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

Shiller: Housing Market Is Nowhere Near Bottom

Yale University economist Robert Shiller, co-developer of the S&P/Case-Shiller Home Price Indices, told Reuters Monday he believes the housing market's slide is by no means nearing its conclusion. Shiller said not only are forecasts of a bottom in 2008 probably wrong, but 2008 could see a decline even worse than that of 2007. "There is a probability of a continuing decline for a period of years, bringing prices in many cities down in the 10s of percent," he said. "The bottom is hard to predict. I do not see it imminent and it could be five or 10 years too." Shiller gained prominence with the bestseller Irrational Exuberance, which warned that stock valuations were too high just before the dotcom bubble burst in 2000. He also raised red flags during the real estate boom, which he said showed signs of infection by "investor psychology." "We have seen housing bubbles many times in history, but they have been much more local than this one," he said during the interview. Shiller forecasts that the areas likely to be hardest hit by plummeting home values are those that saw the most precipitous ascents during the boom and those at the center of the subprime mortgage meltdown, with California and Florida well up on the list. The S&P/Case-Shiller Home Price Indices have seen eight consecutive months of negative annual returns for existing single-family homes through August. "Based on the futures market for the S&P Case-Shiller Composite Index, we are looking at home prices down another 5% in 2008," Shiller said.

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TECHNOLOGY

Oracle Takes On VMware With New Software

Database software giant Oracle announced Monday that it is releasing Oracle VM, its new virtualization technology, for free download as of Wednesday. Oracle will sell service contracts for Oracle VM for $499-999 per year. Virtualization technology creates virtual versions of operating systems, servers and data storage devices, thereby reducing server numbers, downtime and maintenance and saving space and electricity costs. Oracle claims its software is three times as efficient as that of its rivals, which include VMware and Microsoft. VMware, which had one of the summer's most successful IPOs, holds 85% of the market. "Is this bad news for VMware? Yes," said Global Equities Research analyst Trip Chowdhry. "This tells us that the virtualization market will not belong to VMware." A VMware spokesman responded to Oracle's challenge by saying, "We believe customers want a consistent approach to virtualization that has a proven track record with mission critical deployments and a complete offering." On Monday, Hewlett-Packard unveiled its own series of new virtualization products for data centers. Last week, Dell said it will pay $1.4 billion for virtualization-optimized storage vendor EqualLogic. IBM is also pursuing virtualization technology. The IDC research firm forecasts the information technology market will reach $11.7 billion by 2011. VMware shares fell 8.4% to close at $80.36 Monday and then shed another 3.8% to $77.30 in AH trading following Oracle's announcement.

Vodafone Rises on Solid Beat and Raise

Vodafone Group plc topped consensus analyst estimates in both profit and revenue in its latest half results (for the period ended September 30), sending shares higher by 3.3% in London trading. The global telecom company credited emerging market growth as well as higher margins and increased data sales in western Europe for its latest success. Net income came in at £3.29 billion ($6.8 billion), good for EPS of 6.19 pence. The company reported a loss of £5.1 billion in the year-earlier period. Sales were up 9% to £17 billion. Those numbers compare with average analyst expectations for net income of £3.03 billion on sales of £16.9 billion. European sales rose 2% to £12.7 billion pounds while emerging market sales jumped 40% to £4.3 billion pounds. The company increased its full-year outlook for revenue, adjusted operating profit and free cash flow. Vodafone also increased its dividend by 6% to 2.49 pence a share. CEO Arun Sarin: "These results reflect our continuing focus on the execution of our strategy. In Europe, we have performed well in competitive markets by driving strong growth in voice usage and data revenue, whilst improving cost efficiency. In EMAPA [Europe, Middle-East, Asia-Pacific and Associates], we are capturing the revenue growth opportunities within emerging markets and benefiting from continuing momentum at Verizon Wireless," (full earnings call transcript later today).

INTERNET

Yahoo! Announces oneSearch Partnerships Across Asia

Yahoo! announced early Tuesday it has established a handful of new partnerships with some of the leading mobile operators across the Asia Pacific region. Yahoo!'s "oneSearch" mobile search technology will be used by partner mobile internet sites for search and advertising opportunities. Yahoo!'s partners include mobile operators stretching from Hong Kong (no. 2 and no. 3 carriers) to India (four of top-eight carriers), including all of Indonesia's top-four carriers and Malaysia's no. 1 and no.3 carriers. Marco Boerries, chief of Yahoo!'s mobile division, told Reuters in an interview that the announcement of the 16 deals gives Yahoo! approximately 40% coverage of all subscribers in those countries. Boerries also said more deals are in the pipeline, with a "... clear goal to lead the market [and] exceed 50 percent." Yahoo! has reached deals with 20 mobile operators globally since launching oneSearch. In every agreement except with Taiwan, oneSearch will be the featured web search service. Shares of Yahoo! lost 3.9% to $24.78 on Monday and were last up 2.2% to $25.32 in thin pre-market trading.

Sources: Press release, Reuters
Commentary: Is Tech Still a Safe Haven?Alibaba IPO Boosts Yahoo!Yahoo Beats Estimates, Shares Surge
Stocks to watch: YHOO. Competitors: GOOG, MSFT, BIDU
Earnings call transcript: Yahoo! Q3 2007

Orbitz Beats, Stock Jumps

Online travel site Orbitz Worldwide reported a loss after the bell Monday, stemming from the company's IPO costs when it went public in July. Orbitz lost $32 million ($0.38/share) compared to a loss of $9 million last year. However, excluding items such as the $32 million IPO charge, the company earned $43 million ($0.23/share), well ahead of analysts' projections of $35 million ($0.13/share). Revenue jumped 20% to $221 million, also beating analysts' forecasts of $211.8 million. Steve Barnhart, CEO of Orbitz, said, "Our third quarter 2007 financial performance improved sharply over 2006 levels... Our international businesses and CheapTickets posted particularly strong year-over-year revenue growth." Third-quarter travel bookings climbed 11% to $2.6 billion. Orbitz shares, which fell 4.7% in Monday's trading session, increased 8.7 % in after-hours trading to $8.29.

Time Warner's AOL Buys Yahoo Answers Competitor

Last Wednesday it was Quigo and then early Monday morning it was Yedda, making for two Israeli acquisitions by Time Warner unit AOL in a week. Founded in 2006 by Avichay Nissenbaum and Yaniv Golan, Yedda will be absorbed as a wholly AOL owned subsidiary. Purchased at undisclosed terms, Yedda is similar to Yahoo Answers, employing semantic matching technology to automatically matches questions to other related questions while selecting the best available users to answer the question. Quigo, a contextual ad firm whose Ad Sonar is similar to Google's AdSense while its FeedPoint serves up ads on search results or Internet sites, was bought for a reported $340 million. Both of these will go into AOL's Platform A, launched in September, which now includes Advertising.com, AOL-run sites, Tacoda, Third Screen Media (bought just last spring) and AdTech. These recent acquisitions are directly related to AOL's renewed role as an advertising-focused media company. "This acquisition builds on AOL's community legacy," said an AOL spokesperson. "Asking a question is the most natural way to search for information and with the incorporation of Yedda's unique patent-pending technology, AOL will enhance our programming efforts while bringing together editorial and user-generated communities."

MEDIA

EchoStar to Work on Improving Churn Rate

EchoStar Communications tumbled 16% Monday after the satellite television provider reported what it called an "unacceptable" customer churn rate even as third-quarter profits surged 45%. The company blamed excessive free programming and weak economic conditions. Company managers "just haven't done a very good job" of controlling subscriber turnover in recent months," CEO Charles Ergen told analysts, noting that the company historically has done a better job at installation, responding to customer requests and marketing. The housing and credit crises, he said, are also taking a toll. "If you go down some subdivisions in America today, every other house has a for sale sign, and that particular house may have a dish on the roof or may have cable running into the house, and there is nobody living there," he added. Late Friday the company said net income rose to $199.7M ($0.44/share) from $139.6M ($0.31/share) a year earlier. It added 110,000 net new subscribers during the quarter, down from 295,000 a year earlier, putting its churn rate at 1.94% vs 1.76% in the third quarter of 2006. Ergen also said the company was considering a possible minority investment in foreign satellite TV operations.

RETAIL

Wal-Mart Beats Street; Heavy Discounting Succeeds

Wal-Mart Stores Inc. posted better-than-expected Q3 net income and revenue, and boosted its full-year outlook. Net income for the world's number-one retailer was $2.86 billion ($0.70/share), up from $2.65 billion ($0.63/share) last year. Quarterly sales were $91.95 billion, up from $84.47 billion. Analysts, on average, were expecting EPS of $0.67 on revenue of $91.67 billion. U.S. same-store sales were up 1.5% over the quarter; in August the company projected a 1-3% rise. The figure includes a 3.9% jump in same-store sales at Sam's Club, while comps at Wal-Mart's namesake stores were up just 1%. Wal-Mart Stores said it now anticipates Q4 earnings from continuing operations of $0.99 to $1.03 a share, equating to full-year EPS from continuing operations of $3.13 to $3.17. Analysts had been forecasting Q4 EPS of $1.02 and full-year EPS of $3.09. Wal-Mart estimates U.S. comparable-store sales will be flat to 2% higher for the fourth quarter. The results seemed to indicate Wal-Mart's heavy discounting during the quarter did not hurt its margins. "Both Wal-Mart Stores U.S. and Sam’s Club increased profits faster than sales," CEO Lee Scott said. "Our focus on managing inventory this quarter was very positive," (full earnings call transcript later today). During the quarter, Wal-Mart marked down 15,000 holiday items, 20% more than a year ago. "They've struggled with execution for quite a while, but now they're entering an environment where they certainly could excel, given their scale and price focus," money manager Peter Kwiatkowski remarked. Separately, Home Depot reported a 27% decline in net income and cut its full-year outlook, noting housing market indicators continue to deteriorate (full story). Wal-Mart shares are up 3.3% in pre-market trading.

Profits Tumble at Home Depot

Home Depot Inc. saw its Q3 net income fall 27% as same store sales were down 6.2% Y/Y and the housing slump continued to hurt profits at the nation's largest home improvement store. Shares fell 3.06% in pre-market action on the news; through Monday Home Depot was down 29% YTD, well on the way to its third consecutive annual loss in share value. Net income was $1.09 billion, good for EPS of $0.60, versus net income of $1.49 billion and EPS of $0.73 a year ago. Aggressive share repurchases by Home Depot kept EPS down less (-21.6%) than overall net income (-27%). Earnings from continuing operations came in at $0.59; on that basis, Wall Street was expecting earnings of $0.60 per share. Sales fell 3.5% to $18,96 billion, versus $19.65 billion a year earlier. Analysts were expecting sales of $19.43 billion. The company now expects earnings from continuing operations to fall by as much as 11% in FY2007. In September, sales of previously-owned U.S. homes were reported at at-least an eight-year low (records first started being kept in 1999), while housing starts fell to a 14-year low in October (full story). Falling home sales have hit Home Depot especially hard as demand has declined sharply for cabinets, bathroom and kitchen renovations. Home Depot has also lost market share to largest competitor Lowe's on poor customer service, something the company is spending $2 billion on during the current fiscal year to rectify. Reflecting on his company's latest results, CEO Frank Blake said, "We are facing a tough environment as housing indicators continue to deteriorate. Our financial performance in the third quarter reflects these tough conditions," (full earnings call transcript later today).

ENERGY AND MATERIALS

IEA Cuts Oil Demand Outlook

Saying record energy prices may be pressuring demand, the International Energy Agency on Tuesday cut its estimates for world oil demand. "[There are] strong indications that high prices are depressing demand, which, together with signs of higher output from Saudi Arabia, Iraq and Nigeria, have capped further price gains," the Paris-based agency said as it dropped its forecast for fourth-quarter demand by 500,000 bbls./day and its 2008 daily demand outlook by 300,000 barrels. Global daily demand for crude next year, it believes, will be 87.69M bbls. "From a practical standpoint, hitting a round number may not confer any specific damage, but the cumulative $70 rise in price since 2002 is, we believe, having a cumulative effect," it noted. The report added, however, that it was too soon to believe that the effects would be permanent. The price of crude has retreated in its march towards $100 since touching a record $98.62/bbl. last week, dropping as much as $1.30 more to $93.32/bbl. early Tuesday after the report was released. "The whole fact that we've approached $100 has created a scare for some people," one analyst said. "The underlying fundamentals are that we're expecting tighter markets through 2015." The move comes ahead of an OPEC meeting this weekend at which Saudi Arabia may push for expanded output.

FINANCIAL

E*Trade Plummets on Worries Over Company’s Financial Future

E*Trade Financial lost almost 60% of its market value Monday, as investors worried about the true amount the company will have to write down because of its subprime exposure. The company admitted Friday in an SEC filing that it would probably have to take a writedown which would exceed previous estimates (full story). The stock was further hit by analysts' downgrades and questions about the financial future of the company: "Bankruptcy risk cannot be ruled out," Citigroup analysts said. Citigroup also downgraded the stock to Sell, adding "We estimate that trying to liquidate E*Trade 's loan and ABS portfolio would result in over $5 billion of losses, more than wiping out tangible equity." E*Trade sent a letter to customers Monday, saying the company is "well capitalized by regulatory standards." CFO Jarret Lilien said the company could absorb up to a $1 billion writedown and still be well capitalized. However, he also said the company expects the "market will get worse before it gets better."

Sources: Wall Street Journal, Reuters
Commentary: E*Trade's Worth Much More Than ThisE*Trade Bankruptcy Can't Be Ruled Out - Citi
Stocks to watch: ETFC. Competitors: SCHW, AMTD. ETFs: FDN, HHH
Earnings call transcript: E*TRADE Financial Q3 2007

Money Market Funds Scramble To Avoid "Breaking the Buck" - WSJ

Money market mutual funds that hold positions in SIVs are taking steps to prevent their NAVs from "breaking the buck," or heading south of $1 per share, according to Tuesday's Wall Street Journal. The credit crunch has placed SIVs under intense pressure, and their values have fallen sharply as they scramble to dump assets. Last month, S&P downgraded the SIV Cheyne Finance LLC to default status after it entered receivership. Though exposure to that fund is not expected to trigger significant losses at mutual funds, S&P stoked the funds' concerns by stating that exposure to SIVs like Cheyne could affect their ratings. Money manager SEI Investments, faced with the threat of downgrades on its $6.1 billion SEI Daily Income Trust Prime Obligation Fund and $1.4 billion SEI Daily Income Trust Money Market Fund, said it will guarantee some of the funds' SIV holdings. STI Classic Funds approached the SEC with a plan to allow its parent, SunTrust Bank, to provide "an irrevocable standby letter of credit" to protect two of its funds that had invested in notes issued by Cheyne. The SEC told both STI and SEI that it will not intervene to prevent their actions. Some firms, including Credit Suisse, have announced adjustments to the valuations of SIV-related commercial paper held by their funds. "2007 is beginning to rival 1994's derivative crisis as the most dangerous event" in fund history, according to industry publication Money Fund Intelligence. Approximately 5% of money-market mutual-fund assets have SIV exposure.

Legg Mason, SunTrust Firm Up Money-Market Funds

Legg Mason and SunTrust Banks are investing in their money-market funds in an effort to cushion what are considered among the safest investments against possible losses from debt issued by structured investment vehicles. According to an SEC filing, Legg Mason, the second-largest publicly traded U.S. mutual-fund company, has invested $100M in one of its funds and arranged a $238M credit facility for two others. SunTrust, meanwhile, has received regulatory approval to protect two funds that bought debt from Cheyne Finance Plc if the SIV is unable to repay SunTrust. Structured investment vehicles, or SIVs as they are known, borrow money by selling short-term commercial paper and medium-term notes and buying higher-yielding assets such as financial company debt and mortgage-backed bonds. The 10 largest U.S. money-market funds have some $50B of SIV debt, some of which has defaulted because of subprime links. Legg Mason holds $10.7B in SIV debt, or 6% of its $167B in money-market assets. Wachovia also has stepped in to ensure its funds don't fall below $1/share asset value, while Bank of America, Federated Investors and Fidelity Investments are backing a U.S. Treasury plan for an $80B fund to keep SIVs afloat (full story).

Credit Downgrade Could Endanger Countrywide

Countrywide Financial Corp. said in a regulatory filing that if its credit rating falls below investment grade, its access to capital would be limited. The company said falling to junk-bond status would impair it from raising money in public debt markets; will cause its bank subsidiary to lose bank deposits; and will allow financers to require higher interest rates when the company renegotiates its financing arrangements. The company still has investment grade ratings from the three ratings agencies, but each has "placed our ratings on some form of negative outlook," CFC said. Countrywide said it has "adequate funding liquidity," but "future developments on the company may require us to... procure additional sources of financing." The company raised $2 billion in August by selling preferred stock to Bank of America (full story). The lender also said about 4.9% of the subprime loans in its portfolio were pending foreclosures as of September 30th, up from 2.9% last year. Shares of Countrywide fell 4.6% to $13.19 Monday.

INTERNATIONAL

BOJ Holds Again; Q3 GDP Surprises to Upside

As expected, the Bank of Japan voted 8-1 Tuesday to hold its benchmark rate at 0.5% -- unchanged since February. Although Q3 (July - Sept.) GDP rebounded to a better-than-expected 2.6% annualized growth rate (vs. estimates of 1.8%), the subprime-induced credit market challenges in the U.S., combined with high commodities prices and rising uncertainty over the sustainability of the domestic economy's expansion weighed heavily on the BOJ's decision. BOJ Governor Toshihiko Fukui warned the Japanese economy is at risk to a slowdown if U.S. housing market problems drag on private consumption and capital investment. The BOJ is said to be watching global economic and financial developments closely. Governor Fukui expects the U.S. economy will soften in Q4, but says it should be able to avoid a serious downturn. Q3 GDP was driven by strong export growth (esp. to Asia and Europe) of 12% on an annualized basis. Consumer spending grew by only 0.3%, while housing investment fell by 7.8% due to stricter government regulation. In October the BOJ lowered its fiscal year (ending March) GDP outlook to 1.8%, from 2.1%, partially due to weakness in construction. Q2 GDP was downward revised to a 1.6% contraction, from -1.2% previously. The Nikkei 225 lost 0.5%, falling for an eighth-consecutive session (the longest in over three-years) to a 16-month low. The yen rose slightly against the US$ and is trading near a two-year high.

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