vs. UBS's 16% drop. Conversely, Credit Suisse is seen by some as hampered by the lack of a "lucrative wealth management to bail it out" like UBS does, WestLB analyst Georg Kanders said. CS's relatively small asset-management unit posted outflows of almost 21B francs over the quarter, leading to a 3.5% drop in its overall managed assets. Shares were down 2.6% in virt-x trading at 6:30 ET.

Two Traders Leave Citigroup, Analyst Questions Dividend

Citigroup confirmed late Wednesday that two senior traders have left the bank in the wake of the credit crunch that resulted in Citgroup's fixed-income operations posting $2.2B of trading losses in the third quarter. The bank would not comment, however, on the circumstances of their departures. Michael Raynes, head of structured credit, and Nestor Dominguez, co-head of collateralized debt obligations, left the bank less than three weeks after two other senior managers also departed. Following E. Stanley O'Neal's departure from Merrill Lynch this week, there are heightened calls for the removal of Citigroup CEO Charles Prince. Meanwhile, CIBC World Markets analyst Meredith Whitney downgraded the stock to "sector underperform" from "sector perform," raising doubts about the dividend, saying the bank may have to cut the payout or sell assets to save off what she said was a $30B capital shortfall. She believes the stock could face serious pressure and drop to the low $30s, some 28% below its current $41.90 price.

HEALTHCARE/BIOTECH

Glaxo Wins Injunction Against PTO

GlaxoSmithKline plc, the second-largest pharmaceutical company in the world, has been granted an injunction preventing the U.S. Patent and Trademark Office [PTO] from applying new, more restrictive rules to patent applications until a trial can be conducted concerning their merits. "[T]he uncertainty caused by the regulations will cause harm to [Glaxo's] investments and provide a disincentive to their filing of new patent applications for researching new pharmaceutical products," wrote U.S. Judge James Cacheris of the Eastern District of Virginia. The rules, which were written by the PTO to reduce a 760,000-application backlog by a hoped-for 30%, were supposed to go into effect November 1. They restrict the number of times applications can be modified and the number of claims that can be made about an invention, both of which were previously unlimited. Glaxo says the rules will hurt its pending applications, which number approximately 100. Glaxo, which has the support of the Pharmaceutical Research and Manufacturers of America and the American Intellectual Property Law Association, argues that the restrictions will discourage innovation. "We filed the lawsuit because we don't believe the Patent and Trademark Office has the authority to make these changes under patent law," said Glaxo spokeswoman Nancy Pekarek. Glaxo shares closed up 1.2% at $51.25 Wednesday.

Sources: Reuters, Forbes, Bloomberg
Commentary: Big Drugmakers Need To Improve Their Act AlreadyThe Bill Cara Global 100 Best Companies Explained
Stocks to watch: GSK. Competitors: NVS, PFE, SNY. ETFs: DBR, DPN, OTR
Earnings call transcript: GlaxoSmithKline Q3 2007

INTERNATIONAL

China to Launch Stock Index Futures

China will launch index futures on its red-hot stock market, Chinese officials announced Thursday, but cautioned that futures trading might initially increase selling pressure on the cash market. Zhou Qinye, executive VP of the Shanghai Stock Exchange, did not say when trading might commence. Zhou also said regulators have begun the process of approving new quotas for foreign investors, but added the process would be "gradual." Chinese stock markets are still largely off limits to foreigners; the government has said it wants foreign investors to play a bigger role in one of the world's fastest-growing markets. The launch of China's stock index futures and the granting of larger investment quotas to some foreign banks could happen before the end of the year, Reuters reports, citing unnamed market sources.

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Three Key Issues To Determine A Year End Rally
Housing: Housing Bubble and Real Estate Market Tracker
Software: Microsoft Target Raised to $41
Gadgets: Sony: PS3's Mixed Messages Can't Be Good
Media: The Long Case for The New York Times Co.
Retail: Buffalo Wild Wings vs. Chipotle Mexican Grill
Energy: Wind Factor Makes Kaydon Corp. a Buy
Financial: Is Goldman Sachs the Trade of the Year?
ETFs: Outlook for Select Sector ETFs
Options: Wednesday's Options Report
Small-Caps: Standard Parking: The Perfect Spot
Sound Money: Pick the Right Name
Jim Cramer: Latest stock picks
Transcripts: Crocs F3Q07JDS Uniphase F1Q08Newmont Mining Q3 2007Garmin Ltd. Q3 2007IAC/InterActiveCorp Q3 2007Alcatel-Lucent Q3 2007Deutsche Bank Q3 2007MasterCard Q3 2007Jones Apparel Group Q3 2007Kraft Foods Q3 2007PDF Solutions Q3 2007Waste Industries USA Inc. Q3 2007Pharmion Q3 2007Newmont Mining Q3 2007Amdocs F4Q07ManTech International Q3 2007Super Micro Computer F1Q08Smith Micro Software Q3 2007Exar F2Q08Bare Escentuals Q3 2007TTM Technologies Q3 2007Savient Pharmaceuticals Q3 2007Rambus Q3 2007Network Equipment Technologies F2Q08Adaptec Inc. Q2 2008comScore Q3 2007Dionex F1Q08Cytokinetics Q3 2007Clorox F1Q08The Spectranetics Q3 2007Auxilium Pharmaceuticals Q3 2007Equity Residential Q3 2007Berry Petroleum Co. Q3 2007RehabCare Group Q3 2007Cameco Q3 2007United Microelectronics Q3 2007Weyerhaeuser Q3 2007HealthSpring Q3 2007Inverness Medical Innovations Q3 2007Community Health Systems Q3 2007Crown Castle International Q3 2007Brinks Co. Q3 2007Noble Energy Q3 2007LandAmerica Financial Group Q3 2007Transocean Q3 2007Kendle International Q3 2007TDK F2Q08International Flavors and Fragrances Q3 2007DSP Group Q3 2007Tuesday Morning F1Q08NCR Q3 2007Nighthawk Radiology Holdings Q3 2007Waste Services Q3 2007Nacco Industries Q3 2007Alvarion Q3 2007Dresser-Rand Group Q3 2007MarketAxess Holdings Q3 2007Wyndham Worldwide, Q3 2007TriZetto Group Q3 2007
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