Wall Street Breakfast

by: SA Editors posted on: November 07, 2007    

MACRO AND HOUSING

China to Move From Dollar to 'Stronger' Currencies

The dollar slumped to record lows and stock index futures fell sharply early Wednesday after Chinese officials said they would further diversify the nation's $1.43 trillion in foreign reserves in view of a declining U.S. dollar. "We will favor stronger currencies over weaker ones, and will readjust accordingly," said Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. Siwei's comments sent the euro to a new record high of $1.4703, gold futures up $20 to as high as $848, and oil futures as high as $98.6. At the same conference, Xu Jian, a central bank vice director, said the dollar is losing its exclusive status. "The world's currency structure has changed; the dollar is losing its status as the world currency," Xu said. At least one analyst downplayed Cheng's remarks. "Cheng has a history of speaking out on a range of financial market and economic developments, and his comments are not always accurate," Glenn Maguire of Societe Generale told Bloomberg. In January, Cheng referred to the Chinese stock rally as a 'bubble,' sending markets into a severe tailspin. At the time the Shanghai and Shenzhen 300 Index was just over 2,500 points; it now registers over 5,300.

Economy Needs to Get Much Worse Before More Rate Cuts - Fed's Plosser

Philly Fed governor Charles Plosser says he already expects U.S. economic growth to slow to 1.5% or less, and says he would not support another interest rate cut unless the slowdown got even sharper than that. Speaking to the New York Times, Plosser, a non-voting governor, suggested he disagreed with the Fed's decision last week to lower the fed funds target to 4.5%, saying, "I happen to think this decision was a close call." Analysts say Plosser is not alone in his outlook. "This is one of the most hawkish committees that I can recall," Laurence H. Meyer of Macroeconomic Advisers and a former Fed governor, told clients. "The committee is not inclined to ease in December, and it is not convinced that any further easing will be required. However, the market simply refuses to hear it." Aside from last week's dissenting vote from K.C. Fed governor Thomas M. Hoenig, Another signal of internal dissent is the fact 6 of 12 Fed bank governors did not ask for a comparable 0.25% reduction in the discount rate, at which banks borrow from the Fed, assumed to be an implicit objection from non-voting members. Fed governor Frederic Mishkin was more vocal in his support of the rate cut, but agrees with Plosser that the Fed need not make more cuts, and emphasized Fed officials were focused on the country's economic outlook rather than on writedowns at big banks.

Financial Sector Credit Default Swaps Surge on Writedown Fears

Credit-default swaps on the bonds of Citigroup, Wachovia and Morgan Stanley are trading at five-year highs on fears the banks might have to write down more subprime assets. Rising swap prices imply a climbing perceived risk of default. The speculation was sparked by Citigroup's announcement earlier in the week that its subprime losses could approach $11 billion (full story). Morgan Stanley could lose up to $6 billion, according to analyst David Trone of Fox-Pitt Kelton. Analysts at CreditSights project that Lehman, Bear Stearns and Goldman Sachs could lose up to a quarter of their equity. Bloomberg notes that contracts on Morgan Stanley, Goldman Sachs, Lehman, Bear Stearns and Merrill Lynch are all trading as if the firms were rated at junk level. In related news, Standard & Poor's and Moody's have issued default notices on $5 billion worth of CDOs. "The senior controlling class will typically want to get the hell out and pay themselves back, even if that means selling the underlying securities at a discount," said Arturo Cifuentes, MD at fixed-income broker RW Pressprich. Also, the Treasury-backed "superfund" intended to buy securities from distressed SIVs is failing to attract participants beyond the initial three. "As far as we can see, it appears dead in the water right now," said a senior Wall Street banker.

Oil Prices to Stay High, EIA Says

As oil creeps ever closer to the century-mark, the U.S. government predicted Tuesday that prices are likely to remain high amid high demand and tight output. Crude prices jumped to a record of $98.17/bbl. in NYMEX electronic trading on Wednesday after news of an attack on a pipeline in Yemen. "Rising oil consumption and the realization that additional OPEC production may not be sufficient to arrest the inventory decline are keeping markets firm," the Energy Information Administration, the statistical bureau of the Department of Energy, said in its monthly short-term energy outlook. The agency believes oil producers will increase production, which should result in somewhat of an easing in prices, but it nevertheless expects monthly average prices to exceed $80/bbl. over the next several months, and $87/bbl. over the fourth quarter. OPEC has committed to raising output by 500,000 bbls./day starting this month. Non-OPEC supply was also expected to rise through 2008. The EIA raised its 2008 forecast for U.S. oil prices to $80/bbl. from $73.50. The EIA expects U.S. petroleum consumption to increase by 0.5% in 2007 and 1% in 2008, while world oil consumption rises by 1.5M/bbls. per day. Commercial crude inventories, it noted, have been declining since May, a trend the EIA expects to continue through the forecast period. It plans to release its next update December 11.

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TECHNOLOGY

TomTom's $4.2B Trumps Garmin's Tele Atlas Bid

TomTom NV, the world's number-one navigation device maker, Wednesday raised its bid for digital-mapping company Tele Atlas NV to €2.9 billion ($4.2 billion), topping a hostile €2.3 billion offer from Garmin on Oct. 31 (full story). TomTom's offer is €30/share, up from its previous €21.25. Tele Atlas shares are up 16.9% to €31.51 in Amsterdam, indicating investors believe Garmin may counter with an even higher offer. The battle over Tele Atlas is a result of GPS device makers' desire to control the maps their products are based on. Tele Atlas is the last independent global provider of digital maps, after Nokia agreed to buy Navteq in October for $8.1 billion (full story). Last week Fortis Bank analyst Felix Oberdorfer predicted a TomTom counter-offer, and estimated a final price of about €27/share. CIBC's Yair Reiner, meanwhile, said that if TomTom perceives a Tele Atlas acquisition as "life and death," Garmin may have to pay more than €40/share to win a bidding war.

AT&T Ups U-verse Spending, Trims Rollout

AT&T said in a regulatory filing Tuesday it was increasing its spending estimates and at the same time trimming its rollout estimates for its U-verse service, which provides cable TV and video over phone lines. AT&T now expects 2007-2008 U-verse capital spending to reach $4.5-5 billion, up $500M from a previous $4-4.5 billion estimate. It also said it expects U-verse to be available to 17 million homes by the end of 2008, down from a previous 18 million. AT&T has delayed the U-verse rollout numerous times; as late as May, it expected U-verse to be available to 19 million homes by the end of 2008. U-verse is seen as critical to stem the loss of voice subscribers to cable companies. AT&T is bringing fiber-optic lines closer to homes in order to facilitate the service. Shares were flat Tuesday, although at least one analyst thought the news was not significant. "Although some will surely suggest today's disclosure represents a slowdown in video deployment, we note that the company is simply redeploying capital previously earmarked for passing homes in the Southwest region to the Southeast," Deutsche Bank analysts told clients.

INTERNET

Facebook Rolls Out New Ad System

Social networking Internet site Facebook has unveiled a new service, Facebook Ads, that will allow members to tell one another about their online purchases. The service will also provide information to advertisers on users' buying histories, allowing them to target their ads based on user interest. "When people engage your page on Facebook, that's going to spread information about your brand virally through the social graph," Facebook founder Mark Zuckerberg told ad executives in New York Tuesday. "It becomes a trusted referral." Facebook has over 50 million users and registers 200,000 new subscribers a day. Research firm EMarketer Inc. forecasts that ad spending on sites like Facebook and rival MySpace will nearly triple to $3.63 billion globally by 2011. "It's all about using the relationship you have with other people to spread the word about what you're interested in and what kinds of things you might buy or want to use," said Debra Williamson of EMarketer. "It's a big, big, huge concept that they've developed." Forty-four websites, including GM, Coca-Cola and CBS, have signed on. Users will see up to two ads per day connected to friends' online activities. MySpace also announced a targeted ad program Tuesday. "I sense a very real willingness for advertisers to do a lot of experimentation in this space," said Steve Patrizi, director of ad sales for LinkedIn. Last month, Microsoft bought a 1.6% stake in Facebook for $240 million, implying a total value for the company of $15 billion.

MEDIA

Time Warner Q3 Adjusted EPS In-line; TW Cable Misses Estimates

Time Warner reported a 53% drop in net income to $1.09 billion, or $0.29/share, due to gains from asset sales and a tax benefit in the year earlier quarter. Sales rose 8.6% to $11.8B, beating analyst expectations of $11.4B. For the year, Time Warner said it continues to expect adjusted EPS of $1.07. By business segment, AOL's revenues fell 38% to $1.2B, hurt by a 56% ($820M) drop in subscription revenues. Advertising revenues rose 13% to $61M. Operating income was off 24% to $295M. Filmed Entertainment revenue climbed 33% to $3.2B, boosted by strong sales of the latest Harry Potter, Ocean's 13 and Rush Hour 3. Operating income surged 123% to $268M. Networks (Turner & HBO) revenues rose 6% to $2.6B, while operating income jumped 45% to $751M. Publishing (Time Inc.) revenues were essentially flat at $1.2B, with a 12% increase in operating income to $251M. Majority owned Time Warner Cable posted a 79% decline in Q3 profit due to the absence of discontinued operations. Adjusted EPS of $0.25 missed analyst estimates of $0.27/share. Revenue growth of 25% to $4B also came up short (est. $4.06B). Separately, AOL said it has agreed to acquire NY-based site and content targeted advertising firm Quigo for an undisclosed amount. Reuters reports a source said the deal is worth about $340M. Shares of Time Warner rose 2.9% to $18.33 on Tuesday and were slightly lower in very thin pre-market activity. Time Warner Cable gained 0.7% to $27.55 on Tuesday.

IAC Break-Up Rings Alarm Bells

The break-up of IAC/InterActive Corp., which met with an enthusiastic reception on Wall Street when it was announced Monday, is arousing concern over the fate of two smaller component companies as well as a possible clash with major shareholder Liberty Media. IAC's retail business, the Home Shopping Network [HSN], is believed to be worth upward of $2 billion, and Ticketmaster is estimated by analysts at around $3 billion. But the LendingTree loan exchange company and online time-share business Interval are each expected to be valued at less than $1 billion, turning them into small fry who attract neither the money of institutional investors nor the interest of research analysts. The spun-off companies could be acquired, but that might jeopardize their tax-free status. Meanwhile, IAC CEO Barry Diller could be heading for a showdown with Joe Malone, head of Liberty Media, which holds a 24.1% stake in IAC. The companies have an agreement giving Diller the right to vote Liberty Media's shares in any transaction. Malone is unhappy with the arrangement, and Diller might have to grant him concessions to lock in the deal. Two months ago, Diller offered Malone HSN -- which competes with Liberty Media's QVC -- in exchange for agreement to the rest of the break-up. Malone turned down HSN. Despite the difficulties, Diller maintains that "[t]his was the right thing to do, at the right time." IACI shares fell 2.3% in Tuesday trading.

RETAIL

Guess Jumps on Increased Outlook

Shares of Guess Inc. jumped as much as 12% Tuesday, after the apparel retailer upped its profit outlook for the fiscal year. The company now sees earnings coming in between $1.85-$1.90/share, up from $1.79-$1.84/share. Analysts expect $1.97/share. In a note to clients, Deutsche Bank analysts said, "In North America, Guess continues to outpace the competition with double digit [same]-store sales increases (and accelerated performance in October) despite a difficult retail environment. The company is also achieving strong international growth, helping drive overall robust earnings growth." After trading at a 5-month low Monday, shares of Guess traded up 15.8% to $47.72 Tuesday.

TRANSPORT AND AEROSPACE

GM Plummets on Earnings Miss, Record Loss

Top U.S. carmaker General Motors reported a massive net loss in Q3, largely the result of a one-time $37.4 billion charge stemming from a "previously announced valuation allowance against its deferred tax assets." Despite revenue of $43.1 billion, driven by strong overseas sales growth, EPS were -$68.85, on net income of -$39 billion. Adjusted EPS were -$2.80, versus an adjusted EPS gain of $0.88 a year ago. Consensus analyst estimates were for EPS of -$0.36 on sales of $41.9 billion. Despite the record loss, CEO Rick Wagoner said in the earnings statement that his company's "turnaround strategy" is well on track and "are driving steady improvement in our financial results, despite challenging North America market conditions." Wagoner was also "encouraged by our performance in emerging markets... strong evidence that our commitment to great cars and trucks is being embraced by consumers around the globe," (full earnings call transcript later today). GM North America reported a net loss from continuing operations of $247 million. Goldman Sachs analyst Robert Barry wrote on October 7, "The weak volume and a fading mix benefit is a clear signal to us that GM is at the peak of its product cadence" while lowering his estimates for Q3. On a positive note, GM continues to improve its liquidity position with the Voluntary Employees' Beneficiary Association trust growing to $30 billion, up from $27.2 billion in the previous quarter. Global sales grew to 2.39 million vehicles, up 4% Y/Y, on especially strong emerging market sales (full summary). Shares were lower by 7.9% in pre-market action (as of 7:05 AM ET).

Toyota Beats Estimates, Raises Guidance Conservatively

Toyota reported better-than-expected fiscal Q2 earnings as net income increased 11% to ¥450.9 billion ($3.96B), vs. analyst estimates of ¥444.4B, and revenues rose by a similar amount to ¥6.49T. Strong demand from Asia and Europe helped offset sales declines in North America and its home market. Sales growth was highest in Asia, up 45% to ¥785.2B, followed by an 18% increase in Europe to ¥1T. Toyota said it now expects full-year net income of ¥1.7T, compared to its prior forecast of ¥1.5T. Sales are seen reaching ¥25.5T and operating profit totaling ¥2.3T, from prior estimates of ¥25.0T and ¥2.25T, respectively. Reuters says the estimates lag analyst expectations for net income of ¥1.8T and operating income of ¥2.5T. However, a number of analysts noted Toyota's guidance is typically conservative. "Although the North American market has been slightly underperforming as higher oil prices and the subprime problem hit consumer sentiment, our sales have been moving according to our initial forecast, and Toyota's advantage in the market is unchanged," commented a Toyota executive at a news conference. Toyota also raised its total vehicles sales estimate to 8.93M, from 8.89M previously. The company hiked its interim dividend to ¥65/share, compared to ¥50 last year. Ordinary shares of Toyota gained 0.8% to ¥6,440 ahead of its earnings release. Toyota's ADRs rose 0.3% to $111.99 on Tuesday.

Magna Beats Expectations and Ups Sales Outlook

Canadian auto parts producer Magna International announced Tuesday earnings that surpassed forecasts and an increase in its full-year sales outlook. Net income came in at $155 million ($1.38/share) compared to $94 million ($0.86/share) last year. Revenue jumped 12% to $6.1 billion. Both revenue and profit figures beat analysts' estimates of $1.36/share on $5.75 billion in sales. "The beat was not a surprise to us given the company's recent track record," said Richard Kwas, a Wachovia Capital Markets analyst. "Strong sales drove the bulk of the earnings-per-share outperformance." In its sales outlook for 2007, the company increased its expected range to $25 billion-$26.3 billion up from $24.3 billion-$25.6 billion. It also announced a share buyback plan to repurchase as many as 9.5 million shares starting next week. The company will likely see steady revenue growth in the future, as it recently approved a $1.54 billion investment by a Russian firm that should open the door for the company to sell its parts in the growing Russian market(full story). Co-CEO Don Walker said the company is working on a few "promising" projects with OAO AvtoVAZ, Russia's largest carmaker. Shares of Magna climbed 5.3% to $98.24 off the upbeat report.

ENERGY AND MATERIALS

Chesapeake Energy Earnings Slide But Top Forecasts

Chesapeake Energy said late Tuesday it earned $346M ($0.72/share), down 34% from the $523M ($1.13/share) reported a year earlier, hurt by lower natural gas prices, even though production climbed 27%. The average price realized for natural gas fell to $7.41/mcf from $8.39/mcf, last year. Excluding items, earnings were $330M ($0.69/share). Revenue for the quarter was $2.03B, up from $1.93B in the 2006 quarter. Analysts had expected the natural gas producer to post earnings of $0.60/share on revenue of $1.65B, on average, according to Thomson. Daily production during the quarter rose to an average of 2.026 billion cubic feet equivalent from 1.597 bcfe in the 2006 quarter. Looking ahead, the company raised its production guidance, saying it now sees growth of 21%-23% for 2007 and 18%-22% for 2008, rather than its previous views of 18%-22%, 14%-18%, respectively. It reaffirmed its outlook for 2009 production growth of 12%-16%. It expects proved reserves to grow by 20%-25% to about 11 trillion cubic feet equivalent this year and boosted its year-end 2008 and 2009 expectations to 12.5-13 tcfe and 14-15 tcfe from 12 tcfe and 13 tcfe, respectively, previously. Shares edged up 0.4% to $40.85 AH, after climbing 2.6% ahead of the results.

Total's Net Rises as Record Oil Prices Offset Falling Dollar

France's largest oil company, Total S.A., reported its Q3 net income rose 29% on strong production and record oil prices (full earnings call transcript later today). Net income came in at 3.12 billion euros ($4.6 billion), good for EPS of 1.37 euros ($1.89), versus EPS of 1.05 euros a year earlier. Revenue rose 3% to 39.43 billion euros ($57.96 billion). Meanwhile, adjusted net income fell 3% to 3 billion euros (EPS of 1.32 euros, or $1.82). Dollar estimates were for adjusted EPS of $1.83 on revenue of $49.23 billion. The company was able to increase production as new fields came online in Qatar and Norway. Total predicts its output will increase by 4% a year on average through 2010. Revenue would have been higher, but an average oil price increase of 6.4% Y/Y was offset by a similar fall in the dollar versus the euro, which cut into profits. Shares were higher by 2.8% in pre-market trading in New York (as of 6:23 AM ET).

FINANCIAL

Nasdaq to Buy Philadelphia Stock Exchange - Reports

Nasdaq Stock Market will buy the Philadelphia Stock Exchange for some $650M in cash, according to reports citing people close to the deal. Sources said Nasdaq beat out NYSE Euronext and other bidders for the oldest securities exchange in the U.S., which operates the third-largest U.S. equity options market with about 15% of its trades. According to the reports, Nasdaq will pay for the purchase with funds raised from the recent sale of its 30% stake in the London Stock Exchange. It's believed a deal has been in the works for months. The Wall Street Journal reported that terms were agreed upon late Tuesday and will be announced Wednesday morning. The Journal speculated that Nasdaq may move to close trading on the Philly's trading floors since the electronic exchange, in the past, has criticized floor trading as inefficient. The two exchanges had no comment. Nasdaq recently announced plans to buy the Boston Stock Exchange and is planning a merger with Europe's OMX AB.

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: Avoid the U.S. Until the Subprime Mess Really Hits the Fan
Housing: Housing Bubble and Real Estate Market Tracker
Networking: RBC Still Sees Nortel Struggling To Face Cisco
Chips: AuthenTec, Inc.: The Power of Touch
Software: Microsoft Replaced by Oracle on Goldman List
Gadgets: Analysts See Momentum in RIMM's Rising Fundamentals
Biotech: BioLase: Stock Plunges On Dismal 3Q Results
Retail: Crocs Q3: Final Takeaways
Transport: UBS Sees Buying Opprtunity In Cash Rich Magna
Gold: Gold, Oil Prices: A Look Back At January 1980
Energy: Biofuels in Aircrafts: Will It Fly?
Financial: Citi: In Defense of Gary Crittenden
Asia: Adding to ShengdaTech
ETFs: Investing in the Looming Worldwide Water Shortage
Trading Ideas: Fires, Hubris and the Stock Market Investor
Sound Money: Create Company Culture
Jim Cramer: Latest stock picks
Transcripts: Molson Coors F3Q07 • Archer Daniels Midland F1Q08 • Nortel Networks Q3 2007 • Magna International, Inc. Q3 2007 • BMC Software F2Q08 • TurboChef Technologies Q3 2007 • Tucows Q3 2007 • Blue Nile Q3 2007 • Comstock Resources Q3 2007 • Cognizant Technology Solutions Q3 2007 • Anadarko Petroleum Q3 2007 • Peabody Energy Q3 2007 • Dun & Bradstreet Q3 2007 • TheStreet.com Q3 2007 • WellCare Health Plans Q3 2007 • Bio Rad Laboratories Q3 2007 • InterContinental Hotels Group PLC Q3 2007 • Banco Bradesco S.A. Q3 2007 • Holly Corporation Q3 2007 • Watson Pharmaceuticals Q3 2007 • El Paso Corp. Q3 2007 • Armstrong World Industries Q3 2007 • Spectra Energy Corporation Q3 2007 • Quicksilver Resources Q3 2007 • Pioneer Natural Resources Co. Q3 2007 • BMC Software F2Q08 • iPass Q3 2007 • Macrovision Q3 2007 • Primedia Q3 2007 • Pike Electric Corporation Q3 2007 • Silicon Graphics F1Q08 • CV Therapeutics Q3 2007 • Visicu Q3 2007 • Salix Pharmaceuticals Q3 2007 • Carmike Cinemas Q3 2007 • Onyx Pharmaceuticals Q3 2007 • PS Business Parks Q3 2007 • Idenix Pharmaceuticals Q3 2007 • Boston Beer Co. Q3 2007 • Hologic F4Q07 • Insight Communications Q3 2007 • Comstock Resources Q3 2007 • Stillwater Mining Company Q3 2007 • U.S. Cellular Q3 2007 • Telephone & Data Systems Q3 2007 • Orthofix International Q3 2007 • Alesco Financial Q3 2007 • Sierra Health Services Q3 2007 • Valero Energy Q3 2007 • MSC Software Q3 2007 • Mediacom Communications Corp. Q3 2007 • Regent Communications Media Q3 2007 • Primus Guaranty Q3 2007 • EXCO Resources Q3 2007 • Charles River Laboratories Q3 2007 • Career Education Corporation Q3 2007 • Citizens Communications Q3 2007 • Greatbatch Q3 2007 • Republic Services Q3 2007 • Acorda Therapeutics Q3 2007 • CapitalSource Q3 2007 • NBTY F4Q07 • Ameristar Casinos Q3 2007 • Banco Santander Chile Q3 2007

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