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.


Commercial Property Values Declining - MIT, Moody's

Commercial real estate values are finally beginning to decline as a result of the credit crunch, according to two new reports. The MIT Center for Real Estate's quarterly transaction-based index [TBI], which reflects the value of commercial property owned by pension funds, dropped 2.5% in Q3 2007. The decline -- the index's sharpest downturn since Q4 2001 and first drop since Q3 2003 -- could herald the end of the sector's five-year rally. "The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets," said David Geltner, Director of the MIT Center. Meanwhile, a report to be released Monday by Moody's Investors Service shows a 1.2% decline in the value of commercial property in September from August. The two reports suggest that despite the rarity of default in commercial real estate, lenders are reluctant at present to grant credit to any form of real estate. If the value of commercial property slides, the default rate on commercial real estate loans and commercial mortgage-backed securities could rise. The latter has a default rate of 0.4% versus a 20% default rate for subprime loans. Moody's MD Tad Philipp notes that even if the commercial-mortgage default rate triples, it would still not be "alarming." Nonetheless, the change in value direction could "represent the inflection point in commercial real estate values given the ongoing liquidity crunch," according to the Moody's report.

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Xerox to Declare First Dividend in Six Years

Xerox, the world's largest supplier of office printers and copiers, is expected to declare a 4.25 cents/share dividend, payable Jan. 31 for shareholders of record on Dec. 31, the Wall Street Journal reported in its online edition. The announcement, slated for Monday, marks the resumption of quarterly cash dividends after a hiatus of six years. The new dividend will be slightly less than the five-cent quarterly dividend Xerox last paid in 2001. That dividend had been cut from 20 cents a share the year before as Xerox struggled to deal with an accounting scandal, bloated costs and staggering debt. According to the Journal, Xerox CEO Anne Mulcahy, who has led its turnaround, will say in a prepared statement that "declaring a dividend and our continued share-repurchase initiatives reflect the health of our business and our belief in the long-term value we're creating for Xerox shareholders." On Thursday, Moody's Investors Service raised its rating on Xerox's $7.6 billion of debt and said the outlook for further upgrades is "positive." Xerox stock has been sluggish because investors remain concerned about the slow pace of sales growth. Moody's forecast is for "low single digit revenue growth" in 2008.

AT&T Bid for EchoStar Imminent - Barron's

A recent 24% decline (-18% last week) in the share price of EchoStar Communications puts it back in play for an acquisition by AT&T before the end of the year, according to a report by Barron's. Shares of EchoStar, operator of the DISH Network satellite TV service, came under heavy selling pressure last Monday due to a poor Q3 earnings report (full story). Speculation of a takeover by AT&T had boosted EchoStar's shares to above $50, making a reported $65/share offer by AT&T less attractive. Barron's said EchoStar has demanded $75/share. Aside from EchoStar's valuation, the impetus behind getting the deal done this year is because of next year's presidential election and concerns a victory for Democrats will result in heightened M&A scrutiny, Barron's said, citing a person familiar with the company. "Pushing a deal of this size through the regulatory system takes time, so it may have be done in a month or so, if it is to be done at all." On Friday, Citigroup upgraded EchoStar to a Buy from a Hold, based on attractive valuation and an estimated 65% possibility of the company being acquired by AT&T over the next year. EchoStar rose 0.8% to $39.83 on Friday. AT&T gained 0.5% to $39.55. As of 7:30 A.M., ECN data show a single trade of 100 shares for EchoStar at $53 (+33%), while AT&T is untraded.


Amazon to Roll Out Kindle e-Book Device Monday

Newsweek revealed several details about Amazon.com's new e-book reader, called "Kindle." When Amazon.com officially rolls out its latest device at a news conference Monday afternoon, it will reveal the following: Kindle costs $399. It weighs 10.3 ounces, with a 6-inch screen and a tapered width that emulates the bulge toward a book’s binding, all of which give the reader the feel of a 'real' paperback. Kindle uses E-Ink display technology, making it fully visible in sunlight. It holds up to 200 books, with the capacity for hundreds more on a memory card. It gives 30 hours of use on one battery charge and takes only 2 to charge. It has 'free' wireless connectivity via a system called Whispernet (based on the EVDO broadband service offered by Sprint), meaning it works anywhere - not just where WiFi is found. Unlike the Sony Reader, the device downloads books directly from the web. 88,000 digital books will be available when Kindle at launch time, plus the ability to subscribe to newspapers and blogs. Most books will cost $9.99; blogs will cost $0.99-$1.99 a month. Kindle allows web-browsing, as well as searches within a book's text. TechCrunch's Michael Arrington says the device is not, "the most elegant looking gadget ever created, but it packs an impressive list of features and could finally bring e-books mainstream. That’s something Sony couldn’t accomplish with its much more elegant Sony Reader." Amazon CEO Jeff Bezos called Kindle "the most important thing we’ve ever done," leading BusinessWeek's Rob Hof to write "I've gotta think Amazon CEO Jeff Bezos has much more in mind than an e-book reader... I've known Jeff for years, and he never says anything lightly, and certainly never so over-the-top." Hof added: "I can see it hosting subscriptions of many kinds," such as music and video, as well as the formation of social-networking groups.


DreamWorks In Talks With NBC Universal - NY Times

DreamWorks movie studio is in talks to jump ship from Paramount to NBC Universal, but negotiations have hit a snag over financing, the New York Times reported Friday. The studio's principals, Steven Spielberg and David Geffen, have made clear their desire to end their increasingly acrimonious relationship with Paramount and its parent Viacom. (DreamWorks Animation, run by Jeffrey Katzenberg, is a separate company under contract with Paramount until 2012 that will not be affected by these negotiations.) Geffen, whose contract allows him to announce his resignation on January 1, 2008, has not found Paramount and Viacom "sufficiently appreciative." He told Vanity Fair this month that Viacom Chairman Sumner Redstone "is accustomed to bullying people. And I will not be bullied... I chose to sell this company to Paramount. It has turned out to be a poor choice." Spielberg's contract is up in another year, but he has already expressed his desire to move to Universal. Geffen will meet next week with Jeffrey Immelt, chairman of NBC Universal parent GE. Universal is interested in distributing DreamWorks films, but wants DreamWorks to finance their production. DreamWorks, which prefers to be financed and distributed by the same studio, is believed unlikely to attract a slew of competitive bids. "These DreamWorks guys are the A-Rods of the movie business," said media analyst Harold L. Vogel. "They have megawatt personalities and great track records, but almost nobody can afford to pay them." Viacom CEO Philippe Dauman does not appear concerned about the loss of the studio that produced Transformers and the Shrek franchise: "The financial impact to Paramount first and especially to Viacom over all would be completely immaterial," he said at a recent conference (full story).


UBS Hit By Downgrades; SwissRe Takes $1B Writedown

Shares in UBS AG (NYSE:UBS) slipped 2.4% Monday in Zurich after influential CIBC financial analyst Meredith Whitney downgraded the company's shares to Sector Performer from Sector Outperformer and cut her 2008 earnings outlook by a third, predicting writedowns on the bank's riskier investments. We believe UBS will likely take roughly 8 billion Swiss francs in aggregate write-downs over the next five quarters but will do so by managing such against earnings from its Global Wealth Management division so as to not abruptly shock its capital base and therefore risk its highly coveted credit ratings," Whitney wrote. The note comes in contrast to UBS's Thursday statement that it, "does not expect writedowns greater than those implied in its outlook which means writedown numbers like $8 billion are not expected," (Reuters). Also Monday, Dresdner Kleinwort downgraded UBS to Hold from Buy, citing potential subprime writedowns of 11 billion Swiss francs ($9.84 billion) (Bloomberg). Separately, reinsurer Swiss Re (OTC:SWCEY) became the first reinsurer to take a major hit from the subprime mortgage crisis when it said it would take a $1 billion writedown on exposure to credit default swaps sold to a client previously. Swift downgrades by credit ratings agencies and a lack of liquidity "has resulted in a significant and material reduction of the value of the underlying assets", Swiss Re said. "You have to ask which reinsurance groups have similar announcements to make. Now comes the question whether this new-found transparency will be welcomed or whether the already weak shares will be punished further," analysts at bank Wegelin said (Reuters).


Celgene Buys Pharmion, Hopes to Be Global Cancer Drug Leader

Celgene Corporation, maker of thalidomide-based drugs for blood cancers, and Pharmion Corporation on Sunday jointly announced the signing of a $2.9 billion agreement under which Celgene will buy Pharmion, strengthening Celgene’s cancer drug portfolio and European distribution. Celgene will acquire all of the outstanding shares of Pharmion common stock for $72/share; $25 in cash and shares of Celgene as determined by an exchange ratio. Pharmion shareholders will end up with an approximate 6% stake in Celgene. The price is a 46% premium over Pharmion's Friday close of $49.28. The transaction is expected to be slightly dilutive to earnings in 2008 and accretive in 2009. Celgene is paying more than 10 times Pharmion's revenue of $256 million over the past 12 months. The acquisition furthers Celgene's strategy of becoming a major global player in blood-cancer drugs, since the deal brings together Revlimid, Thalomid and particularly Vidaza, a treatment for pre-leukemia blood-cell disorders -- three therapies expected to generate multiple global revenue streams over the next five years. "It's a great move for Celgene," said Michael King, an analyst with Rodman & Renshaw. "Vidaza has the potential to be a billion-dollar product."

Genentech's Avastin Slows Down Brain Cancer - Study

Genentech's Avastin medication has been shown in a study to slow down the spread of brain tumors, the company announced Monday at a meeting of the Society for Neuro-Oncology in Dallas. Brain tumors are notoriously resistant to treatment. The study involved 167 patients with relapsed glioblastoma, an aggressive brain cancer with a life expectancy of three to six months and a 3% five-year survival rate. The tumors of 36% of subjects who took Avastin were stable for six months, well beyond the 15% result of patients on other medications in previous studies. Patients who took a combination of Avastin and the chemotherapy agent irinotecan did even better, with 51% showing stable tumors. "These findings exceeded our expectations," said Hal Barron, Genentech's SVP of development. Timothy Cloughesy, director of the Neuro-Oncology program at the University of California, concurred: "The findings suggested that at six months, more patients had lived without their cancer advancing when Avastin was administered as a single agent or in combination with chemotherapy than what we would normally expect." Avastin works by cutting off the tumors' blood supply. The drug, which brought in sales of $1.75 billion in 2006, is currently approved for use in lung and colon cancer and is being tested against 20 other kinds of cancer.


China's Bank Lending Effectively Frozen

China's Banking Regulatory Commission has been providing "guidance" to local and foreign banks in recent weeks, apparently instituting a freeze on new domestic lending for the remainder of the year at Oct. 31 levels. A Commission spokesman denied a Wall Street Journal report of a "freeze" in lending, but acknowledged "informal guidance" has been provided. Still, the guidance effectively serves as a freeze, because lenders that exceed a 15% cap potentially face penalties and future difficulties in receiving approval for branch and product expansions. Bloomberg reports A Hong Kong-based Goldman Sachs senior economist says the Commission also denied a lending freeze in 2004 when curbs were imposed. Year-to-date through October, Chinese banks have issued new loans totalling the dollar equivalent of $471B for a 15.6% increase from year-end 2006. Since continued rate and reserve requirement hikes -- to a nine-year high of 7.29% and at least a 20-year high of 13.5%, respectively -- have largely failed to slow lending, Beijing is taking an alternative non-market approach. Although economists widely agree the most prudent measure is to raise rates further, Beijing wants to avoid excessive yuan appreciation in fear of hurting its export growth engine. Foreign lenders are seen as being most impacted due to their small size, but overall, most bank lending traditionally slows in Q4 and picks up from Q1, thus the impact on banks' earnings is expected to be limited. Nevertheless, bank stocks struggled Monday as the Shanghai Composite fell for a third-straight session, losing 0.9% to 5,269.82.


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Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries

• Analyst enthusiasm over global crop processor and biofuel producer Archer Daniels Midland (NYSE:ADM) is more likely a contrarian indicator, implying the stock may take a hit on even the slightest of missteps. At a current $38, shares are too expensive. Wait for a 20-30% decline that brings them under $30. (Full summary)
• After Eli Lilly's (NYSE:LLY) revelation that upcoming anti-clotting drug Prasugrel saved more patients from heart attacks and strokes -- but led to an increased risk of fatal bleeding -- Barron's has a hard time seeing much upside for the stock. One analyst says the shares ($52) are "dead money." (Full summary)
• Macau's gaming stocks may soon be the victims of overbuilding. Cash flow growth can't possibly match multiples of 31x EPS (NYSE:MGM), 40x EPS (NASDAQ:WYNN) and 48x EPS (NYSE:LVS). Barron's says its time to cash in your chips. (Full summary)
• "Japan's stock market is out of favor with most global investors. That's made it a bargain. Coming next: a rally." A prominent investor calls Japan "outrageously cheap," and says investors should not underestimate upcoming earnings. Popular U.S.-traded bets include Toyota (NYSE:TM), Nomura Holdings (NYSE:NMR), or broad-based funds like iShares MSCI Japan (NYSEARCA:EWJ) and Japan Small Cap Fund (NYSE:JOF). (Full summary)


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