Consumer Spending Decelerates
The Commerce Department said Thursday September saw the slowest growth in consumer incomes and spending since late spring. The data showed disposable income increased 0.4% and spending rose 0.3%, both in-line with economists estimates. Income and spending growth are essential in an economy that is being dragged down by an extended housing slump. Michael Carey, chief economist at Calyon Corp., does not see increased growth by the end of the year: "Consumer spending is going to slow as we get into the fourth quarter. Consumers may be a bit cautious," he said. Separately, the personal consumption expenditure index, a key inflation gauge, rose 0.2% in September. The core PCE index, which excludes food and energy prices, increased 0.2% as well, and is now up 1.8% for the year. The Fed has an informal target for the core PCE of 1%-2%. Meanwhile, in the labor markets, the Labor Department announced initial jobless claims fell by 6,000 to 327,000. Despite the drop, the four-week average still increased to levels at which economists see signs of a softening labor market. With uncertainty surrounding the labor market and consumer spending and skyrocketing energy prices, economists say the U.S. economy may have bumpy ride ahead of it to close out the year.
Commentary: Market Behavior Following Consecutive Fed Rate Cuts • Short Help Is Better Than None At All • Fed Cuts Key Rates by 0.25%; Markets Rally
Stocks to watch: SPY, DIA
Best Buy/Gateway Desktops More Expensive, Worse Than Apple iMac, Says Mossberg
The Wall Street Journal's influential personal technology columnist, Walter Mossberg, penned a damning review of Gateway's new all-in-one desktop PC and recommended that consumers purchase Apple iMacs instead. The Gateway One is available in three versions costing $1,299, $1,499 and $1,799. Gateway will sell the mid-price version directly, while Best Buy has exclusive rights to sell the low- and high-end models. Mossberg, a long time proponent of Apple computers, said that the Gateway machines had smaller and lower-resolution screens, an inferior operating system (Windows Vista) and multimedia software, slower processors, and lacked built-in video cameras. "Shockingly," he wrote, "for those who still cling to the notion that Windows machines are always priced lower than comparable Macs, the entry-level Gateway One costs $100 more than the entry-level iMac... At the high end, the $1,799 Gateway has a much smaller screen than the comparably priced iMac." The only advantages Mossberg could find in the Gateways were larger hard-drives and more memory. Dell is also set to release an all-in-one desktop PC. While Mossberg's review bodes ill for Gateway and Best Buy's desktop sales in the important holiday shopping season, demand has shifted strongly towards laptop sales over the last two years.
Commentary: Depending on Long-Term Aggressive Growth for Apple is a Gamble • Mossberg reviews Gateway One, says it’s no imac [CrunchGear]
Stocks to watch: AAPL, GTW, DELL, BBY
Earnings call transcript: Gateway Inc. Q2 2007, Apple F4Q07 (Qtr End 9/29/07), Dell Q2 2007
Sprint Considering WiMax Spinoff and Merger with Clearwire - WSJ
The Wall Street Journal reports sources say Sprint is weighing its options for its plans to roll out 4G high-speed wireless Internet service using WiMax technology, including a possible spinoff and merger with Clearwire Corp. Sources say Sprint's board will be reviewing its WiMax plans and the company's CEO search at a retreat this weekend. Acting CEO Paul Saleh declined to name any CEO candidates, but sources say Sprint spinoff Embarq Co. CEO Dan Hesse is a front-runner. Separately, Sprint is reportedly close to reaching an agreement with Google to offer mobile devices based on Google's new mobile operating platform. In its (Q3 earnings) conference call Thursday, Sprint said it spent $73 million on WiMax in Q3, as it is "continuing to prepare for soft launches of WiMax in the Baltimore, Washington and Chicago markets, late this year," (full transcript). However, Sprint said it will likely spend less than its 2007 budget for WiMax. Sprint has a three-year $5B WiMax budget. Over the summer, Sprint and Clearwire reached a tentative agreement to collaborate on a national WiMax network, but a definitive agreement has yet to be signed. Sources say any WiMax restructuring for Sprint would have to wait for a new CEO to be hired. Shares of Sprint fell to a new 52-week low, losing 3% to $16.58 on Thursday. Clearwire gained 4.9% to $21.53.
Commentary: A Sprint Merger With Clearwire • Four Suggestions To Save Sprint • Sprint's Q3 Net Tumbles on More Subscriber Losses
Stocks to watch: S, CLWR, INTC, MOT, GOOG. Competitors: ALVR, T, VZ, DT
Earnings call transcript: Sprint Nextel Q3 2007
Five Affiliated Computer Directors Resign After Clash With Chairman
Five directors at Affiliated Computer Services are stepping down following a vituperative war of words with Darwin Deason, the company's chairman. Deason, incensed over the loss of a $6.2 billion takeover offer from private equity firm Cerberus Capital Management that was withdrawn as a result of the credit crunch, sent the five a letter accusing them of "numerous and egregious breaches of fiduciary duties and other improper conduct" and demanding their immediate resignations (Deason's letter). The directors responded by accusing Deason of "bullying and thuggery," interfering with their mandate, and "[refusing] to understand that the Board's fiduciary duties are to all shareholders -- not just to you" (response letter). Deason's once-cordial relationship with the directors reached a nadir over the Cerberus offer, which included a six-month exclusivity clause between Cerberus and Deason. The board felt the clause would inhibit other bidders from coming forward. "Any suggestion that the Special Committee should have rolled over and simply agreed to your self-interested proposal without having an opportunity to consider alternative transactions would be irresponsible," the directors wrote. "Your self-serving conduct had a material adverse impact on the process of considering strategic alternatives, including your own offer." The directors pointed out that they could "fire you and the entire management team," but prefered to resign out of concern for the company. "In 30 years of trying to track these kind of events, I can't say I've come across such an example" of a clash between board and management, said Purdue management professor John McConnell. ACS shares closed down 3.9% at $48.68 Thursday. In related news, ACS reported fiscal Q1 adjusted non-GAAP EPS of $0.77, shy of analyst expectations of $0.84. Revenue was up 8% to $1.49 billion, in line with expectations.
Commentary: Cerberus Pulls Bid for Affiliated Computer -- WSJ • Affiliated Computer Services Receives Buyout Offer from Founder, Cerebus
Stocks to watch: ACS. Competitors: ACN, CSC, EDS
Earnings call transcript: Affiliated Computer Services F1Q08
Electronic Arts Swings To Loss; Shares Jump on Strong Guidance
Video game maker Electronic Arts reported a loss of $195 million in its latest quarter (F2Q08), but saw its shares climb more than 5.2% after hours on strong forward guidance, reversing a loss of 3.9% in composite trading Thursday. EA posted a loss of $0.62 a share in 2Q08, versus EPS of $0.07 a year ago. Sales fell 18% to $640 million. EA deferred nearly $300 million in net revenue and will report it in a future period. On an adjusted basis, EPS were $0.27; consensus analyst estimates were for EPS of $0.20 on sales of $896 million. The company expects next quarter's EPS in a range of $0.85 to $1.15 (midpoint $1.00) on sales of $1.33 to $1.58 billion. The Street had been expecting EPS of $0.94. EA sold more than a million copies each of Madden NFL 08, FIFA 08, NCAA Football 08, Tiger Woods PGA TOUR 08 and MySims in its latest quarter (Madden was far and away its best seller at 4.5 million copies). EA also announced a restructuring plan, in which it will close certain production facilities and lay off 4% of its global workforce, or roughly 350 individuals. The move will save it $25 million to $30 million a year on a pretax basis. CFO Warren Jensen expects "a great holiday season for consumers" with 10 new titles being launched including a Simpsons game (full earnings call transcript).
Commentary: Street Bullish on Electronic Arts' Deal For BioWare/Pandemic • EA Acquires Game Studios for $775M, Expects Q2 Beat • Electronic Arts Faces Risk Heading Into Holiday Season
Stocks to watch: ERTS. Competitors: ATVI, TTWO, KNM. ETFs: IGV
MetroPCS Withdraws Leap Wireless Bid; Shares of Both Companies Tank
A merger deal between pay-as-you-go wireless carriers MetroPCS Communications Inc. and Leap Wireless International Inc. isn't going to happen any time soon as MetroPCS withdrew its unsolicited offer Thursday to buy Leap. Shares of both companies tanked on the news with Metro falling 10.5% and Leap falling 5.8% during regular hours and another 10.7% after hours. Metro had offered 2.75 of its own shares for each one of Leap's, a deal Leap immediately rejected as insufficient (full summary). The companies both offer unlimited pay-as-you-go mobile services to customers with poor credit ratings who don't qualify for the larger national carrier plans. The two companies' areas of service coverage barely overlap and a combo would mean the formation of a national discount carrier to challenge the wireless industry's major players. Pacific Crest analyst Steve Clement believes the companies will ultimately decide to merge: "it makes too much sense for them to combine their businesses." Meanwhile, Metro "believes strongly in its stand-alone prospects."
Commentary: Leap Wireless Rejects MetroPCS Bid • Metro PCS Communications: The Bull Case • How Does MetroPCS Compare With the Wireless Titans?
Stocks/ETFs to watch: LEAP, PCS. Competitors: T, VZ, S. ETFs: PTE, WMH
MySpace, Bebo Join Google's Facebook Challenge
The Google-led OpenSocial network initiative unveiled earlier this week (full story) received a big boost when News Corp.'s MySpace was introduced as a partner on Thursday. There was speculation regarding the absence of MySpace, which was not among the initially-disclosed list of OpenSocial partners (including Google-owned Orkut, LinkedIn, hi5, Friendster, Plaxo and Ning), that it may be pursuing a proprietary platform similar to rapidly growing rival Facebook. However, the inclusion of MySpace turned out to be a matter of timing for a Google-hosted party for OpenSocial. Google and MySpace have an existing advertising revenue-sharing agreement. MySpace's 110 million worldwide users, plus Bebo's (Britain's leading social site) 39 million users, pushes the total users of OpenSocial over 200 million, compared to around 50 million for Facebook. Google and other members say they have invited other social sites, including Facebook, but a Facebook spokeswoman said the company had not been fully briefed yet, although it expected to meet with Google on Friday. Microsoft outbid Google last week to take a $240M stake in Facebook (full story). One analyst says despite the near-term two-camp arrangement, key internet giants such as Yahoo! eBay and Amazon, all holders of "social" data on their users, have "yet to weigh in."
Commentary: Is Google's OpenSocial Really The Second Coming? • Google-Led Open Alliance to Challenge Facebook - NY Times • Microsoft, Google, Ignoring Broader Market, Reach for New Highs
Stocks to watch: GOOG, MSFT, NWS
TRANSPORT AND AEROSPACE
October Auto Sales: Ford Sags, Toyota Gains, Nissan Surges
U.S. October auto sales were reported Thursday; Ford reported its 12th straight monthly decline, GM and Toyota posted year-over-year gains, and sales of Nissan vehicles surged. Ford sales fell 9.5% from last year. GM, the number-one seller of autos, was up 3.4%, its third consecutive month with an increase. Toyota sales jumped 4.5%, outselling Ford for the first time in the three months, and enjoying the second best sales in the market. Chrysler sales plunged 8.9%, and the company also announced plans to cut 10,000 jobs earlier Thursday morning. Nissan sales surged 13%, helped by its light truck and hybrid car sales. Honda sales increased by 3.8%. With consumers paying around $3/gallon at the pump, truck sales dropped 2% in sales, while small cars and smaller SUVs with better mileage were notable growing segments. Though Thursday saw significant market weakness across the board, Toyota ADRs were able to eek out a gain of 0.01% on the strength of its October performance. Nissan shares jumped 2.7%, shares of GM lost 5.0%, and Ford stock was down 4.2%.
Commentary: GM Overtakes Toyota as Top Global Carmaker in 2007 • Now There's An Ethanol Glut?! I Thought We Couldn't Make Enough
Stocks to watch: F, GM, TM, OTCPK:NSANY, HMC. ETFs: IYT
SEC Probes Merrill on Off-Book Risk Remedies - WSJ
Among the questions the SEC will be asking Merrill Lynch in its investigation of the company is whether the firm swept potential losses under the carpet using off-balance-sheet transactions, the Wall Street Journal says. Unnamed sources say that in one such deal, a hedge fund bought $1 billion in commercial paper from a Merrill-related entity containing mortgages -- but was given the right to sell the paper back to Merrill after a year for a guaranteed return, thereby delaying a potential writedown. "Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," derivative consultant Janet Tavakoli wrote in a recent research note. "One fund claimed that Merrill was offering a floor return so this risk would return to Merrill." She said such transactions could explain how Merrill's mortgage-related exposure lightened in the third quarter. Sources say Merrill's recent "mitigation strategy" includes rounding up hedge funds to relieve it of about $5 billion in mortgage-related securities in order to reduce its on-book risk. Other investment banks involved in similar schemes include Bear Stearns, who sold $1B in risky debt to a hedge fund, agreeing to participate in a post-year auction that guaranteed the fund a minimum return. The much-discussed $80B 'superfund' initiated by Citigroup, BofA and JP Morgan, and backed by the Treasury Dept., is also seen by many as an effort to delay inevitable writedowns on now-shunned structured investment vehicles (full story).
Commentary: Merrill is Not Alone - Barron's • Could Goldman Sachs Still Be Profiting From The CDO Debacle?
Stocks to watch: MER, BSC, C, BAC, JPM. ETFs: KCE, IAI
Earnings call transcript: Merrill Lynch Q3 2007, Bear Stearns F3Q07, Citigroup Q3 2007, Merrill Lynch Q3 2007, JP Morgan Q3 2007
NY AG Accuses First American and WaMu of Collusion
New York Attorney General Andrew Cuomo announced Thursday that he has filed suit against real estate appraisal company First American Corp. and its subsidiary eAppraiseIT for colluding with savings and loan giant Washington Mutual [WaMu] to inflate home values. Cuomo's nine-month investigation into the mortgage industry has revealed "fundamental flaws" in two areas of the business: appraisals and securitization of mortgage loans. This suit is the first action the attorney general has taken against companies involved. "This is a case we believe is indicative of an industry-wide problem," Cuomo said. The suit alleges that eAppraiseIT illegally complied with WaMu's demand that it use a list of "preferred" appraisers. Much of Cuomo's case is based on emails that appear to show that executives were aware they were breaking federal law. "The independence of the appraiser is essential to maintaining the integrity of the mortgage industry," Cuomo said. "By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion." "We have absolutely no incentive to have appraisers inflate home values," WaMu said. "In fact, inflated appraisals are contrary to our interests." Though WaMu was not named as a defendant in the case, its shares fell 7.6% to close at $25.75 following the announcement. First American closed up 1.5% at $30.56.
Commentary: Title Insurers Are Feeling the Heat - WSJ • Rough Times for Title Insurers
Stocks to watch: FAF, WM. Competitors: FNF, LFG, STC. ETFs: IAT
NYSE Euronext Beats Estimates on Record Volume, Cost Cuts
NYSE Euronext posted Q3 profits that almost quadrupled, post merger, as revenue benefitted from recent market turbulence that boosted trading volumes to record levels. Net income jumped to $258 million ($0.97/share),up from $68 million ($0.43/share) a year ago. Ongoing cost cuts helped the firm's bottom line, it said. Adjusted EPS went to $0.76 from $0.44, beating analyst estimates of $0.73. Revenue almost doubled to $1.2 billion from $602 million -- analysts had forecast a much smaller $986 million. "During the third quarter, we delivered record financial results through strong growth across our business lines, driven largely by record trading volumes in the U.S. and Europe and ongoing expense control," said CFO Nelson Chai (full earnings call transcript later today). Shares are up 30% since mid-September, but are still 14% below April, when the combined joint stock started trading.
Commentary: NYSE Euronext Hits a Brick Wall: Why? • The Publicly Held Exchange Industry: Is There Any Value Left?
Stocks to watch: NYX. Competitors: CME, ICE, ISE, NDAQ
Earnings call transcript: NYSE Euronext Q2 2007
Citigroup May Have to Lower Dividend - Analyst
Shares of Citigroup dropped Thursday on a report by CIBC that said the bank may have to cut dividends or sell assets to shore up capital. CIBC notes that Citigroup might have to raise up to $30 billion, and that it could get worse if additional credit concerns arise. "Higher credit losses and further disruption in the [structured investment vehicle] market would only exacerbate our thesis of capital pressures," the report stated. Much of Citigroup's value to investors stems from their dividend, so a decrease would severely hurt demand for the stock: "We believe the stock will be under significant pressure and could trade into the low $30s," analysts wrote. Citi's profit fell 57% last quarter, mostly due to massive write-downs from credit losses (full story). Citigroup shares fell 6.9% to $38.51; they're down almost 31% YTD.
Commentary: When Will Citi Get it Right? • Superfund Isn't a Bailout - NYT • Citi's Off Balance Sheet Liabilities: Spooky as a Halloween Apparition
Stocks to watch: C. Competitors: BAC, JPM, LEH. ETFs: DHS, FDL, PRFF
Earnings call transcript: Citigroup Q3 2007
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