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.


Fannie, Freddie, WaMu Tumble on Expanded Probe

Shares of government sponsored mortgage lenders Fannie Mae and Freddie Mac tumbled Wednesday after receiving subpoenas from New York Attorney General Andrew Cuomo seeking information on loans they bought from Washington Mutual and other banks. Cuomo say he uncovered a "pattern of collusion" between lenders and appraisers, and is seeking documents that may prove the lenders inflated appraisal values. Both have said they will cooperate with the investigation. They also said they will appoint an independent examiner. If decided that they own or guarantee mortgages with inflated appraisals, company policy dictates that the lenders buy back the loans. Last week Cuomo sued the appraisal unit of First American Corp., the number-one U.S. title insurer, for inflating home values after pressure from WaMu. "In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," Cuomo said. WaMu is Fannie Mae's third-largest loan provider, selling it $24.7B in 2007, and Freddie Mac's fourtheenth largest at $7.8B in 2007. Separately WaMu said Wednesday it expects the housing slump to continue through 2008, causing mortgage lending to fall to their lowest levels in a decade. WaMu sees mortgage lending falling to $1.8 trillion in 2008, down drastically from an estimated $2.3-2.4 trillion in 2007. "The soft landing we were anticipating quickly transitioned to a severe downturn," said CEO Kerry Killinger. "This process is painful." Shares of WaMu are down about 55% for the year. In Wednesday trading, WaMu shares fell 17.3%, Fannie Mae shares dropped 10.1%, and Freddie Mac were off 8.6%.

Fed's Poole: Further Rate Cuts Could Be Necessary

St. Louis Federal Reserve Bank President William Poole said Wednesday he believes the current period of turmoil in the markets is not over, and that the housing slump could have a substantial impact on overall economic growth. The Federal Open Market Committee, of which Poole is a voting member this year, will next meet on December 11. "It is easy to imagine a scenario where another rate cut is called for," Poole said. "The loss of wealth associated with the decline in housing prices, as well as the fact that mortgage payments will absorb a larger portion of disposable income for some consumers, might cause consumption -- the largest component of GDP -- to grow at a significantly slower rate." That said, Poole warned that the Fed must be careful to do "what is necessary, but not more." The Fed has cut the benchmark fed-funds rate twice in the past two months, dropping it from 5.25% to 4.5%. The markets put the odds of another quarter-point cut at 70%. "[T]he downdraft from the housing industry [could] spread to other sectors, which might require that recent rate cuts not be reversed, or even that additional cuts would be in order," Poole said. In related news, Federal Reserve Bank of Richmond President Jeffrey Lacker said Wednesday he believes current Fed policy to be where it should be. "I think we have the balance about right, right now," he said. On Tuesday, non-voting member Charles Plosser said he would not support another rate cut unless the economic slowdown got significantly sharper than the currently projected 1.5% GDP growth (full story).

Toll Brothers' Q4 Revenue Forecast Better Than Expected

Luxury homebuilder Toll Brothers reported selected preliminary fourth-quarter financial results early Thursday showing double-digit declines in revenues, contracts and backlog, similar to industry peers. Revenues are expected to fall 36% to $1.17B, compared to analysts' average estimate of $1.13B. Backlog also dropped 36% to $2.85B. Toll signed 32% fewer contracts (total 1,073) worth 38% less (total $693.7B) compared to last Q4. Toll reported 417 cancellations worth $328.5M, versus 585 valued at $412.3M last year. Average price per unit for contracts signed during Q4 was off 3.1% to $646,000. "We continue to believe that excess supply created by cancellations, speculative buyers, and overly ambitious builders; customer concerns about selling their existing homes; and a general lack of confidence are the primary impediments to our market's recovery," commented CEO Robert Toll. The company is scheduled to report Q4 results on Dec. 6. Shares of Toll Brothers fell 4.3% to $21.03 on Wednesday.

TOUSA Hires Advisor to Explore 'Restructuring'

Homebuilder Technical Olympic USA [TOUSA] said Wednesday it has retained the services of Kroll Zolfo Cooper LLC to "explore its long-term business plan and restructuring options." The announcement comes one day after TOUSA said it would delay reporting third-quarter results. In early October, TOUSA hired financial advisors Lazard Freres & Co to help restructure its $1.6 billion in outstanding debt. In mid-October, a creditor for more than $1 billion in TOUSA senior debt hired a law firm purportedly to assess the possibility of a bankruptcy filing. In late October, TOUSA amended two loan agreements to restructure its mounting debts, and said it expects significant Q3 land impairment charges amidst deteriorating market conditions. TOUSA reported second-quarter losses of $132 million, and $66M losses in Q1. Fitch Ratings recently downgraded the company's issuer default rating, saying a turnaround was 'unlikely'. Tousa operates in Florida, the Mid-Atlantic states, Texas and the West, areas hard-hit by the housing slump. Shares have lost over 90% of their value this year. TOUSA said in a statement it "faces many challenges and is considering all available restructuring and reorganization alternatives." One industry analyst has speculated a bottom for the homebuilders will come when "more mortgage companies will declare bankruptcy and at least one major homebuilder will go under," (full story). Shares fell 10.3% Wednesday.

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Cisco Beats Estimates, But Shares Drop

Cisco Systems announced after the bell Wednesday that profits jumped 37% in the company's fiscal first-quarter, as sales in emerging markets took off. Net income increased to $2.21 billion ($0.35/share) compared to $1.61 billion ($0.26/share) a year ago. Excluding certain costs, profits came in at $0.40/share, beating analysts' forecasts of $0.37/share. Revenue increased 17% to $9.55 billion, which was in-line with estimates. Cisco secured orders in emerging markets like Serbia, where businesses and governments are looking to build a more solid infrastructure. "If this market transition continues to unfold as we expect, it has the potential to power Cisco's and the industry's growth for many years to come," CEO John Chambers said. In the company's conference call, Chambers cautioned business spending on networking equipment may hit soon a "bumpy" period as companies hurt by housing softness and credit-market weakness cut their tech budgets (full transcript). Emerging markets make up 10% of the company's revenue. For the coming quarter, Cisco projected revenue of $9.79 billion, slightly missing analyst estimates of $9.81 billion. Shares of the company were down 3.9% in Wednesday's session, and lost another 9.1% on the report in after-hours trading, as investors seemed to be dissapointed by the modest beat. "Cisco is such an execution machine that everybody expects them to come out and beat the top line a little bit," Stifel Nicolaus analyst Sanjiv Wadhwani said. "Overall, it is good performance, but maybe slightly below what people have been used to."

Deutsche Telekom's Net Plunges, But Adjusted EPS Beats

Deutsche Telekom reported its second-consecutive decline in third-quarter earnings, as net income dropped 87% to €259 million ($376M), compared to analyst expectations of €525M. Its shares are trading to the upside however, because adjusted earnings growth of 6.9% to €1.06B beat analyst estimates of €767M and EBITDA surprisingly increased 0.6% to €5.1B, versus estimates of a 3% decline. Revenues rose 1.4% to €15.7B. Deutsche Telekom's earnings suffered on further losses of fixed-line subscriber accounts in its home market and due to a €660M tax credit valuation charge, as well as €600M in amortization and tax-related costs related to overseas wireless assets. Deutsche Telekom's CFO said the company is forecasting 2008 operating profit will be "stable" compared to 2007 with adjusted EBITDA of approximately €19B expected this year. (Earnings call transcript later today). Spending on building out its T-Mobile U.S. wireless high-speed network and expansion of its German broadband business will impact 2008 earnings. T-Mobile USA added 857,000 customers in Q3, increasing its total customers to 27.7M. Ordinary shares of Deutsche Telekom were last up 1.9% to €14.38 in Frankfurt. Deutsche Telekom's ADRs were unchanged at $20.60 on Wednesday.


News Corp.'s Q1 Profit Down; Operating Income Up

Shares of media company News Corp. fell 3% to close at $21.96 Wednesday after the company reported a 13% drop in fiscal Q1 profit. The decline reflected the comparison to the year-ago quarter, which benefited from the sale of several investments. News Corp. earned $732 million ($0.23/per share) in the quarter, down from last year's $843 million ($0.27) (full earnings call transcript). Revenue was up 19% to $7.07 billion. Analysts were expecting EPS of $0.22 on revenue of $6.52 billion. Operating income, which does not include the effects of last year's investment sales, was up 23% to $1.05 billion. Results for the quarter benefited from hit films "The Simpsons Movie" and "Live Free or Die Hard" as well as an increase in the fees the Fox News Channel charges cable operators. Newspaper profits sank 25%. In related news, Rupert Murdoch defended his selection of 27-year-old opera singer Natalie Bancroft to the News Corp. board of directors following News Corp.'s $5 billion purchase of Dow Jones. He dismissed as "rubbish" the suggestion that her lack of experience in finance and journalism could harm shareholders. The Bancroft family, which controlled Dow Jones, was to have selected their representative themselves, but could not reach a decision before the expiry of News Corp.'s deadline. "They're a funny family," Murdoch said.

DirectTV Jumps on 18% Revenue Growth

DirectTV Group reported an increase in revenue as the satellite-TV company was able to attract more new customers with its high-definition and digital recording services. For the quarter, profits decreased to $319 million ($0.27/share) compared to $370 million ($0.30/share) last year. Revenue increased 18% to $4.33 billion. Analysts predicted earnings of $0.29/share on $4.25 billion of revenue. "The headline for the third quarter is that significantly greater sales of high definition [HD] and digital video recorder [DVR] services to higher quality subscribers are having an extremely positive impact on the key operating metrics," said CEO Chase Carey (full earnings call transcript). The company added 240,000 new subscribers, which represented a 45% increase in growth from last year. Of the new customers, 50% signed up for HD-TV or DVR packages. Monthly revenue per subscriber increased 8.3%, while average subscriber acquisition costs increased 10%. Shares of DirectTV traded 2.5% higher to $26.78 Wednesday.

Sources: Press release, Reuters, Wall Street Journal
Commentary: Direct TV: May Be A BuyDirecTV to Offer Internet Over Electric Power Lines -- WSJ
Stocks to watch: DTV. Competitors: DISH, CMCSA, VSAT. ETFs: PBS, PTE
Earnings call transcript: DIRECTV Q3 2007

TiVo to Give Advertisers Ad-Skipper Profiles - WSJ

In an effort to boost revenue, TiVo will announce today it is enhancing the data it collects and sells to advertisers on the viewing habits of subscribers, the Wall Street Journal reports. TiVo last year began selling advertisers data that helped them understand how viewers are using their DVRs, and how many of them are skipping individual adds. TiVo will now add to that demographic information about viewers that will allow advertisers to assemble a detailed profile of ad-watchers and ad-skippers, a program it calls "PowerWatch." "I want to know which segments of my customers are skipping my ads," says Seth McLaughlin, senior VP of marketing for eyewear maker Luxottica. "If one segment has the highest propensity for skipping, I may be able to supplement my marketing mix with other stuff to reach them." The company says about 8% of its consumers are skipping its ads. Nielsen Media Research already offers a similar service, although PowerWatch will sample 20,000 viewers to Nielsen's 3,000. TiVo will also allow marketers to follow up by polling subscribers on their viewing habits and opinions on their ads; Nielsen doesn't allow marketers to query viewers. "The ability to talk to the panel and find out why they are skipping the commercial is key," said Publicis's Chris Boothe, a TiVo data customer. TiVo also said it is considering allowing marketers to compare their internal customer databases with TiVo's in order to build a profile of how people's purchases are affected by ads.


Southwest Airlines' New Fare Plan Geared to Biz Travelers

'Low fare-line' Southwest Airlines is undergoing a radical change in the way it treats customers, the company said in a press release Wednesday. The airline is now offering customers 'Business Select' fares for an average of $10 to $30 more per route in exchange for assigned seating and faster/earlier boarding. Until now, all customers were treated 'equally with no assigned seating or preferential boarding. According to the release, the "new fare guarantees that the 'Business Select' Customer will be among the first to board the aircraft. 'Business Select' holders also receive extra Rapid Rewards credit for the flight, and they even get a cocktail on the house!" In an effort to grow revenue amid stiffer competition from rival airlines and higher fuel prices, Southwest hopes 'Business Select' will attract business travelers, as well as customers willing to pay extra for service, bringing in roughly $100 million a year in revenue. Despite the mid-day announcement Wednesday, LUV shares finished lower by 2.64% amid widespread market losses.


Rio Tinto Rebuffs BHP Buyout Bid

BHP Billiton, number-one global miner, said Thursday it proposed to buyout fellow miner Rio Tinto, who in turn rejected the idea. "BHP Billiton now confirms that it recently wrote to the board of Rio Tinto outlining a proposal in relation to a potential combination with Rio Tinto on terms incorporating a premium, reflecting its confidence in the benefits for both sets of shareholders of such a transaction. In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination," the company said. No price was mentioned. "Rio Tinto rejected the proposal. BHP Billiton has again written to Rio Tinto and intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto." A merger between $220B BHP and $121B Rio would create a global miner that could exert strong control over the markets of many industrial commodities such as aluminum, iron ore, copper and coal -- raising the question of serious regulatory concerns. "There would be regulatory hurdles. In copper, aluminum and coal, as well as iron ore, they may be bumping up against what is allowable... The steel mills in particular would be up in arms," an Australian analyst said. It was first rumored in March that BHP would make a hostile bid for Rio, which was denied by both companies. In September, rumors emerged that BHP and Brazilian miner CVRD were considering a joint bid for Rio (full story). Rio Tinto shares jumped 18.6% while BHP was up 7.7% in London trading.

Crude Retreats After Better-Than-Expected Inventory Data

Crude prices took a break on their march towards $100 Wednesday, retreating $0.33 to $96.37 on the New York Mercantile Exchange, after the Energy Information Administration's weekly inventory report indicated that crude supplies fell by 800,000 bbls. last week, just half the anticipated 1.6M bbls. decline. One economist said the report "wasn't bad enough" given the sharp drops expected by the market, and that had supplies fallen by 3M-5M bbls., crude could have gushed past $100. Meanwhile, traders who bought crude around $80 less than a month ago may be looking to cash out even though it's practically a given the century mark will be reached. "We certainly would not risk $16 or more for the last $2 or $3 a barrel," one oil analyst told clients. "Because of this, we have to expect to see a number of professional traders take profits before we actually see $100." Earlier in the day, futures had touched a new trading high of $98.62/bbl. after the International Energy Agency predicted that worldwide energy usage would rise 50% by 2030, with 45% of that demand coming from India and China. Despite the overall stretched supply of world oil resources, some are surprised record prices are being set just now, a period generally characteristic of slack demand between the summer cooling and winter heating seasons.


Morgan Stanley's Q4 Writedown to Bite Earnings by up to $2.5 Billion

Morgan Stanley said Wednesday it is writing down $3.7 billion of subprime assets and expects the writedown to result in a cut of up to $2.5 billion in Q4 earnings. Analysts had been expecting a Q4 profit of $1.93 billion. The company's shares had shed 6% in regular trading on expectations of an even greater writedown, and rebounded 1.6% to $52.00 in AH trading following the announcement. The writedown was the result of exposure to subprime assets that declined in value from $10.4 billion on August 31 to $6 billion on October 31. Morgan Stanley, Citigroup and Merrill Lynch have announced collective writedowns of $24 billion over the past month. "The dislocation in the market has been quite severe, liquidity has dried up," said Morgan Stanley CFO Colm Kelleher, who now estimates the credit markets will take three or four quarters to bounce back rather than the one or two he estimated on September 19, when Morgan Stanley reported Q3 results. Morgan Stanley spokeswoman Jeanmarie McFadden said the individuals responsible for the derivatives trading losses are no longer with the firm. Morgan Stanley's shares have fallen 24% in the past five trading days.

AIG Profits Skid on Housing Losses

AIG late Wednesday said third-quarter earnings fell to $3.09B ($1.19/sh.) from $4.22B ($1.61/sh.) a year ago while adjusted earning dropped to $3.49B ($1.35/sh.) from $4.02B ($1.53/sh) as profits were impacted by losses in the US housing market and the credit crisis. Revenue was $29.84B vs $29.25 in the year-ago period. Analysts, on average, had expected earnings of $1.62/sh. on revenue of $29.91B. Shares slid 6.7% in composite trading Wednesday leading up to the earnings release. The world's largest insurer said results were impacted by the US residential mortgage and credit market conditions but that exposure was contained by the company's risk management processes. The company's $872.3B investment portfolio lost $864M, while its credit-swap portfolio lost $352M and its mortgage-insurance business $215M. AIG had said in August its exposure to subprime debt was "minimal." "Despite the volatility of the recent quarter, AIG's exposure to the residential mortgage-backed securities market within the investment portfolios remains high quality and with substantial protection through collateral subordination," CEO Martin Sullivan said Wednesday. The mortgage-insurance unit paid out $445M in claims, more than four times the $91M it paid out a year earlier. The delinquency rate at its lending business climbed to 2.22% from 1.59%. Analysts speculated that the disappointing performance could bolster support for former CEO Hank Greenberg, who is trying to shake up the company. "Greenberg's going to use everything he can to leverage his position. He's always been good at that," one analyst said.

American Express Settles with Visa, Receives $2.25B

American Express said Wednesday it agreed to dismiss Visa from a 2004 lawsuit that alleged Visa, MasterCard and their member banks illegally blocked AXP from the bank-issued card business in the U.S. The maximum $2.25B settlement will be funded by Visa USA's member banks, which still must approve the plan. Visa said its nominal payout is $2.065B, with an accounting reserve of $1.9B and a net present value to Visa of $1.8B. The settlement removes the overhang of litigation from Visa Inc.'s planned IPO. It also resolves claims against individual banks J.P. Morgan Chase, Capital One, U.S. Bancorp, Wells Fargo, Providian and Washington Mutual who will be dropped from the suit, leaving MasterCard as the sole defendant and liable for the full amount of damages sought by AXP. "We plan to move forward with the litigation to hold MasterCard accountable for the illegal actions that blocked banks from working with us for many years," AXP CEO Kenneth Chenault said. Calyon Securities said, however, the deal is positive for MasterCard as it would suggest a near-term resolution for MasterCard, as well, with a likely payment of about $1B based on the amount payable by Visa. Before the announcement, MasterCard had said it would "consider a settlement if it were commercially reasonable and in the best interests of our company." On Wednesday, it said, it is "confident in our position" and was still planning to pursue the case in court.


U.S. Market: Wednesday's Selloff Leaves Market On Weaker Ground
Housing: The Real Deal on the Homebuilders
Internet: Baidu.com: Still a Takeover Target
Networking: Cisco Strengthens Domination Over Rival Equipment Makers
Hardware: 7 Reasons to Stick With Syntax-Brillian
Chips: AuthenTec, Inc.: The Power of Touch
Gadgets: Google's New Phone OS: Big Brother is Watching You
Media: Xinhua Finance Media Should Breach $12 in Two Quarters
Retail: Whole Foods Board Wimps Out, Exonerates Mackey
Financial: Citibank's Rapidly Deteriorating Situation
Asia: U.S, China Play Currency 'Chicken'
ETFs: Rydex Launches Leveraged, Short ETFs for Three Indexes
Small-Caps: Rainmaker Systems: Have a Little Faith
Sound Money: Get the Best Seats
Jim Cramer: Latest stock picks
Transcripts: Toyota Motor F2Q08Cisco Systems F1Q08News F1Q08DIRECTV Q3 2007Heelys Q3 2007General Motors Q3 2007Total Q3 2007Devon Energy Q3 2007Expedia Q3 2007Time Warner Q3 2007Chesapeake Energy Q3 2007Herbalife Limited Q3 2007Ctrip.com Q3 2007Frontier Oil Q3 2007NetEase.com Q3 2007Amkor Technology Q3 2007Mentor F2Q07HLTH Q3 2007Cimarex Energy Co. Q3 2007Enbridge Q3 2007First Solar Q3 2007Gaiam Q3 2007iPCS Q3 2007McCormick & Schmick's Seafood Restaurants Q3 2007Visual Sciences Q3 2007GenVec Q3 2007Lakes Entertainment Q3 2007Coherent F4Q07InnerWorkings Q3 2007AAON Q3 2007Xenoport Q3 2007Morgans Hotel Q3 2007Universal Corp. F2Q07Clayton Williams Energy Q3 2007Global Cash Access Q3 2007COMSYS IT Partners Q3 2007CapLease Q3 2007Inland Real Estate Q3 2007American Vanguard Co. Q3 2007SureWest Communications Q3 2007Virgin Media Q3 2007Brigham Exploration Q3 2007W&T Offshore Q3 2007Sara Lee F1Q08Banco Itau Holding Financeira S.A. Q3 2007Parker Drilling Q3 2007Allied Capital Q3 2007Polo Ralph Lauren F2Q08Cogent Communications Group Q3 2007Altus Pharmaceuticals Q3 2007American Tower Q3 2007Clean Harbors Q3 2007Capital Trust Q3 2007Tower Group Q3 2007Gray Television Q3 2007TAL International Group Q3 2007Darwin Professional Underwriters Q3 2007Broadridge Financial Solutions F1Q08Iowa Telecommunications Services Q3 2007Ruth's Chris Steak House Q3 2007NICE Systems Q3 2007NIC Q3 2007Symmetry Medical Q3 2007QIAGEN N.V. Q3 2007Church & Dwight Co. Q3 2007Lear Q3 2007Bio Rad Laboratories Q3 2007InterContinental Hotels Group PLC Q3 2007Banco Bradesco S.A. Q3 2007

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