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MACRO AND HOUSING

Fed Lays Out Plan to Increase Transparency

Fed Chairman Ben Bernanke introduced a new communication strategy Wednesday, which will give the public more information about the Fed's outlook on the economy. At a time of uncertainty, the Fed plans to start releasing projections for inflation-adjusted GDP, unemployment, and inflation four times a year. The new plan should "provide a more-timely insight into the [Federal Open Market Committee's] outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability," Bernanke explained. Before today, these projections were only released twice a year, in February and July. Bernanke also said the Fed will extend its forecast horizon an extra year to three years. The new version of these forecasts will include a "narrative" that will summarize "participants' views of the major forces shaping the outlook, discusses the sources of risk to that outlook, and describes the dispersion of views among policymakers," the Chairman said. The Fed will still release reports to Congress in February and July, but will now release two extra reports with Fed minutes at the beginning of the second and fourth quarters. The new strategy will still not give numeric targets for inflation, a practice done at other central banks. It will however offer forecasts for core inflation, which it had not before. The Fed will kick-off this new strategy on Tuesday, when it releases the minutes from the Oct. 30-31 FOMC meeting.

Buffett: Don't Repeal the Estate Tax

Speaking before a Senate Finance Committee hearing Wednesday, billionaire investor Warren Buffett came out against repealing the estate tax and in favor of a $1,000 annual tax credit for low-income families. "I think we need to... take a little more out of the hides of guys like me," he said in off-the-cuff remarks. "A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy." A 2001 law stipulates that the estate tax will diminish gradually until 2010, when it will be waived completely for a year. In 2011, it will return at its original strength, although the Bush administration is advocating its permanent repeal. Buffett suggested reforming the tax rather than repealing it so it takes increasing bites depending on the size of the estate rather than taxing all eligible estates equally. At the top end, "the rate ought to be higher than 45%," he said. He contested the argument that family-held businesses should have special treatment, arguing that if a business is big enough to owe the tax, it's big enough to borrow against the estate. "They may not prefer to pay the tax, but they have the resources," he said.

Cerberus Backs Away From United Rentals Deal; Shares Tank

Shares of power-tool rental company United Rentals plunged 31% to close at $23.50 Wednesday after it announced that Cerberus Capital Management has backed out of its $7 billion buyout offer. The July 22 deal valued the company at $34.50 per share. "This deal was expected to close sometime this week," said JPMorgan analyst Stephen Volkmann. "The banks were struggling with selling the associated debt offering." In a letter dated Thursday, November 14, Cerberus told United Rentals that unless a lower price is agreed to, it will withdraw its bid completely. United Rental contests Cerberus's right to back out, but a person close to Cerberus said the firm expects to exit the deal with no liability beyond the $100 million breakup fee. On August 31, Cerberus executive Steven Mayer wrote to United Rentals General Counsel Roger Schwed asking for a "constructive dialogue" to discuss "our concerns about recent unanticipated developments in the credit and financial markets" and expressing a desire to review the terms of the transaction. United Rentals responded that troubles in the credit markets were not among the agreement's escape clauses, and that it was "sorely disappointed that your organization is now looking to renegotiate our deal without cause." Unlike other private equity firms that have bailed on deals in recent months, Cerberus is not claiming the target company suffered a material adverse change after the deal was signed. United Rentals is calling Cerberus's attempt to backtrack "unwarranted and incompatible with the covenants of the merger agreement" and is engaging legal representation.

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TECHNOLOGY

Any Future Bid For BEA Would Be Lower - Oracle CEO

"If we made another offer [for BEA], the price would be lower," Oracle (ORCL) CEO Larry Ellison told investors at the company's annual financial analyst meeting Wednesday (FT). In late October, BEA (BEAS) rejected Oracle's unsolicited $17/share bid (full story), saying it, "significantly undervalues BEA, and is therefore not in the best interests of BEA shareholders." BEA countered by saying it was willing to sell itself for $21/share, a price Ellison called at the time "impossibly high." Oracle shares dropped hard last week amid a broad tech downturn, while BEA shares are largely unchanged since the standoff as investors have anticipated a renewed bid from Oracle, or potentially other suitors. "For the BEA board to make the claim that they are worth $21 (per share) without any detailed supporting analysis could mean that they have another interested party," Jefferies analyst Katherine Egbert said. Possible buyers besides Oracle include IBM and Hewlett-Packard. While not saying he wouldn't renew his bid, Ellison told investors, "It looks like no one is going to buy BEA. We were the only buyer then."

Applied Materials Reports In-Line; Shares Fall on Guidance

Semiconductor equipment maker Applied Materials Inc. saw its Q4 profit drop 6% Y/Y on a 6% drop in revenue, and warned its next fiscal year will be "challenging." Net income was $421.8 million, good for EPS of $0.30, versus net income of $449 million a year ago. Revenue was $2.37 billion, down from $2.52 a year ago. Consensus analyst estimates were for EPS of $0.29 on sales of $2.38 billion. On the company's earnings conference call, CEO Mike splinter warned the first part of fiscal 2008 (already underway) would be "challenging, particularly on the silicon businesses. It's a dynamic environment and caution signals from customers reflect uncertainty. We expect semiconductor CapEx to be down roughly 5% to 15% during the year," (full transcript). Semiconductor makers have been trying to work off a supply glut that began in 2006 (full summary). Splinter further cautioned, "We expect investment in DRAM to pull back while Flash should continue to be strong. Investment via foundries was weak in 2007 and we expect that foundries will remain cautious until their demand picture gains clarity." The company expects its F1Q08 revenue to be down between 13% and 18%. Shares fell 4.3% in after-hours trading Wednesday on the company's soft outlook.

Network Appliance Beats; Margin Outlook Reverses AH Rally

Network Appliance initially surged in after-hours trading Wednesday (gaining as much as 12.7% to $29.98), following its better-than-expected fiscal Q2 earnings release. However, it last traded down 0.6% to $26.45 after comments about the "continued sluggishness" of the U.S. economy and CFO Steven Gomo saying the company plans to cut prices on some products in order to boost market share (full transcript). Q2 net income fell 3.4% to $84 million, or $0.23/share, with adjusted EPS totaling $0.32. Analysts were expecting $0.26/share. Revenues grew 21% to $792M, also topping estimates of $759M. Strong sales to the U.S government and customers in Europe and Asia helped to offset the impact of weaker sales to U.S. companies (especially in the key financial services industry). For its fiscal Q3, Network Appliance forecast EPS of $0.33 to $0.34, on sales of $872M to $883M, compared to analyst estimates of $0.32 on sales of $852.6M. Robert W Baird analysts cited the company's positive outlook for maintaining their Outperform rating, while raising EPS estimates and their target share price to $35. Shares of Network Appliance lost 1.3% to $26.61 on Wednesday.

IBM Unveils 'Blue Cloud' Initiative

IBM unveiled plans for its "Blue Cloud" data center initiative Thursday in Shanghai. Blue Cloud is an attempt by IBM to bring the power of data-center computing directly into the hands of its customers via cloud computing, which allows remote access to data and saves local computing resources. In a statement, IBM said its first Blue Cloud offerings (with IBM servers and service management software) are expected to be available to customers next spring, supporting systems with Power and x86 processors. Analysts say IBM's underlying strategy is likely to emerge as a leader in cloud computing, enabling it to expand its hardware, software and services revenues. IBM has 200 researchers on the cloud technology project. The New York Times reports IBM's senior VP of Systems and Technology William Zeitler said the company has a three-year staged plan that would involve an undisclosed large investment. Zeitler acknowledged several customers, including companies and government agencies, are collaborating in pilot projects. "Large financial services companies are going to be among the first to be interested," said Mr. Zeitler. An analyst at IDC commented, "In some ways, the cloud is a natural next step from the grid-utility model." The analyst emphasized that the "Google (open source) programming model... really opens things up." Shares of IBM lost 1.7% to $103.44 on Wednesday.

RETAIL

Kraft's Post Cereals to Merge With Ralcorp in $2.6B Deal

Kraft Foods (KFT) said Thursday it has agreed to merge its Post Cereals unit with Ralcorp (RAH) for approximately $2.6 billion in stock, including debt assumption, ending months of speculation after Kraft said in August it was exploring selling its cereal business (full story). The deal, Ralcorp said, "Creates a larger, stronger business with a portfolio of businesses balanced between branded, private-label and frozen bakery food products [and] increases 2007 sales by 50% to $3.3 billion a year from $2.2 billion, with Post cereals accounting for approximately 32% of total annual sales." Kraft will distribute ownership of Post to shareholders through either a split-off or spin-off, to be determined. A split-off gives Kraft shareholders the option to exchange Kraft shares for stock in the new Ralcorp. A spin-off involves a pro-rata distribution of shares to Kraft shareholders. Either way, upon closing, current Kraft shareholders will own approximately 54% of the new Ralcorp, while current Ralcorp shareholders will own approximately 46% of the combined company. "This is a transforming event for Ralcorp. The addition of Post cereals gives Ralcorp a truly distinctive line of branded cereal products plus a branded infrastructure and platform that we can build on through organic growth and acquisitions," said Ralcorp CEO David P. Skarie. (Press release)

PetSmart Gains on Surprise Earnings Beat

Shares of PetSmart Inc. climbed 6.4% in after hours trading on a slight earnings beat after making a new 52-week low during Wednesday's regular trading session. Last month the company warned Q3 and full year earnings would be soft due to an "uncertain economic environment," (full summary). Because the company revised EPS down to just $0.17-0.20, investors were pleasantly surprised Wednesday when actual EPS came in at $0.23. Shares are down 19% over the last month (excluding Wednesday's after-hours gains), following the company's warning. In the latest quarter, net income was down 6.9% to $29.5 million, despite a 7.8% gain in net sales to $1.12 billion. Consensus analyst estimates were for adjusted EPS of $0.22 on sales of $1.12 billion. Gross margin fell 0.1% to 29.7%, while same store sales showed a Y/Y increase of 1.4%. The company expects Q4 EPS in a range of $0.70 to $0.74 (midpoint in-line with consensus estimates of $0.71) and raised its FY earnings forecast to a range of $2.05 to $2.09 a share, after previously lowering its earnings forecast to a range of $2.02 to $2.07 a share. CFO Chip Molloy sounded a cautiously optimistic note on the earnings call: "We have the tools in place for a strong finish to the year. Our business is well prepared, but we remain cautious due to macroeconomic uncertainty surrounding this year's holiday season," (full transcript).

TRANSPORT AND AEROSPACE

Hedge Fund Pushes Delta-United Merger; Delta Denies Talks

New York hedge fund Pardus Capital, which owns 2.6% of Delta Air Lines and 4.8% of United Airlines parent UAL Corp., sent a letter to Delta management Tuesday urging the airline to pursue a merger with UAL. Delta and United are the second- and third-biggest airlines in the country. The letter calls a merger "imperative" because of soaring fuel costs and "the increased risk to the business as a standalone entity." On Wednesday, Delta denied rumors that it is already in negotiations with United, dampening a 13% runup in Delta's share price to a 4% gain on the day and bringing UAL shares, which had surged 14%, down to a 1.5% advance. "There have been no talks with United regarding any type of consolidation transaction and there are no such ongoing discussions," said Delta CEO Richard Anderson, while United spokeswoman Jean Medina refused comment on "wholly inaccurate statements made by people who claim to have knowledge when they clearly do not." Delta has, however, established a special committee for the purpose of exploring strategic options. The two airlines' territories of strength are neatly congruent -- United is strong in the Pacific and weak in the Southeast, while Delta is just the opposite -- but a Delta-United combination would face serious antitrust hurdles. A year ago, US Airways tried to buy Delta, but the deal was scotched after fierce opposition from Delta employees. The steep ascent of fuel prices has rekindled speculation that industry consolidation will have to pick up speed. "With oil at over $90 a barrel, [a Delta merger] analysis takes on a heightened importance," said Anderson.

ENERGY AND MATERIALS

BP's Azerbaijan Find Could Double Output

Oil giant BP on Wednesday announced a major gas-condensate discovery in the Shah Deniz field in the Caspian Sea. Field partner StatoilHydro said the new field could lead to a more than doubling of present production of 8.6 billion cubic meters a year. The SDX-04 appraisal and exploration well is located about 70 kilometres south east of Baku in water 50-600 metres deep. The Azeri government said the field holds around 1.2-1.3 trillion cubic metres of gas, but BP says appraisal is required to fully delineate the new structure. Results confirm sufficient gas at Shah Deniz for a second stage of development, although further work is required to define this second phase. The gas find could boost BP's efforts to turn around its performance after a 45% fall in Q3 profits. BP has the largest foreign presence in ex-Soviet Azerbaijan, and operates the Shakh Deniz field with a 25.5% stake. Other shareholders include Norway's StatoilHydro with 25.5%, State Oil Company of Azerbaijan Republic [SOCAR], LUKOIL and Total each with 10%. BP, Statoil and other partners plan to spend $4.2 billion on the site's first stage, which started pumping fuel to Turkey in July, easing Europe's dependence on supplies from Russia's Gazprom.

FINANCIAL

NYSE's John Thain Moves to Merrill

NYSE Euronext (NYX) CEO John Thain announced late Wednesday he has accepted the top post at prestigious investment broker Merrill Lynch (MER). The move is both somewhat of a surprise -- as Street insiders and many Merrill executives expected the firm to side with BlackRock (BLK) CEO Larry Fink -- and a snub to Citigroup (C), who was thought to be courting Thain (WSJ, NY Post). The 52 year-old is no stranger to Wall Street, having served as an executive for Goldman Sachs (GS). "He's got investment-banking experience, and no one has thought the NYSE was a career position for him," Sandler O'Neill analyst Richard Repetto said. Sources say Thain disdained the Citi post due to what he saw as extreme managerial difficulties in running the firm. NYSE co-COO Ducan Niederaurer will assume the vacated NYSE post. Thain, who brought public ownership, electronic trading and Euronext to the NYSE, brings instant credibility to the recently maligned brokerage house. He inherits a 16,000-strong army of brokers that is still the envy of Wall Street (MarketWatch). Merrill's top spot became vacant when previous CEO Stan O'Neal lost the board's confidence over massive writedowns on risky investments and an alleged overture to Wachovia (WB) without board approval (full story). Merrill rose 3%; NYSE Euronext fell 0.3%; Citigroup dropped 0.1%; all figures include extended trading.

Bear Stearns Rallies on Lower Than Expected Writedown

Bear Stearns announced Wednesday it expects to writedown $1.2 billion in the fourth quarter, welcome news to investors who were nervous the charge would be much larger. Shares of Bear jumped more than 8% on the news, as the outlook for the company looks a little less uncertain. "There was a sense Bear Stearns would have to take a large writedown, and now people can put their arms around it," said Adam Compton, co-head of global financials research at RCM Global Investors. CFO Samuel Molinaro said at a conference in New York that the company's "view on the mortgage market is bearish." As a result, Molinaro shared that the company had hedged enough of its mortgage-related securities portfolio that Bear is now net short subprime-related mortgage loans and securities. The company has lowered its collateralized debt obligations to $884 million from $2.1 billion at the end of August. Molinaro said the bank will rebuild the mortgage arm of the company next year by helping clients take advantage of depressed prices. Shares of Bear Stearns closed up 2.4% to $103.27.

Sources: Wall Street Journal, Reuters
Commentary: What's Next for the Financial Sector?The New Meriwethers, Writ Large
Stocks to watch: BSC. Competitors: MER, C, GS. ETFs: IAI, KCE, XLF
Earnings call transcript: Bear Stearns F3Q07 (Qtr End 8/31/07)

Barclays Takes Less Than Expected $2.7B Writedown

Shares in Barclays, Britain's third biggest bank, were up 0.6% Thursday in London after the bank's surprise trading update reassured investors the bank was not hurt as badly by the credit crunch as some rivals. Barclays Capital U.K. investment banking division said it's taking 1.3 billion pound ($2.7 billion) writedown, 500 million pounds for the third quarter and 800 million pounds for October, on credit-related securities tied to the U.S. subprime-mortgage market collapse. Barclays shares had fallen 12% this month as investors criticized it for not disclosing the extent of losses following the five-month rout in the $6 trillion market for U.S. home-loan bonds. Chief Executive Officer John Varley said last week the bank's "silence" indicated that market speculation was unjustified. The company had originally said it would not update shareholders until Nov. 27. "They came in better than the market expected," said Mamoun Tazi, an analyst at MF Global Securities. "Any concerns about an emergency rights issue are out of the door. They have enough capital to weather the storm."

INTERNATIONAL

SINA Slips Despite Earnings Beat

Sina Corp., a leading Shanghai-based online media company and mobile value-added service provider serving China and Chinese communities globally, announced its unaudited Q3 financial results on Wednesday. Third-quarter net income rose 60% to $17.2 million ($0.28/share), from $10.7 million ($0.19/share) a year ago. Adjusted earnings were $0.32/share on a 15% rise in revenue to $64.3 million from $56.1 million. Analysts had expected EPS of $0.28 on revenue of $64.6 million. For Q4, Sina forecasts revenue of $68-70 million; analysts are calling for $69.6 million. Shares in Sina, China's top portal by revenue, fell 6.6% in after-hours trading to $46.20 after closing down 3.9% to $49.50 in regular trading on Nasdaq. "There was no surprise in the revenue forecast," said JP Morgan's Dick Wei. "The gross margin fell in the wider sector." Margins have been squeezed by China's mobile carriers, forcing online firms into other more lucrative sectors. Sina's mobile services revenue, which has been declining since government-mandated policy changes last year by, declined 24% to $16.6 million. Sina is beefing up its on-line gaming unit to take advantage of a booming domestic market with more products and investment, and said advertising revenues next year will benefit from increased spending on the Olympic Games, and from financial institutions. The company is planning to raise the fees it charged for Olympic advertising, but had not yet decided by how much, Charles Chao, Sina's CEO, told analysts during a conference call.

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Transcripts: Network Appliance F2Q08Longs Drug Stores F3Q08Applied Materials F4Q07SINA Q3 2007PetSmart Q3 2007Macy’s F3Q07MetroPCS Communications Q3 2007Infineon Technologies F4Q07InterSearch Group Q3 2007Globalstar Q3 2007Woodward Governor F4Q07UGI Corp F4Q07Kaiser Aluminum Corp. Q3 2007Portugal Telecom SGPS SA Q3 FY07Ultrapetrol (Bahamas) Q3 2007Employers Holdings Q3 2007Coleman Cable Q3 2007Innodata Isogen Q3 2007Dawson Geophysical F4Q07Technology Solutions Company Q3 2007Daktronics Incorporated Q2 2008Gatehouse Media Q3 2007La-Z-Boy F2Q08Ivernia Q3 2007Melco PBL Entertainment Q3 2007CGI Group F4Q07Michael Foods Q3 2007 Debtholders CallArvinMeritor Incorporated Q4 2007GigaMedia Q3 2007Greenlight Capital Re, Ltd. Q3 2007Burberry Group plc F2Q08Fossil Inc. Q3 2007Benetton Group SpA Q3 2007Pilgrims Pride Corporation F4Q07Petrobras Q3 2007BioMimetic TherapeuticsQ3 2007

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